[Federal Register Volume 60, Number 19 (Monday, January 30, 1995)]
[Notices]
[Pages 5700-5731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2081]



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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09469, et al.]


Proposed Exemptions; Financial Institutions Retirement Fund, et 
al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restriction of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
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.

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, D.C. 
20210. Attention: Application No. stated in each Notice of Proposed 
Exemption. The applications for exemption and the comments received 
will be available for public inspection in the Public Documents Room of 
Pension and Welfare Benefits Administration, U.S. Department of Labor, 
Room N-5507, 200 Constitution Avenue NW., Washington, D.C. 20210.

Notice to Interested Persons

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

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

Financial Institutions Retirement Fund (the Fund) and Financial 
Institutions Thrift Plan (the Thrift Plan) Located in White Plains, New 
York

[Application No. D-09469]

Proposed Exemption

Section I. Covered Transactions
    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) 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 provision of certain services, 
and the receipt of compensation for such services, by Pentegra 
Services, Inc. (Pentegra), a wholly-owned, for-profit subsidiary 
corporation of the Fund, to employee benefit plans (the Plans) and to 
their sponsoring employers (the Employers) that participate in the Fund 
and the Thrift Plan; provided that the following conditions are met: 
[[Page 5701]] 
    (a) A qualified, independent fiduciary of the Fund determines that 
the services provided by Pentegra are in the best interests of the Fund 
and are protective of the rights of the participants and beneficiaries 
of the Fund;
    (b) At the time the transactions are entered into, the terms of the 
transactions are not less favorable to Pentegra than the terms 
generally available in comparable arm's-length transactions between 
unrelated parties;
    (c) Pentegra receives reasonable compensation for the provision of 
its services, as determined by the independent fiduciary;
    (d) Prior to the offering of services, the independent fiduciary 
will initially review the services to be provided by Pentegra and will 
determine that such services are reasonable and appropriate for 
Pentegra, taking into account such factors as: whether Pentegra has the 
capability to perform such services, whether the fees to be charged 
reflect arm's length terms, whether Pentegra personnel have the 
qualifications to provide such services, and whether such arrangements 
are reasonable based upon a comparison with similarly qualified firms 
in the same or similar locales in which Pentegra proposes to operate;
    (e) No services will be provided by Pentegra without the prior 
review and approval of the independent fiduciary;
    (f) Not less frequently than quarterly, the independent fiduciary 
will perform periodic reviews to ensure that the services offered by 
Pentegra remain appropriate for Pentegra and that the fees charged by 
Pentegra represent reasonable compensation for such services;
    (g) Not less frequently than annually, Pentegra will provide a 
written report to the board of directors of the Fund describing in 
detail the services it provided to employee benefit plans and/or their 
sponsoring employers that participated in the Fund and the Thrift Plan, 
a detailed accounting of the fees received for such services, and an 
estimate of the fees Pentegra anticipates it will receive during the 
following year from such plans and their sponsoring employers;
    (h) Not less frequently than annually, the independent fiduciary 
will conduct a detailed review of approximately 10 percent of all 
completed transactions, which will include a reasonable cross-section 
of all services performed; such transactions will be reviewed for 
compliance with the terms and conditions of this exemption;
    (i) Pentegra's financial statements will be audited each year by an 
independent certified public accountant, and such audited statements 
will be reviewed by the independent fiduciary;
    (j) The independent fiduciary shall have the authority to prohibit 
Pentegra from performing services that such fiduciary deems 
inappropriate and not in the best interests of Pentegra and the Fund; 
and
    (k) Each Pentegra contract with a Fund or Thrift Plan employer, or 
a plan of such employer, will be subject to termination without penalty 
by Pentegra for any reason upon not more than 90 days written notice to 
such employer or plan.
Section II. Recordkeeping
    (1). The independent fiduciary and the Fund will maintain, or cause 
to be maintained, for a period of 6 years, the records necessary to 
enable the persons described in paragraph (2) of this Section II to 
determine whether the conditions of this exemption have been met, 
except that (a) a prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of the independent 
fiduciary and the Fund or their agents, the records are lost or 
destroyed before the end of the six year period, and (b) no party in 
interest other than the independent fiduciary and the Board of 
Directors of the Fund shall be subject to the civil penalty that may be 
assessed under section 502(i) of the Act, or to the taxes imposed by 
section 4975 (a) and (b) of the Code, if the records are not 
maintained, or are not available for examination as required by 
paragraph (2) below.
    (2)(a). Except as provided in section (b) of this paragraph and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (1) of this 
Section II shall be unconditionally available at their customary 
location during normal business hours by:
    (1) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (2) Any employer participating in the Fund or any duly authorized 
employee or representative of such employer; and
    (3) Any participant or beneficiary of the Fund or any duly 
authorized representative of such participant or beneficiary.
    (b) None of the persons described above in subparagraphs (a)(2) and 
(a)(3) of this paragraph (2) shall be authorized to examine trade 
secrets of the independent fiduciary, the Fund, or their affiliates, or 
commercial or financial information which is privileged or 
confidential.
    (3) For purposes of this Section II, references to the Fund shall 
also include Pentegra.

Summary of Facts and Representations

    1. The Fund is a multiple employer, defined benefit pension plan 
which is intended to meet the requirements for qualification under 
section 401(a) of the Code and as an employee pension benefit plan 
within the meaning of section 3(2) of the Act. The applicant further 
represents that because all of the assets of the Fund are available to 
pay all benefits accrued under its retirement program, the Fund is 
considered to be a single plan under the Code and regulations 
thereunder.
    The Fund was established in 1943 to provide a means by which the 
Federal Home Loan Banks and various financial institutions could 
cooperate in providing retirement benefits for their employees. The 
applicant represents that the Fund is currently the largest provider of 
pension benefits in the thrift industry with 12 Federal Home Loan 
Banks, hundreds of individual thrift institutions, and various other 
companies which directly service the thrift industry that have chosen 
to participate in the Fund. As of March 31, 1994, the Fund had total 
assets of approximately $1.36 billion, 355 participating employers, and 
36,714 individual plan participants. As of July 1, 1993, the applicant 
represents that the fair market value of the assets of the Fund exceed 
its liabilities for projected accrued benefits by approximately $420 
million.
    The named fiduciaries of the Fund and the Thrift Plan are their 
respective boards of directors. The President of both the Fund and 
Thrift Plan is also, for both the Fund and Thrift Plan, the chief 
administrative officer, a member ex officio of the board of directors, 
and pursuant to the Act, the ``plan administrator''. The Fund has 
another 13 individuals that are members of its board of directors, most 
of whom are presidents of various employers that participate in the 
Fund, and one individual who is the Regional Director for the Northeast 
Region of the Office of Thrift Supervision.
    The Thrift Plan is a multiple employer, defined contribution plan 
that was established in 1970. As of March 31, 1994, the Thrift Plan had 
total assets of $315,845,510, 196 participating employers, and 16,897 
individual plan participants. It was created to encourage employers 
participating in the Fund to continue their participation by providing 
them with the convenience of a defined contribution plan which is 
administered [[Page 5702]] by the same personnel at the same facilities 
as the Fund. The Thrift Plan has a board of directors which, in 
addition to the President of the Thrift Plan, consists of 6 individuals 
who are presidents of various employers that participate in the Thrift 
Plan.
    2. The Fund proposes to create a wholly-owned, for-profit 
subsidiary corporation designated as Pentegra Services, Inc. 
(Pentegra), a Delaware corporation, in order to externalize the 
services the Fund performs for employee benefit plans (the Plans) and 
their sponsoring employers (the Employers) in a way that will enhance 
the value of the assets of the Fund. The applicant represents that 
research indicates that, if the Fund does not expand its employee 
benefit services to gain new clients, it is facing the problem of 
increased costs of plan administration on a per participant basis 
because of the consolidation and contraction of many companies which 
occurred in recent years in the thrift industry. The intention of the 
Fund is to have Pentegra, on a cost effective basis, expand its current 
services and activities by providing various ministerial or fiduciary 
services to Plans and their Employers, which may or may not participate 
in the Fund or in the Thrift Plan. The applicant represents that the 
creation of Pentegra will enable the Fund to develop new products and 
services for employers outside of the banking industry that not only 
will enhance revenues but will increase significantly the experience 
and resources of the Fund and enable the Fund to attract and retain a 
highly qualified staff of employees.
    The applicant represents that Pentegra will report not less 
frequently than annually to the board of directors of the Fund, a 
detailed description of the services it provided to employee benefit 
plans and/or to their sponsoring employers that participate in the Fund 
and the Thrift Plan. Also, the report by Pentegra will give a detailed 
account of the fees received for such services and will estimate the 
amount of fees it anticipates receiving in the following year from the 
plans and/or their sponsoring employers. Further, Pentegra's financial 
statements will be audited annually by an independent certified public 
accountant and such audited statements will be reviewed by Pentegra's 
independent fiduciary (see below).
    The services that Pentegra is proposing to provide to tax-qualified 
defined benefit and defined contribution plans and to their sponsoring 
employers include:
    (a) Preparation of plan documents and summary plan descriptions.
    (b) Procurement of favorable determination letters with respect to 
the tax qualification of the plans from the Internal Revenue Service.
    (c) Maintenance of books of account for plans and each participant, 
disclosing, among other things, accrued benefits and account balances.
    (d) Performance of plan administration functions involving 
preparation of employee statements, calculation and payment of 
benefits, preparation of investment performance data, top-heavy 
testing, and administration of plan participant loans and hardship 
withdrawals.
    (e) Performance of functions necessary for maintaining compliance 
with applicable provisions of the Code; such as, the special 
nondiscrimination testing, testing for compliance with the annual 
limitations on contributions and benefits, and testing for compliance 
with minimum coverage and participation requirements.
    (f) Assist in the preparation of annual reports and participant 
benefit statements as required by the Act and Code.
    (g) Provide consulting services to its clients, including employers 
participating in the Fund or Thrift Plan, with respect to tax-qualified 
retirement plans.
    Pentegra is represented by the applicant to have intentions of 
offering similar services with regard to nonqualified compensation 
plans or arrangements as will be offered with regard to tax-qualified 
retirement plans. The nonqualified plans will be excess benefit plans, 
supplemental executive retirement plans, salary continuation plans, 
elective deferred compensation plans, and various types of equity-based 
compensation arrangements, such as stock options, stock appreciation 
rights, and phantom stock.
    Accordingly, with respect to such nonqualified plans and 
arrangements, Pentegra intends to perform for its clients, including 
employers participating in the Fund or the Thrift Plan, the following 
enumerated services:
    (a) Preparation of appropriate plan documents and, as applicable, 
summary plan descriptions.
    (b) Assist employers in obtaining various rulings from governmental 
authorities; e.g., IRS private letter rulings.
    (c) Maintenance of books of account for plans and for each 
participant in the plan.
    (d) Performance of various administration functions, such as 
benefit calculations, testing for compliance with tax withholding 
requirements, and making determinations of eligibility for benefits and 
payment options.
    (e) Assist in preparation of annual reports of plans and 
participant benefit statements.
    (f) Provide consulting services to clients, including Fund and 
Thrift Plan sponsoring employers, with respect to nonqualified plans.
    3. The Fund is contracting with Ernst & Young, a New York 
partnership, to employ its division of Actuarial, Benefits, and 
Compensation Consulting Services (ABC) to be the independent fiduciary 
with respect to the services Pentegra will render to Employers that 
participate in the Fund or the Thrift Plan and to the Plans sponsored 
by the Employers.
    Ernst & Young represents that it is an international professional 
services firm performing as independent auditors and business advisers 
to a broad range of companies engaged in various business activities, 
including companies engaged in regulated industries, such as banking, 
insurance, and utilities. Its clientele includes companies required to 
comply with the Act. In addition, Ernst & Young states that as 
auditors, it has numerous policies, practices, and systems in place to 
ensure that it remains independent from its clients.1 Ernst & 
Young has 600 locations worldwide with 20,000 employees that generated 
domestic revenues for fiscal 1993 of $2.3 billion and global revenues 
that exceeded $5 billion. They further represent that including its 
undertaking as independent fiduciary for the Fund, it will not receive 
revenues from the Fund and the Thrift Plan that exceed one percent of 
its gross receipts from all sources for any fiscal year.

    \1\Since Ernst & Young is serving as independent fiduciary for 
Pentegra, Ernst & Young will not be engaged as Pentegra's 
independent certified public accountant.
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    The practice of ABC provides a variety of services related to 
qualified and nonqualified retirement programs, including defined 
benefit and defined contribution arrangements, and welfare benefit and 
executive compensation programs. It also deals with benefits, tax, and 
regulatory issues, actuarial matters, and employee communications. ABC 
has more than 350 professionals located nationwide, comprised of 
attorneys, accountants, actuaries, plan administrators, and 
consultants. ABC is familiar with the types of services that Pentegra 
proposes to provide to both qualified and nonqualified plans because of 
its having performed all of those services for its own clients. ABC 
[[Page 5703]] has also performed surveys that are regularly used to 
advise employers and their employee benefit plans on implementing and 
improving their recordkeeping procedures, benefit valuations, and 
compliance systems. Ernst & Young concludes that the past experience of 
ABC will enable it to discern which services that may be performed by 
Pentegra are appropriate and in the best interests of the Fund and 
whether or not the fees for the services constitute reasonable 
compensation.
    Following the initial review of the services to be provided by 
Pentegra, ABC will perform periodic reviews (at fixed intervals, at 
least quarterly as well as spot checks) to ensure that the services 
offered remain appropriate for the Fund. ABC not only will determine 
whether the services are beneficial for the Fund, but will also 
determine whether the fees charged by Pentegra represent reasonable 
compensation. ABC will use its own service and pricing structure 
experience as well as comparisons to similarly qualified firms in 
similar locales to determine if fees charged by Pentegra are those that 
would be charged in arm's-length transactions. Pentegra will establish 
written schedules for fees for different services it will provide that 
will be subject to review and approval or disapproval by ABC. An annual 
detailed review of approximately 10 percent of all completed service 
transactions undertaken by Pentegra will be made by ABC, selecting a 
reasonable cross-section of all the different services performed.
    Ernst & Young represents that ABC will take an active role in 
determining whether the services performed by Pentegra are economically 
pragmatic for the Fund and whether the services are in the best 
interests of the Fund and its participants and beneficiaries. ABC also 
will determine whether the services performed by Pentegra will enhance 
the services and product availability as well as afford economies of 
scale for the Fund and its respective programs.
    An initial review by ABC of the services to be performed by 
Pentegra and the fees to be charged will involve an in-depth analysis 
of each service proposed by Pentegra and the fees to be charged to 
determine whether such services are reasonable and appropriate for 
Pentegra to perform and whether the fees represent reasonable 
compensation. ABC will review the qualifications of the personnel who 
will perform the services, interview selected individuals, review 
documentation and processes to assess administrative practices, 
systems, and controls employed by Pentegra as well as evaluate the 
overall capabilities of Pentegra to deliver the proposed services. ABC 
will also assess the proposed pricing structure of Pentegra for 
reasonableness in relation to the market. No services will be rendered 
by Pentegra without prior review and approval by ABC.
    As part of the initial review, ABC will explore with Pentegra the 
standardization of certain services by Pentegra to determine whether 
the services could have uniform pricing and marketing. If such 
standardization of services and fees by Pentegra are reasonable and 
competitive, then ABC would not need to approve every transaction 
involving such previously approved standardized service.
    ABC will maintain for a period of 6 years records that document its 
determinations as to the services to be rendered and fees charged by 
Pentegra, and records of the process and rationale used by ABC to make 
its determinations. Such records will include the initial 
determinations as well as ABC's periodic and annual reviews and 
decisions for approving and disapproving the services and fees of 
Pentegra.
    Ernst & Young further represents that ABC will take action to 
prohibit Pentegra from performing services that ABC deems inappropriate 
and not in the best interests of the Fund and its participants and 
beneficiaries. When ABC undertakes to prohibit Pentegra from offering a 
service, it will inform the President and Senior Vice President--Legal 
& Secretary of the Fund by facsimile and overnight mail to cease 
providing the service. Should such service continue, overnight letters 
containing ABC's findings and orders will be sent to each member of 
Pentegra's and the Fund's board of directors.
    4. The applicant represents that the proposed transactions will 
permit Pentegra to operate in a for-profit environment and to develop 
new products and services which will inevitably inure to the benefit of 
Fund and its Employers by way of enhanced services and the attainment 
of greater expertise by the staff. Also, the applicant foresees that 
the proposed provision of services by Pentegra will expand the economic 
value of the Fund's plan administration services and create significant 
increased returns for such services. The applicant further represents 
that the potential returns to be derived from the use of the 
administration services provided by Pentegra will serve to maintain the 
present positive economies of scale available under the Fund, and thus 
facilitate both significant Employer participation in the Fund and its 
continuing viability as a retirement benefit program, and thereby 
provide substantial benefits to individual participants and their 
beneficiaries.
    Under the proposed transactions, the applicant represents that the 
rights of the participants and beneficiaries of the Fund will be 
protected. The staff of the Fund, in conjunction with a market research 
firm, has made a study of the current and projected market in which the 
Fund operates, and the staff performed an analysis of its services and 
the feasibility of offering its services to third-party employers. A 
special committee of the board of directors of the Fund reviewed in 
detail the findings of the staff of the Fund and an independent 
financial advisor (the Deloitte & Touche Valuation Group) provided an 
opinion as to the fairness of the proposed transactions from a 
financial perspective.
    With respect to the setting of compensation for Fund and Pentegra 
employees, the applicant represents that on an annual basis the 
President and the human resources officer of the Fund draft a proposed 
salary budget for the Fund (including Pentegra), taking into account 
input from various management levels, and also, making an analysis of 
each described position, determining the relative worth and fair market 
value of each position, and reviewing the performance of each employee.
    The proposed annual salary budget is then presented by the 
President of the Fund to the personnel committee of the board of 
directors of the Fund, which reports directly to the board of directors 
of the Fund on major personnel policies, including compensation 
matters. The personnel committee typically enters into executive 
session (without the President of the Fund in attendance) when it 
deliberates over the proposed salary budget and presents its 
recommendations to the board of directors of the Fund. The board of 
directors then makes the final decision regarding salary levels.
    The personnel committee consists of 5 presidents of different 
financial institutions that participate in the Fund. No employees or 
officers of the Fund, Pentegra, or the Thrift Plan are members of the 
personnel committee. The applicant represents that, as a result of the 
make-up of the committee and the board of directors, there is assurance 
that compensation levels are appropriate and in accordance with the 
board of directors duty as fiduciaries of the Fund to act in the best 
interests of the participants and beneficiaries of the Fund. 
[[Page 5704]] 
    In addition, the applicant represents that if an employer 
participating in the Fund and/or the Thrift Plan is considering 
retaining Pentegra to provide services and an officer of such employer 
is also a member of either the board of directors of the Fund, the 
Thrift Plan, or Pentegra, such individual shall refrain from any 
discussions or considerations by such board of directors with respect 
to the provision of services by Pentegra.
    The applicant represents that in the event a situation arises which 
could lead to a conclusion that there may be a conflict of interest or 
the appearance of a conflict of interest in the context described above 
involving a person who is a member of the Board of the Fund, the Thrift 
Plan, or Pentegra, the following procedures will be followed:
    (a) The person shall disclose the facts of the situation to the 
Chairperson of the Board of which the person is a member;
    (b) The person shall not participate in any formal or informal 
discussion of, or participate in any decision, or vote on the specific 
contract, relationship, person, or organization with respect to which 
the conflict or appearance of conflict may arise. However, such person 
may be counted to establish a quorum for meetings;
    (c) The person will leave the meeting to allow the remaining 
members to engage in a free and frank discussion regarding the 
contract, relationship, individual, or organization with respect to 
which the conflict or appearance of conflict may arise and not return 
to the meeting until called by the Chairperson of the Board; and
    (d) The minutes of the affected Board shall record the absence of 
the person from the discussions, deliberations, and decisions of the 
Board with respect to the contract, relationship, individual, or 
organization in question. If a vote is taken, the person affected will 
not vote, and the minutes of the meeting will record that fact.
    The applicant represents that the terms of any transactions between 
Pentegra and employers who participate in the Fund or Thrift Plan will 
be at least as favorable to Pentegra as the terms available in arm's-
length transactions between Pentegra and employers who do not 
participate in the Fund or the Thrift Plan. It is represented by the 
applicant that all arrangements between Pentegra and a Fund or Thrift 
Plan employer, or its plan, for the provision of services, will be in 
writing and will be terminable by Pentegra without penalty to Pentegra 
upon not more than 90 days written notice to such an employer or its 
plan. Further, such plans and employers may terminate their contracts 
with Pentegra without penalty upon not more than 90 days written notice 
to Pentegra.
    The applicant represents that Pentegra will report not less than 
annually to the board of directors of the Fund a detailed description 
of the services it provided to employee benefit plans and/or to their 
sponsoring employers that participate in the Fund and the Thrift Plan. 
Also, the report by Pentegra will give a detailed account of the fees 
received for such services and will estimate the amount of fees it 
anticipates receiving in the following year from the such plans and/or 
their sponsoring employers.
    5. In summary, the applicant represent that the proposed 
transactions will satisfy the criteria of section 408(a) of the Act and 
section 4975(c)(2) of the Code because (a) the terms for the proposed 
services between Pentegra and employers that participate in the Fund or 
the Thrift Plan will be as favorable to Pentegra as are the terms 
available in arm's-length transactions between Pentegra and employers 
which do not participate in the Fund or the Thrift Plan; (b) Pentegra 
will be able to terminate without penalty its services to plans 
sponsored by employers which participate in the Fund or the Thrift Plan 
on reasonably short notice under the particular circumstances; (c) an 
independent fiduciary will determine that Pentegra receives reasonable 
compensation for the provision of its services; and (d) the independent 
fiduciary has the authority to prohibit Pentegra from performing 
services that such fiduciary deems inappropriate and not in the best 
interests of the Fund.

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

Mellon Bank, N.A., Located in Pittsburgh, Pennsylvania

[Application No. D-09523]

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, August 10, 1990).
Section I--Exemption for In-Kind Transfer of CIF Assets
    If the exemption is granted, the restrictions of sections 406(a) 
and 406(b) of the Act and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1) (A) 
through (F) of the Code, shall not apply, as of November 5, 1993, to 
the in-kind transfer of assets of plans for which Mellon Bank, N.A. or 
any of its affiliates (Mellon) acts as a fiduciary (the Client Plans), 
other than plans established or maintained by Mellon, that are held in 
certain collective investment funds maintained by Mellon (CIFs), in 
exchange for shares of the Laurel Funds [a/k/a Dreyfus or Premier 
Funds] (the Funds),\2\ open-end investment companies registered under 
the Investment Company Act of 1940 (the 1940 Act), in situations where 
Mellon acts as investment advisor for the Fund as well as custodian, 
dividend disbursing agent, shareholder servicing agent, transfer agent, 
and/or Fund accountant, or provides some other ``secondary service'' to 
the Funds as defined in Section V(h), in connection with the 
termination or partial termination of such CIFs, provided that the 
following conditions and the general conditions of Section IV are met:

    \2\The applicant represents that effective October 1994, the 
Laurel Funds changed their name to either ``Dreyfus'' or ``Premier'' 
as a result of Mellon's acquisition of the Dreyfus Corporation, the 
sponsor of the Dreyfus Funds.
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    (a) No sales commissions or other fees are paid by the Client Plans 
in connection with the purchase of Fund shares through the in-kind 
transfer of CIF assets and no redemption fees are paid in connection 
with the sale of such shares by the Client Plans to the Funds.
    (b) Each Client Plan receives shares of a Fund which have a total 
net asset value that is equal to the value of the Client Plan's pro 
rata share of the assets of the CIF on the date of the in-kind 
transfer, based on the current market value of the CIF's assets as 
determined in a single valuation performed in the same manner at the 
close of the same business day using independent sources in accordance 
with Rule 17a-7 of the Securities and Exchange Commission under the 
1940 Act (see 17 CFR 270.17a-7) and the procedures established by the 
Funds pursuant to Rule 17a-7 for the valuation of such assets. Such 
procedures must require that all securities for which a current market 
price cannot be obtained by reference to the last sale price for 
transactions reported on a recognized securities exchange or NASDAQ be 
valued based on an average of the highest current independent bid and 
lowest current independent offer, as of the close of business on the 
Friday preceding the weekend of the CIF transfers (or, in the case of 
any weekday CIF transfers, the day of the transfer), determined on the 
basis of reasonable inquiry from at least three sources that are 
broker-dealers or pricing services independent of Mellon. 
[[Page 5705]] 
    (c) All or a pro rata portion of the assets of a Client Plan held 
in a CIF are transferred in-kind to the Funds in exchange for shares of 
such Funds.
    (d) A second fiduciary which is independent of and unrelated to 
Mellon (the Second Fiduciary) receives advance written notice of the 
in-kind transfer of assets of the CIFs and full written disclosure of 
information concerning the Funds (including a current prospectus for 
each of the Funds and a statement describing the fee structure) and, on 
the basis of such information, authorizes in writing the in-kind 
transfer of the Client Plan's assets to a corresponding Fund in 
exchange for shares of the Fund.
    (e) For all transfers of CIF assets to a Fund following the 
publication of this proposed exemption in the Federal Register, Mellon 
sends by regular mail to each affected Client Plan the following 
information:
    (1) Within 30 days after completion of the transaction, a written 
confirmation containing:
    (i) The identity of each security that was valued for purposes of 
the transaction in accordance with Rule 17a-7(b)(4);
    (ii) The price of each such security involved in the transaction;
    (iii) The identity of each pricing service or market maker 
consulted in determining the value of such securities; and
    (2) Within 90 days after completion of each transfer, a written 
confirmation that contains:
    (i) The number of CIF units held by the Client Plan immediately 
before the transfer, the related per unit value, and the total dollar 
amount of such CIF units; and
    (ii) The number of shares in the Funds that are held by the Client 
Plan immediately following the transfer, the related per share net 
asset value, and the total dollar amount of such shares.
    (f) The conditions set forth in paragraphs (e), (f) and (n) of 
Section II below are satisfied.
Section II--Exemption for Receipt of Fees
    If the exemption is granted, the restrictions of section 406(a) and 
406(b) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1) (A) through 
(F) of the Code, shall not apply, as of November 5, 1993, to the 
receipt of fees by Mellon from the Funds for acting as an investment 
advisor for the Funds as well as for providing other services to the 
Funds which are ``secondary services'' as defined in Section V(h), in 
connection with the investment by the Client Plans in shares of the 
Funds, provided that the following conditions and the general 
conditions of Section IV are met:
    (a) Each Client Plan receives a cash credit of such Plan's 
proportionate share of all fees charged to the Funds by Mellon for 
investment advisory services and ``secondary services'', including any 
investment advisory fees paid by Mellon to third party sub-advisers, no 
later than the same day as the receipt of such fees by Mellon. The 
crediting of all such fees to the Client Plans by Mellon is audited by 
an independent accounting firm on at least an annual basis to verify 
the proper crediting of the fees to each Client Plan.
    (b) The price paid or received by a Client Plan for shares in a 
Fund is the net asset value per share at the time of the transaction, 
as defined in Section V(e), and is the same price which would have been 
paid or received for the shares by any other investor at that time.
    (c) Neither Mellon nor an affiliate, including any officer or 
director of Mellon, purchases or sells shares of the Funds from or to 
any Client Plan.
    (d) No sales commissions are paid by the Client Plans in connection 
with the purchase or sale of shares of the Funds and no redemption fees 
are paid in connection with the sale of shares by the Client Plans to 
the Funds.
    (e) The combined total of all fees received by Mellon for the 
provision of services to a Client Plan, and in connection with the 
provision of services to the Funds in which the Client Plan may invest, 
are not in excess of ``reasonable compensation'' within the meaning of 
section 408(b)(2) of the Act.
    (f) Mellon does not receive any fees payable pursuant to Rule 12b-1 
under the 1940 Act in connection with the transactions.
    (g) The Client Plans are not employee benefit plans sponsored or 
maintained by Mellon.
    (h) The Second Fiduciary receives full and detailed written 
disclosure of information concerning the Funds (including a current 
prospectus for each of the Funds and a statement describing the fee 
structure) in advance of any investment by the Client Plan in a Fund.
    (i) On the basis of the information described above in paragraph 
(h), the Second Fiduciary authorizes in writing the investment of 
assets of the Client Plan in each particular Fund and the fees to be 
paid by such Funds to Mellon.
    (j) All authorizations made by a Second Fiduciary regarding 
investments in a Fund and the fees paid to Mellon are subject to an 
annual reauthorization wherein any such prior authorization referred to 
in paragraph (i) shall be terminable at will by the Client Plan, 
without penalty to the Client Plan, upon receipt by Mellon of written 
notice of termination. A form expressly providing an election to 
terminate the authorization described in paragraph (i) above (the 
Termination Form) with instructions on the use of the form must be 
supplied to the Second Fiduciary no less than annually. The 
instructions for the Termination Form must include the following 
information:
    (1) The authorization is terminable at will by the Client Plan, 
without penalty to the Client Plan, upon receipt by Mellon of written 
notice from the Second Fiduciary; and
    (2) Failure to return the Termination Form will result in continued 
authorization of Mellon to engage in the transactions described in 
paragraph (i) on behalf of the Client Plan.
    (k) The Second Fiduciary of each Client Plan invested in a 
particular Fund receives full written disclosure in a Fund prospectus 
or otherwise of any increases in the rates of fees charged by Mellon to 
the Funds for investment advisory services or other services (i.e. 
``secondary services'') even though such fees will be credited to the 
Client Plan as required by paragraph (a) above.
    (l) On an annual basis, Mellon provides the Second Fiduciary of a 
Client Plan investing in the Funds with:
    (1) A copy of the current prospectus for the Funds and, upon such 
fiduciary's request, a copy of the Statement of Additional Information 
for such Funds which contains a description of all fees paid by the 
Funds to Mellon;
    (2) A copy of the annual financial disclosure report prepared by 
Mellon which includes information about the Fund portfolios as well as 
audit findings of an independent auditor within 60 days of the 
preparation of the report; and
    (3) Oral or written responses to inquiries of the Second Fiduciary 
as they arise.
    (m) With respect to each of the Funds in which a Client Plan 
invests, in the event such Fund places brokerage transactions with 
Mellon or an affiliate, Mellon will provide the Second Fiduciary of 
such Client Plan at least annually with a statement specifying:
    (1) The total, expressed in dollars, brokerage commissions of each 
Fund's portfolio that are paid to Mellon or an affiliate by such Fund;
    (2) The total, expressed in dollars, of brokerage commissions of 
each Fund's portfolio that are paid by such Fund to brokerage firms 
unrelated to Mellon; [[Page 5706]] 
    (3) The average brokerage commissions per share, expressed as cents 
per share, paid to Mellon or an affiliate by each Fund portfolio; and
    (4) The average brokerage commissions per share, expressed as cents 
per share, paid by each Fund portfolio to brokerage firms unrelated to 
Mellon.
    (n) All dealings between the Client Plans and the Funds are on a 
basis no less favorable to the Client Plans than dealings with other 
shareholders of the Funds.
Section III--Exemption for Transfers of Client Plan Securities from 
Individual Portfolios
    The restrictions of sections 406(a) and 406(b) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1) (A) through (F) of the Code, shall not 
apply to an exchange (the Exchange) by a Client Plan of securities for 
shares of the Funds (other than an exchange covered by Section I 
above), and to the receipt of fees by Mellon from the Funds for acting 
as investment adviser for the Funds as well as providing other services 
to the Funds which are ``secondary services'' as defined in Section 
V(h), in connection with such an investment by a Client Plan in the 
Funds, provided that the following conditions and the general 
conditions in Section IV are met:
    (a) The terms of the transaction are at least as favorable to the 
Client Plan as those obtainable in an arm's-length transaction between 
unrelated parties.
    (b) Each Exchange is a one-time transaction between a Client Plan 
and the Fund.
    (c) All or a pro rata portion of the assets of a Client Plan held 
by Mellon in an investment account or portfolio that is selected by the 
Second Fiduciary of such Client Plan for an Exchange are transferred 
in-kind to the Funds in exchange for shares of such Funds.
    (d) No sales commission or dealer mark-up is paid by the Client 
Plan in connection with the transaction.
    (e) The Exchange meets the requirements of the particular Fund for 
an in-kind purchase of shares of the Fund.
    (f) One of the following conditions is met:
    (1) The Client Plan receives a cash credit of such Plan's 
proportionate share of all fees (including all investment advisory fees 
and all secondary service fees) charged to the Funds by Mellon, less 
any fees paid by Mellon to parties unrelated to Mellon for services 
other than investment advisory services provided to the Funds, no later 
than the same day as the receipt of such fees by Mellon;
    (2) The assets of the Client Plan invested in the Funds are 
excluded from the assets on which the investment management fees paid 
by the Client Plan to Mellon are determined; or
    (3) The Client Plan pays an investment management fee to Mellon 
based on total Plan assets from which a credit is subtracted 
representing only the Client Plan's pro rata share of the investment 
advisory fees paid by the Funds to Mellon.
    (g) For purposes of the Exchange, the price of securities is 
established as of the close of business on the date for the Exchange 
specified in the written authorization by the Second Fiduciary, as 
follows:
    (1) If the security is described in subparagraphs (b) (1) through 
(3) of Rule 17a-7 under the 1940 Act (see 17 CFR 270. 17a-7(b) (1)-
(3)), in accordance with the valuation procedures described in those 
paragraphs; or
    (2) If the security is not described in paragraph (g)(1) above, by 
the recognized, independent pricing service or services disclosed to 
the Second Fiduciary described in paragraph (j) below prior to its 
written authorization of the Exchange. If no price is available from a 
recognized, independent pricing service for such date, or from a 
sufficient number of pricing services if more than one is to be used, 
Mellon will determine the price by averaging the mean of the closing 
bid and asked quotation for each of two or more recognized, independent 
market markers and/or pricing services for such securities on that 
date.
    (h) For purposes of the Exchange, the price paid or received by a 
Client Plan for Fund shares is the net asset value per share at the 
time of the transaction, as defined in Section V(e), and Mellon 
determines the value of the securities exchanged and the net asset 
value of the Funds as of the close of business on the same day.
    (i) Within 30 days after the authorization of the Exchange, the 
Second Fiduciary receives a written confirmation that reflects the 
price of each of the securities involved in the Exchange. For those 
securities described in paragraph (g)(2) above, the confirmation will 
include a written disclosure of the identity of the pricing service or 
market markers consulted in determining the value of the securities.
    (j) The Second Fiduciary acting for the Client Plan--
    (1) Receives advance written disclosure of information concerning 
the Funds (including current prospectuses for the Funds and a statement 
describing the fee structure to be used to comply with paragraph (f) 
above) and, prior to the Exchange, receives in writing (A) the reasons 
why Mellon may consider such Exchanges to be appropriate for the Client 
Plan and a list of the securities held by the Client Plan that would be 
accepted by one or more Funds with respect to the Exchange, (B) the 
date the Exchange is to occur, and (C) an explanation of the procedures 
that would be followed for valuing the securities for purposes of the 
Exchange, including the identity of the recognized, independent pricing 
service or services that will value any of the securities described in 
paragraph (g)(2) above; and
    (2) On the basis of such information, authorizes in writing the 
investment of assets of the Client Plan in the Funds through the 
Exchange and the fees to be paid by the Funds to Mellon.
    (k) The authorization referred to in paragraph (j) is terminable at 
will by the Client Plan, without penalty to the Client Plan, upon 
receipt by Mellon of written notice of termination. A Termination Form 
expressly providing an election to terminate the authorization 
described in paragraph (j) with instructions on the use of the form 
must be supplied to the Second Fiduciary no less than annually. The 
instructions for the Termination Form must include the following 
information:
    (1) The authorization is terminable at will by the Client Plan, 
without penalty to the Client Plan, upon receipt by Mellon of written 
notice from the Second Fiduciary; and
    (2) Failure to return the form will result in continued 
authorization of the investment by the Client Plan in the Funds and the 
payment of fees by the Funds to Mellon.
    (l) If the fee structure described in paragraph (f)(2) or (f)(3) 
above is followed, the Second Fiduciary is notified of any change in 
any of the rates of the fees payable to Mellon for investment advisory 
services or secondary services, that had been disclosed to the Second 
Fiduciary as described in paragraph (j) above, at least 30 days prior 
to the effective date of such change, and approves in writing the 
continued holding of any Fund shares acquired by the Client Plan prior 
to such change which are still held by the Plan. Such approval may be 
limited solely to the investment advisory and other fees paid by the 
Funds in relation to the fees paid by the Client Plan and need not 
relate to any other aspect of such investment.
    (m) The conditions set forth in paragraphs (c), (e), (f), (g), (l), 
(m), and (n) of Section II above are satisfied. [[Page 5707]] 
Section IV--General Conditions
    (a) Mellon maintains for a period of six years the records 
necessary to enable the persons described below in paragraph (b) to 
determine whether the conditions of this exemption have been met, 
except that (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of Mellon, the 
records are lost or destroyed prior to the end of the six-year period, 
and (2) no party in interest other than Mellon shall be subject to the 
civil penalty that may be assessed under section 502(i) of the Act or 
to the taxes imposed by section 4975 (a) and (b) of the Code if the 
records are not maintained or are not available for examination as 
required by paragraph (b) below.
    (b) (1) Except as provided below in paragraph (b)(2) and 
notwithstanding any provisions of section 504(a)(2) of the Act, the 
records referred to in paragraph (a) are unconditionally available at 
their customary location for examination during normal business hours 
by--
    (i) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service,
    (ii) Any fiduciary of the Client Plans who has authority to acquire 
or dispose of shares of the Funds owned by the Client Plans, or any 
duly authorized employee or representative of such fiduciary, and
    (iii) Any participant or beneficiary of the Client Plans or duly 
authorized employee or representative of such participant or 
beneficiary;
    (2) None of the persons described in paragraph (b)(1) (ii) and 
(iii) shall be authorized to examine trade secrets of Mellon, or 
commercial or financial information which is privileged or 
confidential.
Section V--Definitions
    For purposes of this proposed exemption:
    (a) The term ``Mellon'' means the Mellon Bank, N.A. and any 
affiliate thereof as defined below in paragraph (b) of this section.
    (b) An ``affiliate'' of a person includes:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The term ``Fund'' or ``Funds'' shall include the Laurel Funds, 
Inc. [a/k/a the Dreyfus Funds or the Premier Funds], or any other 
diversified open-end investment company or companies registered under 
the 1940 Act for which Mellon serves as an investment adviser and may 
also serve as a custodian, dividend disbursing agent, shareholder 
servicing agent, transfer agent, Fund accountant, or provide some other 
``secondary service'' (as defined below in paragraph (h) of this 
Section) which has been approved by such Funds.
    (e) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and sales calculated by dividing the value of all 
securities, determined by a method as set forth in the Fund's 
prospectus and statement of additional information, and other assets 
belonging to the Fund or portfolio of the Fund, less the liabilities 
charged to each such portfolio or Fund, by the number of outstanding 
shares.
    (f) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or a ``member of the family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
a sister, or a spouse of a brother or a sister.
    (g) The term ``Second Fiduciary'' means a fiduciary of a Client 
Plan who is independent of and unrelated to Mellon. For purposes of 
this exemption, the Second Fiduciary will not be deemed to be 
independent of and unrelated to Mellon if:
    (1) Such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with Mellon;
    (2) Such fiduciary, or any officer, director, partner, employee, or 
relative of the fiduciary is an officer, director, partner or employee 
of Mellon (or is a relative of such persons);
    (3) Such fiduciary directly or indirectly receives any compensation 
or other consideration for his or her own personal account in 
connection with any transaction described in this exemption.
    If an officer, director, partner or employee of Mellon (or relative 
of such persons), is a director of such Second Fiduciary, and if her or 
she abstains from participation in (i) the choice of the Client Plan's 
investment adviser, (ii) the approval of any such purchase or sale 
between the Client Plan and the Funds, and (iii) the approval of any 
change in fees charged to or paid by the Client Plan in connection with 
any of the transactions described in Sections I and II above, then 
paragraph (g)(2) of this section shall not apply.
    (h) The term ``secondary service'' means a service other than an 
investment management, investment advisory, or similar service, which 
is provided by Mellon to the Funds. However, for purposes of this 
exemption, the term ``secondary service'' will not include any 
brokerage services provided to the Funds by Mellon for the execution of 
securities transactions engaged in by the Funds.
    (i) The term ``Termination Form'' means the form supplied to the 
Second Fiduciary which expressly provides an election to the Second 
Fiduciary to terminate on behalf of a Client Plan the authorization 
described in paragraph (j) of Section II. Such Termination Form may be 
used at will by the Second Fiduciary to terminate an authorization 
without penalty to the Client Plan and to notify Mellon in writing to 
effect a termination by selling the shares of the Funds held by the 
Client Plan requesting such termination within one business day 
following receipt by Mellon of the form; provided that if, due to 
circumstances beyond the control of Mellon, the sale cannot be executed 
within one business day, Mellon shall have one additional business day 
to complete such sale.

Effective Date: If the proposed exemption is granted, the exemption 
will be effective November 5, 1993, for those transactions described in 
Sections I and II above.

Summary of Facts and Representations

    1. Mellon Bank, N.A. (Mellon Bank) is a national banking 
association with its principal offices located in Pittsburgh, 
Pennsylvania, and is a subsidiary of Mellon Bank Corporation (referred 
to herein together with its affiliates as ``Mellon''). As of December 
31, 1992, Mellon Bank provided trust services for approximately 3,642 
employee benefit plans, and had total assets under management of 
approximately $41 billion. As of that same date, Mellon Bank had, in 
combination with other subsidiaries of Mellon Bank Corporation, total 
assets of approximately $31.6 billion.
    Mellon acts as a trustee, directed trustee, investment manager, 
and/or custodian for the Client Plans. The Client Plans include various 
pension, profit sharing, and stock bonus plans as well as voluntary 
employees' beneficiary associations, supplemental unemployment benefit 
plans, simplified employee benefit plans, retirement plans for self-
employed individuals (i.e. Keogh Plans) and individual retirement 
accounts (IRAs). Mellon's status as a [[Page 5708]] fiduciary with 
investment discretion for a Client Plan arises out of its relationship 
as a trustee or investment manager, but not from the rendering of any 
investment advice to a third party that has investment discretion under 
the Plan. Mellon, in its capacity as a fiduciary of the Client Plans, 
may exercise investment discretion for all or a portion of the assets 
of such Client Plans. As a custodian or directed trustee of a Client 
Plan, Mellon has custody of Plan assets, collects all income, performs 
bookkeeping and accounting services, generates periodic statements of 
account activity and other reports, and makes payments or distributions 
from the account as directed. However, Mellon has no duty as a 
custodian or directed trustee to review investments or make 
recommendations, acting only as directed by an authorized Second 
Fiduciary.
    2. Mellon is in the process of making a series of mutual fund 
portfolios within the Laurel Funds, Inc. [a/k/a Dreyfus Funds or 
Premier Funds] (i.e. the Funds) available to some of the Client Plans 
as alternatives to or in place of some of its collective funds (i.e. 
the CIFs). Mellon requests an exemption for investments in a Fund which 
occur through an in-kind transfer of a Client Plan's pro rata share of 
assets from either a terminating or partially terminating CIF to a 
corresponding Fund in exchange for shares of such Fund. Mellon also 
requests an exemption for the receipt of fees from the Funds in 
connection with the investment of assets of a Client Plan (including 
any assets of a Client Plan which were held in a terminating or 
partially terminating CIF) for which it acts as a trustee, directed 
trustee, investment manager, or custodian, in shares of the Funds in 
instances where Mellon is an investment adviser for the Funds as well 
as a custodian, dividend disbursing agent, shareholder servicing agent, 
transfer agent, and/or Fund accountant, or provides some other 
secondary service to the Funds. Finally, Mellon seeks exemptive relief 
to be able to transfer securities in-kind, rather than in cash, from a 
Client Plan's individual investment portfolio (which is not a CIF) to a 
Fund in exchange for shares of the Fund to avoid the additional 
transaction costs involved in disposing of and re-acquiring the 
securities on the open market.
    To avoid charging existing Client Plans any additional fees in 
connection with investments in the Funds, primarily as a result of the 
in-kind transfers of CIF assets, Mellon has implemented a fee structure 
under which the Client Plans do not bear any part of the fees charged 
by Mellon to the Funds (as discussed further below). Under this 
arrangement, Mellon charges its negotiated fees to the Client Plans and 
also charges the Funds for investment advisory services as well as 
secondary services. Mellon then credits as cash to each Client Plan its 
proportionate share of all fees paid by the Funds to Mellon, no later 
than the same day as the payment of the fees to Mellon. Therefore, 
Mellon retains only the Plan-level fees for services to the Client 
Plans. However, as noted in Paragraph 11 below, a Client Plan may have 
an alternative fee structure for investments made into a Fund through 
an in-kind transfer of securities from an individual portfolio. Under 
these arrangements, Mellon would retain fees received from the Fund for 
secondary services and would either credit to each Client Plan the fees 
received from the Funds for investment advisory services or would not 
charge the Client Plan a Plan-level investment management fee for those 
assets invested in the Fund. In such instances, the Second Fiduciary's 
choice of whether to obtain either a full or partial credit of Fund 
fees paid by the Funds to Mellon shall be made in writing prior to any 
in-kind transfer of securities into a Fund following full disclosure of 
all relevant information concerning the various fee structures.
    3. The Funds are a Maryland corporation organized as open-end 
investment companies registered under the 1940 Act. The Funds consist 
of a series of investment portfolios (each a ``Fund'') representing 
distinct investment vehicles, which have their own prospectuses or 
joint prospectuses with one or more other Funds. The shares of each 
Fund represent a proportionate interest in the assets of that Fund.
    The Funds involved in the initial transfer transactions were: (i) 
The Laurel Intermediate Income Portfolio; (ii) The Laurel Stock 
Portfolio; (iii) The Laurel Prime Money Market I Portfolio; and (iv) 
The Laurel Short-Term Bond Portfolio. Additional Funds that were 
available for investment in connection with the transactions described 
herein following the initial transfer transactions included: (i) The 
Laurel Midcap Stock Portfolio; (ii) The Laurel Bond Market Index 
Portfolio; and (iii) The Laurel S&P 500 Index Portfolio.
    The applicant states that Mellon subsequently acquired The Dreyfus 
Corporation (Dreyfus), the sponsor of the Dreyfus family of mutual 
funds, in August 1994. Thus, Dreyfus is now an affiliate of Mellon. As 
a result of this acquisition, changes have been made to the names of 
the Laurel Funds and the parties providing services to the Funds. 
Effective October 1994, the Laurel Funds have changed their names to 
include ``Dreyfus'' or ``Premier'' (another name used by Dreyfus). Some 
of the Funds retain ``Laurel'' as part of their names so as not to 
confuse them with existing Dreyfus Funds.
    Shares of all Funds are offered to trust account customers of 
Mellon, including the Client Plans, as a means of acquiring an interest 
in a diversified portfolio of investments. Mellon states that each 
series of Fund shares are offered to the Client Plans under terms and 
conditions which are at least as favorable to the Plans as the terms 
and conditions available to other shareholders of the Fund. Mellon 
states further that additional Funds may be created in the future that 
will receive assets from CIFs or otherwise be used for investment by 
Client Plans.
    4. Mellon served as the investment adviser to each Fund until the 
acquisition of Dreyfus. Dreyfus, as Mellon's affiliate, is now the 
investment adviser to the Funds and receives investment advisory fees 
from each Fund that may vary between 0.20% and 1.50% of the Fund's 
average net assets on an annual basis, depending on the particular 
Fund. As noted above, Mellon also previously served as the custodian, 
dividend disbursing agent, shareholder servicing agent, transfer agent, 
and fund accountant, for which it was entitled to receive fees from the 
Funds.3 Mellon continues to provide such ``secondary services'' to 
the Funds. However, since the acquisition of Dreyfus, the new transfer 
agent is The Shareholder Services Group, Inc., an independent party.

    \3\ The Funds may use broker-dealers that are affiliates of 
Mellon to provide brokerage services to the Funds. The applicant 
states that such brokerage services would be provided in accordance 
with section 17(e) of the 1940 Act, as amended, and Rule 17e-1 
thereunder. Rule 17e-1 requires, among other things, that the 
commissions, fees or other remuneration for any brokerage services 
provided by an affiliate of an investment company's investment 
advisor must be reasonable and fair compared to what other brokers 
receive for comparable transactions involving similar securities.
---------------------------------------------------------------------------

    Until Mellon's acquisition of Dreyfus, the Funds' administrator and 
distributor were Frank Russell Investment Management Company and 
Russell Fund Distributors, Inc. (collectively, the Russell Companies). 
The applicant states that the Russell Companies were independent of and 
unaffiliated with Mellon. The new administrator and distributor is 
Premier Mutual Fund Services, Inc. (Premier Services). Mellon 
represents that Premier Services is also independent of Mellon and its 
affiliates. [[Page 5709]] 
    The Fund administrator receives annual fees of $500,000 plus an 
asset-based component, which is 0.01% of the aggregate assets of the 
Funds up to $10 billion and 0.005% of assets over $10 billion. The 
asset-based fee is payable monthly, charged pro rata to each Fund on 
its average daily net assets for the month. The administrator is also 
entitled to receive reimbursement from the Funds for the start-up costs 
of certain new Funds. Under the current arrangement, the Fund 
distributor is reimbursed for certain of its Fund distribution fees and 
expenses by Mellon. The Client Plans are not charged sales commissions, 
redemption fees, or distribution expenses on their transactions or 
investments in Fund shares.4

    \4\ Mellon represents that all Funds have adopted a Distribution 
and Service Plan pursuant to Rule 12b-1 under the 1940 Act. Prior to 
July 28, 1992, the Funds paid the fees and expenses payable to the 
distributor under such plan. However, since that date, the 
distributor has waived its rights to these fees and expenses in 
exchange for Mellon paying them, as described in the prospectus for 
each Fund. Mellon states that these fees may be charged to the Funds 
again in the future, but will not be charged to a class of Fund 
shares in which the Client Plans have invested. In addition, Mellon 
does not and will not receive fees payable pursuant to Rule 12b-1 in 
connection with transactions involving any shares of the Funds.
---------------------------------------------------------------------------

In-Kind Transfers of CIF Assets

    5. Mellon is offering the Funds as alternatives or replacements for 
a number of the CIFs currently used by Client Plans. In connection with 
making these Funds available to a Client Plan, Mellon is transferring 
in-kind the Plan's assets currently invested in a particular CIF to a 
corresponding Fund with substantially similar investment objectives, if 
a Second Fiduciary for the Client Plan provides prior written 
authorization for the transfer following receipt of full and detailed 
written disclosures regarding the particular Fund and related fees.
    Mellon represents that a principal reason for offering Client Plans 
the opportunity to transfer their CIF investments to the Funds is that 
in many cases the interests of such Plans would be better served by the 
use of mutual funds and Mellon's customers have expressed an interest 
in having mutual funds available as investment vehicles. In this 
regard, mutual funds are valued on a daily basis, whereas most of the 
CIFs are valued weekly or monthly. The daily valuation permits (i) 
immediate investment of Plan contributions in varied types of 
investments; (ii) greater flexibility in transferring assets from one 
type of investment to another; and (iii) daily redemption of 
investments for purposes of making distributions. In addition, 
information concerning the investment performance of mutual funds will 
be available on a daily basis in newspapers of general circulation, 
which will allow Client Plan sponsors and participants to monitor the 
performance of their investments on a daily basis. Furthermore, unlike 
CIF units, mutual fund shares can be given to participants in plan 
distributions, thus avoiding the expense and delay of liquidating plan 
investments and facilitating roll-overs into IRAs.
    6. Prior to investing any Client Plan's assets in a Fund, Mellon 
obtains written approval from the Second Fiduciary for the Client Plan, 
who generally is either the Client Plan's named fiduciary, trustee (if 
other than Mellon), or the sponsoring employer. Mellon provides the 
Second Fiduciary with a current prospectus for that Fund and a written 
statement giving full disclosure of the structure under which Mellon's 
investment advisory and other fees will be credited back to the Client 
Plan. The disclosure statement describes why Mellon believes the 
investment of assets of the Client Plan in the Funds may be 
appropriate. The disclosure statement also describes any limitations on 
Mellon regarding which plan assets may be invested in shares of the 
Funds and the nature of such limitations.
    On the basis of such information, the Second Fiduciary authorizes 
Mellon to invest the Client Plan's assets in the Fund(s) and to receive 
fees from the Fund(s). In connection with the asset transfers from the 
CIFs, if the Second Fiduciary has not provided Mellon with its approval 
of investment in a corresponding Fund by the deadline established for 
approvals of transfers from a CIF, the Client Plan continues to be 
invested in that CIF. However, if the CIF is terminated, the Client 
Plan receives a distribution from the CIF which is then invested in an 
appropriate investment vehicle other than the Funds, in accordance with 
the terms of the Client Plan.
    Any authorization for investment by a Client Plan in shares of a 
Fund and the fees paid to Mellon is terminable at will by the Second 
Fiduciary, without penalty to the Client Plan, upon receipt by Mellon 
of written notice of termination. A Termination Form expressly 
providing an election to terminate the authorization with instructions 
on the use of the form is supplied to the Second Fiduciary no less than 
annually. The Termination Form instructs the Second Fiduciary that the 
authorization is terminable at will by the Client Plan, without penalty 
to the Client Plan, upon receipt by Mellon of written notice from the 
Second Fiduciary (through the return of such form), and that failure to 
return the Termination Form results in continued authorization of 
Mellon to engage in the subject transactions on behalf of the Client 
Plan.
    Mellon states that the Termination Form may be used to notify 
Mellon in writing to effect a termination by selling the shares of the 
Funds held by the Client Plan requesting such termination within one 
business day following receipt by Mellon of the form; provided that if, 
due to circumstances beyond the control of Mellon, the sale cannot be 
executed within one business day, Mellon shall have one additional 
business day to complete such sale.
    The Second Fiduciary will receive notice of any increases in the 
rates of fees charged by Mellon to the Funds for investment advisory 
services as well as for secondary services, through an updated 
prospectus or otherwise. However, such notice will not be accompanied 
by an additional Termination Form since all increases in investment 
advisory fees and secondary fees will be credited by Mellon to the 
Client Plans and will be subject to an annual reauthorization as 
described above.
    Mellon states that the Second Fiduciary receives an updated 
prospectus for each Fund at least annually and either annual or semi-
annual reports for each Fund. Mellon also provides monthly or quarterly 
reports to the Second Fiduciary of all transactions engaged in by the 
Client Plans, including purchases and sales of the Fund shares.
    The Funds may use broker-dealers that are affiliates of Mellon to 
provide brokerage services to the Funds. As noted in Footnote 2 above, 
such brokerage services would be provided in accordance with section 
17(e) of the 1940 Act and Rule 17e-1 thereunder. Mellon represents that 
it will provide at least annually to the Second Fiduciary of any Client 
Plan that invests in the Funds written disclosures indicating the 
following: (i) The total, expressed in dollars, brokerage commissions 
of each Fund's portfolio that are paid to Mellon or an affiliate by 
such Fund; (ii) the total, expressed in dollars, of brokerage 
commissions of each Fund's portfolio that are paid by such Fund to 
brokerage firms unrelated to Mellon; (iii) the average brokerage 
commissions per share, expressed as cents per share, paid to Mellon or 
an affiliate by each Fund portfolio; and (iv) the average brokerage 
commissions per share, expressed as cents per share, paid by each Fund 
[[Page 5710]] portfolio to brokerage firms unrelated to Mellon.
    7. Prior to November 5, 1993, Mellon generally invested assets of 
Client Plans for which it acted as a trustee with investment discretion 
in a series of CIFs. In addition, certain Client Plans where investment 
decisions were directed by a Second Fiduciary generally used a CIF as 
an investment option for individual accounts in the Client Plans. 
However, on Friday, November 5, 1993, Mellon terminated several of its 
CIFs (as noted below) and transferred in-kind the assets that were in 
these CIFs to various corresponding Funds. Mellon represents that the 
initial acquisition of shares in the Funds by Client Plans invested in 
the CIFs was accomplished by distributing the CIF assets to the Client 
Plans, and then transferring these assets from the Client Plans to the 
corresponding Funds.
    Mellon anticipates that there will be additional in-kind transfers 
of CIF assets to the Funds in the future. Such transfers will normally 
take place over a weekend. The steps involved in transferring the 
assets of a CIF attributable to a Client Plan's investment to a 
corresponding Fund are as follows:
    (a) Prior to the transfer, the assets of the CIF are reviewed to 
determine whether they are appropriate investments for the 
corresponding Fund, consistent with the Fund's investment objectives 
and policies as well as the applicable requirements under the 1940 Act 
and the Code. Mellon determines whether the assets are capable of being 
divided between the CIF and the Fund (or among the Client Plans 
receiving distributions, if the CIF is terminating). Assets that are 
not appropriate investments for the corresponding Fund or are not 
capable of being divided are liquidated prior to the transfer date.\5\

    \5\Mellon states that such assets are sold in the open market 
and are not sold through any brokerage firm affiliated with Mellon.
---------------------------------------------------------------------------

    (b) For purposes of the transfer, the values of the CIF assets are 
determined based on market value as of the close of business on the 
Friday preceding the transfer. Values are determined in a single 
valuation in accordance with the valuation procedures described in Rule 
17a-7(b) under the 1940 Act, 17 CFR 270.17a-7(b).\6\ As noted below in 
paragraph (e), the valuation of the securities is performed in the same 
manner for both the CIF's assets and the corresponding Fund's assets at 
the close of the same business day using independent market sources.

    \6\Rule 17a-7 permits transactions between investment funds that 
use the same investment adviser, subject to certain conditions. Rule 
17a-7 requires, among other things, that such transactions be 
effected at the ``independent current market price'' for each 
security, involve only securities for which market quotations are 
readily available, involve no brokerage commissions or other 
remuneration, and comply with valuation procedures adopted by the 
board of directors of the investment company to ensure that all 
requirements of the Rule are satisfied.
---------------------------------------------------------------------------

    (c) Having established the value of the CIF assets, the CIF 
accounting unit determines the value of each Client Plan's investment 
in the CIF. If the Client Plan is transferring its investment, or if 
the CIF is terminating, the Plan's pro rata share of each investment is 
distributed to the Client Plan, either in kind if all the CIF assets 
are securities, or partly in kind and partly in cash if part of the CIF 
assets consist of cash. Thus, each Client Plan receives a pro rata 
share of each security and any cash. The CIF, if not terminating, 
retains the securities and cash representing the pro rata shares of the 
Client Plans that are not transferring their investments to the 
Funds.\7\

    \7\Such distributions are made in compliance with 12 CFR 
9.18(b)(6), which requires that distributions in kind from CIFs must 
be made ``ratably''. The Client Plans withdrawing from the CIF and 
the Client Plans remaining invested in the CIF each receive their 
pro rata portions of each CIF asset and the CIF cash, so that both 
groups of Plans retain the same asset quality and liquidity 
following the transfers.
---------------------------------------------------------------------------

    (d) If the Second Fiduciary provides written approval of the 
transfer of its CIF investments to the Fund by the deadline set for 
such approval, the assets and cash received by the Client Plan from the 
CIF are contributed to the corresponding Fund to purchase shares of 
that Fund through an exchange of securities or investment of cash. 
Exchanges are conducted in accordance with the procedures described in 
the Fund prospectus, which provide that the securities being exchanged 
need to meet the receiving Fund's investment objectives, policies and 
limitations, have a readily ascertainable market value, be liquid, and 
not be subject to resale restrictions.
    (e) The securities received by the Fund are valued by the Fund for 
purposes of the in-kind transfer transaction in the same manner as of 
the same business day as the assets were valued by the corresponding 
CIF and the per-share value of the Fund shares issued are based on the 
Fund's then-current net asset value as of such date. Therefore, the 
value of a Client Plan's investment in a Fund as of the start of 
business the following Monday, based on the Client Plan's pro rata 
share of the underlying market value of the securities transferred to 
the Funds, is the same as the value of its investment in the 
corresponding CIF as of the close of business the previous Friday.
    The CIFs involved in the initial series of transfers and their 
corresponding Funds are as follows:

------------------------------------------------------------------------
             Mellon CIF                          Laurel fund            
------------------------------------------------------------------------
             Portfolio8                                                 
                                                                        
EB Intermediate Bond...............  Intermediate Income                
EB Stock...........................  Stock                              
EB Special Stock...................  Midcap Stock                       
EB Composite Bond Index............  Bond Market Index                  
EB Composite Bond..................  Bond Market Index                  
EB Stock Index.....................  S&P 500 Stock Index                
EB Equity Market...................  S&P 500 Stock Index                
EB Savings.........................  Prime Money Market I               
EB Enhanced Temporary Investment...  Short-Term Bond                    
------------------------------------------------------------------------
8As of October 1994, these Funds were renamed as follows: (i) Premier   
  Limited Term Income; (ii) Dreyfus Disciplined Stock; (iii) Dreyfus    
  Disciplined Midcap Stock; (iv) Dreyfus Bond Market Index; (v) Dreyfus 
  S&P 500 Stock Index; (vi) Dreyfus/Laurel Prime Money Market; and (vii)
  Dreyfus/Laurel Short-Term Bond.                                       

    Mellon states that because of the relatively small number of Client 
Plans approving the transfer of assets from the EB Intermediate Bond 
Fund, the EB Composite Bond Index Fund and the EB Composite Bond Fund, 
and because of the nature of the assets in these CIFs, the transfers 
from these CIFs were made totally in cash rather than in kind. The 
Client Plans investing in these CIFs that had approved the transfer 
received a distribution of the cash value of their CIF units, and that 
cash was then used to acquire shares of the corresponding Funds. 
Therefore, no exemptive relief is requested for the in-kind transfer of 
assets from these three CIFs.
    Each Client Plan that approved the CIF asset transfers to the Funds 
received account statements describing the asset transfers either in 
mid-December 1993, if such Plans were on a monthly account statement 
schedule, or mid-January 1994, if such Plans were on a quarterly 
account statement schedule. The statements showed the disposition of 
the CIF units from the Client Plan account and the acquisition by the 
account of Fund shares, both posted as of Monday, November 23, 
1992.9 This [[Page 5711]] information provided the affected Client 
Plans with written confirmation of the number of CIF units held by the 
Client Plan immediately before the transfer, the related per unit value 
and the total dollar amount of such CIF units as well as the number of 
shares of the Funds held by the Client Plan following the transfer, the 
related per share net asset value, and the total dollar amount of such 
shares.

    \9\The following example illustrates the contents of such a 
statement: Assume a Client Plan held 12,506 units of the Mellon 
Employee Benefit Stock Fund prior to the asset transfers. The 
account statement showed a disposition of 12,506 units of Mellon 
Employee Benefit Stock Fund, at a value of $72.08 per unit, on 
November 23, 1992, with total proceeds of $901,432.18. The statement 
also showed a purchase on that same date of 90,143.218 shares of the 
Laurel Stock Fund, the Fund corresponding to the Mellon Employee 
Benefit Stock Fund, at $10 per share, at a total cost of 
$901,432.18, the same amount as the proceeds of the disposition from 
the Mellon Employee Benefit Stock Fund.
---------------------------------------------------------------------------

    For all subsequent in-kind transfers of CIF assets to a Fund 
following publication of this proposed exemption in the Federal 
Register, Mellon will send by regular mail to each affected Client Plan 
a written confirmation, not later than 30 days after completion of the 
transaction, containing the following information:
    (1) The identity of each security that was valued for purposes of 
the transaction in accordance with Rule 17a-7(b)(4);
    (2) The price of each such security involved in the transaction; 
and
    (3) The identity of each pricing service or market maker consulted 
in determining the value of such securities. Securities which are 
valued in accordance with Rule 17a-7(b)(4) are securities for which the 
current market price cannot be obtained by reference to the last sale 
price for transactions reported on a recognized securities exchange or 
the NASDAQ system. Mellon states that such securities are valued based 
on an average of the highest current independent bid and lowest current 
independent offer, as of the close of business on the Friday preceding 
the weekend of the CIF transfers, determined on the basis of reasonable 
inquiry from at least three sources that are broker-dealers or pricing 
services independent of Mellon.
    In addition, for all in-kind transfers of CIF assets to a Fund that 
occur after the date this proposed exemption is published in the 
Federal Register, Mellon will send by regular mail to the Second 
Fiduciary no later than 90 days after completion of each transfer a 
written confirmation that contains the following information:
    (1) The number of CIF units held by the Client Plan immediately 
before the transfer, the related per unit value, and the total dollar 
amount of such CIF units; and
    (2) The number of shares in the Funds that are held by the Client 
Plan immediately following the transfer, the related per share net 
asset value, and the total dollar amount of such shares.
    Mellon anticipates that additional CIFs will be converted or 
``partially converted'' to the Funds so that the Client Plan investors 
in those CIFs will be given the opportunity to transfer their 
investments in-kind from the CIFs to corresponding Funds, or 
alternatively to continue investing in the CIFs until such CIFs are 
terminated. Mellon states that such transfers will follow the same 
procedures as the initial transfers, including valuations in accordance 
with Rule 17a-7(b), and will comply with the conditions of this 
proposed exemption. In the case of partial CIF terminations, the 
transfers will involve a smaller amount of assets and may occur on a 
weekday rather than a weekend. In all cases, such transfers will use 
the closing market prices for that particular day in valuing the Client 
Plan assets to be transferred and the net asset value of the Fund.
    8. Mellon or an affiliate (i.e. Dreyfus) charges investment 
advisory fees to the Funds in accordance with the investment advisory 
agreements between Mellon and the Funds. These agreements have been 
approved by the independent members of the Board of Directors of the 
Funds (the Directors), in accordance with the applicable provisions of 
the 1940 Act. Any future changes in the fees paid to Mellon must be 
approved by the Directors. These fees are payable monthly by the Funds.
    Mellon uses a fee structure that is designed to preserve the 
negotiated fee rates of the Client Plans that transfer investments from 
the CIFs to the Funds, so as to minimize the impact of the change to 
the Funds on a Client Plan's fees. At the beginning of each month, and 
in no event later than the same day as the payment of the investment 
advisory and other fees by the Funds to Mellon for the previous month, 
Mellon credits to each Client Plan in cash its proportionate share of 
all investment advisory fees charged by Mellon to the Funds for the 
previous month.
    To assure that Client Plans pay no additional fees as a result of 
investing in the Funds rather than the CIFs, and to otherwise preserve 
the negotiated fee rates of the Client Plans, Mellon also credits to 
the Client Plans participating in the transfers their pro rata shares 
of any fees paid by the Funds to Mellon for services other than 
investment advisory services. However, Mellon does retain amounts 
necessary to account for its direct expenses in providing such 
secondary services. These credits are made at the same time and in the 
same manner as the advisory fee credits.
    In addition, Mellon has credited to the Client Plans participating 
in the transfers from the CIFs to the Funds their pro rata shares of 
fees paid by the Funds or Mellon to Fund service providers other than 
Mellon, so that the Client Plans effectively receive a credit of all 
charges assessed upon their investments in the Funds. Mellon retains 
the flexibility to cease crediting these third-party fees and, in such 
instances, provides further disclosure to and obtains express approval 
from any Client Plan before terminating the credit of the third-party 
fees for the Client Plan. However, Mellon states that all investment 
advisory fees charged to the Funds by third party sub-advisers, or paid 
by Mellon to such third party sub-advisers, will continue to be 
credited to the Client Plans.
    9. Mellon maintains a system of internal accounting controls for 
the crediting of all fees to the Client Plans. In addition, Mellon 
retains the services of KPMG Peat Marwick (the Auditor), an independent 
accounting firm, to audit annually the crediting of fees to the Client 
Plans under this program. Such audits provide independent verification 
of the proper crediting to the Client Plans.
    In its annual audit of the credit program, the Auditor will: (i) 
Review and test compliance with the specific operational controls and 
procedures established by Mellon for making the credits; (ii) verify on 
a test basis the monthly credit factors transmitted to Mellon by the 
Funds; (iii) verify on a test basis the proper assignment of 
identification fields to the Client Plans; (iv) verify on a test basis 
the credits paid in total to the sum of all credits paid to each Client 
Plan; (v) recompute, on a test basis, the amount of the credit 
determined for selected Client Plans and verify that the credit was 
made to the proper Client Plan account.
    In the event either the internal audit by Mellon or the independent 
audit by the Auditor identifies an error made in the crediting of fees 
to the Client Plans, Mellon will correct the error. With respect to any 
shortfall in credited fees to a Client Plan, Mellon will make a cash 
payment to the Client Plan equal to the amount of the error plus 
interest paid at money market rates offered by Mellon for the period 
involved. Any excess credits made to a Client Plan will be corrected by 
an appropriate deduction from the Client Plan account or reallocation 
of cash during the next payment period after discovery of the error to 
reflect accurately the amount of total credits due to the Client Plan 
for the period involved.
    10. Mellon also uses the credit procedure described above (referred 
to hereafter as ``the Alternative Credit Method'') for investments by 
Client [[Page 5712]] Plans other than through the asset transfer 
transactions. In addition, Mellon may use a fee offset method that 
complies with Prohibited Transaction Exemption (PTE) 77-4 (42 FR 18732, 
April 8, 1977).10 Mellon states that Client Plans that use the 
Alternative Credit Method have the option to change to an offset method 
that complies with PTE 77-4.

    \10\PTE 77-4, in pertinent part, permits the purchase and sale 
by an employee benefit plan of shares of a registered, open-end 
investment company when a fiduciary with respect to the plan is also 
the investment adviser for the investment company, provided that, 
among other things, the plan does not pay an investment management, 
investment advisory or similar fee with respect to the plan assets 
invested in such shares for the entire period of such investment. 
Section II(c) of PTE 77-4 states that this condition does not 
preclude the payment of investment advisory fees by the investment 
company under the terms of an investment advisory agreement adopted 
in accordance with section 15 of the Investment Company Act of 1940. 
Section II(c) states further that this condition does not preclude 
payment of an investment advisory fee by the plan based on total 
plan assets from which a credit has been subtracted representing the 
plan's pro rata share of investment advisory fees paid by the 
investment company.
---------------------------------------------------------------------------

    However, Mellon represents that the Alternative Credit Method 
offers several advantages to a Client Plan. These advantages include 
the following:
    (a) Plan Sponsor Paying Fees: With many Client Plans, the Plan 
sponsor pays the Plan-level fees. In such instances, if the offset 
method described in PTE 77-4 is used, the Client Plan pays all Fund-
level fees in connection with the investments in the Funds. By 
contrast, under the Alternative Credit Method, the sponsor pays the 
entire Plan-level fee and the Client Plan does not pay any Fund-level 
fees. Thus, where the Plan sponsor pays the Client Plan's fees, the 
Client Plan's rate of return on its investments in the Funds is higher 
under the Alternative Credit Method.
    (b) Timing of Credit: Plan-level trustee fees will generally be 
paid to Mellon quarterly, whereas Fund-level investment advisory fees 
are paid monthly. Consequently, the crediting may not occur for up to 
three months under PTE 77-4 credit method, so that Mellon receives the 
use of the amounts to be credited for the time period between the 
payment dates. In contrast, there is no such time delay under the 
Alternative Credit Method.
    (c) Excess Credits: The amount of a Client Plan's pro rata share of 
Fund advisory fees may exceed the amount of its Plan-level fees, 
depending on the relative fee rates. Under the PTE 77-4 credit method, 
it is not clear how an investment adviser should handle the amount of a 
credit that exceeds the Plan-level fee. The problem of excess credits 
does not arise under the Alternative Credit Method since the credit is 
made directly to the Client Plan, rather than as an offset against the 
Plan-level fees.
    Mellon states that the Alternative Credit Method allows it to 
maintain without modification its fiduciary fee schedules for its 
services to the Client Plans, which is more efficient and less costly 
than a system which employs credits against such fiduciary fees. In 
addition, use of the Alternative Credit Method permits Mellon's 
existing Client Plans to retain their negotiated fiduciary fee 
structures despite the change to a new investment vehicle.
    Mellon states further that where Client Plans are withdrawing 
assets from the CIFs and investing in the corresponding Funds, the CIFs 
and Funds would be forced to incur large transaction costs if the CIF 
assets could not be transferred via the Client Plan accounts to the 
Funds. The asset transfer transactions permit the CIFs and the Funds to 
avoid incurring any such transaction costs in connection with 
liquidating CIF investments and making investments for the Funds, 
enhancing the investment return of the Client Plans.

In-Kind Transfers of Securities From Individual Portfolios

    11. Mellon represents that certain Client Plans may desire in the 
future to transfer securities from their individual portfolios to the 
Funds in exchange for shares of the Funds (i.e. an Exchange), as 
discussed in Section III above. The Exchange would involve assets as to 
which Mellon is a fiduciary which are not distributed from a CIF. All 
or a pro rata portion of the assets of a Client Plan held by Mellon in 
an investment account or portfolio that is selected by the Second 
Fiduciary of such Client Plan for an Exchange would be transferred in-
kind to the Funds in exchange for shares of such Funds. Such Exchanges 
may occur when a Second Fiduciary of a Client Plan trusteed by Mellon 
selects Mellon to manage the Client Plan's assets on a collective 
rather than individual portfolio basis in order to achieve certain 
economies of scale and diversification. Mellon states that in such 
cases it may be less expensive for the Client Plan to exchange its 
existing investments in securities directly for Fund shares rather than 
liquidating the securities and investing the proceeds in the shares. 
The Exchange would avoid transaction costs, such as commissions and 
dealer mark-ups, as well as any adverse market impact from a sale of 
the securities at the time of the transaction.
    The Exchange would have to comply with the requirements for an 
``in-kind'' exchange of securities as stated in the Fund prospectus. 
Specifically, the securities to be exchanged must meet the investment 
objectives, policies and limitations of the particular Fund portfolio, 
must have a readily ascertainable market value, must be liquid and must 
not be subject to resale restrictions. Securities accepted by a Fund 
would be valued in the same manner as the Fund values its assets, and 
the number of Fund shares issued would depend on the relative net asset 
value of the shares purchased and securities exchanged.11 The 
Fund's procedures will protect any existing Fund shareholders while 
assuring that fair value is given to the Client Plan exchanging the 
securities. The Second Fiduciary would receive disclosures regarding 
the relevant Funds and their fees, including each Fund's prospectus and 
additional information regarding the fee structures which may be used 
to avoid duplicative investment advisory fees being paid to Mellon (see 
Section III(f) above). In such instances, Mellon represents that one of 
the following fee structures will be used: (i) The Client Plan will 
receive a cash credit of such Plan's proportionate share of all fees 
(including all investment advisory fees and all secondary service fees) 
charged to the Funds by Mellon, less any fees paid by Mellon to parties 
unrelated to Mellon for services other than investment advisory 
services provided to the Funds, no later than the same day as the 
receipt of such fees by Mellon; (ii) the assets of the Client Plan 
invested in the Funds will be excluded from the assets on which the 
investment management fees paid by the Client Plan to Mellon are 
determined; or (iii) the Client Plan will pay an investment management 
fee to Mellon based on total Plan assets from which a credit is 
subtracted representing only the Client Plan's pro rata share of the 
investment advisory fees paid by the Funds to Mellon.

    \11\In this regard, the Department assumes that the securities 
which are transferred to a Fund will have the same value at the time 
the securities become part of the Fund's portfolio as the value that 
was determined for the securities in the individual Client Plan 
portfolios, in accordance with procedures described in Rule 17a-7 
under the 1940 Act, for purposes of the Exchange.
---------------------------------------------------------------------------

    Prior to the Exchange, the Second Fiduciary would receive in 
writing (i) the reasons why Mellon may consider the Exchange to be 
appropriate for the Client Plan and a list of the securities held by 
the Client Plan that would be accepted by one or more Funds in the 
Exchange, (ii) the date the Exchange is [[Page 5713]] to occur, and 
(iii) an explanation of the procedures that would be followed for 
valuing the securities for purposes of the Exchange, including the 
identity of the independent pricing service or services that would be 
used to value the securities. In addition, within 30 days after the 
Exchange, the Second Fiduciary would receive written confirmation that 
reflects the price of each security involved in the Exchange and, for 
securities which are valued in accordance with Rule 17a-7(b)(4), a 
written disclosure of the identity of the pricing services or broker-
dealers consulted in determining the value of the securities.
    12. In summary, the subject transactions satisfy the statutory 
criteria of section 408(a) of the Act and section 4975(c)(2) of the 
Code for the following reasons:
    (a) The Funds provide many of the Client Plans with a more 
effective investment vehicle than the CIFs currently maintained by 
Mellon, without any increase in fees paid by the Client Plans to 
Mellon;
    (b) Mellon requires annual audits by an independent accounting firm 
to verify that the Client Plans receive proper credits for the fees 
paid to Mellon by the Funds;
    (c) Client Plan fiduciaries and participants have access to more 
frequent reports of Fund performance than are available for plan assets 
invested in the CIFs, which enables such fiduciaries or participants to 
make more informed decisions regarding their investments;
    (d) Client Plan investments in the Funds and the payment of any 
fees by the Funds to Mellon in connection with such investments require 
an advance authorization in writing by an independent fiduciary (i.e. 
the Second Fiduciary) after full written disclosure, including current 
prospectuses for the Funds and a statement describing the Alternative 
Credit Method;
    (e) Any authorization made by the Second Fiduciary is terminable at 
will by that fiduciary, without penalty, upon receipt by Mellon of 
written notice of termination from the Second Fiduciary on a form 
expressly providing an election to terminate the authorization (i.e. 
the Termination Form), which is supplied to the Second Fiduciary no 
less than annually;
    (f) No sales commissions or other fees are paid by the Client Plans 
in connection with any acquisition of Fund shares (either by an in-kind 
transfer of CIF assets, a cash purchase, or an in-kind transfer of 
securities from a Client Plan's individual investment portfolio) and no 
redemption fees are paid in connection with the sale of Fund shares;
    (g) All dealings among the Client Plans, the Funds, and Mellon are 
on a basis no less favorable to the Client Plans than such dealings 
with the other shareholders of the Funds;
    (h) The in-kind transfers of CIF assets into the Funds are done 
with the prior written approval of independent fiduciaries (i.e. the 
Second Fiduciary) following full and detailed written disclosure 
concerning the Funds;
    (i) Each Client Plan receives shares of a Fund which have a total 
net asset value that is equal to the value of the Client Plan's pro 
rata share of the assets of the CIF on the date of the in-kind 
transfer, based on the current market value of the CIF's assets as 
determined in a single valuation performed in the same manner at the 
close of the same business day in accordance with independent sources 
and the procedures established by the Funds for the valuation of such 
assets; and
    (j) With respect to any transfer of securities from an individual 
portfolio of a Client Plan in exchange for Fund shares (i.e. an 
Exchange), the Second Fiduciary receives written disclosures regarding 
the relevant Funds and their fees (including the Fund prospectus, 
additional information regarding the fee structure to be used to avoid 
duplicative advisory fees, and the valuation procedures to be used for 
the securities involved in the Exchange) as well as written 
confirmations that reflect the price of each security involved in the 
Exchange and, for securities valued in accordance with Rule 17a-
7(b)(4), the identity of the pricing service or broker-dealers 
consulted in the valuation of such securities.

Notice to Interested Persons

    Notice of the proposed exemption shall be given to all Second 
Fiduciaries of Client Plans described herein that had investments in a 
terminating CIF and from whom approval was sought, or will be sought 
prior to the granting of this proposed exemption, for a transfer of a 
Client Plan's CIF assets to a Fund. In addition, interested persons 
shall include the Second Fiduciaries of all Client Plans that are 
currently invested in the Funds, as of the date the notice of the 
proposed exemption is published in the Federal Register, where Mellon 
provides services to the Funds and receives fees which would be covered 
by the exemption, if granted. Notice to interested persons shall be 
provided by first class mail within fifteen (15) days following the 
publication of the proposed exemption in the Federal Register. Such 
notice shall include a copy of the notice of proposed exemption as 
published in the Federal Register and a supplemental statement (see 29 
CFR 2570.43(b)(2)) which informs all interested persons of their right 
to comment on and/or request a hearing with respect to the proposed 
exemption. Comments and requests for a public hearing are due within 
forty-five (45) days following the publication of the proposed 
exemption in the Federal Register.

For Further Information Contact:
Mr. E.F. Williams of the Department, telephone (202) 219-8194. (This is 
not a toll-free number.)

Bank South, N.A. (the Bank) Located in Atlanta, Georgia

[Application No. D-09626]

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).
Section I--Exemption for In-Kind Transfer of Assets
    If the exemption is granted, the restrictions of sections 406(a) 
and 406(b) of the Act and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(F) of the Code, shall not apply as of February 11, 1994, to the in-
kind transfer of assets of plans for which the Bank serves as a 
fiduciary (the Client Plans), other than plans established and 
maintained by the Bank, that are held in certain collective investment 
funds maintained by the Bank (the CIFs), in exchange for shares of the 
Peachtree Funds (the Funds), an open-end investment company registered 
under the Investment Company Act of 1940 (the 1940 Act) for which the 
Bank acts as investment adviser, in connection with the termination of 
such CIFs, provided that the following conditions and the general 
conditions of Section III below are met:
    (a) No sales commissions or other fees are paid by the Client Plans 
in connection with the purchase of Fund shares through the in-kind 
transfer of CIF assets and no redemption fees are paid in connection 
with the sale of such shares by the Client Plans to the Funds.
    (b) Each Client Plan receives shares of a Fund which have a total 
net asset value that is equal to the value of the Client Plan's pro 
rata share of the assets of the CIF on the date of the transfer, based 
on the current market value of the CIF's assets, as determined in a 
single [[Page 5714]] valuation performed in the same manner at the 
close of the same business day using independent sources in accordance 
with Rule 17a-7(b) of the Securities and Exchange Commission under the 
1940 Act and the procedures established by the Funds pursuant to Rule 
17a-7 for the valuation of such assets. Such procedures must require 
that all securities for which a current market price cannot be obtained 
by reference to the last sale price for transactions reported on a 
recognized securities exchange or NASDAQ be valued based on an average 
of the highest current independent bid and lowest current independent 
offer, as of the close of business on the Friday preceding the weekend 
of the CIF transfers, determined on the basis of reasonable inquiry 
from at least three sources that are broker-dealers or pricing services 
independent of the Bank.
    (c) A second fiduciary who is independent of and unrelated to the 
Bank (the Independent Fiduciary) receives advance written notice of the 
in-kind transfer of assets of the CIFs and full written disclosure of 
information concerning the Funds (including a current prospectus for 
each of the Funds and a statement describing the fee structure) and, on 
the basis of such information, authorizes in writing the in-kind 
transfer of the Client Plan's CIF assets to a corresponding Fund in 
exchange for shares of the Fund.
    (d) For all transfers of CIF assets to a Fund following the 
publication of this proposed exemption in the Federal Register, the 
Bank sends by regular mail to each affected Client Plan the following 
information:
    (1) Within 30 days after completion of the transaction, a written 
confirmation containing:
    (i) The identity of each security that was valued for purposes of 
the transaction in accordance with Rule 17a-7(b)(4);
    (ii) The price of each such security involved in the transaction;
    (iii) The identity of each pricing service or market maker 
consulted in determining the value of such securities; and
    (2) Within 90 days after completion of each transfer, a written 
confirmation that contains:
    (i) The number of CIF units held by the Client Plan immediately 
before the transfer, the related per unit value, and the total dollar 
amount of such CIF units; and
    (ii) The number of shares in the Funds that are held by the Client 
Plan following the transfer, the related per share net asset value, and 
the total dollar amount of such shares.
    (e) The conditions set forth in paragraphs (e), (f) and (m) of 
Section II below are satisfied.
Section II--Exemption for Receipt of Fees
    If the exemption is granted, the restrictions of sections 406(a) 
and 406(b) of the Act and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(F) of the Code, shall not apply as of February 11, 1994, to the 
receipt of fees by the Bank from the Funds for acting as investment 
adviser to the Funds in connection with the investment in the Funds by 
Client Plans for which the Bank acts as a fiduciary, including any 
Client Plan invested in a CIF which transfers its assets to a Fund, 
provided that the following conditions and the general conditions of 
Section III are met:
    (a) No sales commissions, loads, charges or similar fees are paid 
by the Client Plans for the purchase or sale of shares of the Funds and 
no redemption fees are paid for the sale of shares by the Client Plans 
to the Funds.
    (b) The price paid or received by a Client Plan for shares in a 
Fund is the net asset value per share at the time of the transaction, 
as defined in Section IV(e), and is the same price which would have 
been paid or received for the shares by any other investor at that 
time.
    (c) Neither the Bank nor an affiliate, including any officer or 
director of the Bank, purchases or sells shares of the Funds from or to 
any Client Plan.
    (d) The Client Plans do not pay any plan-level investment 
management fees, investment advisory fees, or similar fees to the Bank 
with respect to any of the assets of such Client Plans which are 
invested in shares of any of the Funds. This condition does not 
preclude the payment of investment advisory fees or similar fees by the 
Funds to the Bank under the terms of an investment advisory agreement 
adopted in accordance with section 15 of the 1940 Act or any other 
agreement between the Bank and the Funds which is in compliance with 
the 1940 Act.
    (e) The combined total of all fees received by the Bank for the 
provision of services to a Client Plan, and in connection with the 
provision of services to the Funds in which the Client Plan may invest, 
are not in excess of ``reasonable compensation'' within the meaning of 
section 408(b)(2) of the Act.
    (f) The Bank does not receive any fees payable pursuant to Rule 
12b-1 under the 1940 Act in connection with the transactions.
    (g) The Client Plans are not employee benefit plans sponsored or 
maintained by the Bank.
    (h) The Independent Fiduciary receives, in advance of any 
investment by the Client Plan in a Fund, full and detailed written 
disclosure of information concerning the Funds, including, but not 
limited to:
    (1) A current prospectus for each Fund in which a Client Plan is 
considering investing;
    (2) A statement describing the fees for investment advisory or 
similar services, as well as all other fees to be charged to or paid by 
the Client Plan and by the Funds, including the nature and extent of 
any differential between the rates of such fees;
    (3) The reasons why the Bank may consider such investment to be 
appropriate for the Client Plan;
    (4) A statement describing whether there are any limitations 
applicable to the Bank with respect to which assets of a Client Plan 
may be invested in the Funds, and if so, the nature of such 
limitations; and
    (5) Upon request of the Independent Fiduciary, a copy of the 
proposed exemption and/or a copy of the final exemption, if granted, 
once such documents become available.
    (i) On the basis of the information described above in paragraph 
(h) of this Section II, the Independent Fiduciary authorizes in writing 
the investment of assets of the Client Plan in each Fund, and the fees 
to be paid by such Funds to the Bank.
    (j) All authorizations made by an Independent Fiduciary regarding 
investments in a Fund and the fees paid to the Bank are subject to an 
annual reauthorization wherein any such prior authorization referred to 
in paragraph (i) of Section II shall be terminable at will by the 
Client Plan, without penalty to the Client Plan, upon receipt by the 
Bank of written notice of termination. A form expressly providing an 
election to terminate the authorization described in paragraph (i) of 
Section II above (the Termination Form) with instructions on the use of 
the form must be supplied to the Independent Fiduciary no less than 
annually. The instructions for the Termination Form must include the 
following information:
    (1) The authorization is terminable at will by the Client Plan, 
without penalty to the Plan, upon receipt by the Bank of written notice 
from the Independent Fiduciary; and
    (2) Failure to return the Termination Form will constitute 
continued authorization of the Bank to engage in [[Page 5715]] the 
transactions described in paragraph (i) of Section II on behalf of the 
Client Plan.
    (k) In the event of an increase in the rate of any fees paid by the 
Funds to the Bank regarding any investment management services, 
investment advisory services, or fees for similar services that the 
Bank provides to the Funds over an existing rate for such services that 
had been authorized by an Independent Fiduciary, in accordance with 
paragraph (i) of this Section II, the Bank will, at least thirty (30) 
days in advance of the implementation of such increase, provide a 
written notice (which may take the form of a proxy statement, letter, 
or similar communication that is separate from the prospectus of the 
Fund and which explains the nature and amount of the increase in fees) 
to the Independent Fiduciary of each of the Client Plans invested in a 
Fund which is increasing such fees. Such notice shall be accompanied by 
a Termination Form. However, if the Termination Form has been provided 
to the Independent Fiduciary pursuant to this paragraph, then the 
Termination Form need not be provided again for an annual 
reauthorization pursuant to paragraph (j) above unless at least six 
months has elapsed since the form was provided in connection with the 
fee increase.
    (l) On an annual basis, the Bank provides the Independent Fiduciary 
of a Client Plan investing in the Funds with:
    (1) A copy of the current prospectus for the Funds and, upon such 
fiduciary's request, a copy of the Statement of Additional Information 
for such Funds which contains a description of all fees paid by the 
Funds to the Bank; and
    (2) Upon the request of such Independent Fiduciary, a report or 
statement (which may take the form of the most recent financial report, 
the current Statement of Additional Information for the Fund, or some 
other written statement) that contains a description of all fees paid 
by the Fund to the Bank.
    (m) All dealings between the Client Plans and the Funds are on a 
basis no less favorable to the Client Plans than dealings with other 
shareholders of the Funds.
Section III--General Conditions
    (a) The Bank maintains for a period of six years the records 
necessary to enable the persons described below in paragraph (b) of 
Section III to determine whether the conditions of this exemption have 
been met, except that (1) a prohibited transaction will not be 
considered to have occurred if, due to circumstances beyond the control 
of the Bank, the records are lost or destroyed prior to the end of the 
six-year period, and (2) no party in interest other than the Bank shall 
be subject to the civil penalty that may be assessed under section 
502(i) of the Act or to the taxes imposed by section 4975 (a) and (b) 
of the Code if the records are not maintained or are not available for 
examination as required by paragraph (b) below.
    (b)(1) Except as provided in paragraph (b)(2) and notwithstanding 
any provisions of section 504 (a)(2) and (b) of the Act, the records 
referred to in paragraph (a) of Section III are unconditionally 
available at their customary location for examination during normal 
business hours by--
    (i) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service,
    (ii) Any fiduciary of the Client Plans who has authority to acquire 
or dispose of shares of the Funds owned by the Client Plans, or any 
duly authorized employee or representative of such fiduciary, and
    (iii) Any participant or beneficiary of the Client Plans or duly 
authorized employee or representative of such participant or 
beneficiary;
    (2) None of the persons described in paragraph (b)(1) (ii) and 
(iii) shall be authorized to examine trade secrets of the Bank, or 
commercial or financial information which is privileged or 
confidential.
Section IV--Definitions
    For purposes of this proposed exemption:
    (a) The term ``Bank'' means the Bank South, N.A. and any affiliate 
thereof as defined below in paragraph (b) of this Section IV.
    (b) An ``affiliate'' of a person includes:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The term ``Fund'' or ``Funds'' shall include the Peachtree 
Funds, Inc., or any other diversified open-end investment company 
registered under the 1940 Act for which the Bank serves as an 
investment adviser.
    (e) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and sales calculated by dividing the value of all 
securities, determined by a method as set forth in the Fund's 
prospectus and statement of additional information, and other assets 
belonging to the Fund or portfolio of the Fund, less the liabilities 
charged to each such portfolio or Fund, by the number of outstanding 
shares.
    (f) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or a ``member of the family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
a sister, or a spouse of a brother or a sister.
    (g) The term ``Independent Fiduciary'' means a fiduciary of a 
Client Plan who is independent of and unrelated to the Bank. For 
purposes of this exemption, the Independent Fiduciary will not be 
deemed to be independent of and unrelated to the Bank if:
    (1) Such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with the Bank;
    (2) Such fiduciary, or any officer, director, partner, employee, or 
relative of the fiduciary is an officer, director, partner, employee or 
affiliate of the Bank (or is a relative of such persons);
    (3) Such fiduciary directly or indirectly receives any compensation 
or other consideration for his or her own personal account in 
connection with any transaction described in this exemption.
    If an officer, director, partner, affiliate or employee of the Bank 
(or relative of such persons), is a director of such Independent 
Fiduciary, and if he or she abstains from participation in (i) the 
choice of the Client Plan's investment adviser, (ii) the approval of 
any such purchase or sale between the Client Plan and the Funds, and 
(iii) the approval of any change in fees charged to or paid by the 
Client Plan in connection with any of the transactions described in 
Sections I and II above, then paragraph (g)(2) of this Section IV shall 
not apply.
    (h) The term ``Termination Form'' means the form supplied to the 
Independent Fiduciary which expressly provides an election to the 
Independent Fiduciary to terminate on behalf of a Client Plan the 
authorization described in paragraph (j) of Section II. The Termination 
Form shall be used at will by the Independent Fiduciary to terminate an 
authorization without penalty to the Client Plan and to notify the Bank 
in writing to effect a termination by selling the shares of the Funds 
held by the Client Plan requesting such termination within one business 
day following receipt by the [[Page 5716]] Bank of the form; provided 
that if, due to circumstances beyond the control of the Bank, the sale 
cannot be executed within one business day, the Bank shall have one 
additional business day to complete such sale.
Effective Date: If the proposed exemption is granted, the exemption 
will be effective February 11, 1994.

Summary of Facts and Representations

    1. The Bank is a Georgia corporation with its principal offices 
located at 55 Marietta Street, N.W., Atlanta, Georgia, and is a wholly-
owned subsidiary of Bank South Corporation, a bank holding company. The 
Bank provides trust services to approximately 128 employee benefit 
plans with total assets of approximately $132 million, as of November 
1, 1993. The Bank has total assets under management of approximately $1 
billion.
    The Bank serves as a discretionary trustee, investment manager, 
directed trustee, or custodian for the Client Plans. The Client Plans 
include various pension, profit sharing, and stock bonus plans as well 
as voluntary employees' beneficiary associations, supplemental 
unemployment benefit plans, simplified employee benefit plans, 
retirement plans for self-employed individuals (i.e. Keogh plans), and 
individual retirement accounts (IRAs).
    The Bank represents that its status as a fiduciary with investment 
discretion for a Client Plan arises out of its relationship as a 
trustee or investment manager for such Plan. The Bank may exercise 
investment discretion for all or a portion of the assets of a Client 
Plan. As a custodian or directed trustee of a Client Plan, the Bank has 
custody of Plan assets, collects all income, performs bookkeeping and 
accounting services, generates periodic statements of account activity 
and other reports, and makes payments or distributions from the account 
as directed. However, the Bank has no duty as a custodian or directed 
trustee to review investments or make recommendations, acting only as 
directed by an authorized Independent Fiduciary.
    2. The Bank requests an exemption for investments in a Fund which 
occur through an in-kind transfer of a Client Plan's pro rata share of 
assets of a terminating CIF to a corresponding Fund in exchange for 
shares of such Fund.12 The Bank also requests an exemption for the 
receipt of fees from the Funds in connection with the investment of 
assets of a Client Plan (including any Client Plan invested in a CIF 
which transfers its assets to a Fund), for which it acts as a trustee, 
directed trustee, investment manager, or custodian in shares of the 
Funds in situations where the Bank acts as an investment adviser to the 
Funds. The exemption for the receipt of fees would include Client Plans 
for which the Bank exercises investment discretion as well as Client 
Plans where investment decisions are directed by an Independent 
Fiduciary.13

    \12\The Bank is not requesting an exemption for any investment 
in the Funds by employee benefit plans sponsored and maintained by 
the Bank (the Bank Plans). The Bank represents that the Bank Plans 
may acquire or sell shares of the Funds pursuant to Prohibited 
Transaction Exemption 77-3 (PTE 77-3, 42 FR 18734, April 8, 1977). 
PTE 77-3 permits the acquisition or sale of shares of a registered, 
open-end investment company by an employee benefit plan covering 
only employees of such investment company, employees of the 
investment adviser or principal underwriter for such investment 
company, or employees of any affiliated person (as defined therein) 
of such investment adviser or principal underwriter, provided 
certain conditions are met. The Department is expressing no opinion 
in this proposed exemption regarding whether any transactions with 
the Funds by the Bank Plans would be covered by PTE 77-3.
    \13\The transactions with the Funds involving Client Plans for 
which the Bank acts as a nondiscretionary trustee may be covered by 
Prohibited Transaction Exemption 84-24 (PTE 84-24, 49 FR 13206, 
April 3, 1984). PTE 84-24 provides, among other things, an exemption 
for the purchase by a plan of securities issued by an investment 
company from, or the sale of such securities to, an investment 
company or an investment company principal underwriter, when the 
investment company, principal underwriter, or investment company 
investment adviser is a fiduciary or service provider to the plan 
solely by reason of the sponsorship of a master or prototype plan or 
the provision of nondiscretionary trust services to the plan, or 
both, if the conditions discussed therein are met (see Section 
III(f) and Section IV of PTE 84-24). However, the applicant states 
that it is unclear whether PTE 84-24 would cover either: (i) The 
``conversion'' transaction, pursuant to which Plan interests in the 
CIFs are exchanged for equivalent interests in the Funds; (ii) the 
``fee offset'' mechanism, pursuant to which the Bank ensures that 
Plans are not charged investment advisory fees at both the Plan-
level and the Fund-level; and (iii) the ``negative consent'' 
mechanism, pursuant to which future Fund-level fee modifications are 
deemed approved unless the Plan submits an ``investment termination 
form'' after receiving notice of the fee modification, as discussed 
herein. The Department expresses no opinion in this proposed 
exemption regarding whether such transactions would be covered by 
PTE 84-24.
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    3. The Funds are a Massachusetts business trust organized as an 
open-end investment company registered under the 1940 Act. The Funds 
currently consist of five Funds or ``portfolios'', each having a 
separate prospectus and representing a distinct investment vehicle. The 
shares of each Fund represent a proportionate interest in the assets of 
that Fund. The existing Funds include the Peachtree Government Money 
Market Fund, the Peachtree Prime Money Market Fund, the Peachtree Bond 
Fund, the Peachtree Equity Fund, and the Peachtree Georgia Tax-Free 
Fund.14 The Bank states that additional Funds may be established 
in the future. Shares of the Funds are offered and sold to eligible 
investors, including the Client Plans and other trust clients of the 
Bank, as a means of acquiring an interest in a diversified portfolio of 
investments. The Bank states that the Fund shares are offered to the 
Bank's trust customers, including the Client Plans, under terms and 
conditions which are at least as favorable to such customers as the 
terms and conditions offered to any other customers of the Bank.

    \14\The Bank does not anticipate that the Client Plans will 
invest in the Peachtree Georgia Tax-Free Fund, since the Plans are 
not subject generally to Federal or State income taxes and would not 
need to seek tax-free income.
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    Investments of Client Plan assets in the Funds occur either through 
a transfer of assets from a terminating CIF, the direct purchase of 
shares of the Funds for a Client Plan by the Bank, the transfer by the 
Bank of Client Plan assets from one Fund to another Fund, or a daily 
automated sweep of uninvested cash of a Client Plan by the Bank into 
one or more Funds previously designated by the Client Plan for sweeping 
such cash. All such investments for the Client Plans are made pursuant 
to the Independent Fiduciary's prior written authorization and annual 
reauthorization to the Bank.
    4. Federated Securities Corporation (FSC) is the principal 
distributor for all shares of the Funds including shares which are sold 
to the Client Plans. There are no fees for distribution expenses, 
pursuant to Rule 12b-1 under the 1940 Act, paid by the Client Plans or 
other trust clients of the Bank to FSC for any shares of the Funds. In 
addition, the Bank does not and will not receive fees payable pursuant 
to Rule 12b-1 in connection with transactions involving any shares of 
the Funds. However, such shareholders are charged for certain 
administrative expenses of the Funds. FSC is a subsidiary of Federated 
Investors (Federated) which, through other subsidiaries, acts as the 
transfer and dividend disbursing agent for the Funds and provides 
certain personnel and administrative services for the Funds. Federated 
and its subsidiaries are unrelated to the Bank. The Bank of New York is 
the custodian for the securities and cash of the Funds.
    5. The Bank serves as the investment adviser for the Funds pursuant 
to investment advisory agreements with the Funds (the Agreements) which 
allow the Bank to receive monthly investment advisory fees based on a 
certain percentage (i.e., between .33% [[Page 5717]] and .75%) of the 
average daily net assets of each of the Funds.15 The Bank is 
currently the sole investment adviser to the Funds' existing portfolios 
and presently contemplates no change for such portfolios. However, the 
Bank states that it may utilize third party sub-advisers in the future 
to enhance the investment alternatives and the investment advisory 
services available to the Funds for certain new portfolios. The 
Agreements and the fees received by the Bank are approved by the Board 
of Directors of the Funds (the Funds' Directors), in accordance with 
the applicable provisions of the 1940 Act. Any changes in the fees or 
services for the Funds are approved by the Funds' Directors, a majority 
of whom must be independent of the Bank.

    \15\The Bank states that it will not perform any services for 
the Funds other than investment advisory services. Thus, the Bank 
will not act as the custodian, transfer agent, or shareholder 
servicing agent for a Fund or provide any other secondary services 
to the Funds. The Bank also will not provide portfolio execution 
services for the Funds. Therefore, all securities transactions for a 
Fund's portfolio will be executed by broker-dealers unrelated to the 
Bank and will not generate commissions or other fees to the Bank.
---------------------------------------------------------------------------

    6. Prior to February 11, 1994, the Bank generally invested assets 
of Client Plans for which it acted as a trustee with investment 
discretion in a series of CIFs. In addition, certain Client Plans where 
investment decisions are directed by an Independent Fiduciary generally 
used a Bank CIF as an investment option for the Client Plans. However, 
on Friday, February 11, 1994, the Bank terminated two of its CIFs--the 
BankSouth Fixed Income CIF and the BankSouth Equity CIF. The assets in 
these CIFs were transferred to the Peachtree Bond Fund and the 
Peachtree Equity Fund, respectively. Each CIF transferred its assets to 
the corresponding Fund in exchange for shares of that Fund at the then 
current market value of the CIF assets, in accordance with Rule 17a-7 
under the 1940 Act (as discussed below).16 The CIFs were then 
liquidated and the Fund shares were distributed to the Client Plans, 
subject to the prior written consent of the Independent Fiduciary for 
the Client Plan. Any Client Plan that had not provided prior written 
approval for the transfer of its CIF assets to the Funds by the 
deadline set for such approvals received a cash distribution of its pro 
rata share of the CIF assets no later than Friday, February 11, 1994, 
preceding the transfers.

    \16\Rule 17a-7 permits transactions between investment funds 
that use the same investment adviser, subject to certain conditions. 
Rule 17a-7 requires, among other things, that such transactions be 
effected at the ``independent current market price'' for each 
security, involve only securities for which market quotations are 
readily available, involve no brokerage commissions or other 
remuneration, and comply with valuation procedures adopted by the 
board of directors of the investment company to ensure that all 
requirements of the Rule are satisfied.
---------------------------------------------------------------------------

    The assets of the CIFs were reviewed by the Bank as investment 
adviser to the Funds, in coordination with Federated Administrative 
Services (FAS), the Funds' third party administrator, to determine that 
the assets were appropriate investments for the corresponding Funds. 
FAS created a portfolio accounting system to track the securities to be 
acquired by the Funds. Prior to the transfer of CIF assets to the 
Funds, the Funds did not hold any securities or other assets.
    The transfer transactions occurred using market values as of the 
close of business on Friday, February 11, 1994. The securities 
transferred from the CIFs were the same as the securities received by 
the Funds. The applicant states that the value of the securities was 
determined in a single valuation by the Bank as investment adviser for 
the Funds, in accordance with the requirement of Rule 17a-7(b) that 
transactions be effected at the ``independent current market price'' of 
the securities. The valuation of the securities was performed in the 
same manner for both the CIF and the corresponding Fund at the close of 
the same business day. Specifically, as required by the Rule, 
securities listed on exchanges were valued at their closing prices on 
Friday, February 11, and unlisted securities were valued based on the 
average of bid and ask quotations at the close of the market on Friday, 
February 11, obtained from three brokers independent of the Bank. Any 
fees charged by the independent brokers for the bid and ask prices were 
paid by the Bank.
    Each Client Plan that approved the CIF asset transfers to the Funds 
received account statements describing the asset transfers on or before 
March 31, 1994. The statements showed the disposition of the CIF units 
from the Client Plan account and the acquisition by the account of Fund 
shares, both posted as of Monday, February 14, 1994.17 This 
information provided the affected Client Plans with written 
confirmation of the number of CIF units held by the Client Plan 
immediately before the transfer, the related per unit value and the 
total dollar amount of such CIF units as well as the number of shares 
of the Funds held by the Client Plan following the transfer, the 
related per share net asset value, and the total dollar amount of such 
shares.

    \17\The following example illustrates the information provided 
by the statements: Assume a Client Plan held 12,506 units of the 
BankSouth Equity CIF prior to the asset transfers. The account 
statement showed a disposition of 12,506 units of the BankSouth 
Equity CIF, at a value of $72.08 per unit, on February 14, 1994 with 
total proceeds of $901,432.18. The statement also showed a purchase 
on that same date of 90,143.218 shares of the Peachtree Equity Fund, 
the Fund corresponding to the BankSouth Equity CIF, at $10 per 
share, at a total cost of $901,432.18, the same amount as the 
proceeds of the disposition from the BankSouth Equity CIF.
---------------------------------------------------------------------------

    Thus, the applicant represents that as of February 14, 1994, Client 
Plans that were formerly invested in the terminated CIFs held shares of 
the corresponding Funds which were of the same value, based on the 
Client Plans' pro rata share of the underlying market value of the 
securities transferred to the Funds, as their assets in the CIF as of 
the close of business on Friday, February 11, 1994. The Bank represents 
that the other CIFs may be terminated in the future and that all such 
terminations and subsequent transfers of CIF assets for shares of the 
Funds will comply with Rule 17a-7 as described above and the conditions 
of this proposed exemption.
    For all transfers of CIF assets to a Fund following publication of 
this proposed exemption in the Federal Register, the Bank sends by 
regular mail to each affected Client Plan a written confirmation, not 
later than 30 days after completion of the transaction, containing the 
following information:
    (1) The identity of each security that was valued for purposes of 
the transaction in accordance with Rule 17a-7(b)(4);
    (2) The price of each such security involved in the transaction; 
and
    (3) The identity of each pricing service or market maker consulted 
in determining the value of such securities. Securities which are 
valued in accordance with Rule 17a-7(b)(4) are securities for which the 
current market price cannot be obtained by reference to the last sale 
price for transactions reported on a recognized securities exchange or 
the NASDAQ system. The Bank states that such securities are valued 
based on an average of the highest current independent bid and lowest 
current independent offer, as of the close of business on the Friday 
preceding the weekend of the CIF transfers, determined on the basis of 
reasonable inquiry from at least three sources that are broker-dealers 
or pricing services independent of the Bank.
    In addition, for all in-kind transfers of CIF assets to a Fund that 
occur after the date this proposed exemption is published in the 
Federal Register, the Bank will send by regular mail to the Independent 
Fiduciary no later than 90 [[Page 5718]] days after completion of each 
transfer a written confirmation that contains the following 
information:
    (1) The number of CIF units held by the Client Plan immediately 
before the transfer, the related per unit value, and the total dollar 
amount of such CIF units; and
    (2) The number of shares in the Funds that are held by the Client 
Plan following the transfer, the related per share net asset value, and 
the total dollar amount of such shares.
    The Bank believes that the interests of the Client Plans are better 
served by the collective investment of assets of the Client Plans in 
the Funds rather than in the CIFs. The Funds are valued on a daily 
basis, whereas the majority of the CIFs are valued monthly. The daily 
valuation permits (i) immediate investment of Client Plan contributions 
in various types of investments; (ii) greater flexibility in 
transferring assets from one type of investment to another; and (iii) 
daily redemption of investments for purposes of making distributions. 
In addition, information concerning the investment performance of the 
Funds will be available on a daily basis in newspapers of general 
circulation which will allow Client Plan fiduciaries to monitor the 
performance of investments on a daily basis and make more informed 
investment decisions.
    7. For investments in the Funds on behalf of Client Plans, the Bank 
currently offsets its investment management or advisory fees for assets 
invested in the Funds in accordance with one of the methods for 
offsetting double investment advisory fees described in Prohibited 
Transaction Exemption 77-4 (PTE 77-4, 42 FR 18732, April 8, 
1977).18 Consequently, the Bank represents that the fee structure 
for these investments complies with the fee structure under PTE 77-4, 
and that the other conditions of PTE 77-4 are met.19

    \18\PTE 77-4, in pertinent part, permits the purchase and sale 
by an employee benefit plan of shares of a registered, open-end 
investment company when a fiduciary with respect to the plan is also 
the investment adviser for the investment company, provided that, 
among other things, the plan does not pay an investment management, 
investment advisory or similar fee with respect to the plan assets 
invested in such shares for the entire period of such investment. 
Section II(c) of PTE 77-4 states that this condition does not 
preclude the payment of investment advisory fees by the investment 
company under the terms of an investment advisory agreement adopted 
in accordance with section 15 of the 1940 Act. Section II(c) states 
further that this condition does not preclude payment of an 
investment advisory fee by the plan based on total plan assets from 
which a credit has been subtracted representing the plan's pro rata 
share of investment advisory fees paid by the investment company.
    \19\The Department is expressing no opinion in this proposed 
exemption regarding whether any transactions with the Funds under 
the circumstances described herein would be covered by PTE 77-4.
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    The Bank charges its standard fees to all the Client Plans for 
serving as a trustee or investment manager for the Client Plans.20 
All fees are billed on a quarterly basis. The annual charges for a 
Client Plan account are based on fee schedules negotiated with the 
Bank. The Bank provides services to the Client Plans for which it has 
investment discretion, including sweep services for uninvested cash 
balances in such Plans, under a single fee arrangement which is 
calculated as a percentage of the market value of the Plan assets under 
management. There are no separate charges for the provision of sweep 
services to the Client Plans for which the Bank has investment 
discretion. However, for Client Plans where investment decisions are 
directed by an Independent Fiduciary, a separate charge is assessed for 
sweep services where the Independent Fiduciary specifically agrees to 
have the Bank provide such services to the Client Plan.21 The Bank 
states that in many cases fees charged by the Bank to a Client Plan are 
paid by the Client Plan sponsor rather than by the Client Plan.

    \20\The applicant represents that all fees paid by Client Plans 
directly to the Bank for services performed by the Bank are exempt 
from the prohibited transaction provisions of the Act by reason of 
section 408(b)(2) of the Act and the regulations thereunder (see 29 
CFR 2550.408b-2). The Department notes that to the extent there are 
prohibited transactions under the Act as a result of services 
provided by the Bank directly to the Client Plans which are not 
covered by section 408(b)(2), no relief is being proposed herein for 
such transactions.
    \21\See DOL Letter dated August 1, 1986 to Robert S. Plotkin, 
Assistant Director, Division of Banking Supervision and Regulation, 
Board of Governors of the Federal Reserve System, stating the 
Department's views regarding the application of the prohibited 
transaction provisions of the Act to sweep services provided to 
plans by fiduciary banks and the potential applicability of certain 
statutory exemptions as described therein.
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    The Bank charges the Funds for its services to the Funds as 
investment adviser, in accordance with the Agreements between the Bank 
and the Funds. Under the Agreements, the Bank charges fees at a 
different rate for each Fund, computed based on the average daily net 
assets for the respective Fund. The fee differentials among the Funds 
result from the particular level of services rendered by the Bank to 
the Funds.
    The investment advisory fees paid by each of the existing Funds are 
accrued on a daily basis and billed by the Bank to the Funds at the 
beginning of the month following the month in which the fees accrued. 
The Bank states that any additional Funds will follow the same monthly 
billing arrangement.
    Under the fee structure which would be covered by the proposed 
exemption, the Bank states that the Client Plans will not pay any plan-
level investment management fees, investment advisory fees, or similar 
fees to the Bank with respect to any of the assets of such Client Plans 
which are invested in shares of any of the Funds. However, this fee 
structure does not preclude the payment of investment advisory fees or 
similar fees by the Funds to the Bank under the terms of the 
Agreements, provided that such Agreements are adopted in accordance 
with section 15 of the 1940 Act.
    The Bank states that the combined total of all fees received by the 
Bank for the provision of services to a Client Plan, and in connection 
with the provision of services to the Funds in which the Client Plan 
may invest, are not in excess of ``reasonable compensation'' within the 
meaning of section 408(b)(2) of the Act.
    The Bank represents that the fee structure ensures that the Bank 
does not receive any additional investment management, advisory or 
similar fees from the Funds as a result of investments in the Funds by 
the Client Plans. Thus, the Bank represents that the fee structure is 
at least as advantageous to the Client Plans as an arrangement pursuant 
to the conditions of PTE 77-4 whereby investment advisory fees paid by 
the Funds to the Bank would be offset or credited against investment 
management fees charged directly by the Bank to the Client Plans. In 
this regard, the Bank states that the fee structure essentially has the 
same effect in offsetting the Bank's investment advisory fees as an 
arrangement under PTE 77-4, section II(c).
    8. With respect to any transfer of a Client Plan's CIF assets to a 
Fund, the Bank states that an Independent Fiduciary for the Client Plan 
receives advance written notice of the in-kind transfer of assets of 
the CIFs and full written disclosure of information concerning the 
Fund. On the basis of such information, the Independent Fiduciary 
authorizes in writing the in-kind transfer of the Client Plan's CIF 
assets to a Fund in exchange for shares of the Fund. With respect to 
the receipt of fees by the Bank from a Fund in connection with any 
Client Plan's investment in the Fund, the Bank states that an 
Independent Fiduciary receives full and detailed written disclosure of 
information concerning the Fund in [[Page 5719]] advance of any 
investment by the Client Plan in the Fund. On the basis of such 
information, the Independent Fiduciary authorizes in writing the 
investment of assets of the Client Plan in the Fund and the fees to be 
paid by the Fund to the Bank. In addition, the Bank represents that the 
Independent Fiduciary of each Client Plan invested in a particular Fund 
will receive full written disclosure, in a statement separate from the 
Fund prospectus, of any proposed increases in the rates of fees charged 
by the Bank to the Funds for investment advisory services which is 
above the rate reflected in the prospectus for the Fund, at least 30 
days prior to the effective date of such increase.22

    \22\ The Department notes that an increase in the amount of a 
fee for an existing investment advisory service (other than through 
an increase in the value of the underlying assets in the Funds) or 
the imposition of a fee for a newly-established investment advisory 
service shall be considered an increase in the rate of such 
investment advisory fee. However, in the event an investment 
advisory fee has already been described in writing to the 
Independent Fiduciary and the Independent Fiduciary has provided 
authorization for the investment advisory fee, and such fee is 
waived, no further action by the Bank would be required in order for 
the Bank to receive such fee at a later time. Thus, for example, no 
further disclosure would be necessary if the Bank had received 
authorization for a fee for investment advisory services from Client 
Plan investors and subsequently determined to waive the fee for a 
period of time in order to attract new investors but later charged 
the fee.
---------------------------------------------------------------------------

    Any authorizations by the Independent Fiduciary regarding the 
investment of a Client Plan's assets in a Fund and the fees to be paid 
to the Bank, including any future increases in rates of such fees, are 
or will be terminable at will by the Independent Fiduciary, without 
penalty to the Client Plan, upon receipt by the Bank of written notice 
of termination. A Termination Form expressly providing an election to 
terminate the authorization with instructions on the use of the form is 
supplied to the Independent Fiduciary no less than annually. The 
instructions for the Termination Form include the following 
information:
    (a) The authorization is terminable at will by the Client Plan, 
without penalty to the Client Plan, upon receipt by the Bank of written 
notice from the Independent Fiduciary; and
    (b) Failure to return the Termination Form will result in continued 
authorization of the Bank to engage in the subject transactions on 
behalf of the Client Plan.
    The Bank states that the Termination Form may be used to notify the 
Bank in writing to effect a termination by selling the shares of the 
Funds held by the Client Plan requesting such termination within one 
business day following receipt by the Bank of the form. The Bank states 
further that if, due to circumstances beyond the control of the Bank, 
the sale cannot be executed within one business day, the Bank will 
complete the sale within the next business day.
    Any disclosure of information regarding a proposed increase in the 
rate of fees for investment advisory services will be accompanied by a 
Termination Form. However, if the Termination Form has been provided to 
the Independent Fiduciary for the authorization of a fee increase, then 
a Termination Form for an annual reauthorization will not be provided 
by the Bank for that year unless at least six months has elapsed since 
the Termination Form was provided for the fee increase.
    Each Independent Fiduciary receives from the Bank a current 
prospectus for the Funds and a written statement giving full disclosure 
of the Fee Structure prior to any investment by the Client Plan in 
shares of the Fund. The disclosure statement explains why the Bank 
believes that the investment of assets of the Client Plan in the Funds 
is appropriate. The disclosure statement also describes whether there 
are any limitations on the Bank with respect to which Client Plan 
assets may be invested in shares of the Funds and, if so, the nature of 
such limitations.23 The Bank states that Client Plan fiduciaries 
will also receive from Federated, the Funds' distributor, an updated 
prospectus and periodic reports for each Fund. In addition to 
information provided to Fund shareholders by Federated, the Bank will 
provide each Independent Fiduciary with a quarterly performance review 
for the Peachtree Equity and Bond Funds. This report will include 
updated information regarding the particular Fund's investment 
strategy, performance, and diversification of assets as well as a 
description of the securities held by the Fund. The Bank states further 
that Fund shareholders may also request a copy of the Statement of 
Additional Information for any Fund free of charge, obtain other 
information, or make inquiries about a Fund by writing or calling the 
Bank.

    \23\ See section II(d) of PTE 77-4 which requires, in pertinent 
part, that an independent plan fiduciary receive a current 
prospectus issued by the investment company and a full and detailed 
written disclosure of the investment advisory and other fees charged 
to or paid by the plan and the investment company, including a 
discussion of whether there are any limitations on the fiduciary/
investment adviser with respect to which plan assets may be invested 
in shares of the investment company and, if so, the nature of such 
limitations.
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    9. No sales commissions are paid by the Client Plans in connection 
with the purchase or sale of shares of the Funds. In addition, no 
redemption fees are paid in connection with the sale of shares by the 
Client Plans to the Funds. The applicant states that all other dealings 
between the Client Plans, the Funds, and the Bank or any affiliate, are 
on a basis no less favorable to the Client Plans than such dealings are 
with the other shareholders of the Funds.
    10. In summary, the Bank represents that the transactions described 
herein satisfy the statutory criteria of section 408(a) of the Act 
because: (a) The Funds provide the Client Plans with a more effective 
investment vehicle than the CIFs maintained by the Bank without any 
increase in investment management, advisory or similar fees paid to the 
Bank; (b) with respect to the transfer of a Client Plan's CIF assets 
into a Fund in exchange for Fund shares, an Independent Fiduciary 
authorizes in writing such transfer prior to the transaction only after 
full written disclosure of information concerning the Fund; (c) each 
Client Plan receives shares of a Fund in connection with the transfer 
of assets of a terminating CIF which have a net asset value that is 
equal to the value of the Client Plan's pro rata share of the CIF 
assets on the date of the transfer, based on the current market value 
of such assets as determined in a single valuation at the close of the 
same business day using independent sources in accordance with 
procedures established by the Fund which comply with Rule 17a-7 of the 
1940 Act; (d) with respect to any investments in a Fund by the Client 
Plans and the payment of any fees by the Fund to the Bank, an 
Independent Fiduciary receives full written disclosure of information 
concerning the Fund, including a current prospectus and a statement 
describing the fee structure, and authorizes in writing the investment 
of the Client Plan's assets in the particular Fund and the fees paid by 
such Fund to the Bank; (e) any authorizations made by a Client Plan 
regarding investments in a Fund and fees paid to the Bank, or any 
increases in the rates of fees for such services, are or will be 
terminable at will by the Client Plan, without penalty to the Client 
Plan, upon receipt by the Bank of written notice of termination from 
the Independent Fiduciary; (f) no commissions or redemption fees are 
paid by the Client Plan in connection with either the acquisition of 
Fund shares, through either a direct purchase of the shares or a 
transfer of CIF assets in exchange for the shares, or the sale of Fund 
shares; and (g) all dealings between the Client Plans, the Funds and 
[[Page 5720]] the Bank, are on a basis which is at least as favorable 
to the Client Plans as such dealings are with other shareholders of the 
Funds.

Notice to Interested Persons

    Notice of the proposed exemption shall be given to all Independent 
Fiduciaries of Client Plans described herein that had investments in a 
terminating CIF and from whom approval was sought, or will be sought 
prior to the granting of this proposed exemption, for a transfer of a 
Client Plan's CIF assets to a Fund. In addition, interested persons 
shall include the Independent Fiduciaries of all Client Plans that are 
currently invested in the Funds, as of the date the notice of the 
proposed exemption is published in the Federal Register, where the Bank 
provides services to the Funds and receives fees which would be covered 
by the exemption, if granted. Notice to interested persons shall be 
provided by first class mail within fifteen (15) days following the 
publication of the proposed exemption in the Federal Register. Such 
notice shall include a copy of the notice of proposed exemption as 
published in the Federal Register and a supplemental statement (see 29 
CFR 2570.43(b)(2)) which informs all interested persons of their right 
to comment on and/or request a hearing with respect to the proposed 
exemption. Comments and requests for a public hearing are due within 
forty-five (45) days following the publication of the proposed 
exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department, 
telephone (202) 219-8194. (This is not a toll-free number.)

Dillon, Read & Co. Inc. (Dillon) Located in New York, New York

[Application No. D-09741]

Proposed Exemption

I. Transactions
    A. 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.24

    \24\Section 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).
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    B. 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 assets 
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.25 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;

    \25\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.
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    (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. 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.26

    \26\In 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.
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    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. 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 [[Page 5721]] 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) for which Dillon 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 section 2510.3-101(i)(2);
    (f) Fractional undivided interests in any of the obligations 
described in clauses (a)-(e) of this section B.(1);27

    \27\The Department wishes to take the opportunity to clarify its 
view that the definition of Trust contained in III.B.(1)(a) through 
(e) includes a two-tier trust structure under which certificates 
issued by the first trust, which contains a pool of receivables 
described above, are transferred to a second trust which issues 
certificates that are sold to plans. However, the Department is of 
the further view that, since the exemption provides relief for the 
direct or indirect acquisition or disposition of certificates that 
are not subordinated, no relief would be available if the 
certificates held by the second trust were subordinated to the 
rights and interests evidenced by other certificates issued by the 
first trust.
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    (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 
[[Page 5722]] 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) Dillon;
    (2) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
Dillon; or
    (3) Any member of an underwriting syndicate or selling group of 
which Dillon 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 assets contained in the 
trust, but is not a party to the pooling and servicing agreement.
    G. ``Servicer'' means any entity which services assets 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 section 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.

Summary of Facts and Representations

    1. Dillon, Read & Co. Inc. is an international investment banking 
firm [[Page 5723]] which has its headquarters in New York, New York. 
The firm has numerous offices in the United States as well as London, 
Paris and Tokyo. Dillon and its affiliates28 engage in a variety 
of activities that facilitate the flow of capital from investors in the 
United States and abroad to corporations, governments and international 
agencies. Dillon provides a broad range of merger and acquisition 
services, engages in securities transactions as both principal and 
agent and provides underwriting, research and financial services to 
domestic and foreign financial institutions. The firm is actively 
involved in the issuance and trading of equity securities, high-yield 
corporate debt, investment grade fixed income securities, U.S. 
Government securities and municipal securities.

    \28\As described herein, the term ``Dillon'' refers to Dillon, 
Read and Co. Inc. and its affiliates unless the context otherwise 
requires.
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    2. Dillon 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;29 (2) motor vehicle 
receivables pool investment trusts; (3) consumer or commercial 
receivables investment trusts; and (4) guaranteed governmental mortgage 
pool certificate investment trusts.30

    \29\The Department notes that Prohibited Transaction Exemption 
(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-l are met. Dillon requests relief 
for single-family residential mortgages in this exemption because it 
would prefer one exemption for all trusts of similar structure. 
However, Dillon has stated that it may still avail itself of the 
exemptive relief provided by PTE 83-1.
    \30\Guaranteed 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. Residential and 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 lease pledged to secure leasehold mortgages will in all 
cases be at least ten years longer than the term of such 
mortgage.31

    \31\Trust 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 or equivalent 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 or certificates 
which may have been originated, in the ordinary course of business, 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. Dillon, or one or more broker-dealers (which may include 
Dillon), acts as underwriter or placement agent with respect to the 
sale of the certificates. All of the public offerings of certificates 
presently contemplated have been or are to be underwritten by Dillon on 
a firm commitment basis. In addition, Dillon anticipates privately 
placing certificates on both a firm commitment and an agency basis. 
Dillon may also act as the lead underwriter for a syndicate of 
securities underwriters.
    Certificateholders will be entitled to receive periodic 
installments of principal and/or interest, or other payments due on the 
trust assets.
    5. Some of the certificates will be multi-class certificates. 
Dillon 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.32

    \32\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)(l)(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. Interest and/or principal 
payments received on the underlying trust assets 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 has 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 trust assets. In neither case will the rights of a 
plan purchasing certificates 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 will share in the amount 
distributed on a pro rata basis.33

    \33\If a trust issues subordinate certificates, holders of such 
subordinate certificates may not share in the amount distributed on 
a pro rata basis. 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 trust assets by the sponsor only in the event of 
defects in documentation discovered within a short time after the 
issuance of trust certificates (within 120 days, except in the case of 
obligations having an [[Page 5724]] original term of 30 years, in which 
case the period will not exceed two years). 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 a 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, financial institutions, 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 of a trust 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 assets to 
be included in the trust, establishing the trust, designating the 
trustee, and assigning the assets 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 Dillon, the trust sponsor or the servicer. Dillon 
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 from the assets of the trust 
by the sponsor or servicer. The method of compensating the trustee will 
be specified in the pooling and servicing agreement and disclosed in 
the prospectus or private placement memorandum relating to the offering 
of the certificates.
    10. The servicer of a trust administers the trust assets 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.
    Receivables of the type suitable for inclusion in a trust 
invariably are serviced with the assistance of a computer. After the 
sale, the servicer keeps the sold receivables on the computer system in 
order to continue monitoring the accounts. Although the records 
relating to sold receivables are kept in the same master file as 
receivables retained by the originator, the sold receivables are 
flagged as having been sold. To protect the investors' interest, the 
servicer ordinarily convenants that this ``sold flag'' will be included 
in all records relating to the sold receivables, including the master 
file, archives, tape extracts, and printouts.
    The sold flags are invisible to the obligor, and do not affect the 
manner in which the servicer performs the billing, posting and 
collection procedures relating to the sold receivables. However, the 
servicer uses the sold flag to identify the receivables for the purpose 
of reporting all activity on those receivables after their sale to the 
trust.
    Depending on the type of receivable and the details of the 
servicer's computer system, in some cases the servicer's internal 
reports can be adapted for investor reporting with little or no 
modification. In other cases, the servicer may have to perform special 
calculations to fulfill the investor reporting responsiblities. These 
calculations can be performed on the servicer's main computer, or on a 
small computer with data supplied by the main system. In all cases, the 
numbers produced for the investors are reconciled to the servicer's 
books and reviewed by public accountants.
    The underwriter will be a registered broker-dealer that acts as 
underwriter or placement agent with respect to the sale of the 
certificates. Public offerings of certificates are generally made on a 
firm commitment basis. Private placements of certificates may be made 
on a firm commitment or agency basis.
    It is anticipated that the lead or co-managing underwriter will 
make a market in certificates offered to the public.
    In some cases, the originator and servicer of assets to be included 
in a trust and the sponsor of the trust (though they themselves may be 
related) will be unrelated to Dillon. However, affiliates of Dillon may 
originate or service assets included in a trust, or may sponsor a 
trust.

Certificate Price, Pass-Through Rate and Fees

    11. In some cases, the sponsor will obtain the assets from various 
originators pursuant to existing contracts with such originators under 
which the sponsor continually buys receivables. In other cases, the 
sponsor will purchase the receivables at fair market value from the 
originator or a finance company pursuant to a purchase and sale 
agreement related to the specific offering of certificates. In other 
cases, the sponsor will originate the receivables itself.
    As compensation for the assets transferred to the trust, the 
sponsor receives cash, or certificates representing the entire 
beneficial interest in the trust. The sponsor sells some or all of 
these certificates for cash to investors or securities underwriters.
    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 assets included in the trust minus a specified servicing 
fee.34 This rate is generally [[Page 5725]] determined by the same 
market forces that determine the price of a certificate.

    \34\The 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.
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    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.
    13. As compensation for performing its servicing duties, the 
servicer (who may also be the sponsor or an affiliate thereof, and 
receive fees for acting as sponsor) will retain the difference between 
payments received on the assets in the trust and payments payable to 
certificateholders, except that in some cases a portion of the payments 
on assets in the trust may be paid to a third party, such as a fee paid 
to a provider of credit support. The servicer may receive additional 
compensation by having the use of the amounts paid on the assets 
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, typically, 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 in a lump sum 
at the time the trust is established, or out of the payments received 
on the assets in the trust.
    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 (c) expenses, fees and charges associated with foreclosure or 
repossession of assets in the trust, 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 assets in the trust 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 an asset and the 
certificate payment. 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 trust assets 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. The underwriter will receive a fee in connection with the 
securities underwriting or private placement of certificates. In a firm 
commitment underwriting, this fee would consist of the difference 
between what the underwriter receives for the certificates that it 
distributes and what it pays the sponsor for those certificates. In a 
private placement, the fee normally takes the form of an agency 
commission paid by the sponsor. In a best efforts underwriting in which 
the underwriter would sell certificates in a public offering on an 
agency basis, the underwriter would receive an agency commission rather 
than a fee based on the difference between the price at which the 
certificates are sold to the public and what it pays the sponsor. In 
some private placements, the underwriter may buy certificates as 
principal, in which case its compensation would be the difference 
between what the underwriter receives for the certificates and what it 
pays the sponsor for these certificates.

Purchase of Receivables by the Servicer

    17. The applicant represents that as the principal amount of the 
assets in a trust is reduced by payment, the cost of administering the 
trust generally increases in proportion to the unpaid balance of the 
assets in the trust, 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 included in the 
trust when the aggregate unpaid balance payable on the receivables is 
reduced to a specified percentage (usually between 5 and 10 percent) of 
the initial balance.
    The repurchase price for such an option is set at a level such that 
the certificateholders will receive the full amount on all of the 
receivables held by the trust plus the accrued interest at the pass-
through rate plus the full amount of property, if any, that has been 
acquired by the trust through collections on or liquidations of the 
receivables.

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 overcollateralization, surety bonds, 
letters of credit or guarantees) 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 servicer, or an affiliate of the servicer, 
may provide credit support to the trust (i.e., act as an insurer). In 
these cases, the 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. In some transactions, the 
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. Moreover, a servicer typically 
can recover advances either from the provider of credit support or from 
the future payment stream. 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.
    If the servicer fails to advance funds, fails to call upon the 
credit support mechanism to provide funds to cover defaulted payments, 
or otherwise fails in its duties, the trustee would be required and 
would be able to enforce the certificateholders' rights pursuant to the 
pooling and servicing agreement.
    Therefore, the trustee, who is independent of the servicer, will 
have the ultimate right to enforce the credit support arrangement.
    When a servicer advances funds, the amount so advanced is 
recoverable by the servicer out of future payments on 
[[Page 5726]] assets held by the trust to the extent not covered by 
credit support. However, where the servicer provides credit support to 
the trust, there are protections, including those described below, 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 assets are passed through to 
investors. These protective 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 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 servicer to follow its normal servicing 
guidelines and will set forth the 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 assets included in the 
trust (monthly, quarterly, or semi-annually as set forth in the pooling 
and servicing agreement), the 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 assets and draws upon the credit support. Further, 
the servicer is required to deliver to the trustee annually a 
certificate of an executive officer of the servicer stating that a 
review of the servicing activities has been made under such officer's 
supervision, and either stating that the servicer has fulfilled all of 
its obligations under the pooling and servicing agreement or, if the 
servicer has defaulted under any of its obligations, specifying any 
such default. The servicer's reports are reviewed at least annually by 
independent accountants to ensure that the servicer is following its 
normal servicing standards and that the master servicer's reports 
conform to the servicer's internal accounting records. The results of 
the independent accountants' review are delivered to the trustee;
    (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. The protection provided by a floor 
dollar amount to the credit support applies particularly where the 
servicer and the insurer are affiliated or are the same entity. (An 
entity should not be considered an insurer solely because it holds 
subordinated certificates.)

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 assets contained in the trust, including 
the types of assets, the diversification of the assets, 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 certificates 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 assets.
    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 
[[Page 5727]] 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 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.

Forward Delivery Commitments

    24. Dillon represents that, to date, it has not entered into any 
forward delivery commitments in connection with the offering of pass-
through certificates. However, Dillon, represents that it may 
contemplate entering into such commitments. Dillon notes that the 
utility of forward delivery commitments has been recognized with 
respect to the offering of similar certificates backed by pools of 
residential mortgages. As such, Dillon states that it may find it 
desirable in the future to enter into such commitments for the purchase 
of certificates.

Secondary Market Transactions

    25. It is Dillon's normal policy to attempt to make a market for 
securities for which it is lead or co-managing underwriter. Dillon 
anticipates that it will make a market in certificates.

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 assets 
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 Dillon 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) Dillon anticipates that it will 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 assets, 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.35

    \35\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). [[Page 5728]] 
---------------------------------------------------------------------------

III. Limited Section 406(b) and Section 407(a) Relief for Sales
    Dillon represents that in some cases a trust sponsor, trustee, 
servicer, insurer, and obligor with respect to assets contained in a 
trust, or an underwriter of certificates may be a pre-existing party in 
interest with respect to an investing plan.36 In these cases, a 
direct or indirect sale or 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.37 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.

    \36\In this regard, we note that the exemptive relief proposed 
herein is limited to certificates with respect to which Dillon or 
any of its affiliates is either (a) the sole underwriter or manager 
or comanager of the underwriting syndicate, or (b) a selling or 
placement agent.
    \37\The applicant represents that where a trust sponsor is an 
affiliate of Dillon, 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 Dillon is not 
a fiduciary with respect to plan assets to be invested in 
certificates.
---------------------------------------------------------------------------

    Additionally, Dillon represents that a trust sponsor, servicer, 
trustee, insurer, and obligor with respect to assets 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. Dillon 
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, Dillon 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.
    For Further Information Contact: Virginia J. Miller of the 
Department, telephone (202) 219-8971. (This is not a toll-free number.)

Treasure Valley Transplants, Inc. Money Purchase Pension Plan (the 
Plan) Located in Boise, Idaho

[Application No. D-09874]

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 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 cash sale (the Sale) of certain 
real property (the Property) by the Plan to Dr. George Holzer, D.V.M. 
(Dr. Holzer), a disqualified person with respect to the Plan; provided 
that (1) the Sale is a one-time transaction for cash; (2) the Plan does 
not incur any expenses in connection with the proposed transaction; and 
(3) the consideration paid for the Property is no less than the fair 
market value of the Property as determined by an independent appraiser.

Summary of Facts and Representations

    1. The Plan is a money purchase pension plan whose sole participant 
is Dr. Holzer. The Plan, which was adopted by Treasure Valley 
Transplants, Inc (the Employer) effective as of September 1, 1992, is a 
successor plan to the George L. Holzer Rollover IRA (the IRA). As of 
October 1, 1994, the Plan had assets of approximately $780,000.00.
    The Employer is an Idaho corporation which specializes in bovine 
embryo transfers. Dr. Holzer is the sole shareholder of the 
Employer.\38\ Dr. Holzer and Kathleen J. Holzer serve as the Plan's co-
trustees.

    \38\Since Dr. Holzer is the sole shareholder of the Employer, 
and the only participant in the Plan, there is no jurisdiction under 
Title I of the Act, pursuant to 29 CFR 2510.3-3(c)(1). There is, 
however, jurisdiction under Title II of the Act pursuant to section 
4975 of the Code.
---------------------------------------------------------------------------

    2. The Property is designated as Lot 16, Block 2, Warm Springs 
Village 2nd Addition in Ketchum, Idaho, together with the improvements 
thereon. The Property was appraised in September, 1994 by Monge 
Appraisal & Investments (Monge), an independent appraisal firm located 
in Sun Valley, Idaho. The appraisal was performed by Kyle T. Kunz and 
Thomas R. Monge, MAI. The Property is described as a contemporary-style 
dwelling completed in 1993, having 4,144 square feet of living space, 
with 4 baths and a total of 10 rooms, including 4 bedrooms. The 
Property is also described as being within walking distance of Warm 
Spring Village and Sun Valley ski lift operations. The size of the lot 
is 64 acres and is described as having good mountain views. Monge 
determined, as of September 26, 1994, that the Property had a fair 
market value of $775,000.00. The applicant represents that the Property 
has never been used or occupied.
    3. On September 3, 1991, the IRA loaned $230,000.00 to David and 
Paula Barovetto to enable them to build a dwelling on the property. The 
applicant represents that the Barovettos are not related to the Plan or 
the IRA. The Barovettos defaulted on the loan on August 29, 1992, prior 
to completion of the dwelling. The IRA subsequently commenced 
foreclosure proceedings to acquire title to the Property. As a result 
of those proceedings, on November 13, 1992, the IRA purchased the deed 
on the Property for $265,756.00. The applicant represents that the 
assets from the IRA were rolled into the Plan during the month of 
November, 1992.\39\ In addition, the applicant represents that, in 
order to protect its investment, the IRA and the Plan authorized work 
on the partially completed dwelling and borrowed over $300,000 to 
continue that work. It is represented that the Plan's total investment 
in the Property as of October 26, 1994, including interest costs and 
property taxes, was $830,717.30.

    \39\The applicant represents that one of the reasons the Plan 
was created was to allow the Property to be rolled into a vehicle to 
which Dr. Holzer could make sufficient contributions to pay for the 
costs of carrying the Property.
---------------------------------------------------------------------------

    4. The Plan proposes to sell the Property to Dr. Holzer for the 
fair market value of the Property as determined by a qualified, 
independent appraiser. The applicant represents that the Plan will 
receive cash and will not incur any expenses in connection with the 
proposed transaction. In addition, the applicant represents that the 
Sale will provide the Plan with the opportunity to divest itself of a 
non-income producing asset which has substantial carrying costs and to 
replace it with liquid assets that can be placed in more diversified 
investments. The applicant further represents that attempts to sell the 
Property have been unsuccessful.
    5. In summary, the applicant represents that the proposed 
transaction will satisfy the statutory criteria for an exemption under 
section 408(a) of the Act because (1) the proposed Sale will be a one-
time transaction for cash; (2) the Plan will receive not less than the 
fair market value of the Property as [[Page 5729]] determined by an 
independent appraiser; (3) the Plan will not incur any expenses in 
connection with the proposed transaction; and (4) the proposed 
transaction will enable the Plan to diversify its assets in more liquid 
investments.

Notice to Interested Persons

    Since Dr. Holzer is the only person affected by the proposed 
transaction, there is no need to distribute notice to interested 
persons. Comments are due 30 days after publication of this notice in 
the Federal Register.
    For Further Information Contact: Virginia J. Miller of the 
Department, telephone (202) 219-8971. (This is not a toll-free number.)

Terry Segal, P.C. Retirement Plans (the Plans) Located in Boston, MA

[Application No. D-09891]

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, 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) shall 
not apply to the proposed purchase by Terry and Harriet Segal (the 
Segals) of an interest (the Interest) in a limited partnership (the 
Limited Partnership) from Mr. Segal's individually-directed account 
(the Account) in the Terry Segal, P.C. Pension Plan (the Pension Plan), 
provided: (1) The purchase is a one-time transaction for cash; (2) the 
Pension Plan Account is not required to pay any fees or commissions in 
connection therewith; (3) the Interest is appraised by a qualified, 
independent appraiser; and (4) the Pension Plan Account receives an 
amount which reflects the fair market value of the Interest.

Summary of Facts and Representations

    1. The Plans, which are defined contribution plans, consist of the 
Pension Plan and the Terry Segal, P.C. Profit Sharing Plan (the Profit 
Sharing Plan). At present, the Plans have two participants. They are 
Terry Segal, a trial attorney who maintains his offices at 210 
Commercial Street, Boston, Massachusetts, and his associate, Scott 
Lopez. As of August 31, 1993, the Plans had total assets of $262,919. 
Of this amount, the Pension Plan had assets of $169,858 and the Profit 
Sharing Plan had assets of $93,061.
    The Plans provide for participant-directed investments. Mr. Segal, 
who serves as the trustee, had Account balances in the Pension Plan and 
the Profit Sharing Plan of $167,504 and $90,744, respectively, as of 
August 31, 1993.
    2. Among the assets in Mr. Segal's Account in the Pension Plan is a 
residual profits (and freely transferable) interest in a limited 
partnership called ``Turbo Dynamix'' whose underlying assets consist of 
machines for making frozen yogurt.40 The Interest was purchased by 
Mr. Segal's Accounts in the Plans in April 1992 for the total cash 
consideration of $50,000. The seller of the Interest was Turbo Dynamix 
Corporation of Cambridge, Massachusetts. This entity is general partner 
of the Limited Partnership and an unrelated party with respect to the 
Accounts. Following acquisition, the Interest was allocated 65 percent 
to Mr. Segal's Pension Plan Account and 35 percent to Mr. Segal's 
Profit Sharing Plan Account. This allocation arrangement continued 
until August 1, 1994. At that time, the allocable portion of the 
Interest held by Mr. Segal's Account in the Profit Sharing Plan was 
transferred to his Pension Plan Account. Thus, the Pension Plan Account 
currently holds 100 percent of the Interest.41 Aside from the 
Interest, Mr. Segal does not invest in the Limited Partnership on an 
individual basis.

    \40\For purposes of the exemptive relief requested herein, the 
Accounts in the Plans that are held by Mr. Lopez will not be 
affected by the proposed transaction.
    \41\The Department is not proposing, nor is the applicant 
requesting, exemptive relief with respect to the transfer of the 
allocable portion of the Interest held by Mr. Segal's Account in the 
Profit Sharing Plan to his Account in the Pension Plan.
---------------------------------------------------------------------------

    3. When initially purchased, the Pension Plan Account and the 
Profit Sharing Plan Account collectively owned a 1.8249 percent profits 
interest in the Limited Partnership. However, because additional 
Limited Partnership interests were subsequently sold, by August 31, 
1994 the Pension Plan Account's share of profits had decreased to 
1.2452 percent. The Accounts never received any investment income for 
the Interest nor did they ever incur any expenses other than the 
$50,000 capital contribution.
    4. Because the Interest has not generated any investment income and 
due to the start-up nature of the Limited Partnership, Mr. and Mrs. 
Segal request an administrative exemption from the Department in order 
to purchase the Interest from the Pension Plan Account. The Segals 
propose to pay the Pension Plan Account the fair market value of the 
Interest on the date of the sale. The Pension Plan Account will not be 
required to pay any fees or commissions in connection therewith.
    6. The Interest has been appraised by Paul Kateman. Mr. Kateman is 
the President of Turbo Dynamix Corporation, which is the general 
partner of the Limited Partnership. Mr. Kateman is not an owner, 
director, officer or director of the sponsor of the Plans nor is he a 
participant or beneficiary of the Plans.
    By letter dated September 6, 1994, Mr. Kateman represents that the 
actual value of the Interest is speculative due to the start-up nature 
of the Limited Partnership. In an addendum to his letter dated December 
19, 1994, Mr. Kateman notes that the Limited Partnership has had no 
earning capacity, no products currently in the market place and has 
funded research and development and other business expenses by raising 
capital. He explains that although the Limited Partnership has been 
successful in raising capital since 1992 and has sold three interests 
for $50,000, there is no ready market for buying and selling of such 
interests. He represents that the book value of the Interest was 
$45,541 as of December 19, 1994. Thus, the Segals propose to pay 
$45,541 for such Interest.
    7. In summary, it is represented that the proposed transaction will 
satisfy the statutory criteria for an exemption under section 408(a) of 
the Act because: (a) The purchase of the Interest will be a one-time 
transaction for cash; (b) the Pension Plan Account will not be required 
to pay any fees or commissions in connection therewith; (c) the 
Interest has been appraised by Mr. Kateman who serves as president of 
the general partner of the Limited Partnership; and (d) the Pension 
Plan Account will receive an amount which reflects the fair market 
value of the Interest.

Notice to Interested Persons

    Because Mr. Segal is the only participant in the Pension Plan whose 
Account therein will be affected by the proposed transaction, it has 
been determined that there is no need to distribute the notice of 
pendency to interested persons. Therefore, comments and requests for a 
public hearing are due 30 days from the publication of this notice in 
the Federal Register.

For Further Information Contact: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)
[[Page 5730]]

Employee Benefit Capital Preservation Fund of Central Fidelity National 
Bank (the Fund) Located in Richmond, Virginia

[Application No. D-09905]

Proposed Exemption

    The Department of Labor 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 C.F.R. 
Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the 
exemption is granted, the restrictions of section 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 past sale by the Fund of three 
Guaranteed Income Contracts (the GICs) of Confederation Life Insurance 
Company (CL) to Central Fidelity Bank, Inc. (CFB), a party in interest 
with respect to the Fund, provided the following conditions are 
satisfied: (1) The sale was a one-time transaction for cash; (2) the 
Fund received no less than the fair market value of the GICs at the 
time of the transaction; (3) the purchase price was not less than the 
GICs' accumulated book values (defined as total deposits plus interest 
accrued but unpaid at the GICs' stated rates of interest through the 
date of sale, less withdrawals) as of the date of the sale.
    Effective Date: If this proposed exemption is granted, it will be 
effective on December 29, 1994.

Summary of Facts and Representations

    1. The Fund is a group trust created on August 1, 1988, established 
and maintained exclusively by Central Fidelity National Bank (the Bank) 
for the collective investment of various participating trusts for the 
assets of retirement, pension, profit sharing, stock bonus or other 
plans exempt from taxation under the Code. Each participating trust is 
deemed to have a proportionate undivided interest in the Fund, and each 
shares ratably with the others in the income, profits, or losses 
thereof. As of September 30, 1994, there were 266 participating trusts 
in the Fund, and the Fund had assets with a total value of 
approximately $48 million. All of the assets of the Fund are held by 
the Bank as fiduciary. The Bank is a wholly-owned subsidiary of CFB, 
which is a bank holding company located in Richmond, Virginia.
    2. Among the Fund's investments are the three GICs, which can be 
described as follows:
    (a) GIC Contract Number 62340 is a single deposit contract acquired 
from CL on November 16, 1990. Its maturity date is November 15, 1995. 
The guaranteed rate of interest payable on the GIC is 8.9%, and the 
deposit amount was $1 million.
    (b) GIC Contract Number 62379 is also a single deposit contract 
acquired from CL on January 11, 1991. Its maturity date is January 10, 
1996. The guaranteed rate of interest payable on this GIC is 8.55%, and 
the deposit amount was also $1 million.
    (c) GIC Contract Number 62424 is also a single deposit contract 
acquired from CL on March 8, 1991. Its maturity date is March 7, 1996. 
The guaranteed rate of interest payable on this GIC is 8.6%, and the 
deposit amount was also $1 million.
    3. On August 11, 1994, Canadian regulatory authorities seized CL 
due to serious liquidity problems facing CL, caused by failed real 
estate investments. As a result, the assets of CL were frozen, 
including the subject GICs. The Bank determined that, as a consequence 
of CL's current financial condition, the likelihood that CL will timely 
satisfy its obligations under the GICs is seriously compromised.
    4. Due to the uncertainty of payments under the GICs, the Bank 
sought to eliminate the financial risk to the Fund's participating 
trusts and to protect the benefits of the participants and 
beneficiaries in the participating trusts. The applicant represents 
that this was accomplished by the cash sale of the GICs to CFB, the 
Bank's parent company. The purchase price for each of the GICs was its 
accumulated book value (defined as deposits plus accrued interest at 
the guaranteed rate, less withdrawals). The total purchase price for 
the three GICs amounted to $3,253,109.59. The Fund had received 
scheduled interest payments from CL prior to August 12, 1994. Thus, the 
purchase price for the GICs included interest at the guaranteed rates 
for the periods from the last interest payments made by CL for the 
respective contracts through the date of sale.
    5. In summary, the applicant represents that the subject 
transaction satisfied the criteria contained in section 408(a) of the 
Act because: (a) The sale was a one time transaction for cash; (b) the 
Fund received the accumulated book value (defined as deposits plus 
unpaid interest to the date of the sale at the guaranteed rate, minus 
withdrawals) of the GICs, which the applicant represents to be equal to 
or in excess of the fair market value of the GICs; (c) the transaction 
has enabled the Fund to avoid any risk associated with continued 
holding of the GICs and to redirect assets to safer investments; and 
(d) the Plan did not incur any expenses related to the transaction.
    For further Information Contact: Gary H. Lefkowitz of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

General Information

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

    [[Page 5731]] Signed at Washington, DC, this 24th day of January 
1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 95-2081 Filed 1-27-95; 8:45 am]
BILLING CODE 4510-29-P