[Federal Register Volume 60, Number 72 (Friday, April 14, 1995)]
[Notices]
[Pages 19086-19099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9254]



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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09660, et al.


Proposed Exemptions; Paloma Securities L.P. & Boston Global 
Advisors, Inc. 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 restrictions of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

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

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue NW., Washington, 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.

Paloma Securities L.P. (Paloma) & Boston Global Advisors, Inc. (BGA), 
Located in Boston, Massachusetts

[Application No. D-09660]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a)(1) (A) through (D) and 
406(b)(1) and (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 lending 
of securities to Paloma by employee benefit plans (including commingled 
investment funds holding plan assets) for which BGA, an affiliate of 
Paloma, acts as securities lending agent (or sub-agent) and to the 
receipt of compensation by BGA in connection with these transactions, 
provided that the following conditions are met:
    1. Neither BGA, Paloma nor an affiliate of either has discretionary 
authority or control with respect to the investment of the plan assets 
involved in the transaction, or renders investment advice (within the 
meaning of 29 CFR 2510.3-21(c) with respect to those assets;
    2. Any arrangement for BGA to lend plan securities to Paloma in 
either an agency or sub-agency capacity will be approved in advance by 
a plan fiduciary who is independent of Paloma and BGA;
    3. A plan may terminate the agency or sub-agency arrangement at any 
time without penalty on five business days notice;
    4. The plan will receive from Paloma (either by physical delivery 
or by book entry in a securities depository, wire transfer or similar 
means) by the close of business on or before the day the loaned 
securities are delivered to Paloma, collateral consisting of cash, 
securities issued or guaranteed by the U.S. Government or its agencies 
or instrumentalities, or irrevocable bank letters of credit issued by a 
person other than Paloma or an affiliate thereof, or any combination 
thereof, or other collateral permitted under PTE 81-6, having, as of 
the close of business on the preceding business day, a market value 
[[Page 19087]] initially equal to at least 102 percent of the market 
value of the loaned securities and, if the market value of the 
collateral falls below 100 percent, Paloma will deliver addition 
collateral on the following day such that the market value of the 
collateral will again equal 102 percent;
    5. All procedures regarding the securities lending activities will 
at a minimum conform to the applicable provisions of Prohibited 
Transaction Exemptions (PTEs) 81-6 and 82-63;
    6. Paloma will indemnify the plan against any losses due to its use 
of the borrowed securities;
    7. The plan will receive the equivalent of all distributions made 
to holders of the borrowed securities during the term of the loan, 
including, but not limited to, cash dividends, interest payments, 
shares of stock as a result of stock splits and rights to purchase 
additional securities, or other distributions;
    8. Prior to any plan's approval of the lending of its securities to 
Paloma, a copy of this exemption, if granted, (and the notice of 
pendency) will be provided to the plan; and
    9. Only plans with total assets having an aggregate market value of 
at least $50 million will be permitted to lend securities to Paloma.

Summary of Facts and Representations

    1. Paloma is a Delaware limited partnership which is a broker-
dealer registered with the Securities and Exchange Commission (SEC) and 
a member of the National Association of Securities Dealers.1 As of 
December 31, 1993, Paloma had in excess of $400 million in combined 
equity. Paloma is approximately 99 percent owned by Paloma Partners 
Holdings L.P. (PPH), which in turn is more than 90 percent owned by 
Paloma Partners, L.P. (PPLP), a Delaware limited partnership.

      1The company's name was legally changed to Paloma 
Securities L.P. from AKT Associates L.P. effective June 1, 1993.
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    2. Acting as principal, Paloma actively engages in the borrowing 
and lending of securities, with daily outstanding loan volume averaging 
several billion dollars. Paloma utilizes borrowed securities to satisfy 
the trading requirements of the Paloma group, or to re-lend to other 
broker-dealers and others who need a particular security for various 
periods of time. All borrowings by Paloma conform to the Federal 
Reserve Board's Regulation T. Pursuant to Regulation T, permitted 
borrowing purposes include making delivery of securities in the case of 
short sales, failures of a broker to receive securities it is required 
to deliver or other similar situations.
    3. BGA, a wholly owned subsidiary of PPH, was organized as a 
Delaware corporation in August 1993 with its principal office in 
Boston. BGA is a broker-dealer and investment advisor, in each case 
registered as such with the SEC.
    4. BGA was formed to provide securities lending services, as agent, 
to institutional clients. BGA, pursuant to authorization from its 
client, negotiates the terms of loans with borrowers pursuant to a 
client-approved form of loan agreement and otherwise acts as a liaison 
between the lender (and its custodian) and the borrower to facilitate 
the lending transaction. BGA has responsibility for monitoring receipt 
of all required collateral and marking such collateral to market daily 
so that adequate levels of collateral are maintained. BGA also monitors 
and evaluates on a continuing basis the performance and 
creditworthiness of the borrowers. BGA does not act as a custodian with 
respect to the client's portfolio of securities being loaned. Custody 
of such securities is lodged with the client's bank or other custodian. 
However, BGA may be authorized from time to time by a client to receive 
and hold pledged collateral and invest cash collateral pursuant to 
guidelines established by the client. All of BGA's procedures for 
lending securities are designed to comply with the applicable 
conditions of Prohibited Transaction Exemption (PTE) 81-6 and PTE 82-
63.2

    \2\PTE 81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR 
18754, May 19, 1987) provides an exemption under certain conditions 
from section 406(a)(1) (A) through (D) of the Act and the 
corresponding provisions of section 4975(c) of the Code for the 
lending of securities that are assets of an employee benefit plan to 
certain broker-dealers or banks which are parties in interest.
    PTE 82-63 (47 FR 14804, April 6, 1982) provides an exemption 
under specified conditions from section 406(b)(1) of the Act and 
section 4975(c)(1)(E) of the Code for the payment of compensation to 
a plan fiduciary for services rendered in connection with loans of 
plan assets that are securities.
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    5. BGA may be retained occasionally by primary securities lending 
agents to provide securities lending services in a sub-agent capacity 
with respect to portfolio securities of clients of such primary lending 
agents. As securities lending sub-agent, BGA's role under the lending 
transactions (i.e., negotiating the terms of loans with borrowers 
pursuant to a client-approved form of loan agreement and monitoring 
receipt of, and marking to market, required collateral) parallels those 
under lending transactions for which BGA acts as primary lending agent 
on behalf of its clients.
    6. When a loan is collateralized with cash, the cash will be 
invested for the benefit and at the risk of the client, and resulting 
earnings (net of a rebate to the borrower) comprise the compensation to 
the plan in respect of such loan. Where collateral consists of 
obligations other than cash, the borrower pays a fee (loan premium) 
directly to the lending plan.
    7. Paloma and BGA request an exemption for the lending of 
securities owned by certain pension plans for which BGA serves as 
securities lending agent or sub-agent (referred to hereinafter as 
client-plans)3 to Paloma, following disclosure of its affiliation 
with Paloma, and for the receipt of compensation by BGA in connection 
with such transactions. BGA will have no discretionary authority or 
control over these client-plans' decisions concerning the acquisition 
or disposition of securities available for loan. Its discretion will be 
limited to activities such as negotiating the terms of the securities 
loans with Paloma and (to the extent granted by the plan fiduciary) 
investing any cash collateral received in respect of the loans. Because 
BGA, under the proposed arrangement, would have discretion to lend plan 
securities to Paloma, and because Paloma is an affiliate of BGA, the 
lending of securities to Paloma by plans for which BGA serves as 
securities lending agent (or sub-agent) may be outside the scope of 
relief provided by PTE 81-6 and PTE 82-63.4

    \3\For the sake of simplicity, future references to BGA's 
performance of services as securities lending agent should be deemed 
to include its parallel performance as securities lending sub-agent 
and references to client-plans should be deemed to refer to plans 
for which BGA is acting as sub-agent with respect to securities 
lending activities, unless otherwise indicated specifically or by 
the context of the reference.
      4Condition 1 of PTE 81-6 requires, in part, that neither 
the borrower nor an affiliate of the borrower has discretionary 
authority or control with respect to the investment of the plan 
assets involved in the transaction.
    PTE 82-63 permits the payment of compensation to a plan 
fiduciary for the provision of securities lending services only if 
the loan of securities itself is not prohibited under section 406(a) 
of the Act.
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    Several safeguards, described more fully below, are incorporated in 
the application in order to ensure the protection of the plan assets 
involved in the transactions. In addition, the applicants represent 
that the proposed lending program incorporates the relevant conditions 
contained in PTE 81-6 and PTE 82-63.
    8. Where BGA is the direct securities lending agent, a fiduciary of 
a client-plan who is independent of BGA and Paloma will sign a 
securities lending [[Page 19088]] agency agreement with BGA (the Agency 
Agreement) before the plan participates in a securities lending 
program. The Agency Agreement will, among other things, describe the 
operation of the lending program, prescribe the form of securities loan 
agreement (Loan Agreement) to be entered into on behalf of the plan 
with borrowers, specify the securities which are available to be lent, 
required margin and daily marking-to-market, and provide a list of 
permissible borrowers, including Paloma. The Agency Agreement will also 
set forth the basis and rate for BGA's compensation from the plan for 
the performance of securities lending services.
    9. The Agency Agreement will contain provisions to the effect that 
if Paloma is designated by the client-plan as an approved borrower (i) 
the client-plan will acknowledge that Paloma is an affiliate of BGA and 
(ii) BGA will represent to the client-plan that each and every loan 
made to Paloma on behalf of the client-plan will be at market rates and 
in no event less favorable to the client-plan than a loan of such 
securities, made at the same time and under the same circumstances, to 
an unaffiliated borrower.
    10. When BGA is lending securities under a sub-agency arrangement, 
the primary lending agent will enter into a securities lending agency 
agreement (the primary lending agreement) with a fiduciary of a client-
plan who is independent of such primary lending agent, BGA or Paloma, 
before the plan participates in the securities lending program. The 
primary lending agent will be unaffiliated with BGA or Paloma. The 
primary lending agreement will contain substantive provisions akin to 
those in the Agency Agreement relating to the description of the 
operation of the lending program, use of an approved form of Loan 
Agreement, specification of securities which are available to be lent, 
required margin and daily marking-to-market, and provision of a list of 
approved borrowers (which will include Paloma). The primary lending 
agreement will specifically authorize the primary lending agent to 
appoint sub-agents, to facilitate its performance of securities lending 
agency functions. Where BGA is to act as such a sub-agent the primary 
lending agreement will expressly disclose that BGA is to so act. The 
primary lending agreement will also set forth the basis and rate for 
the primary lending agent's compensation from the client-plan for the 
performance of securities lending services and will authorize the 
primary lending agent to pay a portion of its fee, as the primary 
lending agent determines in its sole discretion, to any sub-agent(s) it 
retains pursuant to the authority granted under such agreement.
    Pursuant to its authority to appoint sub-agents, the primary 
lending agent will enter into a securities lending sub-agency agreement 
(the Sub-Agency Agreement) with BGA under which the primary lending 
agent will retain and authorize BGA, as sub-agent, to lend securities 
of the primary lending agent's client-plans, subject to the same terms 
and conditions as are specified in the primary lending agreement. Thus, 
for example, the form of Loan Agreement will be the same as that 
approved by the plan fiduciary in the primary lending agreement and the 
list of permissible borrowers under the Sub-Agency Agreement (which 
will include Paloma) will be limited to those approved borrowers listed 
as such under the primary lending agreement.
    BGA represents that the Sub-Agency Agreement will contain 
provisions which are in substance comparable to those described in 
paragraphs 8 and 9 above, which would appear in an Agency Agreement in 
situations where BGA is the primary lending agent. In this regard, BGA 
will make the same representation in the Sub-Agency Agreement as 
described in paragraph 9 above with respect to arm's-length dealing 
with Paloma. The Sub-Agency Agreement will also set forth the basis and 
rate for BGA's compensation to be paid by the primary lending agent.
    11. In all cases, BGA will maintain transactional and market 
records sufficient to assure compliance with its representation that 
all loans to Paloma are effectively at arm's-length terms. Such records 
will be provided to the appropriate plan fiduciary in the manner and 
format agreed to with the lending fiduciary, without charge to the 
plan. A client-plan may terminate the Agency Agreement (or the primary 
lending agreement) at any time, without penalty to the plan, on five 
business days notice.
    12. BGA will enter into the same form of Loan Agreement with Paloma 
on behalf of client-plans as it does with all other borrowers. An 
independent fiduciary of the client-plan will approve the terms of the 
Loan Agreement. The Loan Agreement will specify, among other things, 
the right of the client-plan to terminate a loan at any time and the 
plan's rights in the event of any default by Paloma. The Loan Agreement 
will explain the basis for compensation to the client-plan for lending 
securities to Paloma under each category of collateral. The Loan 
Agreement also will contain a requirement that Paloma must pay all 
transfer fees and transfer taxes related to the security loans.
    13. Before entering into the Loan Agreement, Paloma will furnish 
its most recent available audited and unaudited financial statements to 
BGA, and in turn such statements will be provided to a client-plan 
before the plan is asked to approve the terms of the Loan Agreement. 
The Loan Agreement will contain a requirement that Paloma must give 
prompt notice at the time of a loan of any material adverse changes in 
its financial condition since the date of the most recently furnished 
financial statements. If any such changes have taken place, BGA will 
not make any further loans to Paloma unless an independent fiduciary of 
the plan has approved the loan in view of the changed financial 
condition.
    14. As noted above, the agreement by BGA to provide securities 
lending services, as agent, to a client-plan will be embodied in the 
Agency Agreement. The client-plan and BGA will agree to the arrangement 
under which BGA will be compensated for its services as lending agent 
prior to the commencement of any lending activity. Such agreed upon fee 
arrangement will be set forth in the Agency Agreement and thereby will 
be subject to the prior written approval of a fiduciary of the client-
plan who is independent of Paloma and BGA. Similarly, with respect to 
arrangements under which BGA is acting as securities lending sub- 
agent, the agreed upon fee arrangement of the primary lending agent 
will be set forth in the primary lending agreement, and such agreement 
will specifically authorize the primary lending agent to pay a portion 
of such fee, as the primary lending agent determines in its sole 
discretion, to any sub-agent, including BGA, which is to provide 
securities lending services to the plan.5 The client-plan will be 
provided with any reasonably available information which is necessary 
for the plan fiduciary to make a determination whether to enter into or 
continue to participate under the Agency Agreement (or the primary 
lending agreement) and any other reasonably available information which 
[[Page 19089]] the plan fiduciary may reasonably request.

      5The foregoing provisions describe arrangements 
comparable to conditions c and d of PTE 82-63 which require that the 
payment of compensation to a ``lending fiduciary'' is made under a 
written instrument and is subject to prior written authorization of 
an independent ``authorizing fiduciary.'' In the event that a 
commingled investment fund will participate in the securities 
lending program, the special rule applicable to such funds 
concerning the authorization of the compensation arrangement set 
forth in paragraph f of PTE 82-63 will be satisfied.
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    15. Each time a plan loans securities to Paloma pursuant to the 
Loan Agreement, BGA will reflect in its records the material terms of 
the loan, including the securities to be loaned, the required level of 
collateral, and the fee or rebate payable. The terms of each loan will 
be at least as favorable to the client-plan as those of a comparable 
arm's-length transaction between unrelated parties.
    16. The client-plan will be entitled to the equivalent of all 
interest, dividends and distributions on the loaned securities during 
the loan period. The Loan Agreement will provide that the client-plan 
may terminate any loan at any time. Upon a termination, Paloma will be 
contractually obligated to return the loaned securities to the client-
plan within five business days of notification (or such longer period 
of time permitted pursuant to a class exemption). If Paloma fails to 
return the securities within the designated time, the client-plan will 
have the right under the Loan Agreement to purchase securities 
identical to the borrowed securities and apply the collateral to 
payment of the purchase price and any other expenses of the plan 
associated with the sale and/or purchase.
    17. BGA will establish each day a written schedule of lending fees 
and rebate rates in order to assure uniformity of treatment among 
borrowing brokers and to limit the discretion BGA would have in 
negotiating securities loans to Paloma. Loans to Paloma on any day will 
be made at rates on the daily schedule or at rates which may be more 
advantageous to the client-plans. In no case will loans be made to 
Paloma at rates below those on the schedule. The rebate rates (in 
respect of cash-collateralized loans made by client-plans) which are 
established will take into account the potential demand for loaned 
securities, the applicable bench-mark cost of funds indices (typically, 
Federal Funds, overnight repo rate or the like) and anticipated 
investment return on overnight investments which are permitted by the 
relevant plan fiduciary. The lending fees (in respect of loans made by 
client-plans collateralized by other than cash) which are established 
will be set daily to reflect conditions as influenced by potential 
market demand.
    BGA will negotiate rebate rates for cash collateral payable to each 
borrower, including Paloma, on behalf of a plan. Where, for example, 
cash collateral derived from an overnight loan is intended to be 
invested in a generic repurchase agreement, any rebate fee determined 
with respect to an overnight repurchase agreement benchmark will be set 
below the applicable ``ask'' quotation therefor. Where cash collateral 
is derived from a loan with an expected maturity date (term loan) and 
is intended to be invested in instruments with similar maturities, the 
maximum rebate fee will be less than the investment return (assuming no 
investment default). With respect to any loan to Paloma, BGA will never 
negotiate a rebate rate with respect to such loan which would produce a 
zero or negative return to the client-plan (assuming no default on the 
investments related to the cash collateral from such loan where BGA has 
investment discretion over the cash collateral). BGA represents that 
the written rebate rate established daily for cash collateral under 
loans negotiated with Paloma will not exceed the rebate rate which 
would be paid to a similarly situated unrelated borrower with respect 
to a comparable securities lending transaction. BGA will disclose the 
method for determining the maximum daily rebate rate as described above 
to an independent fiduciary of a client-plan for approval before 
lending any securities to Paloma on behalf of the plan.
    18. For collateral other than cash, the applicable loan fee in 
respect of any outstanding loan is reviewed daily for competitiveness 
and adjusted, where necessary, to reflect market terms and conditions. 
With respect to any calendar quarter, on average 50 percent or more of 
the outstanding dollar value of securities loans negotiated on behalf 
of client-plans will be to unrelated borrowers, and so the 
competitiveness of the loan fee will be tested in the marketplace. 
Accordingly, loans to Paloma should result in competitive rate income 
to the lending client-plan. At all times, BGA will effect loans in a 
prudent and diversified manner. BGA will lend securities to requesting 
borrowers on a ``first come, first served'' basis, as a means of 
assuring uniformity of treatment among borrowers.
    19. Under the Loan Agreement, Paloma will agree to indemnify and 
hold harmless the applicable client-plan (including the sponsor and 
fiduciaries of such client-plan) from any and all damages, losses, 
liabilities, costs and expenses (including attorney's fees) which the 
client-plan may incur or suffer arising in any way from the use by 
Paloma of the loaned securities or any failure of Paloma to deliver 
loaned securities in accordance with the provisions of the Loan 
Agreement or to otherwise comply with the terms of the Loan Agreement.
    20. The client-plan will receive collateral from Paloma by physical 
delivery, book entry in a securities depository, wire transfer or 
similar means by the close of business on or before the day the loaned 
securities are delivered to Paloma. The collateral will consist of 
cash, securities issued or guaranteed by the U.S. Government or its 
agencies or irrevocable bank letters of credit (issued by a person 
other than Paloma or its affiliates) or such other types of collateral 
which might be permitted by the Department under a class exemption. The 
market value of the collateral on the close of business on the day 
preceding the day of the loan will be at least 102 percent of the 
market value of the loaned securities. The Loan Agreement will give the 
client-plan a continuing security interest in and a lien on the 
collateral. BGA will monitor the level of the collateral daily. If the 
market value of the collateral falls below 100 percent (or such greater 
percentage as agreed to by the parties) of that of the loaned 
securities, BGA will require Paloma to deliver by the close of business 
the next day sufficient additional collateral to bring the level back 
to at least 102 percent.
    21. Each client-plan participating in the lending program will be 
sent a monthly transaction report. The monthly report will provide a 
list of all security loans outstanding and closed for a specified 
period. The report will identify for each open loan position, the 
securities involved, the value of the security for collateralization 
purposes, the current value of the collateral, the rebate or loan 
premium (as the case my be) at which the security is loaned, and the 
number of days the security has been on loan.
    22. Only client-plans with total assets having an aggregate market 
value of at least $50 million will be permitted to lend securities to 
Paloma. This restriction is intended to assure that any lending to 
Paloma will be monitored by an independent fiduciary of above average 
experience and sophistication in matters of this kind.
    23. In summary, the applicants represent that the described 
transactions will satisfy the statutory criteria of section 408(a) of 
the Act because: (1) The form of the Loan Agreement pursuant to which 
any loan is effected will be approved by a fiduciary of the client-plan 
who is independent of Paloma and BGA before a client-plan lends any 
securities to Paloma; (2) the lending arrangements will permit the 
client-plans to lend to Paloma, a major borrower of securities, and 
will enable [[Page 19090]] the plans to diversify the list of eligible 
borrowers and earn additional income from the loaned securities on a 
secured basis, while continuing to receive any dividends, interest 
payments and other distributions due on those securities; (3) the 
client-plan will receive sufficient information concerning Paloma's 
financial condition before the plan lends any securities to Paloma; (4) 
the collateral on each loan to Paloma initially will be at least 102 
percent of the market value of the loaned securities, which is in 
excess of the 100 percent collateral required under PTE 81-6, and will 
be monitored daily by BGA; (5) the client-plans will receive a monthly 
report, so that an independent fiduciary of the client-plans also may 
monitor loan activity, fees, the level of the collateral and loan 
return/yield; (6) BGA will have no discretionary authority or control 
over the plan's acquisition or disposition of securities available for 
loan; (7) the terms of each loan will be at least as favorable to the 
plans as those of a comparable arm's-length transaction between 
unrelated parties; and (8) all the procedures under the proposed 
transactions will, at a minimum, conform to the applicable provisions 
of PTE 81-6 and PTE 82-63.

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

Bank of Ashland, Inc. (the Bank), Located in Ashland, Kentucky

[Application Nos. D-09841 thru D-09843]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and 
406(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 as of December 23, 1994, to 
the cash sale of certain collateralized mortgage obligations (CMOs) by 
six employee benefit plans for which the Bank acts as trustee (the 
Plans) to Ashland Bankshares, Inc. (the Holding Company), a party in 
interest with respect to the Plans, provided that the following 
conditions were met:
    (a) Each sale was a one-time transaction for cash;
    (b) Each Plan received an amount which was equal to the greater of 
(i) the outstanding principal balance for the CMOs owned by the Plan, 
plus accrued but unpaid interest, at the time of sale, (ii) the 
amortized cost for the CMOs owned by the Plan, plus accrued but unpaid 
interest, as determined by the Bank based on the outstanding principal 
balance for each CMO on the date of sale, or (iii) the fair market 
value of the CMOs owned by the Plan as determined by an independent, 
qualified appraiser at the time of the sale;
    (c) The Plans did not pay any commissions or other expenses with 
respect to the sale;
    (d) The Bank, as trustee of the Plans, determined that the sale of 
the CMOs is in the best interests of each Plan and their participants 
and beneficiaries at the time of the transaction;
    (e) The Bank took all appropriate actions necessary to safeguard 
the interests of the Plans and their participants and beneficiaries in 
connection with the transactions; and
    (f) Each Plan received a reasonable rate of interest on the CMOs 
during the period of time it held the CMOs.

EFFECTIVE DATE: The proposed exemption, if granted, will be effective 
as of December 23, 1994.

Summary of Facts and Representations

    1. The Bank is a wholly-owned subsidiary of the Holding Company. 
The Bank serves as trustee of the Plans and has investment discretion 
for the assets of the Plans.
    The Plans are the John O. Jones, M.D., PSC Money Purchase Pension 
Plan (the Jones Plan); the Michael G. Ehrie, Jr., M.D., PSC Money 
Purchase Pension Plan (the Ehrie Pension Plan); the Michael G. Ehrie, 
Jr., M.D., PSC Profit Sharing Plan (the Ehrie P/S Plan); the Simons 
Real Estate Money Purchase Pension Plan (the Simons Plan); the Buchanan 
Sound & Communications, Inc. Profit Sharing Plan (the Buchanan Plan); 
and the Bank of Ashland, Inc. Profit Sharing Plan (the Bank Plan). All 
of the Plans are defined contribution plans.
    As of December 23, 1994, the Jones Plan had five participants and 
total assets of $713,790; the Ehrie Pension Plan had seven participants 
and total assets of $322,168; the Ehrie P/S Plan had seven participants 
and total assets of $363,513; the Simons Plan had two participants and 
total assets of $134,791; the Buchanan Plan had 32 participants and 
total assets of $97,841; and the Bank Plan had 58 participants and 
total assets of $2,427,300. Thus, as of December 23, 1994, the Plans 
had 111 participants and total assets of approximately $4,059,403.
    2. The Bank represents that at various times during the third and 
fourth quarters of 1993 and the first quarter of 1994, assets of the 
Plans were invested in the CMOs. The CMOs were purchased by the Bank 
from broker-dealers that were independent of the Plans as well as the 
Bank and its affiliates (including the Holding Company). The CMOs are 
investment products through which investors purchase an interest in a 
pool of residential mortgage loans. Investors receive payments of 
principal and interest. The interest payments change monthly in 
relation to a specific index, such as the London Interbank Offered Rate 
(LIBOR) or the U.S. Federal Reserve's Cost of Funds Index (COFI), 
contained in a formula used to calculate the interest rate for such 
securities. The repayment of principal is usually guaranteed by various 
U.S. government agencies, such as the Federal Home Loan Mortgage 
Corporation (FHLMC or ``Freddie Mac'') or the Federal National Mortgage 
Association (FNMA or ``Fannie Mae'').
    3. The CMOs are described as follows: (i) FHLMC Multiclass Mortgage 
Participation Certificates, Series 1625, Class SB, SE, and SJ; (ii) 
FHLMC Multiclass Mortgage Participation Certificates, Series 1655, 
Class S; (iii) FNMA Guaranteed REMIC Pass-Through Certificates, Fannie 
Mae REMIC Trust 1993-102, Class S; (iv) FNMA Guaranteed REMIC Pass-
Through Certificates, Fannie Mae REMIC Trust 1993-110, Class SH; (v) 
FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae REMIC Trust 
1993-139, Class SL and SC; (vi) FNMA Guaranteed REMIC Pass-Through 
Certificates, Fannie Mae REMIC Trust 1993-202, Class VJ; and (vii) GE 
Capital Mortgage Services, Inc., REMIC Multi-Class Pass-Through 
Certificates, Series 1993-17, Class 17-A20.\6\

    \6\The applicant states that the GE Capital Mortgage Services, 
Inc. REMIC Multi-Class Pass-Through Certificates, Series 1993-17, 
Class 17-A20 (the GE CMO) was a publicly-offered security. In this 
regard, the applicant notes that if a plan acquires a publicly-
offered security that grants the plan an equity interest in an 
entity, the plan's assets include the security but not any of the 
underlying assets of the entity (see 29 CFR 2510.3-101(a)(2) and 
(b)). Therefore, the applicant represents that the assets of the 
Plans that own the GE CMO do not include any of the mortgages 
underlying the GE CMO.
    The applicant states further that if a plan acquires a 
``guaranteed governmental mortgage pool certificate'', the plan's 
assets include the certificate but not any of the mortgages 
underlying such certificate (see 29 CFR 2510.3-101(i). A 
``guaranteed governmental mortgage pool certificate'' is a 
certificate (i) that is backed by, or evidences an interest in, 
specified mortgages or participation interests, and (ii) whose 
interest and principal payments are guaranteed by the Government 
National Mortgage Association (GNMA), FHLMC, or FNMA. Thus, the 
applicant represents that since all of the CMOs, except for the GE 
CMO, have interest and principal payments payable under the CMO 
guaranteed by either FHLMC or FNMA, the assets of the Plans do not 
include any of the mortgages underlying such CMOs.
[[Page 19091]]

    All of the certificates mentioned above are structured as a real 
estate mortgage investment conduit (``REMIC'') under section 860D of 
the Code. The various classes of certificates receive principal and 
interest payments in differing portions and at differing times from the 
cash flows provided from the monthly payments received on the 
underlying mortgages.
    The repayment of principal from the underlying mortgages fluctuates 
significantly. To facilitate the structuring of such REMICs, the 
prepayments on the pools of mortgages are commonly measured relative to 
a variety of prepayment models. The model used for these REMICs is the 
Public Securities Association's standard prepayment model or ``PSA''. 
This model assumes that mortgages will prepay at an annual rate of .2% 
in the first month after origination, then the prepayment rate 
increases at an annual rate of .2% per month up to the 30th month after 
origination and then the prepayment rate is constant at 6% per annum in 
the 30th and later months. This assumption is called 100 PSA.
    The REMIC structure allocates principal payments to the various 
classes in varying amounts as principal payments are made. The exact 
date of repayment of all principal to any class of certificates is not 
known until the final maturity date. The maturity for the various 
classes is referred to as the ``weighted average life'' (WAL). The WAL 
of a security refers to the average amount of time expressed in years 
that will elapse from the date of its issuance until each dollar of 
principal has been repaid to the investor based on the PSA assumption. 
The holders of all classes of the certificates will receive all of 
their principal back. However, the timing of when that principal is 
returned is dependent on how quickly the underlying mortgages are 
repaid or refinanced. In no event will the time for the recovery of 
principal exceed the final maturity date of the underlying mortgages.
    Each month the monthly payments on the underlying mortgages are 
collected and distributed to the holders of the various REMIC classes. 
Interest on the certificates is paid monthly and is determined 
according to a specific formula. The certificates owned by the Plans, 
described in further detail below, are ``inverse floaters'' with an 
interest rate indexed to one month LIBOR or COFI. These certificates 
are ``inverse floaters'' because the formula used to calculate the 
interest rate, which adjusts monthly for each certificate, usually 
raises the rate when the index falls and lowers the rate when the index 
rises.
    All of the CMOs were purchased by the Bank, as trustee of the 
Plans, from either Mark Ross (Mr. Ross) of Kemper Securities, Inc. 
(Kemper Securities), located in Houston, Texas, or Robert Conroy (Mr. 
Conroy) of First Institutional Securities, Inc. (FIS), located in 
Clifton, New Jersey. The Bank states that neither the brokers (i.e. Mr. 
Ross and Mr. Conroy) nor their brokerage firms have any relationship to 
the Plans, the employers which maintain the Plans, the Bank, or any 
affiliates of the Bank.
    A description of each of the CMOs, including the respective 
interest rate formulas, WAL and PSA assumptions are set forth below in 
the APPENDIX.
    4. At the time of purchase, the Bank anticipated that interest 
rates generally would decline and that each CMO would be retired within 
three years of the date of purchase due to prepayments of the 
underlying mortgages in each pool as obligors refinanced their 
mortgages at lower interest rates. The Bank thought that the CMOs would 
yield the Plans a high rate of return as well as offset the adverse 
effects declining interest rates would have on the Plans' floating rate 
assets during this period. The Bank states that the ideal time to buy 
CMOs that are ``inverse floaters'' is when interest rates, as measured 
by indices such as LIBOR or COFI, are high and are expected to go down 
during the time the investor is holding the CMOs. However, when 
interest rates rise, the rate of return on the CMOs goes down and the 
securities become less valuable. The Bank notes that initially the 
Plans were receiving monthly interest payments on the CMOs at rates 
that were significantly above the market rate, as measured by interest 
rate indexes at the time. As a result of increases in interest rates 
during 1994, and the expectation of additional interest rate increases, 
the Bank anticipated that the CMOs would not be retired for at least 15 
years because of the projected decrease in the prepayments of mortgages 
held in each pool. Furthermore, as a result of the increase in interest 
rates, both the rate of return on the CMOs (as measured by the monthly 
interest payments) and the market value of the CMOs decreased 
significantly. Thus, the Bank states that it became increasing 
difficult to find third party investors who were willing to purchase 
the CMOs from the Plans without the Plans incurring significant losses 
on their investments.7

    \7\The Department is expressing no opinion in this proposed 
exemption regarding whether the acquisition and holding of the CMOs 
by the Plans violated any of the fiduciary responsibility provisions 
of Part 4 of Title I of the Act.
    The Department notes that section 404(a) of the Act requires, 
among other things, that a fiduciary of a plan act prudently, solely 
in the interest of the plan's participants and beneficiaries, and 
for the exclusive purpose of providing benefits to participants and 
beneficiaries when making investment decisions on behalf of a plan. 
Section 404(a) of the Act also states that a plan fiduciary should 
diversify the investments of a plan so as to minimize the risk of 
large losses, unless under the circumstances it is clearly prudent 
not to do so.
    In this regard, the Department is not providing any opinion as 
to whether a particular category of investments or investment 
strategy would be considered prudent or in the best interests of a 
plan as required by section 404 of the Act. The determination of the 
prudence of a particular investment or investment course of action 
must be made by a plan fiduciary after appropriate consideration to 
those facts and circumstances that, given the scope of such 
fiduciary's investment duties, the fiduciary knows or should know 
are relevant to the particular investment or investment course of 
action involved, including the plan's potential exposure to losses 
and the role the investment or investment course of action plays in 
that portion of the plan's investment portfolio with respect to 
which the fiduciary has investment duties (see 29 CFR 2550.404a-1). 
The Department also notes that in order to act prudently in making 
investment decisions, a plan fiduciary must consider, among other 
factors, the availability, risks and potential return of alternative 
investments for the plan. Thus, a particular investment by a plan, 
which is selected in preference to other alternative investments, 
would generally not be prudent if such investment involves a greater 
risk to the security of a plan's assets than comparable investments 
offering a similar return or result.
---------------------------------------------------------------------------

    5. Robert W. Nichols (Mr. Nichols), First Vice President of Morgan 
Keegan & Company, Inc., an independent, qualified appraiser located in 
Louisville, Kentucky, calculated the fair market value of the CMOs held 
by the Plans as of December 15, 1994. Mr. Nichols solicited bids for 
all of the CMOs from at least three different independent broker-
dealers, including First National Bank of Knoxville in Knoxville, 
Tennessee; First Commerce Securities in Memphis, Tennessee; and Merrill 
Lynch Institutional Sales in Charleston, West Virginia. Based on 
pricing information obtained from these broker-dealers, Mr. Nichols 
advised the Bank that the fair market value of the CMOs was 
significantly below the original purchase price of the CMOs (as noted 
in the table below in Paragraph 6). The Bank states that Mr. Nichols is 
not related to or associated with the Bank, the Holding Company, the 
Plans or any of the brokers involved in the purchases of the CMOs.
    6. In addition, the Bank calculated the value of the CMOs held by 
the Plans as of December 23, 1994, using an amortized cost computation. 
The Bank states that the computation of the amortized cost was arrived 
at by a series of computations. First, the Bank determined the amount 
of the premium paid upon purchase (Purchase price - 100 = Premium). The 
par value or face value of a bond is referred to as 100. The Bank 
states that since all of CMOs paid interest monthly, the premium was 
allocated monthly in order to be properly matched to the income. The 
number of months that the premium was allocated over was determined by 
the WAL at the time of purchase (expressed in years) multiplied by 
twelve (WAL  x  12 = amortizing months).8 Then, the Bank 
determined the amount of premium that was allocated to each month by 
dividing the premium by the amortizing months. To determine how much 
premium still remained to be amortized, the Bank subtracted from the 
amortizing months those months that the Plan actually held the CMO. The 
Bank states that the remaining months were multiplied by the monthly 
premium amount to arrive at the premium balance. The premium was added 
to the par price (i.e. 100) to arrive at the amortized cost remaining 
for the CMO. Thus, the Bank states that the formula for calculating 
amortized cost was as follows:9 [[Page 19092]] 

    \8\As noted previously in Paragraph 3, the WAL for a CMO is 
determined at the time of purchase based on various assumptions 
about the speed of principal repayments and interest rate changes, 
using financial data provided by independent sources (such as 
Bloomberg Financial Markets). The Bank states that changes to the 
formula for calculating the amortized cost based on WAL assumptions 
other than at the time of purchase would not provide an 
administratively acceptable method of allocating the premium for a 
CMO because such a method would require constant adjustments which 
are not material to the concept of income recognition as it relates 
to CMOs.
    \9\For example, assume that a particular CMO investment has been 
held by a Plan for 6 months. If the WAL at the time of purchase of 
the CMO was 2.02 years and the cost was 102.25 based on the par 
value being referred to as 100, the formula would be (((102.25 - 100 
= 2.25) / 2.02  x  12 = 24.24) = .09282178)  x  ((2.02  x  12 = 
24.24) - 6) = 1.69307 + 100 = 101.69307). As the formula indicates, 
the amortized cost using the WAL at purchase would be 101.69307 as 
compared to the actual cost of 102.25. Therefore, the Bank states 
that the amortized cost formula caused the Plan to be paid an amount 
for this CMO investment which was slightly less than the Plan's 
original cost (i.e. basis) but more than the total remaining 
principal balance plus accrued but unpaid interest.
---------------------------------------------------------------------------

[GRAPHIC][TIFF OMITTED]TN14AP95.000


    The Bank also calculated the remaining principal balance on the CMO 
investments held by each Plan as of December 23, 1994, based on the 
face amount of the securities and the principal and interest payments 
received by the Plans through that date. As shown in the table below, 
the amortized cost of the CMOs held by the Plans exceeded the remaining 
principal balances on the CMOs at the time of the transaction. In 
addition, the table below shows the fair market value of the CMOs held 
by each Plan, based on Mr. Nichols' appraisal of the CMOs on December 
15, 1994.

------------------------------------------------------------------------
          Plan              Amort. cost     Prin. bal.      Mkt. value  
------------------------------------------------------------------------
Jones Plan..............        $226,612        $224,473        $105,711
Ehrie Pension Plan......          79,449          78,410          41,581
Ehrie P/S Plan..........         105,046         104,028          52,924
Simons Plan.............          23,085          22,745          12,002
Buchanan Plan...........          18,240          18,192          10,445
Bank Plan...............         646,699         644,433         302,519
------------------------------------------------------------------------

    The Bank determined that a sales price for the CMOs owned by each 
of the Plans based on amortized cost, plus the total principal and 
interest payments received by the Plans as of the date of sale, would 
produce a total return to the Plans which would exceed the Plans' total 
original cost for the CMOs (as illustrated below).

----------------------------------------------------------------------------------------------------------------
                                                                     Principal                                  
                      Plan                           Interest        rec.'d +     Total receipts    Total cost  
                                                     collected      amort. cost                                 
----------------------------------------------------------------------------------------------------------------
Jones Plan......................................         $25,372        $242,078        $267,450        $246,254
Ehrie Pension Plan..............................           8,060          86,039          94,099          86,812
Ehrie P/S Plan..................................          11,367         115,849         127,216         117,982
Simons Plan.....................................           2,716          25,313          28,029          25,717
Buchanan Plan...................................           1,414          20,049          21,463          20,100
Bank Plan.......................................          72,953         693,782         766,735         705,680
----------------------------------------------------------------------------------------------------------------

    The Bank represents that each Plan received a reasonable rate of 
interest on the CMOs during the period of time it held the CMOs. In 
this regard, the Bank states that the weighted annualized rate of 
interest received by each Plan on its CMOs, net of amortization cost, 
was as follows: (i) 8.19% for the Jones Plan; (ii) 8.06% for the Ehrie 
Pension Plan; (iii) 7.58% for the Ehrie P/S Plan; (iv) 8.68% for the 
Simons Plan; (v) 7.09% for the Buchanan Plan; and (vi) 8.23% for the 
Bank Plan.10

    \10\The formula for the annualized rate of return for the months 
held was as follows: (Interest income collected less amortization of 
premiums realized) divided by (average outstanding balance) divided 
by (average months held) and multiplied by 12.
---------------------------------------------------------------------------

    7. The Bank represents that when the market value and the 
availability of buyers for the CMOs declined, the CMOs became illiquid 
investments. Therefore, the Bank believed that the CMOs were no longer 
suitable investments for the Plans. The Bank states that any sale of 
the CMOs on the open market would have produced significant losses for 
the Plans and the individual accounts of each Plan 
[[Page 19093]] participant involved. In order to prevent such losses, 
the Bank sold the CMOs to the Holding Company at an amount which for 
each Plan was the greater of either: (i) The outstanding principal 
balance for the CMOs owned by the Plan, plus accrued but unpaid 
interest, at the time of sale; (ii) the amortized cost for the CMOs 
owned by the Plan, plus accrued but unpaid interest, as determined by 
the Bank based on the outstanding principal balance for each CMO on the 
date of sale; or (iii) the fair market value of the CMOs owned by the 
Plan as determined by an independent, qualified appraiser at the time 
of the sale.
    The Bank, as trustee of the Plans, believed that the transactions 
were in the best interests of the Plans and their participants and 
beneficiaries. The Bank states that the transactions allowed the Plan 
participants to divest themselves of an illiquid investment and shifted 
to the Holding Company the risks associated with selling the CMOs 
during the current interest rate environment. As a result, the 
individual participants in the Plans were no longer subject to the 
losses that would have resulted from the participants receiving a 
distribution of their account balances based on the fair market value 
of the CMOs. The Bank wanted to sell the CMOs to the Holding Company by 
December 31, 1994, in order to benefit participants of the Plans 
receiving distributions from their individual accounts during 1995. In 
this regard, the Bank notes that distributions made to Plan 
participants are based on the fair market value of the plan assets at 
the year-end valuation. At the time of the transaction, the fair market 
value of the CMOs was substantially less than the amount the Plans 
received as a result of the transactions.
    8. The Bank represents that it took all appropriate actions 
necessary to safeguard the interests of the Plans and their 
participants and beneficiaries in connection with the sale of the CMOs 
to the Holding Company. The Bank ensured that each Plan received the 
appropriate amount of cash from the Holding Company in exchange for 
such Plan's CMOs. The Bank reviewed an updated appraisal of the CMOs to 
ensure that there was an accurate calculation by the independent 
appraiser of the fair market value of each of the CMOs held by the 
Plans, based on pricing information obtained from independent broker-
dealers. The Bank also ensured that the Plans did not pay any 
commissions or other expenses in connection with the transactions.
    9. In summary, the applicant represents that the transactions 
satisfied the statutory criteria of section 408(a) of the Act and 
section 4975 of the Code because: (a) Each sale was a one-time 
transaction for cash; (b) each Plan received an amount which was equal 
to the greater of either (i) the outstanding principal balance for the 
CMOs owned by the Plan, plus accrued but unpaid interest, at the time 
of sale, (ii) the amortized cost for the CMOs owned by the Plan, plus 
accrued but unpaid interest, as determined by the Bank based on the 
outstanding principal balance for each CMO on the date of sale, or 
(iii) the fair market value of the CMOs owned by the Plan as determined 
by an independent, qualified appraiser at the time of the sale; (c) the 
Plans did not pay any commissions or other expenses with respect to the 
sale; (d) the Bank, as trustee of the Plans, determined that the sale 
of the CMOs was in the best interests of each Plan and its participants 
and beneficiaries; (e) the Bank took all appropriate actions necessary 
to safeguard the interests of the Plans and their participants and 
beneficiaries in connection with the transactions; and (f) each Plan 
received a reasonable rate of interest on the CMOs during the period of 
time it held the CMOs.

Notice to Interested Persons

    The applicant states that notice of the proposed exemption shall be 
made by first class mail to the appropriate Plan fiduciaries within 
fifteen (15) days following the publication of the proposed exemption 
in the Federal Register. This 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 
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.

Appendix

    A. The FHLMC Multiclass Mortgage Participation Certificates, Series 
1625, Class SB, SE and SJ, were issued by Freddie Mac as part of an 
issue of multiclass participation certificates with 45 various classes 
in the total amount of $1.5 trillion. The Bank, as trustee of the 
Plans, purchased portions of three of those classes on December 2, 
1993. The Certificates are secured by first lien residential mortgages 
with an original term to maturity of 180 months or less.
    This REMIC uses a 200 PSA assumption regarding principal repayment 
(2 times 100 PSA). The WAL for classes SB, SE and SJ based on a 200 PSA 
was 3.4, 2.0 and 2.0 years, respectively, at the time of purchase.
    The formula for the interest on class SB is 57.000005--
(LIBOR x 6.785715) with a minimum rate of 0.0% and a maximum rate of 
9.5%. For class SE, the interest is 17.999996--(LIBOR x 2.571428) with 
a minimum rate of 0.0% and a maximum rate of 17.999996%. For class SJ, 
the interest is 18.529405--(LIBOR x 2.647058) with a minimum rate of 
0.0% and a maximum rate of 18.529405%. ``LIBOR'' refers to one-month 
LIBOR, a rate established daily by independent market data sources in 
London, England, based on the arithmetic mean of quotations offered by 
creditworthy international banks dealing in Eurodollars. LIBOR moves up 
or down daily as the interest rates charged by such banks move up or 
down. The movement of LIBOR has an inverse relationship on the interest 
paid on all inverse floating rate classes. As interest rates increased 
from February through December 1, 1994, the interest paid on most of 
these classes declined. The initial interest rates for classes SB, SE 
and SJ were 9.5%, 9.803569% and 10.091908%, respectively. The interest 
rates as of December 1, 1994 for classes SB, SE and SJ were 9.5%, 2.57% 
and 2.65%. The interest rates can drop to 0.0% for classes SB, SE and 
SJ if LIBOR reaches or exceeds 8.4, 8.0 and 7.0 percent, respectively. 
LIBOR on December 23, 1994 was 5.94%.
    B. The FHLMC Multiclass Mortgage Participation Certificates, Series 
1655, Class S, were issued by Freddie Mac as part of an issue of 
multiclass certificates with 20 various classes in the total amount of 
$500 million. The Bank, as trustee of the Plans, purchased a portion of 
a class on December 7, 1993. The Certificates are secured by first lien 
residential mortgages with an original term to maturity of 180 months 
or less.
    This REMIC uses a 250 PSA assumption regarding principal repayment 
(2.5 times 100 PSA). The WAL for class S based on a 250 PSA was 3.5 
years at the time of purchase.
    The formula for the interest on class S is 18.983333333--(LIBOR x 
2.333333) with a minimum rate of 3.0% and a maximum rate of 
18.98333333%. As discussed above, the movement of LIBOR has an inverse 
relationship on the interest paid on all inverse floating rate classes. 
As interest rates increased from February through December 1994, the 
interest paid on the class S securities declined. The initial interest 
rate was 11.5458%. As of December 15, 1994, the interest rate was 
4.54%. The interest rate can drop to 3.0% if LIBOR reaches 6.85% or 
higher. As noted [[Page 19094]] above, LIBOR was 5.94% on December 23, 
1994.
    C. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae 
REMIC Trust 1993-102, Class S, were issued by Fannie Mae as part of an 
issue of pass-through certificates with 18 various classes in the total 
amount of $500 million. The Bank, as trustee of the Plans, purchased a 
portion of one class on September 2, 1993. The Certificates are secured 
by first lien residential mortgages with an original term to maturity 
of 180 months or less.
    This REMIC uses a 175 PSA assumption regarding principal repayment 
(1.75 times 100 PSA). The WAL for class S based on a 175 PSA was 3.5 
years at the time of purchase.
    The formula for the interest on class S is 26.95598--(LIBOR x 
3.85086) with a minimum rate of 0.0% and a maximum rate of 26.95598%. 
The movement of LIBOR has an inverse relationship on the interest paid 
on all inverse floating rate classes. As interest rates increased from 
February through December 1994, the interest paid on class S securities 
declined. The initial interest rate was 14.92206%. As of December 23, 
1994, the interest rate was 3.97%. The interest rate can drop to 0.0% 
if LIBOR reaches 7% or higher.
    D. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae 
REMIC Trust 1993-110, Class SH, were issued by Fannie Mae as part of an 
issue of pass-through certificates with 28 various classes in the total 
amount of $925 million. The Bank, as trustee of the Plans, purchased a 
portion of one class on October 5, 1993. The Certificates are secured 
by first lien residential mortgages with an original term to maturity 
of 360 months or less.
    This REMIC uses a 200 PSA assumption regarding principal repayment 
(2 times 100 PSA). The WAL for class SH based on a 200 PSA was 2.8 
years at the time of purchase.
    The formula for the interest on class SH is 16.9929--(COFI  x  
1.857144) with a minimum rate of 0.0% and a maximum rate of 16.9929%. 
In this case, ``COFI'' refers to the U.S. Federal Reserve's 11th 
District Cost of Funds Index for the second month next preceding the 
month in which such interest accrual period commences. COFI moves up or 
down as interest rates move up or down. The movement of COFI will have 
an inverse relationship on the interest paid on all inverse floating 
rate classes. COFI does not react immediately to changes in interest 
rates. Unlike most of the other certificates discussed herein, the 
interest paid on class SH securities declined only slightly during the 
period from February to December, 1994. The initial interest rate was 
9.24677%. As of December 1, 1994, the interest rate was 9.217%. 
However, additional interest rate increases will significantly decrease 
the interest rate on these certificates. The interest rate can drop to 
0.0% if COFI reaches 9.15% or higher. COFI was 4.367% for December 
1994.11

    \ 11\ The applicant states that COFI is adjusted monthly, 
instead of daily.
---------------------------------------------------------------------------

    E. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae 
REMIC Trust 1993-139, Class SL and SC, were issued by Fannie Mae as 
part of an issue of pass-through certificates with 59 various classes 
in the total amount of $1,650,350,872. The Bank, as trustee of the 
Plans, purchased a portion of two classes on September 7 and 21, 1993. 
The Certificates are secured by first lien residential mortgages with 
an original term to maturity of 360 months or less.
    This REMIC uses a 200 PSA assumption regarding principal repayment 
(2 times 100 PSA). The WAL for class SL and SC based on a 200 PSA was 
4.0 and 3.5 years, respectively, at the time of purchase.
    The formula for the interest on class SL is 70.05484--(LIBOR  x  
8.193548) with a minimum rate of 0.0% and a maximum rate of 12.7%. For 
class SC, the interest is 23.94--(LIBOR  x  2.8) with a minimum rate of 
0.0% and a maximum rate of 23.94%. The movement of LIBOR has an inverse 
relationship on the interest paid on all inverse floating rate classes. 
As interest rates increased from February through December 1994, the 
interest paid on the class SC securities declined. The initial interest 
rates for SL and SC classes were 12.7% and 15.015%, respectively. As of 
December 23, 1994, the interest rates were 12.7% and 8.2%, 
respectively. The interest rate for both the SL and SC class can drop 
to 0.0% if LIBOR reaches or exceeds 8.55%. As noted above, LIBOR was 
5.94% on December 23, 1994.
    F. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae 
REMIC Trust 1993-202, Class VJ, were issued by Fannie Mae as part of an 
issue of pass-through certificates with 76 various classes in the total 
amount of $2 trillion. The Bank, as trustee of the Plans, purchased a 
portion of one class on October 28, 1993. The Certificates are secured 
by first lien residential mortgages with an original term to maturity 
of 360 months or less.
    This REMIC uses a 200 PSA assumption regarding principal repayment 
(2 times 100 PSA). The WAL for class VJ based on a 200 PSA was 3.5 
years at the time of purchase.
    The formula for the interest on class VJ is 21.58 - (LIBOR  x  2.6) 
with a minimum rate of 0.0% and a maximum rate of 21.58%. The movement 
of LIBOR has an inverse relationship on the interest paid on all 
inverse floating rate classes. As interest rates increased from 
February through December 1994, the interest paid on class VJ 
securities declined. The initial interest rate was 13.455%. As of 
December 23, 1994, the interest rate was 6.06%. The interest rate can 
drop to 0.0% if LIBOR reaches 8.3% or higher.
    G. The GE Capital Mortgage Services, Inc., REMIC Mult-Class Pass-
Through Certificates, Series 1993-17, Class 17-A20, were issued by GE 
Capital Mortgage Services, Inc., as part of an issue of pass-through 
certificates with 28 senior classes and 6 junior classes in the total 
amount of $493,750,000. The Bank, as trustee of the Plans, purchased a 
portion of one of the senior classes on November 30, 1993. The 
Certificates are secured by first lien residential mortgages with an 
original term to maturity of 360 months or less.
    This REMIC uses a 340 PSA assumption regarding principal repayment 
(3.4 times 100 PSA). The WAL for class A20 based on a 340 PSA was 2.5 
years at the time of purchase. The repayment of principal is not 
guaranteed by any U.S. Government Agency. As with the other REMICs, the 
timing of when the principal is returned is dependent on how quickly 
the underlying mortgages are actually repaid or refinanced.
    The formula for the interest on class A20 is 17.875 - (LIBOR  x  
2.166666) with a minimum rate of 0.0% and a maximum rate of 17.875%. 
The movement of LIBOR has an inverse relationship on the interest paid 
on all inverse floating rate classes. As interest rates increased from 
February through December 1994, the interest paid on class A20 
securities declined. The initial interest rate was 10.96875%. As of 
December 23, 1994, the interest rate was 4.87%. The interest rate can 
drop to 0.0% if LIBOR reaches 8.25% or higher.

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

The Neiman Marcus Group, Inc. Employee Savings Plan (the Plan), 
Located in Chestnut Hill, Massachusetts

[Application No. D-09917]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act [[Page 19095]] 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, August 10, 1990). If 
the exemption is granted the restrictions of sections 406(a), 406 
(b)(1) and (b)(2) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1) (A) through (E) of the Code, shall not apply to (1) proposed 
interest-free loans to the Plan (the Loans) by The Neiman Marcus Group, 
Inc. (the Employer), the sponsor of the Plan, with respect to 
guaranteed investment contract number 62638 (the GIC) issued by 
Confederation Life Insurance Company (Confederation Life); and (2) the 
Plan's potential repayment of the Loans (the Repayments); provided that 
the following conditions are satisfied:
    (A) No interest and/or expenses are paid by the Plan;
    (B) The Loans are made in lieu of amounts due the Plan under the 
terms of the GIC;
    (C) The Repayments are restricted to cash proceeds paid to the Plan 
by Confederation Life and/or any state guaranty association or other 
responsible third party making payment with respect to the GIC (the GIC 
Proceeds), and no other Plan assets are used to make the Repayments; 
and
    (D) The Repayments will be waived to the extent the Loans exceed 
the GIC Proceeds.

Summary of Facts and Representations

    1. The Plan is a defined contribution plan which includes a cash or 
deferred arrangement under section 401(k) of the Code, and which 
provides for employer matching contributions and additional employer 
discretionary contributions. As of September 30, 1994 the Plan had 
approximately 7,805 participants and total assets of approximately 
$68,729,722. The trustee of the Plan is Wachovia Bank of North 
Carolina, N.A. (the Trustee). The Employer, a Delaware public 
corporation with its principal place of business in Chestnut Hill, 
Massachusetts, is a retailer of clothing, fashion apparel, and home 
furnishings.
    2. The Plan provides for individual participant accounts (the 
Accounts) and for participant-directed investment of each Account. Plan 
participants direct investment of their Accounts among options (the 
Funds) offered by the Plan. Participants' directions and changes of 
directions, with respect to investment of the Accounts among the Funds, 
are permitted on a quarterly basis. The Funds include a fixed income 
fund (the F.I. Fund), which invests in, among other things, guaranteed 
investment contracts issued by insurance companies.
    2. Among the assets of the F.I. Fund is the GIC, a guaranteed 
investment contract issued to the Plan in 1992 by Confederation Life 
Insurance Company (Confederation Life), a Canadian insurance company 
doing business in the United States. The GIC is a single-deposit, 
benefit-responsive contract, principal amount $3,500,000, earning 
interest at a guaranteed annual rate of 7.91 percent (the Contract 
Rate). The GIC's terms enable the F.I. Fund to make withdrawals (the 
Withdrawals) to effect, in accordance with the terms of the Plan, 
benefit distributions, in-service withdrawals, participant loans, and 
participant-directed transfers of Account balances to other Funds 
offered by the Plan (the Withdrawal Events). Interest at the Contract 
Rate is credited daily, calculated on the balance remaining deposited 
under the GIC. If interest earned under the GIC exceeds the amount 
withdrawn, the difference is paid annually (the Interest Payments) on 
the anniversary date of the GIC's effective date. All Interest Payments 
have been made when due through April 3, 1994. The terms of the GIC 
also require Confederation Life to make a final payment to the Plan on 
March 31, 1997 (the Maturity Payment) in the amount of the GIC's 
accumulated book value, representing total principal deposits plus 
interest earnings at the Contract Rate less previous withdrawals. As of 
December 31, 1994, the GIC had a total accumulated book value of 
$3,684,555.
    3. Commencing August 11, 1994 (the Receivership Date), insurance 
regulatory authorities in Canada and the state of Michigan instituted 
proceedings to place Confederation Life in receivership (the 
Receivership)12, and normal account activity with respect to 
Confederation Life contracts was stayed pending resolution of the 
Receivership. Since the commencement of the Receivership, the Plan has 
received no payments under the GIC to enable the F.I. Fund to fund 
Withdrawal Events, and the Employer represents that it is uncertain 
whether, or to what extent, the Plan will receive any payments to 
enable funding of future Withdrawal Events. Additionally, the Employer 
represents that it is uncertain whether and to what extent the Maturity 
Payment under the GIC will be paid. The Employer desires to alleviate 
the F.I. Fund of risks associated with investments in the GIC, and to 
enable the F.I. Fund to resume and continue funding the Withdrawal 
Events. Accordingly, the Employer proposes to make loans to the Plan 
(the Loans) in lieu of the amounts due from Confederation Life under 
the terms of the GICs, and is requesting an exemption for the Loans, 
and for their potential repayment (the Repayments) by the Plan, under 
the terms and conditions described herein.

    \12\The Department notes that the decisions to acquire and hold 
the GIC are governed by the fiduciary responsibility requirements of 
Part 4, Subtitle B, Title I of the Act. In this proposed exemption, 
the Department is not proposing relief for any violations of Part 4 
which may have arisen as a result of the acquisition and holding of 
the GIC.
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    5. The Employer and the Trustee will execute a written agreement 
embodying all the terms and conditions of the Loans and the Repayments 
(the Agreement). Under the Agreement, the Employer agrees to make a 
Loan to the F.I. Fund each time Confederation Life fails to pay the 
Plan the full amount of any Withdrawal in accordance with the terms of 
the Plan. The amount of each Loan will be the difference between the 
amount due the Plan as a Withdrawal and the amounts actually paid with 
respect to that Withdrawal by Confederation Life, any conservator, 
liquidator, trustee or other person performing similar functions with 
respect to Confederation Life, or any state guaranty fund or other 
person or entity (other than the Employer) acting as surety, insurer or 
guarantor with respect to Confederation Life with respect to the GIC 
(collectively, the GIC Payors). The Loans will be made only in lieu of 
amounts due with respect to Withdrawals to fund Withdrawal Events, but 
not in lieu of amounts due the Plan in the form of the annual Interest 
Payments. In the event the Receivership and any rehabilitation of 
Confederation Life are not resolved by January 1, 2001, the Employer 
will make a final Loan in the amount of the Maturity Payment which 
would have been due March 31, 1997, less all previous Advances pursuant 
to the Agreement. The Employer will not credit interest under the 
Agreement past March 31, 1997, and that portion of any Account which is 
attributable to amounts remaining invested in the GIC after March 31, 
1997 will cease to earn interest under the Agreement.13 Any Loans 
made by the Employer after the maturity date of March 31, 1997 will be 
based on the Maturity Value of the GIC.

      13 The Department notes that this exemption, if granted, 
will not affect the rights of any participant or beneficiary with 
respect to claims under section 404 of the Act in connection with 
any aspect of the GIC transactions.
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    6. The Agreement provides that the Loans are to be repaid, but only 
from payments made to the Plan pursuant to the GIC by the GIC Payors. 
No other [[Page 19096]] Plan assets will be available for repayment of 
the Loans. If amounts received by the Plan from the GIC Payors (the GIC 
Proceeds) are not sufficient to repay fully the Loans, the Agreement 
provides that the Employer will have no recourse against the Plan, or 
against any participants or beneficiaries of the Plan, for the unpaid 
amount. To the extent the Plan receives GIC Proceeds in excess of the 
total amount of the Loans, such additional amounts will be retained by 
the Plan and allocated among the Accounts invested in the F.I. Fund.
    7. In summary, the applicant represents that the proposed 
transaction satisfies the criteria of section 408(a) of the Act for the 
following reasons: (1) The Loans enable the Plan to resume the full 
funding of the Withdrawal Events; (2) The Loans will protect the Plan's 
investment in the GIC; (3) The Plan will pay no interest or incur any 
expenses with respect to the Loans; (4) Repayment of the Loans will be 
restricted to payments by the GIC Payors and no other Plan assets will 
be involved in the transactions; (5) Repayment of the Loan will be 
waived to the extent the Plan recoups less from the GIC Payors than the 
total amount of the Loans; and (6) In the event the Plan receives GIC 
Proceeds in excess of the Guaranteed Amount, such amounts will be 
retained by the Plan and allocated among the Accounts.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department (202) 
219-8881. (This is not a toll-free number.)

Guarantee Mutual Life Company (Guarantee Mutual), Located in Omaha, 
NE

[Application No. D-09941]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990).14

     14For purposes of this exemption, reference to provisions of 
Title I of the Act, unless otherwise specified, refer also to the 
corresponding provisions of the Code.
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Section I. Covered Transaction
    If the exemption is granted, the restrictions of section 406(a) 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 (D) of 
the Code, shall not apply to the proposed receipt of common stock of 
The Guarantee Life Companies, Inc. (GLCI), or the receipt of cash or 
policy credits by an eligible policyholder (the Eligible Policyholder) 
of Guarantee Mutual which is an employee benefit plan (the Plan), other 
than an Eligible Policyholder which is a plan sponsored by Guarantee 
Mutual for its own employees,15 in exchange for the termination of 
such Eligible Plan Policyholder's membership interest in Guarantee 
Mutual, in accordance with the terms of a plan of demutualization (the 
Plan of Conversion or the Conversion Plan) adopted by Guarantee Mutual 
and implemented pursuant to the Nebraska Insurers Demutualization Act 
(the Demutualization Act), Nebraska Revised Statutes, Sections 44-6101 
through 44-6120.

      15Guarantee Mutual is not requesting, nor is the 
Department providing exemptive relief herein with respect to the 
distributions of stock to plans that Guarantee Mutual or its 
affiliates maintain for their own employees. Guarantee Mutual 
represents that such stock would constitute qualifying employer 
securities within the meaning of section 407(d)(5) of the Act and 
that section 408(e) of the Act would apply to such distributions. In 
this regard, the Department expresses no opinion on whether such 
distributions would satisfy the terms and conditions of section 
408(e) of the Act.
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    The proposed exemption is subject to the general conditions set 
forth below in Section II.
Section II. General Conditions
    (a) The Conversion Plan is implemented in accordance with 
procedural and substantive safeguards that are imposed under Nebraska 
law and is subject to the review and supervision by the Director of the 
Department of Insurance of the State of Nebraska (the Director).
    (b) The Director reviews the terms of the options that are provided 
to Eligible Policyholders of Guarantee Mutual, as part of such 
Director's review of the Conversion Plan, and the Director only 
approves the Conversion Plan following a determination that such 
Conversion Plan is fair and equitable to all Eligible Policyholders.
    (c) Each Eligible Policyholder has an opportunity to comment on the 
Conversion Plan and decide whether to vote to approve such Conversion 
Plan after full written disclosure is given such Eligible Policyholder 
by Guarantee Mutual, of the terms of the Conversion Plan.
    (d) Any election by an Eligible Plan Policyholder to receive stock, 
cash or policy credits, pursuant to the terms of the Conversion Plan is 
made by one or more independent fiduciaries (the Independent 
Fiduciaries) of such Plan and neither Guarantee Mutual nor any of its 
affiliates exercises any discretion or provides investment advice with 
respect to such election.
    (e) After each Eligible Policyholder entitled to receive stock is 
allocated at least 10 shares of common stock, additional consideration 
is allocated to Eligible Policyholders who own participating policies 
based on actuarial formulas that take into account each participating 
policy's contribution to the surplus of Guarantee Mutual which formulas 
have been approved by the Director.
    (f) All Eligible Plan Policyholders participate in the transactions 
on the same basis within their class groupings as other Eligible 
Policyholders that are not Plans.
    (g) No Eligible Policyholder pays any brokerage commissions or fees 
in connection with their receipt of stock or in connection with the 
implementation of the commission-free sales program.
    (h) All of Guarantee Mutual's policyholder obligations remain in 
force and are not affected by the Conversion Plan.
Section III. Definitions
    For purposes of this proposed exemption:
    (a) The term ``Guarantee Mutual'' means Guarantee Mutual Insurance 
Company and any affiliate of Guarantee Mutual as defined in paragraph 
(b) of this Section III.
    (b) An ``affiliate'' of Guarantee Mutual includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with Guarantee Mutual. (For purposes of this paragraph, the term 
``control'' means the power to exercise a controlling influence over 
the management or policies of a person other than an individual.)
    (2) Any officer, director or partner in such person, and
    (3) Any corporation or partnership of which such person is an 
officer, director or a 5 percent partner or owner.
    (c) The term ``Eligible Policyholder'' means a policyholder who is 
eligible to vote and to receive consideration in a demutualization. 
Such policyholder is a policyholder of the mutual insurer on the day 
the plan of conversion is adopted by the board of directors of the 
insurer.
    (d) The term ``policy credit'' means an increase in accumulation 
account value (to which no surrender or similar charges are applied) in 
the general account or an increase in a dividend accumulation on a 
policy. [[Page 19097]] 

Summary of Facts and Representations

    1. Guarantee Mutual is a mutual life insurance company organized in 
1901 under the laws of the State of Nebraska. It provides group life 
and health insurance to employers and life insurance and annuities to 
individuals. Guarantee Mutual transacts business in forty-six states 
and District of Columbia. As of December 31, 1993, Guarantee Mutual had 
total assets of approximately $975 million and more than $20 billion of 
life insurance policies in force.
    As a mutual life insurance company, Guarantee Mutual has no 
stockholders. Policyholders are members of Guarantee Mutual and are 
entitled to vote to elect directors of the company and would be 
entitled to share in the assets of the company if it were liquidated.
    2. Guarantee Mutual is the sole stockholder of two stock life 
insurance companies--(a) Guarantee American Life Company (GALC), a 
Nebraska-domiciled life insurer incorporated in 1982; and (b) Guarantee 
Protective Life Company (GPLC), a life insurer incorporated in 
Minnesota in 1936 and acquired by Guarantee Mutual in 1992 and 
redomesticated to Nebraska in 1993. GALC is principally engaged in 
reinsuring a portion of certain Guarantee Mutual insurance obligations. 
GPLC ceded its group life, health and credit insurance lines to 
nonaffiliated insurance pursuant to reinsurance agreements that were 
completed in late 1992 and early 1993. Currently, GPLC is not 
underwriting any new business. In addition to these insurance 
companies, Guarantee Mutual owns 100 percent of the stock of Guarantee 
Financial Services, Inc., a non-insurance company incorporated in 1990 
in Nebraska that has not yet conducted any operations.
    3. Guarantee Mutual provides a wide variety of insurance products 
to employee benefit plans covered by provisions of the Act and the 
Code. Guarantee Mutual has actively marketed its products to employee 
benefit plans and had as of September 30, 1994, approximately 32,100 in 
force policies and contracts held on behalf of employee pension and 
welfare plans. These include approximately 1,700 policies and contracts 
funding pension and profit sharing plans and over 30,400 contracts 
providing welfare benefit plan coverage such as group life, short- and 
long-term disability, accidental death and dismemberment and group 
health coverage.
    4. On February 1, 1994, Guarantee Mutual's Board of Directors 
authorized management to develop a plan of demutualization pursuant to 
which Guarantee Mutual would be converted from a mutual life insurance 
company to a stock life insurance company by operation of Nebraska law. 
The Board of Directors formally adopted the Conversion Plan on December 
15, 1994.
    The ultimate result of the Conversion Plan will be a structure in 
which all of Guarantee Mutual's stock will be held by a holding 
company, GLCI, which has been organized under Delaware law for this 
purpose. Eligible Policyholders of Guarantee Mutual will receive stock 
of GLCI or, in certain cases, cash or policy credits and their 
membership interests and rights in the surplus of Guarantee Mutual will 
be extinguished. Any election by the Plan to receive stock, cash or 
policy credits pursuant to the Conversion Plan will be made by one or 
more Independent Fiduciaries of such Plan and neither Guarantee Mutual 
nor any of its affiliates will exercise any discretion or render 
investment advice with respect to such election.
    Under the Conversion Plan, two steps will deem to occur 
simultaneously on the effective date of the transaction. First, 
Guarantee Mutual will be deemed to issue common stock to a transfer 
agent for the respective accounts of Eligible Policyholders entitled to 
receive stock under the Conversion Plan. Second, the transfer agent 
will be deemed to transfer such shares, on behalf of the Eligible 
Policyholders, to GLCI in exchange for an equal number of shares of 
GLCI stock. GLCI will then issue such shares of GLCI stock registered 
in the respective names of the Eligible Policyholders entitled to 
receive stock.
    5. The initial public offering (the IPO), in which shares of GLCI 
stock will be sold for cash, is to occur on the effective date of the 
demutualization which is anticipated to take place during the second 
half of 1995. GLCI will contribute a portion of the proceeds from the 
IPO to Guarantee Mutual in an amount at least equal to the amount 
required to pay cash and fund the crediting of policy credits to 
Eligible Policyholders who are to receive such consideration. As 
promptly as possible after the effective date, GLCI will pay, or cause 
Guarantee Mutual to pay, cash or policy credits to Eligible 
Policyholders entitled under the Conversion Plan to receive such 
consideration.
    GLCI stock will be publicly-traded. In this regard, an application 
will be made to list its stock on the National Association of 
Securities Dealers Automated Quotations National Market System.
    6. According to the applicant, the principal purpose of the 
demutualization is to enhance Guarantee Mutual's strategic and 
financial flexibility by creating a corporate structure that will make 
it potentially possible to obtain additional capital from sources that 
are unavailable to the company as a mutual insurer. In addition, the 
applicant represents that the conversion of Guarantee Mutual from a 
mutual life insurance company to a stock life insurance company will 
enable Guarantee Mutual to use stock options or other equity-based 
compensation arrangements in order to attract and retain talented 
employees. Moreover, the applicant notes that Eligible Policyholders 
will benefit by receiving marketable securities, cash or policy credits 
in the demutualization. The applicant further represents that the 
Conversion Plan will not, in any way, change premiums or reduce policy 
benefits, values, guarantees or other policy obligations of Guarantee 
Mutual to its policyholders and contractholders.
    7. The applicant has outlined the procedural requirements under 
Nebraska law for life insurance company demutualization. In this 
regard, the Demutualization Act provides an approval process for 
demutualization of a life insurance company under Nebraska law. A 
conversion plan must be approved by the Director as well as by Eligible 
Policyholders.
    The Demutualization Act requires that a mutual insurer wishing to 
convert to a stock insurer file an application with the Director. The 
application must include: (a) A plan of conversion that contains a 
description of the structure and form of the proposed consideration to 
the policyholders and the projected range of the number of shares of 
capital stock to be issued by the new stock insurer; (b) a 
certification that the plan of conversion has been adopted by a vote of 
not less than two-thirds of the members of the mutual insurer's board 
of directors; (c) certification adopted by not less than two-thirds of 
the members of the mutual insurer's board of directors that the plan is 
fair and equitable to the policyholders; (d) certified copies of the 
proposed amendments to the insurer's articles of incorporation and 
bylaws to effectuate the conversion; and (e) a form of the proposed 
notice to policyholders, describing the plan of conversion and 
informing policyholders of procedures for the meeting of policyholders 
and the policyholder vote on the plan.
    The Director must make an initial determination to approve or 
disapprove an application after conducting a public hearing, at which 
any interested person may appear or otherwise be heard. The 
[[Page 19098]] insurer must give such interested person reasonable 
notice of the public hearing as the Director in his or her discretion 
requires. After the public hearing, the Director will approve the 
application only if he or she finds that (a) the plan of conversion is 
fair and equitable to the policyholders; (b) the plan does not deprive 
the policyholders of their property rights or due process of law; (c) 
the new stock insurer would meet the minimum requirements to be issued 
a certificate of authority by the Director to transact business in 
Nebraska; and (d) that the continued operations of the new stock 
insurer would not be hazardous to future policyholders and the public.
    After the Director makes an initial determination to approve an 
application, the insurer is required to hold a meeting of its 
policyholders to vote on the plan. The Demutualization Act requires 
that the insurer give at least 30 days notice prior to the time fixed 
for the meeting, by first-class mail to the last-known address of each 
policyholder, that the plan of conversion will be voted upon at a 
meeting of the policyholders. The notice must also include a brief 
description of the plan and a statement that the Director has initially 
approved it. Policyholders may vote in person or by written proxy. Each 
policyholder is entitled to only one vote regardless of the number of 
policies owned by the policyholder. The plan of demutualization must be 
approved by the affirmative vote of at least two-thirds of the 
policyholders who vote on the plan.\16\

    \16\Although Guarantee Mutual is uncertain about the number of 
policyholders that will vote on the Conversion Plan, it points out 
that it has approximately 155,000 policyholders who are eligible to 
vote. Guarantee Mutual also represents that prior to the public 
hearing, it will provide each Eligible Policyholder with a summary 
of the Conversion Plan, a notice of the public hearing and a more 
detailed policyholder information statement.
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    After receiving certification from the insurer that the plan of 
demutualization has been approved by the policyholders, the Director 
will enter a final order approving the insurer's application. The 
demutualization will take effect under Nebraska law after the insurer 
certifies that the conditions set forth in the plan of demutualization 
have been satisfied and the Director issues a certificate of authority 
to the insurer.
    Under Nebraska law, the consideration given to policyholders may be 
stock, cash, a combination of stock and cash, or such other valuable 
consideration as the Director may approve. Policyholders are not 
required to be given preemptive rights unless the Director so orders.
    The Demutualization Act permits the Director to engage the services 
of experts to assist in determining whether a plan of conversion meets 
the requirements of the Demutualization Act. In the case of Guarantee 
Mutual, the Director has retained actuaries, Ernst & Young; legal 
advisers, LeBoeuf, Lamb, Green & MacRae and Kennedy, Holland, Delacy & 
Svoboda; and investment banking firm, Donaldson, Lufkin & Jenrette, 
Inc., as consultants.
    A final order by the Director to approve an application pursuant to 
the Demutualization Act is subject to judicial review in the Nebraska 
courts in accordance with the Nebraska Administrative Procedure Act.
    7. Guarantee Mutual's Conversion Plan provides for Eligible 
Policyholders, whose membership interests in the mutual company will be 
extinguished in the demutualization, to receive common stock of GLCI, 
or cash or policy credits. For this purpose, an Eligible Policyholder 
generally is the owner of one or more policies in force on the date 
that Guarantee Mutual's Board of Directors adopted the Conversion 
Plan.\17\ In order to determine the amount of consideration to which 
each Eligible Policyholder is entitled, each Eligible Policyholder will 
be allocated (but not issued) a number of shares of common stock equal 
to the sum of (a) a fixed component of consideration equal to 10 shares 
of GLCI stock which will be subject to proportional adjustment; and (b) 
where the Eligible Policyholder owns one or more participating 
policies, an additional number of shares based on actuarial formulas 
that take into account each participating policy's past and expected 
future contributions to the surplus of Guarantee Mutual.

    \17\Guarantee Mutual represents that under sections 44-6103, 44-
6106 and 44-6109 of Nebraska Insurance Law, the stock, cash, policy 
credits or other compensation resulting from the demutualization 
plan must be distributed to ``policyholders,'' as determined by the 
records of the mutual life insurance company. Guarantee Mutual 
further represents that an insurance or annuity policy that provides 
benefits under an employee benefit plan, typically designates the 
employer that sponsors the plan, or a trustee acting on behalf of 
the plan, as the policyholder. In this regard, Guarantee Mutual 
asserts that it is required under Nebraska Insurance Law to make 
distributions resulting from the demutualization plan to the 
employer or the plan sponsor when they are the designated 
policyholder on the plan policy.
    In general, it is the Department's view that, if an insurance 
policy (including an annuity contract) was purchased with assets of 
an employee benefit plan, and if there exist any participants 
covered under the plan (as defined at 29 CFR 2510.3-3) at the time 
when Guarantee Mutual incurs the obligation to distribute stock, 
cash, policy credits or other compensation, then such consideration 
would constitute an asset of such plan. Under these circumstances, 
the appropriate plan fiduciaries must take all necessary steps to 
safeguard the assets of the plan in order to avoid engaging in a 
violation of the fiduciary responsibility provisions of the Act.
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    8. Certain Eligible Policyholders will receive cash or policy 
credits instead of stock. The amount of cash or policy credits will be 
determined by reference to the price per share at which GLCI stock is 
offered to the public in the IPO.\18\ Eligible Policyholders whose 
mailing address is outside the United States, or to whom mail is 
undeliverable at the address in Guarantee Mutual's records, will 
receive cash in lieu of stock, in an amount equal to the value of the 
stock such policyholders would otherwise have received based on the 
price of GLCI stock in the IPO contemplated by the Plan of Conversion.

    \18\For purposes of allocating the consideration, Guarantee 
Mutual represents that all policyholders will be treated the same 
within their class groupings.
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    In addition, the Plan of Conversion provides that Eligible 
Policyholders who are allocated a number of shares of GLCI stock which 
is less than or equal to the maximum number of shares specified by the 
Board of Directors of Guarantee Mutual, may receive cash instead of 
stock. The maximum number of shares designated by the Board of 
Directors may not be less than 10 shares nor may it exceed 40 shares. 
Such maximum amount is, however, subject to proportional adjustment.
    Certain other Eligible Policyholders, namely owners of individual 
retirement annuities, tax sheltered annuities or certain other policies 
issued directly to plan participants in qualified pension or profit 
sharing plans will receive policy credits equal in value to the stock 
allocated to such Eligible Policyholders.
    Under Nebraska law, a plan of conversion must specify the 
consideration to be given to policyholders and the Director must find 
that the plan is fair and equitable to the policyholders and does not 
deprive them of their property rights or due process of law. Moreover, 
the Director must approve any consideration (such as policy credits) 
other than cash or stock.
    9. The Conversion Plan also provides for a commission-free program 
that is to begin after the ninetieth day following the effective date 
of the demutualization and before the 12 month anniversary of such 
effective date at a time determined by the Board of Directors of GLCI 
to be appropriate and in the best interests of GLCI and its 
stockholders. The program, which will continue for 3 months, will be 
available to any Eligible Policyholder who receives, under the Plan of 
Conversion, fewer shares than the [[Page 19099]] maximum number of 
shares entitled to receive cash as consideration.
    In the program, such Eligible Policyholders will be entitled to 
sell, at prevailing market prices, all the shares of GLCI stock 
received by the Eligible Policyholder in the demutualization. 
Specifically, Chemical Bank, which is unrelated to Guarantee Mutual, or 
one of Chemical Bank's affiliates, will effect sales of stock under the 
commission-free sales program.\19\ No brokerage commissions, mailing 
charges, registration fees or other administrative or similar expenses 
will be charged in connection with the receipt of stock or the 
implementation of the commission-free sales program. The commission-
free program will also offer Eligible Policyholders the opportunity to 
purchase enough shares to round-up their holdings to 100 shares, again 
without paying any fees, charges or commissions (the Round Up Feature). 
Participation in the Round Up Feature will be made available to all 
Eligible Policyholders who on the commission-free program's record date 
hold fewer than a number of shares (not more than 99) specified by the 
Board of Directors of Guarantee Mutual.

    \19\Guarantee Mutual notes that the performance of services by 
Chemical Bank or its affiliates under the commission-free sales 
program will not involve any fiduciary activity on behalf of 
Eligible Plan Policyholders. Guarantee Mutual further represents 
that it will not retain an affiliate to effect securities 
transactions to take place under the commission-free sales program.
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    10. 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 Conversion Plan will be implemented in accordance with 
procedural and substantive safeguards that are imposed under Nebraska 
law and will be subject to the review and supervision by the Director.
    (b) The Director will review the terms of the options that are 
provided to Eligible Policyholders of Guarantee Mutual as part of such 
Director's review of the Conversion Plan, and will approve the 
Conversion Plan following a determination that such Conversion Plan is 
fair and equitable to all Eligible Policyholders.
    (c) Each Eligible Policyholder will have an opportunity to comment 
orally or in writing on the Conversion Plan and decide whether to vote 
to approve in writing such Demutualization Plan after full written 
disclosure is given such policyholder by State Mutual, of the terms of 
the Conversion Plan.
    (d) Any election by an Eligible Policyholder which is a Plan to 
receive stock, cash or policy credits, pursuant to the terms of the 
Conversion Plan will be made by one or more Independent Fiduciaries of 
such plan and neither State Mutual nor any of its affiliates will 
exercise any discretion or provides investment advice with respect to 
such election.
    (e) After each Eligible Policyholder is allocated at least 10 
shares of stock, additional consideration allocated to Eligible 
Policyholders who own participating policies will be based on actuarial 
formulas that take into account each participating policy's 
contribution to the surplus of Guarantee Mutual which formulas have 
been approved by the Director.
    (f) All Plans that are Eligible Policyholders will participate in 
the transactions on the same basis within their class groupings as 
other Eligible Policyholders that are not Plans.
    (g) No Eligible Policyholder will pay any brokerage commissions or 
fees in connection with such Eligible Policyholder's receipt of stock 
or in connection with the implementation of the commission-free sales 
program.
    (h) All of State Mutual's policyholder obligations will remain in 
force and will not be affected by the Conversion Plan.

Notice to Interested Persons

    Guarantee Mutual will provide notice of the proposed exemption to 
all Eligible Plan Policyholders within 14 days of the publication of 
the notice of pendency in the Federal Register. Such notice will be 
provided to interested persons by first class mail and will include a 
copy of the notice of proposed exemption as published in the Federal 
Register. The notice will also inform interested persons of their right 
to comment on the proposed exemption. Comments with respect to the 
notice of proposed exemption are due within 44 days after the date of 
publication of this exemption 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.)

General Information

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

    Signed at Washington, DC, this 11th day of April, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 95-9254 Filed 4-13-95; 8:45 am]
BILLING CODE 4510-29-P