[Federal Register Volume 60, Number 115 (Thursday, June 15, 1995)]
[Notices]
[Pages 31501-31520]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14576]



[[Page 31501]]

DEPARTMENT OF LABOR

[Application No. D-09500, et al.]


Proposed Exemptions; Fidelity Management Trust Company (FMTC) and 
its Affiliates, et al

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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

Written Comments and Hearing Requests

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

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

Notice to Interested Persons

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

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

[Application No. D-09500]

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

Section I--Exemption for Payment of Certain Fees to Fidelity

    The restrictions of section 406(b)(1) and (b)(2) of the Act and the 
taxes imposed by section 4975 of the Code, by reason of section 
4975(c)(1)(E) of the Code, shall not apply to the payment of certain 
performance fees (the Performance Fee) to Fidelity by employee benefit 
plans for which Fidelity provides investment management or 
discretionary trustee services (the Client Plans) pursuant to an 
investment management or trust agreement (the Agreement) entered into 
between Fidelity and the Client Plans either individually, through the 
establishment of a single client separate account (Single Client 
Account), or collectively as participants in a multiple client 
commingled account (Multiple Client Account), provided that the 
conditions set forth below in Section III are satisfied. (Single Client 
Accounts and Multiple Client Accounts are collectively referred to 
herein as Accounts.)

Section II--Exemption for Investments in a Multiple Client Account

    The restrictions of section 406(a)(1)(A) through (D) of the Act and 
the taxes imposed by section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (D) of the Code, shall not apply to any 
investment by a Client Plan in a Multiple Client Account managed by 
Fidelity, provided that the conditions set forth below in Section III 
are satisfied.

Section III--General Conditions

    (a) The investment of plan assets in a Single or Multiple Client 
Account, including the terms and payment of any Performance Fee, shall 
be approved in writing by a fiduciary of a Client Plan which is 
independent of Fidelity (the Independent Fiduciary). Notwithstanding 
the foregoing, Fidelity may authorize the transfer of cash from a 
Single Client Account to a Multiple Client Account provided that: (1) 
The Multiple Client Account has similar investment objectives and the 
identical fee structure as the Single Client Account; (2) the Agreement 
governing the Single Client Account authorizes Fidelity to invest in a 
Multiple Client Account; (3) Fidelity receives no additional fees from 
the Single Client Account for cash invested in the Multiple Client 
Account; (4) a binding commitment to make the transfer to the Multiple 
Client Account occurs within six months of the Independent Fiduciary's 
decision to allocate assets to the Single Client Account or, in the 
event Fidelity's binding commitment to make the transfer occurs more 
than six months after such fiduciary's decision, Fidelity obtains an 
additional authorization from the Independent Fiduciary; and (5) each 
transfer of assets from the Single Client Account to the Multiple 
Client Account occurs within sixty (60) days of the actual transfer of 
such assets to the Single Client Account.
    (b) The terms of any investment in an Account and of any 
Performance Fee shall be at least as favorable to the Client Plans as 
those obtainable in arm's-length transactions between unrelated 
parties.
    (c) At the time any Account is established and at the time of any 
subsequent investment of assets (including the reinvestment of assets) 
in such Account: [[Page 31502]] 
    (1) Each Client Plan shall have total net assets with a value in 
excess of $50 million; and
    (2) No Client Plan shall invest, in the aggregate, more than five 
percent (5%) of its total assets in any Account or more than ten 
percent (10%) of its assets in all Accounts established by Fidelity.
    (d) Prior to making an investment in any Account, the Independent 
Fiduciary of each Client Plan investing in an Account shall receive 
offering materials from Fidelity which disclose all material facts 
concerning the purpose, structure, and operation of the Account, 
including any fee arrangements.
    (e) With respect to its ongoing participation in an Account, the 
Independent Fiduciary of each Client Plan shall receive the following 
written information from Fidelity:
    (1) Audited financial statements of the Account prepared by 
independent public accountants selected by Fidelity no later than 
ninety (90) days after the end of the fiscal year of the Account;
    (2) Quarterly and annual reports prepared by Fidelity relating to 
the overall financial position of the Account and, in the case of a 
Multiple Client Account, the value of such Client Plan's interest in 
the Account. Each such report shall include a statement regarding the 
amount of fees paid to Fidelity during the period covered by such 
report;
    (3) Annual reports indicating the fair market value of the 
Account's assets determined using market sources and valuation 
methodologies acceptable to the Independent Fiduciary of the Client 
Plan for a Single Client Account or the responsible independent 
fiduciaries of Client Plans and other authorized persons acting for 
investors in a Multiple Client Account (the Responsible Independent 
Fiduciaries, as defined in Section IV(c) below), or if market sources 
are not available, values determined by a qualified appraiser 
independent of Fidelity which has been approved by the Independent 
Fiduciary or Responsible Independent Fiduciaries. However, no 
independent appraisals shall be required for assets acquired for the 
Account within the twelve (12) months preceding the end of the period 
covered by the report, unless such appraisals are necessary for 
purposes of determining any compensation due to Fidelity based on the 
value of the assets in the Account for that period; and
    (4) In the case of any Multiple Client Account, a list of all other 
investors in the Account.
    (f) The total fees paid to Fidelity shall constitute no more than 
reasonable compensation.
    (g) The Performance Fee shall be payable after the Client Plan has 
received distributions from the Account in excess of an amount equal to 
100% of its invested capital plus a pre-specified annual compounded 
cumulative rate of return (the Threshold Amount), except that in the 
case of Fidelity's removal or resignation, Fidelity shall be entitled 
to receive a Performance Fee payable either at the time of removal, or 
in the event of Fidelity's resignation, on the scheduled termination 
date of the Account, subject to the requirements of paragraph (j) 
below, as determined by a deemed distribution of the assets of the 
Account based on an assumed sale of such assets at their fair market 
value (in accordance with market sources or independent appraisals as 
described in paragraph (k) below), only to the extent that the Client 
Plan would receive distributions from the Account in excess of an 
amount equal to the Threshold Amount at the time of Fidelity's removal 
or resignation. Both the Threshold Amount and the amount of the 
Performance Fee, expressed as a percentage of the amount distributed 
(or deemed distributed) from the Account in excess of the Threshold 
Amount, shall be established by the Agreement and agreed to by the 
Independent Fiduciary of the Client Plan.
    (h) The Threshold Amount for any Performance Fee shall include at 
least a minimum rate of return to the Client Plan, as defined below in 
Section IV(d). The Independent Fiduciary acting for a Client Plan shall 
specifically agree in writing with Fidelity, prior to any investment in 
the Account, that it would be appropriate for the minimum rate of 
return applicable to the Account to be based upon the rate of change in 
the consumer price index (CPI) during the period specified in the 
Agreement, as described in Section IV(d).
    (i) For any sale of an asset in an Account which shall give rise to 
the payment of a Performance Fee to Fidelity prior to the termination 
of the Account, the sale price of the asset shall be at least equal to 
a target amount (the Target Amount), as defined in Section IV(e), in 
order for Fidelity to sell the asset and receive its Performance Fee 
without further approvals. If the proposed sale price of the asset is 
less than the Target Amount, the proposed sale shall be disclosed to 
and approved by the Independent Fiduciary for a Single Client Account 
or the Responsible Independent Fiduciaries for a Multiple Client 
Account, in which event Fidelity will be entitled to sell the asset and 
receive its Performance Fee. If the proposed sale price is less than 
the Target Amount and the Independent Fiduciary's or Responsible 
Independent Fiduciaries' approval is not obtained, Fidelity shall still 
have the authority to sell the asset, if the Agreement provides 
Fidelity with complete investment discretion for the Account, provided 
that the Performance Fee that would have been payable to Fidelity by 
reason of the sale of the asset is paid only at the termination of the 
Account.
    (j) In the event Fidelity resigns as investment manager or trustee 
of an Account, the Performance Fee shall be calculated at the time of 
resignation based upon a deemed distribution of the assets of the 
Account at their fair market value (determined using market sources or 
independent appraisals as described in paragraph (k) below). The amount 
arrived at by this calculation shall be multiplied by a fraction, the 
numerator of which shall be the sum of the disposition proceeds of all 
assets in the Account received prior to the termination date plus the 
fair market value of the assets remaining in the Account on the 
termination date and the denominator of which shall be the aggregate 
value of the assets in the Account used in determining the amount of 
the Performance Fee as of the date of resignation, provided that this 
fraction shall never exceed 1.0. The resulting amount shall be the 
Performance Fee payable to Fidelity on the scheduled termination date 
of the Account.
    (k) With respect to the valuation of the assets in an Account for 
purposes of determining any Performance Fee based on a deemed 
distribution of such assets, Fidelity shall establish the fair market 
value for the assets using market sources and valuation methodologies 
disclosed to, and approved in writing by, the Independent Fiduciary for 
a Single Client Account or the Responsible Independent Fiduciaries for 
a Multiple Client Account. In the event market sources are not 
available for the valuation of assets in the Account, the fair market 
value of such assets shall be determined by an independent qualified 
appraiser approved by either the Independent Fiduciary for a Single 
Client Account or the Responsible Independent Fiduciaries for a 
Multiple Client Account prior to any valuation of the assets. If a new 
appraiser for an asset is chosen by Fidelity, the appraiser shall be 
approved by such Fiduciaries prior to any valuation of the asset. In 
any event, the fair market value of all assets involved in any deemed 
distribution shall be based on the current market value of such assets 
as of the date of the transactions giving rise to the payment of the 
Performance Fee. [[Page 31503]] 
    (l) Fidelity shall maintain, for a period of six years, the records 
necessary to enable the persons described in paragraph (m) of this 
Section III to determine whether the conditions of this exemption have 
been met, except that: (1) A prohibited transaction will not be 
considered to have occurred if, due to circumstances beyond the control 
of Fidelity, the records are lost or destroyed prior to the end of the 
six year period, and (2) no party in interest, other than Fidelity, 
shall be subject to the civil penalty that may be assessed under 
section 502(i) of the Act or to the taxes imposed by section 4975(a) 
and (b) of the Code if the records are not maintained or are not 
available for examination as required by paragraph (m) below.
    (m)(1) Except as provided in paragraph (m)(2) and notwithstanding 
any provisions of sections 504(a)(2) and (b) of the Act, the records 
referred to in paragraph (l) of this Section III shall be 
unconditionally available at their customary location for examination 
during normal business by:
    (i) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (ii) Any fiduciary of a Client Plan or any duly authorized employee 
or representative of such fiduciary;
    (iii) Any contributing employer to any Client Plan or any duly 
authorized employee or representative of such employer; and
    (iv) Any participant or beneficiary of any Client Plan, or any duly 
authorized employee or representative of such participant or 
beneficiary.
    (2) None of the persons described above in paragraph (m)(1)(ii)-
(iv) shall be authorized to examine the trade secrets of Fidelity or 
any commercial or financial information which is privileged or 
confidential.

Section IV--Definitions

    (a) An ``affiliate'' of a person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative of, or partner of any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (b) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (c) The term ``Responsible Independent Fiduciaries'' means with 
respect to a Multiple Client Account the Independent Fiduciary of 
Client Plans invested in the Account and other authorized persons 
acting for investors in the Account which are not employee benefit 
plans as defined under section 3(3) of the Act (such as governmental 
plans, university endowment funds, etc.) that are independent of 
Fidelity and that collectively hold at least 50% of the interests in 
the Account.
    (d) The term ``Threshold Amount'' means with respect to any 
Performance Fee an amount which equals all of a Client Plan's capital 
invested in an Account plus a pre-specified annual compounded 
cumulative rate of return that is at least a minimum rate of return 
determined as follows:
    (1) A non-fixed rate which is at least equal to the rate of change 
in the CPI during the period from the deposit of the Client Plan's 
assets in the Account until distributions of the Client Plan's assets 
from the Account equal or exceed the Threshold Amount; or
    (2) A fixed rate which is at least equal to the average annual rate 
of change in the CPI over some period of time specified in the 
Agreement, which shall not exceed 10 years.
    (e) The term ``Target Amount'' means a value assigned to each asset 
in the Account established by Fidelity either (1) at the time the asset 
is acquired, by mutual agreement between Fidelity and the Independent 
Fiduciary for a Single Client Account or the Responsible Independent 
Fiduciaries for a Multiple Client Account, or (2) pursuant to an 
objective formula approved by such fiduciaries at the time the Account 
is established. However, in no event will such value be less than the 
acquisition price of the asset.
    (f) The term ``Account'' means any Single Client Account or 
Multiple Client Account established with Fidelity, under a written 
investment management or trust agreement, that is invested primarily 
(i.e. more than 50%) in securities or other assets which are not 
publicly-traded equity securities or publicly-traded, investment grade 
debt securities, pursuant to written instructions and guidelines 
established and approved by an Independent Fiduciary for the Client 
Plan prior to any investment by the Client Plan in the Account. For 
purposes of an ``Account'' meeting the 50% test for assets which are 
not ``publicly-traded equity securities'' or ``publicly-traded, 
investment grade debt securities'', any private market securities held 
by the Account that become publicly-traded securities shall not be 
considered as such for a period of thirty (30) months following the 
date such securities become publicly-traded so as to allow Fidelity 
sufficient time to dispose of such securities in order for the Account 
to remain primarily invested in assets which are not publicly-traded 
securities, including for such purposes any publicly-traded debt 
securities which are not investment grade.1

    \1\As noted above in Section III(f), an Independent Fiduciary 
must specifically agree in writing with Fidelity that it would be 
appropriate for the minimum rate of return applicable to the Account 
to be based upon the rate of change in the CPI during the period 
specified in the Agreement. However, with respect to any Account 
with an investment strategy designed to invest in distressed, 
defaulted or other non-performing debt instruments that may be 
publicly-traded securities at the time they are acquired by the 
Account, the Department encourages Client Plan fiduciaries to 
determine whether or not any of the published indices for publicly- 
traded debt securities would be a more appropriate performance 
benchmark to measure a minimum rate of return for such securities.
    The availability of this exemption, if granted, will be subject to 
the express condition that the material facts and representations 
contained in the application are true and complete, and that the 
application accurately describes all material terms of the transactions 
which are the subject of this exemption.

Summary of Facts and Representations

    1. FMTC is a Massachusetts trust company with its principal office 
located in Boston, Massachusetts, and is a ``bank'' as defined under 
the Investment Advisers Act of 1940. FMTC manages approximately $24 
billion worth of assets for a variety of clients, virtually all of 
which are employee benefit plans. FMTC's client accounts consist of 
either separate accounts for a single client or commingled accounts for 
multiple clients.
    2. Fidelity will offer the investment arrangement described below 
involving the payment of a Performance Fee to Client Plans that seek to 
invest primarily in securities and have aggregate net plan assets with 
a fair market value in excess of $50 million.2 Fidelity will serve 
such Client Plans as the investment manager or discretionary trustee of 
either a Single Client Account or a Multiple Client Account. In 
general, Fidelity will have complete discretion for identifying 
appropriate investments, making investment decisions, and managing and 
disposing of the securities or other assets acquired for the Accounts. 
However, with respect to certain Single Client Accounts, Fidelity will 
not exercise absolute investment discretion and will be required to 
obtain approval for certain investment [[Page 31504]] decisions from 
the Independent Fiduciary of the Client Plan. Such approvals will 
typically be obtained from the Client Plan sponsor or an investment 
committee appointed by the Client Plan sponsor.

    \2\In the case of multiple plans maintained by a single employer 
or a single controlled group of employers, the assets of which are 
invested on a commingled basis (e.g. through a master trust), this 
$50 million threshold will be applied to the aggregate assets of all 
such plans.
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    3. Single Client Accounts will be established pursuant to 
Agreements negotiated with the Independent Fiduciaries of the Client 
Plans. The terms of Fidelity's compensation will be established in the 
Agreements governing the Single Client Account and will be fully 
disclosed to the Independent Fiduciary prior to the investment of 
assets of the Client Plan in the Single Client Account. If agreed to by 
the Independent Fiduciary, the compensation arrangement involving the 
payment of the Performance Fee (as described in Item 5 below) will be 
included in the Agreement.3 The term of each Account will be 
predetermined in the Agreement and approved by the Independent 
Fiduciary of the Client Plan (see Item 8 below).

    \3\Section 404 of the Act requires, among other things, that a 
plan fiduciary act prudently and solely in the interest of the 
plan's participants and beneficiaries. Thus, the Department expects 
a plan fiduciary, prior to entering into any performance- based 
compensation arrangement with an investment manager, to fully 
understand the risks and benefits associated with the compensation 
formula following disclosure by the investment manager of all 
relevant information pertaining to the proposed arrangement. In 
addition, a plan fiduciary must be capable of periodically 
monitoring the actions taken by the investment manager in the 
performance of its duties and must consider, prior to entering into 
the arrangement, whether such plan fiduciary is able to provide 
oversight of the investment manager during the course of the 
arrangement.
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    A Multiple Client Account typically will be organized either as a 
common law trust or a group trust as defined in IRS Revenue Ruling 81-
100 (as to which Fidelity would serve as discretionary trustee), or as 
a limited partnership (as to which Fidelity would be general 
partner).4 For any Multiple Client Account, various decisions 
regarding the Account other than investment management decisions for 
the Account (such as the initial decision to allocate Client Plan 
assets to the Account, decisions with respect to the removal of 
Fidelity or the termination of the Account) will be made by the 
Responsible Independent Fiduciaries. Fidelity represents that in all 
instances the Responsible Independent Fiduciaries will be acting for 
Account investors that collectively hold at least 50% of the interests 
in the Account. The exact percentage required for such decisions will 
be specified in the governing documents of the Account.

    \4\With respect to any Multiple Client Account organized by 
Fidelity as a limited partnership, Fidelity represents that its 
interest as a general partner will not exceed 1% of the aggregate 
outstanding partnership interests of such limited partnership at any 
time.
    The decision to invest assets of a Client Plan in any Multiple 
Client Account will be made by the Independent Fiduciary of such Client 
Plan, based upon full written disclosure of the Performance Fee prior 
to such investment. Notwithstanding the foregoing, Fidelity may 
authorize the transfer of cash from a Single Client Account to a 
Multiple Client Account where: (i) The Multiple Client Account has 
similar investment objectives and the identical fee structure as the 
Single Client Account; (ii) the Agreement governing the Single Client 
Account authorizes Fidelity to invest in a Multiple Client Account; 
(iii) Fidelity receives no additional fees from the Single Client 
Account for cash invested in the Multiple Client Account; (iv) a 
binding commitment to make the transfer to the Multiple Client Account 
is made within six months of the Independent Fiduciary's decision to 
allocate assets to the Single Client Account or, in the event 
Fidelity's binding commitment to make the transfer occurs more than six 
months after such fiduciary's decision, Fidelity obtains an additional 
authorization from the Independent Fiduciary; and (v) each transfer of 
assets from the Single Client Account to the Multiple Client Account 
occurs within sixty (60) days of the actual transfer of such assets to 
the Single Client Account. Fidelity represents that its commitment to 
invest the cash would normally occur within six months of the 
Independent Fiduciary's decision to allocate assets to the Single 
Client Account. However, if more than six months has transpired since 
the Independent Fiduciary's decision to invest the assets in the Single 
Client Account, Fidelity will obtain an additional authorization from 
such fiduciary. Such authorization will occur following written 
disclosure to the Independent Fiduciary of Fidelity's binding 
commitment to make a cash transfer to the Multiple Client Account which 
will be deemed approved unless such fiduciary objects within a 
reasonable time.
    After a transfer of cash, the fee structure for the Multiple Client 
Account will govern all fees received by Fidelity for such Client Plan 
assets. The precise terms of Fidelity's compensation arrangement will 
be established as part of the documents pursuant to which the Multiple 
Client Account is organized and can be amended only with the 
affirmative approval of the Responsible Independent Fiduciaries.
    4. The applicant represents that, in general, the investment 
objectives of each Account will be to obtain current income and/or 
capital appreciation through investments primarily in various types of 
private market securities and real estate related investments. Fidelity 
represents that it offers a wide range of investment services and 
utilizes a wide variety of investment approaches. While the bulk of 
Fidelity's business entails investing Client Plan assets in publicly-
traded securities which are readily valued or easily liquidated, other 
aspects of its investment business entail, at least in part, investing 
Client Plan assets in non-publicly-traded securities and other 
property.
    Fidelity's objective with respect to the requested exemption is to 
achieve sufficient flexibility to respond to client demands and 
preferences for utilization of a Performance Fee arrangement of the 
type described below. Fidelity believes that such a fee arrangement may 
be attractive to Client Plans in situations involving Accounts which 
are to be invested primarily (i.e. more than 50%) in certain types of 
assets other than publicly-traded equity securities or publicly-traded, 
investment grade debt securities. For purposes of an Account meeting 
the 50% test for assets which are not ``publicly-traded equity 
securities'' or ``publicly-traded, investment grade debt securities'', 
any private market securities held by the Account that become publicly-
traded securities shall not be considered as such for a period of 
thirty (30) months following the date such securities become publicly-
traded so as to allow Fidelity sufficient time to dispose of such 
securities in order for the Account to remain primarily invested in 
assets which are not publicly-traded securities, including for such 
purposes any publicly-traded debt securities which are not investment 
grade.5

    \5\The Department notes that a ``publicly-traded security'' 
would include any security that is a ``publicly-offered security'' 
as described in the Department's regulations relating to the 
definition of ``plan assets'' in the context of certain plan 
investments (see 29 CFR 2510.3-101(b) (2)-(4)).
    An Account could entail a wide range of types of investments, 
including privately placed debt and equity securities, high-yield fixed 
income securities, publicly-traded debt securities issued by distressed 
companies, partnership interests in venture capital operating 
companies, various real estate or real estate-related interests, and 
other ``alternative investments'' which have greater risk but 
potentially greater returns than traditional classes of equity or debt 
[[Page 31505]] securities.6 Fidelity states that it would not 
necessarily enter into a Performance Fee arrangement for all Accounts 
which are invested in the these types of assets. However, Fidelity 
wishes to have the opportunity to do so in circumstances where an 
Independent Fiduciary has specifically approved the particular 
investment objectives and fee arrangements for the Account, as being 
appropriate for the payment of such a Performance Fee. The Accounts may 
be designed as either ``blind'' accounts for which Fidelity will select 
the investments after the Client Plans have invested therein or ``pre-
identified asset'' accounts for which Fidelity identifies particular 
securities or other assets for investment prior to the Client Plans' 
investments in the Accounts.

    \6\In this regard, Fidelity represents that an Account will not 
invest in or use any swap transactions (including caps, floors, 
collars, or options relating thereto), forward contracts, exchanged-
traded futures transactions, or options (other than covered call 
options). The Department notes that no relief is being provided in 
this proposed exemption for any underlying investments made by an 
Account which may involve parties in interest with respect to the 
Client Plans invested in the Account.
    In addition, the Department is expressing no opinion as to 
whether the investment of ``plan assets'' by an Account in any 
particular type of asset would violate any provision of Part 4 of 
Title I of the Act. Thus, the Department is not providing an opinion 
regarding whether any particular category of investments or 
investment strategy would be considered prudent or in the best 
interests of a Client Plan as required by section 404 of the Act.
    However, the Department notes that in order to act prudently in 
making investment decisions, plan fiduciaries must consider, among 
other factors, the availability, risks and potential return of 
alternative investments for the plan. A particular investment by a 
plan, which is selected in preference to other available 
investments, would generally not be prudent if such investment 
involves a greater risk to the security of ``plan assets'' than 
other comparable investments offering a similar return.
    The Department notes further that Client Plan fiduciaries must 
thoroughly understand the risks involved with any investment course 
of action and must be capable of monitoring at appropriate intervals 
the investment course of action taken by Fidelity, particularly with 
respect to any period when the payment of a Performance Fee to 
Fidelity would be applicable. In this regard, section 405(a) of the 
Act states, among other things, that a plan fiduciary shall be 
liable for a breach of fiduciary responsibility of another fiduciary 
for the same plan if, by his failure to comply with section 
404(a)(1) in the administration of his specific duties which give 
rise to his status as a fiduciary, he has enabled such other 
fiduciary to commit a breach.
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    5. Fidelity proposes to have the Client Plans pay for investment 
management or discretionary trustee services rendered to the Accounts 
based upon a two-part fee structure which will be approved in advance 
by the Independent Fiduciaries of the Client Plans. In addition to an 
on-going investment management or trustee fee (the Base Fee) paid to 
Fidelity by the Client Plan, the fee structure may include the 
Performance Fee, a fee payable upon a distribution (or deemed 
distribution) of the assets from the Account after the Client Plan has 
received (or would receive) a return of all its invested capital plus a 
certain pre-specified rate of return on its investments in the Account. 
Fidelity requests an exemption for the payment by Client Plans of the 
Performance Fee under circumstances described below.
    With respect to the Base Fee, such fee will be paid throughout the 
term of the Account on a pre-specified periodic basis. The amount of 
the Base Fee will be based on either (i) a percentage of the net fair 
market value of the Client Plan assets in the Account (i.e. without 
regard to any leveraged amounts) as of the last day of each period or 
(ii) a percentage of the assets allocated to the Account (i.e. the 
invested capital) less any amounts thereof which have been distributed 
from the Account. In either event, the Base Fee will be pro-rated for 
any partial periods. The exact percentage to be used in determining the 
Base Fee will be negotiated between Fidelity and the Independent 
Fiduciary of the Client Plan prior to the initial investment of any 
Plan assets in the Account.
    If the Base Fee is calculated based upon the fair market value of 
the assets in the Account as of a specified determination date, the fee 
will be based upon values determined using market sources approved in 
writing by the Independent Fiduciary of the Client Plan (or specified 
in the documents establishing the Account, in the case of a Multiple 
Client Account).7 If market sources are not available, the fee 
will be based upon values determined immediately prior to the payment 
of such fee by an appraiser independent of Fidelity. For any appraisal 
used to determine the Base Fee, Fidelity will initially notify in 
writing the Independent Fiduciary for a Single Client Account or the 
Responsible Independent Fiduciaries for a Multiple Client Account 
regarding the identity of the appraiser whom Fidelity proposes to 
retain to value the asset. The Independent Fiduciary or the Responsible 
Independent Fiduciaries will have an opportunity to approve or 
disapprove the suggested appraiser with an approval being deemed to 
have occurred unless such fiduciaries object to the appraiser within a 
reasonable time. Once approved, the appraiser could perform all future 
valuations of the particular asset unless either (i) the Independent 
Fiduciary or Responsible Independent Fiduciaries affirmatively withdraw 
the prior approval of the appraiser, or (ii) Fidelity suggests a 
different appraiser, in which case an approval by such fiduciaries 
would again be required.

    \7\Fidelity states that in instances where the Base Fee is 
determined based on the amount of capital invested in the Account, 
rather than on the value of the assets in the Account, no such 
market valuations will be utilized to determine the Base Fee. Thus, 
the independent valuation requirements discussed herein, including 
any independent appraisal of assets in an Account, will be limited 
to situations where such valuations are used to calculate either the 
Base Fee or the Performance Fee.
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    In lieu of the Base Fee described above, Fidelity and the 
Independent Fiduciaries of the Client Plans may agree to an alternative 
fee arrangement for an Account (the Alternative Fee) which is based 
upon either a fixed amount or amounts or an objective formula to be 
negotiated (in either case) between Fidelity and the Independent 
Fiduciary of the Client Plan prior to the initial investment of any 
Client Plan assets in the Account. Neither the Base Fee nor any such 
Alternative Fees will be covered by the requested exemption.8

    \8\Fidelity represents that both the Base Fee and the 
Alternative Fee would be covered by section 408(b)(2) of the Act and 
the regulations thereunder (see 29 CFR 2550.408b-2). However, the 
Department expresses no opinion as to whether the payment of such 
fees, as described herein, would meet the conditions of section 
408(b)(2) of the Act.
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    The Performance Fee will be payable either (i) after the Client 
Plan has actually received distributions from the Account, or (ii) in 
the case of the removal or resignation of Fidelity, based on deemed 
distributions from the Account (as discussed in Item 7 below), which in 
each case must be at least equal to such Plan's invested capital plus a 
pre-specified annual compounded cumulative rate of return (i.e. the 
Threshold Amount). The Performance Fee will be equal to a fixed 
percentage (or several fixed percentages) of all amounts distributed 
from an Account in excess of the Threshold Amount (or several Threshold 
Amounts). In this regard, Fidelity represents that there is a 
possibility that several Threshold Amounts may be established with 
different percentages being utilized to determine the Performance Fee 
depending upon which Threshold Amount has been exceeded.9 Fidelity 
states that this structure will allow a Client Plan to negotiate an 
arrangement pursuant to which the [[Page 31506]] amount of the 
Performance Fee will increase as the level of investment performance 
increases. Both the annual rate(s) of return used in determining the 
Threshold Amount(s) and the percentage(s) used to determine the amount 
of the Performance Fee will be negotiated between, and agreed to by, 
Fidelity and the Independent Fiduciary of the Client Plan prior to the 
Client Plan's initial investment in the Account.

    \9\For example, a Client Plan could negotiate a Performance Fee 
whereby Fidelity would receive 10% of all distributions from the 
Account once an initial Threshold Amount (e.g. return of all 
invested capital plus an 8% annual return) has been achieved and 20% 
of all distributions once a second Threshold Amount (e.g. return of 
all invested capital plus a 12% annual return) has been achieved.
    With respect to the determination of the Threshold Amount, Fidelity 
represents that all amounts invested by a Client Plan in an Account 
will have to earn a pre-specified rate of return, which is at least 
equal to the minimum rate of return specified in Section IV(d) 
above,10 for the entire period such assets are in the Account and 
must actually be distributed (or deemed distributed) back to the Client 
Plan in order for the Threshold Amount to be reached. Fidelity states 
that a bookkeeping account will be maintained for each Client Plan 
which will show the amount required to be distributed from the Account 
to satisfy the Threshold Amount. When a certain amount is invested in 
the Account on a particular date, this bookkeeping account will be 
reduced by the full amount of the distribution. Thereafter, the 
required return will be added to this reduced amount until the next 
distribution is made when the bookkeeping account will be reduced to 
reflect the amount of that distribution. Only when this bookkeeping 
account is reduced to zero will the Threshold Amount be satisfied. At 
this time, the Performance Fee will be payable to Fidelity on all 
further distributions (or any deemed distribution) from the Account.

    \10\Fidelity represents that the Independent Fiduciary acting 
for a Client Plan shall specifically agree in writing with Fidelity, 
prior to any investment in the Account, that it would be appropriate 
for the performance benchmark used to measure the minimum rate of 
return applicable to the Account to be based upon the rate of change 
in the CPI over the period specified in the Agreement. However, the 
Department notes that a Client Plan fiduciary should thoroughly 
scrutinize the performance objectives for the Account prior to 
agreeing with Fidelity that such a performance benchmark is 
appropriate to measure the required minimum rate of return. In this 
regard, the Department encourages Client Plan fiduciaries to analyze 
whether any performance benchmarks other than a minimum rate of 
return based on changes in the CPI, such as an index of publicly-
traded equity or debt securities, would be more appropriate to 
measure the Account's performance.
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    Fidelity states that for any sale of an asset in an Account which 
causes the payment of a Performance Fee and which occurs prior to the 
termination of the Account, the sale price for the asset must be at 
least equal to a Target Amount (as defined in Section IV(e) above), in 
order for Fidelity to be able to sell the asset and receive its 
Performance Fee without any further approvals. The Target Amount will 
be established by Fidelity either at the time the asset is acquired, by 
mutual agreement between Fidelity and the Independent Fiduciary for a 
Single Client Account or the Responsible Independent Fiduciaries for a 
Multiple Client Account, or pursuant to a formula approved by such 
fiduciaries at the time the Account is established. If the proposed 
sale price of the asset is less than the Target Amount, the proposed 
sale will be disclosed to the Independent Fiduciary or Responsible 
Independent Fiduciaries for approval in order for Fidelity to receive 
its Performance Fee as a result of the sale. Such approval will be 
deemed to have occurred unless the Independent Fiduciary or Responsible 
Independent Fiduciaries object to the sale within a reasonable time 
after notice of the proposed transaction. If the proposed sale price is 
less than the Target Amount and the Independent Fiduciary's or 
Responsible Independent Fiduciaries' approval is not obtained, Fidelity 
will still have the authority to sell the asset in situations where the 
Agreement provides Fidelity with complete investment discretion for the 
Account. However, in such instances and in all other circumstances 
where the sale price is less than the Target Amount and the Independent 
Fiduciary's or Responsible Independent Fiduciaries' approval is not 
obtained, the Performance Fee which would have been payable to Fidelity 
by reason of the sale of such asset will be paid only at the 
termination of the Account. In this regard, Fidelity states that any 
Performance Fee which is not paid currently to Fidelity because of the 
Target Amount rule will be segregated within the Account and invested 
until the termination of the Account with Fidelity to receive any 
income (or loss) earned by such investment.
    6. All realized income, and proceeds from the sale of the assets of 
the Account, net of expenses (including reasonable reserves), will be 
either (i) distributed from the Account to the applicable investors in 
such Account, including Client Plan(s), or (ii) if the documents 
pursuant to which the Account is maintained so provide, reinvested 
until a specified date, with any income and proceeds (net of expenses, 
including reasonable reserves) of the Account after such date to be 
distributed to the applicable investors. All distributions from the 
Account shall be included in calculating whether the Threshold Amount 
has been reached. Only actual distributions from an Account, and not 
any amounts reinvested as described above, will be included in 
calculating whether the Threshold Amount has been reached for purposes 
of the payment of the Performance Fee.
    7. Fidelity may be removed as investment manager or trustee for an 
Account at any time, without cause, upon the delivery of a notice of 
removal to Fidelity by the Independent Fiduciary for a Single Client 
Account or by the Responsible Independent Fiduciaries of a Multiple 
Client Account. Fidelity may resign as investment manager or trustee of 
an Account at any time, without cause, upon written notice to the 
Independent Fiduciary for a Single Client Account or the Responsible 
Independent Fiduciaries for a Multiple Client Account.
    With respect to a Single Client Account, such removal or 
resignation will not become effective until a successor investment 
manager or trustee is appointed by the Independent Fiduciary for the 
Account.
    With respect to a Multiple Client Account, the removal of Fidelity 
will become effective when either: (i) A successor investment manager 
or trustee is appointed by the Responsible Independent Fiduciaries; or 
(ii) sixty (60) days (or such greater number of days as may be 
specified by the Responsible Independent Fiduciaries) elapse, whichever 
is sooner. Any resignation by Fidelity for a Multiple Client Account 
will become effective when either: (i) A successor investment manager 
or trustee is appointed by the Responsible Independent Fiduciaries; or 
(ii) 180 days elapse, whichever is sooner.
    Upon removal of Fidelity as investment manager or trustee, Fidelity 
will be entitled to receive a Performance Fee if the Client Plans would 
receive distributions from the Account in excess of an amount equal to 
the Threshold Amount at the time of Fidelity's removal. Such 
Performance Fee will be determined by a deemed distribution of the 
assets of the Account based on an assumed sale of such assets at their 
fair market value using market sources approved by the Independent 
Fiduciary of the Client Plan (or specified in the documents 
establishing the Account, in the case of a Multiple Client Account). If 
market sources are not available, the fair market value of the assets 
will be determined by an independent appraiser mutually agreed upon by 
Fidelity and the Independent Fiduciary of each Client Plan in the case 
of a Single Client Account or the [[Page 31507]] Responsible 
Independent Fiduciaries in the case of a Multiple Client Account. If 
Fidelity and such fiduciaries cannot agree on an appraiser, then the 
fair market value of such assets will be equal to the average of the 
two closest appraisals generated by three independent appraisers--one 
selected by Fidelity, one selected by such fiduciaries, and the third 
selected by the two appraisers chosen by the parties.
    Upon Fidelity's resignation as investment manager or trustee, 
Fidelity will not receive a Performance Fee until the scheduled 
termination date for the Account. The amount of the Performance Fee 
will be based upon a deemed distribution of the assets of the Account 
at their fair market value at the time of Fidelity's resignation, as 
determined using market sources approved by the Independent Fiduciary 
of the Client Plan (or specified in the documents establishing the 
Account, in the case of a Multiple Client Account). If such market 
sources are not available, the fair market value of the assets will be 
determined by an independent appraiser mutually agreed to by Fidelity 
and the Independent Fiduciary of the Client Plan in the case of a 
Single Client Account or the Responsible Independent Fiduciaries in the 
case of a Multiple Client Account. However, if Fidelity and such 
fiduciaries cannot agree on an appraiser, the procedure described above 
will be followed.
    The Performance Fee will be calculated at the time of resignation 
based upon the total value of the assets in the Account. The amount of 
the Performance Fee for such assets will be multiplied by a fraction, 
the numerator of which will be the sum of the disposition proceeds of 
all assets in the Account received prior to the termination date plus 
the fair market value of the assets remaining in the Account on the 
termination date and the denominator of which will be the aggregate 
value of the assets in the Account used in determining the amount of 
the Performance Fee as of the date of resignation, provided that this 
fraction will never exceed 1.0. The resulting amount will be the 
Performance Fee payable to Fidelity on the scheduled termination date 
of the Account. Thus, even if the value of the assets declines after 
Fidelity's resignation, Fidelity will still receive the Performance Fee 
for the period of time that it acted as an investment manager or 
discretionary trustee for the Account if the Client Plans would have 
received distributions from the Account in excess of an amount equal to 
the Threshold Amount at the time of Fidelity's resignation, subject to 
the operation of the fraction discussed above. The fraction ensures 
that an appropriate reduction in the Performance Fee will be made upon 
termination of the Account if the value of the assets in the Account 
declines after Fidelity resigns as the investment manager or 
discretionary trustee of the Account, based on the valuation of such 
assets at the time of resignation.
    8. A Single Client Account will terminate upon expiration of the 
period of years specified as the term for the Account in the Agreement 
or upon the removal or resignation of Fidelity. However, the period of 
years specified in the Agreement may be extended by the Independent 
Fiduciary of the Client Plan. In addition, a Single Client Account may 
be terminated at any time by the Independent Fiduciary upon ninety (90) 
days written notice to Fidelity.
    A Multiple Client Account will terminate upon the occurrence of any 
of the following events: (i) The affirmative decision of the 
Responsible Independent Fiduciaries; (ii) the failure of the 
Responsible Independent Fiduciaries to appoint a successor investment 
manager or trustee; (iii) expiration of the period of years specified 
as the term of the Account in the Agreement, provided that the period 
of years is not extended by the Responsible Independent Fiduciaries; 
(iv) the distribution of all assets of the Account; or (v) such other 
circumstances as may be specified in the documents governing the 
Accounts.
    Upon termination of a Single Client Account, the assets in the 
Account will be distributed to the Client Plan in cash or in kind as 
agreed to by Fidelity and the Independent Fiduciary. In case of a 
Multiple Client Account, such distributions (i.e., cash or in-kind) 
will be agreed to by Fidelity and the Responsible Independent 
Fiduciaries for the Account.
    Fidelity will be entitled to the Performance Fee upon termination 
of the Account for all remaining distributions made from the Account if 
the Threshold Amount has been or would be reached at such time. In the 
case of an in kind distribution of assets of the Account, the 
Performance Fee will be based on the fair market value of the assets of 
the Account as determined using market sources approved by the 
Independent Fiduciary of the Client Plan (or specified in the documents 
establishing the Account, in the case of a Multiple Client Account). If 
market sources are unavailable, the fair market value of the assets 
will be determined by an independent appraiser mutually agreed to by 
Fidelity and the Independent Fiduciary of the Client Plan in the case 
of a Single Client Account or the Responsible Independent Fiduciaries 
in the case of a Multiple Client Account. If Fidelity and such 
fiduciaries cannot agree on an appraiser, then the same procedure 
described in Item 7 above will be followed.
    9. Each Client Plan will receive throughout the term of an Account 
the following information:
    (a) Quarterly and annual reports prepared by Fidelity relating to 
the overall financial position of the Account and, in the case of a 
Multiple Client Account, the balance of such Client Plan's interest in 
the Account. In addition, such reports will include a statement 
regarding the amount of all fees paid to Fidelity during the period 
covered by the report.
    (b) Annual reports indicating the current fair market value of all 
assets in the Account as established by using market sources or 
independent appraisals (provided that no such appraisals will be 
required for assets acquired for the Account within twelve (12) months 
preceding the end of the period covered by the report unless such 
appraisals are necessary for purposes of determining any compensation 
due to Fidelity based on the value of the assets in the Account for 
that period).
    (c) In the case of a Multiple Client Account, a list of the 
investors in the Multiple Client Account.
    (d) Audited financial statements prepared by independent public 
accountants selected by Fidelity, within ninety (90) days of the end of 
the Account fiscal year.
    The Independent Fiduciary for the Client Plan, as well as other 
authorized persons described above in paragraph (m)(1) of Section III, 
will have access during normal business hours to Fidelity's records for 
the Accounts in which the Client Plan has an interest.
    10. In summary, the applicant represents that the proposed 
transactions satisfy the statutory criteria of section 408(a) of the 
Act because, among other things:
    (a) Each investment in any Account will be authorized in writing by 
an Independent Fiduciary of a Client Plan;
    (b) No Client Plan may establish a Single Client Account or invest 
in a Multiple Client Account unless the Client Plan has total net 
assets with a value in excess of $50 million. In addition, a Client 
Plan may not invest, in the aggregate, more than five percent (5%) of 
its total assets in any one Account or more than ten percent (10%) 
[[Page 31508]] of its total assets in all Accounts established by 
Fidelity;
    (c) Prior to making an investment in any Account, an Independent 
Fiduciary for each Client Plan will receive offering materials 
disclosing all material facts concerning the purpose, structure and 
operation of the Account, including any fee arrangements;
    (d) Fidelity will provide each Independent Fiduciary of a Client 
Plan with periodic written disclosures with respect to the financial 
condition of the Account, the fees paid to Fidelity, the balance of 
each Client Plan's interest in the Account, the fair market value of 
the Account's assets using market sources or independent appraisals 
approved by the Independent Fiduciary where the value of such assets 
was used to calculate Fidelity's compensation and, in the case of a 
Multiple Client Account, a list of other investors in the Account;
    (e) The total fees paid to Fidelity will constitute no more than 
reasonable compensation; and
    (f) The timing and formula for determining the Performance Fee will 
be established and agreed to by the Independent Fiduciary for each 
Client Plan prior to the Client Plan's investment in the Account and 
will be based on pre-specified percentages of the Client Plan's assets 
distributed (or deemed distributed) from the Account in excess of an 
agreed upon Threshold Amount.

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

Bankers Trust Company (Bankers Trust) Located in New York, NY; Proposed 
Exemption

[Application No. D-09869]

    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 October 28, 1994, to the 
cash sale of certain structured notes (the Notes) for $432,131,250 by 
three collective investment funds for which Bankers Trust acts as 
trustee (the Funds) to Bankers Trust New York Corporation (BTNY), a 
party in interest with respect to employee benefit plans invested in 
the Funds, provided that the following conditions were met:
    (a) Each sale was a one-time transaction for cash;
    (b) Each Fund received an amount which was equal to the greater of 
either (i) the par value of the Notes owned by the Fund at the time of 
sale, (ii) the purchase price paid by the Fund for its interest in each 
of the Notes, or (iii) the fair market value of the Notes owned by the 
Fund, as determined by bid quotations for the Notes obtained from 
independent broker-dealers at the time of sale;
    (c) The Funds did not pay any commissions or other expenses with 
respect to the sale;
    (d) Bankers Trust, as trustee of the Funds, determined that the 
sale of the Notes was in the best interests of each Fund, and the 
employee benefit plans invested in the Fund, at the time of the 
transactions;
    (e) Bankers Trust took all appropriate actions necessary to 
safeguard the interests of the Funds, and the employee benefit plans 
invested in the Funds, in connection with the transactions; and
    (f) The Funds received a reasonable rate of return during the 
period of time that the Funds held the Notes.

EFFECTIVE DATE: The proposed exemption, if granted, will be effective 
as of October 28, 1994.

Summary of Facts and Representations

    1. Bankers Trust, a New York banking corporation, is a leading 
commercial bank which provides a wide range of banking, fiduciary, 
recordkeeping, custodial and investment services to corporations, 
institutions, governments, employee benefit plans, governmental 
retirement plans and private investors worldwide. Bankers Trust is 
wholly owned by BTNY, which is a bank holding company established in 
1965 under the laws of the State of New York. As of December 31, 1993, 
BTNY and its affiliates had consolidated assets in excess of $92 
billion and capital of approximately $4.5 billion.
    2. Bankers Trust is one of the largest providers of trust and other 
services to employee benefit plans. Many of these plans also engage 
BTNY or an affiliate to provide investment advice or to be the plan's 
investment manager, within the meaning of the Act. Bankers Trust 
maintains more than 80 collective investment funds for employee benefit 
plan investment.
    3. The Funds are the Bankers Trust Pyramid Aggressive Cash Fund 
(the BT Aggressive STIF), the Bankers Trust Pyramid Cash Plus Fund (the 
BT Cash Plus Fund), and the Bankers Trust Pyramid Super Cash Fund (the 
BT Super Cash Fund).
    These three Funds are actively managed, market valued money market 
vehicles which endeavor to provide a rate of return in excess of 
traditional par valued short-term money market funds by extending 
eligible maturities, modifying credit restrictions, and taking 
advantage of trading opportunities in the money markets. The applicant 
represents that there are certain differences in the investment 
strategies used by each Fund, including the duration of average 
maturities and, in the case of the BT Aggressive STIF, the permitted 
use of equities and equity equivalents. Bankers Trust states that the 
Notes were permissible investments under the investment guidelines for 
each Fund and initially paid above market returns. However, unexpected 
increases in interest rates during 1994 adversely affected the market 
value of the Notes. Therefore, the Funds sold the Notes to BTNY on 
October 28, 1994, for an amount equal to the par value of the Notes 
owned by each Fund. The Funds had purchased the Notes for an amount 
which equalled the par value of the Notes, except for Note #2 which was 
purchased at a slight discount (see Paragraph 5 below).
    4. The Notes consisted of U.S. Government Constant Maturity 
Treasury (CMT) Notes issued by various U.S. Government agencies, and 
Index Amortizing Notes (IANs) issued by various private sector 
corporations (as described in Paragraph 5 below). All of the issuers 
were parties unrelated to the Funds and employee benefit plans invested 
in the Funds (the Plans) as well as BTNY or any affiliate. In addition, 
the Notes were purchased by the Funds from broker-dealers that were 
independent of the Funds, the Plans, BTNY and its affiliates.
    The CMT Notes were debt instruments which initially paid a premium 
rate of interest monthly based on changes in a specified index, such as 
the London Interbank Offered Rate (LIBOR), the U.S. Treasury Bill Rate 
or the U.S. Federal Reserve's Cost of Funds Index (COFI). However, 
under the terms of CMT Notes at the time of issuance, the formula for 
interest rate payments, and the index upon which such payments were 
based, was scheduled to change on a specified future date to a 
different formula based on the U.S. Treasury CMT Rate. Bankers Trust 
states that the formulas for the interest rate payments made the market 
value of CMT Notes particularly sensitive to certain changes in the 
U.S. Treasury CMT Rate. In this regard, Bankers Trust represents that 
the CMT Notes paid a [[Page 31509]] rate of return that was higher than 
the existing rates for U.S. Treasury securities of comparable maturity 
as long as the yield curve for such securities was ``steep''--with 
interest rates falling based on the specified index. However, Bankers 
Trust states that once the yield curve became ``flat'' (i.e. with 
short-term interest rates rising faster than long-term interest rates) 
or ``climbed'' (i.e. with a general rise in both short-term and long-
term rates), the relative yield on the CMT Notes fell and their market 
value was below par.
    The IANs were debt instruments which initially paid a premium rate 
of interest monthly based on LIBOR, pursuant to certain formulas used 
to calculate such rates at various specified times. However, the IANs 
risked a maturity extension if short-term interest rates, as measured 
by LIBOR, rose above a certain level. Under such circumstances, once 
the maturity on the IANs was extended, the IANs would stop paying 
interest and the outstanding principal balance would be paid down over 
the remaining term pursuant to certain specified schedules.
    5. The terms of the Notes, and the circumstances relating to their 
yield as investments for the Funds, are described as follows:
    Note #1 was a five-year CMT note issued by the Federal National 
Mortgage Association (FNMA or ``Fannie Mae''), which was purchased by 
the Funds on February 15, 1994 from McDonald & Company for $95 million, 
with final maturity on March 2, 1999. Note #1 paid interest monthly at 
a rate equal to one-month LIBOR plus 20 basis points for the first and 
second years, .65 times the two-year CMT rate plus 129 basis points for 
the third through fifth years. At the time of the sale of Note #1 by 
the Funds to BTNY, the note was paying a coupon of LIBOR plus 20 basis 
points. Bankers Trust states that at the time of sale, the forward 
curve (i.e. a measurement of future interest rates based on yields for 
U.S. Treasury securities of comparable duration) suggested that the 
performance of Note #1 would be significantly impaired once the LIBOR-
based coupon payment period ended. According to the forward curve 
determined by Bankers Trust on October 28, 1994, the comparable 
investment rate for the time horizon of February 15, 1996 through March 
15, 1999 was 7.55%. Bankers Trust represents that Note #1 would have 
had a market value greater than par if the ``time weighted average'' of 
the expected coupons had been greater than or equal to 7.55%. However, 
at the time of sale, Bankers Trust did not expect that the coupons to 
be received on Note #1 would be greater than the comparable investment 
rate for the duration of Note #1. Therefore, Bankers Trust determined 
that it was appropriate to sell the security.
    Note #2 was a three-year CMT note issued by the Federal Home Loan 
Bank (FHLB), which was purchased by the BT Cash Plus Fund on October 
27, 1993 from McDonald & Company for $26,831,250, with a final maturity 
on November 12, 1996. The par value of Note #2 was $27 million. Thus, 
the BT Cash Plus Fund purchased Note #2 at a discounted price. Note #2 
paid interest quarterly at a rate equal to the three-month U.S. 
Treasury Bill Rate plus 25 basis points for the first year and .4 times 
the two-year CMT rate plus 205 basis points for the second and third 
years. At the time of the sale of Note #2 by the BT Cash Plus Fund to 
BTNY, the period for the note to pay the three-month U.S. Treasury Bill 
Rate plus 25 basis points had ended. Bankers Trust states that once 
this payment period ended, the forward curve suggested that the 
performance of Note #2 would be significantly impaired. According to 
the forward curve determined by Bankers Trust on October 28, 1994, 
since the remaining life of Note #2 was two years, the comparable 
investment rate was equal to the then current two-year CMT rate which 
was 6.82%. Bankers Trust represents that Note #2 would have had a 
market value greater than par if the ``time weighted average'' of the 
expected coupons had been greater than 6.82%. However, at the time of 
sale, Bankers Trust did not expect that the coupons to be received on 
Note #2 would be greater than the comparable investment rate for the 
duration of Note #2. Therefore, Bankers Trust determined that it was 
appropriate to sell the security.
    Note #3 was a five-year CMT note issued by Fannie Mae, which was 
purchased by the BT Cash Plus Fund on February 7, 1994 from McDonald & 
Company for $95 million, with final maturity on February 17, 1999. Note 
#3 paid interest monthly at a rate equal to the COFI rate plus 10 basis 
points for the first and second years, .4 times the two-year CMT rate 
plus 245 basis points for the third through fifth years. At the time of 
the sale of Note #3 by the BT Cash Plus Fund to BTNY, the note was 
paying the COFI rate plus 10 basis points. However, Bankers Trust 
states that once this COFI-based coupon payment ended, the forward 
curve suggested that the performance of the note would be significantly 
impaired. According to the forward curve determined by Bankers Trust on 
October 28, 1994, the comparable investment rate for the period 
February 17, 1996 to February 1, 1999 was 7.53%. Bankers Trust 
represents that Note #3 would have had a market value greater than par 
if the ``time weighted average'' of the expected coupons had been 
greater than 7.53%. At the time of sale, Bankers Trust did not expect 
that the coupons to be received on Note #3 would be greater than the 
comparable investment rate for the duration of Note #3. Therefore, 
Bankers Trust determined that it was appropriate to sell the security.
    Note #4 was a five-year CMT note issued by the Federal Home Loan 
Mortgage Corporation (FHLMC or ``Freddie Mac''), which was purchased by 
the BT Cash Plus Fund and the BT Super Cash Fund on February 16, 1994 
from Nikko Securities for $71 million, with final maturity on March 2, 
1999. Note #4 paid interest monthly at a rate equal to .5 times the 
two-year CMT rate plus 209 basis points. According to the forward curve 
determined by Bankers Trust on October 28, 1994, the comparable 
investment rate for the period October 28, 1994 through March 2, 1999 
was 7.4%. Bankers Trust represents that Note #4 would have had a market 
value greater than par if the ``time weighted average'' of the expected 
coupons had been greater than 7.4%. However, at the time of sale, 
Bankers Trust did not expect that the coupons to be received on Note #4 
would be greater than the comparable investment rate for the duration 
of Note #4. Therefore, Bankers Trust determined that it was appropriate 
to sell the security.
    Note #5 was a three-year CMT note issued by the Student Loan 
Marketing Association (SLMA or ``Sallie Mae''), which was purchased on 
February 10, 1994 from Nikko Securities for $95 million, with final 
maturity on February 24, 1997. Note #5 paid interest monthly at a rate 
equal to one-month LIBOR plus 20 basis points for the first year and 
.65 times the two-year CMT rate plus 75 basis points for the second and 
third years. At the time of the sale of Note #5 by the Funds to BTNY, 
the note was paying LIBOR plus 20 basis points. However, Bankers Trust 
states that once this LIBOR-based coupon payment ended, the forward 
curve suggested that the performance of the note would be significantly 
impaired. According to the forward curve determined by Bankers Trust on 
October 28, 1994, the comparable investment rate was equal to the then 
current two-year CMT rate which was 6.82%. Bankers Trust represents 
that Note #5 would have had a market value greater than par if the 
``time weighted average'' of the expected coupons had been greater than 
6.82%. At the time of sale, Bankers Trust did not expect that the 
coupons to be received on Note #5 would be greater [[Page 31510]] than 
the comparable investment rate for the duration of Note #5. Therefore, 
Bankers Trust determined that it was appropriate to sell the security.
    Note #6 was an IAN issued by Rabobank, which was purchased by the 
Funds on November 9, 1993 from Lehman Brothers for $14 million, with 
initial maturity on November 17, 1994. Note #6 paid interest quarterly 
at a rate equal to three-month LIBOR plus 50 basis points until 
November 17, 1994 and paid 4.33% thereafter. Bankers Trust states that 
Note #6 was subject to the risk of a maturity extension if short-term 
rates rose above a certain level on a specified date. Under the terms 
of Note #6, if three-month LIBOR was less than 4.9% on November 15, 
1994, the note would mature and the principal would be repaid in full 
on November 17, 1994. However, if three-month LIBOR was above 4.9% on 
November 15, 1994, the term of Note #6 would be extended for three 
years with a fixed coupon rate of 4.33% and principal would be repaid 
according to a pre-set amortization schedule. On October 28, 1994, 
three-month LIBOR was 5.69%, approximately 79 basis points above Note 
#6's trigger rate of 4.9%. Thus, it appeared highly probable that the 
note's maturity would be extended until November 1997. Bankers Trust 
considered the fixed coupon rate of 4.33% on Note #6 to be 
significantly below the comparable investment rate for the duration of 
the note, which was calculated to be 7.14%. Therefore, Bankers Trust 
determined that the security should be sold.
    Note #7 was an IAN issued by Prudential Funding, which was 
purchased by the Funds on September 24, 1993 from Lehman Brothers for 
$34 million, with initial maturity on October 18, 1994. Note #7 paid 
interest quarterly at a fixed rate of 4.75% until October 18, 1994. 
Like Note #6 described above, Bankers Trust states that Note #7 was 
subject to the risk of a maturity extension if short-term rates rose 
above a certain level on a specified date. Under the terms of Note #7, 
if three-month LIBOR was above 5.04% on October 16, 1994, the maturity 
of the note extended for three years at a 0% coupon rate with quarterly 
payments of principal in amounts based on a pre-set amortization 
schedule. If three-month LIBOR was below 5.04% on October 16, 1994, 
Note #7 would mature in full on that date. However, Bankers Trust 
states that three-month LIBOR was above 5.04% on October 16, 1994. At 
the time of sale, Note #7 was scheduled to pay a 0% coupon and its 
maturity had been extended. Thus, Bankers Trust determined that the 
security should be sold.
    Note #8 was an IAN issued by E.I. du Pont, which was purchased by 
the BT Super Cash Fund on September 24, 1993 from Morgan Stanley for 
$1.3 million, with initial maturity on October 14, 1994. Note #8 paid 
interest quarterly at a fixed rate of 4.75%. Like Note #7 described 
above, Bankers Trust states that Note #8 was subject to the risk of a 
maturity extension if short-term rates rose above a certain level on a 
specified date. Under the terms of Note #8, if three-month LIBOR was 
above 5.04% on October 12, 1994, the maturity of the note extended for 
three years at a 0% coupon rate with quarterly payments of principal in 
amounts based on a pre-set amortization schedule. If three-month LIBOR 
was below 5.04% on October 12, 1994, Note #8 would mature in full on 
October 14, 1994. Since three-month LIBOR was above 5.04% on October 
12, 1994, the maturity of Note #8 extended for three years paying a 0% 
coupon. Thus, Bankers Trust determined that the security should be 
sold.
    6. Bankers Trust had the Funds sell their respective interests in 
the Notes to BTNY on October 28, 1994, for the par value of the Notes, 
which in each case was greater than the fair market value of the Notes 
owned by the Fund (see table below). At the time of the transaction, 
the par value of the Notes was equal in each case to the outstanding 
principal balance of the Notes because no principal payments had been 
made on any of the Notes (see charts in Paragraph 7 below). In 
addition, Bankers Trust states that the par value of the Notes was 
either greater than or equal to the initial purchase price paid by the 
Fund for its interest in the Notes.
    Bankers Trust obtained bids from independent broker-dealers to 
establish the fair market value of the Notes at the time of the 
transaction. The most recent bids obtained by Bankers Trust prior to 
the sale of the Notes were as of October 21, 1994. Bankers Trust states 
that bids for the Notes obtained on October 31, 1994 showed no 
significant change had occurred over the ten-day period, thereby 
confirming that the fair market value of the Notes was significantly 
less than the par value of the Notes on the transaction date of October 
28, 1994. Bankers Trust represents that on both October 21, 1994 and 
October 31, 1994, the bids for Note #1 through Note #5 were quoted by 
Nikko Securities, for Note #6 and Note #7 by Lehman Brothers, and for 
Note #8 by Morgan Stanley. The bids for the Notes were quoted by the 
broker-dealers as a percentage of the outstanding principal balance of 
each Note. These bids, in comparison with the par value of the Notes, 
were as follows:

------------------------------------------------------------------------
                             Price quoted                               
         Note         --------------------------   Price received (par  
                         10/21/94     10/31/94            value)        
------------------------------------------------------------------------
#1...................      1196.06        96.00        100 ($95,000,000)
#2...................        96.10        96.05         100 (27,000,000)
#3...................        91.15        91.08         100 (95,000,000)
#4...................        94.08        94.00         100 (71,000,000)
#5...................        96.00        95.27         100 (95,000,000)
#6...................        90.29        90.25         100 (14,000,000)
#7...................        79.25        80.21         100 (34,000,000)
#8...................        80.38        80.50          100 (1,300,000)
------------------------------------------------------------------------
11Bankers Trust states that the prices quoted are per $100 of principal.
  To determine the total price quoted, the face value of each Note is   
  multiplied by the quote, expressed as a percentage of 100. Thus, for  
  example, since the par value of Note #1 is $95,000,000, the quoted    
  price on October 21, 1994 would have been $91,257,000 since           
  $95,000,000  x  .9606 = $91,257,000.                                  

    In addition, Duff & Phelps Capital Markets Co. (D&P) in Chicago, 
Illinois, provided an opinion letter to Bankers Trust on October 27, 
1994, which stated that the fair market value of each Note was less 
than its par value at that time. In providing this opinion, D&P used a 
valuation methodology which was based on a predicted stream of cash 
flows for each Note, discounted at a rate that reflected each Note's 
credit risk and average life. D&P established the predicted stream of 
cash flows based on implied forward interest rates for each Note 
adjusted according to the terms of the Note. In doing this analysis, 
D&P states that it attempted to apply conservative assumptions whenever 
possible such that the analysis would tend to overvalue rather than 
undervalue the Notes. Bankers Trust states that D&P's opinion letter 
helped confirm that the market value of the Notes was less than par at 
the time of sale because D&P's conclusions were consistent with the bid 
quotations received by Bankers Trust for each Note as well as Bankers 
Trust's own analysis of the Notes.
    7. The Funds' holdings regarding each Note, including the 
percentage of the Fund that the Note represented and the interest 
earnings on the Note as of October 28, 1994, are shown on the tables 
below:12 [[Page 31511]] 

    \12\With respect to the figures shown for each Note in the 
tables, if a Fund did not own an interest in the particular Note a 
zero dollar amount is shown.

                                               BT Aggressive STIF                                               
----------------------------------------------------------------------------------------------------------------
                                                  Purchase price/   Outstanding    Approx. % of      Interest   
                      Note                             basis          balance          fund          earnings   
----------------------------------------------------------------------------------------------------------------
#1..............................................     $10,000,000     $10,000,000           19.95        $295,965
#2..............................................               0               0            0.00               0
#3..............................................               0               0            0.00               0
#4..............................................               0               0            0.00               0
#5..............................................       5,000,000       5,000,000            9.97         120,617
#6..............................................       2,500,000       2,500,000            4.99         162,556
#7..............................................       3,000,000       3,000,000            5.98         146,458
#8..............................................               0               0            0.00               0
                                                 ---------------------------------------------------------------
                                                      20,500,000      20,500,000           40.89         725,596
----------------------------------------------------------------------------------------------------------------


                                                BT Cash Plus Fund                                               
----------------------------------------------------------------------------------------------------------------
                                                  Purchase price/   Outstanding    Approx. % of      Interest   
                      Note                             basis          balance          fund          earnings   
----------------------------------------------------------------------------------------------------------------
#1..............................................     $70,000,000     $70,000,000            5.44      $2,071,758
#2..............................................      26,831,250      27,000,000            2.08         383,229
#3..............................................      95,000,000      95,000,000            7.38       2,572,424
#4..............................................      55,000,000      55,000,000            4.27       1,803,636
#5..............................................      70,000,000      70,000,000            5.44       1,688,635
#6..............................................       5,500,000       5,500,000            0.43         939,705
#7..............................................      26,000,000      26,000,000            2.02         960,555
#8..............................................               0               0            0.00               0
                                                 ---------------------------------------------------------------
                                                     348,331,250     348,500,000           27.06      10,419,942
----------------------------------------------------------------------------------------------------------------


                                               BT Super Cash Fund                                               
----------------------------------------------------------------------------------------------------------------
                                                  Purchase price/   Outstanding    Approx. % of      Interest   
                      Note                             basis          balance          fund          earnings   
----------------------------------------------------------------------------------------------------------------
#1..............................................     $15,000,000     $15,000,000            5.32        $295,376
#2..............................................               0               0            0.00               0
#3..............................................               0               0            0.00               0
#4..............................................      16,000,000      16,000,000            5.67         524,694
#5..............................................      20,000,000      20,000,000            7.09         482,467
#6..............................................       6,000,000       6,000,000            2.13         369,828
#7..............................................       5,000,000       5,000,000            1.77         244,097
#8..............................................       1,300,000       1,300,000            0.46          46,313
                                                 ---------------------------------------------------------------
                                                      63,300,000      63,300,000           22.43       1,962,775
----------------------------------------------------------------------------------------------------------------

    Bankers Trust represents that the Notes paid the Funds a reasonable 
rate of interest during the period of time that the Funds held the 
Notes. For example, Bankers Trust states that the annualized rate of 
interest for each Note at the time of the transaction was as follows: 
(i) 5.2% for Note #1; (ii) 5.34% for Note #2; (iii) 4.05% for Note #3; 
(iv) 5.39% for Note #4; (v) 5.26% for Note #5; (vi) 5.44% for Note #6; 
(vii) 4.75% for Note #7; and (viii) 4.75% for Note #8.
    8. Bankers Trust, as trustee of the Funds, believed that the sale 
of the Notes to BTNY was in the best interests of each Fund, and the 
employee benefit plans invested in the Fund, at the time of the 
transaction. Bankers Trust states [[Page 31512]] that any sale of the 
Notes on the open market would have produced significant losses for the 
Funds and for the individual employee benefit plan investors 
involved.13

     13The Department is expressing no opinion in this proposed 
exemption regarding whether the acquisition and holding of the Notes 
by the Funds 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 a plan's potential exposure to losses and 
the role the investment or investment course of action plays in that 
portion of the plan's 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 other comparable investments 
offering a similar return or result.
---------------------------------------------------------------------------

    9. Bankers Trust represents that it took all appropriate actions 
necessary to safeguard the interests of the Funds, and the employee 
benefit plans invested therein, in connection with the transactions. 
Bankers Trust ensured that each Fund received the appropriate amount of 
cash from BTNY in exchange for such Fund's interests in the Notes at 
the time of the transactions. Bankers Trust reviewed the latest 
information regarding the fair market value of the Notes, based on bid 
quotations received from independent broker-dealers. Bankers Trust also 
ensured that the Funds did not pay any commissions or other expenses 
for the sale of the Notes to BTNY.
    10. 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 of the Notes by the 
Funds was a one-time transaction for cash; (b) each Fund received an 
amount which was equal to the greater of either (i) the par value of 
the Notes owned by the Fund at the time of sale, (ii) the purchase 
price paid by the Fund for its interest in each of the Notes, or (iii) 
the fair market value of the Notes owned by the Fund as determined by 
bid quotations for the Notes obtained by Bankers Trust from independent 
broker-dealers at the time of sale; (c) the Funds did not pay any 
commissions or other expenses with respect to the sale; (d) Bankers 
Trust, as trustee of the Funds, determined that the sale of the Notes 
was in the best interests of each Fund, and the employee benefit plans 
invested in the Fund, at the time of the transaction; (e) Bankers Trust 
took all appropriate actions necessary to safeguard the interests of 
the Funds in connection with the transactions; and (f) the Funds 
received a reasonable rate of return during the period of time that the 
Funds held the Notes.

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 for each 
employee benefit plan participating in the Funds at the time of the 
transactions. Notice to the plan fiduciaries shall be made 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.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department, 
telephone (202) 219-8194. (This is not a toll-free number.)
General Electric Pension Trust (the Trust) Located in Fairfield, 
Connecticut; Proposed Exemption

[Application No. D-09880]

    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 effective August 3, 1994, to 
the past and continued lease (the Lease) by the Trust of office space 
in a commercial office building located at 201 Mission Street in San 
Francisco, California (the Property), to GE Capital Aviation Services, 
Inc. (GE Aviation), a party in interest with respect to employee 
benefit plans participating in the Trust, provided the following 
conditions are met:
    (a) All terms and conditions of the Lease are at least as favorable 
to the Trust as those which the Trust could have obtained in an arm's-
length transaction with an unrelated party at the time the Lease was 
executed;
    (b) The rent paid by GE Aviation to the Trust under the Lease is 
not less than the fair market rental value of the office space, as 
established by an independent qualified real estate appraiser;
    (c) David P. Rhoades (Mr. Rhoades), acting as a qualified, 
independent fiduciary for the Trust reviewed all terms and conditions 
of the Lease prior to the transaction, as well as any subsequent 
modifications to the Lease, and determined that such terms and 
conditions would be in the best interests of the Trust at the time of 
the transaction; and
    (d) Mr. Rhoades represents the interests of the Trust for all 
purposes under the Lease as a qualified, independent fiduciary for the 
Trust, monitors the performance of the parties under the terms and 
conditions of the Lease and the exemption, and takes whatever action is 
necessary to safeguard the interests of the Trust throughout the 
duration of the Lease.

EFFECTIVE DATE: This proposed exemption, if granted, will be effective 
for the period from August 3, 1994, until the scheduled termination 
date of the Lease (i.e. September 16, 1999) or, if earlier, the date 
the Lease is actually terminated by the parties.

Summary of Facts and Representations

    1. The Trust holds assets of the General Electric Company Pension 
Plan (the GE Pension Plan), the Knolls Atomic Laboratories Pension 
Plan, ERC Retirement Plan, GE Components Pension Plan For Puerto Rico, 
and Neutron Devices Department Pension Plan (collectively, the Plans). 
The Plans are all defined benefit plans that cover employees of General 
Electric Company (GE) and various GE subsidiaries. There are a total of 
over 488,000 participants and beneficiaries under the Plans. As of 
December 31, 1993, the Trust held approximately $27.3 billion in 
assets.
    The trustees of the Trust are five individuals (the Trustees) who 
are [[Page 31513]] officers of GE and its subsidiaries. The Trustees 
are appointed by the GE Benefit Plans Investment Committee, an 
oversight committee that determines the investment policies of the 
Trust. The Trustees maintain overall responsibility for investment of 
the Trust's assets. The Trustees have delegated specific responsibility 
for investment management of most of the Trust's assets to the General 
Electric Investment Corporation (GEIC).
    GEIC, a Delaware corporation and a wholly-owned subsidiary of GE, 
is a registered investment adviser under the Investment Advisers Act of 
1940. GEIC provides investment management services to a variety of GE-
affiliated entities. As of January 1, 1994, GEIC managed approximately 
$40.4 billion in assets.
    2. GE Aviation, a Delaware corporation formerly known as the 
Polaris Corporation, is a wholly-owned subsidiary of General Electric 
Capital Corporation. The primary business of GE Aviation is airplane 
equipment leasing. GE Aviation's employees are participants in the GE 
Pension Plan.
    3. The transaction for which an exemption is requested involves the 
leasing of office space between the Trust, as landlord, and GE 
Aviation, as tenant, in the office building located at 201 Mission 
Street in San Francisco, California (the Property).
    The Property is a 30-story office building located in the southern 
financial district of San Francisco. The Property is part of a series 
of high-rise buildings developed during the 1980s on the fringes of the 
city's traditional financial district. The ground floor is leased to 
retail businesses and the other floors are leased as office space. The 
rentable area of the Property is approximately 475,675 square feet. The 
current value of the Property is approximately $40 million.
    Construction of the Property was completed in 1981. The Trust 
financed the acquisition of the Property by an unrelated party that 
subsequently went into receivership. The Trust acquired the Property by 
deed in lieu of foreclosure in April 1993. The Trust currently owns the 
Property through a real estate title holding company, Pacific Gateway 
Realty Corporation.
    Most of the office space in the Property was originally rented by 
Bank of America. Bank of America subsequently decided to relocate and 
consolidate its offices, and vacated one-half of the office space it 
occupied in the Property in 1991. At that time, the vacated area was 
leased on a short-term basis to Pacific Gas & Electric (PG&E), which 
was making repairs to its existing offices as a consequence of 
earthquake damage. While there were negotiations in 1993 for PG&E to 
extend its existing lease and to lease additional space, PG&E's board 
of directors ultimately decided against remaining in the Property. PG&E 
intends to vacate the Property in January 1996, when the repairs to its 
original offices are expected to be completed.
    Bank of America vacated the other half of the office space it 
occupied in the Property in late 1993 upon completing its relocation. 
As a result, about 34 percent (i.e. 160,014 square feet) of the 
rentable area in the Property was vacant as of early 1994, compared to 
a general vacancy rate in San Francisco-area office buildings of around 
12 percent at that time.
    In the months after Bank of America vacated, the managers of the 
Property actively searched for tenants, in an effort to lease the 
vacant space as quickly as possible before PG&E leaves. As of June 
1994, tenants had been found for approximately 77,000 square feet of 
space, or about 16 percent of rentable area, leaving around 18 percent 
of the Property vacant. One of the tenants was GE Aviation.
    4. The applicant represents that in early 1994 GE Aviation had its 
offices at Four Embarcadero Center in San Francisco's main business 
district. However, GE Aviation was in the process of downsizing its 
operations and was looking for smaller space in a less expensive part 
of San Francisco. In the course of its search for office space, GE 
Aviation contacted Sentre Partners (Sentre), the independent property 
manager retained by the Trust to manage the Property. GE Aviation 
decided that it was interested in leasing space in the Property and 
entered into negotiations with Sentre.
    The Lease was executed by GE Aviation in July 1994, after which the 
documents were sent to Sentre. The Lease was executed by Pacific 
Gateway Realty Corporation as landlord on August 3, 1994, following 
receipt of the report by Mr. Rhoades, the independent fiduciary acting 
for the Trust in connection with the subject transaction. The applicant 
states that once the Lease was signed by all of the parties, the 
landlord began making extensive improvements to the space in order to 
accommodate a planned occupancy date for GE Aviation of September 1, 
1994.
    5. Under the Lease, GE Aviation has leased approximately 9,376 
square feet of space located on the eastern and southern portions of 
the 27th floor of the Property. This space constitutes approximately 
two percent of the rentable square footage in the Property. The term of 
the Lease is five years, which commenced on September 16, 1994, the 
date that work on the premises was substantially completed. The annual 
rent is $20 per square foot of rentable area, or $187,520, for the 
first three years of the Lease, and $21 per square foot of rentable 
area, or $196,896, for the fourth and fifth years, payable monthly. The 
Lease requires that GE Aviation pay its proportionate share of the 
Trust's real estate taxes and expenses relating to the Property for 
years after 1995, to the extent these taxes and expenses exceed those 
for 1995 (the ``base'' year) or to the extent any additional taxes or 
expenses are properly chargeable solely to GE Aviation in connection 
with its activities with the leased space.
    Late payments are subject to a 5% late payment charge after written 
notice is given. If the late payment becomes an event of default, or in 
the event of any failure by GE Aviation to perform its obligations 
under the Lease, GE Aviation will be obligated for interest charges and 
other amounts necessary to compensate the Trust for damages caused by 
GE Aviations' failure to perform.
    GE Aviation does not have any options or rights to expand or extend 
the Lease, nor has it received any period of free rent. Any assignments 
or subleases by GE Aviation are void unless the Trust has provided 
prior written consent and, if consented to, are subject to additional 
charges.
    6. The Trust has provided agreed-upon improvements to the space 
which, prior to the Lease, contained only nominal improvements. The 
total cost of the improvements shall not exceed $42.50 per rentable 
square foot ($398,480), with any additional costs to be paid by GE 
Aviation.14 The Trust is responsible to repair any defects in this 
work of which it is notified by GE Aviation within one year, other than 
defects resulting from compliance with the specifications provided by 
GE Aviation's architect or engineer. GE Aviation is responsible at its 
expense for any additional work it needs or desires that is not part of 
the agreed-upon [[Page 31514]] improvements. Any alterations to be made 
during the term of the Lease are subject to the Trust's written 
consent. Alterations generally become the property of the Trust and 
remain at the expiration of the Lease, except that the Trust may 
require the alterations to be removed at GE Aviation's expense.

    \14\The Department expresses no opinion in this proposed 
exemption as to whether the expenses incurred by the Trust relating 
to the tenant improvements provided for GE Aviation would violate 
any provision of Part 4 of Title I of the Act. In this regard, the 
Department notes that section 404(a) of the Act requires, among 
other things, that plan fiduciaries act prudently and solely in the 
interest of the plan's participants and beneficiaries when making 
investment decisions on behalf of a plan. In addition, section 
404(a) of the Act requires that plan fiduciaries act for the 
exclusive purpose of providing benefits to participants and 
beneficiaries and to defray reasonable expenses of administering the 
plan.
---------------------------------------------------------------------------

    7. Mr. Rhoades was retained by GEIC to act as an independent 
fiduciary for the Trust in connection with the Lease. Mr. Rhoades is 
president of the real estate appraisal and consulting firm of David P. 
Rhoades & Associates, Inc., of San Francisco, California. Mr. Rhoades 
represents that he and his firm are independent of, and unrelated to, 
GE and its affiliates. Mr. Rhoades states that he is a Member of the 
Appraisal Institute (MAI) and has 22 years experience as a real estate 
appraiser dealing with the valuation and analysis of all types of 
property, including urban office buildings similar to the Property. Mr. 
Rhoades has acknowledged in writing that he is a fiduciary for the 
Trust and that he understands his duties, responsibilities, and 
liabilities as a fiduciary under the Act.
    8. Mr. Rhoades reviewed the Lease and inspected the Property prior 
to the transaction. In an appraisal dated July 6, 1994, Mr. Rhoades 
concluded that the market rent for the space covered by the Lease would 
be in the range of $19.00 to $21.00 per square foot. Thus, Mr. Rhoades 
determined that the proposed average rental rate under the Lease of 
$20.22 per square foot would be at the upper end of the range of rents 
for comparable leases in the San Francisco area and would not be less 
than the fair market rental value for the space. Mr. Rhoades states 
that the terms of the Lease are comparable to the terms that would have 
been negotiated in arm's-length transactions between unrelated parties. 
Mr. Rhoades concluded that the Lease would be in the best interest of 
the Trust because it would yield the Trust a market rate of return, 
would avoid additional leasing efforts, and would avoid the lost 
revenue and associated costs of having the space remain vacant.
    Mr. Rhoades represents that the tenant improvement allowance for 
the Lease of $42.50 per square foot was necessary because of the 
unimproved condition of the particular space. Mr. Rhoades states that 
the space on the 27th floor leased by GE Aviation was previously 
demolished in connection with work that was done for another tenant, 
who currently occupies part of the 27th floor and the two floors above 
the 27th floor. In this regard, the applicant represents that the 27th 
floor space previously was occupied by Bank of America, which had been 
a major tenant in the Building from 1981 through 1991. The entire 27th 
floor, when occupied by the Bank of America, was primarily open space 
with movable partitions. At the time the Bank of America vacated the 
27th floor space, substantial work on the space was needed to satisfy 
applicable legal requirements, such as current fire and safety codes. 
In addition, the Bank of America's use of the space was not readily 
adaptable to a new tenant desiring up-to-date conventional office space 
and was functionally obsolete. Consequently, the applicant states that 
it was cost effective to demolish the entire floor when work was being 
done for a new tenant that would occupy half of the 27th floor and to 
re-build sufficiently to meet the minimum requirements for the entire 
floor, including the part that was not yet being leased. As a result, 
when the other half of the floor was leased to GE Aviation, it was in 
unimproved condition. Thus, prior to the Lease, the space was 
effectively ``first generation'' or unimproved space which required 
relatively high outlays for tenant improvements.
    Mr. Rhoades states that the improvements made to the space leased 
by GE Aviation are functional and reusable by a wide range of tenants 
without major costs, and are typical of the types of improvements 
landlords usually build for such tenants. Mr. Rhoades maintains that 
the residual value of the tenant improvements at the end of the Lease 
(i.e. 5 years) will be about 50 percent of the original cost of the 
tenant improvements, or approximately $21.25 per square foot.
    9. With respect to the overall rate of return to the Trust under 
the terms of the Lease, Mr. Rhoades conducted an analysis of both the 
``internal rate of return'' (IRR) and the ``net present value'' (NPV) 
to the Trust from the Lease.
    Mr. Rhoades represents that the ``rate of return'' on a real estate 
investment is the ratio of income to the original investment and the 
``IRR'' is the annualized rate of return on capital that is generated 
within an investment over a period of ownership.15 Thus, the IRR 
measures the returns from an investment in relation to the original 
capital outlay. In this case, Mr. Rhoades states that the ``returns'' 
consist of the rental income over the Lease term and the pass-through 
of certain expenses after the first year, as well as the residual value 
of the tenant improvements at the end of the Lease. The ``original 
capital outlay'' consists of expenses relating to the leased space, 
including the tenant improvements, operating expenses, brokerage fees, 
parking, and taxes. This ``original capital outlay'' was approximately 
$421,920.

     15Mr. Rhoades cites The Dictionary of Real Estate 
Appraisal (3rd edition) as his source for the definition of these 
terms.
---------------------------------------------------------------------------

    In addition, Mr. Rhoades states that the ``NPV'' is the difference 
between the present value of all expected investment benefits, or 
positive cash flows, and the present value of capital outlays, or 
negative cash flows, over the entire period of the investment. The 
present value calculation involved in determining NPV requires the use 
of a specific discount rate, which operates as the annual rate of 
return objective. In this regard, Mr. Rhoades used the standard real 
estate industry rate of 9 percent for the NPV calculation, which 
provided a basis for comparing the rate of return on the Lease to 
different leasing arrangements in the Property.
    Mr. Rhoades states that his approach to evaluating leases and 
leasing costs is customary in the real estate industry. Mr. Rhoades 
states further that he was consistent in using this approach to 
evaluate the comparable leases in the Building and other comparable 
properties for purposes of determining the fair market rental value of 
the space under the Lease as well as the IRR and NPV of the Lease to 
the Trust. However, Mr. Rhoades notes that his approach did not 
consider the original cost or value of the Building in evaluating the 
specific leases. In this regard, Mr. Rhoades has confirmed that it is 
not customary to consider the cost or value of a building for this 
purpose because the focus in valuing a lease is on the incremental 
costs and income of the lease and the ongoing costs relating to the 
space.
    Based on an extensive analysis and comparison of the terms of the 
Lease to all other leases in the Property at the time of the 
transaction, Mr. Rhoades concluded that the Lease had a greater NPV and 
would yield a higher IRR than any other lease of a comparable term in 
the Property. Mr. Rhoades represents that the Lease will yield an IRR 
to the Trust of approximately 10.83 percent on an annual basis and has 
a NPV of $4.87 per square foot based on a discount rate of 9 percent, 
when taking into account the residual value of the tenant improvements. 
Therefore, Mr. Rhoades states that it is unlikely that the Trust would 
have obtained a lease for the space on more favorable terms from 
[[Page 31515]] other tenants in the market at the time of the 
transaction.16

    \16\Mr. Rhoades states in his letter dated August 12, 1994, that 
the NPV of leaving the space vacant for the five year term of the 
Lease would have been a negative $19.45 per square foot due to the 
operational and tax expenses related to the space. Mr. Rhoades notes 
that while it is unlikely that the space would have remained vacant 
for the entire five year period, it would have taken about six 
months for the Trust to have obtained a lease on terms at least as 
favorable to the Trust, with the same IRR and NPV values, as the 
terms of the Lease.
---------------------------------------------------------------------------

    10. Mr. Rhoades, as independent fiduciary for the Trust, will 
monitor the Lease on an ongoing basis. Mr. Rhoades will determine GE 
Aviation's compliance with the terms of the Lease and has the authority 
to take any action necessary to enforce the rights of the Trust under 
the Lease, including the termination of the Lease. Any renewals of the 
Lease will be subject to the oversight, review and approval of Mr. 
Rhoades. Such a renewal will not be executed in the absence of Mr. 
Rhoades' opinion that the proposed renewal would be in the best 
interests of the Trust.
    11. In summary, the applicant states that the transaction meets the 
statutory criteria of section 408(a) of the Act and section 4975(c)(2) 
of the Code because: (a) the terms of the Lease are at least as 
favorable to the Trust as the terms which would exist in an arm's-
length transaction with an unrelated party; (b) the Trust will receive 
rental amounts under the Lease equal to the fair market rental value 
for the space, as determined by a qualified, independent appraiser; (c) 
an independent fiduciary (i.e. Mr. Rhoades) acting for the Trust 
reviewed the terms and conditions of the Lease and determined that the 
transaction would be in the best interests of the Trust; (d) Mr. 
Rhoades, as the independent fiduciary, will monitor the Lease on behalf 
of the Trust and take whatever actions are necessary to protect the 
interests of the Trust; and (e) the Lease only involves a small 
percentage of the Trust's total assets.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department, 
telephone (202) 219-8194. (This is not a toll-free number.)
The Amended and Restated Profit Sharing Retirement Plan for Employees 
of 84 Lumber Company (the Profit Sharing Plan) and The Amended and 
Restated Savings Fund Plan for Employees of 84 Lumber Company (the 
Savings Plan; together, the Plans) Located in Eighty Four, 
Pennsylvania; Proposed Exemption

[Application Nos. D-09945 and D-09946]

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to (1) The proposed extension of credit by 84 
Lumber Company (Lumber) to the Plans in the form of loans (the Loans) 
with respect to Guaranteed Investment Contract, Number CG0124601A 
issued by Executive Life Insurance Company (ELIC) to the Profit Sharing 
Plan and Guaranteed Investment Contract No. CG0124701A (both Contracts 
together, the GICs) issued by ELIC to the Savings Plan; and (2) the 
Plans' potential repayment of the Loans (the Repayments), provided: (a) 
all terms of such transactions are no less favorable to the Plans than 
those which the Plans could obtain in arm's-length transactions with an 
unrelated party; (b) no interest and/or expenses are paid by the Plans; 
(c) the Loans are made with respect to amounts invested by the Plans in 
the GICs; (d) the Repayments are restricted to the amounts, if any, 
paid to the Plans after the date of the Loans by ELIC or other 
responsible third parties with respect to the GICs (the GIC Proceeds); 
(e) the Repayments under each Loan will not exceed the total amount of 
the Loan; and (f) the Repayments are waived with respect to the amount 
by which any Loan exceeds the GIC Proceeds.

Summary of Facts and Representations

    1. Lumber is a Pennsylvania general partnership engaged in the 
retail lumber and building products business. As of January 1, 1995, 
Lumber operated 374 individual store locations in 31 states. The 
headquarters of Lumber are in Eighty Four, Pennsylvania. The managing 
general partner of Lumber is Pierce-Hardy Real Estate, Inc., a 
Pennsylvania business trust. Lumber is the sponsor of both Plans, each 
of which covers the employees of Lumber. The Profit Sharing Plan also 
covers employees of the Trusty Building Components Company, an 
affiliate of Lumber.
    2. Each of the Plans is a defined contribution plan that is 
qualified under section 401(a) of the Code. The Savings Plan is 
intended to constitute a qualified cash or deferred arrangement in 
accordance with section 401(k) of the Code. The Savings Plan is a 
participant-directed individual account plan under which the 
participants may direct the investment of their accounts in one or more 
investment funds. As of December 31, 1994, (i) the Profit Sharing Plan 
had 3,018 active and terminated vested participants and total assets of 
approximately $24,718,415; and (ii) the Savings Plan had 2,080 active 
and terminated vested participants and total assets of approximately 
$17,187,503.
    3. On September 25, 1987, ELIC issued the GICs to the Plans. The 
Profit Sharing Plan's GIC was in the principal amount of $2 million, 
and the Savings Plan's GIC was in the principal amount of $1 million. 
Each GIC guaranteed an annual interest rate of 9.92% from the issue 
date to the September 25, 1992 maturity date. Interest accrued under 
the GICs was payable yearly, and each Plan received interest payments 
for 1988, 1989 and 1990. The final interest payments made by ELIC were 
received by the Plans on September 25, 1990. No interest accrued under 
the GICs was paid in 1991.
    4. On April 11, 1991 (the Conservation Date), ELIC was placed in 
conservatorship by the Commissioner of Insurance for the State of 
California. As of that date, payments under the GICs were suspended, 
and no payments were made to the Plans.17 As of the Conservation 
Date, the accumulated book values of the GICs (Accumulated Book Value), 
defined as the amount of deposits, plus interest at the contract rate, 
less interest paid, were $2,051,440 for the Profit Sharing Plan and 
$1,049,923 for the Savings Plan. Effective June 30, 1991, the Plans' 
Administrative Committees (the Committees) froze the GICs and a 
proportionate share of the accounts of participants with account 
balances invested in the GICs. The Plans have not permitted 
distributions or withdrawals from the respective plans with respect to 
the frozen portion of a participant's account. Moreover, the Savings 
Plan has not allowed participants to receive a loan from or reallocate 
the frozen portion of their accounts to any other investment option 
under the Savings Plan.

    \17\The Department notes that the decisions to acquire and hold 
the GICs are governed by the fiduciary responsibility provisions of 
Part 4, Subtitle B, of Title I of the Act. In this regard, the 
Department is not herein proposing relief for any violations of Part 
4 which may have arisen as a result of the acquisition and holding 
of the GICs by the Plans.
---------------------------------------------------------------------------

    5. On August 13, 1993, the Los Angeles Superior Court approved the 
terms of the Rehabilitation/Liquidation Plan for ELIC effective 
September 3, [[Page 31516]] 1993 (the Rehab Plan). On or about December 
1, 1993, each ELIC contract holder was provided with an election form 
and a summary of the Rehab Plan. Under the Rehab Plan, ELIC guaranteed 
investment contracts were reduced in value to approximately 79% of the 
Accumulated Book Value as of the Conservation Date and each holder of 
such contracts was paid an amount for accumulated interest and fees for 
the period between the Conservation Date and September 3, 1993 (the 
Interim Payments). Each contract holder, including the Plans, was 
informed that it could elect by February 12, 1994 to ``opt in'' or 
``opt out'' of the Rehab Plan. By opting in, a contract holder would 
have been issued a new 5-year guaranteed investment contract issued by 
Aurora National Life Assurance Company (Aurora), the successor to ELIC, 
in an amount equal to the restructured percentage of the Accumulated 
Book Value as of the Conservation Date, plus the right to receive 
possible distributions from certain trusts and settlements that may 
occur in the liquidation of ELIC. Opting out of the Rehab Plan would 
have resulted in a cash settlement, payment of which would be made by 
immediate payments and future payments from an Allocation Holdback 
Trust, plus the right to receive possible distributions from certain 
trusts and settlements that may occur in the liquidation of ELIC.
    6. After reviewing the Rehab Plan materials supplied by ELIC, 
Lumber elected to ``opt in'' with respect to the GICs. As a result, the 
Plans' GICs were replaced, effective February 27, 1994, with the Aurora 
GICs in accordance with the approved Rehab Plan. A comparison of the 
terms of the ELIC GICs and the Aurora GICs is set forth below:

------------------------------------------------------------------------
                                          ELIC GIC         Aurora GIC   
------------------------------------------------------------------------
1. Profit sharing plan:                                                 
    Contract number.................  CG0214601A        CG01246A1A      
    Maturity date...................  9/25/92           9/3/98          
    Account value...................  $2,000,000        $1,280,487      
    Guaranteed interest rate........  9.92%             5.61%           
2. Savings Plan:                                                        
    Contract number.................  CG0214701A        CG01247A1A      
    Maturity date...................  9/25/92           9/3/98          
    Account value...................  $1,000,000        $640,243        
    Guaranteed interest rate........  19.92%            5.61%           
------------------------------------------------------------------------

    7. As the chart indicates, the present account value of the Aurora 
GICs is substantially less than the pre- conservatorship book values of 
the ELIC GICs. In addition, the interest rate on the Aurora GICs is 
substantially less than the stated interest under the ELIC GICs. 
Interest received by the Plans during ELIC's conservatorship and prior 
to the consummation of the Rehab Plan was also substantially less than 
the ELIC contract rate. The foregoing factors have resulted in a 
significant reduction in value and yield of the contracts held by the 
Plans.
    8. The extended maturity date of the Aurora GICs has also had a 
significant impact on participants in the Plans and their 
beneficiaries. Under the terms of the Aurora GICs, the only payments 
that may be made prior to maturity are semi-annual interest payments. 
The only other benefit withdrawals permitted are the annuitization of 
benefits under the contract, which is not permitted under the Plans 
(which provide only a lump sum form of benefit).18 As a result, 
participants who terminate their employment with Lumber are not able to 
have their lump sum distributions paid out of the respective Aurora 
GICs at this time.

     18The applicant represents that pursuant to section 
401(a)(11) of the Code, the Plans are not required to provide joint 
and survivor annuities. The Department expresses no opinion with 
respect to the applicant's representation.
    9. In order to permit the Plans to resume full funding of all Plan 
events, including distributions, withdrawals, loans, interfund 
transfers and fund investments, Lumber proposes to make the Loans to 
each of the Plans and has requested an exemption to permit the Loans 
under the terms and conditions described herein. The Loans will be made 
(i) pursuant to written agreements and (ii) as a single lump sum cash 
payment to each Plan (the Loan Amount).19 It is contemplated that 
the Loan Amount to the Profit Sharing Plan will be $1,378,000, 
representing the original $2,000,000 principal amount of that Plan's 
ELIC GIC, less an Interim Payment received by the Profit Sharing Plan 
of $405,852, and less payments of $93,416 under the Aurora Replacement 
GIC characterized as return of principal, and certain Rehab Plan 
adjustments attributable to distributions from various trusts (see rep. 
5, above) in the amount of $123,033. It is contemplated that the Loan 
Amount to the Savings Plan will be $689,000, representing the original 
principal amount of that Plan's ELIC GIC, less an Interim Payment 
received by the Savings Plan of $202,925, and less payments of $46,708 
under the Aurora Replacement GIC characterized as return of principal, 
and certain Rehab Plan adjustments attributable to distributions from 
various trusts (see rep. 5, above) in the amount of $61,516.20 The 
Loans will be made as soon as practicable after the granting of the 
exemption proposed herein, and a closing agreement with respect thereto 
has been entered into between Lumber and the Internal Revenue Service. 
The Repayments will be limited to the cash proceeds of any payments 
received by the respective Plans as GIC Proceeds after the date of the 
Loans. Repayments are due only when GIC Proceeds are received by the 
Plans. No interest will be paid on the Loans. Under no circumstances 
will Repayments exceed the Loan Amounts, even if GIC Proceeds should 
exceed such amounts. At such time that Lumber learns that no further 
GIC Proceeds will be received, Repayments of any outstanding Loan 
Amounts will be waived by Lumber.

     19The Department notes that this exemption, if granted, 
will not affect the rights of any participant or beneficiary with 
respect to any civil action against Plan fiduciaries for breaches of 
section 404 of the Act in connection with any aspect of the GIC 
transactions.
     20The Loan Amounts have been rounded to $1,378,000 and 
$689,000 for the Profit Sharing Plan and the Savings Plan, 
respectively.
---------------------------------------------------------------------------

    10. If the exemption proposed herein is granted, the Committees 
intend to value the Aurora GICs at the original principal amount of the 
ELIC GICs. Each frozen account would then be adjusted to reflect this 
new value, and the freeze placed on each participant's account would be 
removed. The Plans would then resume distributions and withdrawals 
under the Plans with [[Page 31517]] respect to frozen account balances. 
Loans and interfund transfers under the Savings Plan would also resume 
with respect to amounts that had been frozen.
    11. In summary, the applicant represents that the proposed 
transactions satisfy the criteria contained in section 408(a) of the 
Act because: (a) All terms of the transactions will be no less 
favorable to the Plans than those obtainable in arm's-length 
transactions with unrelated parties; (b) the Loans will enable the 
Plans to resume normal operations with respect to distributions, 
withdrawals, loans, interfund transfers and fund investments; (c) the 
Plans will pay no interest or other expenses in connection with the 
Loans; (d) Repayments will be made only out of any cash proceeds of any 
amounts received by the Plans as GIC Proceeds after the date of the 
Loans; (e) the Repayments will not exceed the principal amount of the 
Loans; and (f) the Repayments will be waived to the extent the Loan 
Amounts exceed the GIC Proceeds.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)
Warburg Investment Management International Ltd. (Warburg 
International) Located in London, England; Proposed Exemption

[Application No. D-09998]

    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) 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) of the Code, shall 
not apply to the proposed cross-trading of securities between various 
accounts managed by Warburg International or its Affiliates (the 
Accounts) where at least one Account involved in any cross-trade is an 
employee benefit plan account (Plan Account) for which Warburg 
International acts as a fiduciary; provided that both the General 
Conditions of Section I and the Specific Conditions of Section II below 
are met.

Section I--General Conditions

    (a) Each employee benefit plan comprising a Plan Account 
participating in Warburg International's cross-trading program has 
total assets equal to at least $25 million. In the case of multiple 
employee benefit plans maintained by a single employer or controlled 
group of employers, the $25 million requirement may be met by 
aggregating the assets of such plans if the assets are commingled for 
investment purposes in a single master trust.
    (b) A Plan's participation in the cross-trade program is subject to 
a written authorization executed in advance by a qualified Plan 
Fiduciary which is independent of Warburg International and its 
Affiliates (the Independent Fiduciary).
    (c) The authorization referred to in paragraph (b) above is 
terminable at will without penalty to the Plan Account, upon receipt by 
Warburg International of written notice of termination.
    (d) Before an authorization is made for any Plan Account, the 
Independent Fiduciary is furnished with any reasonably available 
information necessary for the Independent Fiduciary to determine 
whether the authorization should be made, including (but not limited 
to) a copy of the final exemption (if granted), an explanation of how 
the authorization may be terminated, a description of Warburg 
International's cross-trade practices, and any other reasonably 
available information regarding the matter that the Independent 
Fiduciary requests.
    (e) Each cross-trade transaction involves only equity or debt 
securities for which there is a generally recognized market. With 
respect to any non-U.S. securities, only those securities traded on a 
recognized foreign securities exchange for which market quotations are 
readily available shall be covered by the exemption.21

    \21\With respect to all non-U.S. securities that are ``plan 
assets'' managed by Warburg or an Affiliate, the applicant 
represents that the requirements of section 404(b) of the Act and 
the regulations thereunder will be met (see 29 CFR 2550.404b-1). In 
this regard, section 404(b) of the Act states that no fiduciary may 
maintain the indicia of ownership of any assets of a plan outside 
the jurisdiction of the district courts of the United States, except 
as authorized by regulation by the Secretary of Labor. The 
Department is providing no opinion herein as to whether such 
requirements will be met.
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    (f) Each cross-trade transaction is effected at the current market 
value for the security on the date of the transactions. For equity 
securities, this shall be the closing price for the security on the 
date of the transaction. The ``closing price'' shall be the last trade 
price on exchanges where dealing is order-driven and the closing mid-
market price (i.e. the average of the closing bid and offer prices) 
where dealing is quote-driven. For debt securities, the current market 
value shall be the fair market value determined in accordance with 
paragraph (b) of Rule 17a-7 issued by the Securities and Exchange 
Commission (SEC) under the Investment Company Act of 1940.
    (g) Neither Warburg International nor its Affiliates charges a Plan 
Account affected by a cross-trade transaction any fee or commission for 
such transaction.
    (h) At least every three months, and not later than 45 days 
following the period to which it relates, Warburg International 
furnishes the Independent Fiduciary with a report disclosing: (1) a 
list of all cross-trade transactions engaged in on behalf of the Plan 
Account, and (2) with respect to each cross-trade transaction, the 
prices at which the securities involved in the transaction were traded 
on the date of such transaction.
    (i) The Independent Fiduciary is furnished with a summary of 
certain additional information at least once per year. The summary must 
be furnished within 45 days after the end of the period to which it 
relates, and must contain the following: (1) A description of the total 
amount of the Plan Account's assets involved in cross-trade 
transactions during the period, (2) a description of Warburg 
International's cross-trade practices, if such practices have changed 
materially during the period covered by the summary, (3) a statement 
that the Independent Fiduciary's authorization of cross-trade 
transactions may be terminated upon receipt by Warburg International of 
written notice to that effect, and (4) a statement that the Independent 
Fiduciary's authorization of the Plan Account's participation in the 
cross-trade program will continue in effect unless it is terminated.
    (j) For all Accounts participating in the cross-trading program, if 
the number of shares of a particular security which any Accounts need 
to sell on a given day is less than the number of shares of such 
security which any Accounts need to buy, or vice versa, the direct 
cross-trade opportunity is allocated among the buying or selling 
Accounts on a pro rata basis.
    (k) The Accounts involved in cross-trade transactions do not 
include assets of any Plan established or maintained by Warburg 
International or its Affiliates.

Section II--Specific Conditions

    (a) An Independent Fiduciary of each Plan specifically authorizes 
each cross-trade transaction in accordance with the following 
procedure:
    (1) No more than three business days prior to the execution of any 
cross-trade transaction, Warburg International shall inform an 
Independent Fiduciary of each Plan Account involved in the 
[[Page 31518]] cross-trade transaction that Warburg International 
proposes to buy or sell specified securities in a cross-trade 
transaction if an appropriate opportunity is available, the current 
trading price for such securities, and the total number of shares to be 
acquired or sold by each such Plan Account;
    (2) Prior to each cross-trade transaction, the transaction shall be 
authorized either orally or in writing by the Independent Fiduciary of 
each Plan Account involved in the cross-trade transaction;
    (3) If a cross-trade transaction is authorized orally by an 
Independent Fiduciary, Warburg International shall provide written 
confirmation of such authorization in a manner reasonably calculated to 
be received by such Independent Fiduciary within one business day from 
the date of such authorization;
    (4) The authorization referred to in this Section II shall be 
effective for a period of three business days; and
    (5) No more than ten days after the completion of a cross-trade 
transaction, the Independent Fiduciary shall be provided with a written 
confirmation of the transaction and the price at which the transaction 
was executed.
    (b) A cross-trade transaction is effected only where the 
transaction involves less than five (5) percent of the aggregate 
average daily trading volume for the securities involved in the 
transaction for the week immediately preceding the authorization of the 
transaction. A cross-trade transaction may exceed this limit only by 
express authorization of Independent Fiduciaries on behalf of Plan 
Accounts affected by the transaction, prior to the execution of the 
cross-trade.
    (c) The cross-trade transaction is effected at a price which is 
within ten (10) percent of the closing price of the security on the day 
before the date on which Warburg International received authorization 
by the Independent Fiduciary to engage in the cross-trade transaction.
Section III--Definitions

    For purposes of this proposed exemption:
    (a) ``Account'' means a Plan Account or Non-Plan Account;
    (b) ``Affiliate'' means any person directly or indirectly through 
one or more intermediaries, controlling, controlled by, or under common 
control with Warburg International;
    (c) ``Buying Account'' means the Account which seeks to purchase 
securities in a cross-trade transaction;
    (d) ``Cross-trade transaction'' means a purchase and sale of 
securities between Accounts for which Warburg International or an 
Affiliate is acting as investment manager;
    (e) ``Plan Account'' means an Account managed by Warburg 
International consisting of assets of one or more employee benefit 
plans which are subject to the Act;
    (f) ``Non-Plan Account'' means an Account managed by Warburg 
International consisting of assets of clients which are not employee 
benefit plans subject to the Act; and
    (g) ``Selling Account'' means the Account which seeks to sell its 
securities in a cross-trade transaction.

Summary of Facts and Representations

    1. Warburg International is a wholly-owned subsidiary of Mercury 
Asset Management plc (MAM), a public limited company organized under 
the laws of the United Kingdom. As of September 30, 1994, MAM and its 
subsidiaries had over $90 billion of assets under management. Warburg 
International is registered as an investment adviser under the U.S. 
Investment Advisers Act of 1940 (the 1940 Act) and is a member of the 
Investment Management Regulatory Organization Limited (IMRO) in the 
United Kingdom. Warburg International's clients are primarily U.S. 
institutional investors, such as qualified pension funds and registered 
investment companies. As of December 31, 1994, Warburg International 
had more than $3 billion in assets under management, of which 
approximately $2 billion consisted of assets of Plan Accounts and 
governmental plan accounts for which it had agreed to act as a 
fiduciary.
    2. The Accounts for which an exemption is requested are those Plan 
Accounts for which Warburg International provides active portfolio 
management. Investment decisions are generally subject to the 
investment manager's discretion, subject to general written guidelines 
as to which types of securities to acquire or sell for the Accounts. 
For some Accounts, investment selections are based in part on the 
corresponding decisions made for registered investment companies or 
other institutional accounts for which Warburg International or an 
Affiliate serves as the investment adviser. Thus, Accounts with the 
same or similar investment guidelines or objectives often will be 
acquiring or selling the same securities on the same day.
    3. Warburg International states that the acquisition or disposition 
of any particular security for an Account would be unrelated to the 
fact that an opportunity for a cross-trade transaction may be 
available. Under the cross-trade program, if Warburg International or 
an Affiliate sells securities to another Account it manages, or 
acquires such securities from another Account it manages, it would have 
an opportunity to save commissions for both the selling or acquiring 
Account. Under current procedures, all securities transactions are 
effected by an independent broker which may be dealing with a second 
broker acting for the party on the other side of the transaction. If 
Warburg International effects a transaction through a broker on the 
open market, the client would ordinarily be charged a commission at the 
market rate (normally about 0.2 percent, but commissions vary according 
to the country where the transaction is effected). However, under the 
cross-trade program, Warburg International states that no commission 
would be charged where the transaction is effected by Warburg 
International or an Affiliate, and in certain markets, transfer or 
registration taxes would also not be charged. Warburg International 
states that even if a broker is involved, matching the buy and sell 
orders for a particular day through a single broker in an off-market 
transaction would still result in lower commission charges for the 
Accounts.
    4. Warburg International represents that the Plan Accounts would 
also benefit under the cross-trade program by not incurring the cost 
(in terms of price) of dealing with a person or a firm acting as 
``market-maker'' for the specific security involved in the transaction. 
This cost is generally measured by the spread between the asking and 
the bidding price for the securities. In normal trading by Warburg 
International, the Selling Account receives a lower ``bid'' price, 
while the Buying Account pays a higher ``ask'' price. By contrast, in a 
direct cross-trade, the price received by the Selling Account would be 
the same as the price paid by the Buying Account, based on an average 
of the ``bid'' and ``ask'' prices, without any dealer mark-ups. In 
addition, if permitted to direct a cross-trading of securities from one 
Account to another, Warburg International would be able to implement 
its investment strategies at the earliest possible point in time. 
Finally, the trading of some securities may be ``thin'', that is there 
are limited numbers of shares available. In such cases, the spread may 
be particularly wide. Matched sales would essentially provide the 
Accounts with early opportunities to acquire or sell such thinly-traded 
securities without paying the spread.

[[Page 31519]]

    5. Participation by Plan Accounts in Warburg International's cross-
trade program will be subject to several conditions. Each cross-trade 
transaction will involve only securities for which there is a generally 
recognized market. With respect to any non-U.S. securities, only those 
securities traded on a recognized foreign securities exchange for which 
market quotations are readily available will be involved in the cross-
trade program. Each cross-trade transaction will be effected at the 
current market value for the security on the date of the direct cross-
trade. For equity securities, the current market value will be the 
closing price for the security on the date of the transaction. The 
``closing price'' will be the last trade price on exchanges where 
dealing is order-driven and the closing mid-market price (i.e. the 
average of the closing bid and offer prices) where dealing is quote-
driven. For all domestic or foreign debt securities, the current market 
value will be the fair market value of the security as determined 
pursuant to paragraph (b) of SEC Rule 17a-7 under the 1940 Act. In this 
regard, SEC Rule 17a-7(b) contains four possible means of determining 
``current market value'' depending on such factors as whether the 
security is a reported security and whether its principal market is an 
exchange. This Rule is also applicable to registered investment 
companies for which Warburg International or an Affiliate acts as an 
investment advisor.
    Warburg International will receive no fees or other incremental 
compensation (other than its previously agreed upon investment 
management fee) with respect to any direct cross-trade transaction.
    6. A fiduciary of a Plan Account independent of Warburg 
International and its Affiliates (i.e. the Independent Fiduciary) will 
provide written authorization allowing for the Plan Account's 
participation in Warburg International's cross-trading program, before 
any specific cross-trades for such Account are effected. This 
authorization will be terminable at will without penalty to the Plan 
Account upon written notice to Warburg International of such 
termination. In addition, before any such general authorization is 
granted, Warburg International will provide the Independent Fiduciary 
with all materials necessary to permit an evaluation of the cross-trade 
program. These materials will include (but not be limited to) a copy of 
the proposed and final exemptions, an explanation of how the 
authorization may be terminated, a description of Warburg 
International's cross-trade practices, and any other reasonably 
available information regarding the matter which the Independent 
Fiduciary may request.
    7. After a Plan Account's participation in Warburg International's 
cross-trading program is authorized, Warburg International will furnish 
periodic reports to the Independent Fiduciary, at least once every 
three months, and no later than 45 days following the period to which 
it relates, disclosing: (a) A list of all cross-trade transactions 
engaged in on behalf of the Plan Account; and (b) with respect to each 
cross-trade transaction, the prices at which the securities involved in 
the transaction were traded on the date of such transaction. The 
Independent Fiduciary will also be furnished with a summary of certain 
additional information at least once per year. The summary will be 
furnished within 45 days after the end of the period to which it 
relates, and will contain the following: (a) A description of the total 
amount of the Plan Account's assets involved in cross-trade 
transactions during the period, (b) a description of Warburg 
International's cross-trade practices, if such practices have changed 
materially during the period covered by the summary, (c) a statement 
that the Independent Fiduciary's authorization of cross-trade 
transactions may be terminated upon receipt by Warburg International of 
written notice to that effect, and (d) a statement that the Independent 
Fiduciary's authorization of the Plan Account's participation in the 
cross-trade program will continue in effect unless it is terminated.
    8. The Accounts involved in cross-trade transactions will not 
include assets of any Plan established or maintained by Warburg 
International or its Affiliates to provide income to its employees or 
to result in a deferral of income by employees for periods extending to 
the termination of covered employment or beyond.
    Each employee benefit plan comprising a Plan Account participating 
in Warburg International's cross-trading program will have total assets 
equal to at least $25 million. In the case of multiple employee benefit 
plans maintained by a single employer or controlled group of employers, 
the $25 million requirement may be met by aggregating the assets of 
such plans if the assets are commingled for investment purposes in a 
single master trust.
    9. Warburg International states that a Plan Account's participation 
in its cross-trade program will also be subject to certain special 
conditions. In addition to requiring a general authorization of a Plan 
Account's participation in the cross-trade program, an Independent 
Fiduciary will specifically authorize each cross-trade transaction. Any 
such authorization will be effective only for a period of three 
business days and will be subject to certain pricing and volume 
limitations (as discussed in Paragraph 10 below). The authorization to 
proceed with the cross-trade transaction will be either oral or 
written. If a cross-trade transaction is authorized orally by an 
Independent Fiduciary, Warburg International will provide a written 
confirmation of the authorization in a manner reasonably calculated to 
be received by the Independent Fiduciary within one business day from 
the date of such authorization. The Independent Fiduciary will be sent 
a written confirmation of the cross-trade transaction, including the 
price at which it was executed, within ten days of the completion of 
the transaction.
    10. Warburg International states that a cross-trade transaction 
will be effected only where the trade involves less than five (5) 
percent of the aggregate average daily trading volume for the 
securities involved in the transaction for the week immediately 
preceding the authorization of the transaction. A cross-trade will 
exceed this limit only by express written or oral authorization of an 
Independent Fiduciary for each Plan Account involved, prior to the 
execution of the cross-trade. With respect to pricing, a cross-trade 
transaction will not be made at a price which differs by more than ten 
(10) percent from the price at the close on the day before specific 
authorization was provided by the Independent Fiduciary.
    11. Warburg International represents that it is conceivable that 
situations will arise in which it will be necessary to allocate cross-
trade opportunities among several Accounts. Warburg International will 
make these decisions pursuant to a non-discretionary pro-rata 
allocation system. For example, in the event that the number of shares 
of a particular security which a Selling Account needs to sell on a 
given day is less than the number of shares of such security which 
other Buying Accounts need to buy on that date, the cross-trade 
opportunity will be allocated among potential Buying Accounts on a pro-
rata basis. A similar procedure would apply where the number of shares 
of a particular security to be sold by Selling Accounts is more than 
the number of such shares which any Buying Accounts need to buy on that 
date. Thus, the Accounts participating in Warburg International's 
cross-trade program will have the opportunity to participate on a 
proportional basis in cross-trade [[Page 31520]] transactions during 
the operation of the program. Warburg International states that this 
aspect of the cross-trading program will be part of the information 
disclosed in writing to the fiduciaries of the Plan Accounts prior to 
their authorization for participation in the program.
    12. In summary, Warburg International represents that the proposed 
transactions will satisfy the statutory criteria of section 408(a) of 
the Act because, among other things: (a) An Independent Fiduciary will 
provide written authorization, which will be terminable at will, to 
Warburg International to permit the Plan Account to participate in the 
cross-trading program; (b) cross-trades will always be executed at the 
current market price of the security on the date of the transaction, as 
determined by an independent, third party source; (c) specific oral or 
written authorization will be provided by the Independent Fiduciary to 
Warburg International prior to each cross-trade transaction; (d) all 
securities involved in cross-trades will be securities for which there 
is a generally recognized market; (e) Warburg International will 
provide periodic reporting of the cross-trade transactions to the 
Independent Fiduciary; (f) the Plan Accounts will realize significant 
cost savings due to reduced brokerage commissions and avoidance of the 
bid and offer spread and will benefit from more efficient 
implementation of investment strategies; (g) each employee benefit plan 
comprising a Plan Account participating in the cross-trade will have 
total assets of at least $25 million or must be part of a master trust 
of plans maintained by a single employer or controlled group of 
employers which has at least $25 million in assets; (h) the cross-trade 
transactions will not include any assets of a Plan established or 
maintained by Warburg International or its Affiliates; and (i) neither 
Warburg International nor its Affiliates will receive any additional 
fees or other compensation as a result of the proposed cross-trade 
transactions.

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

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

    Signed at Washington, DC, this 9th day of June, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 95-14576 Filed 6-14-95; 8:45 am]
BILLING CODE 4510-29-P