[Federal Register Volume 60, Number 125 (Thursday, June 29, 1995)]
[Notices]
[Pages 33859-33872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16063]



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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09582, et al.]


Proposed Exemptions; Retirement Plan for Employees of United 
Jewish Appeal-Federation of Jewish Philanthropies of New York and 
Affiliated Agencies and Institutions (the Plan)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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

Written Comments and Hearing Requests

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

ADDRESSES: All written comments and requests 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. 

[[Page 33860]]


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.

Retirement Plan for Employees of United Jewish Appeal-Federation of 
Jewish Philanthropies of New York, Inc. and Affiliated Agencies and 
Institutions (the Plan) Located in New York, New York

[Application No. D-09582]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply effective May 29, 1990, to the past purchase and 
sale of certain securities (the Securities) on May 29, 1990, between 
the Plan and the endowment fund (the Fund) of the United Jewish Appeal-
Federation of Jewish Philanthropies of New York, Inc. (the Federation), 
a sponsor of the Plan and a party in interest with respect to the Plan; 
provided that the following conditions are satisfied:
    (a) The transfer of the Securities was a one-time cash transaction;
    (b) The transaction was at fair market value as determined by the 
closing prices on May 25, 1990, on the New York Stock Exchange (NYSE) 
and the American Stock Exchange (AMEX);
    (c) The Plan paid no commissions with respect to the transaction;
    (d) The Federation determined upon consultation with Delaware 
Investment Advisors (Delaware) to engage in the transaction;
    (e) The Securities transferred from the Fund to the Plan were all 
listed on either the NYSE or AMEX, and constituted exactly a 50% pro 
rata share of all the securities then owned by the Fund; and
    (f) Over a three plan year period, the Federation will contribute 
$513,009.39 to the Plan to make up the loss sustained by the Plan when 
the Securities were sold out of the Plan portfolio.

EFFECTIVE DATE: If granted this exemption will be effective as of May 
29, 1990.

Summary of Facts and Representations

    1. The Plan is a defined benefit multiple employer plan. As of 
September 30, 1993, the Plan had $76,919,425 million in net assets, and 
as of October 1, 1994, the Plan had approximately 5634 participants. 
Chemical Bank (formerly Manufacturers Hanover Trust Company) is the 
Plan's trustee.
    2. The Federation is a not-for-profit corporation which is exempt 
from federal tax under section 501(c)(3) of the Code. The Federation is 
a private, local voluntary human service organization. The Fund is a 
special general asset account of the Federation.1

    \1\ The Federation's consolidated assets are composed of amounts 
received from donor-created endowments and funds designated by the 
Federation's Board of Directors to provide for the Federation's 
long-term needs.
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    3. The investment committee (the Investment Committee) of the 
Federation appoints investment managers to manage the Fund's and the 
Plan's assets. The members of the Investment Committee are appointed by 
the Board of Directors of the Federation. Delaware Investment Advisors 
(Delaware), a division of Delaware Management Company Inc., served as 
an investment manager for the Fund from 1983 through January of 1993, 
and managed the Fund's assets of approximately $30 million. Fiduciary 
Trust Co. was the custodian for this account.
    4. The applicant represents that early in 1990, the Investment 
Committee decided that it wanted to hire Delaware to replace another 
investment manager, Delphi Management (Delphi), with respect to the 
management of approximately $10 million of the Plan's assets. At that 
time, the Investment Committee also determined that the total amount of 
the Federation related assets, including the assets of the Plan and the 
Fund, managed by any one investment manager should be limited. This 
would limit the risk to the portfolios of the Fund and the Plan and 
further protect the Federation, which as the Plan sponsor was 
ultimately responsible for any losses to the Plan. Because Delaware was 
already managing a desired maximum level of the Fund's assets, it was 
determined that one half of this desired maximum should be managed by 
Delaware for the Plan and one half managed by Delaware for the Fund. 
Fees charged by Delaware for its investment management services 
consisted of an annual charge (billed in quarterly installments) based 
upon the amount of assets under management.
    5. In April of 1990, James L. Rothkopf (Mr. Rothkopf), the chief 
financial officer of the Federation, informed Delaware that the 
Investment Committee wanted a portion of the Plan's assets at that time 
managed by Delphi, to be invested with Delaware. Mr. Rothkopf also 
indicated that to keep the total Federation related assets under 
Delaware management at the same level, the Fund investment with 
Delaware would be reduced to one-half the previous level and that one-
half of the Fund's investments would be transferred pro-rata to the 
Plan portfolio. Delaware indicated to the Investment Committee that it 
wanted the Plan's portfolio to be virtually identical to the Fund's 
portfolio.
    6. The purchase of Securities by the Plan from the Fund took place 
on May 29, 1990, at the direction of the Assistant Comptroller of the 
Federation. In order to accomplish the prescribed allocation, and to 
avoid the Plan paying any commissions on the acquisition of the 
Securities, approximately fifty percent (50%) of the amount of each 
Security held in the Fund portfolio was transferred from Fiduciary 
Trust Co., custodian for the Fund, into the Plan account at 
Manufacturers Hanover Trust Company, the custodian of the Plan's 
assets, and cash representing the fair market value of these Securities 
($10,577,756.77) was transferred to a portion of the Fund asset 
portfolio not 

[[Page 33861]]
managed by Delaware. All the Securities involved in the transaction 
were securities of companies listed on the NYSE, with the exception of 
one Security listed on the AMEX. The fair market value of the 
Securities was determined by using the exchanges' closing prices on 
Friday, May 25, 1990. It is represented that the Plan did not pay any 
fees related to the subject transaction.
    7. The applicant represents that the actual transfer of the 
Securities took place on Tuesday, May 29, 1990, because the prior 
business day Monday, May 28 was a legal holiday and therefore, there 
was no trading. The applicant represents that the closing price of the 
Securities on Friday, May 25, 1990, was effectively equal to the 
opening price of the Securities on Tuesday, May 29, 1990. Upon 
completion of the transaction, the Plan held legal title to the 
Securities acquired from the Fund. It is represented that at the time 
of the transfer, approximately 17% of the Plan's assets were involved 
in the transaction.
    8. Delaware represents that the Federation consummated the 
transaction upon facilitation by Delaware and approved the transfer of 
the Securities from the Fund to the Plan. In an affidavit submitted to 
the Department, Mr. Rothkopf of the Federation stated that Mr. Marion 
Dixon, a former money manager with Delaware who was responsible for the 
Fund portfolio and subsequently for the Plan portfolio, advised him 
that the initial Plan portfolio should represent 50 percent (50%) of 
the existing Fund portfolio. This would enable the Fund and the Plan to 
have identical investment portfolios, thereby achieving the portfolio 
structures desired by Mr. Dixon, and would also save brokerage 
commissions. Delaware represents that Mr. Dixon agreed that the initial 
portfolio for the Plan should contain substantially the same securities 
as were in the Fund portfolio at that time. Delaware represents that 
they were of the opinion then, as well as now, that the transfer 
transaction was in the best interest and protective of the Plan.
    9. The applicant states that between June 1990 and January 1993, 
Delaware sold all the Securities purchased by the Plan in the 
transaction subject to this exemption request. The determination of 
gains and losses on the sale of the Securities by the Plan was 
calculated on a ``first in first out'' basis. The total difference 
between the aggregate purchase price of the Securities by the Plan and 
the aggregate sale price of the Securities by the Plan, was an 
aggregate loss of $513,009.39. The applicant maintains that the Plan 
portfolio was a managed portfolio with transactions not necessarily 
based on individual stock profit or loss positions, but based on the 
portfolio's desired position. As such, stock was sold for a number of 
reasons, including availability of stock with a better return potential 
or less downside risk, diversity, cyclical markets, and a variety of 
other factors. In this regard, stocks were often sold prior to a profit 
realization because preferable alternative investments were available 
or concentrations of stock needed to be changed. However, the applicant 
represents that the Federation is now prepared to contribute to the 
Plan an amount equal to $513,009.39 over a three plan year period (the 
Contribution), in order to make up for the loss to the Plan. The 
Contribution will be made at the same time that the last installment of 
each annual contribution is made to the Plan for the applicable plan 
year.
    10. The applicant represents that subsequent to the transaction, 
both the Plan and the Federation were audited by a ``Big Six'' 
accounting firm, and the transaction was not identified by the auditors 
as being prohibited during either audit. In the summer of 1993, counsel 
for the Federation contacted the law firm of Proskauer Rose Goetz & 
Mendelson 2 (PRG&M) to discuss the Fund's and the Plan's claims in 
a class action settlement against the issuer of one of the Securities 
involved in the subject transaction. When the facts of the transaction 
surfaced in the discussion, it was questioned whether a prohibited 
transaction had occurred as a result of the Plan's purchase of the 
Securities from the Fund. PRG&M then commenced an investigation of the 
facts surrounding the transaction and the ERISA provisions involved. 
The applicant then filed an exemption request in this matter.

     2 This law firm was not counsel to the Federation nor the 
Plan at the time of the transaction.
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    11. The applicant has requested retroactive relief for the 
transaction which occurred on May 29, 1990, noting, among other things 
that: (1) The transaction was a one-time transfer of the Securities for 
cash; (2) the transaction was in the interest and protective of the 
Plan because the Plan was able to acquire the Securities at fair market 
value and not pay any commissions; and (3) the Securities represented a 
well-diversified portfolio of stock of recognized companies.
    12. In summary, the applicant represents that the transaction 
satisfies the statutory criteria of section 408(a) of the Act and 
section 4975(c)(2) of the Code because:
    (a) The transfer of the Securities was a one-time cash transaction;
    (b) The transaction was at fair market value as evidenced by the 
closing prices on May 25, 1990 on the NYSE and the AMEX;
    (c) The Plan paid no commissions with respect to the transaction;
    (d) The Federation determined upon consultation with Delaware to 
engage in the transaction;
    (e) The Securities transferred from the Fund to the Plan were all 
listed on either the NYSE or AMEX and constituted exactly a 50% pro 
rata share of all the securities then owned by the Fund; and
    (f) Over a three plan year period, the Federation will contribute 
$513,009.39 to the Plan to make up the loss sustained by the Plan when 
the Securities were sold out of the Plan portfolio.

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

General Motors Hourly-Rate Employes Pension Plan, General Motors 
Retirement Program for Salaried Employees (the Salaried Plan), Saturn 
Individual Retirement Plan for Represented Team Members, Saturn 
Personal Choices Retirement Plan for Non-Represented Team Members, and 
Employees' Retirement Plan for GMAC Mortgage Corporation (collectively, 
the Plans) Located in New York, New York

[Application Nos. D-09859 through D-09863]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted the restrictions of sections 406(a) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (D) of the Code, shall not 
apply, effective April 9, 1994, to the acquisition by the Plans of 
limited partnership interests (the Interests) in APA Excelsior III, 
L.P. from Metropolitan Life Insurance Company (Metropolitan), a party 
in interest with respect to the Plans; provided that the following 
conditions are satisfied:
    (A) All terms and conditions of the transaction were at least as 
favorable to the Plans as those which the Plans 

[[Page 33862]]
could obtain in an arm's-length transaction with an unrelated party;
    (B) Metropolitan is not, and has not been, a fiduciary with respect 
to any assets of the Plans involved in the transaction;
    (C) The transaction was a one-time transaction for cash in which 
the purchase price did not exceed the fair market value of the 
Interests;
    (D) The methodology for determining the fair market value of the 
Interests was in accordance with standards maintained by professional 
venture capital valuation specialists for the valuation of limited 
partnership interests in venture capital partnerships; and
    (E) Metropolitan did not participate in the Plans' determination of 
the fair market value of the Interests.

EFFECTIVE DATE: This exemption, if granted, will be effective as of 
April 9, 1994.

Summary of Facts and Representations

    Introduction: In April 1994, the Plans acquired limited partnership 
interests (the Interests) in A.P. Excelsior III, Limited Partnership 
(the Partnership) from Metropolitan Life Insurance Company 
(Metropolitan). This transaction occurred without a determination 
having been made that Metropolitan was a party in interest with respect 
to the Plans. Subsequently, the parties discovered that the entity from 
which the Plan acquired the Interests, Metropolitan, is a service-
provider party in interest with respect to certain of the Plans, and an 
exemption is now requested for the Plans' past acquisition of the 
Interests from Metropolitan, under the terms and conditions described 
herein.
    1. The Plans are defined benefit and defined contribution employee 
benefit plans maintained by General Motors Corporation and its 
affiliates (GM), with approximately 831,530 participants as of October 
1, 1994. The approximate fair market value of the total assets of the 
Plans as of May 31, 1994 was $41 billion. The assets of the Plans are 
maintained in two trusts (the Plans' Trusts): The General Motors 
Salaried Employees Pension Trust, which holds the assets of the 
Salaried Plan, and the General Motors Hourly-Rate Employees Pension 
Trust, which holds the assets of the other four Plans. The named 
fiduciary with respect to each Plan is the Finance Committee of the 
board of directors of GM (the Finance Committee).
    2. The Finance Committee has delegated certain fiduciary 
responsibilities to the Pension Investment Committee (the PIC), 
including the responsibility for allocating funds among asset classes 
in accordance with broad investment guidelines established by the 
Finance Committee and overseeing in-house investing for a portion of 
the assets of the trusts which fund the Plans. The PIC is comprised of 
executive officers of GM. The PIC carries out its investment oversight 
responsibility through the General Motors Investment Management 
Corporation (GMIMCO), a registered investment adviser under the 
Investment Advisers Act of 1940, as amended. Certain members of the PIC 
serve on the board of directors of GMIMCO. The Finance Committee 
reviews the actions of the PIC and GMIMCO on a periodic basis to 
evaluate performance and to assure that the Finance Committee's 
delegation of authority continues to be prudent.
    3. GMIMCO is involved in all aspects of the management of the 
Plans' assets, and its functions with respect to the Plans' involvement 
in private market transactions are executed by its private market 
investments staff (PMI Staff). The PMI Staff consists of twelve 
professionals (the PMI Staff) who research, document and negotiate 
private market transactions on behalf of the Plans, with the assistance 
of GMIMCO's legal staff. Under current procedures, all private market 
transactions subject to final approval by GM's in-house investment 
management function are directed to the PMI Staff for review, analysis 
and, if needed development. After an investment has been reviewed, 
analyzed and favorably approved by the PMI Staff, the additional levels 
of approval required for authorization of the investment depends upon 
the amount of the investment. Final approval authority for private 
market transactions rests with the PIC, for investments of amounts of 
$75 million and under, and the Finance Committee, for investments of 
amounts over $75 million. The PIC's final approval authority for the 
investment of amounts of $30 million or less is exercised by a special 
PIC subgroup, the Private Investment Review Team (the PIRT).
    4. The current assets of the Plans under the authority of the PIC 
include the Plans' Trusts' interests in the First Plaza Group Trust 
(First Plaza). First Plaza, which invests solely in private market 
investments, is a group trust maintained by GM on behalf of the Plans' 
Trusts, each of which owns approximately 50 percent. The trustee of 
First Plaza is Mellon Bank, N.A. (Mellon Bank). On April 19, 1994, 
pursuant to the direction of the PIC and GMIMCO, First Plaza invested 
$2,465,784 in the APA Excelsior III, L.P. (the Partnership) by 
purchasing limited partnership interests (the Interests) from 
Metropolitan Life Insurance Company (Metropolitan). The Interests 
purchased by the Plan represent 4.2 percent of the Partnership's total 
limited partnership interests. The Partnership is a venture capital 
operating company, the purpose of which is to generate long-term 
capital appreciation by acquiring a broad portfolio of equity-oriented 
investment positions in quoted and nonquoted companies in a variety of 
industries in the United States. As a result of such purchase, First 
Plaza succeeded to the obligation to make additional capital 
contributions of $1,150,000 to the Partnership. GM represents that the 
Interests represent a total capital contributions commitment of $5 
million to the Partnership, $3,850,000 of which had been paid by 
Metropolitan prior to First Plaza's purchase of the Interests. GM 
states that the difference between the $2,465,784 paid for the 
Interests by First Plaza and the $3,850,000 invested in the Interests 
by Metropolitan represents (a) distributions Metropolitan had already 
received from the Partnership, and (b) a discount negotiated by GMIMCO 
on behalf of First Plaza. GM represents that in June 1994, the PIC and 
GMIMCO and Metropolitan became aware that the transaction was a 
prohibited transaction under the Act, due to the fact that Metropolitan 
is a service-provider party in interest with respect to the Plans. The 
PIC and GMIMCO are requesting an exemption for the Plans' past purchase 
of the Interests from Metropolitan, effective April 9, 1994, under the 
terms and conditions described herein.
    5. Metropolitan is a mutual life insurance company organized under 
the laws of the state of New York, with total assets under management 
of approximately $163.4 billion as of December 31, 1993. Metropolitan 
represents that it offers a wide variety of insurance products, asset 
management and administrative services for thousands of employee 
benefit plans subject to the Act. GM and Metropolitan represent that 
Metropolitan is totally independent from GM, except as provider to the 
Plans of services which are not involved in the subject transaction. GM 
represents that Metropolitan's services to the Plans are described as 
follows:
    (a) In 1940, the General Motors Retirement Program for Salaried 
Employee's was funded by a deferred group annuity contract under which 
annuities were purchased from Metropolitan and other insurance 
companies. Effective January 1, 1977, 

[[Page 33863]]
the funding under the deferred group annuity was changed to a deposit 
administration contract with immediate participation guarantee. It 
remains in effect but no additional funds have been deposited in the 
contract since 1985.
    (b) Metropolitan coordinates the transfer of all insured after-tax 
employee contributions to the Plans' trustee for distribution upon a 
Plan participant's retirement.
    (c) Since 1988, Metropolitan has served as recordkeeper under the 
Saturn Individual Retirement Plan for Represented Team Members and, 
upon request, provides annuities with respect to employee contributions 
under the Saturn Personal Choices Retirement Plan for Non-Represented 
Team Members.
    GM represents that neither Metropolitan nor any of its affiliates 
is a fiduciary with respect to any of the Plans' assets which were used 
to purchase the Interests or any assets to be used to pay the remaining 
capital contributions with respect to the Interests. Metropolitan 
represents that it maintains procedures for determining whether a 
proposed transaction is prohibited under the Act, and that such 
procedures were inadvertently not utilized in advance of the subject 
transaction.
    6. GM and Metropolitan represent that the transaction was 
negotiated at arm's length and in good faith upon the mistaken 
assumption that Metropolitan was not a party in interest with respect 
to the Plans, and, accordingly, that the parties were unaware that the 
transaction with First Plaza was prohibited under section 406(a) of the 
Act. GM represents that the PIC and GMIMCO maintain comprehensive and 
up-to-date lists of parties in interest with respect to the Plans in 
order to guard against inadvertent party in interest transactions, and 
that Metropolitan was reflected in such lists due to its holding and 
investment of employee after-tax contributions under the Plans under 
both separate account and general account arrangements. GM maintains 
that, as with all investments directed by the PIC and GMIMCO, the 
normal due diligence procedures were followed. GM notes that the 
investment contracts with Metropolitan were entered into almost 50 
years ago and are not administered by the PMI Staff, which effected the 
purchase of the Interests from Metropolitan. As a result, Metropolitan 
was not recognized by the PMI Staff as a party in interest, and the PMI 
staff did not refer to the party in interest list in advance of the 
transaction. GM also notes that the current party in interest list 
indicates 1,375 entities which are parties in interest with respect to 
the Plans. GM represents that the staffs and attorneys of the PIC and 
GMIMCO and the PIRT each believed that another responsible party had 
reviewed the party in interest list as the transaction proceeded.
    7. GM represents that the potential purchase of the Interests by 
First Plaza was an opportunity which was brought to the PMI Staff by 
the general partner of the Partnership, and not by Metropolitan. GM 
states that this recommendation was subject to the same thorough 
investigation and analysis by the PMI Staff as any other private market 
transaction proposed for the Plans. GM represents that all aspects of 
the investment analysis, the determination and negotiation of the 
purchase, and the continued monitoring of the investment have proceeded 
strictly in accordance with the procedures which the PIC and GMIMCO 
maintain to ensure that such investments meet the Plans' investment 
criteria and do not subject the Plans to any unnecessary risk.
    8. Valuation of the Interests: GM represents that the purchase 
price paid for the Interests was not in excess of the fair market value 
of the Interests as of the sale date, as determined by GMIMCO's PMI 
Staff contemporaneously with the transaction. In this regard, GM 
represents that the PMI Staff utilized the valuation methodology 
utilized by GMIMCO in any transaction requiring the calculation of the 
fair market value of interests in a venture capital fund. GM describes 
the method of determining the fair market value of the Interests as 
follows:
    The PMI Staff requested and received from the general partner of 
the Partnership (the General Partner) the most recent statement of the 
value of Metropolitan's capital account in the Partnership. The PMI 
Staff adjusted this value by adding all drawdowns to the Partnership by 
Metropolitan, and subtracting all distributions from the Partnership to 
Metropolitan, since the date of the statement. Each public company in 
the Partnership's portfolio was valued using the latest available 
public market value, and then an appropriate liquidity discount was 
taken. The specific discount rate applied to each such portfolio 
company depended on how soon it was then anticipated that its security 
would be distributed from the Partnership to the limited partners.
    The PMI Staff requested and received information from the General 
Partner regarding the private (i.e. non-publicly-traded) investments in 
the Partnership. Using this information and other information which the 
PMI Staff was able to obtain from other sources, the private 
investments in the Partnership's portfolio were valued by the PMI 
Staff. In valuing each such company, the PMI Staff elected to use 
conservative standards and, in fact, valued some companies at zero, not 
because that was the actual value, but because there was not enough 
information available at that time to make a reasonable determination 
of fair market value. GM represents that such ``zero valuation'' is 
standard practice of financial analysis in the venture capital 
industry.
    With respect to the Partnership's holdings of interests in 
publicly-traded companies and those non-public companies for which 
significant financial performance information was available, the PMI 
Staff projected what each company would be worth in the future and then 
discounted that amount back to the present using an appropriate 
discount rate. The future projections were based on the PMI Staff's 
knowledge of each particular company, including projected cash flow of 
the company, probability of when and if the company would be going 
public, the company's business plan, the anticipated timing of 
distribution of a company's securities after the company has gone 
public or the sale proceeds from the sale of the company to a third 
party, and information regarding the General Partner.
    After determining the discounted values of the portfolio companies 
and the adjusted book value of the Partnership's limited partnership 
interests, the PMI Staff entered into negotiations with Metropolitan 
which resulted in a purchase price which was not more than the PMI 
Staff's determination of the fair market value of the Interests.
    9. GM represents that the process and methodology utilized by the 
PMI Staff, described above, reflects the venture capital industry 
standards for evaluation. Specifically, GM states that GMIMCO developed 
this methodology in consultations with two widely-known sponsors of 
venture capital funds, Brinson Partners, Inc. (Brinson) and Chancellor 
Capital Management, Inc., each of which uses the same methodology when 
purchasing limited partnership interests in the secondary market. 
Brinson, a registered investment adviser which maintains a fund 
investing solely in limited partnership interests sold on the secondary 
market, has reviewed and evaluated the methodology utilized by the PMI 
Staff in determining the fair market value of the Interests for 
purposes of First Plaza's 

[[Page 33864]]
purchase of the Interests from Metropolitan. Brinson represents that 
the methodology used by the PMI Staff was appropriate and reasonable, 
and that this conclusion is based on Brinson's experience as a seasoned 
long-term venture capital and secondary partnership investor. GM 
represents that at no time was Metropolitan a part of the process by 
which the PMI Staff determined the fair market value of the Interests.
    10. In summary, the applicants represent that the criteria of 
section 408(a) of the Act are satisfied in the subject transaction for 
the following reasons: (1) The transaction was a one-time transaction 
for cash; (2) Metropolitan was not and is not a fiduciary with respect 
to any assets involved in the transaction; (3) The purchase price did 
not exceed the Interests' fair market value, as determined by the PMI 
Staff; (4) The fair market value of the Interests was determined by the 
PMI Staff according to GMIMCO's standard procedures for valuation of 
interests in venture capital funds; and (5) Brinson determined that the 
methodology utilized by the PMI Staff in determining the Interests' 
fair market value was appropriate and reasonable.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)
First and Farmers Bank of Somerset, Inc. (the Bank) Located in 
Somerset, Kentucky

[Application Numbers D-09921 through D-09926]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and 
406(b)(2) of the Act and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1) (A) 
through (E) of the Code, shall not apply, as of April 25, 1995, to the 
cash sale of certain collateralized mortgage obligations (CMOs) held by 
six employee benefit plans for which the Bank acts as trustee (the 
Plans) to the Bank, a party in interest with respect to the Plans.
    This proposed exemption is subject to the following conditions: (1) 
Each sale was a one-time transaction for cash; (2) Each Plan received 
an amount that was equal to the greater of: (a) the outstanding 
principal balance for each CMO owned by the Plans, plus accrued but 
unpaid interest, at the time of the sale, (b) the amortized cost for 
each CMO owned by the Plans, plus accrued but unpaid interest, as 
determined by the Bank on the date of the sale; or (c) the fair market 
value of each CMO owned by the Plans as determined by the Bank on the 
basis of reasonable inquiry from at least three sources that are 
broker-dealers or pricing services independent of the Bank at the time 
of the sale; (3) The Plans did not pay any commissions or other 
expenses with respect to the sale; (4) The Bank, as trustee of the 
Plans, determined that the sale of the CMOs is in the best interests of 
each of the Plans and their participants and beneficiaries at the time 
of the transaction; (5) The Bank took all appropriate actions necessary 
to safeguard the interests of the Plans and their participants and 
beneficiaries in connection with the transactions; and (6) Each Plan 
received a reasonable rate of return on the CMOs during the period of 
time that it held the CMOs.

EFFECTIVE DATE: If granted, this proposed exemption would be effective 
April 25, 1995.

Summary of Facts and Representations

    1. The Bank is a Kentucky chartered commercial bank that was 
organized in November of 1870. First and Farmers Bancshares, Inc., a 
one-bank holding company incorporated in Kentucky in 1983, owns 80.43 
percent of the Bank. The Bank offers the traditional services of a 
community bank (e.g., checking, savings, loans and trusts) to both 
individuals and entities in the Somerset area. The Bank serves as 
trustee of the Plans and has investment discretion with respect to the 
assets of the Plans.
    The Plans are the Adams and Adams Keogh Retirement Plan (the Adams 
Plan); the Lake Cumberland Home Health Agency Employee Retirement Plan 
(the Lake Plan); the Bank of Cumberland Money Purchase Pension Plan 
(the Cumberland Plan); the Childrens Clinic Money Purchase Pension Plan 
(the Clinic Plan); the Ruckels Farm Supply Defined Contribution Plan 
(the Ruckels Plan); and the First and Farmers Bank Employee Retirement 
Plan (the Bank Plan). All of the Plans are defined contribution plans 
except the Bank Plan, which is a defined benefit plan.
    As of December 30, 1994, the Adams Plan had seven participants and 
total assets of $377,074; the Lake Plan had 271 participants and total 
assets of $939,926; the Cumberland Plan had twenty-one participants and 
total assets of $520,996; the Clinic Plan had fifteen participants and 
total assets of $593,925; the Ruckels Plan had ten participants and 
total assets of $147,207; and the Bank Plan had 124 participants and 
total assets of $662,513. Thus, as of December 30, 1994, the Plans had 
448 participants and total assets of approximately $3,241,641.
    2. The Bank represents that at various times during September, 
November and December of 1993, assets of the Plans were invested in the 
CMOs, which were purchased from broker-dealers that were independent of 
the Plans as well as the Bank and its affiliates. The CMOs are 
investment products through which investors purchase mortgage-backed 
securities that represent interests in a pool of residential mortgage 
loans. In general, investors receive payments of principal and interest 
or, in some cases, either principal or interest only, depending upon 
the type of security purchased. Interest payments change monthly in 
relation to a specific index, such as the London Interbank Offered Rate 
(LIBOR), contained in a formula used to calculate the interest rate for 
such securities. Principal payments vary in amount and timing depending 
upon how quickly the various mortgage-backed securities prepay due to 
the prepayment speed of the mortgages in the mortgage pools. The 
repayment of principal and interest is usually guaranteed by various 
U.S. Government Agencies, such as the Federal National Mortgage 
Association (FNMA or ``Fannie Mae'').
    3. The CMOs are described as follows: (a) CUSIP 31358JAU5, FNMA 
Guaranteed REMIC Pass-Through Certificates, Fannie Mae REMIC Trust 
1991-110, Class E; (b) CUSIP 31358NCV2, FNMA Guaranteed REMIC Pass-
Through Certificates, Fannie Mae REMIC Trust 1992-96, Class E; (c) 
CUSIP 31359GDX1, FNMA Guaranteed REMIC Pass-Through Certificates, 
Fannie Mae REMIC Trust 1993-225, Class SM; (d) CUSIP 31359GDTO, FNMA 
Guaranteed REMIC Pass-Through Certificates, Fannie Mae REMIC Trust 
1993-225, Class SO.3

     3  The applicant states further that if a plan acquires a 
``guaranteed governmental mortgage pool certificate'', the plan's 
assets include the certificate but not any of the mortgages 
underlying such certificate (see 29 CFR 2510.3-101(i)). A 
``guaranteed governmental mortgage pool certificate'' is a 
certificate (i) that is backed by, or evidences an interest in, 
specified mortgages or participation interests, and (ii) whose 
interest and principal payments are guaranteed by the Government 
National Mortgage Association (GNMA), the Federal Home Loan Mortgage 
Corporation (FHLMC or ``Freddie Mac''), or FNMA. Thus, the applicant 
represents that since all of the CMOs have interest and principal 
payments payable under the CMOs guaranteed by FNMA, the 

[[Page 33865]]
assets of the Plans do not include any of the mortgages underlying such 
CMOs.
---------------------------------------------------------------------------

    All of the CMOs mentioned above are structured as a real estate 
mortgage investment conduits (``REMIC'') under section 860D of the 
Code. The various classes of certificates receive principal and, 
possibly, interest payments in differing portions and at differing 
times from the cash flows provided from the monthly payments received 
on the underlying mortgages.
    The repayment of principal from the underlying mortgages fluctuates 
significantly. To facilitate the structuring of such REMICs, the 
prepayments on the pools of mortgages are commonly measured relative to 
a variety of prepayment models. The model used for these REMICs is the 
Public Securities Association's standard prepayment model or ``PSA''. 
This model assumes that mortgages will prepay at an annual rate of .2 
percent in the first month after origination, then the prepayment rate 
increases at an annual rate of .2 percent per month up to the 30th 
month after origination and then the prepayment rate is constant at 6 
percent per annum in the 30th and later months. This assumption is 
called 100 PSA.
    The REMIC structure allocates principal payments to the various 
classes or ``tranches'' in varying amounts as principal payments are 
made accordingly to the allocations specified in the prospectuses. The 
exact date of repayment of all principal to any REMIC class is not 
known until the mortgage-backed securities are paid in full. The 
maturity for the various classes is referred to as the ``weighted 
average life'' (WAL). The WAL of a class refers to the average amount 
of time, expressed in years, which will elapse from the date of its 
issuance until each dollar of principal has been repaid to the investor 
based on the PSA assumption. The holders of all classes will receive 
all of their principal back. However, the timing of when that principal 
is returned is dependent on how quickly the underlying mortgages are 
repaid or refinanced. In no event will the time for the recovery of 
principal exceed the final maturity date of the underlying mortgages.
    Each month the monthly payments on the underlying mortgages are 
collected and distributed to the holders of the various REMIC classes. 
Depending upon the structure of the REMIC, interest may be paid monthly 
according to a specific formula. The CMOs owned by the Plans, described 
in further detail below, are either ``principal only'' or ``inverse 
floaters'' indexed to one month LIBOR.
    Principal only bonds are similar to Series E savings bonds in that 
the investor purchases the bond at a discount and receives the 
principal cash flow off the collateral. The difference in the principal 
amount invested and the face value equates to the investment's yield. 
The timing of the cash flows received determines the ultimate yield on 
the investment. With a principal only bond, the faster the collateral 
pays down, the higher the yield the investor receives. Income is 
recognized by accreting the discount over the expected life of the 
security; however, there are no regular interest payments received on 
principal only bonds. There is no loss of principal because the 
investor will ultimately receive face value. However, because there is 
no guarantee as to the timing of the cash flows, the bond's ultimate 
yield is unknown.
    The remaining CMOs are ``inverse floaters'' so described, because 
the formulas used to calculate the interest payments, which adjust 
monthly for each certificate, usually raise the rate when the index 
falls and lower the rate when the index rises. ``LIBOR'' refers to the 
arithmetic mean of the London Interbank offered quotations for one-
month Eurodollar deposits. LIBOR moves up or down as interest rates 
move up or down. The movement of LIBOR has an inverse relationship with 
the interest paid on all inverse floating rate classes.
    The Bank, as trustee of the Plans, purchased all of the CMOs from 
Andrew F. Cashiola of Government Securities Corporation of Texas, 
located in Houston, Texas, and Randy Stevens of Hart Securities, Inc., 
located in Houston, Texas. The Bank states that neither the brokers 
(i.e. Mr. Cashiola or Mr. Stevens) nor their brokerage firms have any 
relationship to the Plans, the employers that maintain the Plans, the 
Bank or any of its affiliates.
    A description of each CMOs, including the respective interest rate 
formulas, WAL and PSA assumptions are set forth below in the Appendix.
    4. At the time of the purchase of the CMOs by the Bank, as trustee 
of the Plans, the Bank anticipated that each CMO would be retired 
within one to three years of the date of purchase due to prepayments of 
the underlying mortgages in each pool as obligors refinanced their 
mortgages at lower interest rates. Because of recent increases in 
interest rates, the market value of the CMOs had decreased 
significantly. On April 25, 1995, the Bank obtained bids to determine 
the fair market value of each CMO held by the Plans on the date of sale 
from three different independent broker-dealers--PNC Securities in 
Louisville, Kentucky; Commerce Union Investments in Memphis, Tennessee; 
and First Tennessee Corporation in Memphis, Tennessee (the Broker-
Dealers). The Bank states that as of the date of the sale, the Broker-
Dealers were not related to, or associated with, the Bank or the Plans. 
The Broker-Dealers provided the following bids as of April 25, 1995: 
4

     4 The Broker-Dealers' bids shown in the table represent a price 
quoted per $100 of principal. To determine the fair market value for 
each CMO based on the average bid quoted, the par value of the CMO 
would be multiplied by the particular quote, expressed as a 
percentage of 100. For example, if the par value of the CMO was 
$10,000 and the average bid for the CMO on April 25, 1995 was $39.50 
per $100 of principal, the quoted price would have been $3950 since 
$10,000  x  .3950 = $3950.

                                                                                                                
----------------------------------------------------------------------------------------------------------------
                                                                                                        Average 
                  CUSIP No.                     PNC Securities     Commerce Union    First Tennessee      bid   
----------------------------------------------------------------------------------------------------------------
31358JAU5...................................              35.00              37.00              46.50      39.50
31358NCV2...................................              42.00              37.00              39.50      39.50
31359GDT0...................................              29.00              29.75              27.25      28.67
31359GDX1...................................              14.00              20.00              24.50      19.50
----------------------------------------------------------------------------------------------------------------

    Based on the pricing information obtained from the Broker-Dealers, 
the Bank represents that the fair market value of the CMOs was 
significantly below the original purchase price of the CMOs (as noted 
in the first table below in Representation #7). The expectation of 
additional interest rate increases in the near future caused the Bank 
to believe that the CMOs would not appreciate in the near term. As a 
result of these changing market conditions, the Bank anticipated that 
the CMOs will not be retired for fifteen to twenty years due to the 
slowing of the prepayment speed because of the recent increases in the 
interest rates.5 

[[Page 33866]]


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

    5. Under the terms of the Plans and the applicable law, a Plan 
participant who retires or terminates employment is eligible to receive 
a distribution of the value of his or her account in the Plan, sometime 
immediately following retirement or termination. For purposes of this 
distribution, the value of the participant's account is the value of 
the account as of the Plan's last valuation date. If the Plans 
continued to hold the CMOs, the value of each participant's account, as 
of the valuation date, would reflect the recent decreases in fair 
market value of the CMOs. In order to mitigate such potential losses, 
the Bank purchased the CMOs on April 25, 1995 from the Plans at an 
amount, which in each case was equal to the greater of: (a) The 
outstanding principal balance for each CMO owned by the Plans, plus 
accrued but unpaid interest, at the time of the sale, (b) the amortized 
cost for each CMO owned by the Plans, plus accrued but unpaid interest, 
as determined by the Bank on the date of sale; or (c) the fair market 
value of each CMO owned by the Plans on the basis of reasonable inquiry 
from at least three sources that are broker-dealers or pricing services 
independent of the Bank.
    6. The Bank calculated the value of the CMOs held by the Plans, as 
of April 25, 1995, using an amortized cost computation. The Bank states 
that the computation of the amortized cost was arrived at by a series 
of computations. First, the Bank determined the amount of the discount 
paid upon purchase (Purchase price--100 = Discount). The par value or 
face value of each CMO was 100. The Bank states that any discount must 
be allocated monthly in order to be properly matched to the principal 
payments to be received over the life of the investment. Also, any 
discount must be allocated monthly in order to properly account for the 
income to be earned over the life of the investment. The number of 
months to which the Bank allocated each discount was determined by the 
WAL for each CMO at the time of purchase (expressed in years) 
multiplied by twelve (WAL  x  12 = amortizing months).6 Then, the 
Bank determined the amount of each discount to be allocated to each 
month by dividing each discount by the number of amortizing months. The 
Bank determined the number of months remaining in the life of each CMO 
by subtracting from the number of amortizing months the number of 
months that the Plan actually held each CMO. The Bank states that the 
remaining months were then multiplied by each monthly discount amount 
to arrive at the discount balance for each CMO. The discount balance 
was added to the par value for each CMO (i.e., 100) to arrive at the 
amortized cost remaining for each CMO. Thus, the Bank states that the 
formula it used for calculating amortized cost was as follows: 7

    \6\ As noted previously in Representation #3, the WAL for a CMO 
is determined at the time of purchase based on various assumptions 
about the speed of principal repayments and interest rate changes, 
using financial data provided by independent sources (such as 
Bloomberg Financial Markets). The Bank states that changes to the 
formula for calculating the amortized cost based on WAL assumptions 
other than at the time of purchase would not provide an 
administratively acceptable method of allocating the discount for a 
CMO because such a method would require constant adjustments which 
are not material to the concept of income recognition as it relates 
to CMOs.
    \7\ For example, assume that a particular CMO investment has 
been held by a Plan for 6 months. If the WAL was 2.02 years and the 
cost was 90 based on the par value being 100, the formula would be:
    [[(90-100)/(2.02  x  12)]  x  [(2.02  x  12) - 6)]] + 100
      = [(-10/24.24)  x  (24.24 - 6)] + 100
      = (-.4125413  x  18.24) + 100
      = -7.5247533 + 100
      = 92.475247

    As the formula indicates, the amortized cost using the average 
life at purchase would be $92.475247 as compared to the actual cost 
of $90.00. Therefore, the Bank states that the amortized cost 
formula will cause the Plan to be paid an amount for this CMO 
investment which is slightly more than the Plan's original cost 
(i.e. basis).
---------------------------------------------------------------------------

    7. The Bank also calculated the remaining principal balance, plus 
accrued but unpaid interest, on the CMO investments held by each Plan 
as of April 25, 1995, based on the original cost of the securities and 
the principal and interest payments received by the Plans through that 
date. As shown on the table below, the Bank represents that, as of 
April 25, 1995, all of the Plans would have received more than the 
remaining principal balances (plus accrued but unpaid interest) on 
their CMO investments by using the Bank's amortized cost computation 
for the CMOs. In addition, the table below shows the fair market values 
of the CMOs held by each Plan, based on the Bank's solicitation of bids 
from the Broker-Dealers.

------------------------------------------------------------------------
               Plan                Amort. cost   Prin. bal.   Mkt. value
------------------------------------------------------------------------
Adams Plan.......................      $62,321      $53,845      $19,650
Lake Plan........................      259,723      225,534       80,643
Cumberland Plan..................      132,126      111,662       34,889
Clinic Plan......................      139,288      116,543       30,108
Ruckels Plan.....................       14,466       11,698        2,925
Bank Plan........................      243,234      210,076       72,895
------------------------------------------------------------------------

    The Bank also determined that, as of April 25, 1995, a sales price 
for the CMOs held by each Plan based on amortized cost, plus the total 
principal and interest payments received by the Plans through the date 
of sale, produced a total return to the Plans that exceeded the Plans' 
total original cost for the CMOs.

                                                                        

[[Page 33867]]
----------------------------------------------------------------------------------------------------------------
                                                   Interest    Principal                   Total       Original 
                      Plan                         received     received   Amort. cost    receipts       cost   
----------------------------------------------------------------------------------------------------------------
Adams Plan.....................................       $4,080  ...........      $62,321      $66,401      $57,925
Lake Plan......................................       18,117       15,689      259,723      293,529      259,273
Cumberland Plan................................       10,199       18,826      132,126      161,151      140,688
Clinic Plan....................................       12,376  ...........      139,288      151,664      128,884
Ruckels Plan...................................        1,531  ...........       14,466       15,997       13,228
Bank Plan......................................       17,513       20,395      243,234      281,142      247,927
----------------------------------------------------------------------------------------------------------------



    The Bank represents that each Plan received a reasonable rate of 
return on the CMOs during the period of time that it held the CMOs. In 
this regard, the Bank states that the annualized weighted average rate 
of return received by each Plan on its CMOs, net of the principal 
investment, was as follows: (i) 14.28% for the Adams Plan; (ii) 13.57% 
for the Lake Plan; (iii) 16.62% for the Cumberland Plan; (iv) 17.91% 
for the Clinic Plan; (v) 21.53% for the Ruckels Plan; and (vi) 14.16% 
for the Bank Plan.8

    \8\ The formula for the annualized rate of return for the months 
held was computed for each CMO as follows: [[((Interest Collected + 
Accretion Income) / Number of Months Held)  x  12] / Total Cost]. 
The term ``Accretion Income'' represents the accretion of the 
discount received off of the face value of each CMO allocated to the 
number of months each CMO was held. To arrive at an annualized 
weighted average rate of return for each Plan, the annualized rate 
of return for each CMO was calculated to reflect the return of each 
CMO held by each Plan. The individual CMOs held by each Plan were 
``weighted'' according to the amount invested to compute the total 
weighted average rate of return for each Plan.
---------------------------------------------------------------------------

    Based on the Bank's determination that the amortized cost method 
resulted in the greatest sales price as of April 25, 1995, the Bank 
purchased the CMOs from the Plans on April 25, 1995 at each CMOs' 
amortized cost for a total of $851,158.
    8. The Bank, as trustee of the Plans, states that the sale of the 
CMOs was in the best interests of the Plans and their participants and 
beneficiaries. The Bank states that the sale allowed the Plan 
participants to insulate themselves from further decreases in the fair 
market value of the CMOs and to mitigate any losses. In addition, the 
Bank states that the sale of the CMOs shifted the consequences 
associated with selling the CMOs before their retirement from the Plan 
participants to the Bank.
    9. The Bank represents that it took all appropriate actions 
necessary to safeguard the interests of the Plans and their 
participants and beneficiaries in connection with the sale of the CMOs. 
The Bank ensures that each Plan received the appropriate amount of cash 
from the Bank in exchange for such Plan's CMOs on April 25, 1995. The 
Bank also ensures that the Plans did not pay any commissions or other 
expenses in connection with the sale of the CMOs to the Bank.
    10. In summary, the Bank represents that the sale satisfied the 
statutory criteria of section 408(a) of the Act and section 4975 of the 
Code because: (a) Each sale was a one-time transaction for cash; (b) 
Each Plan received an amount that was equal to the greater of: (i) The 
outstanding principal balance for each CMO owned by the Plan, plus 
accrued but unpaid interest, at the time of the sale; (ii) the 
amortized cost for each CMO owned by the Plans, plus accrued but unpaid 
interest, as determined by the Bank on the date of sale; or (iii) the 
fair market value of each CMO owned by the Plan as determined by the 
Bank on the basis of reasonable inquiry from at least three sources 
that are broker-dealers or pricing services independent of the Bank; 
(c) The Plans did not pay any commissions or other expenses with 
respect to the sale; (d) The Bank, as trustee of the Plans, determined 
that the sale of the CMOs would be in the best interests of each Plan 
and its participants and beneficiaries; (e) The Bank took all 
appropriate actions necessary to safeguard the interests of the Plans 
and their participants and beneficiaries in connection with the 
proposed transactions; and (f) Each Plan received a reasonable rate of 
return on the CMOs during the period of time it held the CMOs.

Notice to Interested Persons

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

Appendix

    A. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae 
REMIC Trust 1991-110, Class E were issued by Fannie Mae as part of an 
issue of pass-through certificates with nine various classes in the 
total amount of $200,010,000. The Bank, as trustee of the Plans, 
purchased portions of one of those classes. The Certificates are 
secured by first lien residential mortgages with an original term to 
maturity of 360 months or less.
    This REMIC uses a 300 PSA assumption regarding principal repayment 
(3 times 100 PSA). The WAL for the E class based on a 300 PSA was 10.9 
years at the time of purchase.
    This REMIC is a principal only bond and, therefore, does not bear 
interest. The initial interest rate and final distribution date for 
class E was 9.1 percent and May of 2021, respectively.
    B. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae 
REMIC Trust 1992-96, Class B were issued by Fannie Mae as part of an 
issue of pass-through certificates with six various classes in the 
total amount of $300 million. The Bank, as trustee of the Plans, 
purchased portions of one of those classes. The Certificates are 
secured by first lien residential mortgages with an original term to 
maturity of 360 months or less.
    This REMIC uses a 375 PSA assumption regarding principal repayment 
(3.75 times 100 PSA). The WAL for the B class based on a 375 PSA was 
5.9 years at the time of purchase.
    This REMIC is a principal only bond and, therefore, does not bear 
interest. The initial interest rate and final distribution date for 
class B was 8.3 percent and May of 2022, respectively.
    C. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae 
REMIC Trust 1993-225, Classes SM and SO were issued by Fannie Mae as 
part of an issue of pass-through certificates with 130 various classes 
in the total amount of $3,102,000,000. The Bank, as trustee of the 
Plans, purchased a portion of one class. The Certificates are secured 
by first lien residential mortgages with an original term to maturity 
of 360 months or less. 

[[Page 33868]]

    This REMIC uses a 200 PSA assumption regarding principal repayment 
(2 times 100 PSA). The WAL for class SM and SO based on a 200 PSA was 
20.2 years and 9.4 years, respectively, at the time of purchase.
    The formula for the interest on class SM is 
27.7289%-(LIBOR x 4.26589) with a minimum rate of 0.0% and a maximum 
rate of 27.7289%.9 For class SO, the interest is 23.1358% - 
(LIBOR x 3.30495) with a minimum rate of 0.0% and a maximum rate of 
23.135. As an inverse floater, the movement of LIBOR has an inverse 
relationship on the interest paid on all inverse floating rate classes. 
The initial interest rates for the SM and SO classes were 14.92206% and 
12.60047, respectively. The final distribution dates for the SM and SO 
classes were December 2023 and November 2022, respectively. The 
interest rate for the SM class can drop to 0.0% if LIBOR reaches 6.5% 
or higher. The interest rate for the SO class can drop to 0.0% if LIBOR 
reaches 7.0% or higher.

    \9\ ``LIBOR'' refers to the arithmetic mean of the London 
interbank offered quotations for one-month Eurodollar deposits. 
LIBOR moves up or down as interest rates move up or down. The 
movement of LIBOR has an inverse relationship on the interest paid 
on all inverse floating rate classes.
---------------------------------------------------------------------------

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

[Application No. D-09953]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, PaineWebber Incorporated and each of its affiliates 
(collectively, PaineWebber), shall not be precluded from functioning as 
a ``qualified professional asset manager'' pursuant to Prohibited 
Transaction Class Exemption 84-14 (PTCE 84-14, 49 FR 9494, March 13, 
1984) solely because of a failure to satisfy section I(g) of PTCE 84-
14, as a result of General Electric Company's ownership interest in 
PaineWebber, including any current or future affiliate of PaineWebber 
which is, or in the future may become, eligible to serve as a QPAM 
under PTCE 84-14; provided the following conditions are satisfied:
    (A) This exemption is not applicable to any affiliation by 
PaineWebber with any person or entity convicted of any of the felonies 
described in part I(g) of PTCE 84-14, other than G.E; and
    (B) This exemption is not applicable with respect to any 
convictions of G.E. for felonies described in part I(g) of PTCE 84-14 
other than those involved in the G.E. Felonies, described below.

Summary of Facts and Representations

    Introduction: General Electric Company (G.E.), an approximately 22 
percent owner of PaineWebber Group Inc. (P.G.I.), has been convicted 
during the past ten years of certain felonies relating to G.E.'s 
government contracts operations prior to its acquisition of interests 
in P.G.I. Because G.E. acquired ownership interests in P.G.I. during 
1994, the felony convictions could bar P.G.I. and its wholly-owned 
subsidiaries from acting as ``qualified professional asset managers'' 
(QPAMs) under Prohibited Transaction Class Exemption 84-14 (PTCE 84-14, 
49 FR 9494, March 13, 1984). Part I(g) of PTCE 84-14 requires that no 
person owning, directly or indirectly, 5 percent or more of the QPAM 
has been convicted of certain felonies within ten years preceding the 
transaction for which the QPAM intends to utilize PTCE 84-14. 
PaineWebber Incorporated (PaineWebber), a wholly-owned subsidiary of 
P.G.I, and two of PaineWebber's wholly-owned subsidiaries 
(collectively, the Applicants) are requesting an exemption to enable 
them to qualify as QPAMs without regard to any failure to satisfy part 
I(g) of PTCE 84-14 by reason of G.E.'s ownership of P.G.I., under the 
terms and conditions described herein.
    1. PaineWebber, a Delaware corporation which is wholly owned by 
P.G.I., engages in a variety of securities services, with its principal 
place of business in New York, New York. PaineWebber is registered as a 
broker-dealer and an investment adviser, maintaining memberships on all 
principal securities and commodities exchanges in the United States as 
well as the National Association of Securities Dealers, Inc. 
PaineWebber represents that it provides investment advisory services 
relating to a wide variety of securities, including but not limited to 
the following: Exchange-listed, over-the-counter and foreign 
securities; rights and warrants; securities options and futures; 
corporate and governmental debt securities; commodities futures, 
contracts and options; bankers' acceptances; and mutual fund shares. 
PaineWebber is joined in requesting the exemption by two of its wholly-
owned subsidiaries: (a) Mitchell Hutchins Asset Management Inc. (MHAM), 
located in New York, is an investment management services provider 
which has sponsored and offers interests in a number of limited 
partnerships and offshore funds; and (b) Mitchell Hutchins 
Institutional Investors Inc. (MHII), located in New York, provides 
discretionary investment management services and non-discretionary 
investment advisory services. MHII provides investment advice relating 
to privately-placed alternative asset investment vehicles, including 
funds specializing in venture capital, distressed debt, leveraged 
buyouts and restructurings, and privately-placed securities.
    The Applicants represent that the clientele served by the 
operations of PaineWebber and its subsidiaries, especially MHAM and 
MHII, include substantial numbers of large employee benefit plans 
subject to the Act. The applicants maintain that, given the size and 
number of the plans which the Applicants represent, the large number of 
financial service providers engaged by such plans, the breadth of the 
definition of ``party in interest'' under the Act, and the wide array 
of services offered by the Applicants, it would not be uncommon for an 
Applicant to propose a transaction involving a party in interest with 
respect to a plan for which the Applicant is acting in a fiduciary 
capacity. The Applicants represent that the proposing of such 
transactions is occasionally necessary to offer plan clients adequate 
investment diversification opportunities, and that such opportunities 
will be missed if the Applicants are not permitted to function as QPAMs 
pursuant to PTCE 84-14.
    2. PaineWebber represents that prior to October 17, 1994, G.E. did 
not have any ownership interests in any of the Applicants. On October 
17, 1994, an agreement was executed (the Agreement) between P.G.I., 
G.E. and G.E.'s wholly-owned subsidiary Kidder Peabody Group Inc. 
(Kidder). Pursuant to the Agreement, P.G.I. acquired certain assets of 
Kidder, and G.E. acquired 21,500,00 shares of P.G.I. common stock, 
which is the sole outstanding class of P.G.I. securities entitled to 
vote in the election of P.G.I. directors. The Agreement also resulted 
in G.E.'s receipt of 2,500,000 shares of redeemable preferred P.G.I. 
stock, which does not confer the right to vote for directors or any 
right to convert to shares of common stock, and 1,000,000 shares of 
convertible preferred P.G.I. stock, which does not confer any right to 
vote for directors. G.E. has the right, subject to approval of the 
shareholders of P.G.I., to convert its shares of convertible preferred 
stock into P.G.I. common stock, and G.E. submitted a proposal at 

[[Page 33869]]
the May 1995 annual P.G.I. shareholders meeting to enable the 
conversion of G.E.'s convertible preferred stock into common stock. The 
Applicants represent that it is estimated that G.E. would acquire an 
additional 5,521,811 shares of P.G.I. common stock through the 
conversion of the convertible preferred stock, resulting in G.E.'s 
ownership in the aggregate of approximately 27,021,811 shares, or 
approximately 26.4 percent of the outstanding shares, of P.G.I. common 
stock.
    3. On three occasions from 1986 through 1992, G.E. pled guilty or 
was convicted of felonies relating to the government contract 
activities of G.E. and its subsidiaries (the G.E. Felonies). The 
Applicants represent that the G.E. Felonies did not in any way relate 
to any employee benefit plan or any person's authority with respect to 
an employee benefit plan. The Applicants describe the G.E. Felonies 
more specifically as follows:
    (a) On May 13, 1986, G.E. pled guilty to four counts of filing 
false claims with the United States Air Force and 104 counts of filing 
false statements with the United States Air Force in connection with 
work performed in 1980 by G.E.'s Re- Entry Systems Operation. The 
Applicants represent that these counts primarily related to individual 
time cards that were improperly charged to certain government 
contracts.
    (b) On February 2, 1990, G.E. was convicted of mail fraud and 
violations of the False Claims Act relating to the conduct in 1983 of 
two contract employees of a G.E. subsidiary, Management and Technical 
Services Co., involving failure to notify the United States Army that 
subcontractors had agreed to prices lower than those contained in 
projections for the project. The Applicants represent that neither G.E. 
nor any officer or employee of G.E. was accused of having knowledge of 
the discrepancy and withholding it from the United States Army.
    (c) On July 22, 1992 G.E. pled guilty to violations of 18 U.S.C. 
287 (submitting false claims against the United States), 18 U.S.C. 1957 
(engaging in monetary transactions in criminally derived property), 15 
U.S.C. 78m(b)(2)(A) and 78ff(a) (inaccurate books and records), and 18 
U.S.C. 371 (conspiracy to defraud and commit offenses against the 
United States). The Applicants represent that these violations related 
to a series of events between 1984 and 1990, involving false statements 
made by employees of G.E. Aircraft Engines Division to a foreign 
government that led such foreign government to submit false claims to 
the United States relating to the purchase of weapons.
    4. The Applicants represent that the G.E. Felonies did not relate 
in any way to the conduct or business of PaineWebber, any PaineWebber 
securities broker or dealer, investment adviser, bank, insurance 
company or fiduciary. The Applicants maintain, however, that although 
none of the unlawful conduct involved the Applicants' investment 
management activities or any plans covered by the Act, the criminal 
activities described above could preclude each component of 
PaineWebber, as an affiliate of G.E., from serving as a ``qualified 
professional asset manager'' (QPAM), due to the provisions of sections 
I(g) and V(d) of PTCE 84-14. Section I(g) of PTCE 84-14 precludes a 
person who otherwise qualifies as a QPAM from serving as a QPAM if such 
person or an affiliate thereof has within the 10 years immediately 
preceding the transaction been either convicted or released from 
imprisonment as a result of certain criminal activity, including any 
crime described in section 411 of the Act. Because the G.E. Felonies 
involved crimes described in section 411 of the Act and monies 
transferred to or claimed by G.E., the Applicants represent that they 
may be barred from qualifying as QPAMs.
    5. Accordingly, the Applicants request an exemption to enable 
PaineWebber and its components and subsidiaries to function as QPAMs 
despite their failure to satisfy section I(g) of PTCE 84-14 solely 
because of the G.E. Felonies and the Applicants' affiliation with G.E. 
The Applicants request that the exemption also apply to wholly-owned 
PaineWebber subsidiaries that are created or acquired in the future. 
The transactions covered by the proposed exemption would include the 
full range of transactions that can be executed by investment managers 
who qualify as QPAMs pursuant to PTCE 84-14. If granted, the exemption 
will enable PaineWebber and its direct and indirect wholly-owned 
subsidiaries to qualify as QPAMs by satisfying all conditions of PTCE 
84-14, except that G.E.'s convictions and guilty pleas in connection 
with the G.E. Felonies shall not prevent satisfaction of the condition 
stated in section I(g) of PTCE 84-14 because of affiliation with G.E. 
The exemption, if granted, will relate only to the Applicants' 
affiliation with G.E. and not to their affiliation with any other 
persons or entities.\10\

    \10\ For example, any affiliation of the Applicants with any 
company or individual convicted of any of the felonies described in 
section 411 of the Act, other than G.E. with respect to the G.E. 
Felonies described herein, is not within the scope of the exemption 
proposed herein. Furthermore, any future convictions of or guilty 
pleas by G.E. for felonies described in part I(g) of PTCE 84-14 are 
not within the scope of the exemption proposed herein.
---------------------------------------------------------------------------

    6. The Applicants maintain that because of restrictions on G.E.'s 
ability to influence the management or policies of the Applicants, 
there is no cause for concern that the affiliation with G.E. will in 
any way affect the suitability of any of the Applicants to act as a 
QPAM. The Applicants represent that the Agreement contains the 
following restrictions and prohibitions which effectively preclude G.E. 
from controlling the Applicants: (a) At the annual meeting of P.G.I.'s 
shareholders, G.E. is required to present its shares to establish a 
quorum and may only vote its shares either as directed by P.G.I.'s 
board of directors or in proportion as all other shares are voted on a 
matter; (b) G.E. has only one representative on P.G.I.'s board of 
directors, comprised of 15 persons, and no representative on P.G.I.'s 
executive committee; (c) G.E. is given no right, power or privilege to 
be consulted on decisions of P.G.I. or to be involved in the day-to-day 
management of P.G.I.; (d) G.E. has not been given any veto power over 
any corporate action by P.G.I.; and (e) G.E. is prohibited from 
soliciting proxies or otherwise obtaining proxies in opposition to the 
P.G.I. board of directors. The Applicants emphasize that G.E.'s 
acquisition of an ownership interesting P.G.I. did not result in any 
integration of the separate businesses of G.E. and the Applicants. To 
the contrary, the Applicants represent that G.E. merely became a 
shareholder of P.G.I., and the Applicants' businesses remain entirely 
separate from G.E.'s business.
    Furthermore, the Applicants state that they are committed to a 
strong legal compliance program, involving their own policies and 
procedures to promote compliance with applicable laws including the 
Act. In this regard, the Applicants represent that their internal 
compliance procedures currently are undergoing revision and updating, 
including an expansion of the materials relating to fiduciary 
responsibilities and prohibited transactions under the Act, in order to 
prevent illegal activity in the conduct of their business. The 
Applicants state that such expanded discussion of the Act will be 
reflected in newly-promulgated revisions to P.G.I.'s sales practice 
policy manual and the branch office managers' supervisory manual, each 
of which will feature updated legal developments and illustrative 
examples to make sales staff 

[[Page 33870]]
aware of the restrictions involved in dealing with employee benefit 
plans.
    7. In summary, the Applicants represent that the criteria of 
section 408(a) of the Act are satisfied for the following reasons: (a) 
The G.E. Felonies occurred prior to any affiliation between G.E. and 
the Applicants, and did not involve any conduct on the part of the 
Applicants; (b) G.E. does not have control or influence over the 
operations of the Applicants; (c) The Applicants are undertaking reform 
and revision of their policies and procedures to prevent illegal 
activity; and (d) The exemption will permit the Applicants to engage in 
a broader variety of investments and services on behalf of client 
employee benefit plans which demand diverse investment opportunities.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)
LEGENT Retirement Security Plan (the Plan) Located in Pittsburgh, PA

[Application No. D-10015]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, August 10, 1990). If the exemption is 
granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of 
the Code, shall not apply to the proposed cash sale by the Plan of a 
limited partnership interest in BPT Union City Associates, Inc. (the 
BPT Interest) to LEGENT Corporation (LEGENT), a party in interest with 
respect to the Plan.
    This proposed exemption is conditioned upon the following 
requirements: (1) All terms and conditions of the sale are at least as 
favorable to the Plan as those obtainable in an arm's length 
transaction with an unrelated party; (2) the sale is a one-time 
transaction for cash; (3) the Plan is not required to pay any 
commissions, costs or other expenses in connection with the sale; and 
(4) the Plan receives a sales price which is not less than the greater 
of: (a) The fair market value of the BPT Interest as determined by a 
qualified, independent appraiser, or (b) the total acquisition cost 
plus opportunity costs attributable to the BPT Interest.

Summary of Facts and Representations

    1. The Plan is a defined contribution plan sponsored by LEGENT, a 
publicly-held Pennsylvania corporation engaged in supplying systems 
management solutions to large users of computer technology. As of 
September 30, 1993, the Plan had net assets available for benefits that 
totaled $49,202,389 and 1,890 participants.
    Prior to September 1, 1993, Mellon Bank (Mellon Bank) served as the 
Plan trustee. Effective September 1, 1993, Fidelity Investments became 
the trustee of all of the Plan's assets with the exception of certain 
limited partnership interests (the Interests). Although Mellon Bank 
continues to serve as Plan trustee with respect these Interests, which 
the Plan holds as general assets, effective 1989, the Plan has 
permitted each participant to direct the investments held in his or her 
individual account among several funds selected by LEGENT.
    2. On July 1, 1977, Morino Inc. (Morino), a Delaware corporation 
engaged in supplying systems management solutions to users of computer 
technology, adopted the Morino Associates, Inc. Money Purchase Pension 
Plan (Morino Pension Plan) and the Morino Associates, Inc. Profit 
Sharing Plan (Morino Profit Sharing Plan; collectively, the Morino 
Plans). On October 1, 1989, Morino merged with Duquesne Systems, Inc. 
(Duquesne) and formed LEGENT. Effective October 1, 1989, the Morino 
Pension Plan merged into the Duquesne Systems, Inc. Pension Plan and 
the Morino Profit Sharing Plan merged into the Duquesne Systems, Inc. 
Profit Sharing Plan. The resulting merged plans were amended and 
restated effective October 1, 1989 as the LEGENT Corporation Pension 
Plan and the LEGENT Corporation Savings Plan, respectively. 
Subsequently on October 1, 1992, the LEGENT Corporation Savings Plan 
was amended and restated as the Plan to reflect the merging of the 
LEGENT Corporation Pension Plan and the Goal Systems International, 
Inc. Profit Sharing Plan into the LEGENT Corporation Savings Plan due 
to the merger of Goal Systems International, Inc. into LEGENT.
    3. Among the assets of the Plan is a 6 percent limited partnership 
interest in BPT, a Tennessee limited partnership that was organized to 
acquire, own, operate and sell a strip shopping center located in Union 
City, Tennessee. BPT is an unrelated party. In a private offering 
memorandum dated June 5, 1985, BPT made an aggregate offering to 
investors of $1,548,680. In accordance with the terms of the 
memorandum, BPT offered to sell 35 limited partnership units for a per 
unit purchase price of $25,677 and 35 participation notes for an 
issuance price per note of $18,571. The participation notes consist of 
second deeds of trust on real property and they mature on July 31, 
1995.
    The Morino Pension Plan and the Morino Profit Sharing Plan acquired 
two and three participation notes, respectively, from unrelated parties 
on August 30, 1985 for a total purchase price of $92,855. The 
acquisition of the BPT Interest was made at the direction of Morino. 
Although the Plan received income totaling $20,341 from BPT for the 
years 1990 and 1991, no further income payments were made to the Plan 
after 1991.
    To the extent known, none of the obligors of the notes are parties 
in interest with respect to the Plan. In addition, the general partners 
of BPT and the investors in such limited partnership are not related to 
the Plan or its predecessors. Further, it is represented that LEGENT 
has never invested in BPT.
    4. When Morino was merged with Duquesne, the existing Plan accounts 
invested in the BPT Interest were not intially frozen. Because the 
former Morino Plans did not offer individual participant investment 
elections, the Plan has held the BPT Interest as a general asset with a 
portion of such Interest being allocated to all participants in the 
Morino Plans. As these participants terminated their employment with 
Duquesne, their allocable portion of the BPT Interest was purchased by 
the Plan using the cash generated from such Interest. The remaining 
portions of the participant accounts that were invested in the BPT 
Interest were frozen when Mellon Bank determined that the BPT Interest 
had no value and there was insufficient cash to purchase any additional 
portions from terminating employees. Accordingly, LEGENT froze the 
remaining accounts invested in the BPT Interest. As of January 13, 
1995, the BPT Interest was allocated to the accounts of eighty-six 
former Morino employees.
    5. LEGENT represents that the BPT Interest is a highly illiquid 
investment for which there is a very limited secondary market.\11\ 
Mellon Bank represents, in a letter dated November 29, 1993, that it 
has made every effort to sell the BPT Interest to unrelated parties. 
However, due to the insufficient secondary market, no purchaser has 

[[Page 33871]]
been found. Accordingly, LEGENT requests an administrative exemption 
from the Department in order to purchase the BPT Interest from the 
Plan.

    \11\ The Department expresses no opinion, in this proposed 
exemption, on whether Plan fiduciaries violated any of the fiduciary 
responsibility provisions of Part 4 of Title I of the Act in 
acquiring and holding the BPT Interest.
---------------------------------------------------------------------------

    6. Mellon Bank proposes to sell the BPT Interest to LEGENT for not 
less than the greater of: (a) The fair market value of the BPT Interest 
as determined by a qualified, independent appraiser, or (b) the total 
acquisition cost and opportunity costs attributable to the BPT 
Interest. The proposed sale will be a one-time transaction for cash. In 
addition, the Plan will not be required to pay any fees, commissions or 
expenses in connection with the sale. Mellon Bank represents that it 
will determine, prior to the sale, whether such transaction is 
appropriate for the Plan and is in the best interests of the Plan and 
its participants and beneficiaries.
    7. In an appraisal report dated October 20, 1994, G. Dan Poag, 
President of Bright, Poag & Thompson, Inc., the general partner of BPT, 
states that the BPT Interest has no fair market value. Mr. Poag 
explains that the investor notes are subordinate to the first mortgage 
and have not been serviced in some time. In an addendum to his 
appraisal report of April 17, 1995, Mr. Poag again confirms that the 
BPT Interest has a current fair market value of zero as of that date.
    8. Because the fair market value of the BPT Interest is less than 
its acquisition cost, LEGENT will purchase the BPT Interest from the 
Plan for the latter amount. In addition, LEGENT represents that because 
the Plan did not receive an adequate rate of return on the BPT 
Interest, it will pay $18,922 to make up for the Plan's lost 
opportunity costs.12

     12 LEGENT represents that the average rates of return for the 
remaining assets that were held each year by its predecessor Plans 
is a fair measure of the Plan's lost opportunity costs. Therefore, 
LEGENT has calculated interest on the amount invested in the BPT 
Interest for the Plan Years beginning after September 30, 1991 since 
BPT paid dividends to the Plan through 1991. Using this method of 
calculation, LEGENT represents that the BPT Interest would have 
earned aggregate opportunity costs of $18,922.
---------------------------------------------------------------------------

    Accordingly, LEGENT will purchase the BPT Interest from the Plan 
for an aggregate purchase price of $111,777.13

     13 The applicant represents that the amount by which the 
purchase price for the BPT Interest exceeds its fair market value, 
if treated as an employer contribution to the Plan, when added to 
the balance of the annual additions to such Plan, will not exceed 
the limitation prescribed by section 415 of the Code.
---------------------------------------------------------------------------

    9. In summary, it is represented that the transaction will satisfy 
the statutory criteria for an exemption under section 408(a) of the Act 
because: (a) All terms and conditions of the sale will be at least as 
favorable to the Plan as those obtainable in an arm's length 
transaction with an unrelated party; (b) the sale will be a one-time 
transaction for cash; (c) the Plan will not be required to pay any 
commissions, costs or other expenses in connection with the sale; (d) 
the Plan will receive a sales price not less than the greater of: (1) 
The fair market value of the BPT Interest as determined by a qualified, 
independent appraiser, or (2) the total acquisition cost plus 
opportunity costs that are attributable to the BPT Interest; and (e) 
Mellon Bank will determine that the sale is appropriate transaction for 
the Plan and in the best interests of the Plan and its participants and 
beneficiaries.

Tax Consequences of Transaction

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

Notice to Interested Persons

    Notice of the proposed exemption will be given to all interested 
persons by first-class mail within 30 days of the date of publication 
of the notice of pendency in the Federal Register. Such notice will 
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 on and/or to request a hearing. Comments with respect to the 
notice of proposed exemption are due within 60 days after the date of 
publication of this proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)
KeyCorp 401(k) Savings Plan (the Plan) Located in Cleveland, Ohio

[Application No. D-10023]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a) and 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 to the proposed loan of funds (the 
Loan) to the Plan by KeyCorp (the Employer), the sponsor of the Plan, 
with respect to Guaranteed Investment Contract No. 62149 (the GIC) 
issued by Confederation Life Insurance Company of Canada 
(Confederation), and the potential repayment by the Plan of the Loan 
upon receipt of payments under the GIC; provided the following 
conditions are satisfied: (a) No interest and/or other expenses are 
paid by the Plan in connection with the Loan; (b) All of the terms and 
conditions of the proposed Loan are no less favorable to the Plan than 
those which the Plan could obtain in an arm's-length transaction with 
an unrelated party; (c) The Loan will be no less than the amount 
described in this Notice of Proposed Exemption; (d) The repayment of 
the Loan will not exceed the total amount of the Loan; (e) The 
repayment of the Loan by the Plan will be restricted to funds paid to 
the Plan under the GIC by Confederation or other responsible third 
parties with respect to the GIC; and (f) The repayment of the Loan will 
be waived to the extent the amount of the Loan exceeds the proceeds the 
Plan receives from the GIC.

Summary of Facts and Representatives

    1. The Employer is a financial service holding company 
headquartered in Cleveland, Ohio, and registered under the Federal Bank 
Holding Company Act of 1956. The Key Trust Company of Ohio (Key Bank) 
is a wholly owned subsidiary of the Employer. Society Corporation 
merged with and into KeyCorp effective March 1, 1994, with Society 
Corporation becoming the legal successor-in-interest. Also on March 1, 
1994, Society Corporation changed its name to KeyCorp. The Society 
National Bank, formerly a subsidiary of Society Corporation, is now Key 
Bank.
    2. The Plan is a defined contribution profit sharing plan with a 
cash or deferred arrangement as provided in section 401(k) of the Code, 
and an employee stock ownership plan as provided in section 4975(e)(7) 
of the Code. Participants are permitted to direct the investment of 
their individual accounts among five investment funds, the Equity Fund, 
the Money Market Fund, the Balanced Fund, the Bond Fund, and the 
Corporation Stock Fund. Key Bank is the trustee for four of the five 
investment funds, and Wachovia Bank of North Carolina is the Trustee of 
the Plan's Corporation Stock Fund. Approximately 21,000 employees of 
the 

[[Page 33872]]
Employer and its affiliates participate in the Plan. The Plan had 
assets of $80.8 million as of April 24, 1995.
    3. On April 19, 1990, Society National Bank (now, Key Bank) as 
trustee for the Society Corporation Employee Stock Purchase and Savings 
Plan (now, the Plan) entered into an agreement with Confederation's 
Atlanta, Georgia office to purchase the GIC. Under the terms of the 
GIC, the Plan deposited $1 million at a guaranteed interest rate of 
9.4% for 5 years. Pursuant to the terms of the GIC, interest of $94,000 
was to be paid on April 16 of each year until the expiration date of 
the GIC on April 16, 1995. On April 16, 1995 a final payment of 
$1,094,000 was due to the Plan. In accordance with the terms of the 
GIC, all interest due was paid to the Plan through April 1994.
    On August 11, 1994, the Canadian operations of Confederation were 
placed in conservatorship and rehabilitation by Canadian regulators. 
The next day, August 12, 1994, the Michigan Insurance Commission 
similarly placed Confederation's United States operations into 
conservatorship and rehabilitation.14 Consequently, on April 16, 
1995, the final payment of $1,094,000 due the Plan under the GIC was 
not paid. In addition, the applicant represents that it is uncertain as 
to what portion of the defaulted interest and principal will be paid to 
the Plan and what timeframe and payment terms will be forthcoming as 
part of the rehabilitation proceedings.

     14 The Department notes that the decisions to acquire and 
hold the GIC 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 GIC by the Plan.
---------------------------------------------------------------------------

    4. In order to prevent any loss to the Plan, the Employer wishes to 
make the Loan under the terms described herein. The amount of the Loan 
will be the final payment due the Plan under the GIC ($1,094,000) plus 
interest on such amount from April 16, 1995, at the rate of interest 
earned by the Plan's Bond Fund to the date of the Loan.
    The applicant represents that the Bond Fund is primarily invested 
in the Victory Limited Term Income Fund which is an open-end mutual 
fund (the Mutual Fund). The Mutual Fund prospectus states that the 
Mutual Fund invests in high grade fixed income securities with an 
average maturity of between two and five years. In addition, the Bond 
Fund holds a second GIC which is not the subject of this proposed 
exemption. For the three month period ended March 31, 1995, the Bond 
Fund had a return of 2.87%.
    5. No interest or other expenses will be paid by the Plan pursuant 
to the transaction. Repayment of the Loan is limited to the amounts 
received by the Plan from Confederation or any other responsible third 
parties making payment on behalf of Confederation. The Employer will 
have no recourse against the Plan or any participants or beneficiaries 
for additional funds to repay the Loan. To the extent the amounts 
received from Confederation and responsible third parties are 
insufficient to repay the Loan, repayment will be waived. In no event 
will the repayment exceed the amount of the Loan.
    6. In summary, the applicant represents that the proposed 
transaction will satisfy the criteria of section 408(a) of the Act 
because: (a) The Plan will receive the full amount due under the GIC 
plus interest from the GIC's maturity date to the date of the Loan; (b) 
no interest or other expenses will be paid by the Plan; (c) the 
repayment of the Loan is restricted to amounts received from 
Confederation and other responsible third parties with respect to the 
GIC; (d) the repayment will not exceed the amount of the Loan; and (e) 
repayment will be waived to the extent that the proceeds received with 
respect to the GIC are less than the amount of the Loan.

NOTICE TO INTERESTED PERSONS: Notice to interested persons will be 
provided within 30 days of the publication of this Notice in the 
Federal Register.

 Comments and requests for a hearing are due 60 days from the date of 

publication of this Notice in the Federal Register.FOR FURTHER 
INFORMATION CONTACT: Charles S. Edelstein of the Department, telephone 
(202) 219-8881. (This is not a toll-free number.)

General Information

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

    Signed at Washington, DC, this 26th day of June, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 95-16063 Filed 6-28-95; 8:45 am]
BILLING CODE 4510-29-P