[Federal Register Volume 60, Number 133 (Wednesday, July 12, 1995)] [Notices] [Pages 35932-35941] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 95-17075] ----------------------------------------------------------------------- [[Page 35933]] DEPARTMENT OF LABOR [Prohibited Transaction Exemption 95-56; Exemption Application No. D- 09724, et al.] Grant of Individual Exemptions; Mellon Bank, N.A., and Its Affiliated (Collectively, Mellon), et al. AGENCY: Pension and Welfare Benefits Administration, Labor. ACTION: Grant of Individual Exemptions. ----------------------------------------------------------------------- SUMMARY: This document contains exemptions issued by the Department of Labor (the Department) from certain of the prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (the Act) and/or the Internal Revenue Code of 1986 (the Code). Notices were published in the Federal Register of the pendency before the Department of proposals to grant such exemptions. The notices set forth a summary of facts and representations contained in each application for exemption and referred interested persons to the respective applications for a complete statement of the facts and representations. The applications have been available for public inspection at the Department in Washington, DC. The notices also invited interested persons to submit comments on the requested exemptions to the Department. In addition the notices stated that any interested person might submit a written request that a public hearing be held (where appropriate). The applicants have represented that they have complied with the requirements of the notification to interested persons. No public comments and no requests for a hearing, unless otherwise stated, were received by the Department. The notices of proposed exemption were issued and the exemptions are being granted solely by the Department because, 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 proposed to the Secretary of Labor. Statutory Findings In accordance with section 408(a) of the Act and/or section 4975(c)(2) of the Code and the procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon the entire record, the Department makes the following findings: (a) The exemptions are administratively feasible; (b) They are in the interests of the plans and their participants and beneficiaries; and (c) They are protective of the rights of the participants and beneficiaries of the plans. Mellon Bank, N.A., and Its Affiliates (Collectively, Mellon) Located in Pittsburgh, Pennsylvania [Prohibited Transaction Exemption 95-56; Application No. D-09724] Exemption Section I--Exemption for Cross-Trading Between Certain Accounts The restrictions of sections 406(a)(1)(A) and 406(b)(2) of the Act, and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) of the Code, shall not apply to (1) the purchase and sale of securities (including the stock of Mellon Bank Corporation (MBC)) between Indexed Accounts, as defined in Section IV(a); and (2) the purchase and sale of securities, including the common stock of MBC, between Indexed Accounts and various large accounts (the Large Accounts) pursuant to portfolio restructuring programs of the Large Accounts; provided that the following conditions and the General Conditions of Section III are met: (a) The Indexed Account is based on an index which represents the investment performance of a specific segment of the public market for equity or debt securities in the United States and/or foreign countries. The organization creating and maintaining the index must be (1) engaged in the business of providing financial information, evaluation, advice or securities brokerage services to institutional clients, (2) a publisher of financial news or information, or (3) a public stock exchange or association of securities dealers. The index must be created and maintained by an organization independent of Mellon and its affiliates. The index must be a generally accepted standardized index of securities which is not specifically tailored for the use of Mellon or its affiliates. (b) The price for the securities is set at the current market value for the securities on the date of the transactions. For equity securities, the price shall be the closing price for the security on the day of trading; unless the security was added to or deleted from an index underlying an Indexed Account after the close of trading, in which case the price shall be the opening price for that security on the next business day after the announcement of the addition or deletion. For debt securities, the price shall be the fair market value determined as of the close of the day of trading pursuant to Rule 17a- 7(b) issued by the Securities and Exchange Commission under the Investment Company Act of 1940. (c) The transaction takes place within three business days of the ``triggering event'' giving rise to the cross-trade opportunity. A triggering event is defined as: (1) A change in the composition or weighting of the index underlying an Indexed Account by the organization creating and maintaining the index; (2) A change in the overall level of investment in an Indexed Account as a result of investments and withdrawals made on the Account's opening date, where the Indexed Account is a collective investment fund, or on any relevant date, where the Indexed Account is not a collective investment fund; provided, however, that Mellon does not change the level of investment in the Indexed Account through investments or withdrawals of assets of any employee benefit plan maintained by Mellon or its affiliates (the Mellon Plans) other than any Mellon Plan which is a defined contribution plan under which participants direct the investment of their accounts among various investment options, including Indexed Accounts; or (3) A declaration by Mellon (recorded on Mellon's records) that a ``triggering event'' has occurred, which will be made upon an accumulation of cash in an Indexed Account attributable to interest or dividends on, and/or tender offers for, portfolio securities equal to not more than .5 percent of the Indexed Account's total value. (d) With respect to any Indexed Account that is model-driven, no cross-trades are engaged in by the Account for 10 business days subsequent to any change made by Mellon to the model underlying the Account. (e) In the event that the amount of a particular security which all of the Indexed Accounts or Large Accounts propose to sell on a given day is less than the amount of such security which all of the Indexed Accounts or Large Accounts propose to buy, or vice versa, the direct cross-trade opportunity must be allocated by Mellon among potential buyers or sellers of the security on a pro rata basis. (f) An Indexed Account does not participate in a cross-trade if more than 10 percent of the assets of the Indexed Account at the time of the proposed cross-trade are comprised of assets of Mellon Plans for which Mellon exercises investment discretion. [[Page 35934]] (g) Prior to any proposed cross-trading by an Indexed Account or a Large Account, Mellon provides to each employee benefit plan invested in the Account information which describes the existence of the cross- trading program, the ``triggering events'' which will create cross- trade opportunities, the pricing mechanism that will be utilized for securities purchased or sold by the Accounts, and the allocation methods and other procedures which will be implemented by Mellon for its cross-trading practices. Any employee benefit plan which subsequently invests in the Indexed Account or Large Account shall be provided the same information prior to or immediately after the plan's initial investment in the Account. (h) With respect to cross-trade transactions involving a Large Account: (1) Total assets of the Large Account are in excess of $50 million. (2) Fiduciaries or other appropriate decisionmakers of the Large Account who are independent of Mellon are, prior to any cross-trade transactions, fully informed of the cross-trade technique and provide advance written approval of the cross-trade transactions. Such authorization shall be terminable at will by the Large Account upon receipt by Mellon of written notice of termination. A form expressly providing an election to terminate the authorization, with instructions on the use of the form, must be supplied to the authorizing Large Account fiduciary concurrent with the receipt of the written information describing the cross-trading program. The instructions for such form must include the following information: (i) The authorization is terminable at will by the Large Account, without penalty to the Large Account, upon receipt by Mellon of written notice from the authorizing Large Account fiduciary; and (ii) Failure to return the termination form will result in the continued authorization of Mellon to engage in cross-trade transactions on behalf of the Large Account. (3) Within 45 days of the completion of the Large Account's portfolio restructuring program, the Large Account's fiduciaries shall be fully apprised in writing of the transaction results. However, if the program takes longer than three months to complete, interim reports of the transaction results will be made within 30 days of the end of each three month period. (4) The Large Account transactions occur only in situations where Mellon has been authorized to restructure all or a portion of the Large Account's portfolio into an Indexed Account (including a separate account based on an index or computer model) or to act as a ``trading adviser'' in carrying out a Large Account-initiated liquidation or restructuring of its portfolio. (i) Mellon receives no additional direct or indirect compensation as a result of any cross-trade transactions. (j) Mellon does not purchase or sell any debt securities issued by Mellon or an affiliate for the Indexed Accounts. Section II--Exemption for the Acquisition, Holding and Disposition of MBC Stock The restrictions of sections 406(a)(1)(D), 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)(D) and (E) of the Code, shall not apply to the acquisition, holding or disposition of the common stock of MBC (the MBC Stock) by Indexed Accounts, if the following conditions and the General Conditions of Section III are met: (a) The acquisition or disposition of the MBC stock is for the sole purpose of maintaining strict quantitative conformity with the relevant index upon which the Indexed Account is based. (b) In the event that MBC Stock is added to an index on which an Indexed Account is based or is added to the portfolio of the Indexed Account which tracks an index that includes MBC Stock, all acquisitions necessary to bring the Indexed Account's holdings of MBC Stock to its capitalization weighting in the index, other than cross-trade transactions meeting the conditions of Section I, shall comply with Rule 10b-18 of the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, including the limitations regarding the price paid for such stock. (c) Subsequent to acquisitions necessary to bring the Indexed Account's holdings of MBC Stock to its capitalization weighting in the index pursuant to the restrictions of SEC Rule 10b-18, all aggregate daily purchases of MBC stock, other than cross-trade purchases meeting the conditions of Section I, shall not constitute more than the greater of: (1) 15 percent of the stock's average daily trading volume for the previous five days; or (2) 15 percent of the stock's trading volume on the date of the transaction. (d) If the necessary number of shares of MBC stock cannot be acquired within 10 business days from the date of the event which causes the particular Indexed Account to require MBC stock, Mellon shall appoint a fiduciary which is independent of Mellon and its affiliates to design acquisition procedures and monitor Mellon's compliance with such procedures. (e) All purchases and sales of MBC stock, other than cross-trades meeting the conditions of Section I, shall be executed on the national exchange on which MBC stock is primarily traded. (f) No transactions shall involve purchases from, or sales to, Mellon or any affiliate, officer, director or employee of Mellon or any party in interest with respect to a plan which has invested in an Indexed Account.1 This requirement does not preclude purchases and sales of MBC stock in cross-trade transactions meeting the conditions of Section I, provided that the Indexed Accounts are not maintained by Mellon primarily for the investment of assets of Mellon or any affiliate, including officers, directors or employees of Mellon other than in connection with a Mellon Plan. \1\ The Department notes that ``blind transactions'', in which the identity of the purchaser or seller is not known because the transaction is executed by an independent broker, acting as agent, on a national securities exchange, would not be subject to this requirement. --------------------------------------------------------------------------- (g) No more than five (5) percent of the total amount of MBC stock issued and outstanding at any time shall be held in the aggregate by the Indexed Accounts which hold plan assets. (h) MBC stock shall constitute no more than two (2) percent of the value of any independent third-party index on which the investments of an Indexed Account are based. (i) A plan fiduciary independent of Mellon authorizes the investment of such plan's assets in an Indexed Account which purchases and/or holds MBC stock. (j) A fiduciary independent of Mellon and its affiliates shall direct the voting of the MBC stock held by an Indexed Account on any matter in which shareholders of MBC stock are required or permitted to vote. Section III--General Conditions (a) Mellon maintains or causes to be maintained for a period of six years from the date of the transaction the records necessary to enable the persons described in paragraph (b) of this Section to determine whether the conditions of the exemption have been met, except that (1) a prohibited transaction will not be considered to have occurred if, due to circumstances beyond the control of Mellon, the records are lost or destroyed prior to the end of the six-year period, and (2) no party in interest other than Mellon shall be subject to the civil penalty that may be assessed under section 502(i) of the [[Page 35935]] Act or to the taxes imposed by section 4975(a) and (b) of the Code if the records are not maintained or are not available for examination as required by paragraph (b) below. (b)(1) Except as provided in paragraph (b)(2) and notwithstanding any provisions of section 504(a)(2) and (b) of the Act, the records referred to in paragraph (a) of this Section are available at their customary location for examination during normal business hours by-- (A) Any duly authorized employee or representative of the Department of Labor or the Internal Revenue Service, (B) Any fiduciary of a plan participating in an Indexed Account who has authority to acquire or dispose of the interests of the plan, or any duly authorized employee or representative of such fiduciary, (C) Any contributing employer with respect to any plan participating in an Indexed Account or any duly authorized employee or representative of such employer, and (D) Any participant or beneficiary of any plan participating in an Indexed Account, or any duly authorized employee or representative of such participant or beneficiary. (2) None of the persons described in paragraph (b)(1)(B) through (D) shall be authorized to examine trade secrets of Mellon, any of its affiliates, or commercial or financial information which is privileged or confidential. Section IV--Definitions (a) Indexed Account--Any Index Fund or Model-Driven Fund. (b) Index Fund--Any investment fund, account or portfolio sponsored, maintained, trusteed, or managed by Mellon or an affiliate in which one or more investors invest that is designed to replicate the capitalization-weighted composition of an independently maintained securities index which satisfies the conditions of Section I(a) and Section II(h). (c) Model-Driven Fund--Any investment fund, account or portfolio sponsored, maintained, trusteed, or managed by Mellon or an affiliate, in which one or more investors invest which is based on computer models using prescribed objective criteria to transform an independently maintained securities index which satisfies the conditions of Section I(a) and Section II(h). (d) Opening date--The date on which investments in or withdrawals from an Indexed Account that is a collective investment fund may be made. (e) Large Account--An account of an investor that is either: (1) an employee benefit plan within the meaning of section 3(3) of the Act that has $50 million or more in total assets; or (2) an institutional investor, other than an investment company registered under the Investment Company Act of 1940 (i.e. a mutual fund) advised or sponsored by Mellon, such as an insurance company separate account or general account, a governmental plan, a university endowment fund, a charitable foundation fund, or a trust or other fund which is exempt from taxation under section 501(a) of the Code, that has total assets in excess of $50 million. As noted in Section I(g)(4), a ``Large Account'' shall only be an account to which Mellon has been authorized to restructure all or a portion of the portfolio for such account into an Indexed Account or to which Mellon has been authorized to act as a ``trading adviser'' (as defined below) in connection with a specific liquidation or restructuring program for the account. (f) Trading adviser--A person whose role is limited to arranging a Large Account-initiated liquidation or restructuring of an equity or debt portfolio within a stated period of time so as to minimize transaction costs. The person must not be a fiduciary with investment discretion for any underlying asset allocation, restructuring or liquidation decisions for the account in connection with such transactions. (g) Affiliate--Any person, directly or indirectly through one or more intermediaries, controlling, controlled by, or is under common control with Mellon (except Mellon/McMahon Real Estate Advisors, Inc.). For a more complete statement of the facts and representations supporting the Department's decision to grant this exemption, refer to the notice of proposed exemption published on April 7, 1995, at 60 FR 17814. WRITTEN COMMENTS AND MODIFICATIONS: The applicant submitted the following comments and requests for modifications regarding the notice of proposed exemption (the Proposal). With respect to the heading used in the Proposal, the applicant states that the term ``Mellon'' refers specifically to Mellon Bank, N.A., but not to its affiliates. The applicant notes that in various places throughout the Proposal, the relevant provisions refer to ``Mellon and its affiliates''. However, in numerous other provisions of the Proposal the reference is simply to Mellon which, as designated in the heading, is too narrow since the affiliates should also be covered. The applicant requests that the reference to ``Mellon'' in the heading be changed to include both Mellon Bank, N.A. and its affiliates. The Department concurs with the applicant's requested clarification and has so modified the heading of the Proposal. With respect to the definition of a ``triggering event'' in Section I(c) of the Proposal, the applicant states that subparagraph (2) limits investments and withdrawals from an Indexed Account to those occurring on a ``regularly scheduled opening date'' for the Indexed Account. The applicant represents that the concept of ``an opening date'', as defined in Section IV(d) of the Proposal, is not applicable to Indexed Accounts that are not collective investment funds, such as separate accounts for both employee benefit plans and other institutional clients. Since separate accounts would be encompassed within the definition of an Indexed Account under Section IV(a) of the Proposal, the applicant requests that an appropriate clarification be made. In addition, with respect to the concept of a ``regularly scheduled'' opening date, the applicant represents that the trend for collective investment funds is toward more frequent, and in many cases daily, opening dates. Thus, the applicant requests that the words ``regularly scheduled'' be deleted from Section I(c)(2) of the Proposal. The Department concurs with the applicant's requested clarifications and has modified the language of Sections I(c)(2) and IV(d) of the Proposal. In this regard, Section I(c)(2) has been modified as follows: * * * A change in the overall level of investment in an Indexed Account as a result of investments and withdrawals made on the Account's [regularly scheduled] opening date, where the Indexed Account is a collective investment fund, or on any relevant date, where the Indexed Account is not a collective investment fund * * *. (emphasis added) In addition, Section IV(d) has been modified as follows: * * * Opening date--The [regularly-scheduled] date on which investments in or withdrawals from an Indexed Account that is a collective investment fund may be made. (emphasis added) With respect to the proviso in Section I(c)(2) of the Proposal relating to any Mellon Plans for which Mellon has investment discretion, the applicant states that its understanding of the intent of this proviso is to exclude from the definition of a ``triggering event'' those investments into or withdrawals from an Indexed Account which result from Mellon's exercise of its discretion [[Page 35936]] for a Mellon Plan. However, the applicant states that this proviso was not intended to cover changes in the level of investment in an Indexed Account which result from investment elections made by individual participants in a Mellon Plan (i.e. a defined contribution plan) that permits such participants to direct the investment of their accounts among various available investment options, including Indexed Accounts. Thus, the applicant maintains that the language of the proviso is too broad in that it would apply to any Mellon Plan as to which Mellon exercises any investment discretion, including discretion for the management of assets which have been allocated to an Indexed Account, even though participants have directed the investment of their assets to such Indexed Accounts. Therefore, the applicant suggests that this proviso be clarified by deleting the phrase ``* * * for which Mellon has investment discretion'' and substituting therefor the following: * * * other than any Mellon Plan which is a defined contribution plan under which participants direct the investment of their accounts among various investment options, including Indexed Accounts. The Department concurs with the applicant's requested clarification and has so modified the language of Section I(c)(2) of the Proposal. With respect to Section II(f) of the Proposal, the applicant states that the first sentence sets forth a requirement that transactions by an Indexed Account involving MBC Stock not be with any affiliate, officer, director or employee of Mellon or any party in interest for any plan which has invested in the Indexed Account. The applicant requests that it be made clear that this limitation does not apply to any transaction on an exchange executed by an independent broker acting as agent, given that such transactions would be considered to be ``blind transactions'' for this purpose. In this regard, the Department concurs with the applicant's requested clarification and has added a footnote at the end of the first sentence of Section II(f) stating that ``blind transactions'' executed on a national securities exchange by an independent broker will not be subject to the requirements of Section II(f). Finally, with respect to the definition of ``Large Account'' in Section IV(e) of the Proposal, the applicant states that the definition excludes any investment company registered under the Investment Company Act of 1940 (i.e. any mutual fund). The applicant represents that Mellon had previously agreed to exclude only affiliated mutual funds (i.e. mutual funds advised or sponsored by Mellon or an affiliate) from the definition of ``Large Account''. The Department acknowledges this error in the Proposal and concurs with the applicant's clarification. Thus, the Department has modified the language of Section IV(e)(2) of the Proposal by inserting the phrase ``* * * advised or sponsored by Mellon'' following the reference to mutual funds in the definition of ``Large Account''. No other comments, and no requests for a hearing, were received by the Department during the comment period. Accordingly, based on the current exemption application file and record, the Department has determined to grant the proposed exemption as modified herein. FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department, telephone (202) 219-8194. (This is not a toll-free number.) T.J. Lambrecht Construction, Inc.; Employees' Profit Sharing Plan and Trust; Brown & Lambrecht Earthmovers, Inc.; Employees' Profit Sharing Plan and Trust (collectively, the Plans) Located in Joliet, Illinois [Prohibited Transaction Exemption 95-57; Application Nos. D-09872 and D-09873] Exemption 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 cash sale (the Sale) by each of the Plans of a 12.5% partnership interest in Prime Industries (the Partnership Interest) to Mr. Thomas J. Lambrecht, a party in interest with respect to the Plans; provided the following conditions are satisfied: (1) The Sale is a one-time transaction for cash; (2) the sale price for each Partnership Interest will be the higher of (a) the fair market value of the Partnership Interest as determined by a qualified independent appraiser at the time of the Sale or, (b) each Plan's total investment in the Partnership Interest ($300,000); and (3) the Plans do not suffer any loss nor incur any expenses in connection with the transaction. For a more complete statement of the facts and representations supporting the Department's decision to grant this exemption, refer to the notice of proposed exemption published on May 10, 1995 at 60 FR 24899. FOR FURTHER INFORMATION CONTACT: Virginia J. Miller of the Department, telephone (202) 219-8971. (This is not a toll-free number.) Guarantee Mutual Life Company (Guarantee Mutual) Located in Omaha, NE [Prohibited Transaction Exemption 95-58; Exemption Application No. D- 09941] Exemption Section I. Covered Transaction The restrictions of section 406(a) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1) (A) through (D) of the Code, shall not apply to the proposed receipt of common stock of The Guarantee Life Companies Inc., or the receipt of cash or policy credits by an eligible policyholder (the Eligible Policyholder) of Guarantee Mutual which is an employee benefit plan (the Plan), other than an Eligible Policyholder which is a plan sponsored by Guarantee Mutual for its own employees, in exchange for the termination of such Eligible Plan Policyholder's membership interest in Guarantee Mutual, in accordance with the terms of a plan of demutualization (the Plan of Conversion or the Conversion Plan) adopted by Guarantee Mutual and implemented pursuant to the Nebraska Insurers Demutualization Act, Nebraska Revised Statutes, Sections 44-6101 through 44-6120. The exemption is subject to the general conditions set forth below in Section II. Section II. General Conditions (a) The Conversion Plan is implemented in accordance with procedural and substantive safeguards that are imposed under Nebraska law and is subject to the review and supervision by the Director of the Department of Insurance of the State of Nebraska (the Director). (b) The Director reviews the terms of the options that are provided to Eligible Policyholders of Guarantee Mutual, as part of such Director's review of the Conversion Plan, and the Director only approves the Conversion Plan following a determination that such Conversion Plan is fair and equitable to all Eligible Policyholders. (c) Each Eligible Policyholder has an opportunity to comment on the Conversion Plan and decide whether to vote to approve such Conversion Plan after full written disclosure is given such Eligible Policyholder by Guarantee Mutual, of the terms of the Conversion Plan. (d) Any election by an Eligible Plan Policyholder to receive stock, cash or policy credits, pursuant to the terms of the Conversion Plan is made by one or more independent fiduciaries of such [[Page 35937]] Plan and neither Guarantee Mutual nor any of its affiliates exercises any discretion or provides investment advice with respect to such election. (e) After each Eligible Policyholder entitled to receive stock is allocated at least 10 shares of common stock, additional consideration is allocated to Eligible Policyholders who own participating policies based on actuarial formulas that take into account each participating policy's contribution to the surplus of Guarantee Mutual which formulas have been approved by the Director. (f) All Eligible Plan Policyholders participate in the transactions on the same basis within their class groupings as other Eligible Policyholders that are not Plans. (g) No Eligible Policyholder pays any brokerage commissions or fees in connection with their receipt of stock or in connection with the implementation of the commission-free sales program. (h) All of Guarantee Mutual's policyholder obligations remain in force and are not affected by the Conversion Plan. Section III. Definitions For purposes of this proposed exemption: (a) The term ``Guarantee Mutual'' means Guarantee Mutual Insurance Company and any affiliate of Guarantee Mutual as defined in paragraph (b) of this Section III. (b) An ``affiliate'' of Guarantee Mutual includes-- (1) Any person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with Guarantee Mutual. (For purposes of this paragraph, the term ``control'' means the power to exercise a controlling influence over the management or policies of a person other than an individual.) (2) Any officer, director or partner in such person, and (3) Any corporation or partnership of which such person is an officer, director or a 5 percent partner or owner. (c) The term ``Eligible Policyholder'' means a policyholder who is eligible to vote and to receive consideration in a demutualization. Such policyholder is a policyholder of the mutual insurer on the day the plan of conversion is adopted by the board of directors of the insurer. (d) The term ``policy credit'' means an increase in accumulation account value (to which no surrender or similar charges are applied) in the general account or an increase in a dividend accumulation on a policy. Written Comments The Department received three written comments with respect to the notice of proposed exemption. Two comments were submitted by Plan policyholders of Guarantee Mutual. Of the comments in this category, one was withdrawn. The third comment was submitted by Guarantee Mutual. Following is a discussion of the Plan policyholder comment that was not withdrawn and the response made by Guarantee Mutual with respect to this comment. Also discussed is the comment that was submitted by Guarantee Mutual and the Department's response to that comment. Plan Policyholder Comment The commentator states that he is opposed to the conversion because he does not believe there are adequate safeguards to ensure that management of Guarantee Mutual will not use the demutualization process as an opportunity to further their personal interests. The commentator explains that owners of corporations are no better off than owners of a mutual company in terms of democratic rule over the company. The commentator further asserts that managers should not be permitted to convert or change organizational structures of companies until corporate democratic principles can be guaranteed. Therefore, the commentator does not recommend that the Department approve the proposed exemption. In response, Guarantee Mutual states that the comment does not address the merits of the proposed transaction. Guarantee Mutual notes that before the Conversion Plan can proceed, it must be approved by the Director of the Nebraska Department of Insurance after a public hearing. According to Guarantee Mutual, the public hearing was held on April 13, 1995 and June 12, 1995 in Lincoln, Nebraska. Notice of the hearing was mailed to each Eligible Policyholder and published in the Omaha World-Herald, the Lincoln Journal-Star and the Omaha Daily Record. Guarantee Mutual points out that the next step of the Conversion Plan is for the Director to approve such Plan and find that (a) the Conversion Plan is fair and equitable to policyholders, (b) the Conversion Plan does not deprive policyholders of property rights or due process of law and (c) the new stock insurer would meet the minimum requirements to be issued a certificate of authority by the Director to transact business in Nebraska and the continued operations of the new stock insurer would not be hazardous to future policyholders and the public. Guarantee Mutual notes that the Director will continue to monitor the demutualization through the effective date of the conversion and, with respect to other matters, after the effective date. In addition, Guarantee Mutual points out that Nebraska law requires that two-thirds of voting Eligible Policyholders vote for the adoption of the Conversion Plan before the demutualization can occur. With respect to the commentator, Guarantee Mutual explains that he, along with other Eligible Policyholders, was mailed a notice of the public hearing and has been afforded the opportunity to express his views to the Director either in writing or at the public hearing. Guarantee Mutual also explains that the commentator will be given the opportunity to vote for or against the Conversion Plan. Accordingly, Guarantee Mutual believes that the commentator is being offered all of the procedural safeguards inherent in the Nebraska conversion statute and that the comment should not affect the Department's granting of the exemption. Guarantee Mutual's Comment Guarantee Mutual's comment is intended to clarify information contained in a footnote to the Summary of Facts and Representations of the proposed exemption. In this regard, Footnote 16 of the Notice states, in pertinent part, that prior to the public hearing, Guarantee Mutual * * * will provide each Eligible Policyholder with a summary of the Conversion Plan, a notice of the public hearing and a more detailed policyholder information statement. Guarantee Mutual notes, however, that the Director will first conduct the public hearing, and later, if the Director makes an initial determination to approve Guarantee Mutual's application, a policyholder vote will take place. Guarantee Mutual explains that Eligible Policyholders will receive the more detailed policyholder statement before the vote, but not before the hearing. Therefore, Guarantee Mutual requests that Footnote 16 be modified to read as follows: Guarantee Mutual also represents that prior to the public hearing, it will provide each Eligible Policyholder with a summary of the Conversion Plan and a notice of the public hearing and that prior to the policyholder meeting and vote, it will provide each Eligible Policyholder with a more detailed policyholder information statement. In addition, Guarantee Mutual requests certain modifications in [[Page 35938]] references to Guarantee Mutual and The Guarantee Life Companies Inc. In this regard, Guarantee Mutual notes that Representations 10 (c), (d) and (h) of the Summary of Facts and Representations refer to ``State Mutual'' but not to ``Guarantee Mutual.'' Therefore, Guarantee Mutual requests that these references be corrected. Further, Guarantee Mutual explains that the reference to ``The Guarantee Companies, Inc.'' in Section I of the proposed exemption should be modified by deleting the comma after the word ``Companies.'' Finally, it is noted that Guarantee Mutual did not comply with the notice to interested persons requirement within the time frame stated in the exemption application. By letter dated May 25, 1995, Guarantee Mutual certifies that it extended the comment period until June 5, 1995 by mailing postcards to the same group of Eligible Policyholders it had previously notified of the proposed exemption. Other than the two comments that were submitted by the Plan policyholders of Guarantee Mutual and the comment submitted by Guarantee Mutual, no additional comments were received by the Department. The Department does not object to any of the clarifications or modifications to the proposed exemption. After giving full consideration to the entire record, including the written comments that were submitted, the Department has decided to grant the exemption as described and revised above. The comment letters have been included as part of the public record of the exemption application. The complete application file, including all supplemental submissions received by the Department, is made available for public inspection in the Public Documents Room of the Pension and Welfare Benefits Administration, Room N-5638, U.S. Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 20210. For a more complete statement of the facts and representations supporting the Department's decision to grant this exemption, refer to the notice of proposed exemption published on April 14, 1995 at 60 FR 19096. FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, telephone (202) 219-8881. (This is not a toll-free number.) Rothschild, Incorporated (Rothschild) Located in New York, New York [Prohibited Transaction Exemption 95-59; Exemption Application No. D- 09993] Exemption I. Transactions A. The restrictions of sections 406(a) and 407(a) of the Act and the taxes imposed by section 4975(a) and (b) of the Code by reason of section 4975(c)(1)(A) through (D) of the Code shall not apply to the following transactions involving trusts and certificates evidencing interests therein: (1) The direct or indirect sale, exchange or transfer of certificates in the initial issuance of certificates between the sponsor or underwriter and an employee benefit plan when the sponsor, servicer, trustee or insurer of a trust, the underwriter of the certificates representing an interest in the trust, or an obligor is a party in interest with respect to such plan; (2) The direct or indirect acquisition or disposition of certificates by a plan in the secondary market for such certificates; and (3) The continued holding of certificates acquired by a plan pursuant to subsection I.A.(1) or (2). Notwithstanding the foregoing, section I.A. does not provide an exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and 407 for the acquisition or holding of a certificate on behalf of an Excluded Plan by any person who has discretionary authority or renders investment advice with respect to the assets of that Excluded Plan.\2\ \2\ Section I.A. provides no relief from sections 406(a)(1)(E), 406(a)(2) and 407 for any person rendering investment advice to an Excluded Plan within the meaning of section 3(21)(A)(ii) and regulation 29 CFR 2510.3-21(c). --------------------------------------------------------------------------- B. The restrictions of sections 406(b)(1) and 406(b)(2) of the Act and the taxes imposed by section 4975(a) and (b) of the Code by reason of section 4975(c)(1)(E) of the Code shall not apply to: (1) The direct or indirect sale, exchange or transfer of certificates in the initial issuance of certificates between the sponsor or underwriter and a plan when the person who has discretionary authority or renders investment advice with respect to the investment of plan assets in the certificates is (a) an obligor with respect to 5 percent or less of the fair market value of obligations or receivables contained in the trust, or (b) an affiliate of a person described in (a); if: (i) the plan is not an Excluded Plan; (ii) solely in the case of an acquisition of certificates in connection with the initial issuance of the certificates, at least 50 percent of each class of certificates in which plans have invested is acquired by persons independent of the members of the Restricted Group and at least 50 percent of the aggregate interest in the trust is acquired by persons independent of the Restricted Group; (iii) a plan's investment in each class of certificates does not exceed 25 percent of all of the certificates of that class outstanding at the time of the acquisition; and (iv) immediately after the acquisition of the certificates, no more than 25 percent of the assets of a plan with respect to which the person has discretionary authority or renders investment advice are invested in certificates representing an interest in a trust containing assets sold or serviced by the same entity.\3\ For purposes of this paragraph B.(1)(iv) only, an entity will not be considered to service assets contained in a trust if it is merely a subservicer of that trust; \3\ For purposes of this exemption, each plan participating in a commingled fund (such as a bank collective trust fund or insurance company pooled separate account) shall be considered to own the same proportionate undivided interest in each asset of the commingled fund as its proportionate interest in the total assets of the commingled fund as calculated on the most recent preceding valuation date of the fund. --------------------------------------------------------------------------- (2) The direct or indirect acquisition or disposition of certificates by a plan in the secondary market for such certificates, provided that the conditions set forth in paragraphs B.(1)(i), (iii) and (iv) are met; and (3) The continued holding of certificates acquired by a plan pursuant to subsection I.B.(1) or (2). C. The restrictions of sections 406(a), 406(b) and 407(a) of the Act, and the taxes imposed by section 4975(a) and (b) of the Code by reason of section 4975(c) of the Code, shall not apply to transactions in connection with the servicing, management and operation of a trust, provided: (1) such transactions are carried out in accordance with the terms of a binding pooling and servicing arrangement; and (2) the pooling and servicing agreement is provided to, or described in all material respects in the prospectus or private placement memorandum provided to, investing plans before they purchase certificates issued by the trust.\4\ \4\ In the case of a private placement memorandum, such memorandum must contain substantially the same information that would be disclosed in a prospectus if the offering of the certificates were made in a registered public offering under the Securities Act of 1933. In the Department's view, the private placement memorandum must contain sufficient information to permit plan fiduciaries to make informed investment decisions. [[Page 35939]] --------------------------------------------------------------------------- Notwithstanding the foregoing, section I.C. does not provide an exemption from the restrictions of section 406(b) of the Act or from the taxes imposed by reason of section 4975(c) of the Code for the receipt of a fee by a servicer of the trust from a person other than the trustee or sponsor, unless such fee constitutes a ``qualified administrative fee'' as defined in section III.S. D. The restrictions of sections 406(a) and 407(a) of the Act, and the taxes imposed by sections 4975(a) and (b) of the Code by reason of sections 4975(c)(1)(A) through (D) of the Code, shall not apply to any transactions to which those restrictions or taxes would otherwise apply merely because a person is deemed to be a party in interest or disqualified person (including a fiduciary) with respect to a plan by virtue of providing services to the plan (or by virtue of having a relationship to such service provider described in section 3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H) or (I) of the Code), solely because of the plan's ownership of certificates. II. General Conditions A. The relief provided under Part I is available only if the following conditions are met: (1) The acquisition of certificates by a plan is on terms (including the certificate price) that are at least as favorable to the plan as they would be in an arm's-length transaction with an unrelated party; (2) The rights and interests evidenced by the certificates are not subordinated to the rights and interests evidenced by other certificates of the same trust; (3) The certificates acquired by the plan have received a rating at the time of such acquisition that is in one of the three highest generic rating categories from either Standard & Poor's Corporation (S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc. (D & P) or Fitch Investors Service, Inc. (Fitch); (4) The trustee is not an affiliate of any member of the Restricted Group. However, the trustee shall not be considered to be an affiliate of a servicer solely because the trustee has succeeded to the rights and responsibilities of the servicer pursuant to the terms of a pooling and servicing agreement providing for such succession upon the occurrence of one or more events of default by the servicer; (5) The sum of all payments made to and retained by the underwriters in connection with the distribution or placement of certificates represents not more than reasonable compensation for underwriting or placing the certificates; the sum of all payments made to and retained by the sponsor pursuant to the assignment of obligations (or interests therein) to the trust represents not more than the fair market value of such obligations (or interests); and the sum of all payments made to and retained by the servicer represents not more than reasonable compensation for the servicer's services under the pooling and servicing agreement and reimbursement of the servicer's reasonable expenses in connection therewith; and (6) The plan investing in such certificates is an ``accredited investor'' as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under the Securities Act of 1933. B. Neither any underwriter, sponsor, trustee, servicer, insurer, or any obligor, unless it or any of its affiliates has discretionary authority or renders investment advice with respect to the plan assets used by a plan to acquire certificates, shall be denied the relief provided under Part I, if the provision of subsection II.A.(6) above is not satisfied with respect to acquisition or holding by a plan of such certificates, provided that (1) such condition is disclosed in the prospectus or private placement memorandum; and (2) in the case of a private placement of certificates, the trustee obtains a representation from each initial purchaser which is a plan that it is in compliance with such condition, and obtains a covenant from each initial purchaser to the effect that, so long as such initial purchaser (or any transferee of such initial purchaser's certificates) is required to obtain from its transferee a representation regarding compliance with the Securities Act of 1933, any such transferees will be required to make a written representation regarding compliance with the condition set forth in subsection II.A.(6) above. III. Definitions For purposes of this exemption: A. ``Certificate'' means: (1) a certificate-- (a) that represents a beneficial ownership interest in the assets of a trust; and (b) that entitles the holder to pass-through payments of principal, interest, and/or other payments made with respect to the assets of such trust; or (2) a certificate denominated as a debt instrument-- (a) that represents an interest in a Real Estate Mortgage Investment Conduit (REMIC) within the meaning of section 860D(a) of the Internal Revenue Code of 1986; and (b) that is issued by and is an obligation of a trust; with respect to certificates defined in (1) and (2) above for which Rothschild or any of its affiliates is either (i) the sole underwriter or the manager or co-manager of the underwriting syndicate, or (ii) a selling or placement agent. For purposes of this exemption, references to ``certificates representing an interest in a trust'' include certificates denominated as debt which are issued by a trust. B. ``Trust'' means an investment pool, the corpus of which is held in trust and consists solely of: (1) either (a) secured consumer receivables that bear interest or are purchased at a discount (including, but not limited to, home equity loans and obligations secured by shares issued by a cooperative housing association); (b) secured credit instruments that bear interest or are purchased at a discount in transactions by or between business entities (including, but not limited to, qualified equipment notes secured by leases, as defined in section III.T); (c) obligations that bear interest or are purchased at a discount and which are secured by single-family residential, multi-family residential and commercial real property (including obligations secured by leasehold interests on commercial real property); (d) obligations that bear interest or are purchased at a discount and which are secured by motor vehicles or equipment, or qualified motor vehicle leases (as defined in section III.U); (e) ``guaranteed governmental mortgage pool certificates,'' as defined in 29 CFR 2510.3-101(i)(2); (f) fractional undivided interests in any of the obligations described in clauses (a)-(e) of this section B.(1); (2) property which had secured any of the obligations described in subsection B.(1); (3) undistributed cash or temporary investments made therewith maturing no later than the next date on which distributions are to be made to certificateholders; and (4) rights of the trustee under the pooling and servicing agreement, and rights under any insurance policies, third-party guarantees, contracts of suretyship and other credit support [[Page 35940]] arrangements with respect to any obligations described in subsection B.(1). Notwithstanding the foregoing, the term ``trust'' does not include any investment pool unless: (i) the investment pool consists only of assets of the type which have been included in other investment pools, (ii) certificates evidencing interests in such other investment pools have been rated in one of the three highest generic rating categories by S&P's, Moody's, D & P, or Fitch for at least one year prior to the plan's acquisition of certificates pursuant to this exemption, and (iii) certificates evidencing interests in such other investment pools have been purchased by investors other than plans for at least one year prior to the plan's acquisition of certificates pursuant to this exemption. C. ``Underwriter'' means: (1) Rothschild; (2) any person directly or indirectly, through one or more intermediaries, controlling, controlled by or under common control with Rothschild; or (3) any member of an underwriting syndicate or selling group of which Rothschild or a person described in (2) is a manager or co- manager with respect to the certificates. D. ``Sponsor'' means the entity that organizes a trust by depositing obligations therein in exchange for certificates. E. ``Master Servicer'' means the entity that is a party to the pooling and servicing agreement relating to trust assets and is fully responsible for servicing, directly or through subservicers, the assets of the trust. F. ``Subservicer'' means an entity which, under the supervision of and on behalf of the master servicer, services loans contained in the trust, but is not a party to the pooling and servicing agreement. G. ``Servicer'' means any entity which services loans contained in the trust, including the master servicer and any subservicer. H. ``Trustee'' means the trustee of the trust, and in the case of certificates which are denominated as debt instruments, also means the trustee of the indenture trust. I. ``Insurer'' means the insurer or guarantor of, or provider of other credit support for, a trust. Notwithstanding the foregoing, a person is not an insurer solely because it holds securities representing an interest in a trust which are of a class subordinated to certificates representing an interest in the same trust. J. ``Obligor'' means any person, other than the insurer, that is obligated to make payments with respect to any obligation or receivable included in the trust. Where a trust contains qualified motor vehicle leases or qualified equipment notes secured by leases, ``obligor'' shall also include any owner of property subject to any lease included in the trust, or subject to any lease securing an obligation included in the trust. K. ``Excluded Plan'' means any plan with respect to which any member of the Restricted Group is a ``plan sponsor'' within the meaning of section 3(16)(B) of the Act. L. ``Restricted Group'' with respect to a class of certificates means: (1) each underwriter; (2) each insurer; (3) the sponsor; (4) the trustee; (5) each servicer; (6) any obligor with respect to obligations or receivables included in the trust constituting more than 5 percent of the aggregate unamortized principal balance of the assets in the trust, determined on the date of the initial issuance of certificates by the trust; or (7) any affiliate of a person described in (1)-(6) above. M. ``Affiliate'' of another person includes: (1) Any person directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with such other person; (2) Any officer, director, partner, employee, relative (as defined in section 3(15) of the Act), a brother, a sister, or a spouse of a brother or sister of such other person; and (3) Any corporation or partnership of which such other person is an officer, director or partner. N. ``Control'' means the power to exercise a controlling influence over the management or policies of a person other than an individual. O. A person will be ``independent'' of another person only if: (1) such person is not an affiliate of that other person; and (2) the other person, or an affiliate thereof, is not a fiduciary who has investment management authority or renders investment advice with respect to any assets of such person. P. ``Sale'' includes the entrance into a forward delivery commitment (as defined in section Q below), provided: (1) The terms of the forward delivery commitment (including any fee paid to the investing plan) are no less favorable to the plan than they would be in an arm's length transaction with an unrelated party; (2) The prospectus or private placement memorandum is provided to an investing plan prior to the time the plan enters into the forward delivery commitment; and (3) At the time of the delivery, all conditions of this exemption applicable to sales are met. Q. ``Forward delivery commitment'' means a contract for the purchase or sale of one or more certificates to be delivered at an agreed future settlement date. The term includes both mandatory contracts (which contemplate obligatory delivery and acceptance of the certificates) and optional contracts (which give one party the right but not the obligation to deliver certificates to, or demand delivery of certificates from, the other party). R. ``Reasonable compensation'' has the same meaning as that term is defined in 29 CFR 2550.408c-2. S. ``Qualified Administrative Fee'' means a fee which meets the following criteria: (1) the fee is triggered by an act or failure to act by the obligor other than the normal timely payment of amounts owing in respect of the obligations; (2) the servicer may not charge the fee absent the act or failure to act referred to in (1); (3) the ability to charge the fee, the circumstances in which the fee may be charged, and an explanation of how the fee is calculated are set forth in the pooling and servicing agreement; and (4) the amount paid to investors in the trust will not be reduced by the amount of any such fee waived by the servicer. T. ``Qualified Equipment Note Secured By A Lease'' means an equipment note: (1) which is secured by equipment which is leased; (2) which is secured by the obligation of the lessee to pay rent under the equipment lease; and (3) with respect to which the trust's security interest in the equipment is at least as protective of the rights of the trust as would be the case if the equipment note were secured only by the equipment and not the lease. U. ``Qualified Motor Vehicle Lease'' means a lease of a motor vehicle where: (1) the trust holds a security interest in the lease; (2) the trust holds a security interest in the leased motor vehicle; and (3) the trust's security interest in the leased motor vehicle is at least as protective of the trust's rights as would be the case if the trust consisted of motor vehicle installment loan contracts. V. ``Pooling and Servicing Agreement'' means the agreement or [[Page 35941]] agreements among a sponsor, a servicer and the trustee establishing a trust. In the case of certificates which are denominated as debt instruments, ``Pooling and Servicing Agreement'' also includes the indenture entered into by the trustee of the trust issuing such certificates and the indenture trustee. For a more complete statement of the facts and representations supporting the Department's decision to grant this exemption, refer to the notice of proposed exemption published on May 22, 1995 at 60 FR 27132. The Department notes that this exemption is included within the meaning of the term ``Underwriter Exemption'' as it is defined in section V(h) of the grant of the Class Exemption for Certain Transactions Involving Insurance Company General Accounts, for which the notice of proposed exemption was published on August 22, 1994 at 59 FR 43134. FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department, telephone (202) 219-8881. (This is not a toll-free number.) General Information The attention of interested persons is directed to the following: (1) The fact that a transaction is the subject of an exemption under section 408(a) of the Act and/or section 4975(c)(2) of the Code does not relieve a fiduciary or other party in interest or disqualified person from certain other provisions to which the exemptions 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) These exemptions are supplemental to and not in derogation of, any other provisions of the Act and/or the Code, including statutory or administrative exemptions and transactional 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 (3) The availability of these exemptions is 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, D.C., this 7th day of July, 1995. Ivan Strasfeld, Director of Exemption Determinations, Pension and Welfare Benefits Administration, U.S. Department of Labor. [FR Doc. 95-17075 Filed 7-11-95; 8:45 am] BILLING CODE 4510-29-P