[Federal Register Volume 60, Number 177 (Wednesday, September 13, 1995)]
[Notices]
[Pages 47593-47608]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22753]



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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09845 and D-09846, et al.]


Proposed Exemptions; Prudential Property Investment Separate 
Account (PRISA) and Prudential Property Investment Separate Account II 
(PRISA II)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of Proposed Exemptions.

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

Written Comments and Hearing Requests

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

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

Notice to Interested Persons

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

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

[Application Nos. D-09845 and D-09846]

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 C.F.R. Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of section 406(a), 406(b)(1), and 
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,1 shall not apply, effective December 31, 1995, to 
the advanced commitment to provide an enhanced return and the payment 
of such return by the Prudential Insurance Company of America 
(Prudential) to various employee benefit plans (the Plan or Plans) on 
the assets of such Plans which are invested either in PRISA and/or 
PRISA II (the Account or Accounts), as of April 1, 1994, and which 
remain invested for all or any portion of a twenty-one (21) month 
period, beginning April 1, 1994, and ending December 31, 1995, (the 
Investment Period), provided that the following conditions are met:

     1 For purposes of this exemption, references to specific 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
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    (1) The decision to invest funds in either or both of the Accounts 
for all or a portion of the Investment Period has 

[[Page 47594]]
been and will be made by fiduciaries of the Plans independent of 
Prudential;
    (2) The amount of the enhanced return payment with respect to the 
assets of the Plans that are invested in either or both of the Accounts 
for only a portion of the Investment Period will be calculated in the 
same manner as the amount of the enhanced return payment with respect 
to the assets of the Plans that remain invested in either or both of 
the Accounts for the entire Investment Period;
    (3) The enhanced return will be derived by comparing the cumulative 
total return for the Investment Period reported by the expanded 
Russell-NCREIF Property Index (the Index) with the cumulative total 
return of PRISA or PRISA II for the same period;
    (4) The Plans will obtain an enhanced rate of return (but not more 
than 200 basis points) for amounts invested in one or both of the 
Accounts during all or any portion of the Investment Period, if the 
cumulative total investment return of such Account for such Investment 
Period is less than that reported for the Index;
    (5) The payments, if any, of enhanced return will be made by 
Prudential to investors in the Accounts not later than thirty (30) days 
following the final determination of the amounts owed;
    (6) Every property held by the Accounts is individually valued at 
least once during the Investment Period and thereafter will be valued 
at least once in each calendar year by an independent qualified 
appraiser;
    (7) A valuation policy committee (the Valuation Policy Committee), 
consisting of representatives from an valuation management firm (the 
Valuation Management Firm), Prudential Real Estate Investors (PREI), 
the interim and permanent advisory councils (the Advisory Council or 
Advisory Councils) composed of investors in PRISA and PRISA II and 
their consultants, and other clients of PREI, will meet at least 
quarterly and set valuation policy for the Accounts;
    (8) The Valuation Management Firm, an independent third party, will 
be responsible for retaining (and terminating) all appraisal firms 
which value the properties in the Accounts; reviewing all appraisals 
generated by such appraisal firms; and collecting, reviewing, and 
distributing any information needed by such appraisal firms to appraise 
the properties in the Accounts;
    (9) The Plans invested in the Accounts who receive the enhanced 
return will incur no additional cost or risk in connection with the 
transaction;
    (10) In connection with the determination of enhanced return 
payments, no upward adjustment will be made by Prudential to the value 
reported by an external independent appraiser of any Property in PRISA 
and PRISA II without the concurrence of the Valuation Management Firm;
    (11) Any required state insurance regulatory approvals are obtained 
for the transaction; and
    (12) The Plans will receive the same treatment and proportional 
payment under the enhanced return as any other investor in PRISA and 
PRISA II.

Summary of Facts and Representations

    1. Prudential is a mutual life insurance company organized under 
the laws of the State of New Jersey and subject to the supervision and 
examination by the Insurance Commissioner of the State of New Jersey. 
It is represented that Prudential is the largest life insurance company 
in the United States, with total consolidated assets, as of December 
31, 1993, of approximately $218 billion.
    Among the variety of insurance products and services it offers, 
Prudential provides funding, asset management and other services for 
thousands of employee benefit plans subject to the provisions of Title 
I of the Act. In this regard, Prudential maintains separate accounts in 
which pension, profit-sharing, and thrift plans participate. Prudential 
also manages the assets of such plans held in single customer separate 
accounts and advisory accounts.
    2. PRISA and PRISA II are both open-end pooled separate accounts 
created by Prudential in 1970 and 1980, respectively. The Accounts were 
designed as funding vehicles for tax-qualified employee pension benefit 
plans to invest in real estate on a commingled basis. It is represented 
that the establishment and operation of PRISA and PRISA II have been 
approved by the New Jersey Insurance Commissioner.
    As of June 30, 1994, PRISA had total net assets of approximately 
$2.25 billion, including interests in 124 properties located in 22 
states and the District of Columbia. The investors in PRISA, as of June 
30, 1994, consisted of 190 employee pension benefit plans, including 
171 plans covered under the Act and 19 governmental plans that are 
exempt from coverage under the Act.
    As of June 30, 1994, PRISA II had total net assets of approximately 
$575.6 million, including interests in 18 properties located in 12 
states and the District of Columbia. The 38 investors in PRISA II, as 
of June 30, 1994, consisted of 28 plans covered under the Act and 10 
governmental plans that are exempt from coverage under the Act.
    The assets of the Accounts consist primarily of real property, and 
may also include mortgage loans, interests in companies, including 
partnerships, which acquire, develop or manage real property, and cash 
or cash equivalents. Interests in the Accounts are expressed in terms 
of units of participation, the value of which is determined 
periodically, based upon the net value of each of the Accounts (i.e. 
the market value of the real property and other assets held in an 
Account, less the amount of liability for indebtedness and expenses). 
It is represented that every property held by the Accounts is valued at 
least once in each calendar year by an independent qualified appraiser.
    As separate accounts, PRISA and PRISA II hold assets which are 
segregated from all other assets held or managed by Prudential. In this 
regard, it is represented that the assets of each of the Accounts may 
be charged only with liabilities arising from the operation of that 
Account and may not be charged with liabilities arising from other 
business conducted by Prudential.
    3. The assets of PRISA and PRISA II are managed by PREI. PREI is a 
division of the Prudential Investment Corporation which is a direct 
subsidiary of Prudential. It is represented that PREI is a full-service 
real estate investment advisor whose sole function is to provide real 
estate investment advisory and portfolio and asset management services 
to institutional investors. In addition to PRISA and PRISA II, PREI 
manages several other pooled separate accounts maintained by Prudential 
and also manages various single customer separate accounts and advisory 
accounts. It is represented that PREI currently manages real estate 
assets of approximately $4.6 billion.
    4. The Plans which invest in PRISA and PRISA II consist of defined 
benefit plans and defined contribution plans. Investment in PRISA by 
defined contribution plans, where a unit value account is maintained 
for each individual plan participant, is limited to no more than 33 
percent (33%) of the investment fund for which such unit value is 
determined. It is represented that PRISA II does not have this 
restriction on the extent of participation by defined contribution 
plans. The Retirement System for U.S. Employees and Special Agents, a 
defined benefit plan sponsored by Prudential has invested in PRISA and 
PRISA II since 1970 and 1980, respectively. It is represented that, as 
of June 30, 1994, approximately 4 percent (4%) of the 

[[Page 47595]]
assets of this plan were in the aggregate invested in the Accounts.
    The Plans participate in the Accounts, in accordance with the 
provisions of group pension annuity contracts offered by Prudential. 
Pursuant to the terms of such group pension annuity contracts, 
Prudential is appointed as an investment manager to each of the Plans, 
with discretion to delegate to one or more of its direct or indirect 
wholly-owned subsidiaries all or part of its authority under such 
contract. It is represented that for the performance of its duties as 
investment manager of each of the Accounts, Prudential charges a 
quarterly fee of a percentage of the value of the assets in each 
Account.\2\ In this regard, Prudential acknowledges that it is a 
fiduciary and party in interest, pursuant to section 3(14) of the Act, 
with respect to each Plan, to the extent of the assets of such Plans 
which are invested in either or both Accounts, pursuant to the terms of 
such group pension annuity contracts.

    \2\ It is represented that Prudential and its affiliates rely 
upon the statutory exemption, as set forth in section 408(b)(2) of 
the Act, for the receipt of fees for investment management services 
provided with respect to PRISA and PRISA II. The Department, herein, 
expresses no opinion as to whether the provision of services by 
Prudential and its affiliates to PRISA and PRISA II and the 
compensation received therefore satisfy the terms and conditions, as 
set forth in section 408(b)(2) of the Act.
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    5. It is represented that allegations of improprieties by 
Prudential in connection with the overvaluation of properties in the 
PRISA and PRISA II portfolios arose in November 1993, as part of a suit 
brought against Prudential by a former employee. In addition, such 
allegations were the subject of an investigation by the Department of 
Labor.\3\ It is represented that Prudential hired an outside counsel, 
Sonnenschein Nath & Rosenthal (Sonnenschein), and an independent 
accounting firm, Kenneth Leventhal & Company (Leventhal), to conduct 
independent reviews of various aspects of these allegations. In this 
regard, Prudential made available to investors in PRISA and PRISA II on 
April 27, 1994, and to the Department on April 25 and June 26, 1994, 
the results of such independent reviews conducted by Sonnenschein and 
Leventhal.

    \3\ Prudential represents that, by letter dated March 21, 1995, 
it was advised that the Department had concluded its investigation, 
and that no further action was contemplated at that time.
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    As a result of these investigations and conclusions made by 
Sonnenschein and Leventhal, Prudential determined to taken certain 
steps to improve the operation and management of the Accounts. These 
efforts include: (a) Changing certain of the personnel responsible for 
the management of the Accounts; (b) establishing the Advisory Councils 
for each of the Accounts; (c) transferring responsibility for the 
valuation of properties from PREI to Prudential's Department of the 
Comptroller (the Comptroller); (d) retaining the services of the 
independent Valuation Management Firm; (e) creating the Valuation 
Policy Committee; (e) implementing a fiduciary education program for 
associates of Prudential; and (f) making financial remediation to 
investors in PRISA and PRISA II in order to restore each investor to 
his financial position, absent any overvaluation of PRISA and PRISA II 
properties.
    6. In order to make the Accounts more attractive investments for 
the Plans and in addition to the other efforts taken by Prudential, as 
described above, Prudential proposes to provide an enhanced return and 
to pay such return to the Plans on the assets of such Plans which are 
invested in either or both Accounts, as of April 1, 1994, and which 
remain invested for all or any portion of the twenty-one (21) month 
Investment Period; provided any required state insurance regulatory 
approvals are obtained and the proposed exemption is granted.\4\ In 
this regard, Prudential has requested exemptive relief from the 
prohibited transaction provision, set forth in section 406(a) of the 
Act, because it believes that its obligation to make the enhanced 
return payments could be viewed as an implicit or indirect extension of 
credit by the Plans to Prudential which will remain outstanding until 
such time as Prudential satisfies its obligation by payment of the 
enhanced return.

    \4\ By letter dated April 11, 1995, Prudential was advised that 
the New Jersey Insurance Department has approved the proposed 
enhanced return payment, as described herein.
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    Further, in Prudential's view, the proposed enhanced return could 
give rise to a conflict of interest between Prudential and the Plans 
that invest in the Accounts in violation of section 406(b)(1) and 
(b)(2) of the Act. In this regard, the amount of each Account's 
cumulative total return for the Investment Period will be affected in 
part by Prudential's exercise of its fiduciary authority, control, and 
responsibility with respect to the operation and management of the 
Accounts, including the valuation of assets of the Accounts. 
Accordingly, it could appear that Prudential has an interest in 
maximizing the cumulative total return of the Accounts, as determined 
for the Investment Period, April 1, 1994 through December 31, 1995, 
thereby reducing the amount of, or entirely eliminating, Prudential's 
obligation to make the enhanced return payment.
    7. With certain limitations, as more fully described below, the 
amount of enhanced return Prudential proposes to pay to the Plans 
invested in one or both of the Accounts will be derived by comparing 
the cumulative total return for the Investment Period reported by a 
preselected Index with the cumulative total return of PRISA or PRISA II 
for the same period.
    The Index is an index of returns (before deduction of management 
fees) on real property investments in the United States. The Index is 
produced in partnership between Russell Real Estate Consulting (a 
division of the Frank Russell Company, an investment consulting firm) 
and the National Council of Real Estate Investment Fiduciaries 
(NCREIF). NCREIF is a non-profit association of institutional real 
estate investment professionals, including investment managers, plan 
sponsors, academicians, consultants, appraisers, CPAs, and other 
service providers who have significant involvement in pension fund real 
estate investments.
    It is represented that all events giving rise to Prudential's 
payment obligation on the enhanced return will have occurred by 
December 31, 1995. However, Prudential expects that the information 
necessary to compare the cumulative total returns of PRISA and PRISA II 
to that of the Index for the Investment Period, April 1, 1994, through 
December 31, 1995, will not be available before the end of the second 
quarter of 1996. It is contemplated that the payments, if any, of 
enhanced return will be made by Prudential to investors in the Accounts 
not later than thirty (30) days following the final determination of 
the amounts owed.
    Specifically, the maximum enhanced return shall be equal to the 
product of (i) one-seventh (1/7th), multiplied by (ii) the difference 
(but not more than 200 basis points) between the cumulative total 
return for the entire Investment Period reported by the Index and the 
cumulative total return of PRISA or PRISA II, prior to reduction for 
Prudential's management fees, for such entire period, multiplied by 
(iii) the number of complete calendar quarters that the amounts remain 
invested in PRISA or PRISA II during the Investment Period.
    For example, in the case of an amount that is invested in an 
Account as of April 1, 1994, and is withdrawn on June 30, 1995, the 
enhanced return will be 

[[Page 47596]]
equal to the difference between the cumulative total return for such 
period reported by the Index and the cumulative total return of the 
Account, prior to reduction for Prudential's management fees, for the 
same period, but not more than the enhanced return (not in excess of 
200 basis points) determined with respect to the entire period April 1, 
1994 through December 31, 1995, multiplied by five-sevenths (5/7ths).
    9. Prudential represents that the exemption is administratively 
feasible in that the proposed transaction is narrowly circumscribed and 
of limited duration. In this regard, the proposed transaction involves 
a one-time determination of comparative investment returns based upon a 
recognized real estate industry index that can be readily reviewed and 
monitored for compliance in all applicable requirements. In addition, 
it is represented that the comparative return calculation involves a 
relatively simple and objective comparison of readily available return 
information, which can be easily confirmed by the fiduciaries of the 
Plans invested in the Accounts and by the Department. Further, it is 
represented that the Plans invested in the Accounts who receive the 
enhanced return will incur no additional cost or risk in connection 
with the proposed payment, and that Prudential will bear the cost of 
the exemption application and of notifying interested persons.
    10. It is represented that the exemption is in the interest of the 
Plans and their participants and beneficiaries in that the Plan will 
obtain an enhanced rate of return (but not more than 200 basis points) 
for amounts invested in one or both of the Accounts during all or any 
portion of the Investment Period, if the cumulative total investment 
return of such Account for such Investment Period is less than that 
reported for the Index. In addition, Prudential expects that its 
commitment to provide the enhanced return will reduce requests from 
investors in one or both Accounts for withdrawal, and will thereby 
avoid the negative impact on the performance of such Accounts that 
would likely result from forced liquidation of the properties in the 
Accounts in order to obtain the cash necessary to satisfy withdrawal 
requests.
    11. It is represented that the proposed exemption contains 
safeguards which protect the interests of the Plans and the rights of 
participants and beneficiaries. In this regard, the decision to invest 
funds in either or both of the Accounts for all or a portion of the 
Investment Period has been and will be made by fiduciaries of Plans 
independent of Prudential. In this regard, disclosure of Prudential's 
proposal to make enhanced return payments was first made to investors 
in the Accounts by correspondence, dated April 27, 1994. In addition, 
it is represented that the investors in the Accounts have been kept 
apprised of related developments in the Accounts, such as state 
insurance regulatory approvals and the filing of the exemption 
application. Further, it is represented that an additional level of 
independent oversight of the proposed transaction will occur through 
the review of the operations and returns of the Accounts conducted by 
interim and permanent Advisory Councils for PRISA and PRISA II.
    It is represented that the interim Advisory Councils were created 
by Prudential to be in place through year-end 1994 or until the 
transition to the permanent Advisory Councils. The responsibilities of 
the interim Advisory Councils were: (a) To review and comment upon the 
composition, structure, responsibilities, frequency of meetings, 
selection of members, and other procedures to be followed by the 
permanent Advisory Councils; (b) to review and comment on suggested 
structural changes to the Accounts, including valuation and appraisal 
policy, dividend policy, and fees; and (c) prior to appointment of the 
permanent Advisory Councils, to satisfy all the responsibilities 
pertaining to the duties of such permanent Advisory Councils, as listed 
in the paragraph below.
    The permanent Advisory Council for each Account will be composed of 
from seven to eleven (preferably nine) investors in the Accounts or 
their consultants or other representatives who have in-depth knowledge 
of real estate investment and management. Members of the Advisory 
Councils will be elected by investors on an investment weighted basis 
and will serve for a minimum of two (2) years. It is represented that 
formal meetings of the Advisory Councils will be held quarterly 
approximately thirty (30) days following the end of each quarter, with 
additional meetings to be held at the discretion of the Advisory 
Councils. It is represented that the Advisory Councils do not have veto 
authority. The role of the Advisory Councils is to monitor, review, 
comment, and advise. For each of the Accounts, the responsibilities of 
the permanent Advisory Council are: (a) To review Account investment 
strategy and philosophy, including diversification strategy; (b) to 
review the annual business plan for each Account, including the 
criteria for acquisitions, dispositions, capital expenditures and 
budgets, and to review quarterly variations to the business plan; (c) 
to review property and portfolio leverage strategy; (d) to review 
PREI's plans for paying out redemption requests; (e) to review data and 
reports sent to all clients; (f) to review and comment on acquisitions 
and dispositions; and (g) to make suggestions and to comment on all 
information presented at quarterly meetings.
    It is represented that Prudential will calculate the enhanced 
return payments and will disclose such calculations in the open forum 
of the Advisory Councils with full disclosure (through distribution of 
the minutes of Advisory Council meetings) to all investors in the 
Accounts. Further, PREI will review the returns for each Account with 
the Advisory Councils for each Account. It is represented that the 
comparative return calculation for determining the amount of the 
enhanced return payments involves a relatively simple and objective 
comparison of readily available information, which can easily be 
confirmed by the Advisory Council and the account investors.
    With respect to the valuation process, it is represented that all 
the properties in the Accounts will be individually valued at least 
once during the Investment Period and thereafter will be appraised by 
external, independent, qualified MAI appraisers at least annually. In 
this regard, it is represented that external appraisals are performed 
as of the last day of a calendar quarter. The current Prudential policy 
is for properties with market values in excess of $50 million to be 
externally appraised twice each year and properties with values below 
such amount to be externally appraised once each calendar year. In 
addition, it is represented that certain events (e.g., significant 
property or market changes, or internal adjustment of value over a 
certain threshold) can trigger additional external valuations.
    Prudential proposes to strengthen the independence of the valuation 
process through the appointment of the Valuation Management Firm and 
the creation of the Valuation Policy Committee. In addition, Prudential 
has limited the role of PREI in the valuation process to the provision 
of property, tenant, and market information and participation on the 
Valuation Policy Committee.
    The Valuation Policy Committee will consist of representatives from 
the Valuation Management Firm, PREI, the PRISA Advisory Council, and 
other clients of PREI. The Valuation Policy Committee will be chaired 
by an MAI 

[[Page 47597]]
appraiser employed by Prudential (the Prudential Valuation Reviewer). 
It is represented that Phyllis A. Cummins (Ms. Cummins), Vice President 
and Chief Appraiser of Prudential and a member of the Comptroller's 
Department, is currently serving as the Prudential Valuation Reviewer.
    It is represented that Ms. Cummins is qualified to serve as the 
Prudential Valuation Reviewer in that she has been employed by 
Prudential for over twenty (20) years and in that time has had 
significant experience in valuations, development, assets management, 
acquisitions, sales, and mortgages of all property types. In addition 
to being an MAI appraiser since 1983, Ms. Cummins holds the Counselor 
of Real Estate (CRE), the Certified Property Manager (CPM), and the 
Certified Shopping Center Manager (CSM) designations. Further, Ms. 
Cummins is certified in New Jersey as a General Appraiser and licensed 
as a Broker-Salesperson. Ms. Cummins is a graduate of The Ohio State 
University and received her MBA from the University of North Florida.
    It is represented that the Valuation Policy Committee will meet at 
least quarterly and set valuation policy, including such items as the 
minimum qualifications for appraisal firms, fee schedules for such 
firms, rotation of appraisal firms, and valuation methodology. 
Prudential represents that it will bear the costs of the Valuation 
Policy Committee.
    Prudential represents that, pursuant to guidelines established by 
the Valuation Policy Committee, it will retain for a non-renewable 
fixed term an experienced and qualified, independent third party to 
serve as the Valuation Management Firm. It is represented that the 
Valuation Management Firm will report to the Valuation Policy 
Committee. The Valuation Management Firm will be responsible for: (a) 
Retaining (and terminating) all appraisal firms which value the 
properties in the Accounts; (b) reviewing all appraisals generated by 
such appraisal firms for conformance to certain standards, including 
those established by the Valuation Policy Committee; and (c) 
collecting, reviewing, and distributing any information from PREI 
portfolio managers, asset managers, market intelligence coordinators, 
and third party property managers needed by such appraisal firms to 
appraise the properties in the Accounts. It is represented that Price 
Waterhouse is currently serving as the Valuation Management Firm.
    It is represented that the costs of the appraisal firms and the 
Valuation Management Firm are currently paid by Prudential. However, 
after significant discussions with the PRISA and PRISA II Advisory 
Councils and investors in the Accounts, Prudential has proposed a 
revised fee schedule which includes passing on the costs of third party 
appraisers and the Valuation Management Firm to the Accounts. 
Prudential believes that this practice is customary in the industry. A 
proposal to revise the fee schedule is currently being reviewed by the 
appropriate state insurance departments. Subject to the necessary 
regulatory approval, Prudential has notified the investors in the 
Accounts (as required by contract) that it intends to implement this 
new fee schedule on March 31, 1997.5 In the interim, it is 
represented that investors in the Accounts will be charged the lower of 
the two schedules until the new schedule goes into effect.

     5 Prudential has not requested relief for the institution 
of the revised fee schedule which proposes to pass on the costs of 
third party appraisers and the Valuation Management Firm to the 
Accounts.
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    The Prudential Valuation Reviewer will serve as the Valuation 
Management Firm's contact at Prudential. In this regard, it is 
anticipated that the Valuation Management Firm will report the values 
of the properties in the Accounts to the Prudential Valuation Reviewer 
who will have final approval authority. In addition, the Prudential 
Valuation Reviewer may order additional external appraisals; or, as 
necessary, may adjust property values, based on tenant, property, or 
market information provided by PREI or otherwise made available, in 
calendar quarters when no independent appraisals have been performed. 
Prudential anticipates that the Prudential Valuation Reviewer will 
adjust a value estimate provided by an external appraisal only in rare 
circumstances and extremely infrequently. In this regard, since April 
1, 1994, the Prudential Valuation Reviewer has modified the estimate of 
value of a property in an Account provided by an external appraiser in 
only one circumstance and where both the Prudential Valuation Reviewer 
and the Valuation Management Firm believed the external appraiser's 
estimate of value was overstated. It is represented that this 
adjustment in the value of a property was disclosed to the investors in 
the Account in the PRISA Quarter 1995 Report and in minutes of the May 
3, 1995 Advisory Council meeting. It is represented that any such 
similar occurrences in the future will be disclosed in a like manner. 
Further, it is represented that no upward adjustment will be made to 
the value reported by an external appraiser of any property in the 
Accounts without the Valuation Management Firm's concurrence to such 
increase in value. It is represented that the Prudential Valuation 
Reviewer will document any such changes and will report all property 
values to Prudential's Comptroller, rather than to the PREI business 
unit.
    It is represented that Prudential's Comptroller will be responsible 
for presenting values on financial statements (after adjusting any 
property not held in fee for the Account's applicable ownership 
interest). In addition, Prudential's Comptroller will calculate and 
present the unit values and returns for the Accounts.
    12. In summary, the applicant represents that the proposed 
transaction meets the statutory criteria of section 408(a) of the Act 
because:
    (1) The decision to leave funds invested in either or both of the 
Accounts for all or a portion of the Investment Period has been and 
will be made by fiduciaries of the Plans independent of Prudential;
    (2) The amount of the enhanced return payment with respect to the 
assets of the Plans that are invested in either or both of the Accounts 
for only a portion of the Investment Period will be calculated in the 
same manner as the amount of the enhanced return payment with respect 
to the assets of the Plans that remain invested in either or both of 
the Accounts for the entire Investment Period;
    (3) The enhanced return will be derived by comparing the cumulative 
total return for the Investment Period reported by the Index with the 
cumulative total return of PRISA or PRISA II for the same period;
    (4) The Plans will obtain an enhanced rate of return (but not more 
than 200 basis points) for amounts invested in one or both of the 
Accounts during all or any portion of the Investment Period, if the 
cumulative total investment return of such Account for such Investment 
Period is less than that reported for the Index;
    (5) The payments, if any, of enhanced return will be made by 
Prudential to investors in the Accounts not later than thirty (30) days 
following the final determination of the amounts owed;
    (6) Every property held by the Accounts is individually valued at 
least once during the Investment Period and thereafter will be valued 
at least once in each calendar year by an independent qualified 
appraiser;
    (7) Independent oversight of the proposed transaction will occur 
through 

[[Page 47598]]
the review of the operations and returns of the Accounts conducted by 
interim and permanent Advisory Councils for PRISA and PRISA II;
    (8) The Valuation Policy Committee will meet at least quarterly and 
set valuation policy for the Accounts;
    (9) The Valuation Management Firm will be responsible for retaining 
(and terminating) all appraisal firms which value the properties in the 
Accounts; reviewing all appraisals generated by such appraisal firms; 
and collecting, reviewing, and distributing any information needed by 
such appraisal firms to appraise the properties in the Accounts;
    (10) In connection with the determination of enhanced return 
payments, no upward adjustment will be made by Prudential to the value 
reported by an external independent appraiser of any Property in PRISA 
and PRISA II without the concurrence of the Valuation Management Firm;
    (11) The Plans invested in the Accounts who receive the enhanced 
return will incur no additional cost or risk in connection with the 
transaction;
    (12) The transaction is subject to state insurance regulatory 
approvals;
    (13) The calculation of the enhanced return involves a one-time 
determination of comparative investment returns based upon a recognized 
real estate industry index that can be readily reviewed and monitored 
for compliance in all applicable requirements;
    (14) The comparative return calculation involves a relatively 
simple and objective comparison of readily available return 
information, which can be easily confirmed by the fiduciaries of the 
Plans invested in the Accounts and by the Department; and
    (15) The Plans will receive the same treatment and proportional 
payment under the enhanced return as any other investor in PRISA and 
PRISA II.

Notice to Interested Persons

    Those persons who may be interested in the pendency of the proposed 
exemption include fiduciaries, participants and beneficiaries of the 
Plans that are invested in one or both of the Accounts. However, it is 
represented that there are hundreds of thousands of participants in the 
Plans that invest in one or both of the Accounts. Because of the 
impracticality of providing notice to all such persons, Prudential 
proposes to give notice to interested persons by distributing the 
Notice of Proposed Exemption, as published in the Federal Register, 
together with a supplemental statement in the form set forth in the 
Department's regulations under 29 C.F.R. 2570.43(b)(2), to the 
contractholder on behalf of each of the Plans that was invested in 
PRISA or PRISA II, as of April 1, 1994. It is represented that these 
contractholders are generally the sponsors of the Plans or the trustees 
or administrators of the Plans. Distribution of notice will be effected 
by first-class mail, postage pre-paid, within fifteen (15) days of the 
date of publication of the Notice of Proposed Exemption in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the 
Department, telephone (202) 219-8883 (This is not a toll-free number.)
First Hawaiian Bank Located Honolulu, HI

[Application No. D-09877]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act and 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).6

     6 For purposes of this exemption, reference to provisions of 
Title I of the Act, unless otherwise specified, refer also to 
corresponding provisions of the Code.
---------------------------------------------------------------------------

Section I. Exemption for In-Kind Transfer of Assets
    If the exemption is granted, the restrictions of section 406(a) and 
section 406(b) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (F) of the Code, shall not apply to the in-kind 
transfer to any open-end investment company (the Fund or Funds) 
registered under the Investment Company Act of 1940 (the '40 Act) to 
which First Hawaiian Bank or any of its affiliates (collectively, the 
Bank) serves as investment adviser and may provide other services, of 
the assets of various employee benefit plans (the Plan or Plans) that 
are held in certain collective investment funds (the CIF or CIFs) 
maintained by the Bank or otherwise held by the Bank as trustee, 
investment manager, or in any other capacity as fiduciary on behalf of 
the Plans, in exchange for shares of such Funds, provided the following 
conditions are met:
    (a) A fiduciary (the Second Fiduciary) who is acting on behalf of 
each affected Plan and who is independent of and unrelated to the Bank, 
as defined in paragraph (g) of Section III below, receives advance 
written notice of the in-kind transfer of assets of the Plans or the 
CIFs in exchange for shares of the Fund and the disclosures described 
in paragraph (g) of Section II below.
    (b) On the basis of the information described in paragraph (g) of 
Section II below, the Second Fiduciary authorizes in writing the in-
kind transfer of assets of the Plans in exchange for shares of the 
Funds, the investment of such assets in corresponding portfolios of the 
Funds, and the fees received by the Bank in connection with its 
services to the Fund. Such authorization by the Second Fiduciary to be 
consistent with the responsibilities, obligations, and duties imposed 
on fiduciaries by Part 4 of Title I of the Act.
    (c) No sales commissions are paid by the Plans in connection with 
the in-kind transfers of asset of the Plans or the CIFs in exchange for 
shares of the Funds.
    (d) All or a pro rata portion of the assets of the Plans held in 
the CIFs or all or a pro rata portion of the assets of the Plans held 
by the Bank in any capacities as fiduciary on behalf of such Plans are 
transferred in-kind to the Funds in exchange for shares of such Funds.
    (e) The Plans or the CIFs receive shares of the Funds that have a 
total net asset value equal in value to the assets of the Plans or the 
CIFs exchanged for such shares on the date of transfer.
    (f) The current market value of the assets of the Plans or the CIFs 
to be transferred in-kind in exchange for shares is determined in a 
single valuation performed in the same manner and at the close of 
business on the same day, using independent sources in accordance with 
the procedures set forth in Rule 17a-7b (Rule 17a-7) under the '40 Act, 
as amended from time to time or any successor rule, regulation, or 
similar pronouncement and the procedures established by the Funds 
pursuant to Rule 17a-7 for the valuation of such assets. Such 
procedures must require that all securities for which a current market 
price cannot be obtained by reference to the last sale price for 
transactions reported on a recognized securities exchange or NASDAQ be 
valued based on an average of the highest current independent bid and 
lowest current independent offer, as of the close of business on the 
last business day preceding the date of the Plan or CIF transfers 
determined on the basis of reasonable inquiry from at least three 
sources that are broker-dealers or pricing services independent of the 
Bank.
    (g) Not later than 30 business days after completion of each in-
kind transfer of assets of the Plans or the CIFs in 

[[Page 47599]]
exchange for shares of the Funds, the Bank sends by regular mail to the 
Second Fiduciary, who is acting on behalf of each affected Plan and who 
is independent of and unrelated to the Bank, as defined in paragraph 
(g) of Section III below, a written confirmation that contains the 
following information:
    (1) The identity of each of the assets that was valued for purposes 
of the transaction in accordance with Rule 17a-7(b)(4) under the '40 
Act;
    (2) The price of each of the assets involved in the transaction; 
and
    (3) The identity of each pricing service or market maker consulted 
in determining the value of such assets; and
    (h) No later than 90 days after completion of each in-kind transfer 
of assets of the Plans or the CIFs in exchange for shares of the Funds, 
the Bank sends by regular mail to the Second Fiduciary, who is acting 
on behalf of each affected Plan and who is independent of and unrelated 
to the Bank, as defined in paragraph (g) of Section III below, a 
written confirmation that contains the following information:
    (1) The number of CIF units held by each affected Plan immediately 
before the conversion (and the related per unit value and the aggregate 
dollar value of the units transferred); and
    (2) The number of shares in the Funds that are held by each 
affected Plan following the conversion (and the related per share net 
asset value and the aggregate dollar value of the shares received).
    (i) The conditions set forth in paragraphs (d), (e), (f), (o), (p), 
(q) and (r) of Section II below are satisfied.
Section II. Exemption for Receipt of Fees From Funds
    If the exemption is granted, the restrictions of section 406(a) and 
section 406(b) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(D) through (F) of the Code shall not apply to the proposed 
receipt of fees by the Bank from the Funds for acting as the investment 
adviser, custodian, sub-administrator, and other service provider for 
the Funds in connection with the investment in the Funds by the Plans 
for which the Bank acts as a fiduciary provided that:
    (a) No sales commissions are paid by the Plans in connection with 
purchases or sales of shares of the Funds and no redemption fees are 
paid in connection with the sale of such shares by the Plans to the 
Funds.
    (b) The price paid or received by the Plans for shares in the Funds 
is the net asset value per share, as defined in paragraph (e) of 
Section III, at the time of the transaction and is the same price which 
would have been paid or received for the shares by any other investor 
at that time.
    (c) Neither the Bank nor an affiliate, including any officer or 
director purchases from or sells to any of the Plans shares of any of 
the Funds.
    (d) As to each individual Plan, the combined total of all fees 
received by the Bank for the provision of services to the Plan, and in 
connection with the provision of services to any of the Funds in which 
the Plan may invest, is not in excess of ``reasonable compensation'' 
within the meaning of section 408(b)(2) of the Act.
    (e) The Bank does not receive any fees payable, pursuant to Rule 
12b-1 under the '40 Act (the 12b-1 Fees) in connection with the 
transactions.
    (f) The Plans are not sponsored by the Bank.
    (g) A Second Fiduciary who is acting on behalf of each Plan and who 
is independent of and unrelated to the Bank, as defined in paragraph 
(g) of Section III below, receives in advance of the investment by the 
Plan in any of the Funds a full and detailed written disclosure of 
information concerning such Fund (including, but not limited to, a 
current prospectus for each portfolio of each of the Funds in which 
such Plan is considering investing and a statement describing the fee 
structure).
    (h) On the basis of the information described in paragraph (g) of 
this Section II, the Second Fiduciary authorizes in writing the 
investment of assets of the Plans in shares of the Funds and the fees 
received by the Bank in connection with its services to the Funds. Such 
authorization by the Second Fiduciary is consistent with the 
responsibilities obligations, and duties imposed on fiduciaries by Part 
4 of Title I of the Act.
    (i) The authorization, described in paragraph (h) of this Section 
II, is terminable at will by the Second Fiduciary of a Plan, without 
penalty to such Plan. Such termination will be effected by the Bank 
selling the shares of the Fund held by the affected Plan within one 
business day following receipt by the Bank, either by mail, hand 
delivery, facsimile, or other available means at the option of the 
Second Fiduciary, of the termination form (the Termination Form), as 
defined in paragraph (i) of Section III below, or any other written 
notice of termination; provided that if, due to circumstances beyond 
the control of the Bank, the sale cannot be executed within one 
business day, the Bank shall have one additional business day to 
complete such redemption.
    (j) Plans do not pay any Plan-level investment management fees, 
investment advisory fees, or similar fees to the Bank with respect to 
any of the assets of such Plans which are invested in shares of any of 
the Funds. This condition does not preclude the payment of investment 
advisory fees or similar fees by the Funds to the Bank under the terms 
of an investment advisory agreement adopted in accordance with section 
15 of the '40 Act or other agreement between the Bank and the Funds.
    (k) In the event of an increase in the rate of any fees paid by the 
Funds to the Bank regarding any investment management services, 
investment advisory services, or fees for similar services that the 
Bank provides to the Funds over an existing rate for such services that 
had been authorized by a Second Fiduciary, in accordance with paragraph 
(h) of this Section II, the Bank will, at least 30 days in advance of 
the implementation of such increase, provide a written notice (which 
may take the form of a proxy statement, letter, or similar 
communication that is separate from the prospectus of the Fund and 
which explains the nature and amount of the increase in fees) to the 
Second Fiduciary of each of the Plans invested in a Fund which is 
increasing such fees. Such notice shall be accompanied by the 
Termination Form, as defined in paragraph (i) of Section III below.
    (l) In the event of an addition of a Secondary Service, as defined 
in paragraph (h) of Section III below, provided by the Bank to the Fund 
for which a fee is charged or an increase in the rate of any fee paid 
by the Funds to the Bank for any Secondary Service, as defined in 
paragraph (h) of Section III below, that results either from an 
increase in the rate of such fee or from the decrease in the number or 
kind of services performed by the Bank for such fee over an existing 
rate for such Secondary Service which had been authorized by the Second 
Fiduciary of a Plan, in accordance with paragraph (h) of this Section 
II, the Bank will at least 30 days in advance of the implementation of 
such additional service for which a fee is charged or fee increase, 
provide a written notice (which may take the form of a proxy statement, 
letter, or similar communication that is separate from the prospectus 
of the Fund and which explains the nature and amount of the additional 
service for which a fee is charged or the nature and amount of the 
increase in fees) to the Second Fiduciary 

[[Page 47600]]
of each of the Plans invested in a Fund which is adding a service or 
increasing fees. Such notice shall be accompanied by the Termination 
Form, as defined in paragraph (i) of Section III below.
    (m) The Second Fiduciary is supplied with a Termination Form at the 
times specified in paragraphs (k), (l), and (n) of this Section II, 
which expressly provides an election to terminate the authorization, 
described above in paragraph (h) of this Section II, with instructions 
regarding the use of such Termination Form including statements that:
    (1) The authorization is terminable at will by any of the Plans, 
without penalty to such Plans. Such termination will be effected by the 
Bank redeeming shares of the Fund held by the Plans requesting 
termination within one business day following receipt by the Bank, 
either by mail, hand delivery, facsimile, or other available means at 
the option of the Second Fiduciary, of the Termination Form or any 
other written notice of termination; provided that if, due to 
circumstances beyond the control of the Bank, the redemption of shares 
of such Plans cannot be executed within one business day, the Bank 
shall have one additional business day to complete such redemption; and
    (2) Failure by the Second Fiduciary to return the Termination Form 
on behalf of a Plan will be deemed to be an approval of the additional 
Secondary Service for which a fee is charged or increase in the rate of 
any fees, if such Termination Form is supplied pursuant to paragraphs 
(k) and (l) of this Section II, and will result in the continuation of 
the authorization, as described in paragraph (h) of this Section II, of 
the Bank to engage in the transactions on behalf of such Plan.
    (n) The Second Fiduciary is supplied with a Termination Form, 
annually during the first quarter of each calendar year, beginning with 
the first quarter of the calendar year that begins after the date the 
grant of this proposed exemption is published in the Federal Register 
and continuing for each calendar year thereafter; provided that the 
Termination Form need not be supplied to the Second Fiduciary, pursuant 
to paragraph (n) of this Section II, sooner than six months after such 
Termination Form is supplied pursuant to paragraphs (k) and (l) of this 
Section II, except to the extent required by said paragraphs (k) and 
(l) of this Section II to disclose an additional Secondary Service for 
which a fee is charged or an increase in fees.
    (o)(1) With respect to each of the Funds in which a Plan invests, 
the Bank will provide the Second Fiduciary of such Plan:
    (A) At least annually with a copy of an updated prospectus of such 
Fund;
    (B) Upon the request of such Second Fiduciary, with a report or 
statement (which may take the form of the most recent financial report, 
the current statement of additional information, or some other written 
statement) which contains a description of all fees paid by the Fund to 
the Bank; and
    (2) With respect to each of the Funds in which a Plan invests, in 
the event such Fund places brokerage transactions with the Bank, the 
Bank will provide the Second Fiduciary of such Plan at least annually 
with a statement specifying:
    (A) The total, expressed in dollars, brokerage commissions of each 
Fund's investment portfolio that are paid to the Bank by such Fund;
    (B) The total, expressed in dollars, of brokerage commissions of 
each Fund's investment portfolio that are paid by such Fund to 
brokerage firms unrelated to the Bank;
    (C) The average brokerage commissions per share, expressed as cents 
per share, paid to the Bank by each portfolio of a Fund; and
    (D) The average brokerage commissions per share, expressed as cents 
per share, paid by each portfolio of a Fund to brokerage firms 
unrelated to the Bank.
    (p) All dealings between the Plans and any of the Funds are on a 
basis no less favorable to such Plans than dealings between the Funds 
and other shareholders holding the same class of shares as the Plans.
    (q) The Bank maintains for a period of 6 years the records 
necessary to enable the persons, as described in paragraph (r) of 
Section II below, to determine whether the conditions of this proposed 
exemption have been met, except that:
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of the Bank, the 
records are lost or destroyed prior to the end of the 6 year period; 
and
    (2) No party in interest, other than the Bank, shall be subject to 
the civil penalty that may be assessed under section 502(i) of the Act, 
or to the taxes imposed by section 4975 (a) and (b) of the Code, if the 
records are not maintained, or are not available for examination as 
required by paragraph (r) of Section II below;
    (r)(1) Except as provided in paragraph (r)(2) of this Section II 
and notwithstanding any provisions of subsection (a)(2) and (b) of 
section 504 of the Act, the records referred to in paragraph (q) of 
Section II above are unconditionally available at their customary 
location for examination during normal business hours by--
    (i) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service (the Service) or the 
Securities and Exchange Commission (the SEC);
    (ii) Any fiduciary of each of the Plans who has authority to 
acquire or dispose of shares of any of the Funds owned by such a Plan, 
or any duly authorized employee or representative of such fiduciary; 
and
    (iii) Any participant or beneficiary of the Plans or duly 
authorized employee or representative of such participant or 
beneficiary;
    (2) None of the persons described in paragraph (r)(1)(ii) and 
(r)(1)(iii) of Section II shall be authorized to examine trade secrets 
of the Bank, or commercial or financial information which is privileged 
or confidential.
Section III. Definitions
    For purposes of this proposed exemption,
    (a) The term ``Bank'' means First Hawaiian Bank and any affiliate 
of the Bank, as defined in paragraph (b) of this Section III.
    (b) An ``affiliate'' of a person includes:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person.
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The term ``Fund or Funds'' means any diversified open-end 
investment company or companies registered under the '40 Act for which 
the Bank serves as investment adviser, and may also provide custodial 
or other services as approved by such Funds.
    (e) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and sales calculated by dividing the value of all 
securities, determined by a method as set forth in a Fund's prospectus 
and statement of additional information, and other assets belonging to 
each of the portfolios in such Fund, less the liabilities charged to 
each portfolio, by the number of outstanding shares.
    (f) The term ``relative'' means a ``relative'' as that term is 
defined in 

[[Page 47601]]
section 3(15) of the Act (or a ``member of the family'' as that term is 
defined in section 4975(e)(6) of the Code), or a brother, a sister, or 
a spouse of a brother or a sister.
    (g) The term ``Second Fiduciary'' means a fiduciary of a plan who 
is independent of and unrelated to the Bank. For purposes of this 
exemption, the Second Fiduciary will not be deemed to be independent of 
and unrelated to the Bank if:
    (1) Such Second Fiduciary directly or indirectly controls, is 
controlled by, or is under common control with the Bank;
    (2) Such Second Fiduciary, or any officer, director, partner, 
employee, or relative of such Second Fiduciary is an officer, director, 
partner, or employee of the Bank (or is a relative of such persons);
    (3) Such Second Fiduciary directly or indirectly receives any 
compensation or other consideration for his or her own personal account 
in connection with any transaction described in this proposed 
exemption.
    If an officer, director, partner, or employee of the Bank (or a 
relative of such persons), is a director of such Second Fiduciary, and 
if he or she abstains from participation in (i) the choice of the 
Plan's investment manager/adviser, (ii) the approval of any purchase or 
redemption by the Plan of shares of the Funds, and (iii) the approval 
of any change of fees charged to or paid by the Plan, in connection 
with any of the transactions described in Sections I and II above, then 
paragraph (g)(2) of Section III above, shall not apply.
    (h) The term ``Secondary Service'' means a service, other than an 
investment management, investment advisory, or similar service, which 
is provided by the Bank to the Funds, including but not limited to 
custodial, accounting, brokerage, administrative, or any other service.
    (i) The term ``Termination Form'' means the form supplied to the 
Second Fiduciary, at the times specified in paragraphs (k), (l), and 
(n) of Section II above, which expressly provides an election to the 
Second Fiduciary to terminate on behalf of the Plans the authorization, 
described in paragraph (h) of Section II. Such Termination Form may be 
used at will by the Second Fiduciary to terminate such authorization 
without penalty to the Plans and to notify the Bank in writing to 
effect such termination by redeeming the shares of the Fund held by the 
Plans requesting termination within one business day following receipt 
by the Bank, either by mail, hand delivery, facsimile, or other 
available means at the option of the Second Fiduciary, of written 
notice of such request for termination; provided that if, due to 
circumstances beyond the control of the Bank, the redemption cannot be 
executed within one business day, the Bank shall have one additional 
business day to complete such redemption.

Summary of Facts and Representations

Description of the Parties
    1. The parties or entities that are involved in the subject 
transactions are described as follows:
    a. The Bank is state-chartered bank that is incorporated under the 
laws of Hawaii and maintains its principal office at 1132 Bishop 
Street, Honolulu, Hawaii. The Bank is a wholly-owned subsidiary of 
First Hawaiian, Inc., a Delaware holding company.
    Over the past seventy years, the Bank and its corporate 
predecessors have provided asset management services to several types 
of accounts including personal trusts, guardianship and probate 
accounts, corporate assets portfolio accounts and employee benefit 
plans including HR-10 Plans. As of May 1, 1994, the Bank had total 
assets under management of approximately $1.5 billion. The Bank serves 
as trustee with respect to the CIFs and as an investment adviser to the 
Fund portfolios described herein.
    b. The Plans consist of retirement plans qualified under section 
401(a) of the Code with respect to which the Bank serves or will serve 
as a trustee or investment fiduciary and that constitute ``pension 
plans'' as defined in section 3(2) of the Act and section 4975(e)(1) of 
the Code. The Plans do not include any plans that are sponsored by the 
Bank.\7\

    \7\ The Department herein is not proposing relief for 
transactions afforded relief by Section 404(c) of the Act.
---------------------------------------------------------------------------

    c. The CIFs consist of separate investment portfolios of the First 
Hawaiian Bank Collective Investment Trust for Employee Benefit Trusts 
(the Collective Investment Trust) or similar investment trusts that may 
be established and maintained by the Bank. The Bank serves as trustee 
of the Collective Investment Trust.
    As of June 30, 1993, the aggregate fair market value of the current 
CIFs maintained by the Bank was approximately $165.3 million. 
Participation in the CIFs is limited to Plans and public retirement 
funds for which the Bank acts as trustee or co-trustee or agent for the 
trustee or trustees of such Plan or CIF.
    The CIFs that will be involved initially in the subject 
transactions are the Equity Fund, the HR-10 Equity Fund and the Pooled 
Fixed Income Fund.\8\ These CIFs will be terminated immediately 
following the in-kind transfers.\9\

    \8\ The Pooled Equity Fund and the HR-10 Equity Fund principally 
invest in equity securities. The Pooled Fixed Income Fund invests 
primarily in fixed income securities or other tangible or intangible 
property or interests in either real or personal property.
    \9\ A fourth CIF, the Pooled Short-Term Fixed Income Fund, will 
be terminated at or prior to the time that the other CIFs are 
converted. At present, the only investor in this CIF is the Pooled 
Fixed Income Fund.
    d. The Funds are separate portfolios of open-end investment 
companies registered under the '40 Act. The Funds currently consist of 
the Bishop Street Funds, a Massachusetts business trust that was 
established on May 25, 1994. The Bishop Street Funds constitute a no-
load, open-end management investment company with four portfolios in 
existence. The existing Funds include the Equity Fund (corresponding to 
the Pooled Equity Fund and the HR-10 Equity Fund of the Collective 
Investment Trust) and the High-Grade Income Fund (corresponding to the 
Fixed Income Fund of the Collective Investment Trust).
    The Bishop Street Funds will issue two classes of shares. 
Institutional Class A shares will be offered primarily to agency, 
fiduciary, custodial and advisory clients of the Bank. Retail Class B 
shares will be offered primarily to individuals. The Bishop Street 
Funds will be offered and sold exclusively through the use of 
prospectuses and other materials and will be offered and sold in full 
compliance with regulations of the SEC.
    The Bank will serve as the investment adviser to each of the Bishop 
Street Funds. As the investment adviser, the Bank will make investment 
decisions with respect to the assets of each Fund and continuously 
review, supervise and administer each Fund's investment program. For 
investment advisory services rendered to the Funds, the Bank will 
receive an investment advisory fee. The Bishop Street Funds will pay 
separate fees for services provided to the Funds by the transfer agent, 
administrator and custodian, all of whom will not be affiliated with 
the Bank. Neither the Bank nor its affiliates will receive any 12b-1 
fees from the Funds.
Description of the Transactions
    2. Because the Bank recognizes that (a) in-kind transfers to Funds 
that the Bank services or advises of all or a pro rata portion of Plan 
assets in the CIFs or all or a pro rata portion of Plan assets 

[[Page 47602]]
that the Bank otherwise manages, and (b) the approval process for 
additional services for which a fee is charged and fee increases by the 
Bank for these services may be outside the scope of Prohibited 
Transaction Exemption 77-4 (42 FR 18732, April 8, 1977), the Bank has 
requested relief for the transactions described in Sections I and II. 
Each of these transactions is discussed more fully herein. The proposed 
exemption is conditioned on the satisfaction of certain requirements 
and compliance with various general conditions which are also discussed 
below. It is the Bank's express intention that the description of these 
transactions and the conditions of the requested exemption with respect 
to such transactions will be applicable uniformly to the current Funds 
and to any of the other Funds for which the Bank serves as the 
investment advisor and in which the Plans invest.
In-Kind Transfers to Funds
    3. The Bank has maintained CIFs in which the Plans have invested in 
accordance with requirements under Hawaiian banking law that apply to 
CIFs. The Bank has decided to terminate all current CIFs and to offer 
to the Plans participating in such CIFs appropriate interests in 
certain Funds as alternative investments. Because interests in CIFs 
generally must be liquidated or withdrawn to effect distributions, the 
Bank believes that the interests of the Plans invested in CIFs would be 
better served by investment in shares of the Funds which can be 
distributed in-kind. Also, the Bank believes that the Funds offer the 
Plans numerous advantages as pooled investment vehicles. In this 
regard, the Plans, as shareholders of a Fund, have the opportunity to 
exercise voting and other shareholder rights.
    The Plans, as shareholders of the Funds, as mandated by the SEC, 
periodically receive certain disclosures concerning the Funds: (a) A 
copy of the prospectus which is updated annually; (b) an annual report 
containing audited financial statements of the Funds and information 
regarding such Funds' performance (unless such performance information 
is included in the prospectus of such Funds); and (c) a semi-annual 
report containing unaudited financial statements. In addition, at the 
option of the Funds, the Plans may receive other pertinent information.
    With respect to the Plans, the Bank reports all transactions in 
shares of the Funds in periodic account statements provided the Second 
Fiduciary of each of the Plans. Further, the Bank maintains that the 
net asset value of the portfolios of the Funds can be monitored daily 
from information available in newspapers of general circulation.
    In order to avoid the potentially large brokerage expenses that 
would otherwise be incurred, the Bank proposes that from time to time 
it may be appropriate for an individual Plan for which the Bank serves 
as a fiduciary to transfer all or a pro rata share of its in-kind 
assets to any of the Funds in exchange for shares of such Funds. In 
this regard, for example, in the case of an in-kind exchange between an 
individual Plan whose portfolio consists of common stock, money market 
securities and real estate, and a Fund that, under its investment 
policy, invests only in common stock and money market securities, the 
exchange would involve all or a pro rata share of the common stock and 
money market securities held by the Plan, if such stock and securities 
are eligible for purchase by the Fund, and would not involve the 
transfer or exchange of the real estate holdings of such Plan. A Fund's 
eligible investments are set forth in its prospectus. No brokerage 
commission or other fees or expenses (other than customary transfer 
charges paid to parties other than the Bank or its affiliates) will be 
charged to the Plans or the CIFs in connection with the in-kind 
transfers of assets into the Funds and the acquisition of shares of the 
Funds by the Plans or the CIFs. Thus, the Bank has requested 
prospective relief for transactions which would involve: (a) The in-
kind transfer by the CIFs of all or a pro rata portion of the assets of 
any of the Plans held in such CIFs to the Funds in exchange for shares 
of the Fund which subsequently are distributed to the Plans; or (b) the 
in-kind transfer of all or a pro rata portion of the assets of any of 
the Plans held by the Bank in any capacity as fiduciary on behalf of 
such Plans to the Funds in exchange for shares of such Funds; provided 
that conditions described in Section I above are satisfied.
    The Bank maintains that the in-kind transfers of assets in exchange 
for shares of the Funds are ministerial transactions performed in 
accordance with pre-established objective procedures which are approved 
by the board of trustees of each Fund. Such procedures require that 
assets transferred to a Fund: (a) Are consistent with the investment 
objectives, policies, and restrictions of the corresponding portfolios 
of such Fund, (b) satisfy the applicable requirements of the '40 Act 
and the Code, and (c) have a readily ascertainable market value. In 
addition, any assets that are transferred will be liquid and will not 
be subject to restrictions on resale. Assets which do not meet these 
requirements will be sold in the open market through an unaffiliated 
brokerage firm prior to any transfer in-kind. Further, prior to 
entering into an in-kind transfer, each affected Plan receives certain 
disclosures from the Bank and approves such transaction in writing.
    Valuation of assets transferred in-kind to the Funds will be 
established by reference to independent sources. In this regard, for 
purposes of the transaction, it is represented that all assets 
transferred in-kind are valued in accordance with the valuation 
procedures described in Rule 17a-7 under the '40 Act, as amended from 
time to time or any successor rule, regulation, or similar 
pronouncement and the procedures established by the Funds pursuant to 
Rule 17a-7 for the valuation of such assets. Such procedures must 
require that all securities for which a current market price cannot be 
obtained by reference to the last sale price for transactions reported 
on a recognized securities exchange or NASDAQ be valued based on an 
average of the highest current independent bid and lowest current 
independent offer, as of the close of business on the last business day 
preceding the date of the Plan or CIF transfers determined on the basis 
of reasonable inquiry from at least three sources that are broker-
dealers or pricing services independent of the Bank.
    Further, the Bank represents that within 30 days of the completion 
of a transfer in-kind, it will provide to Plans written confirmation of 
the identity of each security valued under Rule 17a-7(b)(4), the price 
of each security, and the identity of each pricing service or market 
maker consulted in determining the value of the assets transferred. The 
securities subject to valuation under Rule 17(a)-7(b)(4) include all 
securities other than ``reported securities,'' as the term is defined 
in Rule 11Aa3-1 under the Securities Exchange Act of 1934 (the '34 
Act), or those quoted on the NASDAQ system or for which the principal 
market is an exchange.
    The value of the assets transferred in-kind will be equal to the 
aggregate value of the corresponding portfolios shares of the Fund at 
the close of business on the date of the transaction. In this regard, 
it is represented that for all conversion transactions that occur after 
the date of this proposed exemption, the Bank, no later than 90 days 
after completion of each in-kind transfer of assets of the Plans or the 
CIFs in exchange for shares of the Funds, will mail to the Second 
Fiduciary a written confirmation of the 

[[Page 47603]]
number of CIF units held by each affected Plan immediately before the 
conversion (and the related per unit value and the aggregate dollar 
value of the units transferred), and the number of shares in the Funds 
that are held by each affected Plan following the conversion (and the 
related per share net asset value and the aggregate dollar value of the 
shares received).
The Initial Exemption Transactions
    4. The Bank has requested prospective exemptive relief, for the in-
kind transfer to the Bishop Street Funds. At the time of such in-kind 
transfer, all of the assets of the three CIFs described above, which 
are maintained by the Bank and in which the Plans hold interests, will 
be transferred to the Bishop Street Funds which have investment 
objectives and policies substantially identical to those of the CIFs. 
At the same time, the three CIFs will be terminated and the assets of 
each, then consisting of shares in portfolios of the Bishop Street 
Funds, will be distributed in-kind to the Plans participating in such 
CIFs based on each Plan's pro rata share of the assets of the CIFs on 
the date of the transaction.
    The Bank will provide to each affected Plan disclosures that 
announce the termination of the CIFs, summarize the transaction and 
otherwise comply with provisions of Section I of the exemption. Based 
on these disclosures, the Second Fiduciary from each affected Plan will 
approve in writing the transfer of the CIFs' assets to the 
corresponding portfolios of the Bishop Street Funds in exchange for 
shares of the Bishop Street Funds, and the receipt by the Bank of fees 
for services to the Bishop Street Funds. The assets of Plans that do 
not approve investment in the Bishop Street Funds will be withdrawn 
from the CIFs and held or invested in appropriate alternative 
investments in accordance with the terms of such Plans.
    Prior to the transaction, the assets of the three CIFs will be 
reviewed to confirm that such are appropriate investments for the 
corresponding portfolios of the Bishop Street Funds into which such 
assets will be transferred. If any of the assets of the three CIFs are 
not appropriate for the Bishop Street Funds, the Bank intends to sell 
such assets in the open market through an unaffiliated brokerage firm 
prior to the transfer.
    The assets transferred by the three CIFs to the Bishop Street Funds 
will consist entirely of cash and marketable securities. For purposes 
of the transfer in-kind, the value of the securities in each of the 
three CIFs will be determined based on market values as of the close of 
business on the last business date prior to the transfer (the CIF 
Valuation Date). The values will be determined in a single valuation 
using the valuation procedures described in Rule 17a-7 under the '40 
Act. In this regard, the ``current market price'' for specific types of 
CIF securities involved in the transaction will be determined as 
follows:

    a. If the security is a ``reported security'' as the term is 
defined in Rule 11Aa3-1 under the 1934 Act, the last sale price with 
respect to such security reported in the consolidated transaction 
reporting system (the Consolidated System) for the CIF Valuation 
Date; or if there are no reported transactions in the Consolidated 
System that day, the average of the highest independent bid and the 
lowest independent offer for such security (reported pursuant to 
Rule 11Ac1-1 under the '34 Act), as of the close of business on the 
CIF Valuation Date; or
    b. If the security is not a reported security, and the principal 
market for such security is an exchange, then the last sale on such 
exchange on the CIF Valuation Date; or if there is no reported 
transaction on such exchange that day, the average of the highest 
independent bid and lowest independent offer on such exchange as of 
the close of business on the CIF Valuation Date; or
    c. If the security is not a reported security and is quoted in 
the NASDAQ system, then the average of the highest independent bid 
and lowest independent offer reported on Level 1 of NASDAQ as of the 
close of business on the CIF Valuation Date; or
    d. For all other securities, the average of the highest 
independent bid and lowest independent offer as of the close of 
business on the CIF Valuation Date, determined on the basis of 
reasonable inquiry. For securities in this category, the Bank 
intends to obtain quotations from at least three sources that are 
either broker-dealers or pricing services independent of and 
unrelated to the Bank and, where more than one valid quotation is 
available, use the average of the quotations to value the 
securities, in conformance with interpretations by the SEC and 
practice under Rule 17a-7.

    The securities received by the corresponding portfolios of the 
Bishop Street Funds will be valued by such portfolio for purposes of 
the transfer in the same manner and on the same day as such securities 
will be valued by the CIFs. The per share value of the shares of each 
portfolio of the Bishop Street Funds issued to the CIFs will be based 
on the corresponding portfolio's then current net asset value. As a 
result of the proposed procedure, the Bank expects that the aggregate 
value of the shares of the corresponding portfolio of the Bishop Street 
Funds issued to the CIFs to be equal to the value of the assets (cash 
and marketable securities) transferred to such portfolio as of the 
opening of business on next business day following the CIF Valuation 
Date. The Bank also expects the value of a Plan's investment in shares 
of a corresponding portfolio of the Bishop Street Funds as of the 
opening of business on the date of the transaction will be equal to the 
value of such Plan's investment in the CIF as of the close of business 
on the last business day prior to the transaction.
    Not later than 30 business days after completion of the 
transaction, the Bank will send by regular mail a written confirmation 
of the transaction to each affected Plan. Such confirmation will 
contain: (a) The identity of each security that is valued in accordance 
with Rule 17a7(b)(4), as described above; (b) the price of each such 
security for purposes of the transaction; and (c) the identity of each 
pricing service or market maker consulted in determining the value of 
such securities. In accordance with the conditions under Section I of 
the proposed exemption, similar procedures will occur upon any future 
in-kind exchanges between CIFs maintained by the Bank or Plans, and the 
Funds.
Receipt of Fees From Funds
    5. Under certain conditions, PTE 77-4 permits the Bank to receive 
fees from the Funds under either of two circumstances: (a) Where a Plan 
does not pay any investment management, investment advisory, or similar 
fees with respect to the assets of such Plan invested in shares of a 
Fund for the entire period of such investment; or (b) where a Plan pays 
investment management, investment advisory, or similar fees to the Bank 
based on the total assets of such Plan from which a credit has been 
subtracted representing such Plan's pro rata share of such investment 
advisory fees paid to the Bank by the Fund. As such, it is represented 
that there are two levels of fees--those fees which the Bank charges to 
the Plans for serving as trustee with investment discretion or as 
investment manager (the Plan-level fees); and those fees the Bank 
charges to the Funds (the Fund-level fees) for serving as investment 
advisor, custodian, or service provider.
    Plan-level investment management, investment advisory, or fees for 
similar services provided by the Bank are currently charged in the form 
of a single asset-based investment management fee. There is also a 
Plan-level trustee fee for basic administrative services provided by 
the Bank as well as other specific service fees, such as a cash 
``sweep'' fee. Currently, the annual investment management fee for 
assets invested in the Pooled Equity Fund and the HR-10 Equity Fund is 
0.60 percent of assets under management, based on the daily net asset 
value of the fund. The fee for 

[[Page 47604]]
assets invested in the Pooled Fixed Income Fund is 0.40 percent of 
assets under management, based on the daily net asset value of the 
fund. Plan-level fees are subject to annual minimums for administration 
and management expressed as flat dollar amounts and administrative fees 
are subject to the application of certain ``break points.'' In addition 
to the Plan-level fees for investment management, investment advisory, 
or similar services, a one-time fee (also a flat dollar amount) may be 
charged in connection with the establishment of an account for a Plan, 
and separate transaction fees may be charged for various administrative 
transactions, such as for example, a participant loan. Depending on the 
terms governing documents of the Plan, Plan-level fees are paid to the 
Bank either by the sponsor of the Plan or from the assets of the Plan. 
Plan-level fees for investment management, investment advisory or 
similar investment services will terminate immediately after the 
execution of the subject transactions described herein.
    As mentioned above, the Bank may receive Fund-level fees. Such 
Fund-level fees can be divided into: (a) Fees paid to the Bank by a 
Fund for investment management, investment advisory, or similar 
services provided to such Fund, and (b) fees paid to the Bank for 
administrative, custodial, transfer, accounting, and other Secondary 
Services provided either to such Fund or to the distributor of shares 
of such Funds and its affiliates. The Bank is currently not paid any 
fees in this category from the Bishop Street Funds. The current fee 
arrangements between the Bank and the Bishop Street Funds provide for 
the Bank to receive fees from the Bishop Street Funds only for acting 
as investment adviser. This compensation paid to the Bank for 
investment advisory services is in accordance with agreements between 
the Bishop Street Funds and the Bank. In this regard, it is represented 
that the Bishop Street Funds' Trustees and the shareholders of the 
Bishop Street Funds approve the compensation that the Bank receives 
from the Bishop Street Funds. Also, the Bishop Street Funds' Trustees 
approve any changes in the compensation paid to the Bank for services 
rendered to the Bishop Street Funds.
    With respect to Plans managed by the Bank that are invested in the 
Funds, although such Plans will no longer pay a Plan-level investment 
management fee to the Bank, a Plan-level fee will continue to be 
charged to the Plans for basic administrative services not including 
investment management.10 Such administrative services would 
include, among others, the Bank's acting as custodian of the assets of 
a Plan, maintaining the records of a Plan, preparing periodic reports 
concerning the status of the Plan and its assets, and accounting for 
contributions, benefit distributions, and other receipts and 
disbursements. These functions performed by the Bank on the Plan-level 
are separate and distinct from those performed on the Fund-level by the 
Bank.

    \10\ The fact that certain transactions and fee arrangements are 
the subject of an administrative exemption does not relieve the 
fiduciaries of the Plans from the general fiduciary responsibility 
provisions of section 404 of the Act. Thus, the Department cautions 
the fiduciaries of the Plans investing in the Funds that they have 
an ongoing duty under section 404 of the Act to monitor the services 
provided to the Plans to assure that the fees paid by the Plans for 
such services are reasonable in relation to the value of the 
services provided. Such responsibilities would include 
determinations that the services provided are not duplicative and 
that the fees are reasonable in light of the level of services 
provided.
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    The Bank will continue to receive Plan-level compensation from the 
Plans for investment management services provided with respect to 
assets of the Plans not invested in shares of any of the Funds. Since 
the Plan-level investment management fee for Plans investing in the 
Funds will terminate, there will be no credit to the Plans their pro 
rata share of the investment advisory fees paid at the Fund-level. 
Instead, the only compensation received by the Bank for investment 
advisory services will be that which is paid by the Funds to the Bank 
for such services rendered to such Funds. In addition, the Bank will 
retain fees for providing Secondary Services to the Funds.
    The Bank believes that this proposed fee arrangement complies with 
PTE 77-4. However, there is one difference from PTE 77-4 requested by 
the Bank for which an exemption is required. In this regard, one of the 
requirements of PTE 77-4 has been that any change in any of the rates 
of fees would require prior written approval by the Second Fiduciary of 
the Plans participating in the Funds. The applicant maintains that 
where many Plans participate in a Fund, the addition of a service or 
any good faith increase in fees could not be implemented until written 
approval of such change is obtained from every Second Fiduciary. The 
Bank proposes an alternative which the Bank believes provides the basic 
safeguards for the Plans and is more efficient, cost effective, and 
administratively feasible than those contained in PTE 77-4.
    In the event of an increase in the rate of any investment 
management fees, investment advisory fees, or similar fees, the 
addition of a Secondary Service for which a fee is charged, or an 
increase in the fees for Secondary Services paid by the Funds to the 
Bank over an existing rate that had been authorized by the Second 
Fiduciary, the Bank will provide, at least 30 days in advance of the 
implementation of such additional service or fee increase, to the 
Second Fiduciary of the Plans invested in such Fund a written notice of 
such additional service or fee increase, (which may take the form of a 
proxy statement, letter, or similar communication that is separate from 
the prospectus of the Fund and which explains the nature and amount of 
the additional service or the nature and amount of the increase in 
fees). In this regard, such increase in fees for Secondary Services can 
result either from an increase in the rate of such fee or from the 
decrease in the number or kind of services performed by the Bank for 
such fee over that which had been authorized by the Second Fiduciary of 
a Plan. The Bank believes that notice provided in this way will give 
the Second Fiduciary of each of the Plans adequate opportunity to 
decide whether or not to continue the authorization of a Plan's 
investment in any of the portfolios of the Funds in light of the 
increase in investment management fees, investment advisory fees, or 
similar fees, the addition of a Secondary Service for which a fee is 
charged, or the increase in fees for any Secondary Services. In 
addition, the Bank represents that such fee increase will be disclosed 
to the Second Fiduciaries in an amendment of or supplement to the 
Funds' prospectus or in the Funds' statement of additional information, 
to the extent necessary to comply with SEC disclosure 
requirements.11

    \11\ An increase in the amount of a fee for an existing 
Secondary Service (other than through an increase in the value of 
the underlying assets in the Funds) or the imposition of a fee for a 
newly-established Secondary Service shall be considered an increase 
in the rate of such Secondary Fee. However, in the event a Secondary 
Fee has already been described in writing to the Second Fiduciary 
and the Second Fiduciary has provided authorization for the amount 
of such Secondary Fee, and such fee was waived, no further action by 
the Bank would be required in order for the Bank to receive such fee 
at a later time. Thus, for example, no further disclosure would be 
necessary if the Bank had received authorization for a fee for 
custodial services from Plan investors and subsequently determined 
to waive the fee for a period of time in order to attract new 
investors but later charged the fee. However, reinstituting the fee 
at an amount greater than previously disclosed would necessitate the 
Bank providing notice of the fee increase and a Termination Form. 

[[Page 47605]]

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Authorization Requirements for the Second Fiduciary
    6. The written notice of an additional service for which a fee is 
charged or a fee increase, as described in Representation 5, will be 
accompanied by a Termination Form, as defined in paragraph (i) of 
Section III, and by instructions on the use of such form, as described 
in paragraph (l) of Section II, which expressly provide an election to 
the Second Fiduciaries to terminate at will any prior authorizations 
without penalty to the Plans. The Second Fiduciary will be supplied 
with a Termination Form annually during the first quarter of each 
calendar year, beginning with the first quarter of the calendar year 
that begins after the date the grant of this proposed exemption is 
published in the Federal Register and continuing for each calendar year 
thereafter, regardless of whether there have been any changes in the 
fees payable to the Bank or changes in other matters in connection with 
services rendered to the Funds. However, if the Termination Form has 
been provided to the Second Fiduciary in the event of an increase in 
the rate of any investment management fees, investment advisory fees, 
or similar fees, an addition of a Secondary Service for which a fee is 
charged, or an increase in any fees for Secondary Services paid by the 
Fund to the Bank, then such Termination Form need not be provided again 
to the Second Fiduciary until at least six months have elapsed, unless 
such Termination Form is required to be sent sooner as a result of 
another increase in any investment management fees, investment advisory 
fees, or similar fees, the addition of a Secondary Service for which a 
fee is charged, or an increase in any fees for Secondary Services.
    The Termination Form will contain instructions regarding its use 
which will state expressly that the authorization is terminable at will 
by a Second Fiduciary, without penalty to any Plan, and that failure to 
return the form will be deemed to be an approval of the additional 
Secondary Service or the increase in the rate of any fees and will 
result in the continuation of all authorizations previously given by 
such Second Fiduciary. Termination by any Plan of authorization to 
invest in the Funds will be effected by the Bank redeeming the shares 
of the Fund held by the affected Plan by the close of business on the 
day following receipt by the Bank, either by mail, hand delivery, 
facsimile, or other available means at the option of the Second 
Fiduciary, of the Termination Form or any other written notice of 
termination. If, due to circumstances beyond the control of the Bank, 
the redemption cannot be executed within one business day, the Bank 
shall have one additional business day to complete such redemption.
    The rates paid by each of the portfolios of the Funds to the Bank 
for services rendered may differ depending on the fee schedule for each 
portfolio and on the daily net assets in each portfolio. The investment 
advisory fees paid to the Bank by the Funds will be based on the 
different fee rates of each of the portfolios into which the assets of 
the Plans are allocated. For example, for services provided to the 
Equity Fund, the Bank receives from the Bishop Street Funds an annual 
fee of 0.40 percent based on the Fund's average daily net assets. For 
services provided to the High-Grade Income Fund, the Bank receives from 
the Bishop Street Funds an annual fee of 0.25 percent, based on the 
Fund's average daily net assets. The Bank proposes to allocate the 
assets of the Plans among the portfolios offered of the Bishop Street 
Funds and/or among any of the Funds under the terms of this proposed 
exemption.
    The impact of the change in fee structures resulting from the 
exemptive transactions on the aggregate fees received by the Bank is 
difficult to determine, according to the applicant, because various 
factors and variables are unique to each Plan. These factors include 
the size of the Plan, the extent to which Plan assets are invested in 
the Funds, usage by the Plans of separate services provided by the Bank 
and the application of certain ``break points'' in the schedule of 
Plan-level fees. Further, the Bank notes that Fund size, the identity 
of the particular investment portfolio of the Fund into which the Plan 
assets are allocated and voluntary waivers by the Bank of Fund-level 
fees are likely to be different in each situation and may affect the 
aggregate amount of fees received by the Bank. In this regard, the Bank 
believes that, as to each individual Plan, the combined total of all 
Plan-level and Fund-level fees received by it for the provision of 
services to the Plans and to the Funds, respectively, is not in excess 
of ``reasonable compensation'' within the meaning of section 408(b)(2) 
of the Act.
Conditions for Exemption
    7. If granted, this proposed exemption will be subject to the 
satisfaction of certain general conditions that will further protect 
the interests of the Plans. For example, the proposed transactions are 
subject to the prior authorization of a Second Fiduciary, acting on 
behalf of each of the Plans, who has been provided with full written 
disclosure by the Bank. The Second Fiduciary will generally be the 
administrator, sponsor, or a committee appointed by the sponsor to act 
as a named fiduciary for a Plan.
    With respect to disclosure, the Second Fiduciary of such Plan will 
receive advance written notice of the in-kind transfer of assets of the 
CIFs and full written disclosure of information concerning the Funds 
(including a current prospectus for each of the Funds and a statement 
describing the fee structure).
    On the basis of the information disclosed, the Second Fiduciary 
will authorize in writing the investment of assets of a Plan in shares 
of the Funds in connection with the transactions set forth herein and 
the compensation received by the Bank in connection with its services 
to the Funds. Written authorization will extend to only those 
investment portfolios of the Funds with respect to which the Plan has 
received the written disclosures referred to above and which are 
specifically mentioned in such disclosure described above. Having 
obtained the authorization of the Second Fiduciary, the Bank will 
invest the assets of a Plan among the portfolios and in the manner 
covered by the authorization, subject to satisfaction of the other 
terms and conditions of this proposed exemption. However, the Bank will 
not invest assets of a Plan in any portfolio not specifically mentioned 
in the written disclosure and authorization described above. For 
example, if the written authorization of the Second Fiduciary covered 
only one of the portfolios then existing, the Bank could only invest 
the assets of such Plans in that one portfolio specifically authorized. 
Further, if a new portfolio were established under any of the Funds, 
the Bank could invest assets of a Plan in such new portfolio only after 
providing the required disclosures and obtaining from the Second 
Fiduciary a separate written authorization which specifically mentions 
the new portfolio.
    In addition to the disclosures provided to the Plan prior to 
investment in any of the Funds, the Bank represents that it will 
routinely provide at least annually to the Second Fiduciary updated 
prospectuses of the Funds in accordance with the requirements of the 
'40 Act and the SEC rules promulgated thereunder. Further, the Second 
Fiduciary will be supplied, upon request, with a report or statement 
(which may take the form of the most recent financial report of such 
Funds, the current statement of additional information, or some other 
written 

[[Page 47606]]
statement) which contains a description of all fees paid by the Fund.
    The Bank does not now execute nor in the future intend to execute 
securities brokerage transactions for the investment portfolios of any 
of the Funds, except as and to the extent permitted by the '40 Act and 
applicable rules of the SEC. However, in the event the Bank ever 
performs brokerage services for which a fee is paid to the Bank by the 
investment portfolio of any of the Funds, the Bank represents that it 
will at least 30 days in advance of the implementation of such 
additional service provide a written notice which explains the nature 
of such additional brokerage service and the amount of the fees. 
Further, the Bank represents that it will provide at least annually to 
the Second fiduciary of any Plan that invests in such Funds with a 
written disclosure indicating (a) the total, expressed in dollars, of 
brokerage commissions of each Fund's investment portfolio that are paid 
to the Bank by such Fund; (b) the total, expressed in dollars, of 
brokerage commissions of each Fund's investment portfolio that are paid 
by such Fund to brokerage firms unrelated to the Bank; (c) the average 
brokerage commissions per share, expressed as cents per share, paid to 
the Bank by each portfolio of a Fund; and (d) the average brokerage 
commissions per share, expressed as cents per share, paid by each 
portfolio of a Fund to brokerage firms unrelated to the Bank.
    The receipt of fees, as described above, is generated in connection 
with the investment in the Funds by the Plans. These investments are 
the result of purchases of shares in the Funds and exchanges of assets 
of the Plans, including those in CIFs, for shares in the Funds.
    With respect to such purchases, (a) the Plans and other investors 
will purchase or redeem shares in the Funds in accordance with standard 
procedures described in the prospectus for each portfolio of the Funds; 
(b) the Plans will pay no sales commissions or redemption fees in 
connection with purchase or redemption of shares in the Funds by the 
Plans; (c) the Bank will not purchase from or sell to any of the Plans 
shares of any of the Funds; and (d) the price paid or received by the 
Plans for shares of the Funds will be the net asset value per share at 
the time of such purchase or redemption and will be the same price as 
any other investor would have paid or received at that time. The value 
of the Bishop Street Funds' shares and the value of each Bishop Street 
Funds' portfolios are determined on a daily basis. In the case of the 
non-money market portfolios, assets are valued at fair or market value, 
as required by Rule 2a-4 under the '40 Act. In the case of any money 
market portfolio, the assets are valued based on the amortized cost 
method authorized by SEC Rule 2a-7, in order to maintain a net asset 
value of $1.00 per share. Both the money market portfolios and the non-
money market portfolios determine the net asset value per share for 
purposes of pricing purchases and redemptions by dividing the value of 
all securities, determined by a method as set forth in the prospectus 
for each Bishop Street Fund portfolio, and other assets belonging to 
each of the portfolios, less the liabilities charged to each portfolio, 
by the number of each portfolio's outstanding shares.
    Purchases and redemptions of shares in any of the Funds by the 
Plans may also occur in connection with daily automated cash ``sweep'' 
arrangements. However, agreement to such arrangement is not a condition 
for the Plan otherwise choosing to invest in shares of the Fund, nor 
will the reverse be required.
    Under the automated cash ``sweep'' arrangement, a Plan may 
participate in the ``sweep'' program only with the initial written 
approval of the Second Fiduciary and only after certain disclosures 
have been provided by the Bank. If such approval is given, cash 
balances of the Plan held from time to time thereafter pending other 
investment or distribution are invested automatically in shares of the 
Bishop Street Funds Money Market Fund or other short-term investment 
vehicle selected by the Second Fiduciary on behalf of a Plan. The 
automated cash ``sweep'' arrangement would not involve shares of any 
non-money market portfolios.
    After the Money Market Fund of the Bishop Street Funds has been 
selected by the Second Fiduciary on behalf of the Plan, otherwise 
uninvested cash down to the last $1.00 balance of the Plans may be 
invested automatically on a nightly basis. The Bank has no discretion 
with respect to the timing of the ``sweep'' either into or out of the 
Bishop Street Funds. Under the automated ``sweep'' arrangement, the 
Bank's computerized cash management system automatically scans the 
accounts of the Plans, as of the end of each business day to determine 
whether such accounts have positive or negative net cash balances. 
Based on this information, the system automatically invests the case of 
the Plans having positive balances in shares of the Money Market Fund. 
In the case of a Plan having a negative cash balance, the system 
automatically liquidates the Bishop Street Fund shares as necessary to 
eliminate such negative balance.
    Plans may terminate their participation in the automated cash 
``sweep'' arrangement and withdraw at any time by notifying the Bank. 
Such termination will be effected by the Bank redeeming the shares of 
the Bishop Street Funds held by the Plan requesting termination by the 
close of the business day following the date of receipt by the Bank, 
either by mail, hand delivery, facsimile, or other available means of 
written communication at the option of the Second Fiduciary, of the 
Termination Form or any other written notice of termination. However, 
if due to circumstances beyond the control of the Bank, the redemption 
of shares of such Plan cannot be executed within one business day, the 
Bank would complete the redemption within one additional business day.
    No fee, charge or penalty of any kind is charged in connection with 
a termination by a Plan of participation in the automated cash ``sweep 
arrangement'' in the Bishop Street Funds or in any of the Funds. The 
Bank currently charges a Plan-level cash sweep fee for sweep services 
in connection with the investment of cash balances in short-term 
investment vehicles managed by unaffiliated entities. This fee will be 
terminated for Plans that elect to use the Money Market Fund as their 
cash management vehicle. The Bank does not charge separate or 
additional fees to Plans in order to participate in the daily automated 
cash ``sweep'' arrangement through the Bishop Street Funds, nor is such 
additional compensation contemplated by the proposed exemption.12

    \12\ The Department in a letter, dated August 1, 1986, to Robert 
S. Plotkin, Assistant Director, Division of Banking Supervision and 
Regulation, Board of Governors of the Federal Reserve System, 
addressed the application of section 408(b)(2) of the Act to 
arrangements involving ``sweep services.'' In that letter, the 
Department set forth several examples to illustrate various 
circumstances under which violations of section 406(b) of the Act 
would arise with respect to such arrangements. Conversely, the 
letter provided that, if a bank provides ``sweep'' services without 
the receipt of additional compensation or other consideration (other 
than reimbursement of direct expenses properly and actually incurred 
in the performance of such services), then the provision of 
``sweep'' services by the bank would not, in itself, constitute a 
violation of section 406(b) of the Act. Moreover, including 
``sweep'' services under a single fee arrangement for investment 
management services which is calculated as a percentage of the 
market value of the total assets under management would not, in 
itself, constitute an act described in section 406(b)(1), because 
the bank would not be exercising its fiduciary authority or control 
to cause a plan to pay an additional fee.
    In addition, the letter also discusses the applicability of the 
statutory exemptions under section 408(b)(6) of the Act (fees for 
``ancillary services'') and under section 408(b)(8) of the Act 
(investments in collective trust funds maintained by such bank) to 
such ``sweep'' service arrangements. 

[[Page 47607]]

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    8. In summary, it is represented that the proposed transactions 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) Neither the Plans nor the CIFs will pay sales commissions or 
redemption fees in connection with the in-kind transfer of assets to 
the Funds in exchange for shares of the Funds or in connection with 
purchases or redemptions by the Plans of shares of the Funds, including 
purchases and redemptions handled through daily automated cash 
``sweep'' arrangements.
    (b) The Plans or the CIFs will receive shares of the Funds that are 
equal in value to the assets of the Plans or the CIFs exchanged for 
such shares, as determined in a single valuation performed in the same 
manner and as of the close of business on the same day in accordance 
with the procedures set forth in Rule 17a-7 under the '40 Act, as 
amended from time to time or any successor rule, regulation or similar 
pronouncement.
    (c) Not later than 30 business days after completion of each in-
kind transfer of assets in exchange for shares of the Funds, the Plans 
will receive written confirmation of the assets involved in the 
exchange which were valued in accordance with Rule 17a-7(b)(4), the 
price of such assets and the identity of the pricing service or market 
maker consulted.
    (d) No later than 90 days after completion of each in-kind transfer 
of assets of the plans or the CIFs in exchange for shares of the Funds, 
the Bank will mail to the Second Fiduciary of each Plan, a written 
confirmation of the number of CIF units held by each affected Plan 
immediately before the conversion (and the related per unit value and 
the aggregate dollar value of the units transferred), and the number of 
shares in the Funds that are held by each affected Plan following the 
conversion (and the related per share net asset value and the aggregate 
dollar value of the shares received).
    (e) The price that will be paid or received by the Plans for shares 
in the Funds is the net asset value per share at the time of the 
transaction and is the same price for the shares which would have been 
paid or received by any other investor for shares of the same class at 
that time.
    (f) Neither the Bank nor an affiliate, including any officer or 
director will purchase from or sell to any of the Plans shares of any 
of the Funds.
    (g) As to each individual Plan, the combined total of all fees 
received by the Bank for the provision of services to the Plan, and in 
connection with the provision of services to any of the Funds in which 
the Plan may invest, will not be in excess of ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act.
    (h) The Bank will not receive any 12b-1 Fees in connection with the 
proposed transactions.
    (i) Prior to investment by a Plan in any of the Funds, in 
connection with transactions, the Second Fiduciary will receive a full 
and detailed written disclosure of information concerning such Fund.
    (j) Subsequent to the investment by a Plan in any of the Funds, the 
Bank will provide the Plan, among other information, at least annually 
with an updated copy of the prospectus for each of the Funds in which 
the Plan invests.
    (k) In the event such Fund places brokerage transactions with the 
Bank, the Bank will provide the Second Fiduciary of such Plan at least 
annually with a statement specifying the total, expressed in dollars, 
of brokerage commissions of each Fund's investment portfolio that are 
paid by such Fund to the Bank and to unrelated brokerage firms and the 
average brokerage commissions per share, expressed as cents per share, 
by each portfolio of a Fund paid to the Bank and to brokerage firms 
unrelated to the Bank.
    (l) On the basis of the disclosures, the Second Fiduciary will 
authorize the transactions.
    (m) The authorization by the Second Fiduciary will be terminable at 
will without penalty to such Plans, and any such termination will be 
effected by the close of the business day following the date of receipt 
by the Bank, either by mail, hand delivery, facsimile or other 
available means of written communication at the option of the Second 
Fiduciary, of the Termination Form or any other written notice of 
termination, unless due to circumstances beyond the control of the Bank 
delay execution for no more than one additional business day.
    (n) The Plans do not pay investment management, investment advisory 
or similar fees to the Bank with respect to any of the assets of such 
Plans which are invested in shares of any of the Funds.
    (o) The Second Fiduciary will receive a written notice accompanied 
by the Termination Form with instructions regarding the use of such 
form, at least 30 days in advance of the implementation of any increase 
in the rate of any fees for investment management, investment advisory 
or similar fees, any addition of a Secondary Service for which a fee is 
charged, or any increase in fees for Secondary Services that the Bank 
provides to the Funds.
    (p) All dealings between the Plans and any of the Funds will be on 
a basis no less favorable to such Plans than dealings between the Funds 
and other shareholders holding the same shares of the same class as the 
Plans.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

General Information

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

[[Page 47608]]
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 8th day of September, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 95-22753 Filed 9-12-95; 8:45 am]
BILLING CODE 4510-29-P