[Federal Register Volume 61, Number 233 (Tuesday, December 3, 1996)]
[Notices]
[Pages 64150-64173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30720]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10014, et al.]


Proposed Exemptions; Wells Fargo Bank, N.A., et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of Proposed Exemptions.

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

Written Comments and Hearing Requests

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

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

Wells Fargo Bank, N.A. (Wells Fargo) Located in San Francisco, CA; 
Proposed Exemption

[Application No. D-10014]

    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, August 10, 1990).1
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    \1\ For purposes of this proposed exemption, reference to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
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Section I. Covered Transactions

    If the exemption is granted, the restrictions of section 406(a) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (D) of 
the Code, shall not apply, effective October 1, 1995, to the

[[Page 64151]]

purchase or redemption of shares by an employee benefit plan (the 
Plan), in certain mutual funds that are either affiliated with Wells 
Fargo (the Affiliated Funds) or are unaffiliated with Wells Fargo (the 
Third Party Funds),2 in connection with the participation by the 
Plan in the Wells Fargo Portfolio Advisor Program (the Portfolio 
Advisor Program).
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    \2\ The Affiliated Funds and the Third Party Funds are 
collectively referred to herein as the Funds.
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    In addition, the restrictions of 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) (E) and (F) of the Code, shall not 
apply, effective October 1, 1995, to the provision, by Wells Fargo, of 
asset allocation services to an independent fiduciary of a 
participating Plan (the Independent Fiduciary) or to a participant (the 
Directing Participant) of a Plan covered under the provisions of 
section 404(c) of the Act (the Section 404(c) Plan) which may result in 
the selection of portfolios by the Independent Fiduciary or the 
Directing Participant in the Portfolio Advisor Program for the 
investment of Plan assets.
    This proposed exemption is subject to the conditions set forth 
below in Section II.

Section II. General Conditions

    (a) The participation by each Plan in the Portfolio Advisor Program 
is approved by an Independent Fiduciary or Directing Participant, in 
the case of a Section 404(c) Plan, and no Plan investing therein is 
sponsored or maintained by Wells Fargo and/or its affiliates.
    (b) As to each Plan, the total fees that are paid to Wells Fargo 
and its affiliates constitute no more than reasonable compensation for 
the services provided.
    (c) With the exception of distribution-related fees pursuant to 
Rule 12b-1 (the 12b-1 Fees) of the Investment Company Act of 1940 (the 
'40 Act) which are offset, no Plan pays a fee or commission by reason 
of the acquisition or redemption of shares in the Funds.
    (d) The terms of each purchase or redemption of shares in the Funds 
remain at least as favorable to an investing Plan as those obtainable 
in an arm's length transaction with an unrelated party.
    (e) Wells Fargo provides written documentation to each Plan's 
Independent Fiduciary or Directing Participant of its recommendations 
or evaluations with respect to the Affiliated Funds or the Third Party 
Funds based upon objective criteria.
    (f) Any recommendation or evaluation made by Wells Fargo to an 
Independent Fiduciary or Directing Participant is implemented only at 
the express direction of such Independent Fiduciary or Directing 
Participant.
    (g) The quarterly fee that is paid by a Plan to Wells Fargo and its 
affiliates for asset allocation and related services (the Outside Fee) 
rendered to such Plan under the Portfolio Advisor Program is offset by 
all gross investment management fees (the Advisory Fees) and 
administrative fees (the Administrative Fees) received from the 
Affiliated Funds by Wells Fargo, its affiliates, its former affiliates 
and unrelated parties, including all 12b-1 Fees and Administrative Fees 
that are paid by the Affiliated Funds to Stephens Inc. (Stephens) and 
all 12b-1 Fees that Wells Fargo receives from the Third Party Funds, 
such that the sum of the offset and the net Outside Fee (the Net 
Outside Fee) will always equal the Outside Fee and the selection of 
Affiliated or Third Party Funds will always be revenue neutral.
    (h) With respect to its participation in the Portfolio Advisor 
Program, prior to purchasing shares in the Affiliated Funds and the 
Third Party Funds,
    (1) Each Independent Fiduciary receives the following written or 
oral disclosures from Wells Fargo:
    (A) A brochure describing the Portfolio Advisor Program; a 
Portfolio Advisor Program Account Agreement; a description of the 
allocation models (the Allocation Models) as discussed in 
Representation 1; and a reference guide/disclosure statement providing 
details about the Portfolio Advisor Program, the fees charged 
thereunder, the procedures for establishing, making additions to and 
withdrawing from Portfolio Advisor Program Accounts (the Accounts); and 
other related information.
    (B) A risk tolerance and goal analysis questionnaire (the 
Questionnaire) as described in Representation 11.
    (C) Copies of applicable prospectuses (the Prospectuses) for the 
Funds discussing the investment objectives of the Funds; the policies 
employed to achieve these objectives; the corporate affiliation 
existing between Wells Fargo and its affiliates; the compensation paid 
to such entities; disclosures relating to rebalancing and reallocating 
Allocation Models; and information explaining the risks attendant to 
investing in the Affiliated Funds or the Third Party Funds.
    (D) Upon written or oral request to Wells Fargo, a Statement of 
Additional Information supplementing the applicable Prospectus, which 
describes the types of securities and other instruments in which the 
Funds may invest, the investment policies and strategies that the Funds 
may utilize, including a description of the risks.
    (E) A copy of the agreement between the Plan and Wells Fargo 
relating to such Plan's participation in the Portfolio Advisor Program.
    (F) A written recommendation of a specific Allocation Model 
together with a copy of the Questionnaire and response.
    (G) Upon written request to Wells Fargo, a copy of its investment 
advisory agreement and sub-advisory agreement pertaining to the 
Affiliated Funds as well as its distribution agreement pertaining to 
the Third Party Funds.
    (H) Copies of the proposed exemption and grant notice describing 
the exemptive relief provided herein.
    (I) Written disclosures of Wells Fargo's affiliation or 
nonaffiliation with the parties who act as sponsors, distributors, 
administrators, investment advisers and sub-advisers, custodians and 
transfer agents of the Third Party Funds and the Affiliated Funds; and
    (2) In the case of a Section 404(c) Plan,
    (A) Wells Fargo provides each Directing Participant or Independent 
Fiduciary (for dissemination to the Directing Participant) with copies 
of the documents described above in paragraphs (h)(1)(A)-(I); and,
    (B) In addition to the written disclosures, an explanation will be 
provided to the Independent Fiduciary, upon request, by a Wells Fargo 
Personal Financial Officer (the Personal Financial Officer) regarding 
the services offered under the Portfolio Advisor Program, including the 
operation and objectives of the Funds. Such information will be given 
to either the Independent Fiduciary or the Directing Participant.
    (3) If accepted as an investor in the Portfolio Advisor Program, an 
Independent Fiduciary or Directing Participant is required to 
acknowledge, in writing, to Wells Fargo, prior to purchasing shares of 
the Funds that such Independent Fiduciary or Directing Participant has 
received copies of the documents described in paragraph (h)(1) of this 
Section II.
    (4) With respect to a Title I Plan that does not permit 
participant-directed investments as contemplated under section 404(c) 
of the Act, written acknowledgement of the receipt of such documents is 
provided by the Independent Fiduciary (i.e., the Plan administrator, 
trustee, investment manager or named fiduciary, as the recordholder of 
shares of the Funds.) Such Independent Fiduciary will be

[[Page 64152]]

required to represent in writing to Wells Fargo that such fiduciary 
is--
    (A) Independent of Wells Fargo and its affiliates;
    (B) Capable of making independent decisions regarding the 
investment of Plan assets;
    (C) Knowledgeable with respect to the Plan in administrative 
matters and funding matters related thereto; and
    (D) Able to make an informed decision concerning participation in 
the Portfolio Advisor Program.
    (5) With respect to a Section 404(c) Plan or a Plan that is covered 
under Title II of the Act, the Directing Participant or the Independent 
Fiduciary is required to acknowledge, in writing, receipt of such 
documents and represent to Wells Fargo that such individual is--
    (A) Independent of Wells Fargo and its affiliates;
    (B) Knowledgeable with respect to the Plan in administrative 
matters and funding matters related thereto; and,
    (C) Able to make an informed decision concerning participation in 
the Portfolio Advisor Program.
    (i) Subsequent to its participation in the Portfolio Advisor 
Program, each Independent Fiduciary receives the following written or 
oral disclosures from Wells Fargo with respect to ongoing participation 
in the Portfolio Advisor Program:
    (1) Written confirmations of each purchase or redemption 
transaction involving shares of an Affiliated Fund or a Third Party 
Fund (including transactions resulting from the realignment of assets 
caused by a change in the Allocation Model's investment mix and from 
periodic rebalancing of Account assets).
    (2) Telephone quotations of such Independent Fiduciary's Plan 
Account balance.
    (3) A periodic, but not less frequently than quarterly, statement 
of Account specifying the net asset value of the Plan's assets in such 
Account, a summary of purchase, sale and exchange activity and 
dividends received or reinvested and a summary of cumulative realized 
gains and/or losses.
    (4) Semiannual and annual reports that include financial statements 
for the Affiliated Funds and the Third Party Funds as well as the fees 
paid to Wells Fargo and its affiliates.
    (5) A quarterly newsletter or other report pertaining to the 
applicable Allocation Model which describes the Allocation Model's 
performance during the preceding quarter, market conditions and 
economic outlook and, if applicable, prospective changes in Affiliated 
Fund and Third Party Fund allocations for the Allocation Model and the 
reasons therefor.
    (6) At least annually, a written or oral inquiry from Wells Fargo 
to ascertain whether the information provided on the Questionnaire is 
still accurate and to determine if such information should be updated.
    (7) At least annually, a termination form (the Termination Form) as 
described below in Section II(l) and (m).
    (j) In the case of a Section 404(c) Plan, the Independent Fiduciary 
will decide whether the information described in Section II(i) above is 
to be distributed by Wells Fargo to the Directing Participants of such 
Plan or whether the Independent Fiduciary will receive this information 
and then provide it to the Directing Participants.
    (k) If authorized in writing by the Independent Fiduciary or 
Directing Participant, the Plan is automatically rebalanced on a 
periodic basis by Wells Fargo to the Allocation Model previously 
prescribed by the Independent Fiduciary or Directing Participant, if 
one or more Fund allocations deviates from the Allocation Model 
prescribed by the Independent Fiduciary or Directing Participant.
    (l) In rebalancing a Plan,
    (1) Wells Fargo is bound by the Allocation Model and is limited in 
the degree of change that it can make to an Allocation Model's 
investment mix.
    (2) Wells Fargo is authorized to make changes in the mix of asset 
classes in a Plan Account within a range of 0-15 percent (plus or 
minus) for Stock and Bond Fund investments and within a range of 0-30 
percent (plus or minus) for Money Market Fund investments without 
obtaining the prior written approval of the Independent Fiduciary or 
Directing Participant.
    (3) Wells Fargo may not change the asset mix outside the authorized 
limits unless it provides the Independent Fiduciary or Directing 
Participant with 30 days' advance written notice of the proposed change 
and gives the Independent Fiduciary or Directing Participant time to 
elect not to have the change made.
    (4) Wells Fargo may not divide a Fund sub-class unless it provides 
30 days' advance written notice to the Independent Fiduciary or 
Directing Participant of the proposed change and gives such individual 
the opportunity to object to the change.
    (5) Wells Fargo may not replace a Third Party Fund with an 
Affiliated Fund.
    (m) Although an Independent Fiduciary or Directing Participant may 
withdraw from the Portfolio Advisor Program at any time, Wells Fargo 
will provide such Independent Fiduciary or Directing Participant with 
the Termination Form, at least annually during the first quarter of 
each calendar year, but in all cases where Wells Fargo changes the 
asset mix outside of the current Allocation Model, when a Fund sub-
class is to be divided, when Wells Fargo determines that it is in the 
best interest of the Plan to use a Third Party Fund instead of an 
Affiliated Fund and whenever the Outside Fee is increased. Wells Fargo 
will provide such written notice to the Independent Fiduciary or 
Directing Participant at least 30 days prior to the implementation of 
the change.
    (n) The instructions for the Termination Form must--
    (1) State that the authorization is terminable at will by the 
Independent Fiduciary or Directing Participant, without penalty to 
such, upon receipt by Wells Fargo of written notice from the 
Independent Fiduciary or Directing Participant; and
    (2) Explain that any of the proposed changes noted above in 
paragraph (m) of this Section, will go into effect if the Independent 
Fiduciary or Directing Participant does not elect to withdraw by the 
effective date.
    (o) Wells Fargo maintains, for a period of six years, the records 
necessary to enable the persons described in paragraph (p) of this 
Section II to determine whether the conditions of this exemption have 
been met, except that--
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of Wells Fargo 
and/or its affiliates, the records are lost or destroyed prior to the 
end of the six year period; and
    (2) No party in interest other than Wells Fargo 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 (p) of this Section II below.
    (p)(1) Except as provided in section (p)(2) of this paragraph and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (o) of this 
Section II are unconditionally available at their customary location 
during normal business hours by:
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service (the Service) or the 
Securities and Exchange Commission (the SEC);

[[Page 64153]]

    (B) Any fiduciary of a participating Plan or any duly authorized 
representative of such fiduciary;
    (C) Any contributing employer to any participating Plan or any duly 
authorized employee representative of such employer; and
    (D) Any participant or beneficiary of any participating Plan, or 
any duly authorized representative of such participant or beneficiary.
    (p)(2) None of the persons described above in paragraphs (p)(1)(B)-
(p)(1)(D) of this paragraph (p) are authorized to examine the trade 
secrets of Wells Fargo or commercial or financial information which is 
privileged or confidential.

Section III. Definitions

    For purposes of this proposed exemption:
    (a) The term ``Wells Fargo'' means Wells Fargo Bank, N.A. and any 
affiliate of Wells Fargo, as defined in paragraph (b) of this Section 
III.
    (b) An ``affiliate'' of Wells Fargo includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with Wells Fargo.
    (2) Any officer, director or partner in such person, and
    (3) Any corporation or partnership of which such person is an 
officer, director or a 5 percent partner or owner.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The term ``Plan or Plans'' include Keogh plans, cash or 
deferred compensation plans, profit sharing plans, pension and stock 
bonus plans, individual retirement accounts (IRAs), salary reduction 
simplified employee pension plans (SARSEPs), simplified employee 
pension plans (SEP-IRAs) and, in the case of a Section 404(c) Plan, the 
individual account of a Directing Participant.
    (e) The term ``Independent Fiduciary'' means a Plan fiduciary which 
is independent of Wells Fargo and its affiliates and is either--
    (1) A Plan administrator, trustee, investment manager or named 
fiduciary, as the recordholder of shares of the Funds of a Section 
404(c) Plan;
    (2) An individual covered by a Keogh Plan which invests in shares 
of the Funds;
    (3) An individual covered under a self-directed IRA, SEP-IRA or 
SARSEP which invests in shares of the Funds;
    (4) An employee, officer or director of Wells Fargo and/or its 
affiliates covered by an IRA, a SEP-IRA or a SARSEP subject to Title I 
of the Act; or
    (5) A Plan administrator, trustee, investment manager or named 
fiduciary responsible for investment decisions in the case of a Title I 
Plan that does not permit individual direction as contemplated by 
Section 404(c) of the Act.
    (f) The term ``Directing Participant'' is a participant in a Plan, 
such as a Section 404(c) Plan, who is permitted under the terms of the 
Plan to direct, and who elects to so direct the investment of the 
assets of his or her account in such Plan.

EFFECTIVE DATE: If granted, this proposed exemption will be effective 
as of October 1, 1995.

Summary of Facts and Representations

Description of the Parties

    1. The parties to the transactions are described as follows:
    (a) Wells Fargo, a wholly owned subsidiary of Wells Fargo & 
Company, is one of the sixteenth largest commercial banks in the United 
States. Wells Fargo provides a full range of banking services to 
commercial, agribusiness, real estate and small business customers 
mainly in California. Its Investment Management Group manages personal 
trust accounts, corporate 401(k) and other qualified plans and mutual 
funds. Its holding company, Wells Fargo and Company, is a full-line 
banking firm serving institutions, government and individual investors 
in the United States. Wells Fargo & Company stock is publicly-traded on 
the New York Stock Exchange. Wells Fargo maintains its corporate 
headquarters in San Francisco, California.
    In addition to serving as a custodian or trustee to employee 
benefit plans, IRAs and SEP-IRAs, Wells Fargo sponsors and serves as a 
mass submitter and identical adopter for master and prototype pension 
and profit sharing plans, including Keogh plans, cash or deferred 
plans, and pension and stock bonus plans. Wells Fargo sponsors 
prototype IRAs, SEP-IRAs and SARSEPs. With respect to the subject 
transactions, Wells Fargo serves as the investment adviser/manager, 
transfer agent, selling agent and dividend disbursing agent to certain 
Affiliated Funds.
    (b) Wells Fargo Securities, Inc. (WFSI), a wholly owned broker-
dealer of Wells Fargo, is a full service broker-dealer registered with 
the SEC and a member of the National Association of Securities Dealers. 
WFSI provides a full range of brokerage services to retail and private 
customers and is principally located in San Francisco, California.
    (c) Stephens of Little Rock, Arkansas, is a full service broker-
dealer and investment advisory firm that is unrelated to Wells Fargo 
and/or its affiliates. It is the clearing broker for WFSI and the 
sponsor and administrator for the Affiliated Funds. Stephens also 
serves as the principal underwriter or distributor of each Affiliated 
Fund's shares.
    (d) Wells Fargo Nikko Investment Advisors (WFNIA) is a general 
partnership that was formerly 50 percent owned by a subsidiary of Wells 
Fargo and 50 percent owned by a subsidiary of The Nikko Securities Co., 
Ltd., an unaffiliated Japanese securities firm. WFNIA is a registered 
investment adviser and serves as a sub-adviser to certain of the 
Affiliated Funds. WFNIA maintains its principal place of business in 
San Francisco, California.
    (e) Wells Fargo Institutional Trust Company, N.A. (WFITC) is a 
trust company that was 99.9 percent owned by WFNIA and 0.1 percent 
owned by Wells Fargo & Company. WFITC serves as the custodian for 
certain of the Affiliated Funds. WFITC maintains its principal place of 
business in San Francisco, California.
    Pursuant to an agreement dated June 21, 1995, Wells Fargo & Company 
and Wells Fargo agreed to effect the sale of all of their right, title 
and interest in the capital stock of WFITC and the partnership interest 
in WFNIA, respectively, to Barclays Bank PLC, Barclays California 
Corporation and Barclays Bank of Canada (collectively, Barclays), all 
of which are unrelated to Wells Fargo & Company, Wells Fargo or any of 
their affiliates. After consummation of the sale, which occurred on 
December 29, 1995, WFITC and WFNIA became a part of BZW Global 
Investors, an indirect wholly owned subsidiary of Barclays Bank PLC. 
The new entity is located in San Francisco, California.
    (f) The Plans are qualified plans, IRAs, SARSEPs and SEP-IRAs for 
which Wells Fargo acts as master or prototype plan sponsor, mass 
submitter sponsor and identical adopter, custodian, directed trustee or 
recordkeeper. None of the Plans are sponsored by Wells Fargo or its 
affiliates.

Description of the Affiliated Funds

    2. The Affiliated Funds consist of the Stagecoach Funds, Inc. (the 
Stagecoach Funds) and the Overland Express Funds, Inc. (the Overland 
Funds), which are open-end investment companies registered under the 
'40 Act. The Stagecoach Funds were organized as a Maryland corporation 
in September 1991 and currently offer sixteen separate portfolios. The 
Overland Funds

[[Page 64154]]

were organized as a Maryland corporation in April 1987 and currently 
offer shares in twelve separate portfolios. Each Affiliated Fund is 
registered under the Securities Act of 1933, as amended (the '33 Act), 
and the '40 Act.
    Each Affiliated Fund is designed to provide a means of investing in 
separate portfolios that are professionally managed by Wells Fargo or 
sub-advised by WFNIA. These portfolios may be sold through WFSI or 
Wells Fargo as selling agent on behalf of the Affiliated Funds. Shares 
in the Stagecoach Funds and the Overland Funds are currently being 
offered by Wells Fargo to Plan customers, at no load.
    Overall management and supervision of each Affiliated Fund rests 
with such Fund's Board of Directors (the Directors). The Directors 
approve all significant agreements involving the appropriate Affiliated 
Fund and the persons and companies that furnish services. At least 40 
percent of the Directors are unrelated to Wells Fargo and its 
affiliates, including Stephens.
    Currently, fifteen Affiliated Funds are being offered to investors 
under the Portfolio Advisor Program. These Fund portfolios range from 
the Stagecoach Corporate Stock Fund to the Overland U.S. Treasury Money 
Market Fund. The Affiliated Funds are further divided into eight asset 
sub-classes which range from Growth and Income to Cash. A number of the 
portfolios are sub-advised by WFNIA whose sub-advisory fees are paid by 
Wells Fargo from its Advisory Fees.
    3. Wells Fargo serves as each Affiliated Fund's investment manager 
pursuant to an advisory agreement entered into with such Fund. In 
addition, Wells Fargo serves as the transfer agent, selling agent and 
dividend disbursing agent of each Affiliated Fund, as custodian of 
certain of the Affiliated Funds and as shareholder servicing agent of 
the Stagecoach Funds.
    For services rendered to the Affiliated Funds by Wells Fargo, its 
affiliates or Stephens, the underlying contracts entered thereunder 
must be approved by the Directors of each Affiliated Fund, including a 
majority of disinterested Directors. The contracts must be approved for 
an initial period of up to two years and then reapproved by the 
Directors or the shareholders of the Affiliated Funds and by the 
disinterested Directors, at least annually thereafter. Subject to the 
supervision and direction of the Directors, Wells Fargo manages the 
investment and reinvestment of each Affiliated Fund's assets and 
provides investment guidance and policy direction in connection with 
the objectives of the Affiliated Funds.
    Each Affiliated Fund portfolio pays Wells Fargo Advisory Fees that 
are computed daily and paid monthly at an annual rate based on a 
percentage of the value of the portfolio's average daily net assets. 
Currently, the annualized Advisory Fees range from 0.05 percent to 0.70 
percent depending upon the portfolio.
    In addition to the Advisory Fees, Wells Fargo and WFTIC may receive 
custody, portfolio accounting, transfer agency and shareholder 
servicing expenses from the Affiliated Funds (i.e., the Administrative 
Fees) which may be waived from time to time. For some portfolios, the 
Administrative Fees are included in that portion of Wells Fargo's 
Advisory Fee that is paid to the sub-adviser. If not included in the 
Advisory Fee, the current fee for (a) custodial services is 0.0167 
percent annually, (b) $2,000 per month plus 0.07 percent on the first 
$50 million, 0.045 percent on the next $50 million and 0.02 percent on 
the excess over $100 million for portfolio accounting services, (c) a 
minimum of $3,000 monthly, plus various transaction charges for 
transfer agency services, and (d) 0.00 percent to 0.30 percent for 
shareholder servicing.
    4. Stephens serves as each Affiliated Fund's sponsor and 
administrator and as distributor of portfolio shares. In general, 
Stephens manages all aspects of the administration and operation of the 
portfolios of the Affiliated Funds. For services provided to the 
portfolio, Stephens receives a fee that is computed daily and paid 
monthly at an annual rate based on a percentage of the value of the 
portfolio's average net assets. As distributor, Stephens is the 
principal underwriter of the shares of each Affiliated Fund. Stephens 
enters into selling agreements with broker-dealers and other financial 
institutions (i.e., selling agents) which make such shares available to 
their customers. Stephens receives 12b-1 Fees from certain of the 
Affiliated Fund portfolios. These fees range from 0.05 percent of net 
assets annually from the Stagecoach Funds to 0.75 percent of net assets 
annually from certain Overland Funds. In addition, Stephens receives 
Administrative Fees from each Affiliated Fund portfolio ranging from 
0.03 percent to 0.15 percent annually of such portfolios' net assets.
    5. WFSI has entered into selling agreements with Stephens and acts 
as a selling agent for certain Affiliated Fund portfolios. However, 
with respect to Plans investing in the Affiliated Funds, WFSI will not 
receive a sales load or commission (in the form of a 12b-1 Fee) from 
Stephens.
    6. WFNIA acts as the sub-adviser for certain portfolios. For 
services rendered, WFNIA is paid a fee that is computed daily and paid 
monthly at an annual rate based on a percentage of the portfolio's 
average daily net assets. As stated above, these sub-advisory fees are 
paid by Wells Fargo out of its Advisory Fees. Although WFNIA may 
provide investment advice to such portfolios, Wells Fargo retains final 
investment discretion with respect to the management of the assets of 
each portfolio.
    7. WFTIC currently acts as the custodian of the assets of certain 
of the Affiliated Funds and it receives a custodian fee for such 
services. The amount of this expense, to the extent not included in the 
Advisory Fees is 0.0167 percent of the daily net assets of the 
applicable Affiliated Fund.

Description of the Third Party Funds

    8. The Third Party Funds are open-end, diversified management 
investment companies registered under the '40 Act whose sponsors, 
administrators, distributors, investment advisers and sub-advisers are 
not affiliated with Wells Fargo or its affiliates. The Third Party 
Funds may be made available from time to time to Plans investing in the 
Portfolio Advisor Program.

Description of the Portfolio Advisor Program

    9. The Portfolio Advisor Program is an asset allocation program 
that has been offered by Wells Fargo to Independent Fiduciaries of 
Plans since October 1, 1995. It is designed to provide small- and 
medium-sized Plans with access to the type of investment advice that is 
typically available to larger investors. The Portfolio Advisor Program 
is intended to provide a format for investment with the following 
features--a unified account statement covering all investments, 
automatic allocation of assets and contributions, a single asset 
allocation fee and no sales charges on purchases, redemptions, 
reinvestments or transfers between investments.3 The minimum 
investment required to establish a Portfolio Advisor Program Account is 
$10,000.4
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    \3\ Although shares in the Affiliated Funds can be marketed 
outside of the Portfolio Advisor Program, such shares would 
generally carry load fees.
    \4\ If an investor has already opened a Portfolio Advisor 
Program Account with Wells Fargo with a minimum investment of 
$10,000, that same investor may open a second Portfolio Advisor 
Program Account with Wells Fargo with a minimum investment of 
$2,000. An investor having other accounts with Wells Fargo of 
$10,000 or more that are not Portfolio Advisor Program Accounts will 
not be eligible for this lower investment minimum.

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[[Page 64155]]

    With respect to a Section 404(c) Plan, Wells Fargo will offer the 
Portfolio Advisor Program to the Plan's Independent Fiduciary as an 
investment option for the Plan or a portion of the Plan. Alternatively, 
the Plan's Independent Fiduciary may decide to utilize the Portfolio 
Advisor Program for all of the Plan's investment needs. In either 
situation, Wells Fargo will afford the Independent Fiduciary the 
opportunity to decide whether Wells Fargo will interact directly with 
the Plan's Directing Participants or exclusively with the Independent 
Fiduciary.
    Wells Fargo will provide each Independent Fiduciary contemplating 
investing in the Portfolio Advisor Program with a brochure describing 
the Program; an Account agreement; a description of the Allocation 
Models; and a reference guide/disclosure document providing detailed 
information about the Portfolio Advisor Program, the fees charged 
thereunder, the procedures for establishing, making additions to and 
withdrawing from Accounts, and other related information. In the case 
of a Section 404(c) Plan, this information may be provided to either 
the Directing Participants by Wells Fargo or to the Independent 
Fiduciary depending upon the arrangement such Independent Fiduciary has 
negotiated with Wells Fargo.5
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    \5\ The Department wishes to point out that an Independent 
Fiduciary has the responsibility to disseminate all information it 
receives to each Directing Participant investing in the Portfolio 
Advisor Program.
---------------------------------------------------------------------------

    10. Individual IRA, SEP-IRA and single participant Keogh plan 
participants contemplating investing in the Portfolio Advisor Program 
will open an Account with Wells Fargo. With respect to the Independent 
Fiduciary of a Section 404(c) Plan, Wells Fargo will ask such fiduciary 
to select the type of Account that is to be established. The 
Independent Fiduciary of a Section 404(c) Plan may open a custody 
Account for each individual Directing Participant or, in the 
alternative, establish single custody Accounts in the name of the Plan 
reflecting the grouping of Directing Participants by similar asset 
Allocation Models.6
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    \6\ If Wells Fargo establishes a single custody account in the 
name of a Section 404(c) Plan, it is represented that Wells Fargo 
will not keep track of the individual interests of the Directing 
Participants. Instead, the Independent Fiduciary will maintain such 
records or have a third party recordkeeper perform this service.
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    11. After opening an Account, the Independent Fiduciary will obtain 
and complete an Account Agreement and risk tolerance and goal analysis 
Questionnaire (which may be in paper or electronic form). Then, the 
Independent Fiduciary will present the completed Account Agreement and 
Questionnaire to a Personal Financial Officer or other representative 
of Wells Fargo. The Questionnaire will be scored to determine which one 
of several Allocation Models is most appropriate given the financial 
goals, objectives and risk tolerances identified by the Independent 
Fiduciary in the Questionnaire.7
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    \7\ Wells Fargo proposes to canvass each investor annually to 
ascertain whether any of the answers to the Questionnaire have 
changed from the previous year. If so, Wells Fargo will update the 
Questionnaire. However, in the event an investor wishes to change 
his or her Questionnaire during a quarter so that another Allocation 
Model is called for, that new Allocation Model will be presented to 
and approved by the investor and the change to the new Allocation 
Model will be effected immediately.
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    In the case of a Section 404(c) Plan, the Independent Fiduciary may 
elect to have Wells Fargo meet with each Directing Participant. Then, a 
Personal Financial Officer will provide information relating to the 
Portfolio Advisor Program as noted above, have each Directing 
Participant complete the Questionnaire, present the Directing 
Participant with a recommended Allocation Model and provide the 
Directing Participant with the relevant Prospectuses of the Funds in 
the Allocation Model.
    Alternatively, if the Independent Fiduciary chooses to have Wells 
Fargo interact with it instead of the Directing Participants, the 
Personal Financial Officer will meet with the Independent Fiduciary and 
provide such fiduciary with a description of the Portfolio Advisor 
Program for dissemination to the Directing Participants. The Personal 
Financial Officer will also give the Independent Fiduciary 
Questionnaires for completion by the Directing Participants. Based on 
the results of the returned Questionnaires, Wells Fargo will then 
recommend to the Independent Fiduciary, the appropriate Allocation 
Models and provide such fiduciary with relevant Prospectuses of the 
Funds in the recommended Allocation Models for distribution to the 
Directing Participants.
    12. The Allocation Models are designed to satisfy a variety of risk 
tolerances and investment horizons. At the outset, there will be only 
nine Allocation Models, some with growth-based investment objectives 
and others with income-based investment objectives. In the future, more 
Allocation Models may be added by Wells Fargo. Each Allocation Model 
will have three asset classes and initially, nine asset sub-classes. 
Table I shows the asset distribution for a sample Portfolio Advisor 
Program Allocation Model.

                                               Table I.--Portfolio Advisor Program Sample Allocation Model                                              
                                                         [Moderate Medium-Term Model Allocation]                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                         Min        Norm       Max                                                          Min        Norm       Max   
                Class                 (percent)  (percent)  (percent)         Fund type             Asset sub-class      (percent)  (percent)  (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Stock Funds.........................         45         60         75  Third party............  Growth.................          0         15         30
                                                                       Third party............  Equity International...          0          5         20
                                                                       Affiliated.............  Growth & Income........          0         15         30
                                                                       Affiliated.............  Equity Income..........          0         15         30
                                                                       Affiliated.............  Asset Allocation.......          0         10         25
Bond Funds..........................         25         40         55  Affiliated.............  Total Return Bond......          0         15         30
                                                                       Affiliated.............  Intermediate Bond......          0         15         30
                                                                       Affiliated.............  Short-Term Bond........          0         10         25
Money Market Funds..................          0          0         30  Affiliated.............  Cash...................          0          0        30 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: A Third Party Fund will never be replaced by an Affiliated Fund whereas an Affiliated Fund may be replaced by a Third Party Fund. (See discussion 
  in Representation 15 regarding extraordinary changes that are outside the accepted percentage bands.)                                                 


[[Page 64156]]

    13. The Allocation Models are developed and maintained by the Wells 
Fargo Bank Asset Allocation Committee (the Allocation Committee) which 
is comprised of senior investment officers of Wells Fargo's Investment 
Management Group. The Allocation Committee is responsible for 
determining the overall asset allocation of each Allocation Model among 
the currently nine asset sub-class categories. The Allocation Committee 
integrates both quantitative and fundamental analysis to determine 
optimal Allocation Models that match risk and reward objectives. In 
this regard, the Allocation Committee does not rely upon a software 
program but rather examines current asset allocation strategies and 
determines changes based on the present financial outlook, estimates of 
expected returns, volatility in markets, asset class correlation, 
economic trends and various securities valuation measures. These 
criteria are provided by Wells Fargo to all Portfolio Advisor Program 
investors in the disclosure materials.
    14. The Allocation Models may be adjusted by the Allocation 
Committee as changes in the economy and market conditions dictate 
within the permissible ranges described below in Representation 15. 
Such adjustments may include changing the investment mix of the 
Allocation Models by altering the proportion of assets invested among 
the asset sub-classes. However, such adjustments do not include the 
Allocation Committee's adding to or deleting from Funds in an 
Allocation Model without obtaining the written consent of the 
Independent Fiduciary or the Directing Participant.
    In addition, the Allocation Committee is subject to certain 
limitations in changing the design of the Allocation Models. For 
example, the Allocation Committee is required to design Allocation 
Models that include the stock, bond and money market fund asset classes 
and their respective sub-classes.
    15. The Independent Fiduciary or Directing Participant will 
authorize Wells Fargo to change the asset mix of a given Allocation 
Model within a 15 percent range (i.e., 15 percent above or below the 
normal position for the stock and bond asset sub-classes).8 
Movement within each sub-class of assets will also be authorized within 
a range of no more than 15 percent above or below the normal position. 
The Independent Fiduciary or Directing Participant will also authorize 
Wells Fargo to change the cash position in a given Allocation Model in 
a range of 0-30 percent above or below the normal position to 
accommodate extremes in the other two asset sub-classes.9 Wells 
Fargo will make changes in the asset mix within these authorized limits 
without seeking further approval from the Independent Fiduciary or the 
Directing Participant. However, Wells Fargo will not change the asset 
mix outside those limits unless it provides the Independent Fiduciary 
or Directing Participant with 30 days' advance written notice of the 
proposed change 10 and gives the Independent Fiduciary or 
Directing Participant time to elect not to have the change made.11
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    \8\ Movement within each sub-class will apply to the total 
assets held in an Independent Fiduciary's or a Directing 
Participant's Account.
    \9\ For any Allocation Model, it is represented that not more 
than 30 percent of an investor's assets can be placed in the Money 
Market Funds. If the range for cash is exceeded on a rebalancing 
date due to market forces, then the assets will be rebalanced to 
achieve the targeted percentages established in the relevant 
Allocation Model. The rebalancing will require a redemption of 
shares in the Money Market Funds so that the percentage in cash will 
be aligned with the relevant Allocation Model percentage. In 
addition, a corresponding purchase of funds in the asset sub-classes 
that are below the targeted range will be made. (See Representation 
18 for a discussion of the rebalancing of Accounts.)
    \10\ Changes outside these limits may take the form of an 
extraordinary shift (such as the movement of a large percentage of 
assets into cash if the Allocation Committee determines that such a 
move is warranted by economic conditions) or a change in the normal 
position for the allocation mix of a particular Allocation Model 
which the Allocation Committee considers necessary because of a more 
permanent shift in market or economic conditions. In either case, 
Wells Fargo will notify each Independent Fiduciary whose Plan is 
invested in the relevant model or Directing Participant of the 
change and give such Independent Fiduciary or Directing Participant 
time to elect not to have the change made. The change will then be 
made for all Independent Fiduciaries or Directing Participants who 
do not elect otherwise. If a change is made to the normal position 
for the allocation mix of a particular Allocation Model, Wells Fargo 
will be authorized to change the allocation of assets within a 15 
percent range (30 percent in the case of cash) above or below the 
newly established normal position without notifying the Independent 
Fiduciary in advance. If, on the other hand, after first notifying 
the Independent Fiduciary or Directing Participant, Wells Fargo 
makes an extraordinary change to the asset allocation which moves it 
outside the authorized limit, Wells Fargo will be authorized to 
return the asset mix back within the authorized limit without 
further notice, but any other change which will result in the asset 
mix remaining outside the authorized limit will only be made after 
giving 30 days' advance written notice and allowing the Independent 
Fiduciary or Directing Participant the opportunity to elect not to 
have such change made.
    \11\ Assuming an Independent Fiduciary of a Section 404(c) Plan 
establishes a single custody Account with Wells Fargo in the name of 
the Plan, it is represented that if a Directing Participant does not 
wish to have his or her assets reallocated in accordance with Wells 
Fargo's recommendation, such Directing Participant may choose 
another Allocation Model or leave the Portfolio Advisor Program.
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    16. Wells Fargo's Investment Review Committee (the Review 
Committee), which is comprised of senior Wells Fargo officers, is 
responsible for selecting Affiliated Funds and Third Party Funds that 
satisfy the asset allocations specified by the Allocation Committee for 
each Allocation Model. With the exception of the Growth and Equity 
International asset sub-classes, the Review Committee will select 
portfolios of the Affiliated Funds for investment. The Review Committee 
will always select Third Party Funds for investment to the extent an 
Allocation Model calls for an allocation of assets in the Equity 
International and Growth sub-classes. If, however, the Review Committee 
determines that investment in an Affiliated Fund is imprudent (e.g., 
the Affiliated Fund does not meet the requirements of a necessary asset 
sub-class), it will select a Third Party Fund in lieu of an Affiliated 
Fund for a particular sub-class of assets.12 If a Third Party Fund 
is substituted for an Affiliated Fund, the Review Committee must 
thereafter use only a Third Party Fund (i.e., the same Third Party Fund 
or another Third Party Fund). In the applicants' view, this precaution 
will remove any conflicts of interest that may arise if the Review 
Committee is faced with the prospect of selecting an Affiliated Fund 
over a Third Party Fund.13
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    \12\ Changes in the Affiliated Funds or Third Party Funds used 
to satisfy the need for investment in a particular asset sub-class 
will only be made after Wells Fargo has notified all of the affected 
Independent Fiduciaries or Directing Participants in writing and has 
explained that the proposed changes will go into effect if the 
Independent Fiduciaries or Directing Participants do not elect to 
withdraw by the effective date of such change. (See Representation 
27.)
    \13\ If the Allocation Committee should later divide the asset 
sub-classes for an Allocation Model into one or more new sub-
classes, the Review Committee will select Affiliated Fund Portfolios 
to satisfy the call for investment in the new sub-class unless (a) 
there is no Affiliated Fund Portfolio which invests in the new sub-
class of assets; (b) Wells Fargo's Affiliated Fund is not performing 
as well as a similar Third Party Fund based upon such measurable 
criteria as performance, expense ratio, standard deviation and, in 
the case of the Bond Funds, the SEC yield; or (c) a Third Party Fund 
has been utilized initially for the asset sub-class that is being 
divided.
    For example, Wells Fargo represents that ``total return'' is a 
recognized sub-class of the Bond Fund asset class that is set forth 
in Table I. Assuming the industry begins distinguishing between U.S. 
bonds and foreign bonds, Wells Fargo explains that it may do this 
for the benefit of its investors. In this regard, if an Affiliated 
Fund has been used as the Fund for the total return sub-class, and 
Wells Fargo has available two Bond Funds, each of which is 
appropriate for the new sub-classes, Wells Fargo explains that it 
will utilize these Affiliated Funds. If an Affiliated Fund is being 
used for the U.S. bond sub-class, but Wells Fargo does not have an 
appropriate Affiliated Fund for the foreign bond sub-class, it will 
select a Third Party Fund. Thus, when the original sub-class is 
serviced by an Affiliated Fund and that sub-class is divided, Wells 
Fargo states that it may use an Affiliated Fund, a Third Party Fund 
or a combination of the two. If, on the other hand, a Third Party 
Fund is being used for the total return sub-class, Wells Fargo must 
utilize Third Party Funds for both the new divided sub-classes. In 
any event, Wells Fargo represents that it will give all investors 30 
days' notice and the ability to object before any sub-class is 
divided.

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[[Page 64157]]

    17. The asset allocation services provided by the Personal 
Financial Officer will not be binding on the Independent Fiduciary or 
Directing Participant. No action will be taken on the recommendation 
unless and until the Independent Fiduciary or Directing Participant 
accepts and approves in writing the particular Allocation Model and the 
corresponding investment mix (i.e., the investment allocation) 
recommended by the Personal Financial Officer. The Independent 
Fiduciary or Directing Participant can add or withdraw Plan assets to 
or from the respective Account at any time (subject to a $100 minimum 
redemption and purchase requirement) and can also choose a different 
Allocation Model if the Independent Fiduciary's or Directing 
Participant's investment needs and goals have changed. Moreover, Wells 
Fargo intends to ask Independent Fiduciaries or Directing Participants 
annually whether any information provided in the Questionnaire should 
be changed or updated.

Rebalancing and Reallocation of Plan Accounts

    18. Once an Independent Fiduciary or Directing Participant has 
directed Wells Fargo to invest Plan assets that are held in an Account 
in a particular Allocation Model, Wells Fargo will invest the Account 
in the Affiliated Funds and/or Third Party Funds that the Allocation 
Committee has previously chosen to satisfy the asset allocation called 
for by the Allocation Model. It is anticipated that, over time, 
disproportionate earnings as between asset types will cause the 
Account's investment mix to drift out of balance with the Allocation 
Model originally chosen by the Independent Fiduciary or Directing 
Participant.
    For example, the Allocation Model chosen by the Independent 
Fiduciary or Directing Participant may require that 60 percent of 
Account assets be invested in the Stock Funds and 40 percent of Account 
assets be invested in the Bond Funds. If the Stock Funds perform better 
than the Bond Funds during a particular period of time, more than 60 
percent of the Account's assets will be invested in the Stock Funds by 
the end of the period.
    To correct this imbalance, Wells Fargo will move assets among 
investments by buying and selling shares of the Affiliated Funds and/or 
Third Party Funds on the second to the last business day of each 
calendar quarter. For purposes of rebalancing, Wells Fargo will use the 
net asset values of the affected Funds as of close of business for the 
preceding trading day.14 The applicants represent that the act of 
rebalancing Accounts will not involve any exercise of investment 
discretion on the part of Wells Fargo or its affiliates because the 
rebalancing will be confined to bringing the Account into balance with 
the Allocation Model chosen by the Independent Fiduciary or the 
Directing Participant.
---------------------------------------------------------------------------

    \14\ It is represented that neither Wells Fargo nor its 
affiliates will receive fees or commissions in connection with the 
rebalancing. It is also represented that the current percentage 
threshold for triggering rebalancing is a deviation of more than 5 
percent above or below the targeted percentage for an asset sub-
class.
---------------------------------------------------------------------------

    Wells Fargo will also make periodic changes (or reallocations) to 
the asset mix of the Allocation Models and to the mix and identity of 
the Affiliated Funds and/or Third Party Funds that satisfy the 
Allocation Models. Such changes will be made to take into account 
changes in the economy and market conditions and will be made 
independently of the selection of Funds. The changes will also be 
confined to the percentage bands set forth above in Table I. When 
changes are made to the Allocation Models, Wells Fargo will 
automatically realign each Plan Account to make the Account's 
investment mix match the new investment mix of the Allocation Model 
selected by the Independent Fiduciary or Directing Participant.
    Wells Fargo will realign the Accounts' assets by shifting assets 
between Affiliated Funds and Third Party Funds according to changes in 
the Allocation Model. This type of automatic realignment will take 
place only within the percentage bands that have been authorized by the 
Independent Fiduciary or Directing Participant. If an Allocation Model 
changes such that assets would be allocated outside of the authorized 
bands, Wells Fargo will notify the affected Independent Fiduciary or 
Directing Participant of the proposed change and give each individual 
an opportunity to elect not to permit such change.15
---------------------------------------------------------------------------

     15 In the preceding example, if the Allocation Model were to be 
changed such that the new investment allocation is 55 percent in the 
Stock Funds and 45 percent in the Bond Funds (a 5 percent change 
that is within 15 percent of the normal position for that Allocation 
Model), Wells Fargo would then sell sufficient shares in the Stock 
Funds to reduce the percentage of assets invested in such fund to 55 
percent and invest the proceeds in the Bond Funds. If, however, a 
change of more than 15 percent is proposed, Wells Fargo will first 
notify each Independent Fiduciary or Directing Participant affected 
and make changes to the Accounts of the Independent Fiduciaries or 
Directing Participants who did not elect otherwise.
---------------------------------------------------------------------------

Disclosures

    19. Aside from the Questionnaire described above, in order for a 
Plan to participate in the Portfolio Advisor Program, Wells Fargo will 
provide an Independent Fiduciary or Directing Participant, with the 
following materials and/or oral disclosures: (a) A copy of the 
agreement between the Plan and Wells Fargo relating to the Plan's 
participation in the Portfolio Advisor Program; (b) upon written 
request to Wells Fargo, a copy of its investment advisory agreement and 
sub-advisory agreement pertaining to the Affiliated Funds as well as 
its distribution agreement pertaining to the Third Party Funds; (c) a 
written recommendation of a specific Allocation Model together with a 
copy of the Independent Fiduciary's Questionnaire and answers; (d) a 
written or oral explanation of the Portfolio Advisor Program and the 
operation and objectives of the Allocation Models; (e) sufficient and 
understandable disclosure relating to rebalancing and reallocating the 
Allocation Models; (f) a copy of the proposed and final exemptions 
granting the relief requested herein; (g) written disclosures of Wells 
Fargo's affiliation or nonaffiliation with the parties who act as 
sponsors, distributors, administrators, investment advisers and sub- 
advisers, custodians and transfer agents of the Third Party Funds and 
the Affiliated Funds; and (h) in the case of a Section 404(c) Plan, to 
the extent requested by the Independent Fiduciary, an explanation by a 
Personal Financial Officer to Directing Participants in such Plan of 
the services offered under the Portfolio Advisor Program, the operation 
and objectives of the Funds and copies of the documents described in 
(a)-(g).
    Wells Fargo will make available for inspection by the Independent 
Fiduciary or Directing Participant at the time of enrollment in the 
Portfolio Advisor Program, copies of Prospectuses of each Affiliated 
Fund and Third Party Fund in which a Plan's assets are invested. The 
Prospectuses will also be mailed to the Independent Fiduciary, or if 
applicable, to the Directing Participant, after the initial investment 
of assets under the Portfolio Advisor Program. These documents discuss 
the investment objectives of the Affiliated Funds and the Third Party 
Funds, the policies employed to achieve these objectives, the corporate 
affiliation existing between Wells Fargo and its

[[Page 64158]]

affiliates, the compensation paid to such entities and any information 
explaining the risks attendant to investing in the Affiliated Funds or 
Third Party Funds. In addition, upon written or oral request, an 
Independent Fiduciary or Directing Participant will be given a 
Statement of Additional Information supplementing the applicable 
Prospectus which describes the securities and other instruments in 
which the Funds may invest, the investment policies and strategies that 
the Affiliated Funds or Third Party Funds may utilize, including a 
description of the risks.
    20. If accepted as an investor in the Portfolio Advisor Program, 
the Independent Fiduciary or Directing Participant will be required to 
acknowledge in writing, prior to investing through the Program, that 
such Independent Fiduciary or Directing Participant has received copies 
of the aforementioned documents. With respect to a Title I Plan that 
does not permit participant- directed investments as contemplated under 
section 404(c) of the Act, written acknowledgement of the receipt of 
such documents is provided by the Independent Fiduciary (i.e., the Plan 
administrator, trustee, investment manager or named fiduciary, as the 
recordholder of shares of the Funds.) Such Independent Fiduciary will 
be required to represent in writing to Wells Fargo that such fiduciary 
is (a) independent of Wells Fargo and its affiliates; (b) capable of 
making independent decisions regarding the investment of Plan assets; 
(c) knowledgeable with respect to the Plan in administrative matters 
and funding matters related thereto; and (d) able to make an informed 
decision concerning participation in the Portfolio Advisor Program.
    With respect to a Section 404(c) Plan or a Plan that is covered 
under Title II of the Act, the Directing Participant or the Independent 
Fiduciary is required to acknowledge, in writing, receipt of such 
documents and represent to Wells Fargo that such individual is (a) 
independent of Wells Fargo and its affiliates; (b) knowledgeable with 
respect to the Plan in administrative matters and funding matters 
related thereto; and, (c) able to make an informed decision concerning 
participation in the Portfolio Advisor Program.
    21. On an ongoing basis, Wells Fargo will provide the Independent 
Fiduciary with (a) written confirmations of each purchase and 
redemption of shares of an Affiliated Fund or Third Party Fund 
(including transactions resulting from the realignment of assets caused 
by a change in an Allocation Model's investment mix and from periodic 
rebalancing of Account assets); (b) telephone quotations of such 
Independent Fiduciary's Account balance; (c) a periodic (but not less 
frequently than quarterly) statement of Account specifying the net 
asset value of a Plan's assets that are invested in such Account, a 
summary of purchase, sale and exchange activity and dividends received 
or reinvested and a summary of cumulative realized gains/losses; (d) 
semiannual and annual reports which will include financial statements 
for the Funds and the fees paid by the Funds to Wells Fargo and its 
affiliates; (e) a quarterly newspaper or other report pertaining to the 
applicable Allocation Model describing such Allocation Model's 
performance during the preceding quarter, market conditions and 
economic outlook and, if applicable, prospective changes in Affiliated 
Fund and Third Party Fund allocations for the Allocation Model and the 
reasons therefor; (f) a written or oral inquiry at least once annually 
to determine if the information provided in the Questionnaire is still 
accurate and to determine if such information should be updated; and 
(g) at least annually, a Termination Form that the Independent 
Fiduciary may use to withdraw from the Portfolio Advisor Program 
together with instructions for using such form.
    With respect to a Section 404(c) Plan, the Independent Fiduciary 
will determine whether the aforementioned information is provided 
directly to the Directing Participants by Wells Fargo or whether such 
fiduciary will receive this information and disseminate it to the 
Directing Participants. If custody accounts are established in the 
names of the Directing Participants, such participants will receive 
individualized information.

Fee Structure

    22. As to each investing Plan, the total fees that are paid to 
Wells Fargo and its affiliates will constitute no more than reasonable 
compensation for the services provided.16 In this regard, for its 
asset allocation and related services, Wells Fargo will charge each 
participating Plan an annual Plan-level investment fee. The Outside Fee 
will be based on total assets under management which are attributable 
to such Plan's investment in both the Affiliated Funds and the Third 
Party Funds. The annualized Outside Fee will be 1.95 percent (for 
balances below $20,000), 1.85 percent (for balances of between $20,000 
and $100,000, 1.65 percent (for balances between $100,000 and $250,000) 
and 1.50 percent (for balances above $250,000).17 From time to 
time, Wells Fargo may reduce the Outside Fee for promotional purposes. 
The duration and promotional nature of such reductions will be 
disclosed to investors. The Outside Fee will be computed quarterly on 
the average daily value of assets in the Plan's Account during the 
quarter and will be deducted directly from the Account on a quarterly 
basis.
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     16 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 
Independent Fiduciaries of 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 services remain 
appropriate and that the fees paid by the Plans for such services 
are reasonable in relation to the value of the services provided. In 
considering whether to enter into the arrangement for the provision 
of asset allocation services, the Department emphasizes that it 
expects the Independent Fiduciary to fully understand that the 
selection or addition of Third Party Funds may result in a Plan 
paying a larger overall aggregate fee for the package of services 
than if the fiduciary had selected Affiliated Funds.
     17 In the case of a Section 404(c) Plan, the computation 
of the Outside Fee will be based on the average daily value of all 
of the assets in the Accounts of Directing Participants who invest 
in the Portfolio Advisor Program. In other words, the Outside Fee is 
based on the aggregate asset value of the Plan's asset and not on 
the value of each Directing Participant's Account in the Portfolio 
Advisor Program. The result is that all Directing Participants in a 
Section 404(c) Plan will be subject to the same Outside Fee as well 
as the breakpoints.
---------------------------------------------------------------------------

    23. Wells Fargo will receive Advisory Fees from the Affiliated 
Funds ranging from 0.05 percent to 0.70 percent, annually, depending 
upon the applicable portfolio. A sub- advisory fee is paid by Wells 
Fargo out of its investment advisory fee to WFNIA. Wells Fargo may also 
receive Administrative Fees from the Affiliated Funds. As stated in 
Representation 3, if such fees are not included in the Advisory Fee for 
a portfolio, the current fee for (a) custodial services is 0.0167 
percent annually, (b) $2,000 per month plus 0.07 percent on the first 
$50 million, 0.045 percent on the next $50 million and 0.02 percent on 
the excess over $100 million for portfolio accounting services, (c) a 
minimum of $3,000 monthly, plus various transaction charges for 
transfer agency services, and (d) 0.00 percent to 0.30 percent for 
shareholder servicing. Further, Wells Fargo may receive 12b-1 fees in 
the form of ``trailing'' commissions of 0.05 percent to 0.50 percent of 
assets invested with respect to Third Party Funds in the Portfolio 
Advisor Program.
    24. With respect to the Affiliated Funds, Wells Fargo proposes to 
offset,

[[Page 64159]]

quarterly, against its Outside Fee, (a) all Advisory Fees and 
Administrative Fees that are paid by the Affiliated Funds to Wells 
Fargo, its affiliated sub-advisers, its former affiliates, WFNIA and 
WFITC, and to other unrelated parties and (b) all 12b-1 Fees and 
Administrative Fees that are paid to Stephens.18 As stated in 
Representation 3, the annualized Advisory Fees currently range from 
0.05 percent to 0.70 percent of the portfolio's average daily net 
assets. As stated in Representation 4, the annualized 12b-1 Fees that 
are paid to Stephens range from 0.05 to 0.75 percent of the net assets 
of the Affiliated Funds. In addition, the annualized Administrative 
Fees that are paid to Stephens range from 0.03 percent to 0.15 percent 
of the portfolio's net assets. With respect to the Third Party Funds, 
Wells Fargo proposes to offset quarterly, against the Outside Fee, all 
12b-1 Fees that it receives. As stated in Representation 23, these fees 
currently range from 0.05 percent to 0.50 percent annually of net 
assets invested.
---------------------------------------------------------------------------

     18 The Department notes that if the Advisory Fee that is 
offset includes a fee that is paid by Wells Fargo to an unrelated 
sub- adviser, no additional offsetting will be required with respect 
to that portion of the fee that is actually paid by Wells Fargo to 
such sub-adviser.
---------------------------------------------------------------------------

    All such Fees described above will be offset in accordance with the 
crediting mechanism that is described in Prohibited Transaction 
Exemption (PTE) 77-4 (42 FR 18732, April 8, 1977). After the offset, 
Wells Fargo will be paid a Net Outside Fee that may be deducted from 
Plan Accounts. The Net Outside Fee, together with the Advisory Fees, 
the Administrative Fees and 12b- 1 Fees will equal the Outside Fee 
prior to any offset. Wells Fargo believes that the offset will 
eliminate any potential conflicts of interest that may exist as a 
result of the fact that the investment in certain Funds would generate 
higher overall fees to Wells Fargo and its affiliates. In addition, by 
insuring that the sum of the offset and the Net Outside Fee always 
equals the Outside Fee, Wells Fargo believes that the selection of 
Affiliated or Third Party Funds will be revenue-neutral.
    Table II illustrates the revenue-neutral result of the offset 
arrangement. As Table II shows, if a Plan with an Account balance of 
$10,000 is invested in a Portfolio in which 50 percent or $5,000 is 
invested, respectively, in an Affiliated Fund and a Third Party Fund, 
the Plan will be subject to an Outside Fee of $195 or 1.95 percent of 
assets invested.

                                TABLE II.--Example of Revenue-Neutral Fee Offset                                
----------------------------------------------------------------------------------------------------------------
                                     Percentage                   Offset (advisory,                             
                                     of assets      Amount      administrative, 12b-1                           
             Fund type               allocated   invested in            fees)           Net outside  Outside fee
                                      to fund        fund    --------------------------     fee        (1.95%)  
                                     (percent)                  Percent       Amount                            
----------------------------------------------------------------------------------------------------------------
Third Party.......................         0.50        5,000         0.25        12.50        85.00        97.50
Affiliated........................         0.50        5,000         0.80        40.00        57.50        97.50
                                   -----------------------------------------------------------------------------
    Total.........................       100.00       10,000          N/A        52.50       142.50       195.00
----------------------------------------------------------------------------------------------------------------

    25. At the end of each quarter, Wells Fargo will calculate the 
percentage of gross revenues that it has received during the quarter in 
the form of Advisory Fees, Administrative Fees and 12b-1 Fees from the 
applicable Affiliated Fund or Third Party Fund. Such percentage will 
also include all 12b-1 Fees and Administrative Fees that are paid to 
Stephens. These figures will be calculated as a percentage of the 
average daily net asset value of assets in the appropriate Fund. The 
weighted average of such revenues (the Offset Percentage) will then be 
calculated for each Allocation Model. This will yield the amount of 
Advisory Fees, Administrative Fees and 12b-1 Fees that are received. 
This amount will be expressed as a percentage of the average daily net 
value of Account assets. Wells Fargo proposes to reduce the Outside Fee 
for the quarter for each Plan by subtracting from the Outside Fee the 
Offset Percentage for the Allocation Model in which Plan assets were 
invested during the quarter. Only after the Offset Percentage has been 
subtracted will Wells Fargo deduct the Outside Fee from the Plan 
Account in the Portfolio Advisor Program.
    26. Table III shows the calculation of the Offset Percentage for a 
sample Allocation Model. In this example, gross revenues for Wells 
Fargo, its affiliates and where applicable, Stephens, as between the 
Affiliated Funds and the Third Party Funds vary from 0.25 percent to 
1.09 percent of the daily net asset value (annualized), depending on 
which Affiliated Fund or Third Party Fund is selected. The weighted 
average of these revenues for the entire Allocation Model is 0.83 
percent (annualized), which is subtracted from the 1.95 percent Outside 
Fee, thereby leaving a net Outside Fee of 1.12 percent (annualized) for 
the quarter.

                          Table III.--Example of Fee Offset on Sample Allocation Model                          
----------------------------------------------------------------------------------------------------------------
                                                                                  Percentage                    
                                                                 Total             of assets           Weighted 
              Fund type                      Sub-class         revenues*           allocated              fee   
                                                               (percent)            to fund           percentage
----------------------------------------------------------------------------------------------------------------
Third Party.........................  Growth.................       0.50    x          15.00     =          7.50
Third Party.........................  Equity Intn'tl.........       0.25    x           5.00     =          1.25
Affiliated..........................  Growth & Income........       1.09    x          10.00     =         10.90
Affiliated..........................  Equity Income..........       1.09    x          15.00     =         16.35
Affiliated..........................  Asset Allocation.......       0.80    x          10.00     =          8.00
Affiliated..........................  Total Return...........       1.03    x          15.00     =         15.45
Affiliated..........................  Intermediate...........       0.75    x          15.00     =         11.25

[[Page 64160]]

                                                                                                                
Affiliated..........................  Short-Term.............       0.80    x          10.00     =          8.00
Affiliated..........................  Cash...................       0.75    x           5.00     =          3.75
                                                                                 ------------                   
    Total...........................                                                  100.00               82.45
                                                                                 ------------                   
Outside Fee.........................                                                    1.95                    
Weighted Average of Wells Fargo                                                         0.83                    
 Revenues (82.45  100).                                                                                 
Net Account Fee (Annual)--Would be                                                      1.12                    
 Calculated Quarterly.                                                                                          
----------------------------------------------------------------------------------------------------------------
* For the Affiliated Funds, total revenues include all fees that are paid to Wells Fargo, its affiliated sub-   
  advisers, its former affiliates, Stephens and to other unrelated parties. For the Third Party Funds, total    
  revenues include 12b-1 Fees. Any other fees that Wells Fargo may receive from the Third Party Funds are paid  
  from the 12b-1 Fees.                                                                                          

Use of the Termination Form

    27. Although an Independent Fiduciary or Directing Participant may 
withdraw from the Portfolio Advisor Program at any time, Wells Fargo 
will provide each such individual with a Termination Form, at least 
annually, but in all cases where Wells Fargo changes the asset mix 
outside of the current Allocation Model, when Wells Fargo proposes to 
divide a Fund sub-class, when Wells Fargo determines that it is in the 
best interest of the Plan to use a Third Party Fund instead of an 
Affiliated Fund and whenever the Outside Fee is increased. Wells Fargo 
will provide such written notice to the Independent Fiduciary or 
Directing Participant at least 30 days prior to the implementation of 
the change. The written notification will include the Termination Form 
that the Independent Fiduciary or Directing Participant may use to 
withdraw from the Portfolio Advisor Program. The Termination Form will 
be accompanied by instructions on its use. The instructions will 
expressly (a) provide that the authorization is terminable at will and 
without penalty, upon receipt by Wells Fargo of written notice from the 
Independent Fiduciary or Directing Participant; and (b) explain that 
the proposed change will go into effect if the Independent Fiduciary or 
Directing Participant does not elect to withdraw by the effective date.
    28. In summary, it is represented that the transactions have 
satisfied or will satisfy the statutory criteria for an exemption under 
section 408(a) of the Act because:
    (a) The investment of a Plan's assets in the Portfolio Advisor 
Program has been or will be made by a Plan fiduciary or Directing 
Participant who is independent of Wells Fargo and its affiliates such 
that the Independent Fiduciary or Directing Participant will maintain 
complete discretion with respect to participating in the Portfolio 
Advisor Program.
    (b) No Plan has paid or will pay a fee or commission by reason of 
the acquisition, redemption, reinvestment or transfer of shares in the 
Funds.
    (c) As to each Plan, the total fees that are paid to Wells Fargo 
and its affiliates have constituted or will constitute no more than 
reasonable compensation for the services provided.
    (d) Prior to investing in the Portfolio Advisor Program, each 
Independent Fiduciary or Directing Participant have received or will 
receive offering materials and disclosures from Wells Fargo which set 
forth all material facts concerning the purpose, fees, structure, 
operation, Account rebalancing, risks and participation in such 
program.
    (e) Wells Fargo has provided or will provide written documentation 
to an Independent Fiduciary or Directing Participant of its 
recommendations or evaluations based upon objective criteria.
    (f) The quarterly Outside Fee that is paid by a Plan to Wells Fargo 
for asset allocation and related services rendered to such Plan under 
the Portfolio Advisor Program will be offset by (i) all Advisory Fees 
(including sub-advisory fees) and Administrative Fees received from the 
Affiliated Funds by Wells Fargo, its affiliates, its former affiliates, 
and unrelated parties, (ii) all 12b-1 Fees and Administrative Fees that 
are paid by the Affiliated Funds to Stephens and (iii) all 12b-1 Fees 
Wells Fargo receives from the Third Party Funds, such that the sum of 
the offset and the Net Outside Fee will always equal the Outside Fee 
and the selection of Affiliated or Third Party Funds will always be 
revenue neutral.
    (g) Although Wells Fargo will have discretion to change the 
investment mix of an Allocation Model, it has been and will be bound by 
the financial goals and risk tolerances that the model represents and 
it will be limited in the degree of change that it can make to an 
Allocation Model's investment mix.
    (h) Any authorizations made by an Independent Fiduciary or 
Directing Participant with respect to increases in the Outside Fee, 
changes in the asset mix outside an Allocation Model, the division of a 
Fund sub-class, or the substitution of a Third Party Fund for an 
Affiliated Fund, have been and will be terminable at will and without 
penalty to the Plan, upon receipt by Wells Fargo of written notice of 
termination from the Independent Fiduciary or the Directing 
Participant.
    (i) Each Independent Fiduciary or Directing Participant has 
received and will receive ongoing disclosures from Wells Fargo 
regarding the continued participation in the Portfolio Advisor Program.
    (j) All dealings between the Plans, the Funds and Wells Fargo have 
been and will remain on a basis which is at least as favorable to the 
Plans as such dealings are with other shareholders of the Funds.

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

Cassemco, Inc. Retirement Plan and Trust Agreement Located in 
Cookeville, Tennessee; Proposed Exemption

[Application No. D-10350]

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act

[[Page 64161]]

and section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the restrictions 
of sections 406(a) and 406 (b)(1) and (b)(2) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1) (A) through (E) of the Code, shall not 
apply to the proposed cash sale (the Sale) by the Plan of certain 
securities (the Securities) to Cassemco, Inc. the sponsoring employer 
(the Employer) and party in interest with respect to the Plan; provided 
(1) the Sale is a one-time transaction for cash, (2) the Plan pays no 
commissions nor incurs any expenses in connection with the proposed 
Sale, and (3) the Plan receives as consideration for the Sale no less 
than the fair market value of the Securities as of the date of the 
Sale.

Summary or Facts and Representations

    1. The Employer, a Tennessee corporation organized October 19, 
1978, is in the business of manufacturing protective sporting goods 
equipment for sporting-goods dealers and supplying packaging materials 
for ammunition to military prime contractors.
    Mrs. Barbara Nipper Tetreault is the sole owner of the Employer, 
succeeding her late husband in 1991, when also she became the trustee 
and fiduciary of the Plan.
    The Plan is a defined benefit pension plan with approximately 
$137,921.50 in total assets and 31 participants, as of September 3, 
1996. The Employer, because of financial problems, discontinued funding 
the Plan in 1991. On July 3, 1996, the Plan submitted a formal notice 
of termination to the Pension Benefit Guaranty Corporation, and now the 
Plan is prepared to distribute the accrued vested benefits of the Plan 
to its participants and beneficiaries.
    2. The Securities, which the Plan proposes to sell to the Employer, 
consist of 956 shares of common stock, and 956 warrants that are 
exercisable at $10.50 and expire December 31, 1997. The Securities were 
issued to the Plan, effective December 31, 1995, by AquaPro 
Corporation, a Tennessee corporation, in an exchange for the limited 
partnership holdings of the Plan in a catfish farm, Circle Creek 
AquaCulture, L.P., a Tennessee limited partnership. The Plan acquired 
its limited partnership holdings in the Circle Creek AquaCulture, L.P. 
on May 1, 1989, from an unrelated party for investment purposes.
    In a letter dated September 4, 1996, Mr. George S. Hastings, Jr., 
President of AquaPro Corporation determined that the current fair 
market value of the Securities held by the Plan was $7.50 for each of 
the 956 shares and $2.25 for each of the 956 warrants, or a total fair 
market value of $9,321 for all the Securities held by the Plan.
    Mr. Hastings represents, that although the Securities are not 
currently registered or listed on a national securities exchange, 
several million dollars have been invested in the shares of common 
stock of AquaPro Corporation and acquired by outside investors, paying 
$7.50 per share; also, Mr. Hastings determined that the automatic 
conversion feature of the warrants, effective on the expiration date, 
December 31, 1997,\19\ gave the warrants a fair market value of $2.25 
per warrant.
---------------------------------------------------------------------------

    \19\ The automatic conversion feature of the warrants provides 
that upon their expiration each warrant converts to 3/10 share of 
the common stock issued by AquaPro Corporation.
---------------------------------------------------------------------------

    In addition, in a letter dated November 6, 1995, Bishop Crown 
Investment Research, Inc. (Bishop), located in San Diego, California 
determined the Securities value was $7.50 per share for the common 
stock and the value of the warrants was $2.25 per warrant. The 
determination by Bishop was made for determining the exchange values 
when AquaPro Corporation acquired the limited partnership holdings of 
the Plan, effective December 31, 1995, in Circle Creek AquaCulture, 
L.P.
    The applicant and Mr. Hastings represent that both Mr. Hastings and 
Bishop are unrelated and independent of the Plan and the trustee or 
sponsor of the Plan.
    3. The applicant requests an administrative exemption from the 
prohibited transaction provisions of the Act to enable the Plan to sell 
for cash the Securities at their fair market value to the Employer. 
Following the proposed Sale the applicant intends to complete the 
termination of the Plan by distributing the accrued vested benefits to 
the Plan participants and beneficiaries. The applicant represents that 
an additional funding contribution will be made to the Plan so that on 
the date of distribution the Plan will pay the participants and 
beneficiaries all their accrued benefits due under the terms of the 
Plan. The applicant also represents that because of the limited trading 
activity of the Securities since they are not registered or listed on a 
national securities exchange, the Plan has not been able to sell the 
Securities to a non-party in interest with respect to the Plan.
    The Sale is represented by the applicant to be in the best 
interests of the Plan and its participants and beneficiaries because 
the Plan will be able to distribute the accrued vested benefits and be 
able to terminate and avoid additional costs and expenses.
    Also, the applicant represents that the rights of the participants 
and beneficiaries are protected by the independent determination of the 
fair market value of the Securities by Mr. Hastings and Bishop.
    4. In summary, the applicant represents that the proposed 
transaction will satisfy the criteria of section 408(a) of the Act 
because (a) the Sale of the Securities involves a one-time transaction 
for cash; (b) the Plan will not incur any commission payments nor any 
other expenses from the Sale; (c) the Plan will be able to distribute 
the accrued vested benefits to Plan participants and beneficiaries and 
terminate; (d) the Securities have been independently appraised by the 
president of the issuing corporation; and (e) the Plan will receive as 
consideration from the Sale an amount no less than the fair market 
value of the Securities as of the date of the Sale.

FOR FURTHER INFORMATION CONTACT: Mr. C.E. Beaver of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

PanAgora Asset Management, Inc. (PanAgora) Located in Boston, 
Massachusetts; Proposed Exemption

[Application No. D-10351]

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, PanAgora shall not be precluded from functioning as a 
``qualified professional asset manager'' pursuant to Prohibited 
Transaction Exemption 84-14 (PTE 84-14, 49 FR 9494, March 13, 1984) 
solely because of a failure to satisfy Section I(g) of PTE 84-14, as a 
result of affiliation with E.F. Hutton & Company, Inc. (Hutton) and 
Shearson Lehman Brothers, Inc. (Shearson), formerly Shearson Lehman 
Hutton, Inc. (SLH).
    Effective Date: This exemption, if granted, will be effective as of 
September 22, 1989, the date on which PanAgora was formed.

Summary of Facts and Representations

    1. PanAgora is a Delaware corporation that was formed on September 
22, 1989.

[[Page 64162]]

PanAgora originally was a wholly-owned subsidiary of The Boston 
Company, Inc. (TBC), which was in turn a subsidiary of SLH. On April 
27, 1990, Nippon Life Insurance Company (NLI) obtained a 50% interest 
in PanAgora; the remaining 50% interest was owned 25% by SLH and 25% by 
TBC. On May 20, 1993, the ownership was changed so that NLI owned 50% 
and SLH owned 50%. On July 31, 1993, as part of the reorganization 
accompanying the sale of the Shearson retail brokerage business, the 
ownership changed to 50% NLI and 50% Lehman Brothers, Inc.20
---------------------------------------------------------------------------

     20  On March 13, 1993, Shearson entered into an asset purchase 
agreement with Primerica Corporation and its wholly-owned 
subsidiary, Smith Barney, providing for the sale to Smith Barney and 
its designated affiliates of substantially all of the assets of the 
Shearson Lehman Brothers Division of Shearson and the SLB Asset 
Management Division of Shearson. The remaining business was renamed 
Lehman Brothers, Inc.
---------------------------------------------------------------------------

    PanAgora has a Board of Directors of 10 persons. Four are 
designated by NLI, three are designated by Lehman and three are 
PanAgora employees. PanAgora is a registered investment adviser under 
the Investment Advisers Act of 1940 (the Advisers Act). As of December 
31, 1995, PanAgora managed investments of $13,486,300,000 for 98 
clients, including 73 clients which are plans subject to the Act, 5 
foundations, 10 governmental plans, 7 mutual funds and 3 offshore 
funds.
    2. Shearson is a wholly-owned subsidiary of Shearson Lehman 
Brothers Holdings Inc. (Shearson Holdings), 100 percent of the issued 
and outstanding common stock of which is owned by American Express 
Company (AMEX). AMEX is a publicly-owned company whose stock is traded 
on the New York Stock Exchange. AMEX and its subsidiaries form a 
diversified financial and travel services company.
    On January 13, 1988, over 90 percent of the stock of E.F. Hutton 
Group Inc. (Hutton Group), the parent company of Hutton, was tendered 
to SLBP Acquisition Corporation (SLBP), a wholly-owned subsidiary of 
Shearson Holdings, pursuant to an Agreement and Plan of Merger (Merger 
Agreement) dated December 2, 1987, as amended on December 28, 1987, 
entered into among Shearson Holdings, SLBP, and the Hutton Group. On 
January 21, 1988, as permitted by the terms of the Merger Agreement, 
SLBP assigned its right to purchase those shares so accepted to 
Shearson and Shearson purchased the shares. As a result of the 
acquisition of the Hutton Group stock, Shearson controls the Hutton 
Group and indirectly controls Hutton.
    3. On May 2, 1985, Hutton entered a plea of guilty (the Guilty 
Plea) to an Information filed in the United States District Court for 
the Middle District of Pennsylvania. The Information charged that 
Hutton had violated the federal mail and wire fraud statutes in 
connection with its handling of certain checking accounts it maintained 
for the deposit of its own funds during the period from July 1, 1980 to 
February 16, 1982. The applicant represents that as a result of the 
Guilty Plea, Hutton agreed to pay, and has paid, a criminal fine of 
$2,000,000 plus $750,000 to defray the costs of the government 
investigation. Hutton further agreed to establish, and has established, 
a restitution program for the benefit of commercial banks that may have 
been damaged by its actions. None of the acts alleged in the 
Information, however, involved funds or securities owned by any 
investment advisory or brokerage clients of Hutton or any employee 
benefit plan for which Hutton or any affiliate is a party in interest.
    4. On May 16, 1988, Hutton entered a plea of guilty (the Providence 
Plea) in the United States District Court for the District of Rhode 
Island on two counts of violating the Bank Secrecy Act and one count of 
conspiracy to violate that Act. The applicant represents that Hutton 
agreed to pay, and has paid, an aggregate fine of $1,010,000 as a 
result of the Providence Plea. The Information filed by the government 
in connection with the Providence Plea alleges that the conduct of the 
two brokers, formerly employed at Hutton-Providence, was in violation 
of the Bank Secrecy Act. The Bank Secrecy Act requires the filing of a 
Currency Transaction Report, under certain circumstances, if more than 
$10,000 in cash is deposited with a financial institution. The 
applicant represents that the brokers' unlawful conduct occurred 
primarily in the period from 1982 to 1983, and no such conduct 
transpired later than October 1984--more than three years before 
Shearson acquired its majority interest in Hutton.
    5. On March 3, 1989, George Inserra, a broker employed by Shearson, 
pled guilty to charges of securities fraud, soliciting commissions in 
connection with an employee benefit plan, and filing a false income tax 
return. On the same date, John Inserra, also employed by Shearson as a 
broker, pled guilty to securities fraud conspiracy. Further, on May 1, 
1989, the Department filed a complaint in the U.S. District Court for 
the Northern District of New York alleging that Shearson, among others, 
and its agents, misused assets of three New York Teamsters Funds (the 
Funds) to benefit themselves and others through a stock parking scheme 
and indirect fee arrangements with banks, and that Shearson mishandled 
the Funds' cash balances and manipulated stock purchases. On September 
19, 1990, Shearson and the Department executed a settlement agreement 
(the Settlement) regarding the Department's complaint. Without 
admitting or denying the Department's allegations, Shearson agreed 
pursuant to the Settlement to make a payment to the affected Funds.
    6. The applicant states that the Inserras had left the employment 
of Shearson in October 1985, long before the guilty pleas were entered 
in March 1989. The applicant further represents that although the 
Securities and Exchange Commission (SEC) instituted proceedings against 
Shearson as a result of the Inserras' activities, Shearson was not 
charged with any criminal offenses. Shearson settled the SEC 
proceedings by accepting a censure by the SEC for failure to exercise 
reasonable supervision of the Inserras. As part of the settlement with 
the SEC, Shearson agreed to institute revised policies and procedures 
recommended by an independent consultant to prevent the kinds of 
defalcations engaged in by the Inserras. The applicant represents that 
the independent consultant thoroughly analyzed Shearson's operations 
and recommended systemic changes designed to preclude the types of 
unsupervised actions committed by the Inserras.
    7. AMEX has represented that although none of the unlawful conduct 
involved Hutton's investment management activities or any plans covered 
by the Act, the criminal activities described above could preclude each 
component of AMEX, as an affiliate of Hutton, from serving as a 
``qualified professional asset manager'' (QPAM) pursuant to sections 
I(g) and V(d) of PTE 84-14. Similarly, AMEX has represented that the 
guilty pleas of the Inserras could preclude each component of AMEX, as 
an affiliate of Shearson, from serving as a QPAM, pursuant to sections 
I(g) and V(d) of PTE 84-14. Section I(g) of PTE 84-14 precludes a 
person who otherwise qualifies as a QPAM from serving as a QPAM if such 
person or an affiliate 21 thereof has

[[Page 64163]]

within the 10 years immediately preceding the transaction been either 
convicted or released from imprisonment as a result of certain criminal 
activity. PanAgora requests an exemption to enable it to function as a 
QPAM despite its failure to satisfy section I(g) of PTE 84-14 due to 
affiliation with Hutton and Shearson and the pleas entered by Hutton 
and the Inserras.22
---------------------------------------------------------------------------

    \21\ For purposes of section I(g) of PTE 84-14, an ``affiliate'' 
of a person is defined, in relevant part, as ``any person directly 
or indirectly, through one or more intermediaries, controlling, 
controlled by, or under common control with the person * * *'' (PTE 
84-14 section V(d)). As such, under this definition, American 
Express and all its subsidiaries (collectively, AMEX) would be 
considered affiliates of Shearson and Hutton.
    \22\ In Prohibited Transaction Exemption 94-34 (PTE 94-34, 59 FR 
19247, April 22, 1994), AMEX obtained the relief proposed herein for 
itself and its wholly owned subsidiaries, including Lehman Brothers, 
Inc., the successor to SLH. Although PanAgora was then a subsidiary 
of AMEX, PTE 94-34 provided no relief for PanAgora because it was 
not a wholly owned subsidiary.
---------------------------------------------------------------------------

    8. The transactions covered by this proposed exemption would 
include the full range of transactions that can be executed by 
investment managers who qualify as QPAMs pursuant to PTE 84-14. The 
applicant represents that the requested exemption is not relevant to 
most transactions involving the purchase/sale of securities, securities 
lending, investment in short-term instruments (such as repurchase 
agreements and bankers' acceptances) and certain residential mortgage 
pools, since each such transaction is covered by other class 
exemptions. However, the applicant represents that the requested 
exemption, to enable access to the exemptive relief afforded by PTE 84-
14, is needed for PanAgora to engage in various transactions involving 
investments in real estate, mortgages, and commodities, between plans 
over which PanAgora has investment discretion and parties in interest 
with respect to such plans.
    9. AMEX has represented that various measures have been taken by 
Hutton and Shearson, since the Hutton pleas and the Inserra pleas, to 
ensure that conduct such as that involved in such pleas will not recur. 
Among the steps taken to prevent such conduct in the future are the 
following:
    (A) Hutton has acted to recompense its depository banks for any 
harm which may have been caused by the illegal acts involved in the 
Guilty Plea and the Providence Plea.
    (B) Hutton initiated changes in its organizational structure and 
management practices: Realignment and centralization of financial 
operations, computerized enhancement of Hutton's headquarters to 
monitor activity at the branch and regional levels, and instruction of 
all employees on the procedural revisions.
    (C) Hutton adopted recommendations made by former Judge Griffin 
Bell, U.S. Court of Appeals for the Fifth Circuit,23 who was 
retained to conduct an independent inquiry into the cash management 
practices to which Hutton pled guilty. The changes made pursuant to 
Judge Bell's recommendation include restructuring of the financing, 
financial control, operations and general counsel functions, 
establishment of an independent audit committee with full access to 
Hutton's chief executive officer and board of directors, and 
development of a corporate code of ethics, supplemented by educational 
and monitoring programs, in conjunction with the Ethics Resource Center 
in Washington, D.C.
---------------------------------------------------------------------------

    \23\ Judge Bell has also served as Attorney General of the 
United States.
---------------------------------------------------------------------------

    (D) In late December 1987, following the announcement of Shearson's 
merger with Hutton Group, Shearson retained outside counsel to 
investigate and advise with respect to Hutton's compliance with the 
Bank Secrecy Act. The investigation revealed certain unreported 
currency transactions at Hutton branch offices prior to Shearson's 
acquisition of Hutton. AMEX has represented that the United States 
Attorney for the Southern District of New York completed its inquiry 
into possible legal violations at Hutton branch offices and indicated 
it will take no further action.
    (E) In connection with Shearson's application to the SEC for an 
exemption from the provisions of section 9(a) of the Investment Company 
Act of 1940, Shearson agreed to retain independent auditors: (i) To 
confirm that the Shearson currency reporting procedures are in place in 
each former Hutton branch office; (ii) to review the currency reporting 
procedures to determine whether they are reasonably designed to ensure 
compliance with the Bank Secrecy Act and whether changes are needed to 
ensure ongoing compliance; and (iii) to report the results of the 
review to Shearson. AMEX has represented that upon completion of the 
auditor's review, Shearson submitted the report and recommendations to 
the SEC, together with a report by Shearson setting forth the action 
proposed for implementation of the recommendations. AMEX stated that 
such proposed action has been taken.
    (F) As of February 8, 1988, as part of the consolidation of the 
Hutton branch offices into the Shearson branch office system, each 
Hutton branch adopted the same internal procedures for processing 
currency transactions as those followed by Shearson. AMEX has 
represented that such procedures prevent the kind of irregularities 
involved in the Providence Plea. AMEX stated that as additional 
safeguards, the Shearson procedures forbid all Shearson employees from 
taking possession of currency for a customer, escorting a customer to a 
financial institution to convert currency, and/or advising a customer 
as to how to ``structure'' a transaction with a financial institution 
in order to avoid reporting requirements under the Currency Transaction 
Reporting Act.
    (G) Although the SEC instituted proceedings against Shearson as a 
result of the Inserras' activities, Shearson was not charged with any 
criminal offense, and Shearson expeditiously settled the SEC 
proceedings by accepting a censure by the SEC for failure to reasonably 
supervise the Inserras and the branch manager overseeing the Inserras. 
As part of the settlement, Shearson committed to institute revised 
policies and procedures recommended by an independent consultant and 
designed to prevent the kinds of defalcations engaged in by the 
Inserras.
    10. The applicant asserts that failure to grant the requested 
exemption will prohibit employee benefit plans for which PanAgora acts 
as investment manager from engaging in transactions with parties in 
interest that would otherwise be permitted under PTE 84-14, and will 
cause the plans to forego attractive investment opportunities. The 
applicant notes that it would be deprived of its abilities to offer and 
render the full panoply of specialized investment advisory services 
demanded by employee benefit plans covered by the Act. The applicant 
represents that neither of the Hutton pleas involved PanAgora in any 
way, and thus do not impair the abilities of PanAgora to serve as 
independent investment manager.
    With respect to the conduct and pleas of the Inserras, AMEX has 
pointed out that the Inserras were not employees of Shearson at the 
time they pled guilty to the charges against them, and Shearson was 
never charged with any criminal offense in connection with their 
activities. The applicant represents that the ability of PanAgora or 
any other AMEX affiliate to act as a QPAM has not been affected by the 
activities of the Inserras, which were neither authorized nor condoned 
by Shearson or any other AMEX affiliate.
    11. In summary the applicant represents that the proposed exemption 
satisfies the criteria of section 408(a) of the Act for the following 
reasons: (A) Hutton's criminal activity occurred prior to acquisition 
by Shearson, and the activities of the Inserras did not involve any 
criminal charges against Shearson; (B) Both Hutton and Shearson have 
undertaken substantial reforms

[[Page 64164]]

and put in place procedures designed to prevent any recurrence of the 
criminal activity; (C) PanAgora will be able to engage in a broader 
variety of investment services on behalf of employee benefit plans 
which demand such services; (D) The ability of PanAgora to act as QPAM 
has not been impaired by criminal acts that were neither authorized nor 
condoned by Shearson or any other AMEX affiliate; and (E) The other 
conditions of PTE 84-14, combined with the procedures adopted by Hutton 
and Shearson, afford ample protection of the interests of participants 
and beneficiaries of employee benefit plans.

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

SouthTrust Securities, Inc. (ST) Located in Birmingham, Alabama; 
Proposed Exemption

[Application No. D-10376]

I. Transactions

    A. Effective October 25, 1996, the restrictions of sections 406(a) 
and 407(a) of the Act and the taxes imposed by section 4975 (a) and (b) 
of the Code by reason of section 4975(c)(1) (A) through (D) of the Code 
shall not apply to the following transactions involving trusts and 
certificates evidencing interests therein:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and an employee benefit plan when the sponsor, 
servicer, trustee or insurer of a trust, the underwriter of the 
certificates representing an interest in the trust, or an obligor is a 
party in interest with respect to such plan;
    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates; 
and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.A. (1) or (2).

Notwithstanding the foregoing, section I.A. does not provide an 
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and 
407 for the acquisition or holding of a certificate on behalf of an 
Excluded Plan by any person who has discretionary authority or renders 
investment advice with respect to the assets of that Excluded Plan.\24\
---------------------------------------------------------------------------

    \24\ Section I.A. provides no relief from sections 406(a)(1)(E), 
406(a)(2) and 407 for any person rendering investment advice to an 
Excluded Plan within the meaning of section 3(21)(A)(ii) and 
regulation 29 CFR 2510.3-21(c).
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    B. Effective October 25, 1996, the restrictions of sections 
406(b)(1) and 406(b)(2) of the Act and the taxes imposed by section 
4975 (a) and (b) of the Code by reason of section 4975(c)(1)(E) of the 
Code shall not apply to:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and a plan when the person who has discretionary 
authority or renders investment advice with respect to the investment 
of plan assets in the certificates is (a) an obligor with respect to 5 
percent or less of the fair market value of obligations or receivables 
contained in the trust, or (b) an affiliate of a person described in 
(a); if:
    (i) The plan is not an Excluded Plan;
    (ii) Solely in the case of an acquisition of certificates in 
connection with the initial issuance of the certificates, at least 50 
percent of each class of certificates in which plans have invested is 
acquired by persons independent of the members of the Restricted Group 
and at least 50 percent of the aggregate interest in the trust is 
acquired by persons independent of the Restricted Group;
    (iii) A plan's investment in each class of certificates does not 
exceed 25 percent of all of the certificates of that class outstanding 
at the time of the acquisition; and
    (iv) Immediately after the acquisition of the certificates, no more 
than 25 percent of the assets of a plan with respect to which the 
person has discretionary authority or renders investment advice are 
invested in certificates representing an interest in a trust containing 
assets sold or serviced by the same entity.\25\ For purposes of this 
paragraph B.(1)(iv) only, an entity will not be considered to service 
assets contained in a trust if it is merely a subservicer of that 
trust;
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    \25\ For purposes of this exemption, each plan participating in 
a commingled fund (such as a bank collective trust fund or insurance 
company pooled separate account) shall be considered to own the same 
proportionate undivided interest in each asset of the commingled 
fund as its proportionate interest in the total assets of the 
commingled fund as calculated on the most recent preceding valuation 
date of the fund.
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    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates, 
provided that the conditions set forth in paragraphs B.(1) (i), (iii) 
and (iv) are met; and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.B. (1) or (2).
    C. Effective October 25, 1996, the restrictions of sections 406(a), 
406(b) and 407(a) of the Act, and the taxes imposed by section 4975 (a) 
and (b) of the Code by reason of section 4975(c) of the Code, shall not 
apply to transactions in connection with the servicing, management and 
operation of a trust, provided:
    (1) Such transactions are carried out in accordance with the terms 
of a binding pooling and servicing arrangement; and
    (2) The pooling and servicing agreement is provided to, or 
described in all material respects in the prospectus or private 
placement memorandum provided to, investing plans before they purchase 
certificates issued by the trust.\26\
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    \26\ In the case of a private placement memorandum, such 
memorandum must contain substantially the same information that 
would be disclosed in a prospectus if the offering of the 
certificates were made in a registered public offering under the 
Securities Act of 1933. In the Department's view, the private 
placement memorandum must contain sufficient information to permit 
plan fiduciaries to make informed investment decisions.

Notwithstanding the foregoing, section I.C. does not provide an 
exemption from the restrictions of section 406(b) of the Act or from 
the taxes imposed by reason of section 4975(c) of the Code for the 
receipt of a fee by a servicer of the trust from a person other than 
the trustee or sponsor, unless such fee constitutes a ``qualified 
administrative fee'' as defined in section III.S.
    D. Effective October 25, 1996, the restrictions of sections 406(a) 
and 407(a) of the Act, and the taxes imposed by sections 4975 (a) and 
(b) of the Code by reason of sections 4975(c)(1) (A) through (D) of the 
Code, shall not apply to any transactions to which those restrictions 
or taxes would otherwise apply merely because a person is deemed to be 
a party in interest or disqualified person (including a fiduciary) with 
respect to a plan by virtue of providing services to the plan (or by 
virtue of having a relationship to such service provider described in 
section 3(14) (F), (G), (H) or (I) of the Act or section 4975(e)(2) 
(F), (G), (H) or (I) of the Code), solely because of the plan's 
ownership of certificates.

II. General Conditions

    A. The relief provided under Part I is available only if the 
following conditions are met:
    (1) The acquisition of certificates by a plan is on terms 
(including the certificate price) that are at least as favorable to the 
plan as they would be in an arm's-length transaction with an unrelated 
party;
    (2) The rights and interests evidenced by the certificates are not 
subordinated

[[Page 64165]]

to the rights and interests evidenced by other certificates of the same 
trust;
    (3) The certificates acquired by the plan have received a rating at 
the time of such acquisition that is in one of the three highest 
generic rating categories from either Standard & Poor's Ratings 
Servicer (S&P's), Moody's Investors Service, Inc. (Moody's), Duff & 
Phelps Inc. (D & P) or Fitch Investors Service, Inc. (Fitch);
    (4) The trustee is not an affiliate of any member of the Restricted 
Group. However, the trustee shall not be considered to be an affiliate 
of a servicer solely because the trustee has succeeded to the rights 
and responsibilities of the servicer pursuant to the terms of a pooling 
and servicing agreement providing for such succession upon the 
occurrence of one or more events of default by the servicer;
    (5) The sum of all payments made to and retained by the 
underwriters in connection with the distribution or placement of 
certificates represents not more than reasonable compensation for 
underwriting or placing the certificates; the sum of all payments made 
to and retained by the sponsor pursuant to the assignment of 
obligations (or interests therein) to the trust represents not more 
than the fair market value of such obligations (or interests); and the 
sum of all payments made to and retained by the servicer represents not 
more than reasonable compensation for the servicer's services under the 
pooling and servicing agreement and reimbursement of the servicer's 
reasonable expenses in connection therewith; and
    (6) The plan investing in such certificates is an ``accredited 
investor'' as defined in Rule 501(a)(1) of Regulation D of the 
Securities and Exchange Commission under the Securities Act of 1933.
    B. Neither any underwriter, sponsor, trustee, servicer, insurer, 
nor any obligor, unless it or any of its affiliates has discretionary 
authority or renders investment advice with respect to the plan assets 
used by a plan to acquire certificates, shall be denied the relief 
provided under Part I, if the provision of subsection II.A.(6) above is 
not satisfied with respect to acquisition or holding by a plan of such 
certificates, provided that (1) such condition is disclosed in the 
prospectus or private placement memorandum; and (2) in the case of a 
private placement of certificates, the trustee obtains a representation 
from each initial purchaser which is a plan that it is in compliance 
with such condition, and obtains a covenant from each initial purchaser 
to the effect that, so long as such initial purchaser (or any 
transferee of such initial purchaser's certificates) is required to 
obtain from its transferee a representation regarding compliance with 
the Securities Act of 1933, any such transferees will be required to 
make a written representation regarding compliance with the condition 
set forth in subsection II.A.(6) above.

III. Definitions

    For purposes of this exemption:
    A. ``Certificate'' means:
    (1) a certificate--
    (a) that represents a beneficial ownership interest in the assets 
of a trust; and
    (b) that entitles the holder to pass-through payments of principal, 
interest, and/or other payments made with respect to the assets of such 
trust; or
    (2) a certificate denominated as a debt instrument--
    (a) that represents an interest in a Real Estate Mortgage 
Investment Conduit (REMIC) within the meaning of section 860D(a) of the 
Internal Revenue Code of 1986; and
    (b) that is issued by and is an obligation of a trust;

with respect to certificates defined in (1) and (2) above for which ST 
or any of its affiliates is either (i) the sole underwriter or the 
manager or co-manager of the underwriting syndicate, or (ii) a selling 
or placement agent.
    For purposes of this exemption, references to ``certificates 
representing an interest in a trust'' include certificates denominated 
as debt which are issued by a trust.
    B. ``Trust'' means an investment pool, the corpus of which is held 
in trust and consists solely of:
    (1) either
    (a) secured consumer receivables that bear interest or are 
purchased at a discount (including, but not limited to, home equity 
loans and obligations secured by shares issued by a cooperative housing 
association);
    (b) secured credit instruments that bear interest or are purchased 
at a discount in transactions by or between business entities 
(including, but not limited to, qualified equipment notes secured by 
leases, as defined in section III.T);
    (c) obligations that bear interest or are purchased at a discount 
and which are secured by single-family residential, multi-family 
residential and commercial real property (including obligations secured 
by leasehold interests on commercial real property);
    (d) obligations that bear interest or are purchased at a discount 
and which are secured by motor vehicles or equipment, or qualified 
motor vehicle leases (as defined in section III.U);
    (e) ``guaranteed governmental mortgage pool certificates,'' as 
defined in 29 CFR 2510.3-101(i)(2);
    (f) fractional undivided interests in any of the obligations 
described in clauses (a)-(e) of this section B.(1); \27\
---------------------------------------------------------------------------

    \27\ It is the Department's view that the definition of 
``trust'' contained in III.B. includes a two-tier structure under 
which certificates issued by the first trust, which contains a pool 
of receivables described above, are transferred to a second trust 
which issues securities that are sold to plans. However, the 
Department is of the further view that, since the exemption provides 
relief for the direct or indirect acquisition or disposition of 
certificates that are not subordinated, no relief would be available 
if the certificates held by the second trust were subordinated to 
the rights and interests evidenced by other certificates issued by 
the first trust.
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    (2) property which had secured any of the obligations described in 
subsection B.(1);
    (3) undistributed cash or temporary investments made therewith 
maturing no later than the next date on which distributions are to made 
to certificateholders; and
    (4) rights of the trustee under the pooling and servicing 
agreement, and rights under any insurance policies, third-party 
guarantees, contracts of suretyship and other credit support 
arrangements with respect to any obligations described in subsection 
B.(1).

Notwithstanding the foregoing, the term ``trust'' does not include any 
investment pool unless: (i) the investment pool consists only of assets 
of the type which have been included in other investment pools, (ii) 
certificates evidencing interests in such other investment pools have 
been rated in one of the three highest generic rating categories by 
S&P's, Moody's, D & P, or Fitch for at least one year prior to the 
plan's acquisition of certificates pursuant to this exemption, and 
(iii) certificates evidencing interests in such other investment pools 
have been purchased by investors other than plans for at least one year 
prior to the plan's acquisition of certificates pursuant to this 
exemption.
    C. ``Underwriter'' means:
    (1) ST;
    (2) any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
ST; or
    (3) any member of an underwriting syndicate or selling group of 
which ST or a person described in (2) is a manager or co-manager with 
respect to the certificates.
    D. ``Sponsor'' means the entity that organizes a trust by 
depositing

[[Page 64166]]

obligations therein in exchange for certificates.
    E. ``Master Servicer'' means the entity that is a party to the 
pooling and servicing agreement relating to trust assets and is fully 
responsible for servicing, directly or through subservicers, the assets 
of the trust.
    F. ``Subservicer'' means an entity which, under the supervision of 
and on behalf of the master servicer, services loans contained in the 
trust, but is not a party to the pooling and servicing agreement.
    G. ``Servicer'' means any entity which services loans contained in 
the trust, including the master servicer and any subservicer.
    H. ``Trustee'' means the trustee of the trust, and in the case of 
certificates which are denominated as debt instruments, also means the 
trustee of the indenture trust.
    I. ``Insurer'' means the insurer or guarantor of, or provider of 
other credit support for, a trust. Notwithstanding the foregoing, a 
person is not an insurer solely because it holds securities 
representing an interest in a trust which are of a class subordinated 
to certificates representing an interest in the same trust.
    J. ``Obligor'' means any person, other than the insurer, that is 
obligated to make payments with respect to any obligation or receivable 
included in the trust. Where a trust contains qualified motor vehicle 
leases or qualified equipment notes secured by leases, ``obligor'' 
shall also include any owner of property subject to any lease included 
in the trust, or subject to any lease securing an obligation included 
in the trust.
    K. ``Excluded Plan'' means any plan with respect to which any 
member of the Restricted Group is a ``plan sponsor'' within the meaning 
of section 3(16)(B) of the Act.
    L. ``Restricted Group'' with respect to a class of certificates 
means:
    (1) each underwriter;
    (2) each insurer;
    (3) the sponsor;
    (4) the trustee;
    (5) each servicer;
    (6) any obligor with respect to obligations or receivables included 
in the trust constituting more than 5 percent of the aggregate 
unamortized principal balance of the assets in the trust, determined on 
the date of the initial issuance of certificates by the trust; or
    (7) any affiliate of a person described in (1)-(6) above.
    M. ``Affiliate'' of another person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (2) Any officer, director, partner, employee, relative (as defined 
in section 3(15) of the Act), a brother, a sister, or a spouse of a 
brother or sister of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner.
    N. ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    O. A person will be ``independent'' of another person only if:
    (1) such person is not an affiliate of that other person; and
    (2) the other person, or an affiliate thereof, is not a fiduciary 
who has investment management authority or renders investment advice 
with respect to any assets of such person.
    P. ``Sale'' includes the entrance into a forward delivery 
commitment (as defined in section Q below), provided:
    (1) The terms of the forward delivery commitment (including any fee 
paid to the investing plan) are no less favorable to the plan than they 
would be in an arm's-length transaction with an unrelated party;
    (2) The prospectus or private placement memorandum is provided to 
an investing plan prior to the time the plan enters into the forward 
delivery commitment; and
    (3) At the time of the delivery, all conditions of this exemption 
applicable to sales are met.
    Q. ``Forward delivery commitment'' means a contract for the 
purchase or sale of one or more certificates to be delivered at an 
agreed future settlement date. The term includes both mandatory 
contracts (which contemplate obligatory delivery and acceptance of the 
certificates) and optional contracts (which give one party the right 
but not the obligation to deliver certificates to, or demand delivery 
of certificates from, the other party).
    R. ``Reasonable compensation'' has the same meaning as that term is 
defined in 29 CFR 2550.408c-2.
    S. ``Qualified Administrative Fee'' means a fee which meets the 
following criteria:
    (1) The fee is triggered by an act or failure to act by the obligor 
other than the normal timely payment of amounts owing in respect of the 
obligations;
    (2) The servicer may not charge the fee absent the act or failure 
to act referred to in (1);
    (3) The ability to charge the fee, the circumstances in which the 
fee may be charged, and an explanation of how the fee is calculated are 
set forth in the pooling and servicing agreement; and
    (4) The amount paid to investors in the trust will not be reduced 
by the amount of any such fee waived by the servicer.
    T. ``Qualified Equipment Note Secured By A Lease'' means an 
equipment note:
    (1) Which is secured by equipment which is leased;
    (2) Which is secured by the obligation of the lessee to pay rent 
under the equipment lease; and
    (3) With respect to which the trust's security interest in the 
equipment is at least as protective of the rights of the trust as would 
be the case if the equipment note were secured only by the equipment 
and not the lease.
    U. ``Qualified Motor Vehicle Lease'' means a lease of a motor 
vehicle where:
    (1) The trust holds a security interest in the lease;
    (2) The trust holds a security interest in the leased motor 
vehicle; and
    (3) The trust's security interest in the leased motor vehicle is at 
least as protective of the trust's rights as would be the case if the 
trust consisted of motor vehicle installment loan contracts.
    V. ``Pooling and Servicing Agreement'' means the agreement or 
agreements among a sponsor, a servicer and the trustee establishing a 
trust. In the case of certificates which are denominated as debt 
instruments, ``Pooling and Servicing Agreement'' also includes the 
indenture entered into by the trustee of the trust issuing such 
certificates and the indenture trustee.
    W. ``ST'' means SouthTrust Securities, Inc. and its affiliates.
    The Department notes that this proposed exemption is included 
within the meaning of the term ``Underwriter Exemption'' as it is 
defined in section V(h) of Prohibited Transaction Exemption 95-60 (60 
FR 35925, July 12, 1995), the Class Exemption for Certain Transactions 
Involving Insurance Company General Accounts at 35932.

Summary of Facts and Representations

    1. ST is the wholly-owned, separately capitalized investment 
banking subsidiary of South Trust Corporation (the Bank), a Birmingham, 
Alabama based bank holding company which had assets of $24.8 billion as 
of September 30, 1996 and operates eight affiliate banks with more than 
500 offices in Alabama, Florida, Georgia, Mississippi, North Carolina, 
South Carolina and Tennessee. The Bank also owns and operates 
subsidiaries that engage in data processing, trust, leasing, mortgage 

[[Page 64167]]

banking, and investment and brokerage services.
    ST was originally incorporated as SouthTrust Brokerage Services in 
1985. In 1989, the investment division of SouthTrust Bank of Alabama 
was merged into SouthTrust Brokerage Services, Inc., and the name of 
the corporation was changed to SouthTrust Securities, Inc. ST maintains 
its principal place in Birmingham, Alabama. ST is a registered broker-
dealer with the Securities and Exchange Commission. As a member of the 
National Association of Securities Dealers, ST maintains a fixed income 
securities brokerage service for the initial placement and remarketing 
of offerings originated by the firm as well as other issues traded in 
the secondary market.
    Pursuant to a July 10, 1989 order of the Board of Governors of the 
Federal Reserve System, ST is authorized to engage, to a limited 
extent, in underwriting and dealing in certain securities through a 
bank holding company subsidiary. The underwriting activities include 
one- to four-family mortgage-related securities, municipal revenue 
bonds, commercial paper, and consumer receivable-related securities. 
Pursuant to this order, ST may also provide full service brokerage 
services and investment advice and buy and sell securities solely as 
agent for the account of customers. This order is subject to the 
condition that ST does not derive more than 10% of its average gross 
revenues from such activities during any two year rolling period.
    Affiliates of ST began securitizing assets in 1993. Since that time 
ST's affiliates have securitized nursing home loans and multi-family 
conduit loans. The professionals of ST have also been active 
participants in the area of tax-exempt financing, including housing, 
public finance and industrial development issues. ST itself began 
securitizing assets in 1996 when it completed a securitization of 
mobile home loans in a private placement. It is anticipated that ST 
will be involved as an underwriter or placement agent in the future in 
asset securitizations.

Trust Assets

    2. ST seeks exemptive relief to permit plans to invest in pass-
through certificates representing undivided interests in the following 
categories of trusts: (1) Single and multi-family residential or 
commercial mortgage investment trusts; 28 (2) motor vehicle 
receivable investment trusts; (3) consumer or commercial receivables 
investment trusts; and (4) guaranteed governmental mortgage pool 
certificate investment trusts.29
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    \28\ The Department notes that PTE 83-1 [48 FR 895, January 7, 
1983], a class exemption for mortgage pool investment trusts, would 
generally apply to trusts containing single-family residential 
mortgages, provided that the applicable conditions of PTE 83-1 are 
met. ST requests relief for single-family residential mortgages in 
this exemption because it would prefer one exemption for all trusts 
of similar structure. However, ST has stated that it may still avail 
itself of the exemptive relief provided by PTE 83-1.
    \29\ Guaranteed governmental mortgage pool certificates are 
mortgage-backed securities with respect to which interest and 
principal payable is guaranteed by the Government National Mortgage 
Association (GNMA), the Federal Home Loan Mortgage Corporation 
(FHLMC), or the Federal National Mortgage Association (FNMA). The 
Department's regulation relating to the definition of plan assets 
(29 CFR 2510.3-101(i)) provides that where a plan acquires a 
guaranteed governmental mortgage pool certificate, the plan's assets 
include the certificate and all of its rights with respect to such 
certificate under applicable law, but do not, solely by reason of 
the plan's holding of such certificate, include any of the mortgages 
underlying such certificate. The applicant is requesting exemptive 
relief for trusts containing guaranteed governmental mortgage pool 
certificates because the certificates in the trusts may be plan 
assets.
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    3. Commercial mortgage investment trusts may include mortgages on 
ground leases of real property. Commercial mortgages are frequently 
secured by ground leases on the underlying property, rather than by fee 
simple interests. The separation of the fee simple interest and the 
ground lease interest is generally done for tax reasons. Properly 
structured, the pledge of the ground lease to secure a mortgage 
provides a lender with the same level of security as would be provided 
by a pledge of the related fee simple interest. The terms of the ground 
leases pledged to secure leasehold mortgages will in all cases be at 
least ten years longer than the term of such mortgages.30
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    \30\ Trust assets may also include obligations that are secured 
by leasehold interests on residential real property. See PTE 90-32 
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6, 
1990 at 23150).
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Trust Structure

    4. Each trust is established under a pooling and servicing 
agreement between a sponsor, a servicer and a trustee. The sponsor or 
servicer of a trust selects assets to be included in the trust. These 
assets are receivables which may have been originated by a sponsor or 
servicer of the trust, an affiliate of the sponsor or servicer, or by 
an unrelated lender and subsequently acquired by the trust sponsor or 
servicer.31
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    \31\ It is the view of the Department that section III.B.(4) 
includes within the definition of the term ``trust'' rights under 
any yield supplement or similar arrangement which obligates the 
sponsor or master servicer, or another party specified in the 
relevant pooling and servicing agreement, to supplement the interest 
rates otherwise payable on the obligations described in section 
III.B.(1), in accordance with the terms of a yield supplement 
arrangement described in the pooling and servicing agreement, 
provided that such arrangements do not involve swap agreement or 
other notional principal contracts.
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    On or prior to the closing date, the sponsor acquires legal title 
to all assets selected for the trust, establishes the trust and 
designates an independent entity as trustee. On the closing date, the 
sponsor conveys to the trust legal title to the assets, and the trustee 
issues certificates representing fractional undivided interests in the 
trust assets. ST, alone or together with other broker-dealers, acts as 
underwriter or placement agent with respect to the sale of the 
certificates. All of the public offerings of certificates presently 
contemplated are to be underwritten by ST on a firm commitment basis. 
In addition, ST anticipates that it may privately place certificates on 
both a firm commitment and an agency basis. ST may also act as the lead 
underwriter for a syndicate of securities underwriters.
    Certificateholders will be entitled to receive monthly, quarterly 
or semi-annual installments of principal and/or interest, or lease 
payments due on the receivables, adjusted, in the case of payments of 
interest, to a specified rate--the pass-through rate--which may be 
fixed or variable.
    When installments or payments are made on a semi-annual basis, 
funds are not permitted to be commingled with the servicer's assets for 
longer than would be permitted for a monthly-pay security. A segregated 
account is established in the name of the trustee (on behalf of 
certificateholders) to hold funds received between distribution dates. 
The account is under the sole control of the trustee, who invests the 
account's assets in short-term securities which have received a rating 
comparable to the rating assigned to the certificates. In some cases, 
the servicer may be permitted to make a single deposit into the account 
once a month. When the servicer makes such monthly deposits, payments 
received from obligors by the servicer may be commingled with the 
servicer's assets during the month prior to deposit. Usually, the 
period of time between receipt of funds by the servicer and deposit of 
these funds in a segregated account does not exceed one month. 
Furthermore, in those cases where distributions are made semi-annually, 
the servicer will furnish a report on the operation of the trust to the 
trustee on a monthly basis. At or about the time this report is 
delivered to the trustee, it will be made available to 

[[Page 64168]]

certificateholders and delivered to or made available to each rating 
agency that has rated the certificates.
    5. Some of the certificates will be multi-class certificates. ST 
requests exemptive relief for two types of multi-class certificates: 
``strip'' certificates and ``fast-pay/slow-pay'' certificates. Strip 
certificates are a type of security in which the stream of interest 
payments on receivables is split from the flow of principal payments 
and separate classes of certificates are established, each representing 
rights to disproportionate payments of principal and interest.32
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    \32\ It is the Department's understanding that where a plan 
invests in REMIC ``residual'' interest certificates to which this 
exemption applies, some of the income received by the plan as a 
result of such investment may be considered unrelated business 
taxable income to the plan, which is subject to income tax under the 
Code. The Department emphasizes that the prudence requirement of 
section 404(a)(1)(B) of the Act would require plan fiduciaries to 
carefully consider this and other tax consequences prior to causing 
plan assets to be invested in certificates pursuant to this 
exemption.
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    ``Fast-pay/slow-pay'' certificates involve the issuance of classes 
of certificates having different stated maturities or the same 
maturities with different payment schedules. Interest and/or principal 
payments received on the underlying receivables are distributed first 
to the class of certificates having the earliest stated maturity of 
principal, and/or earlier payment schedule, and only when that class of 
certificates has been paid in full (or has received a specified amount) 
will distributions be made with respect to the second class of 
certificates. Distributions on certificates having later stated 
maturities will proceed in like manner until all the certificateholders 
have been paid in full. The only difference between this multi-class 
pass- through arrangement and a single-class pass-through arrangement 
is the order in which distributions are made to certificateholders. In 
each case, certificateholders will have a beneficial ownership interest 
in the underlying assets. In neither case will the rights of a plan 
purchasing a certificate be subordinated to the rights of another 
certificateholder in the event of default on any of the underlying 
obligations. In particular, if the amount available for distribution to 
certificateholders is less than the amount required to be so 
distributed, all senior certificateholders then entitled to receive 
distributions will share in the amount distributed on a pro rata 
basis.33
---------------------------------------------------------------------------

    \33\ If a trust issues subordinated certificates, holders of 
such subordinated certificates may not share in the amount 
distributed on a pro rata basis with the senior certificateholders. 
The Department notes that the exemption does not provide relief for 
plan investment in such subordinated certificates.
---------------------------------------------------------------------------

    6. For tax reasons, the trust must be maintained as an essentially 
passive entity. Therefore, both the sponsor's discretion and the 
servicer's discretion with respect to assets included in a trust are 
severely limited. Pooling and servicing agreements provide for the 
substitution of receivables by the sponsor only in the event of defects 
in documentation discovered within a short time after the issuance of 
trust certificates (within 120 days, except in the case of obligations 
having an original term of 30 years, in which case the period will not 
exceed two years). Any receivable so substituted is required to have 
characteristics substantially similar to the replaced receivable and 
will be at least as creditworthy as the replaced receivable.
    In some cases, the affected receivable would be repurchased, with 
the purchase price applied as a payment on the affected receivable and 
passed through to certificateholders.

Parties to Transactions

    7. The originator of a receivable is the entity that initially 
lends money to a borrower (obligor), such as a home- owner or 
automobile purchaser, or leases property to a lessee. The originator 
may either retain a receivable in its portfolio or sell it to a 
purchaser, such as a trust sponsor.
    Originators of receivables included in the trusts will be entities 
that originate receivables in the ordinary course of their business, 
including finance companies for whom such origination constitutes the 
bulk of their operations, financial institutions for whom such 
origination constitutes a substantial part of their operations, and any 
kind of manufacturer, merchant, or service enterprise for whom such 
origination is an incidental part of its operations. Each trust may 
contain assets of one or more originators. The originator of the 
receivables may also function as the trust sponsor or servicer.
    8. The sponsor will be one of three entities: (i) A special-purpose 
or other corporation unaffiliated with the servicer, (ii) a special-
purpose or other corporation affiliated with the servicer, or (iii) the 
servicer itself. Where the sponsor is not also the servicer, the 
sponsor's role will generally be limited to acquiring the receivables 
to be included in the trust, establishing the trust, designating the 
trustee, and assigning the receivables to the trust.
    9. The trustee of a trust is the legal owner of the obligations in 
the trust. The trustee is also a party to or beneficiary of all the 
documents and instruments deposited in the trust, and as such is 
responsible for enforcing all the rights created thereby in favor of 
certificateholders.
    The trustee will be an independent entity, and therefore will be 
unrelated to ST, the trust sponsor or the servicer. ST represents that 
the trustee will be a substantial financial institution or trust 
company experienced in trust activities. The trustee receives a fee for 
its services, which will be paid by the servicer or sponsor. The method 
of compensating the trustee which is specified in the pooling and 
servicing agreement will be disclosed in the prospectus or private 
placement memorandum relating to the offering of the certificates.
    10. The servicer of a trust administers the receivables on behalf 
of the certificateholders. The servicer's functions typically involve, 
among other things, notifying borrowers of amounts due on receivables, 
maintaining records of payments received on receivables and instituting 
foreclosure or similar proceedings in the event of default. In cases 
where a pool of receivables has been purchased from a number of 
different originators and deposited in a trust, the receivables may be 
``subserviced'' by their respective originators and a single entity may 
``master service'' the pool of receivables on behalf of the owners of 
the related series of certificates. Where this arrangement is adopted, 
a receivable continues to be serviced from the perspective of the 
borrower by the local subservicer, while the investor's perspective is 
that the entire pool of receivables is serviced by a single, central 
master servicer who collects payments from the local subservicers and 
passes them through to certificateholders.
    Receivables of the type suitable for inclusion in a trust 
invariably are serviced with the assistance of a computer. After the 
sale, the servicer keeps the sold receivables on the computer system in 
order to continue monitoring the accounts. Although the records 
relating to sold receivables are kept in the same master file as 
receivables retained by the originator, the sold receivables are 
flagged as having been sold. To protect the investor's interest, the 
servicer ordinarily covenants that this ``sold flag'' will be included 
in all records relating to the sold receivables, including the master 
file, archives, tape extracts and printouts.
    The sold flags are invisible to the obligor and do not affect the 
manner in which the servicer performs the billing,

[[Page 64169]]

posting and collection procedures related to the sold receivables. 
However, the servicer uses the sold flag to identify the receivables 
for the purpose of reporting all activity on those receivables after 
their sale to investors.
    Depending on the type of receivable and the details of the 
servicer's computer system, in some cases the servicer's internal 
reports can be adapted for investor reporting with little or no 
modification. In other cases, the servicer may have to perform special 
calculations to fulfill the investor reporting responsibilities. These 
calculations can be performed on the servicer's main computer, or on a 
small computer with data supplied by the main system. In all cases, the 
numbers produced for the investors are reconciled to the servicer's 
books and reviewed by public accountants.
    The underwriter will be a registered broker-dealer that acts as 
underwriter or placement agent with respect to the sale of the 
certificates. Public offerings of certificates are generally made on a 
firm commitment basis. Private placement of certificates may be made on 
a firm commitment or agency basis. The lead or co-managing underwriters 
may make a market in certificates offered to the public.
    In some cases, the originator and servicer of receivables to be 
included in a trust and the sponsor of the trust (although they may 
themselves be related) will be unrelated to ST. In other cases, 
however, affiliates of ST may originate or service receivables included 
in a trust or may sponsor a trust.

Certificate Price, Pass-Through Rate and Fees

    11. In some cases, the sponsor will obtain the receivables from 
various originators pursuant to existing contracts with such 
originators under which the sponsor continually buys receivables. In 
other cases, the sponsor will purchase the receivables at fair market 
value from the originator or a third party pursuant to a purchase and 
sale agreement related to the specific offering of certificates. In 
other cases, the sponsor will originate the receivables itself.
    As compensation for the receivables transferred to the trust, the 
sponsor receives certificates representing the entire beneficial 
interest in the trust, or the cash proceeds of the sale of such 
certificates. If the sponsor receives certificates from the trust, the 
sponsor sells all or a portion of these certificates for cash to 
investors or securities underwriters.
    12. The price of the certificates, both in the initial offering and 
in the secondary market, is affected by market forces, including 
investor demand, the pass-through interest rate on the certificates in 
relation to the rate payable on investments of similar types and 
quality, expectations as to the effect on yield resulting from 
prepayment of underlying receivables, and expectations as to the 
likelihood of timely payment.
    The pass-through rate for certificates is equal to the interest 
rate on receivables included in the trust minus a specified servicing 
fee.34 This rate is generally determined by the same market forces 
that determine the price of a certificate. The price of a certificate 
and its pass-through, or coupon, rate together determine the yield to 
investors. If an investor purchases a certificate at less than par, 
that discount augments the stated pass-through rate; conversely, a 
certificate purchased at a premium yields less than the stated coupon.
---------------------------------------------------------------------------

    \34\ The pass-through rate on certificates representing 
interests in trusts holding leases is determined by breaking down 
lease payments into ``principal'' and ``interest'' components based 
on an implicit interest rate.
---------------------------------------------------------------------------

    13. As compensation for performing its servicing duties, the 
servicer (who may also be the sponsor or an affiliate thereof, and 
receive fees for acting in that capacity) will retain the difference 
between payments received on the receivables in the trust and payments 
payable (at the pass-through rate) to certificateholders, except that 
in some cases a portion of the payments on receivables may be paid to a 
third party, such as a fee paid to a provider of credit support. The 
servicer may receive additional compensation by having the use of the 
amounts paid on the receivables between the time they are received by 
the servicer and the time they are due to the trust (which time is set 
forth in the pooling and servicing agreement). The servicer typically 
will be required to pay the administrative expenses of servicing the 
trust, including in some cases the trustee's fee, out of its servicing 
compensation.
    The servicer is also compensated to the extent it may provide 
credit enhancement to the trust or otherwise arrange to obtain credit 
support from another party. This ``credit support fee'' may be 
aggregated with other servicing fees, and is either paid out of the 
interest income received on the receivables in excess of the pass-
through rate or paid in a lump sum at the time the trust is 
established.
    14. The servicer may be entitled to retain certain administrative 
fees paid by a third party, usually the obligor. These administrative 
fees fall into three categories: (a) prepayment fees; (b) late payment 
and payment extension fees; and (c) expenses, fees and charges 
associated with foreclosure or repossession, or other conversion of a 
secured position into cash proceeds, upon default of an obligation.
    Compensation payable to the servicer will be set forth or referred 
to in the pooling and servicing agreement and described in reasonable 
detail in the prospectus or private placement memorandum relating to 
the certificates.
    15. Payments on receivables may be made by obligors to the servicer 
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and 
servicing agreement may permit the servicer to place these payments in 
non-interest bearing accounts maintained with itself or to commingle 
such payments with its own funds prior to the distribution dates. In 
these cases, the servicer would be entitled to the benefit derived from 
the use of the funds between the date of payment on a receivable and 
the pass-through date. Commingled payments may not be protected from 
the creditors of the servicer in the event of the servicer's bankruptcy 
or receivership. In those instances when payments on receivables are 
held in non-interest bearing accounts or are commingled with the 
servicer's own funds, the servicer is required to deposit these 
payments by a date specified in the pooling and servicing agreement 
into an account from which the trustee makes payments to 
certificateholders.
    16. The underwriter will receive a fee in connection with the 
securities underwriting or private placement of certificates. In a firm 
commitment underwriting, this fee would consist of the difference 
between what the underwriter receives for the certificates that it 
distributes and what it pays the sponsor for those certificates. In a 
private placement, the fee normally takes the form of an agency 
commission paid by the sponsor. In a best efforts underwriting in which 
the underwriter would sell certificates in a public offering on an 
agency basis, the underwriter would receive an agency commission rather 
than a fee based on the difference between the price at which the 
certificates are sold to the public and what it pays the sponsor. In 
some private placements, the underwriter may buy certificates as 
principal, in which case its compensation would be the difference 
between what it receives for the certificates that it sells and what it 
pays the sponsor for these certificates.

[[Page 64170]]

Purchase of Receivables by the Servicer

    17. The applicant represents that as the principal amount of the 
receivables in a trust is reduced by payments, the cost of 
administering the trust generally increases, making the servicing of 
the trust prohibitively expensive at some point. Consequently, the 
pooling and servicing agreement generally provides that the servicer 
may purchase the receivables remaining in the trust when the aggregate 
unpaid balance payable on the receivables is reduced to a specified 
percentage (usually 5 to 10 percent) of the initial aggregate unpaid 
balance.
    The purchase price of a receivable is specified in the pooling and 
servicing agreement and will be at least equal to: (1) The unpaid 
principal balance on the receivable plus accrued interest, less any 
unreimbursed advances of principal made by the servicer; or (2) the 
greater of (a) the amount in (1) or (b) the fair market value of such 
obligations in the case of a REMIC, or the fair market value of the 
receivables in the case of a trust that is not a REMIC.

Certificate Ratings

    18. The certificates will have received one of the three highest 
ratings available from either S&P's, Moody's, D&P or Fitch. Insurance 
or other credit support (such as surety bonds, letters of credit, 
guarantees, or overcollateralization) will be obtained by the trust 
sponsor to the extent necessary for the certificates to attain the 
desired rating. The amount of this credit support is set by the rating 
agencies at a level that is a multiple of the worst historical net 
credit loss experience for the type of obligations included in the 
issuing trust.

Provision of Credit Support

    19. In some cases, the master servicer, or an affiliate of the 
master servicer, may provide credit support to the trust (i.e. act as 
an insurer). In these cases, the master servicer, in its capacity as 
servicer, will first advance funds to the full extent that it 
determines that such advances will be recoverable (a) out of late 
payments by the obligors, (b) from the credit support provider (which 
may be the master servicer or an affiliate thereof) or, (c) in the case 
of a trust that issues subordinated certificates, from amounts 
otherwise distributable to holders of subordinated certificates, and 
the master servicer will advance such funds in a timely manner. When 
the servicer is the provider of the credit support and provides its own 
funds to cover defaulted payments, it will do so either on the 
initiative of the trustee, or on its own initiative on behalf of the 
trustee, but in either event it will provide such funds to cover 
payments to the full extent of its obligations under the credit support 
mechanism. In some cases, however, the master servicer may not be 
obligated to advance funds but instead would be called upon to provide 
funds to cover defaulted payments to the full extent of its obligations 
as insurer. Moreover, a master servicer typically can recover advances 
either from the provider of credit support or from future payments on 
the affected assets.
    If the master servicer fails to advance funds, fails to call upon 
the credit support mechanism to provide funds to cover delinquent 
payments, or otherwise fails in its duties, the trustee would be 
required and would be able to enforce the certificateholders' rights, 
as both a party to the pooling and servicing agreement and the owner of 
the trust estate, including rights under the credit support mechanism. 
Therefore, the trustee, who is independent of the servicer, will have 
the ultimate right to enforce the credit support arrangement.
    When a master servicer advances funds, the amount so advanced is 
recoverable by the master servicer out of future payments on 
receivables held by the trust to the extent not covered by credit 
support. However, where the master servicer provides credit support to 
the trust, there are protections in place to guard against a delay in 
calling upon the credit support to take advantage of the fact that the 
credit support declines proportionally with the decrease in the 
principal amount of the obligations in the trust as payments on 
receivables are passed through to investors. These safeguards include:
    (a) There is often a disincentive to postponing credit losses 
because the sooner repossession or foreclosure activities are 
commenced, the more value that can be realized on the security for the 
obligation;
    (b) The master servicer has servicing guidelines which include a 
general policy as to the allowable delinquency period after which an 
obligation ordinarily will be deemed uncollectible. The pooling and 
servicing agreement will require the master servicer to follow its 
normal servicing guidelines and will set forth the master servicer's 
general policy as to the period of time after which delinquent 
obligations ordinarily will be considered uncollectible;
    (c) As frequently as payments are due on the receivables included 
in the trust (monthly, quarterly or semi-annually, as set forth in the 
pooling and servicing agreement), the master servicer is required to 
report to the independent trustee the amount of all past-due payments 
and the amount of all servicer advances, along with other current 
information as to collections on the receivables and draws upon the 
credit support. Further, the master servicer is required to deliver to 
the trustee annually a certificate of an executive officer of the 
master servicer stating that a review of the servicing activities has 
been made under such officer's supervision, and either stating that the 
master servicer has fulfilled all of its obligations under the pooling 
and servicing agreement or, if the master servicer has defaulted under 
any of its obligations, specifying any such default. The master 
servicer's reports are reviewed at least annually by independent 
accountants to ensure that the master servicer is following its normal 
servicing standards and that the master servicer's reports conform to 
the master servicer's internal accounting records. The results of the 
independent accountants' review are delivered to the trustee; and
    (d) The credit support has a ``floor'' dollar amount that protects 
investors against the possibility that a large number of credit losses 
might occur towards the end of the life of the trust, whether due to 
servicer advances or any other cause. Once the floor amount has been 
reached, the servicer lacks an incentive to postpone the recognition of 
credit losses because the credit support amount thereafter is subject 
to reduction only for actual draws. From the time that the floor amount 
is effective until the end of the life of the trust, there are no 
proportionate reductions in the credit support amount caused by 
reductions in the pool principal balance. Indeed, since the floor is a 
fixed dollar amount, the amount of credit support ordinarily increases 
as a percentage of the pool principal balance during the period that 
the floor is in effect.

Disclosure

    20. In connection with the original issuance of certificates, the 
prospectus or private placement memorandum will be furnished to 
investing plans. The prospectus or private placement memorandum will 
contain information material to a fiduciary's decision to invest in the 
certificates, including:
    (a) Information concerning the payment terms of the certificates, 
the rating of the certificates, and any material risk factors with 
respect to the certificates;
    (b) A description of the trust as a legal entity and a description 
of how the trust was formed by the seller/servicer or other sponsor of 
the transaction;

[[Page 64171]]

    (c) Identification of the independent trustee for the trust;
    (d) A description of the receivables contained in the trust, 
including the types of receivables, the diversification of the 
receivables, their principal terms, and their material legal aspects;
    (e) A description of the sponsor and servicer;
    (f) A description of the pooling and servicing agreement, including 
a description of the seller's principal representations and warranties 
as to the trust assets and the trustee's remedy for any breach thereof; 
a description of the procedures for collection of payments on 
receivables and for making distributions to investors, and a 
description of the accounts into which such payments are deposited and 
from which such distributions are made; identification of the servicing 
compensation and any fees for credit enhancement that are deducted from 
payments on receivables before distributions are made to investors; a 
description of periodic statements provided to the trustee, and 
provided to or made available to investors by the trustee; and a 
description of the events that constitute events of default under the 
pooling and servicing contract and a description of the trustee's and 
the investors' remedies incident thereto;
    (g) A description of the credit support;
    (h) A general discussion of the principal federal income tax 
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
    (i) A description of the underwriters' plan for distributing the 
pass-through securities to investors; and
    (j) Information about the scope and nature of the secondary market, 
if any, for the certificates.
    21. Reports indicating the amount of payments of principal and 
interest are provided to certificateholders at least as frequently as 
distributions are made to certificateholders. Certificateholders will 
also be provided with periodic information statements setting forth 
material information concerning the underlying assets, including, where 
applicable, information as to the amount and number of delinquent and 
defaulted loans or receivables.
    22. In the case of a trust that offers and sells certificates in a 
registered public offering, the trustee, the servicer or the sponsor 
will file such periodic reports as may be required to be filed under 
the Securities Exchange Act of 1934. Although some trusts that offer 
certificates in a public offering will file quarterly reports on Form 
10-Q and Annual Reports on Form 10-K, many trusts obtain, by 
application to the Securities and Exchange Commission, a complete 
exemption from the requirement to file quarterly reports on Form 10-Q 
and a modification of the disclosure requirements for annual reports on 
Form 10-K. If such an exemption is obtained, these trusts normally 
would continue to have the obligation to file current reports on Form 
8-K to report material developments concerning the trust and the 
certificates. While the Securities and Exchange Commission's 
interpretation of the periodic reporting requirements is subject to 
change, periodic reports concerning a trust will be filed to the extent 
required under the Securities Exchange Act of 1934.
    23. At or about the time distributions are made to 
certificateholders, a report will be delivered to the trustee as to the 
status of the trust and its assets, including underlying obligations. 
Such report will typically contain information regarding the trust's 
assets, payments received or collected by the servicer, the amount of 
prepayments, delinquencies, servicer advances, defaults and 
foreclosures, the amount of any payments made pursuant to any credit 
support, and the amount of compensation payable to the servicer. Such 
report also will be delivered to or made available to the rating agency 
or agencies that have rated the trust's certificates.
    In addition, promptly after each distribution date, 
certificateholders will receive a statement prepared by the servicer, 
paying agent or trustee summarizing information regarding the trust and 
its assets. Such statement will include information regarding the trust 
and its assets, including underlying receivables. Such statement will 
typically contain information regarding payments and prepayments, 
delinquencies, the remaining amount of the guaranty or other credit 
support and a breakdown of payments between principal and interest.

Forward Delivery Commitments

    24. To date, no forward delivery commitments have been entered into 
by ST in connection with the offering of any certificates, but ST may 
contemplate entering into such commitments. The utility of forward 
delivery commitments has been recognized with respect to offering 
similar certificates backed by pools of residential mortgages, and ST 
may find it desirable in the future to enter into such commitments for 
the purchase of certificates.

Secondary Market Transactions

    25. ST anticipates that it may make a market in certificates for 
which it is lead or co-managing underwriter.

Retroactive Relief

    26. ST represents that it has not assumed that retroactive relief 
would be granted prior to the date of its application, and therefore 
has not engaged in transactions related to mortgage-backed and asset-
backed securities based on such an assumption. However, ST requests the 
exemptive relief granted to be retroactive to October 25, 1996, the 
date of its application, and would like to rely on such retroactive 
relief for transactions entered into prior to the date exemptive relief 
may be granted.

Summary

    27. In summary, the applicant represents that the transactions for 
which exemptive relief is requested satisfy the statutory criteria of 
section 408(a) of the Act due to the following:
    (a) The trusts contain ``fixed pools'' of assets. There is little 
discretion on the part of the trust sponsor to substitute receivables 
contained in the trust once the trust has been formed;
    (b) Certificates in which plans invest will have been rated in one 
of the three highest rating categories by S&P's, Moody's, D&P or Fitch. 
Credit support will be obtained to the extent necessary to attain the 
desired rating;
    (c) All transactions for which ST seeks exemptive relief will be 
governed by the pooling and servicing agreement, which is made 
available to plan fiduciaries for their review prior to the plan's 
investment in certificates;
    (d) Exemptive relief from sections 406(b) and 407 for sales to 
plans is substantially limited; and
    (e) ST may make a secondary market in certificates.

Discussion of Proposed Exemption

I. Differences between Proposed Exemption and Class Exemption PTE 83-1

    The exemptive relief proposed herein is similar to that provided in 
PTE 81-7 [46 FR 7520, January 23, 1981], Class Exemption for Certain 
Transactions Involving Mortgage Pool Investment Trusts, amended and 
restated as PTE 83-1 [48 FR 895, January 7, 1983].
    PTE 83-1 applies to mortgage pool investment trusts consisting of 
interest-bearing obligations secured by first or second mortgages or 
deeds of trust on single-family residential property. The exemption 
provides relief from sections 406(a) and 407 for the sale, exchange or

[[Page 64172]]

transfer in the initial issuance of mortgage pool certificates between 
the trust sponsor and a plan, when the sponsor, trustee or insurer of 
the trust is a party-in-interest with respect to the plan, and the 
continued holding of such certificates, provided that the conditions 
set forth in the exemption are met. PTE 83-1 also provides exemptive 
relief from section 406 (b)(1) and (b)(2) of the Act for the above-
described transactions when the sponsor, trustee or insurer of the 
trust is a fiduciary with respect to the plan assets invested in such 
certificates, provided that additional conditions set forth in the 
exemption are met. In particular, section 406(b) relief is conditioned 
upon the approval of the transaction by an independent fiduciary. 
Moreover, the total value of certificates purchased by a plan must not 
exceed 25 percent of the amount of the issue, and at least 50 percent 
of the aggregate amount of the issue must be acquired by persons 
independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1 
provides conditional exemptive relief from section 406(a) and (b) of 
the Act for transactions in connection with the servicing and operation 
of the mortgage trust.
    Under PTE 83-1, exemptive relief for the above transactions is 
conditioned upon the sponsor and the trustee of the mortgage trust 
maintaining a system for insuring or otherwise protecting the pooled 
mortgage loans and the property securing such loans, and for 
indemnifying certificateholders against reductions in pass-through 
payments due to defaults in loan payments or property damage. This 
system must provide such protection and indemnification up to an amount 
not less than the greater of one percent of the aggregate principal 
balance of all trust mortgages or the principal balance of the largest 
mortgage.
    The exemptive relief proposed herein differs from that provided by 
PTE 83-1 in the following major respects: (1) The proposed exemption 
provides individual exemptive relief rather than class relief; (2) The 
proposed exemption covers transactions involving trusts containing a 
broader range of assets than single-family residential mortgages; (3) 
Instead of requiring a system for insuring the pooled receivables, the 
proposed exemption conditions relief upon the certificates having 
received one of the three highest ratings available from S&P's, 
Moody's, D&P or Fitch (insurance or other credit support would be 
obtained only to the extent necessary for the certificates to attain 
the desired rating); and (4) The proposed exemption provides more 
limited section 406(b) and section 407 relief for sales transactions.

II. Ratings of Certificates

    After consideration of the representations of the applicant and 
information provided by S&P's, Moody's, D&P and Fitch, the Department 
has decided to condition exemptive relief upon the certificates having 
attained a rating in one of the three highest generic rating categories 
from S&P's, Moody's, D&P or Fitch. The Department believes that the 
rating condition will permit the applicant flexibility in structuring 
trusts containing a variety of mortgages and other receivables while 
ensuring that the interests of plans investing in certificates are 
protected. The Department also believes that the ratings are indicative 
of the relative safety of investments in trusts containing secured 
receivables. The Department is conditioning the proposed exemptive 
relief upon each particular type of asset-backed security having been 
rated in one of the three highest rating categories for at least one 
year and having been sold to investors other than plans for at least 
one year.35
---------------------------------------------------------------------------

    \35\ In referring to different ``types'' of asset-backed 
securities, the Department means certificates representing interests 
in trusts containing different ``types'' of receivables, such as 
single family residential mortgages, multi-family residential 
mortgages, commercial mortgages, home equity loans, auto loan 
receivables, installment obligations for consumer durables secured 
by purchase money security interests, etc. The Department intends 
this condition to require that certificates in which a plan invests 
are of the type that have been rated (in one of the three highest 
generic rating categories by S&P's, D&P, Fitch or Moody's) and 
purchased by investors other than plans for at least one year prior 
to the plan's investment pursuant to the proposed exemption. In this 
regard, the Department does not intend to require that the 
particular assets contained in a trust must have been ``seasoned'' 
(e.g., originated at least one year prior to the plan's investment 
in the trust).
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III. Limited Section 406(b) and Section 407(a) Relief for Sales

    ST represents that in some cases a trust sponsor, trustee, 
servicer, insurer, and obligor with respect to receivables contained in 
a trust, or an underwriter of certificates may be a pre-existing party 
in interest with respect to an investing plan.36 In these cases, a 
direct or indirect sale of certificates by that party in interest to 
the plan would be a prohibited sale or exchange of property under 
section 406(a)(1)(A) of the Act.37 Likewise, issues are raised 
under section 406(a)(1)(D) of the Act where a plan fiduciary causes a 
plan to purchase certificates where trust funds will be used to benefit 
a party in interest.
---------------------------------------------------------------------------

    \36\ In this regard, we note that the exemptive relief proposed 
herein is limited to certificates with respect to which ST or any of 
its affiliates is either (a) the sole underwriter or manager or co-
manager of the underwriting syndicate, or (b) a selling or placement 
agent.
    \37\ The applicant represents that where a trust sponsor is an 
affiliate of ST, sales to plans by the sponsor may be exempt under 
PTE 75-1, Part II (relating to purchases and sales of securities by 
broker-dealers and their affiliates), if ST is not a fiduciary with 
respect to plan assets to be invested in certificates.
---------------------------------------------------------------------------

    Additionally, ST represents that a trust sponsor, servicer, 
trustee, insurer, and obligor with respect to receivables contained in 
a trust, or an underwriter of certificates representing an interest in 
a trust may be a fiduciary with respect to an investing plan. ST 
represents that the exercise of fiduciary authority by any of these 
parties to cause the plan to invest in certificates representing an 
interest in the trust would violate section 406(b)(1), and in some 
cases section 406(b)(2), of the Act.
    Moreover, ST represents that to the extent there is a plan asset 
``look through'' to the underlying assets of a trust, the investment in 
certificates by a plan covering employees of an obligor with respect to 
receivables contained in a trust may be prohibited by sections 406(a) 
and 407(a) of the Act.
    After consideration of the issues involved, the Department has 
determined to provide the limited sections 406(b) and 407(a) relief as 
specified in the proposed exemption.

NOTICE TO INTERESTED PERSONS: The applicant represents that because 
those potentially interested participants and beneficiaries cannot all 
be identified, the only practical means of notifying such participants 
and beneficiaries of this proposed exemption is by the publication of 
this notice in the Federal Register. Comments and requests for a 
hearing must be received by the Department not later than 30 days from 
the date of publication of this notice of proposed exemption in the 
Federal Register.

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

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest 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

[[Page 64173]]

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

    Signed at Washington, DC, this 26th day of November, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 96-30720 Filed 12-2-96; 8:45 am]
BILLING CODE 4510-29-P