[Federal Register Volume 62, Number 120 (Monday, June 23, 1997)]
[Notices]
[Pages 33910-33925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16361]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10346, et al.]


Proposed Exemptions; 1st Source Bank

AGENCY: Pension and Welfare Benefits Administration, Labor

ACTION: Notice of proposed exemptions.

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

Written Comments and Hearing Requests

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

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

[[Page 33911]]

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.

1st Source Bank Located in South Bend, Indiana

[Application No. D-10346]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 C.F.R. Part 
2570, Subpart B (55 F.R. 32836, 32847, August 10, 1990).1
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    \1\ For purposes of this exemption, references to specific 
provisions of title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
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Section I--Exemption for In-Kind Transfer of Assets

    If the exemption is granted the restrictions of section 406(a) and 
section 406(b) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1) (A) through (F) of the Code, shall not apply, effective 
September 19, 1996, to the in-kind transfer to separate series of an 
open-end investment company registered under the Investment Company Act 
of 1940 (the Funds) to which 1st Source Bank or any of its affiliates 
(collectively, the Bank) serves as investment advisor, and may provide 
other services, of the assets of various employee benefit plans (the 
Plans) that are held in certain collective investment funds (the CIFs) 
maintained by the Bank or otherwise held by the Bank as trustee, 
investment manager, or in any other capacity as fiduciary on behalf of 
the Plans, in exchange for shares of such Funds; provided that the 
following conditions are met:
    (A) A fiduciary (the Second Fiduciary) who is acting on behalf of 
each affected Plan and who is independent of and unrelated to the Bank, 
as defined in paragraph (G) of Section III below, receives in advance 
of the investment by the Plan in any of the Funds a full and detailed 
written disclosure of information concerning such Fund, including, but 
not limited to:
    (1) A current prospectus for each portfolio of each of the Funds in 
which such Plan is considering investing,
    (2) A statement describing the fees for investment management, 
investment advisory, or other similar services, any fees for secondary 
services (Secondary Services), as defined in paragraph (H) of section 
III below, and all other fees to be charged to or paid by the Plan and 
by such Funds to the Bank, including the nature and extent of any 
differential between the rates of such fees,
    (3) The reasons why the Bank may consider such investment in the 
Funds to be appropriate for the Plan,
    (4) A statement describing whether there are any limitations 
applicable to the Bank with respect to which assets of a Plan may be 
invested in the Funds, and, if so, the nature of such limitations, and
    (5) Upon request of the Second Fiduciary, a copy of this proposed 
exemption and/or a copy of the final exemption;
    (B)(1) With respect to each of the Funds in which a Plan invests, 
the Bank will provide the Second Fiduciary of such Plan:
    (a) At least annually with a copy of an updated prospectus of such 
Fund,
    (b) Upon the request of such Second Fiduciary, with a report or 
statement (which may take the form of the most recent financial report, 
the current statement of additional information or some other written 
statement) which contains a description of all fees paid by the Fund to 
the Bank;
    (2) On the basis of the information described above in paragraph 
(A) of this section I, the Second Fiduciary authorizes in writing the 
in-kind transfer of assets of the Plans in exchange for shares of the 
Funds, the investment of such assets in corresponding portfolios of the 
Funds, and the fees received by the Bank in connection with its 
services to the Funds, such authorization by the Second Fiduciary to be 
consistent with the responsibilities, obligations, and duties imposed 
on fiduciaries by Part 4 of Title I of the Act;
    (C) No sales commissions or other fees are paid by the Plans in 
connection with the purchase of Fund shares through the in-kind 
transfer of Plan assets in the CIFs, and no redemption fees are paid in 
connection with the sale of such shares by the Plans to the Fund;
    (D) All or a pro rata portion of the assets of the Plans held in 
the CIFs or all or a pro rata portion of the assets of the Plans held 
by the Bank in any capacities as fiduciary on behalf of such Plans are 
transferred in-kind to the Funds in exchange for shares of such Funds;
    (E) The Plans receive shares of the Funds that have a total net 
asset value that is equal to the value of the assets of the Plans or 
the CIFs exchanged for such shares on the date of transfer, based on 
the current market value of the assets of the Plans or the CIFs;
    (F) The current market value of the assets of the Plans or the CIFs 
to be transferred in-kind in exchange for shares is determined in a 
single valuation performed in the same manner and at the close of 
business on the same day, using independent sources in accordance with 
the procedures set forth in Rule 17a-7(b) (Rule 17a-7), issued by the 
Securities and Exchange Commission under the Investment Company Act of 
1940, and the procedures established by the Funds pursuant to Rule 17a-
7 for the valuation of such assets. Such procedures must require that 
all securities for which a current market price cannot be obtained by 
reference to the last sale price for transactions reported on a 
recognized securities exchange or NASDAQ be valued based on an average 
of the highest current independent bid and lowest current independent 
offer, as of the close of business on the day preceding the CIF or Plan 
transfers determined on the basis of reasonable inquiry from at least 
three sources that are broker-dealers or pricing services independent 
of the Bank;

[[Page 33912]]

    (G) For all conversion transactions that occur after the date of 
publication in the Federal Register of a notice proposing this 
exemption: Not later than thirty (30) days after completion of each in-
kind transfer of assets of the Plans or the CIFs in exchange for shares 
of the Funds, the Bank sends by regular mail to the Second Fiduciary, 
as defined in paragraph (G) of Section III below, a written 
confirmation which contains the following information:
    (1) The identity of each of the assets that was valued for purposes 
of the transaction in accordance with Rule 17a-7(b)(4) under the 
Investment Company Act of 1940;
    (2) The price of such asset involved in the transaction; and
    (3) The identity of each pricing service or market maker consulted 
in determining the value of such assets;
    (H) No later than ninety (90) days after completion of each in-kind 
transfer of assets of the Plans or the CIFs in exchange for shares of 
the Funds, the Bank sends by regular mail to the Second Fiduciary, who 
is acting on behalf of each affected Plan and who is independent of and 
unrelated to the Bank, as defined in paragraph (G) of section III 
below, a written confirmation that contains the following information:
    (1) The number of CIF units held by each affected Plan immediately 
before the transfer, the related per unit value, and the aggregate 
dollar value of the units transferred; and
    (2) The number of shares in the Funds that are held by each 
affected Plan following the transfer, the related per share net asset 
value, and the aggregate dollar value of the shares received;
    (I) The combined total of all fees received by the Bank for the 
provision of services to the Plans, and in connection with the 
provision of services to any of the Funds in which the Plans may 
invest, are not in excess of ``reasonable compensation'' within the 
meaning of section 408(b)(2) of the Act;
    (J) The Bank does not receive any fees payable pursuant to Rule 
12b-1 under the Investment Company Act of 1940 in connection with the 
transactions described herein;
    (K) The Plans are not sponsored by the Bank;
    (L) All dealings between the Plans and any of the Funds are on a 
basis no less favorable to the Plans than dealings between the Funds 
and other shareholders holding the same class of shares as the Plans; 
and
    (M) The requirements of Prohibited Transaction Class Exemption 77-4 
(42 FR 18732, April 8, 1977) are met with respect to all arrangements 
under which investment advisory fees are paid to the Bank directly or 
indirectly by Plans with assets invested in the Funds.

Section II--General Conditions

    (A) The Bank maintains for a period of six years the records 
necessary to enable the persons, as described in paragraph (B) 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 the Bank, the 
records are lost or destroyed prior to the end of the six (6) year 
period, and
    (2) No party in interest, other than the Bank, shall be subject to 
the civil penalty that may be assessed under section 503(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 (B) of this section;
    (B)(1) Except as provided in paragraph (B)(2) of this section II 
and notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the records referred to in paragraph (A) of 
section II above are unconditionally available at their customary 
location for examination during normal business hours by--
    (a) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service,
    (b) Any fiduciary of each of the Plans who has authority to acquire 
or dispose of shares of any of the Funds owned by such a Plan, or any 
duly authorized employee or representative of such fiduciary, and
    (c) Any participant or beneficiary of the Plans or duly authorized 
employee or representative of such participant or beneficiary;
    (2) None of the persons described in paragraphs (B)(1)(b) and 
(B)(1)(c) of this section II shall be authorized to examine trade 
secrets of the Bank or commercial or financial information which is 
privileged or confidential.

Section III--Definitions

    For purposes of this exemption:
    (A) The term ``Bank'' means 1st Source Bank and any affiliate of 
the Bank, as defined in paragraph (B) of this section III.
    (B) An ``affiliate'' of a person includes:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person,
    (2) Any officer, director, employee, relative, or partner in any 
such person, and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (C) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (D) The term ``Fund'' or ``Funds'' means any diversified open-end 
investment company or companies registered under the Investment Company 
Act of 1940 for which the Bank serves as investment adviser, and may 
also provide custodial or other services as approved by such Funds.
    (E) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and sales calculated by dividing the value of all 
securities, determined by a method as set forth in a Fund's prospectus 
and statement of additional information, and other assets belonging to 
each of the portfolios in such Fund, less the liabilities charged to 
each portfolio, by the number of outstanding shares.
    (F) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or a ``member of the family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
a sister, or a spouse of a brother or sister.
    (G) The term ``Second Fiduciary'' means a fiduciary of a plan who 
is independent of and unrelated to the Bank. For purposes of this 
exemption, the Second Fiduciary will not be deemed to be independent of 
and unrelated to the Bank if:
    (1) Such Second Fiduciary directly or indirectly controls, is 
controlled by, or is under common control with the Bank,
    (2) Such Second Fiduciary, or any officer, director, partner, 
employee, or relative of such Second Fiduciary is an officer, director, 
partner, or employee of the Bank (or is a relative of such person), or
    (3) Such Second Fiduciary directly or indirectly receives any 
compensation or other consideration for his or her own personal account 
in connection with any transaction described in this exemption.
    If an officer, director, partner, or employee of the Bank (or a 
relative of such persons) is a director of such Second Fiduciary, and 
if he or she abstains from participation in (i) the choice of the 
Plan's investment manager/advisor, (ii) the approval of any purchase or 
sale by the Plan of shares of the Funds, and (iii) the approval of any 
change of fees charged

[[Page 33913]]

to or paid by the Plan, in connection with any of the transactions 
described in section I above, then paragraph (G)(2) of section III 
above shall not apply.
    (H) The term ``Secondary Service'' means a service, other than an 
investment management, investment advisory, or similar service, which 
is provided by the Bank to the Funds, including but not limited to 
custodial, accounting, brokerage, administrative or any other service.

EFFECTIVE DATE: This exemption, if granted, will be effective as of 
September 19, 1996.

Summary of Facts and Representations

    1. The Bank is a state chartered banking association having its 
principal office in South Bend, Indiana. The Bank has total nontrust 
assets of approximately $1.74 billion and trust assets of approximately 
$1.17 billion. The 1st Source Corporation, with headquarters in South 
Bend, owns all of the outstanding stock of the Bank.
    2. The Plans involved in the transactions for which the Bank 
requests exemptive relief are numerous plans for which the Bank has 
acted or will act as fiduciary and has exercised or will exercise 
investment discretion with respect to all or a portion of the assets of 
such Plans.2 For this reason, specific information relating 
to each individual Plan does not appear in the application. However, it 
is anticipated that the Plans include or will include various employee 
benefit plans, as defined by section 3(3) of the Act, and certain plans 
or trusts as defined by section 4975(e)(1) of the Code. These Plans are 
sponsored or maintained by parties unrelated to the Bank 3 
and include, among others, pension, profit sharing, stock bonus, and 
other retirement plans qualified for tax purposes under section 401(a) 
of the Code, voluntary employees' beneficiary associations and other 
welfare benefit plans, and individual retirement accounts and 
simplified employee pension plans described in section 408 of the Code.
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    \2\ The Department herein is not proposing relief for 
transactions afforded relief by section 404(c) of the Act.
    \3\ The Department herein is not proposing relief for 
transactions involving any plan sponsored by the Bank or its 
affiliates.
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    The Bank represents that, as fiduciary, it exercises investment 
discretion with respect to all or a portion of the assets of 
approximately 443 such Plans having total assets under management by 
the Bank of approximately $443 million. The Bank receives compensation 
for serving as fiduciary with respect to these Plans in accordance with 
standard published fee schedules or as otherwise agreed upon by the 
Bank and the sponsors of such Plans.4 The Bank represents 
that it generally receives separate compensation for investment 
management services and for administrative services other than 
investment management. These administrative services include, among 
others, acting as custodian of the Plan's assets, maintaining Plan 
records, preparing periodic reports concerning the status of the Plan 
and its assets, and accounting for Plan contributions and benefit 
distributions and other receipts and disbursements. Depending on the 
terms of the Plan's governing documents, the Bank's compensation is 
paid either from the Plan's assets or by its sponsor.
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    \4\ The Department expresses no opinion as to whether the 
provision of services by the Bank or its affiliates to the Plans 
satisfies the requirements for statutory exemption, as set forth in 
section 408(b)(2) of the Act and 29 CFR 2550.408(b)(2) of the 
Department's regulation. To the extent that such provision of 
services to the Plan by the Bank or its affiliates does not satisfy 
the requirements of section 408(b)(2) of the Act, the Department, 
herein, is offering no relief.
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    3. The transactions for which the Bank requests exemptive relief 
involve the Funds, each which constitutes a separate investment 
portfolio or a series of portfolios having a separate prospectus and 
representing a distinct investment vehicle. In the aggregate, the Funds 
comprise an Ohio business trust registered as an open-end investment 
company under the Investment Company Act of 1940 (the 1940 Act). The 
Funds currently include a diversified equity fund, an income equity 
fund, a special equity fund and an intermediate fixed income fund, 
along with the a money market portfolio. Additional series may be 
established in the future, and the existing portfolios may be modified, 
reorganized, or terminated.
    4. BISYS Fund Services Limited Partnership, located in Columbus, 
Ohio (BISYS), acts as the administrator of the Funds and the 
distributor of shares of the Funds. BISYS Fund Services, Inc. (BISYS 
Services), an affiliate of BISYS, is the transfer agent and shareholder 
servicing agent of the Funds. The Bank represents that BISYS and BISYS 
Services are unrelated to the Bank. The Funds pay a monthly fee to 
BISYS for its services. Although the Funds have adopted a plan of 
distribution in accordance with Rule 12b-1 under the 1940 Act, such 
plan relates only to retail shareholders and the Bank represents that 
the Funds do not currently pay any 12b-1 fees to any entity. When sale 
commissions or ``loads'' or redemption fees are charged in connection 
with purchases or sales of Fund shares, the Funds implement procedures 
which exempt the Plans from any such charges. The Bank represents, and 
the conditions of this proposed exemption require, that in the event 
the Funds pay any such fees in the future, no portion of such fees will 
be paid, directly or indirectly to the Bank or any of its affiliates in 
connection with the acquisition or holding of Fund shares by any Plan 
with respect to which the Bank or any of its affiliates acts as a 
fiduciary.
    5. The Bank, through the 1st Source Trust Investment Division, acts 
as investment adviser to the Funds. The Bank receives compensation from 
the Funds or from BYSIS or BYSIS Services for the services provided to 
the Funds, and expects to receive compensation for any additional 
services it may provide in the future.5 The Bank's 
compensation is computed daily and paid monthly in accordance with 
various agreements between the Bank and the Funds, BYSIS, or BYSIS 
Services. These agreements are approved by the trustees of the Funds 
and by the shareholders of the Funds. The Fund trustees will also 
approve any changes in the compensation paid to the Bank for services 
rendered with respect to the Funds.
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    \5\ The Department notes that pursuant to paragraph (K) of 
Section I of the proposed exemption, in any compensation 
arrangements between the Bank and BYSIS or BYSIS Services, the Bank 
is prohibited from receiving any fees payable pursuant to Rule 12-b1 
of the Investment Company Act of 1940 in connection with any of the 
transactions described herein.
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    6. Investors in the Funds, including Plans, are able to purchase or 
sell Fund shares in accordance with the standard procedures described 
in the prospectus for each portfolio. In addition, the Bank makes 
available to Plans an automated cash management procedure (the ACMP), 
or ``sweep'' arrangement, whereby otherwise uninvested cash balances of 
Plan may be invested automatically overnight in the Money Market 
Portfolio.6 Under the ACMP, the Bank's computerized system 
will automatically scan or ``sweep'' the accounts of the affected Plans 
as of the end of each business day to determine whether such accounts 
have positive or negative net cash balances. Based on this information, 
the system will automatically invest the cash of Plans having positive 
balances down to the last $.01 in shares of the Money Market Portfolio 
or, in the case of Plans having negative cash balances, automatically 
liquidate Fund shares held by the Plan

[[Page 33914]]

as necessary to eliminate the negative balance. The purchases and sales 
of Fund shares will be effected and posted to the accounts as of the 
business day following the business day on which the cash balance sweep 
occurs. The procedure will be fully automated, and the Bank will have 
no discretion with respect to the timing of the sweep. The Money Market 
Portfolio will be required to maintain a constant net asset value of 
$1.00 per share at all times. The Bank will not charge separate or 
additional fees to Plans participating in the ACMP. A Plan may 
participate in the ACMP only with the written approval of an 
independent fiduciary of the Plan based on written disclosures provided 
by the Bank. The Bank represents that it expects that substantially all 
Plans served by the Bank will elect to participate in the ACMP. 
However, a Plan participating in the ACMP may terminate participation 
at any time by notifying the Bank, orally or in writing. The Bank will 
take the steps necessary to terminate a Plan's participation as soon as 
practicable after receipt of the notice. The Bank will impose no fee, 
charge, or penalty of any kind in connection with a Plan's termination 
of its participation in the ACMP.
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    \6\ In this proposed exemption the Department is not proposing 
any exemptive relief for any transactions relating to the ACMP or 
the investments by the Plans in the Money Market Portfolio.
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    7. The Bank represents that it maintains collective investment 
funds (the CIFs) in accordance with Regulation 9 promulgated by the 
Comptroller of the Currency (12 CFR Part 9) and Internal Revenue 
Service Revenue Ruling 81-100 (1981-1 C.B. 326). The Bank has decided 
for business reasons to discontinue certain of the CIFs. The Bank 
believes that the interests of the Plans are better served by the 
investment of Plan assets in shares of the Funds rather than through 
the CIFs, for a variety of reasons, summarized as follows: Each of the 
Funds is valued on a daily basis, and the daily valuation permits 
almost immediate investment of contributions to a Plan in various types 
of investments, maximum flexibility in transferring Plan assets from 
one type of investment to another, and daily redemption of Fund shares 
for purposes of making distributions or other disbursements under a 
Plan. In addition, information concerning the investment performance of 
each of the Funds is available in newspapers of general circulation. 
This allows Plan sponsors and participants to monitor Fund performance 
on a daily basis. As shareholders of the Funds, the Plans receive 
disclosures mandated by the Securities and Exchange Commission and have 
the opportunity to exercise voting and other shareholder rights 
conferred by the 1940 Act. Finally, Fund shares may be distributed in 
kind to retiring or terminating participants, whereas interests in CIFs 
generally must be liquidated or withdrawn to effect distributions. 
While the CIFs are currently valued on a daily basis, the Funds offer 
the additional benefits of access to information on investment 
performance and the availability of disclosure documents.
    8. The proposed exemption applies to the in-kind transfer of Plan 
assets from investment in the CIFs to investment in shares of the 
Funds, subject to the prior written authorization of an independent 
fiduciary. No sales commissions are paid by the Plans in connection 
with the in-kind transfers. All or a pro-rata portion of the assets of 
the Plans are transferred in-kind in exchange for shares of the Funds. 
The net asset value of the shares in the Funds received by the Plans 
equals the value of the assets transferred to the Funds on the date of 
transfer. In this regard, the proposed exemption requires that each 
Plan receive Fund shares in connection with the transfer of assets of a 
terminating CIF which have a net asset value that is equal to the value 
of the Plan's pro rata share of the CIF assets on the date of the 
transfer, based on the current market value of such assets as 
determined in a single valuation as the close of the same business day 
using independent sources in accordance with procedures established by 
the Fund which comply with Rule 17a-7 of the 1940 Act. A written 
confirmation of each transfer transaction is sent to each Plan 
involved. The proposed exemption does not apply to any receipt by the 
Bank of compensation for services rendered to any of the Funds where 
Plan assets have been invested in shares of the Funds. In this regard, 
with respect to the Bank's receipt of compensation from the Funds for 
investment advisory services, and the continued receipt of fees from 
the Plans for services rendered, the proposed exemption requires the 
Bank to meet all requirements of Prohibited Transaction Class Exemption 
77-4 (PTE 77-4, 42 FR 18732, April 8, 1977). With respect to Plan 
assets invested in shares of the Funds, the Bank's sole compensation 
for investment advisory services will be the fees paid by the Funds to 
the Bank. The Bank represents that in accordance with PTE 77-4, no Plan 
will pay fees to the Bank for investment management services with 
respect to Plan assets invested in shares of the Fund, and that 
procedures are proposed which ensure this result, described as follows:
    9. Fees: Under the current fee structure, the Bank charges the 
Plans, on a quarterly basis, fees for serving as trustee (Plan-level 
Fees). Plan-level Fees consist of separate fees for basic 
administration services, such as reporting, which do not include 
investment advisory or management services (Admin Fees), and for 
discretionary investment management services (Investment Fees). The 
Bank also receives fees, computed and charged daily, from the Funds for 
investment advisory and management services rendered to the Funds 
(Fund-level Fees). Under the arrangements of the proposed exemption, 
the structure of Plan-level fees does not change. The Admin Fee is 
charged regardless of whether Plan assets are invested in the Funds. 
The Investment Fee is also charged, but only with respect to Plan 
assets not invested in the Funds. To the extent that Plan assets are 
invested in the Funds, the Bank does not charge the Investment Fee with 
respect to such assets. A division of the Bank, 1st Source Trust 
Investment Division, receives the Fund-level Fees directly from the 
Funds. The Bank represents that the total combined Plan-level Fees and 
Fund-level Fees received by the Bank do not and will not exceed 
``reasonable compensation'' within the meaning of section 408(b)(2) of 
the Act.7
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    \7\ The Department expresses no opinion as to whether the Plan-
level Fees and the Fund-level Fees constitute ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act.
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    10. The Bank as fiduciary will not invest Plan assets in shares of 
the Funds unless a fiduciary of each affected Plan who is unrelated to 
the Bank (the Second Fiduciary) has authorized such investment. The 
Bank represents that the Second Fiduciary with respect to each Plan 
will be the Plan's administrator, sponsor, or a committee appointed by 
the sponsor to act as a named fiduciary of the Plan. The Bank will not 
be permitted to invest a Plan's assets in shares of the Funds unless 
the Second Fiduciary has received full written disclosures concerning 
the Funds and all compensation received by the Bank in connection with 
its services to the Funds and, based on such information, authorized 
the investment under the following procedures:
    The Second Fiduciary of each Plan will receive a current prospectus 
of the Fund portfolios and a written statement describing the 
compensation received by the Bank in connection with its services to 
the Funds. The statement will describe applicable limitations, if any, 
on investments by the Plan in shares of the Funds. On the basis of such 
information, the Second Fiduciary will authorize in writing the 
investment

[[Page 33915]]

of Plan assets in shares of the Funds and the compensation received by 
the Bank. The authorization will be terminable at will by the Second 
Fiduciary, without penalty to the Plan. In the event of any termination 
of the authorization, the Bank will sell shares of the Funds held by 
the Plan within one (1) business day following receipt by the Bank of 
written notice of such termination, unless due to circumstances beyond 
the control of the Bank, the sale of such shares cannot be executed 
within one business day, in which case the Bank will have an additional 
business day to complete such sale.
    The exemption also requires the Bank to make certain disclosures to 
the Second Fiduciary after the transfer transactions in confirmation 
thereof. Within 30 days after completion of each in-kind transfer of 
assets of the Plans or the CIFs in exchange for shares of the Funds, 
the Bank is required to provide the Second Fiduciary with a written 
confirmation of the transaction which discloses the identity of each of 
the assets that was valued for purposes of the transaction in 
accordance with Rule 17a-7(b)(4) of the Investment Company Act of 1940, 
the price of each such asset involved in the transaction, and the 
identity of each pricing service or market maker consulted in 
determining the value of such assets. Additionally, within 90 days 
after completion of each in-kind transfer of assets of the Plans or the 
CIFs in exchange for shares of the Funds, the Bank is required to 
provide the Second Fiduciary with a written confirmation of the 
transaction which discloses (1) the number of CIF units held by each 
affected Plan immediately before the transfer, the related per unit 
value, and the aggregate dollar value of the units transferred; and (2) 
the number of shares in the Funds that are held by each affected Plan 
following the transfer, the related per share net asset value, and the 
aggregate dollar value of the shares received. The Bank represents that 
for the conversion transactions which have occurred prior to the 
publication of this proposed exemption in the Federal Register, all of 
this confirmatory information has been provided to the Second Fiduciary 
after the completion of each in-kind transfer of assets in exchange for 
shares of the Funds.
    11. The Bank represents that the transactions for which the 
exemption is requested took place on and after September 9, 1996. 
Hence, the Bank requests that the exemption be effective retroactively 
to that date.
    12. In summary, the Bank represents that the transactions described 
herein will satisfy the criteria of section 408(a) of the Act for the 
following reasons:
    (a) The Funds provide the Plans with a more effective investment 
vehicle than the CIFs maintained by the Bank without any increase in 
investment management, advisory or similar fees paid to the Bank;
    (b) With respect to the transfer of a Plan's CIF assets into a Fund 
in exchange for Fund shares, a Second Fiduciary authorized in writing 
such transfer prior to the transaction only after full written 
disclosure of information concerning the Fund;
    (c) Each Plan receives shares of a Fund in connection with the 
transfer of assets of a terminating CIF which have a net asset value 
that is equal to the value of the Plan's pro rata share of the CIF 
assets on the date of the transfer, based on the current market value 
of such assets as determined in a single valuation at the close of the 
same business day using independent sources in accordance with 
procedures established by the Fund which comply with Rule 17a-7 of the 
1940 Act;
    (d) No sales commissions or other fees, including any fees payable 
pursuant to Rule 12b-1 of the 1940 Act, are paid by a Plan in 
connection with the purchase of Fund shares through the in-kind 
transfer of CIF assets;
    (e) The Plans will not pay any ``loads'', redemption fees or sales 
commissions charged by the Funds in connection with the purchases or 
sales of Fund shares;
    (f) The Bank will provide ongoing disclosures to Second Fiduciaries 
of the Plans to verify the fees paid to the Bank and its affiliates by 
the Fund; and
    (g) All dealings by or between the Plans and the Fund have been and 
will remain on a basis which is at least as favorable to the Plans as 
such dealings with other shareholders of the Fund.

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

John Hancock Mutual Life Insurance Company (JH), Located in Boston, 
Massachusetts

[Application Nos. D-10416-10420]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of 
the Code, shall not apply to the: (1) The acquisition by a separate 
account maintained by JH (the FPGT Account) from Willamette Industries, 
Inc. (Willamette) of certain oil and gas rights (the Deer Creek Oil and 
Gas Rights), subject to existing leases (the Leases) of such rights to 
Enerfin Resources Northwest Limited Partnership (Enerfin), a party in 
interest with respect to the plans invested in the FPGT Account; and 
(2) the continuation of the Leases following the acquisition by the 
FPGT Account, provided the following conditions are satisfied: (a) As 
part of its decision to enter into the separate account contract 
establishing the FPGT Account, an independent fiduciary determines that 
the acquisition of the Deer Creek Oil and Gas Rights is in the interest 
of the participants of the plans investing in the FPGT Account and that 
the price paid for the rights is no more than the fair market value of 
such rights; (b) an independent fiduciary determines that the 
continuation of the Leases is in the best interests of the FPGT 
Account; and (c) an independent fiduciary will monitor the performance 
of Enerfin under the Leases, as well as any proposed modifications or 
renewals of the Leases, and will take such steps as are necessary to 
protect the interests of the FPGT Account with respect to the Leases.

Summary of Facts and Representations

    1. JH, a Massachusetts corporation, is a mutual life insurance 
company. JH offers group annuity contracts to contract holders, 
including retirement plans. Certain of these contracts provide that, in 
accordance with contract holder direction, the premiums or 
contributions received under these group annuity contracts will be 
allocated to segregated asset accounts or ``separate accounts''. A 
separate account may be established to back a group of substantially 
identical group annuity contracts issued to a group of unrelated 
customers (a ``pooled separate account'').
    2. JH currently holds legal title to large holdings in timberland. 
Beneficial ownership in these assets has been allocated to a number of 
JH pooled and single customer separate accounts known as the 
``ForesTree'' separate accounts. JH currently has established a total 
of fifteen such pooled and non-pooled ForesTree separate accounts which 
are invested only in timberland. Twenty contract holders currently 
participate in these ForesTree separate accounts. These contract 
holders

[[Page 33916]]

include both plans covered under the Act and non-ERISA governmental 
plans. The group annuity contracts state that JH shall be the sole 
owner of the ForesTree separate account assets and that JH shall have 
the right to control, manage and administer the account, including the 
sole discretion to select investments in accordance with the investment 
policy established by JH for the account.
    3. The timberland investments allocated to the ForesTree separate 
accounts are managed by Hancock Natural Resource Group, Inc. (HNRG), 
which was established in 1995. HNRG is an indirect, wholly owned 
subsidiary of JH. Before 1995, HNRG was operated as a unit within JH. 
HNRG manages 2.2 million acres of timberland currently valued at 
approximately $2.2 billion. Pursuant to an agreement with JH, HNRG is 
responsible for all decisions regarding the acquisition and disposition 
of timberland properties and for the management of the properties, 
including matters such as timber harvesting and reforestation, road 
building and maintenance, leases of interests to third parties, 
acquisition of insurance and payment of taxes. On-site work is 
performed by independent forest managers under contract with HNRG.
    4. JH is engaged in traditional life insurance business, including 
the sale of all types of life insurance for both the individual and 
group markets, and the sale of annuity products and long-term care 
insurance. The premiums received by JH are invested by the company as 
part of its general account. Currently, JH's general account is 
approximately $30 billion, which is invested in numerous public and 
private bonds, mortgages, real estate and other investments.
    5. One of the investments in JH's general account is a limited 
partnership interest in Enerfin. The JH general account is the sole 
limited partner of Enerfin and is entitled to 99% of the partnership 
profits. Enerfin III-95, an entity unrelated to JH, is Enerfin's 
general partner. Enerfin is engaged in the business of leasing oil and 
gas rights from the fee owners of these mineral interests.
    6. JH has entered into an agreement to purchase from Willamette 
approximately 100,000 acres of timberland located in the State of 
Oregon known as the Columbia Tree Farm (the Farm). JH is and has always 
been unaffiliated with Willamette. The purchase price for the Farm is 
$350 million. The Farm consists of six parcels. Under its agreement 
with Willamette, JH has a right to purchase some or all of these six 
parcels before November 15, 1997. Under this agreement, each of the six 
parcels has been allocated a portion of the total purchase price. This 
purchase price (and each parcel's allocable share of the purchase 
price) represents no more than the fair market value of the land and 
its timber since the price was negotiated at arm's-length between JH 
and Willamette. In determining the purchase price for the Farm (and the 
underlying parcels), JH did not take into account any of the oil and 
gas rights that are appurtenant to the timberland.
    7. The Farm is being acquired on behalf of various HNRG pension 
clients and will be allocated to JH ForesTree separate accounts in 
which those clients invest. The applicant has requested the exemption 
proposed herein for certain transactions involving the separate account 
to which one of the Farm parcels (the Deer Creek Parcel) is to be 
allocated. This single customer separate account, the FPGT Account, 
will be established for the First Plaza Group Trust, a collective trust 
holding assets of certain qualified plans sponsored by General Motors 
Corporation and its subsidiaries. The named fiduciary with respect to 
investment activities of each of the plans participating in the First 
Plaza Group Trust is General Motors Investment Management Corporation 
(GMIMCo), a wholly owned subsidiary of General Motors Corporation. 
GMIMCo qualifies as an In-House Asset Manager as that term is defined 
in Prohibited Transaction Exemption 96-23 (61 FR 15975, April 10, 
1996). 8
---------------------------------------------------------------------------

    \8\ The applicant represents that JH and GMIMCo did not purport 
to rely on PTE 96-23 for the transactions which are the subject of 
the exemption proposed herein because such reliance may have 
required GMIMCo to exercise a level of discretion with respect to 
the transactions that would be inappropriate given the fiduciary 
structure of the separate account and could adversely impact the 
parties' compliance with other applicable law.
---------------------------------------------------------------------------

    8. The following plans participate in the First Plaza Group Trust:
    (a) General Motors Hourly Rate Employees Pension Plan, a defined 
benefit plan which had 609,669 participants and approximately $40 
billion in assets as of December 31, 1996;
    (b) General Motors Retirement Plan for Salaried Employees, a 
defined benefit plan with 218,299 participants and approximately $24 
billion in assets as of December 31, 1996;
    (c) Saturn Individual Retirement Plan for Represented Team Members, 
a defined contribution plan with 7,315 participants and approximately 
$103 million in assets as of December 31, 1996;
    (d) Saturn Personal Choices Retirement Plan for Non-Represented 
Team Members, a defined benefit plan with 2,445 participants and 
approximately $11.5 million in assets as of December 31, 1996;
    (e) Employees' Retirement Plan for GMAC Mortgage Corporation, a 
defined benefit plan with 2,700 participants and approximately $38.8 
million as of December 31, 1996;
    (f) National Car Rental System, Inc. Hourly Paid Employees' Pension 
Plan, a defined benefit plan with 2,716 participants and approximately 
$4.3 million as of December 31, 1996; and
    (g) National Car Rental system, Inc. Salaried Employees' Pension 
Plan, a defined benefit plan with 1,718 participants and approximately 
$27.6 million in assets as of December 31, 1996.
    9. The Deer Creek Parcel is subject to the Leases, two existing oil 
and gas leases with Enerfin, an affiliate of JH. These Leases are the 
result of arm's-length negotiations between the prior fee owners of the 
Deer Creek Parcel and Enerfin's predecessor in interest and were 
entered into prior to any discussion by JH regarding the purchase of 
the timberland. As is typical of oil and gas leases, the Leases are 
long-term leases. While the Leases may terminate if Enerfin fails to 
develop the mineral rights, if those rights are developed the Leases 
will continue as long as the Deer Creek Parcel is producing oil or gas. 
The Leases, which were originally granted in 1985 and 1988, have an 
approximate current fair market value of $109,000 to the holder of the 
mineral rights. This value was determined by an appraisal conducted on 
April 30, 1996 by Forrest A. Garb and Associates (Garb), International 
Petroleum Consultants of Dallas, Texas, an independent appraiser, which 
set a total value of $607,000 for all the mineral rights subject to 
Enerfin leases. On February 11, 1997, at the request of GMIMCo, Garb 
reviewed the April 30, 1996 appraisal and concluded that the fair 
market value allocated to the Deer Creek Parcel mineral interests was 
$109,000.
    10. In order to avoid a potential prohibited transaction prior to 
the granting of the exemption proposed herein, JH purchased for the 
FPGT Account Willamette's interest in the Deer Creek Parcel exclusive 
of the Oil and Gas Rights. Closing on the purchase took place on 
February 14, 1997, pursuant to the agreement between JH and Willamette 
(see rep. 6, above). Ownership of the Deer Creek Oil and Gas Rights 
will remain with Willamette. The $52,052,432 purchase price originally 
established between

[[Page 33917]]

Willamette and JH for the Deer Creek Parcel was reduced by the fair 
market value of the Oil and Gas Rights because it originally included 
such rights. Once the exemption proposed herein is granted, JH on 
behalf of the FPGT Account will purchase the Deer Creek Oil and Gas 
Rights from Willamette. The transfer of the Deer Creek Oil and Gas 
Rights to the FPGT Account will not in any way affect the obligations 
and rights of Enerfin or the lessor under the Leases. Following the 
transfer, the lease payments will be paid by Enerfin to the new lessor, 
JH (on behalf of the FPGT Account).
    11. As part of its decision to enter into the separate account 
contract establishing the FPGT Account, GMIMCo has reviewed and 
approved the acquisition of the Deer Creek Oil and Gas Rights, 
including the purchase price and the underlying Enerfin Leases. GMIMCo 
will also monitor Enerfin's performance under the Leases, including any 
proposed modification of the Leases, and will take any steps necessary 
to protect the interest of the plans. It is not contemplated that any 
changes will be made to the Leases.
    12. The applicant represents that denial of the exemption proposed 
herein would preclude the FPGT Account from taking advantage of the 
investment opportunity offered by the Deer Creek Parcel solely because 
of pre-existing and relatively insignificant Leases to a partnership 
owned by JH. The Leases were originally entered into between Enerfin's 
predecessor in interest and unrelated third parties and are arm's-
length contracts that, if anything, add to the value of the Deer Creek 
Parcel. The Leases will provide additional cash flow income to the FPGT 
Account that was not taken into account at the time the purchase price 
for the Deer Creek Parcel was established.
    13. In summary, the applicant represents that the proposed 
transactions satisfy the criteria contained in section 408(a) of the 
Act because: (a) the consideration to be paid for the Deer Creek Oil 
and Gas Rights has been determined by arm's-length negotiations between 
JH, acting on behalf of plans invested in the FPGT Account, and 
Willamette, and has been validated by an independent appraisal 
performed by Garb; (b) the Leases are pre-existing contracts that were 
negotiated at arm's-length between unrelated parties; (c) as part of 
its decision to enter into a separate account contract establishing the 
FPGT Account, a plan fiduciary unaffiliated with JH has reviewed and 
approved all terms of the acquisition of the Deer Creek Oil and Gas 
Rights, including the underlying Enerfin Leases; and (d) the 
independent fiduciary will monitor Enerfin's performance under the 
Leases to ensure that the plans' interests are protected.

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

AmSouth Bank of Alabama (AmSouth) Located in Birmingham, Alabama

[Application No. D-10422]

Proposed Exemption

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

Section I--Transactions

    If the exemption is granted, the restrictions of section 406(a) and 
406(b) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(F) of the Code, shall not apply to the receipt of fees by AmSouth from 
the AmSouth Mutual Funds, or any other diversified open-end investment 
companies registered under the Investment Company Act of 1940 (the 
Funds), for acting as an investment adviser for the Funds as well as 
for providing other services to the Funds which are ``Secondary 
Services'' as defined in Section III(h), in connection with the 
investment by the Client Plans in shares of the Funds, provided that 
the conditions set forth in Section II below are met.

Section II--Condition

    (a) Each Client Plan satisfies either (but not both) of the 
following:
    (1) The Client Plan receives a cash credit of such Plan's 
proportionate share of all fees charged to the Funds by AmSouth for 
investment advisory services, including any investment advisory fees 
paid by AmSouth to third party sub-advisers, no later than one business 
day after the receipt of such fees by AmSouth. The crediting of all 
such fees to the Client Plans by AmSouth is audited by an independent 
accounting firm on at least an annual basis to verify the proper 
crediting of the fees to each Plan; or
    (2) The Client Plan does not pay any Plan-level investment 
management fees, investment advisory fees, or similar fees to AmSouth 
with respect to any of the assets of such Plan which are invested in 
shares of any of the Funds. This condition does not preclude the 
payment of investment advisory or similar fees by the Funds to AmSouth 
under the terms of an investment management agreement adopted in 
accordance with section 15 of the Investment Company Act of 1940 (the 
1940 Act), nor does it preclude the payment of fees for Secondary 
Services to AmSouth pursuant to a duly adopted agreement between 
AmSouth and the Funds.
    (b) The price paid or received by a Client Plan for shares in a 
Fund is the net asset value per share at the time of the transaction, 
as defined in Section III(e), and is the same price which would have 
been paid or received for the shares by any other investor at that 
time.
    (c) AmSouth, including any officer or director of AmSouth, does not 
purchase or sell shares of the Funds from or to any Client Plan.
    (d) No sales commissions are paid by the Client Plans in connection 
with the purchase or sale of shares of the Funds and no redemption fees 
are paid in connection with the sale of shares by the Client Plans to 
the Funds.
    (e) For each Client Plan, the combined total of all fees received 
by AmSouth for the provision of services to a Client Plan, and in 
connection with the provision of services to the Funds in which the 
Client Plan may invest, are not in excess of ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act.
    (f) AmSouth does not receive any fees payable pursuant to Rule 12b-
1 under the 1940 Act in connection with the transactions.
    (g) The Client Plans are not employee benefit plans sponsored or 
maintained by AmSouth.
    (h) The Second Fiduciary receives, in advance of any initial 
investment by the Client Plan in a Fund, full and detailed written 
disclosure of information concerning the Funds, including but not 
limited to:
    (1) A current prospectus for each Fund in which a Client Plan is 
considering investing;
    (2) A statement describing the fees for investment advisory or 
similar services, any secondary services as defined in Section III(h), 
and all other fees to be charged to or paid by the Client Plan and by 
the Funds, including the nature and extent of any differential between 
the rates of such fees;
    (3) The reasons why AmSouth may consider such investment to be 
appropriate for the Client Plan;
    (4) A statement describing whether there are any limitations 
applicable to AmSouth with respect to which assets of a Client Plan may 
be invested in the

[[Page 33918]]

Funds, and if so, the nature of such limitations; and
    (5) Upon request of the Second Fiduciary, a copy of the proposed 
exemption and/or a copy of the final exemption, if granted, once such 
documents are published in the Federal Register.
    (i) After consideration of the information described above in 
paragraph (h), the Second Fiduciary authorizes in writing the 
investment of assets of the Client Plan in each particular Fund and the 
fees to be paid by such Funds to AmSouth.
    (j) All authorizations made by a Second Fiduciary regarding 
investments in a Fund and the fees paid to AmSouth are subject to an 
annual reauthorization wherein any such prior authorization referred to 
in paragraph (i) shall be terminable at will by the Client Plan, 
without penalty to the Client Plan, upon receipt by AmSouth of written 
notice of termination. A form expressly providing an election to 
terminate the authorization described in paragraph (i) above (the 
Termination Form) with instructions on the use of the form must be 
supplied to the Second Fiduciary no less than annually; provided that 
the Termination Form need not be supplied to the Second Fiduciary 
pursuant to this paragraph sooner than six months after such 
Termination Form is supplied pursuant to paragraph (l) below, except to 
the extent required by such paragraph in order to disclose an 
additional service or fee increase. The instructions for the 
Termination Form must include the following information:
    (1) The authorization is terminable at will by the Client Plan, 
without penalty to the Client Plan, upon receipt by AmSouth of written 
notice from the Second Fiduciary; and
    (2) Failure to return the Termination Form will result in continued 
authorization of AmSouth to engage in the transactions described in 
paragraph (i) on behalf of the Client Plan.
    (k) For each Client Plan using the fee structure described in 
paragraph (a)(1) above with respect to investments in a particular 
Fund, the Second Fiduciary of the Client Plan receives full written 
disclosure in a Fund prospectus or otherwise of any increases in the 
rates of fees charged by AmSouth to the Funds for investment advisory 
services, prior to the effective date of such increase.
    (l)(1) For each Client Plan using the fee structure described in 
paragraph (a)(2) above with respect to investments in a particular 
Fund, an increase in the rate of fees paid by the Fund to AmSouth 
regarding any investment management services, investment advisory 
services, or similar services that AmSouth provides to the Fund over an 
existing rate for such services that had been authorized by a Second 
Fiduciary in accordance with paragraph (i) above; or
    (2) For any Client Plan under this proposed exemption, an addition 
of a Secondary Service (as defined in Section III(h) below) provided by 
AmSouth to the Fund for which a fee is charged, or an increase in the 
rate of any fee paid by the Funds to AmSouth for any Secondary Service 
that results either from an increase in the rate of such fee or from 
the decrease in the number of kind of services performed by AmSouth for 
such fee over an existing rate for such Secondary Service which had 
been authorized by the Second Fiduciary of a Client Plan in accordance 
with paragraph (i) above;
    AmSouth will, at least 30 days in advance of the implementation of 
such additional service for which a fee is charged or fee increase, 
provide a written notice (which may take the form of a proxy statement, 
letter, or similar communication that is separate from the prospectus 
of the Fund and which explains the nature and amount of the additional 
service for which a fee is charged or of the increase in fees) to the 
Second Fiduciary of the Client Plan. Such notice shall be accompanied 
by a Termination Form with instructions as described in paragraph (j) 
above.
    (m) On an annual basis, AmSouth provides the Second Fiduciary of a 
Client Plan investing in the Funds with:
    (1) A copy of the current prospectus for the Funds in which the 
Client Plan invests and, upon such fiduciary's request, a copy of the 
Statement of Additional Information for such Funds which contains a 
description of all fees paid by the Funds to AmSouth;
    (2) A copy of the annual financial disclosure report prepared by 
AmSouth which includes information about the Fund portfolios as well as 
audit findings of an independent auditor within 60 days of the 
preparation of the report; and
    (3) Oral or written responses to inquiries of the Second Fiduciary 
as they arise.
    (n) With respect to each of the Funds in which a Client Plan 
invests, in the event such Fund places brokerage transactions with 
AmSouth, AmSouth will provide the Second Fiduciary of such Plan at 
least annually with a statement specifying:
    (1) The total, expressed in dollars, of brokerage commissions of 
each Fund that are paid to AmSouth by such Fund;
    (2) The total, expressed in dollars, of brokerage commissions of 
each Fund that are paid by such Fund to brokerage firms unrelated to 
AmSouth;
    (3) The average brokerage commissions per share, expressed as cents 
per share, paid to AmSouth by each Fund; and
    (4) The average brokerage commissions per share, expressed as cents 
per share, paid by each Fund to brokerage firms unrelated to AmSouth.
    (o) All dealings between the Client Plans and the Funds are on a 
basis no less favorable to the Plans than dealings with other 
shareholders of the Funds.
    (p) AmSouth maintains for a period of six years the records 
necessary to enable the persons described below in paragraph (q) 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 AmSouth, the 
records are lost or destroyed prior to the end of the six-year period, 
and (2) no party in interest other than AmSouth or an affiliate 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 (q) below.
    (q)(1) Except as provided below in paragraph (b)(2) and 
notwithstanding any provisions of section 504(a)(2) of the Act, the 
records referred to in paragraph (p) are unconditionally available at 
their customary location for examination during normal business hours 
by--
    (i) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service, (ii) Any fiduciary of the 
Client Plans who has authority to acquire or dispose of shares of the 
Funds owned by the Client Plans, or any duly authorized employee or 
representative of such fiduciary, and
    (iii) Any participant or beneficiary of the Client Plans or duly 
authorized employee or representative of such participant or 
beneficiary;
    (2) None of the persons described in paragraph (q)(1)(ii) and (iii) 
shall be authorized to examine trade secrets of AmSouth, or commercial 
or financial information which is privileged or confidential.

Section III--Definitions

    For purposes of this proposed exemption:
    (a) The term ``AmSouth'' means AmSouth Bank of Alabama and any 
affiliate thereof as defined below in paragraph (b) of this section.
    (b) An ``affiliate'' of a person includes:

[[Page 33919]]

    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The term ``Fund'' or ``Funds'' shall include the AmSouth Mutual 
Funds or any other diversified open-end investment company or companies 
registered under the 1940 Act for which AmSouth serves as an investment 
adviser and may also serve as a custodian, dividend disbursing agent, 
shareholder servicing agent, transfer agent, Fund accountant, or 
provide some other ``Secondary Service'' (as defined below in paragraph 
(h) of this Section) which has been approved by such Funds.
    (e) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and sales calculated by dividing the value of all 
securities, determined by a method as set forth in the Fund's 
prospectus and statement of additional information, and other assets 
belonging to the Fund or portfolio of the Fund, less the liabilities 
charged to each such portfolio or Fund, by the number of outstanding 
shares.
    (f) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or a ``member of the family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
a sister, or a spouse of a brother or a sister.
    (g) The term ``Second Fiduciary'' means a fiduciary of a Client 
Plan who is independent of and unrelated to AmSouth. For purposes of 
this exemption, the Second Fiduciary will not be deemed to be 
independent of and unrelated to AmSouth if:
    (1) Such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with AmSouth;
    (2) Such fiduciary, or any officer, director, partner, employee, or 
relative of the fiduciary is an officer, director, partner or employee 
of AmSouth (or is a relative of such persons);
    (3) Such fiduciary directly or indirectly receives any compensation 
or other consideration for his or her own personal account in 
connection with any transaction described in this proposed exemption.
    If an officer, director, partner or employee of AmSouth (or 
relative of such persons), is a director of such Second Fiduciary, and 
if he or she abstains from participation in (i) the choice of the 
Client Plan's investment adviser, (ii) the approval of any such 
purchase or sale between the Client Plan and the Funds, and (iii) the 
approval of any change in fees charged to or paid by the Client Plan in 
connection with any of the transactions described in Sections I and II 
above, then paragraph (g)(2) of this section shall not apply.
    (h) The term ``Secondary Service'' means a service other than an 
investment management, investment advisory, or similar service, which 
is provided by AmSouth to the Funds, including (but not limited to) 
custodian services, transfer and dividend disbursing agent services, 
administrator or sub-administrator services, accounting services, 
shareholder servicing agent services and brokerage services.
    (i) The term ``Termination Form'' means the form supplied to the 
Second Fiduciary which expressly provides an election to the Second 
Fiduciary to terminate on behalf of a Client Plan the authorization 
described in paragraph (i) of Section II. Such Termination Form may be 
used at will by the Second Fiduciary to terminate an authorization 
without penalty to the Client Plan and to notify AmSouth in writing to 
effect a termination by selling the shares of the Funds held by the 
Client Plan requesting such termination within one business day 
following receipt by AmSouth of the form; provided that if, due to 
circumstances beyond the control of AmSouth, the sale cannot be 
executed within one business day, AmSouth shall have one additional 
business day to complete such sale.

EFFECTIVE DATE: If the proposed exemption is granted, the exemption 
will be effective as of April 16, 1997.

Summary of Facts and Representations

    1. AmSouth is an Alabama banking corporation that serves as 
trustee, investment manager and/or custodian to a number of employee 
benefit plans. As of October 31, 1996, AmSouth and its affiliates--
AmSouth Bank of Tennessee and AmSouth Bank of Florida--had 
approximately $20 billion in assets under administration, of which $6.4 
billion were assets of employee benefits plans covered under the Act as 
well as other benefit plans. AmSouth and its affiliates are 
subsidiaries of AmSouth Bancorporation. References made herein to 
AmSouth are intended to refer both to AmSouth and its affiliates.
    2. AmSouth acts as a trustee, directed trustee, investment manager, 
and/or custodian for the Client Plans. The Client Plans may include 
various pension, profit sharing, and stock bonus plans as well as 
voluntary employees' beneficiary associations, supplemental 
unemployment benefit plans, simplified employee benefit plans, 
retirement plans for self-employed individuals (i.e. Keogh Plans) and 
individual retirement accounts (IRAs). Some of the Client Plans may be 
participant-directed individual account plans.
    As custodian of a Client Plan, AmSouth is responsible for 
maintaining custody over all or a portion of the Client Plan's assets, 
for providing trust accounting and valuation services, for asset and 
transaction reporting, and for execution and settlement of directed 
transactions. Where AmSouth serves as trustee or directed trustee, it 
is responsible for ownership of the assets of the Client Plan, and may 
provide additional trust services such as benefit payments, loan 
processing, and participant accounting. Where AmSouth is also acting as 
the investment manager, AmSouth has investment discretion over the 
Client Plan's assets and is responsible for implementing the Plan's 
funding policies and investment objectives within the guidelines 
established by the plan sponsor or named fiduciary.
    The Client Plans pay fees in accordance with fee schedules 
negotiated with AmSouth. Fees for custodian, trustee and investment 
management services are based on a percentage of assets in the account, 
subject to certain minimum fee amounts. AmSouth also may provide other 
services to a Client Plan, as selected by the Client Plan sponsor or 
named fiduciary. Fees may be paid by the Client Plan or the Client Plan 
sponsor, depending on the particular circumstances.
    The specific Client Plans of AmSouth for which this proposed 
exemption is being requested are those to which AmSouth or an affiliate 
is a fiduciary and whose assets either (i) are currently invested in 
the Funds, or (ii) may be invested in the Funds in the future.
    However, AmSouth does not seek relief for investments in the Funds 
by any employee benefit plans maintained by AmSouth or an affiliate for 
its own employees (the Bank Plans). 9
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    \9\ AmSouth represents that it will comply with the requirements 
of Prohibited Transaction Exemption (PTE) 77-3, 42 FR 18734 (April 
8, 1977), with respect to any investments in the Funds made by the 
Bank Plans. PTE 77-3 permits the acquisition or sale of shares of a 
registered, open-end investment company by an employee benefit plan 
covering only employees of such investment company, employees of the 
investment adviser or principal underwriter for such investment 
company, or employees of any affiliated person (as defined therein) 
of such investment adviser or principal underwriter, provided 
certain conditions are met. The Department is expressing no opinion 
in this proposed exemption regarding whether any of the transactions 
with the Funds by the Bank Plans would be covered by PTE 77-3.

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[[Page 33920]]

    3. The AmSouth Mutual Funds, a Massachusetts business trust 
organized on October 1, 1987, are registered as an open-end investment 
company with the Securities and Exchange Commission (SEC) under the 
1940 Act.
    AmSouth Mutual Funds consist of eleven investment portfolios (each 
a ``Fund'') representing distinct investment vehicles, which have their 
own prospectuses or joint prospectuses with one or more other Funds. 
The shares of each Fund represent proportionate interests in the assets 
of that Fund.
    The nine Funds currently available for investment by the Client 
Plans in connection with the transactions described herein are the 
following: (i) The AmSouth Equity Fund; (ii) the AmSouth Regional 
Equity Fund; (iii) the AmSouth Balanced Fund; (iv) the AmSouth Bond 
Fund; (v) the AmSouth Limited Maturity Fund; (vi) the AmSouth 
Government Income Fund; (vii) the AmSouth Prime Obligations Fund; 
(viii) the AmSouth U.S. Treasury Fund; and (ix) the AmSouth Tax Exempt 
Fund.10
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    \10\ The applicant states that the Client Plans generally do not 
invest in tax-free or tax-exempt Funds because the investment 
returns of such Plans are already tax-exempt.
---------------------------------------------------------------------------

    The overall management of the Funds, including the negotiation of 
investment advisory contracts, rests with the Board of Trustees of the 
Funds, all of whose current members are independent of AmSouth and its 
affiliates. The Board of Trustees of each Fund is elected by the 
shareholders of the Fund.
    AmSouth serves as the investment adviser to each Fund within the 
meaning of the 1940 Act. AmSouth receives investment advisory fees from 
the Funds that vary between 0.30 percent and 0.80 percent of a Fund's 
average net assets on an annual basis, depending on the particular Fund 
and subject to voluntary fee waivers by AmSouth.
    AmSouth also serves as a sub-administrator for the Funds. As sub-
administrator, AmSouth is responsible for assisting the administrator 
of the Funds in clerical, recordkeeping and administrative services 
relating to the legal compliance and day-to-day operations of the 
Funds. AmSouth receives fees from the administrator of the Funds for 
its services as the sub-administrator in accordance with an agreement 
between the Funds and the administrator. In addition, AmSouth was 
selected by the Funds to serve as custodian for the Funds, effective as 
of April 16, 1997, pursuant to the conditions of this proposed 
exemption. Thus, AmSouth receives fees for custody services provided to 
the Funds in accordance with custodial services agreements between 
itself and such Funds.
    The other service providers to the Funds are currently independent 
of and unaffiliated with AmSouth. These service-providers include: (i) 
The administrator, ASO Services Company, Inc.; (ii) the distributor, 
BISYS Fund Services, L.P. (formerly the Winsbury Company); and (iii) 
the transfer agent and fund accountant, BISYS Funds Services of Ohio, 
Inc.
    Purchases of shares of the Funds may be subject to a sales charge. 
However, sales charges are waived for investments by investors for whom 
AmSouth or an affiliate acts as a fiduciary, including the Client 
Plans. AmSouth and its affiliates also will not receive any fees 
payable pursuant to Rule 12b-1 under the 1940 Act in connection with 
the transactions involving the Client Plans.
    4. AmSouth represents that there are material advantages to the 
Client Plans from the use of the Funds as investment vehicles. AmSouth 
states that the Funds provide a means for Client Plans of all sizes to 
receive the benefits of AmSouth's investment management expertise and 
greater diversification than would be available through a separate 
account arrangement. The Funds are also valued on a daily basis. The 
daily valuation permits: (i) Immediate investment of Client Plan 
contributions in varied types of investments; (ii) greater flexibility 
in transferring assets from one type of investment to another; and 
(iii) daily redemption of investments for purposes of making 
distributions. Information concerning the investment performance of 
most of the Funds is available each day in newspapers of general 
circulation, which allows Client Plan sponsors and participants to 
monitor the performance of their investments on a daily basis. Fund 
shares can be given to participants in Client Plan distributions, thus 
avoiding the expense and delay of liquidating plan investments and 
facilitating roll-overs into IRAs.
    Investments by Client Plans in the Funds occur through direct 
purchases of shares of the Funds on an ongoing basis. No sales 
commissions or redemption fees are charged in connection with the 
purchase or sale of Fund shares by Client Plan customers of AmSouth.
    5. Because AmSouth is considered a fiduciary with respect to a 
Client Plan as to which it serves as trustee and serves as an 
investment adviser to the Funds (and receives fees for such investment 
advisory services), AmSouth has required that any Client Plan's 
investments in the Funds meet the conditions of Prohibited Transaction 
Exemption 77-4 (PTE 77-4, 42 FR 18732, April 8, 1977) to avoid engaging 
in a prohibited transaction in connection with such 
investments.11
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    \11\ PTE 77-4, in pertinent part, permits the purchase and sale 
by an employee benefit plan of shares of a registered, open-end 
investment company when a fiduciary with respect to the plan is also 
the investment adviser for the investment company, provided that, 
among other things, the plan does not pay an investment management, 
investment advisory or similar fee with respect to the plan assets 
invested in such shares for the entire period of such investment. 
Section II(c) of PTE 77-4 states that this condition does not 
preclude the payment of investment advisory fees by the investment 
company under the terms of an investment advisory agreement adopted 
in accordance with section 15 of the Investment Company Act of 1940. 
Section II(c) states further that this condition does not preclude 
payment of an investment advisory fee by the plan based on total 
plan assets from which a credit has been subtracted representing the 
plan's pro rata share of investment advisory fees paid by the 
investment company.
---------------------------------------------------------------------------

    In order to meet the conditions of PTE 77-4 that a Client Plan not 
pay duplicative fees for investment advisory services, AmSouth states 
that it has not charged a Client Plan any direct fees for investment 
management with respect to assets that are invested in the Funds. These 
Client Plans have paid fees to AmSouth solely for non-investment trust 
or custody services. AmSouth states that the fees it has received for 
investment management of a Client Plan's assets have come solely from 
the Funds in accordance with the respective advisory agreements between 
such Funds and AmSouth.
    AmSouth states that Client Plans have not paid any commissions or 
other sales charges in connection with their investments in the Funds, 
as required under PTE 77-4. In addition, the applicant states that all 
of the other conditions of PTE 77-4, including advance written 
disclosure of information to a Client Plan regarding the fees to be 
received by AmSouth from each Fund and advance written authorization 
from an independent fiduciary of such Client Plan for investment in the 
Fund and the receipt of fees from the Fund by AmSouth, have been 
met.12
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    \12\  The Department is expressing no opinion in this proposed 
exemption as to whether the transactions with the Funds by Client 
Plans managed by AmSouth have met the conditions necessary for an 
exemption under PTE 77-4.

---------------------------------------------------------------------------

[[Page 33921]]

    6. AmSouth is requesting an individual exemption that, like the 
relief provided by PTE 77-4, would permit the receipt of fees by 
AmSouth or an affiliate from the Funds for acting as investment adviser 
as well as for providing non-advisory services (i.e. ``Secondary 
Services'' as defined herein). The applicant states that the conditions 
of this proposed exemption are based on PTE 77-4. However, there are 
two differences between the conditions of PTE 77-4 and the conditions 
proposed herein:
    (i) the use of a ``termination form'' under this proposed exemption 
would take the place of the PTE 77-4 requirement that an independent 
plan fiduciary (referred to therein as a ``Second Fiduciary'') 
affirmatively approve any changes in the rates of fees charged by the 
mutual funds; and
    (ii) the Client Plans subject to this proposed exemption may, as an 
alternative to not paying a plan-level investment management fee to 
AmSouth for any assets invested in the Fund shares (referred to as an 
``offset'' fee structure), receive a cash credit of such Plan's 
proportionate share of the Funds' investment advisory fees (referred to 
as a ``crediting'' fee structure).
    AmSouth will charge investment advisory fees to the Funds in 
accordance with the investment advisory agreements between AmSouth and 
the Funds. These agreements will be approved by the independent members 
of the Board of Trustees of the Funds, in accordance with the 
applicable provisions of the 1940 Act, and any subsequent changes in 
the fees will have to be approved by such Trustees. These fees also 
will not be increased without the approval of the shareholders of the 
affected Funds. The fees will be paid monthly by the Funds. In 
addition, AmSouth will charge fees for custody services it provides to 
the Funds in accordance with custodial services agreements with the 
Funds.
    AmSouth will avoid charging the Client Plans duplicative investment 
management fees by either: (a) crediting the Client Plan's pro rata 
share of the Fund advisory fees back to the Client Plan; or (b) waiving 
any investment management fee for the Client Plan at the Plan-level.

Crediting Fee Structure

    7. The ``crediting'' fee structure will be designed to preserve the 
negotiated fee rates of the Client Plans so as to minimize the impact 
of the change to the Funds on a Client Plan's fees. AmSouth will charge 
a Client Plan its standard fees as applicable to the particular Client 
Plan for serving as trustee, directed trustee, investment manager or 
custodian. At the beginning of each month, and in no event later than 
one business day after the payment of investment advisory fees by the 
Funds to AmSouth for the previous month, AmSouth will credit to each 
Client Plan in cash its proportionate share of all investment advisory 
fees charged by AmSouth to the Funds for the previous month. The credit 
will include the Client Plan's share of any investment advisory fees 
paid by AmSouth to third party sub-advisors.
    AmSouth states that the credit will not include the custodial fees 
or other fees for secondary services payable by the Funds to AmSouth 
because such services rendered at the Fund-level will not be 
duplicative of any services provided directly to the Client Plan. For 
example, the custodial services to the Funds will involve maintaining 
custody and providing reporting relative to the individual securities 
owned by the Funds. The services to the Client Plans will involve 
maintaining custody over all or a portion of the Client Plans' assets 
(which may include Fund shares, but not the assets underlying the Fund 
shares), providing trust accounting and participant accounting (if 
applicable), providing asset and transaction reporting, execution and 
settlement of directed transactions, processing benefit payments and 
loans, maintaining participant accounts, valuing plan assets, 
conducting non-discrimination testing, preparing Forms 5500 and other 
required filings, and producing statements and reports regarding 
overall plan and individual participant holdings. AmSouth states that 
these trust services will be necessary regardless of whether the Client 
Plans' assets are invested in the Funds. Thus, AmSouth represents that 
its receipt of fees for both secondary services at the Fund-level and 
trustee services at the Plan-level will not involve the receipt of 
``double fees'' for duplicative services to the Client Plans because a 
Fund will be charged for custody and other services relative to the 
individual securities owned by the Fund, while a Client Plan will be 
charged for the maintenance of Plan accounts reflecting ownership of 
the Fund shares and other assets.13
---------------------------------------------------------------------------

    \13\ The Department notes that although certain transactions and 
fee arrangements are the subject of an administrative exemption, a 
Client Plan fiduciary must still adhere to the general fiduciary 
responsibility provisions of section 404 of the Act. Thus, the 
Department cautions the fiduciaries of the Client Plans investing in 
the Funds that they will have an ongoing duty under section 404 of 
the Act to monitor the services provided to the Client Plans to 
assure that the fees paid by the Client Plans for such services are 
reasonable in relation to the value of the services provided. Such 
responsibilities will include determinations that the services 
provided are not duplicative and that the fees are reasonable based 
on the level of services provided.
    The Department also notes that AmSouth, as a trustee and 
investment manager for a Client Plan in connection with the decision 
to invest Client Plan assets in the Funds, will have a fiduciary 
duty to monitor all fees paid by a Fund to AmSouth, its affiliates, 
and third parties for services provided to the Fund to ensure that 
the totality of such fees will be reasonable and will not involve 
the payment of any ``double'' fees for duplicative services to the 
Fund by such parties.
---------------------------------------------------------------------------

    AmSouth represents that for each Client Plan, the combined total of 
all fees it receives directly and indirectly from the Client Plans for 
the provision of services to the Plans and/or to the Funds will not be 
in excess of ``reasonable compensation'' within the meaning of section 
408(b)(2) of the Act.14
---------------------------------------------------------------------------

    \14\ The Department is expressing no opinion in this proposed 
exemption as to whether the fee arrangements discussed herein will 
comply with section 408(b)(2) of the Act and the regulations 
thereunder (see 29 CFR 2550.408b-2).
---------------------------------------------------------------------------

    8. AmSouth will maintain a system of internal accounting controls 
for the crediting of all fees to the Client Plans. In addition, AmSouth 
has retained the services of Ernst & Young LLP (the Auditor), an 
independent accounting firm, to audit annually the crediting of fees to 
the Client Plans under this program. Such audits will provide 
independent verification of the proper crediting to the Client Plans.
    In its annual audit of the credit program, the Auditor will: (i) 
verify on a test basis the investment advisory fees paid by the Funds 
to AmSouth; (ii) verify on a test basis the daily factors used to 
determine the investment advisory fees; (iii) verify on a test basis 
the credits paid in total for a one-month period; (iv) recompute, on a 
test basis using the daily factors described above, the amount of the 
credit determined for selected plans; (v) verify on a test basis the 
proper assignment of identification fields for receipt of fee credits 
to the plans; and (vi) verify on a test basis that the credits were 
posted to the plans within one business day.
    In the event either the internal audit by AmSouth or the 
independent audit by the Auditor identifies an error made in the 
crediting of fees to the Client Plans, AmSouth will correct the error. 
With respect to any shortfall in credited fees to a Client Plan, 
AmSouth will make a cash payment to the Client Plan equal to the amount 
of the error plus interest paid at money market rates offered by 
AmSouth for the period involved. Any excess credits made to a Client 
Plan will be corrected by an appropriate deduction from the Client Plan 
account or reallocation of cash during the next payment period after

[[Page 33922]]

discovery of the error to reflect accurately the amount of total 
credits due to the Client Plan for the period involved.
    9. AmSouth represents that the use of the ``crediting'' fee 
structure will be available for investments made by Client Plans in the 
Funds in situations where: (i) the Client Plan sponsor wishes to pay 
all fees of the Client Plan, including investment management; and (ii) 
fees charged by AmSouth at the Plan-level are negotiated. With respect 
to (i) above, AmSouth states that the Client Plan sponsor would not be 
able to take over payment of the investment management fees if the 
``offset'' structure (as discussed further below) were used because in 
such instances the investment management fees would be paid directly 
out of the Client Plan's investment in the Funds. With respect to (ii) 
above, AmSouth states that from time to time Plan-level fees are 
negotiated to amounts which are below AmSouth's published fee schedules 
due to competitive pressures in the marketplace. When the negotiated 
fees paid at the Plan-level are less than the investment advisory fees 
paid to AmSouth by the Funds, the ``credit'' method would be used as it 
would be the most beneficial and practical method available to 
accommodate these Client Plans.
    The use of the ``crediting'' fee structure must be approved prior 
to the Client Plan's initial investment in the Funds by a Second 
Fiduciary acting for the Client Plan. The Second Fiduciary will receive 
full and detailed written disclosure of information concerning the 
Funds in advance of any investment by the Client Plan in the Funds, 
including the Fund prospectuses as well as a separate statement 
describing the crediting fee structure.
    After consideration of such information, the Second Fiduciary will 
authorize in writing the investment of assets of the Client Plan in one 
or more specified Funds and the fees to be paid by the Funds to 
AmSouth. In addition, the Second Fiduciary of each Client Plan invested 
in a particular Fund will receive full written disclosure, in a 
statement separate from the Fund prospectus, of any proposed increases 
in the rates of fees charged by AmSouth to the Funds for secondary 
services which are above the rates reflected in the Fund prospectuses, 
at least thirty (30) days prior to the effective date of such increase.
    In the event that AmSouth provides an additional secondary service 
for which a fee is charged or there is an increase in the rate of fees 
paid by the Funds to AmSouth for any secondary service, including any 
increase resulting from a decrease in the number or kind of services 
performed by AmSouth for such fees in connection with a previously 
authorized secondary service, AmSouth will, at least 30 days in advance 
of the implementation of such additional service or fee increase, 
provide written notice to the Second Fiduciary explaining the nature 
and the amount of the additional service for which a fee will be 
charged or the nature and amount of the increase in fees of the 
affected Fund.15 Such notice will be made separate from the 
Fund prospectus and will be accompanied by a Termination Form. The 
Second Fiduciary also will receive full written disclosure in a Fund 
prospectus or otherwise of any increases in the rate of fees charged by 
AmSouth to the Funds for investment advisory services prior to the 
effective date of such increases, even though these fees will be 
credited to the investing Client Plans.
---------------------------------------------------------------------------

    \15\ With respect to increases in fees, the Department notes 
that an increase in the amount of a fee for an existing secondary 
service (other than through an increase in the value of the 
underlying assets in the Funds) or the imposition of a fee for a 
newly-established secondary service shall be considered an increase 
in the rate of such fees. However, in the event a secondary service 
fee has already been described in writing to the Second Fiduciary 
and the Second Fiduciary has provided authorization for the fee, and 
such fee was temporarily waived, no further action by AmSouth would 
be required in order for the Bank to receive such fee at a later 
time. Thus, for example, no further disclosure would be necessary if 
AmSouth had received authorization for a fee for custodial services 
from Plan investors and subsequently determined to waive all or a 
portion of the fee for a period of time in order to attract new 
investors but later charged the full fee.
---------------------------------------------------------------------------

    The authorizations made by a Second Fiduciary of any Client Plan 
will be terminable at will, without penalty to the Client Plan, upon 
receipt by AmSouth of written notice of termination. A form (the 
Termination Form) expressly providing an election to terminate the 
authorization, with instructions on the use of the form, will be 
supplied to the Second Fiduciary no less than annually. However, the 
Termination Form will not need to be supplied to the Second Fiduciary 
for an annual reauthorization sooner than six months after such 
Termination Form is supplied for an additional service or for an 
increase in fees (as discussed above), unless another Termination Form 
is required to disclose additional services or fee increases. The 
Termination Form will instruct the Second Fiduciary that the 
authorization is terminable at will by the Client Plan, without penalty 
to the Client Plan, upon receipt by AmSouth of written notice from the 
Second Fiduciary, and that failure to return the Termination Form will 
result in the continued authorization of AmSouth to engage in the 
subject transactions on behalf of the Client Plan.
    The Termination Form will be used to notify AmSouth in writing to 
effect a termination by selling the shares of the Funds held by the 
Client Plan, requesting such termination within one business day 
following receipt by AmSouth of the form. If, due to circumstances 
beyond the control of AmSouth, the sale cannot be executed within one 
business day, AmSouth will be obligated to complete the sale within the 
next business day.

Offset Fee Structure

    10. AmSouth represents that small and mid-size Client Plans that 
invest in the Funds would be offered an ``offset'' fee structure (i.e. 
a waiver of the investment management fee for the Client Plan at the 
Plan-level) rather than a ``crediting'' fee structure (i.e. a credit of 
the Client Plan's pro rata share of Fund-level advisory fees back to 
the Client Plan). These Client Plans typically would be so-called 
``401(k)'' Plans (i.e. deferred compensation arrangements pursuant to 
section 401(k) of the Code) that are designed to be simple, 
standardized products using fixed fee arrangements. In addition, 
AmSouth typically would offer the ``offset'' fee structure for other 
plan products when Plan-level fees are not negotiated to an amount 
which is below AmSouth's published fee schedule.16 In these 
cases, if the Second Fiduciary authorizes the ``offset'' fee structure 
under this proposed exemption, AmSouth will waive Plan-level investment 
management fees that would otherwise be charged for the Client Plan's 
assets invested in the Funds, so that the Plan-level fees will be 
``offset'' and the Client Plan will pay only one investment management 
fee for those assets, at the Fund-level.17 This ``offset''

[[Page 33923]]

fee structure, which is similar to one of the fee structures described 
in PTE 77-4, will ensure that AmSouth does not receive any duplicative 
investment management, advisory or similar fees as a result of 
investments in the Funds by the Client Plans.
---------------------------------------------------------------------------

    \16\ AmSouth states that larger Client Plans often may negotiate 
Plan-level fees to amounts below AmSouth's published fee schedule. 
If, as a result of the negotiations, the Plan-level investment 
management fees are less than the Fund-level investment advisory 
fees, the Client Plan would benefit more from a Fund-level fee 
credit than an ``offset'' of the Plan-level fees for assets invested 
in the Funds.
    \17\ In this regard, the Department notes that when a Second 
Fiduciary authorizes a particular fee structure to prevent AmSouth 
from receiving ``double fees'' for investment management and 
investment advisory services, AmSouth's disclosures to the Second 
Fiduciary should, in a clear and concise manner, reveal sufficient 
information to the Second Fiduciary to enable such Fiduciary to 
determine the nature and extent of any differentials between the 
rates of fees charged at the Plan-level and the rates of fees 
charged at the Fund-level. Such information would enable the Second 
Fiduciary to adhere to its duties and responsibilities under section 
404 of the Act to act prudently when approving and monitoring the 
services provided to the Client Plan and would help ensure that the 
fees paid for such services are reasonable.
---------------------------------------------------------------------------

    Disclosures, approvals, and notifications with regard to any 
changes in fees or secondary services will be handled in the same 
manner as for the ``credit'' fee structure described in paragraph 9 
above, with one exception. The exception is that notifications with 
regard to increases in rates of investment advisory fees for the Funds 
will conform to the procedures for increases in rates of secondary 
service fees as described in paragraph 9. Therefore, in such instances, 
there will be prior written notification of the fee increase to the 
Second Fiduciary for the Client Plan, in a statement separate from the 
Fund prospectus, and a Termination Form will be provided. The reason 
for the exception is that the total fees paid by the Client Plan, under 
the ``offset'' fee structure, will be directly affected by any 
increases in the rates of Fund-level investment advisory fees because 
such fees will not be credited back to the Client Plan.
    11. AmSouth states that a Second Fiduciary will always receive a 
written statement giving full disclosure of the fee structures prior to 
any investment in the Funds. The disclosure statement will explain why 
AmSouth believes that the investment of assets of the Client Plan in 
the Funds may be appropriate. The disclosure statement also will 
describe whether there are any limitations on AmSouth with respect to 
which Client Plan assets may be invested in shares of the Funds and, if 
so, the nature of such limitations.18
---------------------------------------------------------------------------

    \18\ See section II(d) of PTE 77-4 which requires, in pertinent 
part, that an independent plan fiduciary receive a current 
prospectus issued by the investment company and a full and detailed 
written disclosure of the investment advisory and other fees charged 
to or paid by the plan and the investment company, including a 
discussion of whether there are any limitations on the fiduciary/
investment adviser with respect to which plan assets may be invested 
in shares of the investment company and, if so, the nature of such 
limitations.
---------------------------------------------------------------------------

    12. On an annual basis, the Second Fiduciary of a Client Plan 
investing in the Funds will receive copies of the current Fund 
prospectuses and, upon such fiduciary's request, a copy of the 
Statement of Additional Information for such Funds as well as copies of 
the annual financial disclosure reports containing information about 
the Fund and independent auditor findings.
    In addition, if the Funds obtain brokerage services in the future 
from any broker-dealers that are affiliates of AmSouth, AmSouth will 
provide at least annually to the Second Fiduciary of Client Plans 
investing in the Funds written disclosures indicating the following: 
(i) the total, expressed in dollars, of brokerage commissions of each 
Fund that are paid to AmSouth by such Fund; (ii) the total, expressed 
in dollars, of brokerage commissions of each Fund that are paid by such 
Fund to brokerage firms unrelated to AmSouth; (iii) the average 
brokerage commissions per share, expressed as cents per share, paid to 
AmSouth by each Fund portfolio; and (iv) the average brokerage 
commissions per share, expressed as cents per share, paid by each Fund 
portfolio to brokerage firms unrelated to AmSouth. All such brokerage 
services would be provided in accordance with section 17(e) of the 1940 
Act and Rule 17e-1 thereunder. Such provisions require, among other 
things, that the commissions, fees or other remuneration for any 
brokerage services provided by an affiliate of an investment company's 
investment adviser be reasonable and fair compared to what other 
brokers receive for comparable transactions involving similar 
securities.
    13. No sales commissions will be paid by the Client Plans in 
connection with the purchase or sale of shares of the Funds. In 
addition, no redemption fees will be paid in connection with the sale 
of shares by the Client Plans to the Funds. AmSouth states that it will 
not receive any fees payable pursuant to Rule 12b-1 under the 1940 Act 
in connection with the transactions covered by this proposed exemption. 
AmSouth states further that all other dealings between the Client Plans 
and the Funds will be on a basis no less favorable to the Client Plans 
than such dealings will be with the other shareholders of the Funds.
    14. In summary, AmSouth represents that the transactions described 
herein will satisfy the statutory criteria of section 408(a) of the Act 
because: (a) the Funds will provide the Client Plans with an effective 
investment vehicle without any duplicative investment management, 
advisory or similar fees paid to AmSouth; (b) AmSouth will require 
annual audits by an independent accounting firm to verify the proper 
crediting to the Client Plans of investment advisory fees charged by 
AmSouth to the Funds under the ``crediting'' fee structure; (c) with 
respect to any investments in a Fund by the Client Plans and the 
payment of any fees by the Fund to AmSouth, a Second Fiduciary will 
receive full written disclosure of information concerning the Fund, 
including a current prospectus and a statement describing the fee 
structure, and will authorize in writing the investment of the Client 
Plan's assets in the Fund and the fees paid by the Fund to AmSouth; (d) 
any authorizations made by a Client Plan regarding investments in a 
Fund and fees to be paid to AmSouth, or any increases in the rates of 
fees for secondary services which will be retained by AmSouth, will be 
terminable at will by the Client Plan, without penalty to the Client 
Plan, upon receipt by AmSouth of written notice of termination from the 
Second Fiduciary; (e) no commissions or redemption fees will be paid by 
the Client Plan in connection with either the acquisition of Fund 
shares or the sale of Fund shares; (f) AmSouth will not receive any 
fees payable pursuant to Rule 12b-1 under the 1940 Act in connection 
with the subject transactions; and (g) all dealings between the Client 
Plans and the Funds will be on a basis which is at least as favorable 
to the Client Plans as such dealings are with other shareholders of the 
Funds.

Notice to Interested Persons

    Notice of the proposed exemption shall be given to all Second 
Fiduciaries of Client Plans that were invested in the Funds as of the 
effective date of the proposed exemption (i.e. April 16, 1997). In 
addition, notice of the proposed exemption shall be given to Client 
Plans that are currently invested in the Funds, as of the date the 
notice of the proposed exemption is published in the Federal Register, 
where AmSouth is providing services to the Funds and receives fees 
which would be covered by the proposed exemption, if granted.
    Notice to interested persons shall be provided by first class mail 
within thirty (30) days following the publication of the proposed 
exemption in the Federal Register. Such notice shall include a copy of 
the notice of proposed exemption as published in the Federal Register 
and a supplemental statement (see 29 CFR 2570.43(b)(2)) which informs 
all interested persons of their right to comment on and/or request a 
hearing with respect to the proposed exemption. Comments and requests 
for a public hearing are due within sixty () days following the 
publication of the proposed exemption in the Federal Register.

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

[[Page 33924]]

Alloy Die Casting Co. Employees' Profit Sharing Plan and Trust (the 
Plan) Located in Anaheim, California

[Application No. D-10439]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of section 406(a), 406(b)(1) and (b)(2) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to the proposed cash sale by the Plan to the 
Alloy Die Casting Co./W.E. Holmes, Inc. (Alloy), the Plan sponsor and a 
party in interest with respect to the Plan, of units (the Units) in the 
Krupp Insured Plus-II Limited Partnership (the Partnership), provided: 
(a) the sale is a one-time transaction for cash; (b) no commissions or 
other expenses are paid by the Plan in connection with the sale; and 
(c) the Plan will receive the greater of: (1) $13.05 per Unit, or (2) 
$1.15 above the highest bid price for the Units at the most recent 
sealed bid auction for the Units which has occurred prior to the time 
of the sale.

Summary of Facts and Representations

    1. Alloy, an Anaheim, California corporation, is the sponsor of the 
Plan. The Plan is a profit sharing plan which had 148 participants and 
aggregate assets with an approximate fair market value of $3,873,829 as 
of December 31, 1996.
    2. On July 21, 1987, the Plan bought 51,282 Units in the 
Partnership for $1 million. The Plan's cost basis was $19.50 per Unit. 
Through February 27, 1997, the Plan had received distributions from the 
Partnership in the amount of $14.88 per Unit. Consequently, the 
unrecovered cost to the Plan of the Units is currently $4.62 per Unit.
    3. Alloy was sold in 1996, and the Plan is in the process of being 
terminated and liquidated. All assets of the Plan, with the exception 
of the Units, have been converted into cash or short-term equivalents.
    4. The Partnership is a Massachusetts limited partnership which 
invests primarily in federally insured mortgages on multi-family 
residential properties through the purchase of mortgage-backed 
securities. Krupp Insured Plus Corp. (Krupp) and Mortgage Services 
Partners Limited Partnership are the general partners of the 
Partnership. The applicant represents that the Units cannot be 
converted into short-term cash equivalents because transfers of the 
Units are subject to certain restrictions whereby Unit holders are not 
able to liquidate their investment.19 As a result of these 
restrictions, it is not administratively feasible for the Plan to 
distribute the Units to the participants; instead, it must sell the 
Units in order to distribute each participant's pro-rata share of the 
value of such Units in cash.
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    \19\ The Department notes that the decisions to acquire and hold 
the Units are governed by the fiduciary responsibility requirements 
of Part 4, Subtitle B, Title I of the Act. In this regard, the 
Department herein is not proposing relief for any violations of Part 
4 of the Act which may have arisen as a result of the acquisition 
and holding of the Units.
---------------------------------------------------------------------------

    5. The applicant represents that there is no established market for 
the Units. Alloy has therefore requested the exemption proposed herein 
to purchase the Units from the Plan for cash. The applicant represents 
that no commissions will be paid in connection with the transaction. 
Alloy has offered to pay the Plan $1.15 per Unit in excess of the fair 
market value of the Units as determined by the highest bid price at the 
most recent sealed bid auction for the Units which has occurred prior 
to the time of the sale. The applicant states that Krupp has 
represented that the most recent sealed bid auction took place on 
February 14, 1997, at which time the average price paid per Unit was 
$11.55, and the highest price paid per Unit was $11.90. Thus, Alloy has 
offered to pay the Plan the higher of: (a) $13.05 per Unit, or (b) 
$1.15 per Unit above the highest bid price for the Units at the most 
recent sealed bid auction which has occurred prior to the date of the 
sale.
    6. In summary, the applicant represents that the proposed 
transaction satisfies the criteria of section 408(a) of the Act 
because: (a) the sale would be a one-time transaction for cash, and no 
commissions or other expenses would be paid by the Plan in connection 
with the transaction; (b) the transaction will provide liquidity for 
the Plan which is currently being terminated; c) the purchase price for 
the Units will exceed the Plan's original cost for the Units less 
distributions received from the Partnership; and (d) the Plan will 
receive not less than $1.15 more per Unit than the highest bid price at 
the most recent sealed bid auction for the Units.

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


[[Page 33925]]


    Signed at Washington, DC, this 18th day of June, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 97-16361 Filed 6-20-97; 8:45 am]
BILLING CODE 4510-29-P