[Federal Register Volume 62, Number 202 (Monday, October 20, 1997)]
[Notices]
[Pages 54471-54480]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27701]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10412, et al.]


Proposed Exemptions; Metropolitan Life Insurance Company

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 restrictions of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
requests 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.

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

[[Page 54472]]

Labor, 200 Constitution Avenue, N.W., Washington, D.C. 20210. 
Attention: Application No.____, stated in each Notice of Proposed 
Exemption. The applications for exemption and the comments received 
will be available for public inspection in the Public Documents Room of 
Pension and Welfare Benefits Administration, U.S. Department of Labor, 
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.

Notice to Interested Persons

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

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

Metropolitan Life Insurance Company (MetLife) Located in New York, NY

[Application No. D-10412]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of 
the Code, shall not apply, effective April 1, 1997, to (1) the purchase 
or retention by an employee benefit plan (the Plan) and (2) the sale or 
continuation by MetLife or an affiliate (collectively, MetLife) of a 
synthetic guaranteed investment contract (the MetLife Trust GIC) 
entered into between the Plan and MetLife under which MetLife 
guarantees (the Guarantee) certain amounts (the Guaranteed Value).
    This proposed exemption is conditioned upon the following 
requirements:
    (a) The decision to enter into a MetLife Trust GIC is made on 
behalf of a participating Plan in writing by a fiduciary of such Plan 
which is independent of MetLife.
    (b) A Plan investing in a MetLife Trust GIC has assets that are in 
excess of $25 million.
    (c) Prior to the execution of the MetLife Trust GIC, the Plan 
fiduciary receives a full and detailed written disclosure of all 
material features concerning the MetLife Trust GIC, including--
    (1) A Letter of Agreement between MetLife and the Plan fiduciary 
which stipulates the relevant provisions of the GIC, the applicable 
fees and the rights and obligations of the parties;
    (2) Investment Guidelines defining the manner in which an 
investment manager will manage a MetLife Trust GIC;
    (3) A copy of the Investment Management Agreement between MetLife 
and the Plan fiduciary;
    (4) Information explaining in a manner calculated to be understood 
by a Plan fiduciary that, if a MetLife affiliated manager underperforms 
or if adverse market conditions occur, the interest rate that is 
credited (the Credited Rate) to a MetLife Trust GIC account (the 
Account) may be as low as 0 percent;
    (5) The pertinent features of a MetLife conventional GIC (the 
MetLife Conventional GIC) that a Plan fiduciary may obtain upon the 
discontinuance of a MetLife Trust GIC, including an explanation that, 
although a MetLife Conventional GIC will offer a guarantee of 
principal, it may have a credited rate as low as 0 percent for the 
duration of the contract; and
    (6) If granted, copies of the proposed exemption and grant notice 
with respect to the exemptive relief provided herein.
    (d) Upon the selection by a Plan fiduciary of a MetLife Trust GIC, 
a participant in a Plan that provides for participant investment 
selection (the Section 404(c) Plan) is given--
    (1) A summary of the pertinent features of the documents listed 
above in paragraph (c) which are deemed appropriate for distribution to 
such participant;
    (2) A copy of the operative language of the proposed exemption if 
the Section 404(c) Plan has entered into a MetLife Trust GIC 
arrangement before the final exemption is issued; and
    (3) A copy of the operative language of the final exemption (i) to 
the extent that there have been modifications to the operative language 
of proposed exemption, or (ii) the Section 404(c) Plan acquires a 
MetLife Trust GIC after the final exemption is granted.
    (e) Subsequent to a Plan's investment in a MetLife Trust GIC, the 
Plan fiduciary and, if applicable, the Plan participant, upon such 
participant's request, receive the following ongoing disclosures 
regarding such investment:
    (1) A monthly report consisting of a Guaranteed Value Statement, 
which specifies the affected Plan's MetLife Trust GIC balance for the 
prior month, contributions, withdrawals, transfers, interest earned, 
the current month's ending balance for the MetLife Trust GIC, the 
current interest rate and a summary of transactions;
    (2) A quarterly report consisting of a Market Value Statement, 
which specifies the prior quarter's ending market value for a Plan's 
MetLife Trust GIC, contributions, withdrawals, the fees paid to 
MetLife, investment income, realized capital gains and/or losses from 
sales, changes in unrealized appreciation of assets, the current 
quarter's ending market value and rate of return, and a summary of 
transactions; and
    (3) An annual portfolio listing or letter describing key events, 
depending upon its arrangements with a Plan fiduciary.
    (f) As to each Plan, the combined total of all fees and charges 
imposed under a MetLife Trust GIC is not in excess of ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act.
    (g) Each MetLife Trust GIC specifically provides an objective 
method for determining the fair market value of the securities owned by 
the Plan pursuant to such GIC.
    (h) Each MetLife Trust GIC has a predefined maturity date or dates 
selected by the Plan fiduciary and agreed to by MetLife.
    (i) Prior to the affirmation of a maturity date, MetLife informs 
the Plan fiduciary of the new reset rate for the Credited Rate.
    (j) MetLife maintains books and records of each MetLife Trust GIC 
transaction for a period of six years. Such books and records are 
subject to

[[Page 54473]]

annual audit by independent, certified public accountants.

EFFECTIVE DATE: If granted, this proposed exemption will be effective 
as of April 1, 1996.

Summary of Facts and Representations

    1. The parties to the transactions are described as follows:
    (a) MetLife is a mutual life insurance company organized under New 
York law and subject to supervision and examination by the Insurance 
Commissioner of the State of New York. It is the second largest life 
insurance company in the United States. As of December 31, 1996, 
MetLife and its subsidiaries had $279 billion in assets under 
management. MetLife provides funding, asset management and other 
services for Plans covered by the Act. MetLife also maintains pooled 
and single separate accounts pursuant to New York Insurance Law. These 
accounts are used in connection with group annuity and group life 
insurance contracts issued to Plans as well as other entities. The 
assets in these accounts are insulated from MetLife's general account. 
The returns generated from such accounts are used to support 
contractual obligations. Accounts are created to invest in one or more 
asset classes and are managed by MetLife, an affiliate of MetLife or a 
nonaffiliated company.
    As of June 11, 1996, MetLife's ratings were as follows:

------------------------------------------------------------------------
          Rating firm                 Rating             Rationale      
------------------------------------------------------------------------
A.M. Best.....................  A+ (Superior)....  Financial position   
                                                    and operating       
                                                    performance.        
Duff & Phelps.................  AA+..............  Claims-paying        
                                                    ability.            
Moody's.......................  Aa2 (Excellent)..  Financial strength.  
Standard & Poor's.............  AA (Excellent)...  Claims-paying        
                                                    ability.            
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    (b) State Street Research & Management Company (State Street 
Research), a wholly owned subsidiary of MetLife, is an investment 
management company registered as an investment adviser under the 
Advisers Act. State Street Research, which is Boston-based, was founded 
in 1927 and acquired by MetLife in 1983. As of December 31, 1996, State 
Street Research managed $41 billion in equity, fixed income and 
balanced accounts for retirement plans, foundations and endowments and 
mutual funds.
    (c) The Plans involved herein will consist primarily of defined 
contribution plans that are subject to the provisions of Act as well as 
Plans that are subject to sections 401(a) and 403(b) of the Code.
    2. MetLife has offered a variety of guaranteed investment contracts 
or ``GICs'' to Plans for many years. A GIC is a group annuity contract 
from an insurance company which provides contractholders with a fixed 
rate of return for a specified period, while paying benefits to Plan 
participants at guaranteed value. The GICs issued by MetLife, which are 
described herein, will have predefined maturity dates.
    Plan fiduciaries frequently use GICs as funding vehicles for the 
``fixed income'' or ``stable value'' investment options of defined 
contribution plans. According to Plan provisions, participants may have 
the right to transfer funds among a Plan's various investment options, 
or to take funds out of the Plan in withdrawals or loans. Such payments 
from a given option are called ``participant-initiated withdrawals'' or 
``benefits.''
    Recently, many Plan sponsors have begun to request the direct 
ownership of the assets that back the GIC since nominal ownership of 
the assets affords such sponsors full insulation in case of the 
insurance company's insolvency. For this reason, insurers have begun to 
develop ``synthetic GICs'' which offer all or nearly all of the same 
features as traditional GIC products except that the assets are placed 
in a segregated trust or custodial bank account owned by the Plan 
rather than being owned by the insurer.
    3. Since April 1, 1997, MetLife has been offering an investment 
product (referred to herein as a ``MetLife Trust GIC'') to Plans having 
assets that are in excess of $25 million. MetLife believes that the 
transaction would violate section 406(a)(1) (A) and (B) of the Act 
because MetLife would be guaranteeing a certain asset value (i.e., the 
Guaranteed Value) to a Plan and thereby extending credit to such Plan 
as the result of a Plan's purchase of a MetLife Trust GIC. In addition, 
MetLife believes that the transaction would violate section 406 (b)(1) 
and (b)(2) of the Act because MetLife or an affiliate, in honoring a 
withdrawal initiated by either a Plan participant or a Plan sponsor 
(see Representations 15 and 16 of this proposed exemption), would be 
using their discretion in selecting securities that will be subject to 
the Guarantee and in reducing the Guaranteed Value to reflect the 
withdrawal.
    Further, MetLife asserts that the proposed Guarantee could be 
perceived as giving rise to a conflict of interest between MetLife or 
an affiliate and the Plans in violation of section 406 (b)(1) and 
(b)(2) of the Act because the amount of the cumulative total return of 
each MetLife Trust GIC will be affected in part by MetLife or its 
affiliate's exercise of fiduciary authority or control, including the 
valuation of assets. In this regard, MetLife notes that both it and its 
affiliates have an interest in maximizing the cumulative total return 
of a MetLife Trust GIC, thereby reducing the amount of, or entirely 
eliminating, MetLife's obligation to make a payment on the Guarantee. 
Accordingly, MetLife requests exemptive relief from the Department.
    4. Each MetLife Trust GIC will consist of a group annuity contract 
and an Investment Management Agreement between the Plan sponsor and 
MetLife, which will typically be the investment manager. A MetLife 
Trust GIC will be offered to a Plan having total assets that are in 
excess of $25 million. The principal amount of such Trust GIC will be 
negotiated between MetLife and the Plan fiduciary.
    5. The decision to enter into a MetLife Trust GIC will be made on 
behalf of the Plan by a Plan fiduciary who is independent of MetLife 
and its affiliates. MetLife represents that due to the large size of 
the Plans involved, the independent fiduciaries authorizing Plans to 
enter into the MetLife Trust GICs can be expected to be (or retain) 
sophisticated, professional asset managers with specialized expertise 
in the area of GICs and similar investments. However, prior to the 
Plan's investment, MetLife will furnish the Plan's independent 
fiduciary with a full and detailed disclosure of all features 
concerning the MetLife Trust GIC. In addition to the MetLife Trust GIC 
document, such disclosures will include (a) a Letter of Agreement 
between MetLife and the Plan fiduciary which stipulates the relevant 
provisions of the GIC, the applicable fees and the rights and 
obligations of the parties; (b) Investment Guidelines defining the 
manner in which an investment manager will manage a MetLife Trust GIC; 
(c) a copy of the Investment

[[Page 54474]]

Management Agreement between MetLife and the Plan fiduciary; (d) an 
explanation that if a MetLife affiliated manager underperforms or if 
adverse market conditions occur, the Credited Rate applied to a MetLife 
Trust GIC Account may be as low as 0 percent; (e) the pertinent 
features of a MetLife Conventional GIC including an explanation that, 
although a MetLife Conventional GIC will offer a guarantee of 
principal, it may have a credited rate as low as 0 percent for the 
duration of the contract, assuming the Plan fiduciary decides to 
discontinue a MetLife Trust GIC by converting it into a MetLife 
Conventional GIC; and (f) if granted, copies of the proposed exemption 
and grant notice with respect to the exemptive relief provided herein.
    Upon the selection by a Plan fiduciary of a MetLife Trust GIC, a 
participant in a Section 404(c) Plan will be provided with a summary of 
the pertinent features of the documents listed above which are deemed 
appropriate for distribution to such participant. In addition, the 
participant will be given a copy of the operative language of the 
proposed exemption if the Section 404(c) Plan has entered into a 
MetLife Trust GIC arrangement before the final exemption is issued. 
Further, the participant will receive a copy of the operative language 
of the final exemption (a) to the extent there have been modifications 
to the operative language of the proposed exemption, or (b) the Section 
404(c) Plan acquires a MetLife Trust GIC after the final exemption is 
granted. In the event the participant wishes to review the underlying 
documents, including the proposed and final exemptions, such 
information will be made available to the participant upon request.
    6. Plan assets that are invested in a MetLife Trust GIC will be 
placed in a segregated custodian account or trust account. The Plan 
sponsor will select an independent custodian and/or trustee, with the 
approval of MetLife. MetLife will not be a party to the custodial 
agreement or the master trust document. Thus, each MetLife Trust GIC 
will have its own Account. At all times, the Plan, through the trustee, 
will own all of the assets in the Account.
    7. As stated above, MetLife, acting in a fiduciary capacity, will 
generally be the Account's investment manager. However, by mutual 
agreement with the Plan sponsor, MetLife may designate State Street 
Research as sub-manager with respect to some or all of the assets in an 
Account. At its discretion and by agreement with the Plan sponsor, 
MetLife may also designate an unaffiliated investment manager as sub-
manager to manage some or all of the Account assets, assuming MetLife 
obtains appropriate regulatory approvals. Under all circumstances, each 
investment manager or sub-manager servicing an Account will acknowledge 
in writing to the Plan fiduciary that it will be a fiduciary of the 
Plan with respect to a MetLife Trust GIC and as such, will be subject 
to the fiduciary provisions of the Act.
    8. Before an Account is established, MetLife and the Plan sponsor 
will agree to a set of investment guidelines which will define how the 
investment manager will manage the Account's assets, identify the 
assets that are approved for investment by the Plan and allow 
performance to be measured against one or more published indices based 
upon recognized industry sources. It is anticipated that these 
guidelines will vary from one Plan to another. Once the investment 
guidelines are established, they can be changed only by mutual 
agreement between MetLife and the Plan sponsor. The investment 
guidelines will be subject to review by the New York Department of 
Insurance and possibly, by the insurance departments of other states.
    Objective performance benchmarks for an Account will allow the Plan 
sponsor to evaluate the performance of the investment manager or sub-
manager. The benchmarks selected for the Account will be appropriate to 
the assets and specific investment objectives of the Account. The 
benchmarks will be based on objectively-published indices such as the 
Lehman Brothers Intermediate Government/Corporate Index, the Merrill 
Lynch Intermediate Government/Corporate Index, or a combination of one 
or more indices, as appropriate to the composition of the 
Account.\1\
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    \\1\\ It is represented that data from indices such as the 
Lehman Brothers Intermediate Government/Corporate Index is available 
on a daily basis from Bloomberg or by subscription from Lehman 
Brothers.
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    9. Contributions placed into an Account will be invested 
immediately by the investment manager or, if applicable, sub-manager, 
primarily in publicly-traded, fixed income securities. The specific 
classes of investments allowed in any particular Account will be set 
forth in the Account's investment guidelines. These investments may 
include U.S. Treasury securities, U.S. agency debt, corporate bonds, 
mortgage-backed securities, asset-backed securities, equities, foreign 
government and agency debt, supranational agency debt or other asset 
classes and employer debt securities within the meaning of section 
407(d) of the Act.\2\ The investment guidelines may also 
allow the use of options (other than naked put and call options), 
futures, warrants, forwards or similar instruments on a limited basis 
for hedging and risk management purposes.\3\
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    \\2\\ The Department is not proposing, nor it the applicant 
requesting, exemptive relief herein with respect to the acquisition 
and holding of employer debt securities beyond that provided under 
sections 407 and 408 of the Act.
    \\3\\ In this regard, it is represented that the use of options 
and futures contracts will be governed by the investment guidelines 
that are negotiated between MetLife and Plan fiduciaries. Any 
guidelines permitting investment in derivatives must be approved by 
both the Plan fiduciaries and MetLife. The use of derivatives will 
be for hedging purposes only. Futures contracts will not be 
permitted to be used to leverage a MetLife Trust GIC and only 
unaffiliated brokers will be used to purchase such contracts.
    MetLife represents that the yield-to-maturity calculated on 
equities and hedge securities will be calculated, depending on the 
nature of the Account, on a proxy that will provide an equivalent to 
the historical yield. MetLife also states that the Credited Rate 
reset formula will ensure that all market performance is passed 
through in future Credited Rates.
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    MetLife does not expect any single Account to utilize every one of 
these types of assets or asset quality specifications. Therefore, the 
aforementioned investments are intended to represent the universe of 
investment alternatives among which the Plan sponsor can choose to meet 
its investment and benefit needs.
    As part of the investment guidelines, the appropriateness of the 
broad asset classes and asset quality levels will be subject to the 
review and approval of the New York State Insurance Department (and 
possibly the insurance departments of other states).
    10. The value of the Account will be its fair market value (the 
Market Value). In the case of an asset consisting of a security for 
which market quotations are readily available, the quoted Market Value 
of such security, as determined by the investment manager or the sub-
manager, will be the fair market value. Because MetLife expects the 
investments will be composed primarily of publicly-traded, fixed income 
securities, it expects that in virtually all cases, asset investment 
values can be determined readily from any of a number of widely-
available, independent published sources.
    In the case of any other asset, quotations will be obtained from 
broker-dealers or pricing services that are independent of MetLife, the 
investment manager and/or the sub-manager. The asset will be valued 
based on the average of at least three bid and three ask prices 
obtained from such independent sources. To the extent that

[[Page 54475]]

quotations cannot be obtained, the Market Value of the asset will be 
based upon an appraisal made by an independent appraiser selected by 
either the custodian or a Plan sponsor or fiduciary which is not 
affiliated with MetLife, the investment manager, and/or the sub-
manager.\4\
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    \\4\\ MetLife anticipates that in many cases, the custodian bank 
will perform the asset valuation function in reliance on published 
sources. If the assets are not listed in published sources, the 
custodian may ask the investment manager to supply the price. To the 
extent that MetLife or an affiliated manager or sub-manager has the 
authority to establish the value of the assets of a MetLife Trust 
GIC, MetLife proposes a three-part method in order of preference: 
(a) From independent published sources, (b) the average of at least 
three bid and ask prices from independent sources; or (c) based on 
an appraisal by an independent appraiser which is not selected by or 
affiliated with MetLife, the investment manager and/or the sub-
manager.
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    11. Each MetLife Trust GIC will provide a Guaranteed Value that 
will be available exclusively for participant-initiated benefit 
withdrawals. The Guaranteed Value is defined as the amount of any 
contributions, plus interest at a credited rate (i.e., the Credited 
Rate), minus withdrawals. It is expected that the Guaranteed Value and 
the Market Value of the Account may differ at any given time. However, 
MetLife will seek to maintain the Guaranteed Value as reasonably close 
to the Market Value by reflecting any difference between them in the 
Credited Rate.\5\
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    \\5\\ For example, assume that the Guaranteed Value of a MetLife 
Trust GIC is $10,000,000 while its Market Value is $10,250,000. 
Assume also that the Anticipated Yield-To-Maturity of such 
investment is 7.25 percent based upon an objective, external index 
and the approximate duration of the MetLife Trust GIC is 5.23 years, 
again based upon an external, objective index. Assume further that 
no deposits or withdrawals are ever made to or from the MetLife 
Trust GIC.
    The 2.5 percent difference between the Market Value and the 
Guaranteed Value will be amortized by MetLife over the 5.23 year 
Duration of the MetLife Trust GIC by increasing the Credited Rate. 
Therefore, the first year's addition to the Credited Rate will be 
approximately 48 basis points (2.5 percent/5.23 years).
    Instead of crediting the 7.25 percent anticipated yield of the 
MetLife Trust GIC, MetLife represents that participants will be 
credited with an effective annual rate of 7.73 percent for the first 
year (7.25 percent + 0.48 percent).
    In the foregoing example, if the Guaranteed Value of the MetLife 
Trust GIC is $10,000,000 and the Market Value is $9,750,000, MetLife 
states that there will be a reduction in the Credited Rate of 
approximately 48 basis points. Rather than crediting participants 
with the 7.25 percent yield, participants will be credited with an 
effective annual rate of 6.77 percent for the first year (7.25 
percent--0.48 percent).
    For subsequent years, the Credited Rate will be determined in 
the same manner.
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    12. MetLife will determine the initial Credited Rate by using an 
objective methodology that is fully disclosed and agreed to by Plan 
sponsors. The initial Credited Rate will reflect three factors: (a) The 
expected yield-to-maturity of assets in an Account; (b) payments 
expected into or out of an Account; and (c) the anticipated expenses to 
be charged under the MetLife Trust GIC.\6\ The Credited Rate 
will not be affected by the length of time that MetLife has managed a 
MetLife Trust GIC Account.
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    \\6\\ The applicant notes that factors (a) and (c), cited above, 
are components of the net Anticipated Yield-to-Maturity or YTM and 
that factor (b) comprises the Cash Flow or CF variable in the 
Credited Rate reset formula which is discussed later in this 
Representation.
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    The period for which the Credited Rate is in effect will be agreed 
to in advance by MetLife and the Plan sponsor and it will not exceed 
one year.\7\ At the end of this period, on an agreed-upon 
date, MetLife will reset the Credited Rate by declaring a new interest 
rate (which can never be less than 0 percent) to be credited to the 
Guaranteed Value. The new Credited Rate will be based upon the criteria 
noted above and also reflect the amortization of any difference between 
the Guaranteed Value and Market Value. (The amortization period will be 
no longer than the period specified in the MetLife Trust GIC which is 
typically the approximate average duration of the assets in the 
Account.)
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    \\7\\ Typical Credited Rate reset dates may occur monthly, 
quarterly, semiannually or annually at the choice of the Plan 
sponsor. For example, during the period from 24 to 12 months prior 
to the final maturity date of a MetLife Trust GIC (see 
Representation 13), the Credited Rate may be reset as frequently as 
quarterly. During the period from 12 months prior to the final 
maturity date to the final maturity date, the Credited Rate may be 
reset as frequently as monthly.
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    In resetting the Credited Rate, MetLife will utilize the following 
formula:

(MV+CF)*(1+YTM)n=(GV+CF)*(1+i)n
    Where--

     MV = Market Value (includes fees and expenses)
     CF = Expected Cash Flow
     GV = Guaranteed Value (includes fees and expenses)
     YTM = Anticipated Yield-To-Maturity (net of fees and 
expenses)
     n = Duration
     i = Credited Rate.\8\
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    \8\ In this proposed exemption, MetLife has described such 
components of the Credited Rate reset formula as the Market Value 
and the Guaranteed Value. MetLife has further defined the terms 
``Expected Cash Flow,'' ``Duration,'' and ``Yield-to-Maturity,'' and 
represents that such variables, with the exception of Expected Cash 
Flow, are based upon objective, external criteria which would be 
communicated by MetLife to the Plan fiduciary. MetLife also explains 
that a Plan fiduciary would then be able to verify the accuracy of 
the index data directly from the index provider or from a third 
party news or information source.
    MetLife represents that the Expected Cash Flow is the net amount 
of participant-initiated contributions and withdrawals expected to 
flow into or out of a MetLife Trust GIC Account during the period 
for which the Credited Rate will be effective (i.e., the Credited 
Rate Period). MetLife notes that the Expected Cash Flow is not 
related to any external index but reflects the cumulative effect of 
individual participants' asset allocation decisions. According to 
MetLife, the level of Expected Cash Flow is determined in 
consultation with the Plan and is based upon the Plan's historical 
cash flow pattern as well as expected Plan events.
    MetLife explains that the Duration is the period from the 
effective date of the Credited Rate reset until the maturity date or 
average maturity date. MetLife notes that the Credited Rate reset 
formula for a MetLife Trust GIC will use the duration of the index 
unless specifically requested by the Plan with MetLife's consent. 
MetLife represents that it will not calculate the duration of the 
index. Rather, such calculation will be made by the index provider.
    According to MetLife, the Yield-to-Maturity is the yield of a 
Treasury security with a comparable duration once a Plan has 
selected a defined maturity date. Prior to the selection of a 
maturity date, MetLife states that the Yield-to-Maturity component 
will be the Yield-to-Maturity of an external index unless 
specifically requested by the Plan with MetLife's consent. MetLife 
further represents that the yield-to-maturity of the index will be 
calculated by the index provider.
    MetLife further points out that should a Plan choose another 
source for the aforementioned variables, the source may only be used 
with MetLife's consent. MetLife notes that the consent must be 
renewed by the Plan at least annually.
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    To solve the equation for the Credited Rate, (i), the formula can 
be mathematically restated as--
((MV+CF/GV+CF)*(1+YTM)n)1/n--1=i

    The formula then shows that the Credited Rate, (i), equals the 
Anticipated Yield-To-Maturity of the assets in the Account (YTM), 
adjusted by the difference between the Market and Guaranteed Values 
(MV/GV) spread over the portfolio's Duration (1/n) of the Account's 
investment portfolio. In other words, the starting point for the 
Credited Rate will always be the current net Anticipated Yield-To-
Maturity or the expected return on assets in the portfolio. The 
Credited Rate will then be adjusted to account for the differences 
between the prior expected returns and the portfolio's actual returns. 
To provide a smooth pattern of returns for Plan participants, MetLife 
will factor these differences in over time. For example, if a portfolio 
has a duration of three years, one-third of the difference will be 
recognized in the current reset.
    The Credited Rate may also be reset by MetLife as a result of 
certain actions by a contractholder or in the event of a contract 
discontinuance. Specifically, the events that will trigger a reset of 
the Credited Rate before the end of the stated period are (a) notice of 
the discontinuance of a MetLife Trust GIC, (b) Plan contributions 
beyond those anticipated under the Plan's formula, (c) withdrawals that 
are not initiated by Plan participants, and (d) a Plan fiduciary's 
request for an earlier reset. Any reset of the Credited Rate will be

[[Page 54476]]

determined by the Credited Rate reset formula described above and will 
reflect any change in the parameters (such as Market Value and 
Guaranteed Value) since the prior reset. Such reset of the Credited 
Rate will be disclosed to the sponsor of a Plan. Depending upon the 
events causing the rate change, up to 30 days' advance written notice 
of such change will be given by MetLife to the Plan fiduciary. Assuming 
the Plan fiduciary does not agree to the reset under circumstances (b) 
and (d), such fiduciary will be afforded the opportunity to discontinue 
the MetLife Trust GIC.
    13. Each MetLife Trust GIC will have a defined maturity date or 
dates selected by the Plan fiduciary and agreed to by MetLife. One 
month before the anniversary date of the MetLife Trust GIC, MetLife 
will notify the Plan fiduciary, in writing, of the impending 
anniversary of such MetLife Trust GIC, as well as the new reset rate 
for the Credited Rate, and afford the fiduciary the opportunity to 
notify MetLife that it will affirm the maturity date. If the Plan 
fiduciary does not inform MetLife, in writing, prior to the anniversary 
date of the intention to affirm the maturity date, the date will be 
extended by one year and the notification procedure will be repeated 
prior to the next impending anniversary date of the MetLife Trust 
GIC.9 Upon the maturity of a MetLife Trust GIC, MetLife 
represents that if the Market Value of the assets invested in the 
MetLife Trust GIC is less than the amount initially placed in the 
Account plus guaranteed interest at the Credited Rate, it will make up 
the difference. Such amount will be adjusted for interim contributions 
and withdrawals. As an additional benefit, MetLife states that if at 
maturity the Market Value of a MetLife Trust GIC exceeds the Guaranteed 
Value, the Plan will retain the full Market Value appreciation of the 
underlying assets.
---------------------------------------------------------------------------

    \9\ MetLife notes that the procedures governing the maturity 
date of a MetLife Trust GIC will not affect the ability of a Plan 
fiduciary to discontinue such investment as described in 
Representation 19.
---------------------------------------------------------------------------

    14. The Plan sponsor will pay MetLife a single contract charge that 
is based upon a specified percentage of the Guaranteed Value. The 
contract charge will include management fees, risk charges and 
administrative expense charges, all of which will not exceed reasonable 
compensation within the meaning of section 408(b)(2) of the 
Act.10 The contract charge, which will be negotiated by 
MetLife with each Plan fiduciary, will be influenced by the composition 
of the MetLife Trust GIC, the investment guidelines and the nature of 
the Plan. In general, the higher the dollar investment in a MetLife 
Trust GIC, the lower the contract charge.
---------------------------------------------------------------------------

    \10\ The Department expresses no opinion herein on whether such 
compensation will satisfy the terms and conditions of section 
408(b)(2) of the Act.
---------------------------------------------------------------------------

    The contract charge will be calculated monthly by multiplying the 
specified percentage of the MetLife Trust GIC's average Guaranteed 
Value for the month by an applicable fee schedule 
percentage.11 MetLife will withdraw the contract charge from 
the Account each month. Afterwards, MetLife will compensate the 
affiliated and unaffiliated investment managers and sub-managers from 
the contract charge unless the Plan fiduciary elects to compensate the 
investment manager or sub-manager directly.
---------------------------------------------------------------------------

    \11\ MetLife has constructed the following fee schedule to 
illustrate its contract charges under a hypothetical arrangement:
     First $100 million--50 basis points;
     Next $100 million--45 basis points;
     Excess over $200 million--35 basis points.
    MetLife notes that due to the bundled nature of the fees and the 
fee variations among the investment managers and sub-managers, it 
would be impossible to forecast precisely how MetLife would allocate 
the investment management component of such fees among the managers. 
However, MetLife explains that a recent survey of institutional 
investment managers indicated that fees for managing this type of 
assets could range from 12 to 44 basis points. Therefore, MetLife 
expects that at least initially, the investment management component 
of the contract charge that is paid by MetLife to State Street 
Research or any other affiliated or unaffiliated investment manager 
or sub-manager for managing a MetLife Trust GIC should be close or 
within this range. MetLife further explains that in no event will 
such fees exceed reasonable compensation.
---------------------------------------------------------------------------

    15. In the event of a participant-initiated benefit withdrawal, 
which will trigger the Guarantee mechanism in a MetLife Trust GIC, 
MetLife typically requests written notice of such a benefit withdrawal 
at least 48 hours in advance. Sometimes, such a benefit withdrawal 
request may be made by a Plan orally and then followed by a confirming 
fax. Under such circumstances, the investment manager or the sub-
manager will make sufficient liquidity available to meet the withdrawal 
and the custodian/trustee will transfer this amount. Such liquidity for 
participant-initiated benefit withdrawals will be made by MetLife at 
the Guaranteed Value of the Account. No additional fees will be 
charged. If the investment manager or sub-manager has liquidated more 
assets than are needed to meet the benefit withdrawal, the excess will 
be immediately reinvested.
    16. In addition to participant-initiated benefit withdrawals, the 
Plan sponsor can choose to withdraw funds from a MetLife Trust GIC at 
any time. In a non-benefit withdrawal, the Plan fiduciary will remove 
assets from the MetLife Trust GIC Account. A non-benefit withdrawal 
will be made at Market Value. Under these circumstances, MetLife will 
reduce the Guaranteed Value by a proportionate amount that bears the 
same ratio to the entire Guaranteed Value as the amount withdrawn has 
to the entire Market Value.
    17. MetLife represents that it is precluded from selling 
depreciating assets and retaining appreciating assets held in a MetLife 
Trust GIC Account to honor non-benefit withdrawals because all assets 
are reported at their current market values. Under such circumstances, 
all gains and losses will flow through to the Plan and the Plan will 
retain ownership of the assets at all times. Therefore, MetLife states 
that the selection of assets to be liquidated to satisfy a withdrawal 
request will have no bearing on the type of withdrawal transaction.
    18. MetLife will provide monthly and quarterly written reports to 
Plan fiduciaries following their preparation.12 The monthly 
report will consist of a Guaranteed Value Statement showing the 
affected Plan's MetLife Trust GIC balance for the prior month, 
contributions, withdrawals, transfers, interest earned, the current 
month's ending balance for the MetLife Trust GIC, the current credited 
interest rate and a summary of transactions. MetLife represents that 
the monthly report will not reflect the Market Value because the assets 
that comprise the Market Value are owned by the Plan and are held in 
the Plan's MetLife Trust GIC Account. Because these are Plan assets, 
MetLife explains that the Plan fiduciary can check the Market Value of 
the Account whenever he or she may so choose. MetLife further notes 
that it expects the trustee or custodian of the Account will generate 
this type of information to the Plan fiduciary.
---------------------------------------------------------------------------

    \12\ The reports described above may also be provided by Plans 
to Plan participants upon such participants' request.
---------------------------------------------------------------------------

    The quarterly report will consist of a Market Value Statement which 
will reflect the prior quarter's ending market value for a Plan's 
MetLife Trust GIC (based upon data provided to MetLife by the trustee 
or the custodian), contributions, withdrawals, the fees paid to MetLife 
from which MetLife will make payments to an investment manager or sub-
manager, if applicable, investment income, realized capital gains and/
or losses from sales, changes in unrealized appreciation of assets, the 
current quarter's ending market value and rate of return, and a summary 
of

[[Page 54477]]

transactions.13 In addition to the Market Value Statement, 
MetLife will provide a Guaranteed Value Statement to the Plan fiduciary 
on a quarterly basis.
---------------------------------------------------------------------------

    \13\ It is represented that the Guaranteed Value Statement does 
not include a separate entry for fees because fees are reflected in 
the Credited Rate and are not deducted separately from the 
Guaranteed Value. It is also represented that a custodian or trustee 
of a MetLife Trust GIC may provide periodic statements to a Plan 
fiduciary.
---------------------------------------------------------------------------

    Although there is no specific requirement that MetLife issue an 
annual report, the Plan fiduciary will be provided with either an 
annual portfolio listing or a letter describing key events. Any further 
information provided to the Plan fiduciary will depend upon particular 
arrangements with such fiduciary.
    In addition to the aforementioned reports, MetLife will maintain 
books and records of each MetLife Trust GIC transaction for a period of 
six years. Such books and records will be subject to annual audit by 
independent, certified public accountants.
    19. A Plan sponsor may discontinue a MetLife Trust GIC at any time 
and for any reason. However, MetLife may discontinue the MetLife Trust 
GIC for cause only (e.g., a Plan's disqualification), a material breach 
of the MetLife Trust GIC (e.g., a Plan sponsor's encouraging 
participants to withdraw or transfer funds invested in a MetLife Trust 
GIC) or a material alteration of a Plan's practices and procedures as 
specified in the MetLife Trust GIC. Assets that are held in a MetLife 
Trust GIC will be valued in accordance with the valuation methodology 
described above in Representation 10. If the discontinuance occurs 
prior to the maturity date, the assets of the MetLife Trust GIC will be 
liquidated at the Market Value. However, if the discontinuance occurs 
at the maturity date of the MetLife Trust GIC, the underlying assets 
will be liquidated at the greater of the Guaranteed Value or the Market 
Value.
    Neither MetLife nor any investment manager or sub-manager will have 
the right to purchase or otherwise acquire these assets. In addition, 
no surrender or withdrawal fees will be paid to MetLife or to any 
investment manager or sub-manager upon the discontinuance of a MetLife 
Trust GIC.
    20. If a MetLife Trust GIC is discontinued prior to maturity, three 
options will generally be available. The assets of a MetLife Trust GIC 
Account may (a) revert to the Plan sponsor, (b) be converted into a 
MetLife ``benefit responsive, nonparticipating, general account 
conventional GIC (i.e., the MetLife Conventional GIC) or (c) be fully 
liquidated and distributed to the Plan in cash. 14
---------------------------------------------------------------------------

    \14\ MetLife represents that it will not be precluded from 
presenting a Plan sponsor with other options that are deemed to be 
better-suited to the needs of the Plan.
---------------------------------------------------------------------------

    (a) Reversion Option. With respect to this option, management of 
the Account may revert to the Plan sponsor. Under such circumstances, 
the Plan sponsor will receive the MetLife Trust GIC portfolio intact 
with whatever appreciation or depreciation has occurred. In the event 
of a loss, MetLife will not be required to make restitution to the Plan 
sponsor because the sponsor will receive the actual results of 
investment performance. In the event of a gain, MetLife will not be 
permitted to retain the gain and the Plan will benefit from the full 
amount of the gain.
    (b) The MetLife Conventional GIC Option. If a MetLife Trust GIC is 
discontinued at a time when there are losses and other than for cause, 
the Plan sponsor may select the second option by liquidating the 
Account in order to purchase a MetLife Conventional GIC. The MetLife 
Conventional GIC will be identical to a traditional GIC which could be 
purchased by a Plan fiduciary with ``new money'' except that the 
maturity structure and credited rate will reflect the experience of the 
MetLife Trust GIC. The maturity date (or average maturity date, as 
appropriate) of the MetLife Conventional GIC may not exceed the 
duration of the index that has been used to set the MetLife Trust GIC's 
Credited Rate, unless agreed to by the Plan fiduciary. The credited 
rate of the MetLife Conventional GIC will reflect the rate MetLife is 
then offering for GICs with similar average maturity dates, adjusted so 
that any market value loss or gain present in the MetLife Trust GIC 
will be amortized over the period ending with the final maturity date 
of the MetLife Conventional GIC. The credited rate for the MetLife 
Conventional GIC will also be fixed for the entire contractual period 
and it cannot be lower than 0 percent.
    MetLife represents that under this option, Plan participants will 
continue to have full access to their accounts on the basis of the 
guaranteed amount of the MetLife Conventional GIC which they may 
withdraw or transfer, as permitted under the terms of the Plan, at any 
time (including the day following the conversion), and without 
interruption. In practice, this means that even if the Market Value of 
a MetLife Trust GIC Account is less than its Guaranteed Value, the Plan 
fiduciary will have the option to discontinue the MetLife Trust GIC 
without recognizing a loss in value to participant accounts. 
15
---------------------------------------------------------------------------

    \15\ Assuming a Plan sponsor directs participants to withdraw 
their account balances from a MetLife Conventional GIC, MetLife 
reserves the right not to honor withdrawals based upon the 
guaranteed value of the GIC.
---------------------------------------------------------------------------

    Assuming this investment option is selected, MetLife will disclose 
in advance to a Plan fiduciary, and if applicable, to a Plan 
participant, pertinent features regarding the MetLife Conventional GIC 
including a representation to the effect that although a MetLife 
Conventional GIC may guarantee principal, it may have a credited rate 
of 0 percent. 16
---------------------------------------------------------------------------

    \16\ The Department notes that the decision by a Plan fiduciary 
to convert a MetLife Trust GIC into a MetLife Conventional GIC, 
which guarantees principal but provides a below market rate of 
return (e.g., 0 percent), is subject to the provisions of section 
404 of the Act. Accordingly, the Department emphasizes that it 
expects the Plan fiduciary to evaluate fully the terms of this 
investment option before electing a MetLife Conventional GIC.
---------------------------------------------------------------------------

    (c) Cash Distribution Option. Under this option, the Plan sponsor 
may agree to a cash distribution whereby the Plan will receive the full 
Market Value of the Account including any appreciation or losses that 
have occurred.
    21. In summary, it is represented that the transactions have 
satisfied or will satisfy the statutory criteria for an exemption under 
section 408(a) of the Act because:
    (a) The decision to enter into a MetLife Trust GIC has been made 
and will be made on behalf of a participating Plan in writing by a 
fiduciary of such Plan who is independent of MetLife.
    (b) Each Plan investing in a MetLife Trust GIC has and will have 
assets that are in excess of $25 million.
    (c) Prior to and subsequent to the execution of the MetLife Trust 
GIC, the Plan fiduciary, and if applicable, Plan participants, have 
received and will receive written disclosures of all material features 
concerning the MetLife Trust GIC, including a description of all 
applicable fees and charges, as well as ongoing disclosures with 
respect to such investment.
    (d) As to each Plan, the combined total of all fees and charges 
imposed under a MetLife Trust GIC has not and will not be in excess of 
``reasonable compensation'' within the meaning of section 408(b)(2) of 
the Act.
    (e) Each MetLife Trust GIC has provided and will specifically 
provide an objective method for determining the fair market value of 
the securities owned by the Plan pursuant to such GIC.
    (f) MetLife has maintained and will maintain for a period of six 
years from the date of each MetLife Trust GIC

[[Page 54478]]

transaction, books and records of such transactions that will be 
audited annually by independent, certified public accountants.

Notice to Interested Persons

    Notice of the proposed exemption will be given to interested 
persons within 60 days of the date of publication of the notice of 
pendency in the Federal Register. Such notice will be mailed by MetLife 
to Plan fiduciaries that have already entered into MetLife Trust GIC 
arrangements. The notice will include (a) a copy of the proposed 
exemption, as published in the Federal Register, which will be given to 
the Plan fiduciaries, (b) the text of the operative portion of the 
proposed exemption, which will be distributed by Plan fiduciaries to 
Plan participants in Section 404(c) Plans, and (c) a supplemental 
statement, as required pursuant to 29 CFR 2570.43(b)(2). The 
supplemental statement will inform interested persons of their right to 
comment on and/or to request a hearing with respect to the pending 
exemption. Comments and hearing requests regarding the proposed 
exemption will be due 90 days from the publication of the notice of 
proposed exemption in the Federal Register.

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

Valley Forge Consulting Corporation, Profit Sharing Trust (the 
Plan), Located in King of Prussia, PA

[Application No. D-10466]

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 proposed sale of a first mortgage note 
(the Note) by the individually-directed account (the Account) in the 
Plan of Steven R. Eyer to Mr. Eyer, provided--
    (a) The terms of the transaction are at least as favorable to the 
Account as those obtainable in an arm's length transaction with an 
unrelated party.
    (b) The Account is not required to pay any fees, commissions or 
other expenses in connection with the sale.
    (c) The sale of the Note represents a one-time transaction for 
cash.
    (d) The fair market value of the Note is determined by a qualified, 
independent appraiser.
    (e) As consideration for the Note, the Account receives an amount 
that is no less than the fair market value of the Note as of the date 
of the sale.

Summary of Facts and Representations

    1. The Plan is a defined contribution plan sponsored by Valley 
Forge Consulting Corporation, a pension design and administration firm 
maintaining its principal place of business in King of Prussia, 
Pennsylvania. The Plan provides for participant-directed investments. 
As of May 16, 1997, the Plan had 19 participants, one of whom included 
Mr. Eyer who serves as a Plan trustee. The other trustees of the Plan 
are Jack C. Holland, W. Gerald Murphy and Leonard A. Mayo. As of 
February 28, 1996, the Plan had net income of $743,918. Also on that 
date, Mr. Eyer had $514,027 in his individual Account in the Plan.
    2. Mr. Eyer requests an administrative exemption from the 
Department in order to purchase a defaulted mortgage note (the Note) 
from his Account in the Plan. The Note, dated August 3, 1990, is a 
first mortgage note that was executed between the Account, as lender, 
and Willie Torres, an unrelated party, as the borrower. The Note is 
secured by a parcel of improved real property located at 629-631-633 W. 
Girard Avenue and 1213 N. Seventh Street, Philadelphia, Pennsylvania 
(the Property). The Note was in the original principal amount of 
$22,000 and carried interest at the rate of 14\1/2\ percent per annum. 
The Note required 60 monthly payments of principal and interest in the 
amount of $269. It was amortized on the basis of a 30 year amortization 
schedule and matured on August 2, 1995. The Note required a balloon 
payment at maturity.
    3. From August 1990 until July 1995, Mr. Eyer's Account received 59 
monthly payments under the Note totalling $15,895 and it paid $211 in 
connection with the Note's administration. Because Mr. Torres made no 
further payments after July 1995, the Note was considered to be in 
default. At the time of the default, the Note had an outstanding 
principal balance of $21,695. Moreover, at the time of the default, 
there was a second mortgage on the Property in the principal amount of 
$38,150 which had been provided by Milton and Sandra Klein, the 
original owners of the Property as well as unrelated parties, to Mr. 
Torres. The second mortgage note had been executed contemporaneously 
with the Note.
    4. Currently, the Property consists of an abandoned shell having 
multiple apartments. There is no glass in the windows and water damage 
has been extensive. In addition, Mr. Torres has filed for bankruptcy 
and is unable to make payments under the Note. Although foreclosure on 
the Property has been considered as a way of recouping the Account's 
investment in the Note, Mr. Eyer does not believe the potential value 
of the Property will cover over $15,000 in back taxes, $2,000 in back 
utilities and the second mortgage. Therefore, Mr. Eyer proposes to 
purchase the Note from his Account in order that the sale proceeds may 
be invested by his Account in performing assets.
    5. The Note has been appraised by Vincent DiPentino, a licensed 
real estate salesman and broker. Mr. DiPentino is affiliated with the 
real estate firm of Century 21-DiPentino Associates, which is located 
in Philadelphia, Pennsylvania.
    Mr. DiPentino represents that he has been in the real estate 
business in the Philadelphia area since 1978 and states that he has 
bought and sold properties both as principal and agent in the vicinity 
of the Property. Mr. DiPentino also states that he is independent of 
the parties involved in the proposed sale.
    In an appraisal report dated June 23, 1997, Mr. DiPentino has 
determined the fair market value of the Note by first examining the 
fair market value of the underlying Property. In this regard, he notes 
that the Property is located in a distressed section of Philadelphia 
and has incurred substantial deterioration. Based on sales of 
comparable rental properties, he concludes that the fair market value 
of the Property is approximately $35,000 as of June 23, 1997. However, 
from this base value, Mr. DiPentino notes that the following costs must 
be deducted: (a) $3,000 in selling costs, (b) $16,000 in outstanding 
taxes, and (c) $2,000 in outstanding water and sewer bills. In 
addition, because the Note is in default, Mr. DiPentino states that it 
will be necessary to foreclose on the Property, an action that will 
result in additional costs of approximately $3,000. Thus, considering 
the foregoing factors as well as conversations with other parties 
potentially interested in purchasing the Note, Mr. DiPentino has placed 
the maximum fair market value of the Note at $10,000 as of June 23, 
1997.
    6. Mr. Eyer proposes to purchase the Note from his Account for 
$10,000, which represents the fair market value of the Note as 
determined by Mr.

[[Page 54479]]

DiPentino.17 Mr. Eyer will not pay his Account accrued 
interest with respect to the Note inasmuch as all such interest had 
been paid through the date of default. The Account will not incur any 
sales commissions, fees or other expenses in connection with the 
proposed sale. All transactional costs will be borne entirely by Mr. 
Eyer.
---------------------------------------------------------------------------

    \17\ It should be noted that the $11,695 ``loss'' or 
differential between the outstanding principal balance of the Note 
($21,695) and its independently appraised value ($10,000) will only 
affect Mr. Eyer's Account in the Plan rather than the accounts of 
the other Plan participants.
---------------------------------------------------------------------------

    7. In summary, it is represented that the proposed transaction will 
satisfy the statutory criteria for an exemption under section 408(a) of 
the Act because:
    (a) The terms of the transaction will be at least as favorable to 
the Account as those obtainable in an arm's length transaction with an 
unrelated party.
    (b) The Account will not be required to pay any fees, commissions 
or other expenses in connection with the sale.
    (c) The sale of the Note will represent a one-time transaction for 
cash.
    (d) The fair market value of the Note has been determined by a 
qualified, independent appraiser.
    (e) As consideration for the Note, the Account will receive an 
amount that is no less than the fair market value of the Note as of the 
date of the sale.

Notice to Interested Persons

    Because Mr. Eyer is the only participant in the Plan whose Account 
in the Plan will be affected by the proposed transaction, the 
Department has determined that there is no need to distribute the 
notice of proposed exemption to interested persons. However, comments 
and requests for a hearing must be received by the Department within 30 
days of the publication of this notice of proposed exemption in the 
Federal Register.

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

Robert A. Doneff Custodial IRA (the IRA) Located in Manitowoc, WI

[Application No. D-10480]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
August 10, 1990). If the exemption is granted, the sanctions resulting 
from the application of section 4975 of the Code, by reason of section 
4975(c)(1) (A) through (E) of the Code, shall not apply to the proposed 
cash sale (the Sale) of a certain parcel of real property (the 
Property) by the IRA 18 to Robert A. Doneff (Mr. Doneff), a 
disqualified person with respect to the IRA, provided that the 
following conditions are met:
---------------------------------------------------------------------------

    \18\  Because Mr. Doneff is the only participant in the IRA, 
there is no jurisdiction under 29 CFR Sec. 2510.3-3(b). However, 
there is jurisdiction under Title II of the Act pursuant to section 
4975 of the Code.
---------------------------------------------------------------------------

    (a) The Sale is a one-time transaction for cash;
    (b) The terms and conditions of the Sale are at least as favorable 
to the IRA as those obtainable in an arm's length transaction with an 
unrelated party;
    (c) the IRA receives the fair market value of the Property, as 
established at the time of the Sale by a qualified, independent 
appraiser; and
    (d) the IRA is not required to pay any commissions, costs, or other 
expenses in connection with the Sale.

Summary of Facts and Representations

    1. The IRA is an individual retirement account, as described under 
section 408(a) of the Code. The IRA was established by Mr. Doneff, the 
sole participant and beneficiary. As of June 1997, the IRA held assets 
valued at approximately $179,500. The trustee of the IRA is the First 
National Bank of Manitowoc.
    2. The Property consists of a single parcel located north of 
Manitowoc, Wisconsin. It consists of approximately 71.5 acres of level 
to gently rolling land zoned for agricultural use and surrounded by 
other properties utilized for agricultural purposes. Although the 
zoning also permits building of single family residences with a minimum 
of five (5) acre lots and 330 feet of road frontage, the Property is 
presently used to grow crops. Mr. Doneff represents that he does not 
own any land adjacent to the Property and that the Property has not 
been leased or used by any disqualified persons.
    3. According to the applicant, the IRA originally acquired the 
Property as a real estate investment. The IRA purchased the Property in 
1993 from an unrelated third party in a cash transaction for $74,000. 
Since acquiring the Property, the IRA has rented it for agricultural 
usage at a rate of $45 per acre per year and has generated a net income 
of $6,095.43.
    4. Lyle J. Hartman (Mr. Hartman), an accredited appraiser with Lyle 
Hartman, Appraisals, located in Manitowoc, WI, originally appraised the 
Property on March 22, 1997, and updated his appraisal on September 9, 
1997. After inspecting the Property, Mr. Hartman determined that a fee 
simple interest in the Property is worth $171,600.
    In his appraisal, Mr. Hartman relied primarily on the market 
approach. This method of appraisal involves an analysis of similar 
recently sold properties in the area in question, so as to derive the 
most probable sales price of the Property. Mr. Hartman determined the 
present highest and best use for the Property to be agricultural. 
However, due to the proximity of the Property to the City of Manitowoc, 
Mr. Hartman also considered the potential of the Property as a rural 
building site or, in case of its annexation by the City of Manitowoc, a 
residential building site.
    Mr. Hartman states that he is a full time qualified, independent 
appraiser, as demonstrated by his status as a Senior Member of the 
National Association of Real Estate Appraisers. He has over 20 years 
experience and is familiar with the market changes and current market 
conditions pertaining to real estate in Manitowoc County, Wisconsin. In 
addition, Mr. Hartman represents that both he and his firm are 
independent of Mr. Doneff and that he possesses no present or future 
interest in the Property.
    5. The applicant requests an exemption for the proposed sale of the 
Property by the IRA to Mr. Doneff. As noted above, the IRA would 
receive cash for the Property in an amount equal to the fair market 
value of such Property, as determined by a qualified, independent 
appraiser at the time of the Sale.
    The applicant represents that the proposed transaction would be 
administratively feasible in that it would be a one-time transaction 
for cash. Furthermore, the applicant states that the transaction would 
be in the best interests of the IRA because it would allow the IRA to 
dispose of the Property, thus enabling the IRA to diversify the 
investments and facilitate distributions from the IRA when appropriate. 
Finally, the applicant asserts that the transaction will be protective 
of the rights of the participant and beneficiary as indicated by the 
fact that the IRA will receive the fair market value of the Property, 
as determined by a qualified, independent appraiser on the date of sale 
and will incur no commissions, costs, or other expenses as a result of 
the Sale.
    6. In summary, the applicant represents that the proposed 
transaction satisfies the statutory criteria of section 4975(c)(2) of 
the Code because: (a) The terms and conditions of the Sale would be at 
least as favorable to the IRA as those obtainable in an arm's length

[[Page 54480]]

transaction with an unrelated third party; (b) the Sale would be a one-
time cash transaction allowing the IRA to diversify its investments and 
facilitate the making of distributions from the IRA when appropriate; 
(c) the IRA would receive the fair market value of the Property, 
established by a qualified, independent appraiser as of the date of 
sale; (d) the IRA would not be required to pay any commissions, costs, 
or other expenses in connection with the Sale; and (e) Mr. Doneff has 
determined that the proposed Sale of the Property would be feasible, in 
the best interests of the IRA, and protective of the participant and 
beneficiary.

Notice to Interested Persons

    Because Mr. Doneff is the only participant in the IRA, it has been 
determined that there is no need to distribute the notice of proposed 
exemption (the Notice) to interested persons. Comments and requests for 
a hearing are due thirty (30) days after publication of the Notice in 
the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. James Scott Frazier, 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 that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 15th day of October, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 97-27701 Filed 10-17-97; 8:45 am]
BILLING CODE 4510-29-P