[Federal Register Volume 63, Number 61 (Tuesday, March 31, 1998)]
[Notices]
[Pages 15443-15464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8197]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. L-09583, et al.]


Proposed Exemptions; U S West, Inc.

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, on or before May 15, 1998. 
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 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.

U S WEST, Inc. Located in Englewood, Colorado

[Application No. L-09583]

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).
Section I--Transactions Involving Contributions In-Kind
    If the exemption is granted, effective March 31, 1994, the 
restrictions of sections 406(a)(1)(E), 407(a)(2), 406(b)(1), and 
406(b)(2) of the Act shall not apply to voluntary contributions in-kind 
by U S WEST, Inc. and/or its affiliates (U S WEST) of certain shares of 
publicly traded common stock of U S WEST (the Stock) and/or any 
replacement publicly traded shares of such Stock to certain trusts (the 
Trusts or Trust) for the purpose of pre-funding post-retirement welfare 
benefits under one or more employee welfare benefit plans (the Plan or 
Plans) maintained by U S WEST, provided that:
    (a) the Plan provisions explicitly authorize U S WEST to pre-fund 
benefits through in-kind contributions of Stock, and all contributions 
of Stock have been and will be made in conformity with such Plan 
provisions;
    (b) neither the Plans nor the Trusts have paid nor will pay, 
whether in cash or in other property or in a diminution

[[Page 15444]]

of any funding obligation of U S WEST, any consideration for Stock 
contributed in-kind by U S WEST;
    (c) U S WEST has no obligation to pre-fund welfare benefits 
provided to participants under any of the Plans, either pursuant to the 
plan documents, the terms of any collective bargaining agreement, or 
the provisions of the Act;
    (d) none of the Plans have ceded, nor will cede, any right to 
receive cash contributions from U S WEST;
    (e) none of the Plans or Trusts have paid, nor will pay, any 
commissions in connection with the contribution in-kind of Stock by U S 
WEST; and
    (f) each of the conditions, as set forth below in Section III, have 
been satisfied and at all times will be satisfied.
Section II--Transactions Involving Purchases of Stock in Connection 
With Rebalancing of a Trust's Holding of Stock
    If the exemption is granted, the restrictions of sections 
406(a)(1)(E), 407(a)(2), 406(b)(1), and 406(b)(2) of the Act shall not 
apply to purchases of classes of Stock by any of the Trusts with all or 
part of (but no more than) the cash proceeds from prior sales of such 
Stock; provided that:
    (a) all such purchases of Stock will occur in connection with 
rebalancing of a Trust's holding of Stock as part of the active 
management of such Stock by an independent, qualified fiduciary
(the I/F);
    (b) all sales and subsequent purchases of Stock in connection with 
rebalancing of a Trust's holding of Stock will occur in ``blind'' 
transactions with unrelated third parties on the open market at the 
fair market value of such Stock on the date of such transactions, or 
where appropriate to minimize any adverse market impact on the value of 
the Stock remaining in such Trust, in private transactions with persons 
who are not ``parties in interest,'' as defined in section 3(14) of the 
Act, at the fair market value of such Stock on the date of such 
transactions; and
    (c) each of the conditions, as set forth in Section III, below, at 
all times will be satisfied.
Section III--Conditions
    The exemption is conditioned upon the adherence by U S WEST to the 
material facts and representations described in this notice of proposed 
exemption (the Notice) and upon satisfaction of the following 
requirements:
    (a) all Stock contributed in-kind by U S WEST to any of the Trusts 
or acquired by such Trusts, as a result of the recapitalization of U S 
WEST constituted qualifying employer securities (QES), as defined in 
section 407(d)(5) of the Act; and all Stock contributed in-kind in the 
future, any replacement publicly traded shares of such Stock, or any 
Stock acquired as a result of purchases in connection with rebalancing 
of a Trust's holding of Stock will constitute QES;
    (b) stock contributed in-kind by U S WEST or acquired, as a result 
of the recapitalization of U S WEST have been held in Trusts, which are 
qualified under section 501(c)(9) of the Code, and which are 
established for the purpose of funding life, sickness, accident, and 
other welfare benefits for the participants and beneficiaries of the 
Plans, and all stock contributed in-kind in the future, any replacement 
publicly traded shares of such Stock, or any Stock acquired as a result 
of purchases in connection with rebalancing will be held in such 
Trusts;
    (c) all Stock contributed in-kind by U S WEST to any Trust or 
acquired by any Trust as a result of the recapitalization of U S WEST 
has been held in a separate account (the Account or Accounts) under 
such Trust, and all Stock contributed in-kind in the future, any 
replacement publicly traded shares of such Stock, or any Stock acquired 
as a result of purchases in connection with rebalancing of the holding 
of Stock by a Trust will be held in an Account under such Trust. Such 
Accounts under a Trust have been and will be managed by an I/F, who is 
an independent, qualified investment manager, or any successor 
independent, qualified investment manager, and who has represented and 
will represent the interests of the Plans which are funded by such 
Trusts for all purposes with respect to the Stock for the duration of 
the Trust's holding of any of such Stock;
    (d) the I/F of the Accounts in the Trusts which fund any welfare 
plan benefits, has accepted Stock from U S WEST through in-kind 
contributions and recapitalization of U S WEST, and will accept Stock 
through future in-kind contributions, through any replacement publicly 
traded shares of such Stock, or through purchases of Stock in 
connection with rebalancing of a Trust's holding of Stock, only after 
such I/F determines at the time of the transactions that such 
transactions are feasible, in the interest of, and protective of 
participants and beneficiaries of the Plans funded by such Trusts;
    (e) the I/F has had sole responsibility and, at all times will have 
sole responsibility for the ongoing management of the Accounts under 
the Trusts which hold the Stock and has taken and will take whatever 
action is necessary to protect the rights of the Plans funded by such 
Trusts, including but not limited to all decisions regarding the 
acceptance of contributions in-kind by U S WEST, the sale or retention 
of such Stock, the exercise of voting rights of such Stock, any 
purchases of such Stock in connection with rebalancing of a Trust's 
holding of Stock, and any other acquisition or dispositions of such 
Stock;
    (f) any contributions in-kind of Stock made by U S WEST to any 
Trust, any acquisitions of Stock in connection with the 
recapitalization of U S WEST, did not cause immediately after each such 
transaction, and in the future any contributions in-kind of Stock, any 
replacement publicly traded shares of such Stock, or any Stock 
purchases in connection with rebalancing of a Trust's holding of Stock 
will not cause immediately after each such transaction the aggregate 
fair market value of such Stock, plus the fair market value of all 
qualifying employer real property (QERP), as defined by section 
407(d)(4) of the Act, and the fair market value of all other QES held 
by such Trust to exceed 25 percent (25%) of the fair market value of 
the assets of such Trust as determined on the date of each such 
transaction;
    (g) the percentage limitations, as set forth above in paragraph (f) 
of this Section III, have been and will be applied without regard to 
amounts of securities issued by U S WEST that may be held by an 
unrelated common or collective trust fund maintained by an independent 
manager in which any of the Plans through the Trusts may have invested 
or may invest, provided that the fair market value of the securities 
issued by U S WEST and held in such unrelated common or collective 
trust fund does not exceed 5 percent (5%) of the fair market value of 
each such common or collective trust fund; and provided further that 
the conditions of Prohibited Transaction Class Exemption 91-38 (PTCE 
91-38) 1 are satisfied, including the requirement that the 
interests of the Plans in such unrelated common or collective trust 
fund does not exceed 10 percent (10%) of the total of all assets in 
such common or collective trust fund;
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    \1\ The Notice of Proposed Exemption for exemption application 
number D-8414 was published at 56 FR 4856 on February 6, 1991. PTCE 
91-38 was granted at 56 FR 31966 on July 12, 1991.
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    (h) nothing in the conditions, as set forth above in paragraph (f) 
of this Section III, shall preclude, the holding by any Trust of Stock, 
any other QES

[[Page 15445]]

and QERP, in amounts in excess of 25 percent (25%) of the assets of 
such Trust, if the aggregate fair market value of such Stock, other QES 
and QERP exceeds 25 percent (25%) of the value of the assets of such 
Trust solely by reason of:
    (1) a greater rate of appreciation to the value of such Stock, 
other QES and QERP relative to the rate of appreciation to the value of 
the assets in such Trust, other than the Stock, other QES and QERP; or
    (2) a greater decline in the value of the other assets of the Trust 
relative to that of such Stock, other QES and QERP;
    (i) none of the assets of any of the Trusts have reverted, nor at 
any time will any of the assets of such Trusts revert to the use or 
benefit of U S WEST.

Summary of Facts and Representations

    1. U S WEST is a diversified, global telecommunications company 
with offices located in Englewood Colorado. As of December 31, 1995, it 
is represented that U S WEST had assets of approximately $25.2 billion, 
and annual revenues of nearly $10.7 billion. The domestic and 
international business activities of U S WEST are focused primarily in 
communications, data solutions, marketing services, and financial 
services. In this regard, a subsidiary of U S WEST provides 
communications and data services to more than twenty-five million 
residential and business customers in fourteen (14) western and mid-
western states. Other subsidiaries are engaged in marketing activities, 
directory publishing, direct-mail listings, cellular mobile 
communications, paging, cable television, and financial services.
    2. It is represented that the proposed exemption would affect a 
number of employee benefit plans sponsored by U S WEST providing 
current and post-retirement welfare benefits, including life insurance 
and health insurance, to employees and retirees of U S WEST. 
2 It is represented that the manner in which welfare 
benefits are provided to U S WEST's current and former employees is 
subject to periodic restructuring. Thus, the particular Plans affected 
by this exemption may be amended or terminated from time to time and 
new Plans may be added. Although U S WEST has reserved the right to 
amend, modify, or terminate any of the Plans, U S WEST has represented 
that it intends to provide benefits to employees and retirees under the 
Plans indefinitely.
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    \2\ As of November 15, 1993, the list of the Plans sponsored by 
U S West included: (a) U S WEST Group Life Insurance Plan; (b) U S 
WEST Retiree Health Care Medical Plan 1; (c) U S WEST Disability 
Benefit Plan; (d) U S WEST Retiree Health Care Medical Plan 2; (e) U 
S WEST Retiree Health Care Medical Plan 3; (f) U S WEST Retiree 
Health Care Medical Plan; (g) U S WEST Retiree Health Care Dental 
Plan 1; (h) U S WEST Retiree Health Care Dental Plan 2; (i) U S WEST 
Retiree Health Care Dental Plan 3; (j) U S WEST Retiree Health Care 
Dental Plan 4; (k) U S WEST Retiree Health Care Dental Plan 5; (l) U 
S WEST Business Travel Accident Plan No. 532; (m) U S WEST Business 
Travel Accident Plan No. 533; (n) U S WEST Health Care Plan; (o) U S 
WEST Enterprises, Inc, Sickness and Accident Disability Benefit Plan 
for Non-Salaried Employees. It is represented that the health plans 
sponsored by U S WEST were merged in December 1993, into a single 
plan, the U S WEST Health Care Plan, Plan Number 537 (the Health 
Plan).
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    It is represented that U S WEST serves as the plan administrator 
for each of the Plans. In this regard, the Board of Directors of U S 
WEST has delegated the administrative responsibilities of U S WEST to 
the U S WEST Employees' Benefit Committee, which has authority to 
establish and administer the Plans.
    None of the Plans or applicable collective bargaining agreements 
require U S WEST to pre-fund the benefits provided by the Plans, nor 
does the Act require that the Plans be funded. However, effective on 
January 1, 1994, amendments to the Plans authorized U S WEST to pre-
fund benefits with contributions, including contributions of QES, to 
one or more trusts that may be established by U S WEST for the benefit 
of the Plans. In this regard, U S WEST established the following Trusts 
to pre-fund a portion of the welfare benefits under the Plans: (1) the 
U S WEST Benefit Assurance Trust (the Assurance Trust); (2) U S WEST 
Management Benefit Assurance Trust (the Management Trust); and (3) U S 
WEST Life Insurance and Welfare Trust (the Life Insurance Trust).
    It is represented that these three Trusts are voluntary employees' 
beneficiary associations which are tax-qualified under section 
501(c)(9) of the Code. The trust agreement for each of these Trusts 
provides that such Trust will be administered by U S WEST. U S WEST 
also has sole responsibility for the investment or reinvestment of the 
assets of the Trusts, and authority to appoint one or more investment 
managers to manage any part of the assets of each of the Trusts. The 
Board of Directors of U S WEST has appointed a Trust Investment 
Committee to exercise general oversight of the Trusts.
    It is represented that no assets of any of the Trusts may be used 
except for the exclusive purpose of providing life, sickness, accident, 
and other covered benefits to U S WEST employees, retirees, and their 
dependents and beneficiaries and for reasonable expenses. It is 
represented that the trust agreements for all of these Trusts 
specifically prohibit U S WEST from obtaining any reversion of the 
assets of the Trusts.
    As of December 31, 1992, the Assurance Trust has funded post-
retirement medical and dental benefits for approximately 62,300 
employees and retirees of U S WEST covered by collective bargaining 
agreements under various Plans providing medical and dental benefits to 
employees and retirees of U S WEST. As of the same date, the Management 
Trust has funded post-retirement medical and dental benefits to 
approximately 37,700 employees and retirees of U S WEST not covered by 
collective bargaining agreements under various medical and dental 
benefits plans for all employees and retirees of U S WEST. As of 
November 15, 1993, the Life Insurance Trust has funded life insurance 
benefits for approximately 100,000 current and former employees of U S 
WEST. It was further represented that the total number of participants 
covered by these three Trusts, as of December 12, 1996, had not changed 
materially since the application for exemption was filed.
    As of November 30, 1996, the Assurance Trust and the Management 
Trust, respectively, held assets with a fair market value of 
approximately $1.4 billion and $200 million. As of November 30, 1996, 
the Life Insurance Trust held total assets with a fair market value of 
approximately $529 million. It is represented that none of the assets 
of any of these Trusts are invested in any leases or loans to U S WEST. 
However, a small percentage of the assets of each of these Trusts is 
invested either directly or through certain index funds in securities 
of U S WEST which are represented to constitute QES. U S WEST maintains 
that the acquisition and holding of such securities by these Trusts is 
permitted by section 407(a) of the Act and the statutory exemption 
provided under section 408(e) of the Act.3
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    \3\ The Department expresses no opinion as to whether the 
securities of U S WEST held by these three Trusts are qualifying 
employer securities, as defined by section 407(d)(5) of the Act, 
whether the acquisition or holding of such securities was permitted 
by 407(a), or whether acquisition or holding was covered by the 
statutory exemption provided by section 408(e) of the Act. Further, 
the Department, herein, is offering no relief for transactions other 
than those proposed.
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    3. It is represented that the competitive environment in the 
telecommunications industry has reduced the cash available to U S WEST 
for discretionary expenditures. Accordingly, U S WEST does not 
anticipate at any time in the foreseeable

[[Page 15446]]

future pre-funding welfare benefits by making substantial cash 
contributions to its Plans. Instead, U S WEST has made in the past and 
proposes in the future to make in-kind contributions to the Trusts of 
shares of stock issued by U S WEST. U S WEST believes that such in-kind 
contributions offer a practical means of pre-funding the welfare 
benefits under the Plans.
    4. It is represented that on March 31, 1994, U S WEST contributed 
in-kind approximately 4.6 million shares of the Stock to the Assurance 
Trust that funds part of the benefits provided under the Health Plan. 
It is represented that, as of the date of the contribution, such shares 
have been held in an Account under the Assurance Trust. It is 
represented that at the time of the in-kind contribution the Stock was 
valued on a per share basis at $39.875 and that the aggregate fair 
market value for such shares totaled $183,425,000. It is further 
represented that immediately after such in-kind contribution the 
aggregate fair market value of such shares constituted 23.71% of the 
assets of the Health Plan.4
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    \4\ The applicant has represented that the assets of the 
Assurance Trust have been reported as assets of the Health Plan and 
that such assets have been held solely for the purpose of pre-
funding post-retirement health benefits under the Health Plan. For 
this reason, the representation that the fair market value of the 
Stock contributed in-kind by U S WEST did not comprise more than 25 
percent (25%) of the assets of the Health Plan immediately following 
each contribution is essentially correct. However, in light of the 
fact that the assets of the Assurance Trust could be used to fund 
benefits for any welfare plan established by U S WEST under a 
collective bargaining agreement, the Department has determined for 
the purpose of this exemption to apply the 25 percent limitation on 
the trust level, rather than to a particular welfare plan.
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    Subsequently, on or before March 31, 1995, U S WEST made a second 
contribution in-kind (the Second Contribution) to the Assurance Trust 
of approximately 1.5 million shares of the Stock. It is represented 
that at the time of the Second Contribution the Stock was valued on a 
per share basis at $40.50 and that the aggregate fair market value of 
the shares contributed totaled $60,750,000. It is further represented 
that both contributions in-kind by U S WEST totaled 6.1 million shares 
with an aggregate value of $244,175,000. It is represented that these 
shares also have been in an Account under the Assurance Trust. It is 
further represented that, immediately following the Second Contribution 
in-kind, no more than 22.8 percent (22.8%) of the aggregate fair market 
value of the assets of the Assurance Trust were invested in employer 
securities of any kind. It is further represented that other than the 
two in-kind contributions to the Assurance Trust described above, U S 
WEST has made no additional contributions of Stock or other non-cash 
assets to the Assurance Trust or to any other trust. As of November 30, 
1996, it is represented that the Stock comprised approximately 19.5 
percent (19.5%) of the total assets of the Assurance Trust. It is 
further represented that, as of March 9, 1998, the Assurance Trust no 
longer holds any of the Stock contributed by U S WEST.
    The Stock, at the time of each in-kind contribution and at all 
times thereafter, has been widely held and publicly traded on the New 
York Stock Exchange (NYSE) and on other major exchanges throughout the 
world. It is further represented that such Stock, at the time of each 
in-kind contribution and at all times thereafter, has been an 
``employer security,'' as defined by section 407(d)(1) of the 
Act,5 which has satisfied each of the requirements for a 
``qualifying employer security,'' as defined by section 407(d)(5) of 
the Act,6 and also has satisfied the requirements of section 
407(f)(1) of the Act.7 It is represented that approximately 
89 percent (89%) of such Stock has been and is held by persons who are 
independent of U S WEST.
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    \5\ Pursuant to section 407(d)(1) of the Act, an employer 
security means a security issued by an employer of employees covered 
by the plan, or by an affiliate of such employer.
    \6\ Section 407(d)(5) of the Act provides that the term 
qualifying employer security means an employer security which is 
stock or a marketable obligation (as defined in subsection (e)). 
After December 17, 1987, in the case of a plan other than an 
eligible individual account plan, stock shall be considered a 
qualifying employer security only if such stock satisfies the 
requirements of subsection 407(f)(1).
    \7\ Pursuant to section 407(f)(1) of the Act, stock satisfies 
such requirements if, immediately following the acquisition of such 
stock--(A) no more than 25 percent of the aggregate amount of stock 
of the same class issued and outstanding at the time of acquisition 
is held by the plan, and (B) at least 50 percent of the aggregate 
amount referred to in subparagraph (A) is held by persons 
independent of the issuer.
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    5. Subsequent to the in-kind contributions made by U S WEST in 
March of 1994 and 1995, U S WEST shareholders voted on October 31, 
1995, in favor of a proposal to create two classes of U S WEST 
securities. Accordingly, effective November 1, 1995, each share of 
Stock that had been contributed to the Assurance Trust was replaced 
with two shares which are targeted to specific areas of U S WEST's 
business (the Targeted Shares). The Targeted Shares are designated: (1) 
``C'' shares (NYSE symbol USW); and (2) ``M'' shares (NYSE symbol UMG). 
Specifically, the ``C'' shares represent an interest in U S WEST 
Communications Group and reflect the business of U S WEST, primarily in 
its present 14-state region, involving integrated communications, 
entertainment, information, and transaction services. The ``M'' shares 
represent an interest in U S WEST Media Group and reflect U S WEST 
businesses involving cable, wireless, directory, interactive, and 
international services. The ``M'' shares are not expected to pay 
dividends, but are anticipated to be growth securities that will be 
attractive to investors seeking capital appreciation.
    6. As described above, U S WEST on two occasions in the past has 
made voluntary contributions in-kind of Stock to the Assurance Trust 
the value of which did not exceed 25 percent (25%) of the assets of the 
Assurance Trust at the time of such contributions. Subsequently, 
pursuant to the recapitalization of U S WEST, the Assurance Trust 
acquired ``C'' shares and the ``M'' shares in exchange for Stock 
previously contributed in-kind by U S WEST. Further, subject to the 
conditions set forth in this exemption, U S WEST anticipates in the 
future making additional in-kind contributions to any of the Trusts of 
Stock which will be held in Accounts under such Trusts.
    With regard to any past and future in-kind contribution of Stock by 
U S WEST to the Trusts, it is represented that the I/F has and will be 
responsible for actively managing of any such Stock. In this regard, it 
is anticipated that from time to time a Trust may wish to rebalance its 
holding of Stock. Such ``rebalancing,'' would entail a Trust selling 
all or a portion of the ``C'' shares and/or the ``M'' shares in its 
portfolio to unrelated third parties in ``blind'' transactions on the 
open market at the fair market value of such Stock on the date of such 
sale. In the alternative, where appropriate to minimize any adverse 
market impact on the value of the Stock remaining in a Trust, such 
Trust may sell such Stock in private transactions with persons who are 
not ``parties in interest'' at the fair market value of such Stock on 
the date of such transactions. Thereafter, an I/F with all or part of 
(but no more than) the cash proceeds from such prior sales of Stock, 
may purchase ``C'' shares and/or ``M'' shares at fair market value in 
subsequent ``blind'' transactions on the open market or in subsequent 
private transactions with persons who are not ``parties in interest'' 
at the fair market value of such Stock on the date of such 
transactions.
    In the opinion of U S WEST each of the two prior in-kind 
contribution of Stock to the Assurance Trust may have resulted or any 
future contribution in-kind of Stock to any of the Trusts may result in 
an acquisition of QES where

[[Page 15447]]

immediately after such acquisition, the aggregate fair market value of 
the Stock, any other QES or QERP held by such Trust, exceeds 10 percent 
(10%) of the fair market value of the assets of such Trust. In order 
for U S WEST and the I/F to engage in contributions in-kind of Stock to 
the extent that such transactions have caused or will cause an 
acquisition of QES in the form of Stock the value of which exceeds the 
10 percent (10%) limitation, as set forth under section 407(a)(2) of 
the Act, U S WEST has requested exemptive relief from the provisions of 
section 406(a)(1)(E) and 407(a)(2) of the Act. Because immediately 
after the first in-kind contribution of Stock to the Assurance Trust on 
March 31, 1994, the fair market value of such Stock constituted more 
than 10 percent (10%) of the assets of the Assurance Trust, U S WEST 
has requested retroactive exemptive relief, effective as of March 31, 
1994. In addition, to the extent the 10 percent (10%) limit was 
exceeded as a result of: (1) The recapitalization of U S WEST; and/or 
(2) the Second Contribution of Stock to the Assurance Trust, U S WEST 
has also requested relief. Further, to the extent the 10 percent (10%) 
limit will be exceeded, U S WEST has requested relief: (1) for any 
future contributions of Stock to any Trust, any replacement publicly 
traded shares; and (2) for any purchases of Stock in connection with 
rebalancing of such Trust's holding of ``C'' shares and ``M'' shares.
    In addition, in the opinion of U S WEST the contributions of QES in 
the form of Stock to any of the Trusts may be prohibited by section 
406(b). Specifically, U S WEST, as the sponsoring employer of Plans, is 
a fiduciary to such Plans, pursuant to section 3(21) of the Act. 
Section 406(b)(1) of the Act prohibits a plan fiduciary from dealing 
with the assets of a plan in his own interest or for his own account. 
Section 406(b)(2) of the Act prohibits a plan fiduciary from acting in 
a transaction involving a plan on behalf of a party whose interests may 
be adverse to the interests of such plan, including such plan 
fiduciary's own interests. Thus, in the view of U S WEST, any 
transaction between it and any of the Plans may be deemed to involve 
self-dealing or a conflict of interest prohibited by section 406(b)(1) 
and 406(b)(2) for which relief has been requested.
    7. With regard to the past two contributions in-kind, U S WEST 
represents that the aggregate fair market value of all Stock 
contributed by U S WEST to the Assurance Trust, or acquired as a result 
of the recapitalization of U S WEST, plus the fair market value of all 
Stock, other QES and QERP held by the Assurance Trust did not exceed 25 
percent (25%) of the fair market value of the assets of the Assurance 
Trust immediately after such transactions. Further, U S WEST proposes 
that it be permitted in the future to contribute amounts of Stock to 
any of the Trusts; provided that the aggregate fair market value of all 
Stock contributed by U S WEST, and/or acquired as a result of the 
replacement of such Stock or of purchases of Stock in connection with 
rebalancing of a Trust's holding of Stock, plus the fair market value 
of all Stock, other QES and QERP held by such Trust, does not exceed 25 
percent (25%) of the fair market value of the assets of such Trust 
immediately after such transactions.
    A Trust may hold Stock, other QES, and QERP in amounts above 25 
percent (25%), if the aggregate fair market value of such Stock and 
other QES, and QERP exceeds 25 percent (25%) of the assets of such 
Trust solely by reason of: (1) A greater rate of appreciation to the 
value of such Stock, other QES and QERP relative to that of assets in 
that Trust other than such Stock and other QES and QERP; or (2) a 
greater decline in the value of the other assets of such Trust relative 
to that of such Stock, other QES, and QERP.
    In addition, U S WEST represents that some or all of the Plans may 
have invested or may invest in one or more unrelated common or 
collective trust funds which are maintained by independent managers. As 
it is possible that securities issued by U S WEST, including the Stock, 
may be held in such funds (particularly in index-type passively managed 
funds), U S WEST wishes to ensure that the percentage limitations, as 
set forth in Section III(f) of the exemption, will be applied without 
regard to amounts of U S WEST securities that may be held by such funds 
in which a Plan may invest. In this regard, U S WEST estimates that the 
market value of the securities issued by U S WEST and held in such 
funds does not exceed 5 percent (5%) of the fair market value of each 
such fund and that no more than 10 percent (10%) of all interests in 
each such fund are held by Plans maintained by U S WEST. Further, U S 
WEST represents that the conditions of PTCE 91-38 have been and will at 
all times be satisfied. In the opinion of U S WEST, the limited nature 
of the investment by Plans in such funds demonstrates that the amount 
of U S WEST securities held by such funds, if any, is not subject to 
influence by U S WEST or the I/F of the Plans, as appears to be the 
intent in section I(a)(1)(A) of PTCE 91-38. Accordingly, paragraph (g) 
of Section III of this exemption provides that the percentage 
limitations, as set forth above in paragraph (f) of Section III, will 
be applied without regard to amounts of securities issued by U S WEST 
that may be held by unrelated common or collective trust funds which 
are maintained by independent managers and in which any of the Plans 
may have invested or may invest, provided that the fair market value of 
the securities issued by U S WEST and held in each such fund does not 
exceed 5 percent (5%) of the fair market value of such fund; that the 
interests of Plans maintained by U S WEST in each such fund does not 
exceed 10 percent (10%) of the total of all assets in such fund; and 
that the remaining conditions of PTCE 91-38 are satisfied.
    8. U S WEST maintains that specific safeguards included in this 
exemption ensure that the rights of the participants and beneficiaries 
of the Plans have been and will be fully protected with respect to the 
transactions. In this regard, neither the Plans nor the Trusts have 
paid or will pay any consideration for the contributions in-kind of the 
Stock, either in cash, in other property, or in any diminution of a 
mandatory funding obligation of U S WEST. Further, neither the Plans 
nor the Trusts have paid any commissions, nor will the Plans or the 
Trusts pay any commissions with respect to such in-kind contributions. 
However, it is represented that the costs of preparing and filing the 
application for exemption were and will be allocated to the Plans, and 
the fees of the I/F of such Plans have been and will be borne by the 
Trusts.
    9. U S WEST maintains that the transactions have been and will be 
administratively feasible and the level of oversight required by the 
Department has been and will be minimal. In this regard, it is 
represented that the Guidelines for the Trusts, the documents of the 
Plans, and the financial statements of the Trusts and of the Plans are 
readily available for inspection and have been and will be subject to 
the audit requirements of section 103(a)(3)(A) of the Act. Further, U S 
WEST represents that the transactions are in the interest of the Plans, 
as growth in the telecommunications industry will cause any Stock 
contributed to the Trusts to appreciate in value. For this reason, U S 
WEST believes the Stock to be a highly desirable investment. Further, U 
S WEST represents that the exemption is protective of the participants 
and beneficiaries, in that the transactions

[[Page 15448]]

also provide security regarding the continuation of benefits to current 
and former employees of U S WEST.
    10. It is represented that acceptance of the past contributions of 
Stock on March 31, 1994, and on March 31, 1995, by U S WEST to the 
Assurance Trust was approved by an I/F. Further, it is represented that 
an I/F will approve any future in-kind contribution of such Stock into 
any of the Trusts.
    In this regard, U S WEST appointed United States Trust Company of 
New York (U.S. Trust) to serve as I/F and as equity investment manager 
of the Account in the Assurance Trust which held the Stock contributed 
in-kind by U S WEST. U.S. Trust is a bank and trust company organized 
under the laws of New York. U.S. Trust represents that as an 
experienced employee benefits trust fiduciary with a large professional 
staff, it is qualified to serve as independent fiduciary. As of May 12, 
1994, U.S. Trust had approximately $393 billion of assets in custody 
and, as of June 19, 1995, had approximately $40 billion in assets under 
discretionary management. U.S. Trust is independent in that it is 
totally unrelated to U S WEST and does not have any directors in 
common. Further, U.S. Trust represents that it receives less than one 
percent (1%) of its income from U S WEST.
    It is represented that in its capacity as independent investment 
manager of the Accounts under the Assurance Trust, U.S. Trust acted as 
a fiduciary with responsibility: (1) For evaluating the appropriateness 
of accepting any contribution in-kind of Stock; (2) for establishing 
the value of such Stock contributions; and (3) for managing the 
Accounts on an ongoing basis, including making all decisions regarding 
acquisition, retention, or sale of the Stock contributed by U S WEST, 
including exercising any and all voting rights appurtenant to the Stock 
in accordance with the U S WEST Trust Investment Proxy Voting Policy. 
It is represented that U.S. Trust retained the right to delegate these 
responsibilities to its affiliate, U.S. Trust Company of California, 
N.A., a national financial institution providing specialized fiduciary 
services primarily to plans covered by the Act.
    It is represented that after its appointment U.S. Trust had full 
discretion to manage the Accounts, subject to specific investment 
guidelines (the Guidelines), as mutually agreed between U S WEST and 
U.S. Trust, which were reevaluated at least annually by both parties. 
Such Guidelines specify that there would be no short sales, trading on 
margin, or lending of securities without the prior approval of U S 
WEST. Further, the Guidelines specify that there are no requirements 
for or restrictions against realization of net investment gains or 
losses during the calendar year. It is represented that U.S. Trust has 
engaged in all transactions on behalf of the Trusts on an agency, 
rather than principal, basis.
    The Guidelines specify that the assets in the Accounts are invested 
solely in QES, cash, cash equivalents, and/or other derivative 
financial investments to hedge the Accounts consistent with the 
Guidelines. In this regard, it is represented that cash equivalents are 
held for transactional purposes only and average no more than 5% of the 
portfolio of any of the Accounts. It is anticipated that the Stock will 
be held in the Accounts for long-term income or appreciation, unless 
U.S. Trust or its successor deems it imprudent to do so.8
---------------------------------------------------------------------------

    \8\ Notwithstanding the fact that U.S. Trust and U S WEST have 
adopted a long term performance policy for the assets in the 
Accounts, U.S. Trust and any successor I/F remains subject to the 
fiduciary responsibility provisions of section 404 of the Act. In 
this regard, the Department expects that U.S. Trust and any 
successor I/F will use its authority to dispose of as much of the 
Stock as is necessary to comply with its fiduciary responsibilities 
at the appropriate time regardless of the policy that the assets of 
the Accounts be held for long term appreciation.
---------------------------------------------------------------------------

    It is represented that the emphasis in measurement under the 
Guidelines is on long-term performance. U.S. Trust or its successor is 
responsible for achieving a higher return over time than an appropriate 
market index chosen by U S WEST.9
---------------------------------------------------------------------------

    \9\ The Department, herein, is not opining on the 
appropriateness of the index selected by U.S. Trust to evaluate the 
long term performance of the Accounts under the Guidelines.
---------------------------------------------------------------------------

    Specifically, the Guidelines state that the ten (10) year average 
annual returns are expected to meet or exceed the return of U.S. 
Treasury Bills, plus five (5) percentage points per year. It is 
represented that returns are measured net of fees and have been and 
will be reported periodically by Boston Safe Deposit and Trust Company, 
as trustee of the Assurance Trust. In addition, regularly scheduled 
meetings between U.S. Trust and U S WEST have been held and information 
regarding investment results, strategies, and holdings have been 
reviewed quarterly.
    It is represented that U.S. Trust began the process of determining 
whether and under what circumstances the Assurance Trust should accept 
the Stock contributed in-kind, by analyzing the investment needs of the 
Health Plan and the nature of the contribution.10 With 
respect to the investment needs of the Health Plan, it is represented 
that U.S. Trust in its capacity as I/F: (1) Reviewed the investment 
allocation policy and investment guidelines of the Health Plan; (2) 
determined that it was appropriate to rely on such guidelines with 
respect to the percentage to be committed to the Stock; (3) determined 
the value of the assets of the Health Plan committed to equities at 
that time; and (4) determined that the Health Plan could accept the 
contribution of Stock without exceeding the guidelines relating to 
equity investments. In this regard, U.S. Trust determined: (1) that the 
allocation policy and investment guidelines of the Health Plan relating 
to investments in employer securities were appropriate; (2) that 
acceptance of the contribution in-kind of the Stock was within such 
allocation policy and investment guidelines; (3) that the contribution 
in-kind was not accepted in lieu of any other assets or cash 
contributions; (4) the contribution was accepted as part of an 
investment portfolio structured to meet the Health Plan's liquidity 
needs; and (5) the in-kind contribution of the Stock had no detrimental 
effect on the ability of the Health Plan to meet its liquidity needs.
---------------------------------------------------------------------------

    \10\ At the time U.S. Trust rendered its opinion the assets in 
the Assurance Trust were being used solely for the purpose of pre-
funding post-retirement health benefits under the Health Plan.
---------------------------------------------------------------------------

    With respect to the nature of the contribution in-kind, U.S. Trust 
represents that it undertook to perform an analysis of the Stock and of 
U S WEST, to value such Stock, and to analyze the acquisition of such 
Stock in light of the overall portfolio of the Assurance Trust. In 
making these analyses, U.S. Trust represents that it had access to all 
information on U S WEST that it reasonably required, including 
financial statements, annual reports, materials filed with the 
Securities and Exchange Commission, and independent research and 
reports. Based on this information, U.S. Trust concluded that U S WEST 
will remain a major player in the emerging telecommunications industry 
and that the near term prospects for the company remain favorable. U.S. 
Trust stated that the financial performance of U S WEST is likely to 
continue to improve in light of strong regional demand and the 
commitment of U S WEST to increasing internal efficiencies. 
Accordingly, in the opinion of U.S. Trust, the Stock offers good total 
return potential in a long-term investment horizon.
    With respect to the fair market value of the Stock, U.S. Trust 
noted that such Stock is traded on the NYSE, and like other publicly 
traded shares, is subject to price fluctuations. In this regard, in 
order to establish the fair market value of the Stock and to ensure 
that the value of the Stock contributed on March 31,

[[Page 15449]]

1994, did not exceed 25 percent (25%) of the assets of the Health Plan, 
U.S. Trust determined to accept the value of the Stock at its closing 
price, as of the previous day, March 30, 1994. It is represented that 
the price utilized by U.S. Trust in valuing the Stock is verifiable by 
the publicly disclosed trading prices of such Stock on March 30, 1994. 
U.S. Trust believes that this method of determining the fair market 
value of such Stock was reasonable and appropriate.
    U.S. Trust determined not to discount the value of the Stock, 
because the Stock comprised only slightly more than one percent (1%) of 
the issued and outstanding Stock. As such, in the opinion of U.S. Trust 
the amount of Stock contributed did not represent such a large block 
that it would not be possible to dispose of such Stock within a 
reasonable period of time. It is represented that the 4.6 million 
shares contributed by U S WEST constituted approximately five (5) days 
of normal trading volume of such Stock. Given the fluctuation in 
trading volume of such Stock from day to day, U.S. Trust concluded that 
a purchase or sale of this amount of Stock over a two to three week 
period would have little effect on the market price of such Stock.
    Prior to the contribution in-kind of the Stock by U S WEST on March 
31, 1994, it is represented that U.S. Trust was granted full authority 
to accept or reject any part of the in-kind contribution of Stock. In 
this regard, U.S. Trust analyzed the impact of the contribution in-kind 
on the risk and return characteristics of the Assurance Trust 
portfolio. In analyzing such impact, U.S. Trust reviewed: (1) The 
expected return of the portfolio; (2) the overall volatility of the 
portfolio; (3) the beta risk level or market risk of the portfolio. In 
addition, U.S. Trust compared the performance of five (5) modeled 
portfolios that included the Stock with the performance of comparable 
portfolios which excluded such Stock. Based on the results of its 
analysis, U.S. Trust concluded that by accepting the in-kind 
contribution of Stock, the risk/return tradeoff using traditional 
portfolio analysis was at least as favorable, and possibly more so, to 
the Health Plan than it would have been without such contribution of 
such Stock.
    U.S. Trust concluded that the contribution in-kind of Stock 
satisfied two of the three conditions, as set forth in section 408(e) 
of the Act. Specifically, no commission was charged to the Health Plan 
or the Assurance Trust as a result of the contribution in-kind of the 
Stock that occurred on March 31, 1994. Further, the Health Plan did not 
pay more than ``adequate consideration'' for such Stock, since no Plan 
or Trust has paid or will pay any consideration for the contribution, 
either in cash or other property, or in any diminution of a mandatory 
funding obligation of U S WEST. Moreover, as discussed above, U.S. 
Trust ensured that the value assigned to the Stock was the fair market 
value on the date of the contribution and that such amount represented 
less than 25 percent (25%) of the assets of the Health Plan, based on a 
valuation of the assets of the Health Plan performed by Boston Safe 
Deposit and Trust Company, as trustee of the Assurance Trust.
    U.S. Trust also concluded that acquisition of Stock by the Health 
Plan on March 31, 1994, was not inconsistent with the diversification 
requirements of section 404(a)(1) of the Act, even though the value of 
such Stock contributed on March 31, 1994, represented approximately 25 
percent (25%) of the assets of the Health Plan on that date. In the 
opinion of U.S. Trust, the ability of the Health Plan to pay benefits 
and expenses when due were not impaired by the acquisition of the Stock 
contributed in-kind on March 31, 1994. It is represented that U.S. 
Trust reached such conclusion mindful of the fact that U S WEST has no 
statutory or contractual obligation to pre-fund any of the benefits 
provided by the Health Plan and that pre-funding through the in-kind 
contribution of Stock necessarily provides better security to 
participants and beneficiaries of the Health Plan than would otherwise 
be required.
    Based on its review and examination, it is the conclusion of U.S. 
Trust that it was in the interest of the Health Plan and protective of 
the participants and beneficiaries of the Health Plan to accept the 
contribution in-kind of Stock on March 31, 1994, at a total value of 
$183,425,000 for the following reasons: (1) The Health Plan did not 
give up any rights to cash or other property in connection with its 
acceptance of the contribution of such Stock; (2) the contribution of 
such Stock will increase the assets available to pay benefits under the 
Health Plan at no cost to such plan; (3) the I/F is authorized to sell 
such Stock at any time; (4) as the Stock contributed on March 31, 1994, 
represents only slightly more than one percent (1%) of the total 
outstanding shares, such that if cash were needed to pay benefits under 
the Health Plan, the Stock could be liquidated over a relatively short 
period of time without adversely impacting the market price; (5) the 
Health Plan and the Assurance Trust paid no commission in connection 
with the acquisition of the Stock; (6) the Stock was transferred to the 
Assurance Trust at fair market value as of the date of the 
contribution; and (7) the transaction was at least as favorable to the 
Health Plan as an arm's length transaction with an unrelated third 
party.
    With respect to the Second Contribution of shares of Stock by U S 
WEST on March 31, 1995, U.S. Trust, in its capacity as independent 
fiduciary, evaluated the appropriateness of accepting such additional 
contribution of Stock and assessed the value of such Stock. It is 
represented that U.S. Trust began the process of determining whether 
and under what circumstances to accept the Second Contribution by: (1) 
Reviewing the terms of the Health Plan and the circumstances under 
which U S WEST made the first contribution in-kind; (2) reviewing the 
asset allocation policies and investment guidelines of the Health Plan 
and determining that acceptance of the Second Contribution by the 
Health Plan did not violate the terms and restrictions of such policies 
and guidelines; (3) verifying that the Second Contribution consisted of 
``qualifying employer securities,'' as defined by the Act; and (4) 
analyzing the value of the Stock. In fulfilling its responsibility, 
U.S. Trust represented that it had access to all information about U S 
WEST that it reasonably required and had sufficient information 
relating to the Stock to make an appropriate analysis. It was 
represented that given U S WEST's favorable operating environment, pro-
active competitive posture and future growth prospects, combined with 
its solid earnings base from the regional telephone business, in the 
opinion of U.S. Trust, the Stock offers good total return potential in 
a long-term investment horizon.
    In order to establish the current fair market value of the Stock 
contributed on March 31, 1995, and to ensure that the value assigned to 
such Stock would comprise no more than 25 percent (25%) of the assets 
of the Assurance Trust, as of the date of the Second Contribution, U.S. 
Trust determined to accept the value of the Stock at its closing price 
on the NYSE, as of March 30, 1995, the day before the Second 
Contribution. U.S. Trust represented that this method of determining 
the fair market value of the Stock was reasonable and appropriate. It 
is represented that the price utilized by U.S. Trust in valuing the 
Stock is verifiable by the publicly disclosed trading prices of such 
Stock on March 30, 1995.

[[Page 15450]]

    U.S. Trust determined not to apply a discount to the value of the 
Stock contributed on March 31, 1995. In this regard, U.S. Trust 
determined that no minority interest discount was necessary, because 
such Stock was already valued on a minority interest basis. A 
marketability discount was not applicable, in the opinion of U.S. 
Trust, because the Stock is registered and fully tradeable. Further, 
all of the Stock acquired in both contributions in-kind on March 31, 
1994, and March 31, 1995, constituted less than 1.3 percent (1.3%) of 
the outstanding Stock. In the opinion of U.S. Trust the entire holding 
of Stock (totaling 6.1 million shares after completion of the Second 
Contribution) does not represent such a large block that it would not 
be possible to dispose of such Stock within a reasonable period of 
time. It is represented that the 6.1 million shares contributed by U S 
WEST represent approximately nine (9) days of normal trading volume of 
such Stock. Given the fluctuation in trading volume of the Stock from 
day to day, U.S. Trust concluded that a purchase or sale of this amount 
of Stock over a two to three week period would have little effect on 
the market price of such Stock.
    With respect to the liquidity of the Health Plan, U.S. Trust 
determined that the ability of the Health Plan to pay benefits and 
expenses when due will not be impaired by the acceptance of the Second 
Contribution. With respect to diversification, U.S. Trust confirmed 
that the fair market value of the Stock contributed in-kind on March 
31, 1995, comprised 22.8 percent (22.8%) of the assets of the Health 
Plan, as of that date.11
---------------------------------------------------------------------------

    \11\ See footnote 4.
---------------------------------------------------------------------------

    Upon completion of its review of the Second Contribution, U.S. 
Trust concluded that it would be in the interest of the Health Plan and 
its participants and beneficiaries to accept the contribution of 1.5 
million shares of Stock valued on a per share basis of $40.50 and 
valued in the aggregate at $60,750,000. In support of its conclusion, 
U.S. Trust gave the following reasons: (1) The Health Plan did not give 
up any rights to cash or other property in connection with its 
acceptance of the Second Contribution; (2) the Second Contribution will 
increase the assets available to pay benefits under the Health Plan at 
no cost to such plan; (2) there is no guarantee that U S WEST will make 
additional attempts to pre-fund the Health Plan in the future; (3) the 
I/F is authorized to sell the Stock at any time; (4) the combined 
holdings of the Assurance Trust represent only 1.3 percent (1.3%) of 
the total outstanding Stock; (5) the Stock could be liquidated over a 
relatively short period of time if needed to pay benefits under the 
Health Plan without adversely impacting the market price of such Stock; 
(6) the Health Plan and the Assurance Trust paid no commissions in 
connection with the acquisition of the Stock; (7) acceptance of the 
Stock is consistent with the guidelines and the asset allocation policy 
applicable to the Assurance Trust; (8) the Stock was transferred to the 
Assurance Trust at fair market value, as of the date of the Second 
Contribution; (9) the Second Contribution was at least as favorable to 
the Health Plan as an arm's length transaction with an unrelated third 
party.
    11. U.S. Trust served as the I/F with respect to the transactions 
which are the subject of this exemption and investment manager of the 
assets in the Account in the Assurance Trust from March 31, 1994, 
through October 31, 1995. However, it is represented that U.S. Trust 
was replaced by State Street Bank and Trust Company (State Street), 
headquartered in Boston, Massachusetts. In this regard, it is 
represented that the replacement of U.S. Trust did not create a gap in 
independent fiduciary oversight of the Assurance Trust and did not 
result from any dissatisfaction with the services provided by U.S. 
Trust. Rather, following its recapitalization, U S WEST made a 
determination to retain State Street as an independent fiduciary to 
undertake responsibility for the active management of employer 
securities in the portfolios of several U S WEST plans, including the 
Health Plan. U S WEST represents that as a result of the selection of 
State Street these Plans would receive at more competitive fees the 
sophisticated analytical ability and experience of State Street in 
managing employer securities portfolios.
    Further, effective November 1, 1995, U S WEST retained State Street 
to act as the investment manager with respect to the active management 
of the assets held in the Assurance Trust including the Stock, 
consisting of the ``C'' shares and the ``M'' shares. As investment 
manager, State Street is responsible for all decisions regarding 
acquisitions, voting, tenders, conversions, exchanges, sales, and 
generally for the exercise of all rights, powers, and privileges with 
respect to the employer securities held by the Assurance Trust. State 
Street has represented that it understands and acknowledges its duties 
and responsibilities under the Act as a fiduciary in performing these 
services with respect to the Assurance Trust.
    It is represented that in managing the portfolio of the Assurance 
Trust of ``C'' shares and ``M'' shares, State Street has utilized and 
will utilize an active management strategy as opposed to a more passive 
strategy generally utilized in stock accounts consisting of a single 
employer security. It is represented that the active management 
approach enables State Street to maximize value while attempting to 
minimize risk.
    In general with regard to its active management strategy, State 
Street attempts to identify the difference between the underlying value 
of each stock compared to its market price. Using extensive market 
analysis tools, research and in-house investment expertise, State 
Street attempts to take advantage of market opportunities considering 
the projected growth, financial strength, and the future stream of 
earnings and dividends of such stock while carefully considering the 
volatility of each stock and the overall risk associated with the 
holding of such stock.
    The application of the active management strategy would allow State 
Street to vary the relative mix of ``C'' shares and ``M'' shares in the 
portfolio. The change in the mix is accomplished either by selling 
``C'' shares and reinvesting all or part of (but no more than) the cash 
proceeds from such sale in ``M'' shares, or selling ``M'' shares and 
reinvesting all or part of (but no more than) the cash proceeds from 
such sale in ``C'' shares. For example, if the market price of the 
``M'' shares at a particular time is viewed as over-valued, and the 
market price of the ``C'' shares at that time is viewed as under-
valued, State Street would sell a portion of the ``M'' shares and 
reinvest the proceeds in ``C'' shares thereby taking advantage of a 
market opportunity.
    It is represented that to accomplish this active management 
strategy, a communication analyst at State Street monitors daily and 
analyzes the ``C'' shares, and a media analyst monitors daily and 
analyzes the ``M'' shares to evaluate the performance of each 
investment, identify any value opportunities, and determine the 
prudence of those shares as an investment. It is represented that these 
analysts will compare their conclusions, jointly evaluate the 
portfolio, present the portfolio performance, and recommend changes to 
the State Street Trust Investment Committee which in turn reports to 
the State Street Retirement Investment Services Fiduciary Committee for 
a final determination.
    It is represented that as of March 9, 1998, the Assurance Trust no 
longer

[[Page 15451]]

holds any of the shares of Stock contributed in-kind by U S WEST. As of 
the same date, U S WEST confirms that State Street has not engaged in 
any ``rebalancing'' transactions involving the repurchase of Stock. 
However, with regard to any shares of Stock which may in the future be 
contributed in-kind by U S WEST to any of the Trusts, it is anticipated 
that State Street may engage in ``rebalancing'' transactions for the 
benefit of such trust. In this regard, it is represented that all sales 
and subsequent purchases of Stock in connection with rebalancing of the 
holding of Stock by such Trusts will occur in ``blind'' transactions on 
the open market and that all Stock acquired in such transactions will 
be ``qualifying employer securities'' within the meaning of section 
407(d)(5) of the Act. Further, in accordance with the condition of this 
exemption, as set forth in Section III(f) above, any acquisition of 
Stock, including any rebalancing of the holding of Stock by a Trust, 
must not cause immediately after such acquisition the fair market value 
of such Stock, plus the fair market value of all Stock and other QERP 
and QES held by such Trust to exceed 25 percent (25%) of the fair 
market value of its assets, on the date of such transaction.
    It is represented that before accepting any future in-kind 
contributions of Stock from U S WEST, State Street will identify the 
other holdings in the Assurance Trust and review asset allocation for 
such trust as determined by U S WEST. In addition, State Street will 
review the structural process that U S WEST has in place to monitor the 
overall investment mix, the manner by which asset allocation 
determinations are made, and any changes or shifts in the asset 
allocation policy of U S WEST. Further, State Street will evaluate the 
Stock being contributed to determine if such contribution is prudent 
and will evaluate the effect of such contribution on the portfolio of 
the Assurance Trust. Specifically, State Street will review the impact 
such contributions have on the volatility of such portfolio and will 
make any necessary adjustments. It is represented that State Street 
will monitor the holding of the Stock in the Assurance Trust and will 
continue to hold the Stock only if such holding continues to be in the 
best interest of the Assurance Trust.
    State Street represents that it is qualified to act as I/F and 
investment manager with respect to the assets held in the Assurance 
Trust (consisting of the ``C'' shares and the ``M'' shares) in that it 
has been in the business of serving as a discretionary fiduciary with 
respect to employer securities since 1985, and in the past two years 
has created two business units dedicated exclusively to independent 
fiduciary transactions and the management of employer securities. The 
experience of State Street includes acting as discretionary fiduciary 
for more than $30 billion in employer securities held in approximately 
ninety (90) qualified retirement plans. Further, State Street, as an 
independent fiduciary, has represented the interests of retirement plan 
participants in over eighty (80) transactions involving employer 
securities.
    Although State Street currently provides administrative and 
investment management services to other plans sponsored by U S WEST, 
State Street represents that it is sufficiently independent of U S WEST 
to serve as I/F and investment manager for the Assurance Trust with 
respect to the management of the ``C'' shares and the ``M'' shares. In 
this regard, the total revenue received by State Street from U S WEST 
and its plans constitutes less than one-tenth of one percent (.1%) of 
the annual revenues of State Street.
    12. In summary, the applicant represents that the proposed 
transactions meet the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) all Stock contributed in-kind by U S WEST to any of the Trusts 
or acquired by such Trusts, as a result of the recapitalization of U S 
WEST constituted QES; and all Stock contributed in-kind in the future, 
any replacement publicly traded shares of such Stock, or any Stock 
acquired as a result of purchases in connection with rebalancing of a 
Trust's holding of Stock will constitute QES;
    (b) all purchases of Stock will only occur in connection with 
rebalancing of a Trust's holding of Stock and in connection with the 
active management of the Stock by an I/F;
    (c) all sales and subsequent purchases of Stock in connection with 
rebalancing of a Trust's holding of Stock will occur in ``blind'' 
transactions with unrelated third parties on the open market at the 
fair market value of such Stock on the date of such transactions, or 
where appropriate to minimize any adverse market impact on the value of 
the Stock remaining in any Trust, will occur in private transactions 
with persons who are not ``parties in interest'' at the fair market 
value of such Stock on the date of such transactions;
    (d) the Plan provisions explicitly authorize U S WEST to pre-fund 
benefits through in-kind contributions of Stock, and all contributions 
of Stock were, and will be made in conformity with such Plan 
provisions;
    (e) Stock contributed in-kind by U S WEST or acquired as a result 
of the recapitalization of U S WEST has been held by Trusts which are 
qualified under section 501(c)(9) of the Code, and which are 
established for the purpose of funding life, sickness, accident, and 
other welfare benefits for the participants and beneficiaries of the 
Plans; and all Stock contributed in the future, any replacement 
publicly traded shares of such Stock, or any Stock acquired as a result 
of purchases in connection with rebalancing will be held in such 
Trusts;
    (f) all Stock contributed in-kind by U S WEST to any Trust or 
acquired by any Trust as a result of the recapitalization of U S WEST 
has been held in separate Accounts under such Trusts and all Stock 
contributed in-kind in the future, any replacement publicly traded 
shares of such Stock, or any Stock acquired as a result of purchases in 
connection with rebalancing of a Trust's holding of Stock will be held 
in separate Accounts under such Trusts;
    (g) the Accounts in such Trusts have been and will be managed by an 
I/F who is an independent, qualified investment manager, or a successor 
independent, qualified investment manager and who has represented and 
has represented and will represent the interests of the Plans which are 
funded by such Trusts for all purposes with respect to the Stock for 
the duration of the Trust's holding of any of such Stock;
    (h) the I/F for the Accounts in any Trust which fund welfare plan 
benefits, has accepted and will accept contributions in-kind of Stock 
by U S WEST to any of the Trusts and has accepted acquisitions of Stock 
in connection with the recapitalization of U S WEST and will accept 
through future in-kind contributions, through any replacement publicly 
traded shares of such Stock, or through purchases of such Stock in 
connection with rebalancing of such Trust's holding of Stock, only 
after such I/F determines that such transactions are feasible, in the 
interest of, and protective of participants and beneficiaries of the 
Plans which are funded by such Trusts;
    (i) an I/F has had sole responsibility and at all times will have 
sole responsibility for the ongoing management of the Accounts under 
the Trusts which hold the Stock has taken and will take whatever action 
is necessary to protect the rights of the Plans which are funded by 
such Trusts;
    (j) any contributions in-kind of Stock by U S WEST to any Trust or 
acquisitions of Stock in connection with the recapitalization of U S 
WEST did not cause immediately after such

[[Page 15452]]

transactions the aggregate fair market value of such Stock, plus the 
fair market value of all other QERP and QES held by such Trust to 
exceed 25 percent (25%) of the fair market value of the assets of such 
Trust on the date of such transaction; and any future contributions in-
kind of Stock by U S WEST to any Trust, any replacement publicly traded 
shares of such Stock, or any purchases of Stock in connection with 
rebalancing of any Trust's holding of Stock will not cause immediately 
after such transactions the aggregate fair market value of such Stock, 
plus the fair market value of all other QERP and QES held by such Trust 
to exceed 25 percent (25%) of the fair market value of the assets of 
such Trust on the date of such transaction;
    (k) none of the assets of the Trust have reverted nor will revert 
to the use or benefit of U S WEST;
    (l) neither the Plans nor the Trusts have paid nor will pay, 
whether in cash or in other property or in a diminution of any funding 
obligation of U S WEST, any consideration for Stock contributed in-kind 
by U S WEST;
    (m) none of the Plans have ceded nor will cede any right to receive 
cash contributions from U S WEST;
    (n) none of the Plans or the Trusts have paid nor will pay any 
commissions in connection with the contribution in-kind of Stock by U S 
WEST; and
    (o) U S WEST has no obligation to pre-fund welfare benefits 
provided to participants under any of the Plans, either pursuant to the 
plan documents, the terms of any collective bargaining agreement, or 
the provisions of the Act.

Notice to Interested Persons

    Those persons who may be interested in the pendency of the 
requested exemption include all active employees of U S WEST and all 
retirees. It is represented that these two classes of interested 
persons will be notified through different methods.
    In this regard, it is represented that notice will be provided, 
within sixty (60) calendar days of the date of publication of the 
Notice in the Federal Register, to all active employees of U S WEST by 
posting at those locations within the principal places of employment of 
U S WEST which are customarily used for notices regarding labor-
management matters for review. Such posting will contain a copy of the 
Notice, as it appears in the Federal Register on the date of 
publication, plus a copy of the supplemental statement (the 
Supplemental Statement), as required, pursuant to 29 CFR 2570.43(b)(2), 
which will advise such interested persons of their right to comment and 
to request a hearing.
    It is represented that notice will be provided to all retirees who 
participate in the Plans by mailing first class a retiree newsletter 
within sixty (60) calendar days of the date of publication of the 
Notice. Such newsletter will contain a copy of the Notice, as it 
appears in the Federal Register on the date of publication, plus a copy 
of the Supplemental Statement, as required, pursuant to 29 CFR 
2570.43(b)(2), which will advise such interested persons of their right 
to comment and to request a hearing. It is represented that the 
newsletter containing the Notice and the Supplemental Statement will be 
enclosed with the monthly retirement benefit checks to retirees.
    It is represented that notice will be provided to all terminated 
participants in the Plans who are not yet receiving retirement benefits 
by mailing bulk rate mail within sixty (60) calendar days from the date 
of publication of the Notice, a copy of the Notice, as it appears in 
the Federal Register on the date of publication, plus a copy of the 
Supplemental Statement, as required, pursuant to 29 CFR 2570.43(b)(2), 
which will advise such interested persons of their right to comment and 
to request a hearing.
    All written comments and requests for a hearing must be received by 
the Department no later than thirty (30) days from the date such 
interested persons receive a copy of the Notice and the Supplemental 
Statement.
    For Further Information Contact: Angelena C. Le Blanc of the 
Department, telephone (202) 219-8883 (This is not a toll-free number.)

Union Bank of Switzerland (UBS/Swiss) and UBS Securities, LLC (UBS 
Securities) Located in Zurich, Switzerland and New York, New York, 
Respectively

[Exemption Application Nos. D-10459 and D-10460]

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)(1)(A) through (D) and 
406(b)(1) and (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 
(1) lending of securities to UBS/Swiss, UBS Securities, UBS Ltd. (UBS/
UK), and UBS Securities Limited (UBS/Japan), which are affiliated 
domestic or foreign broker-dealers of UBS Securities,12 by 
employee benefit plans (the Client Plans or Plans), including 
commingled investment funds holding plan assets, for which UBS/Swiss, 
acting through its New York branch in connection with securities 
lending activities (UBS NY), an affiliate of the proposed UBS 
Borrowers, may serve as a securities lending agent, sub-agent, or as a 
custodian or a directed trustee to Client Plans under either of two 
securities lending arrangements, referred to herein as ``Plan A'' or 
``Plan B''; and (2) the receipt of compensation by UBS NY in connection 
with these transactions.
---------------------------------------------------------------------------

    \12\ For purposes of this proposed exemption, UBS/Swiss, UBS/UK 
and UBS/Japan are collectively referred to as the UBS Foreign 
Borrowers. In addition, UBS Securities and the UBS Foreign Borrowers 
are together referred to herein as the UBS Borrowers or individually 
as a UBS Borrower.
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    This proposed exemption is subject to the following conditions:
    (a) For each Client Plan, neither UBS NY, any of the UBS Borrowers 
nor any affiliate of those entities has discretionary authority or 
control with respect to the investment of the Plan assets involved in 
the transaction, or renders investment advice (within the meaning of 29 
CFR 2510.3-21(c)) with respect to those assets.
    (b) With regard to--
    (1) Plan A, under which UBS NY lends securities of a Client Plan to 
any UBS Borrowers in either an agency or sub-agency capacity, such 
arrangement is approved in advance by a Plan fiduciary who is 
independent of UBS NY and the UBS Borrower and is negotiated by UBS NY 
which acts as a liaison between the lender and the borrower to 
facilitate the securities lending transaction.13
---------------------------------------------------------------------------

    \13\ The Department, herein, is not providing exemptive relief 
for securities lending transactions engaged in by primary lending 
agents, other than UBS NY, beyond that provided pursuant to 
Prohibited Transaction Exemption (PTE) 81-6 (46 FR 7527, January 23, 
1981, as amended at 52 FR 18754, May 19, 1987) and PTE 82-63 (47 FR 
14804, April 6, 1982).
---------------------------------------------------------------------------

    (2) Plan B, under which the UBS Borrower directly negotiates the 
agreement with the fiduciary of a Client Plan, including a Plan for 
which UBS NY provides services with respect to the portfolio of 
securities to be loaned pursuant to an exclusive borrowing arrangement 
(the Exclusive Borrowing Arrangement), such Client Plan fiduciary is 
independent of both the UBS Borrower and UBS NY, and UBS NY does not 
participate in any such negotiations.

[[Page 15453]]

    (c) The independent fiduciary of a Client Plan approves the general 
terms of the securities loan agreement (the Loan Agreement) between the 
Client Plan and the UBS Borrower.
    (d) The terms of each loan of securities by a Client Plan to a UBS 
Borrower are at least as favorable to such Plan as those of a 
comparable arm's length transaction between unrelated parties.
    (e) A Client Plan may terminate the agency or sub-agency 
arrangement under Plan A or an Exclusive Borrowing Agreement under Plan 
B at any time, without penalty, on five business days notice, whereupon 
the UBS Borrowers will deliver certificates for securities identical to 
the borrowed securities (or the equivalent thereof in the event of 
reorganization, recapitalization or merger of the issuer of the 
borrowed securities) to the Client Plan within--
    (1) The customary delivery period for such securities;
    (2) Five business days; or
    (3) The time negotiated for such delivery by the Client Plan and 
the UBS Borrowers, whichever is less.
    (f) The Client Plan or its designee receives from each UBS Borrower 
by physical delivery or by book entry in a securities depository 
located in the United States, wire transfer or similar means by the 
close of business on or before the day the loaned securities are 
delivered to the UBS Borrower, collateral consisting of U.S. currency, 
securities issued or guaranteed by the United States Government or its 
agencies or instrumentalities, or irrevocable bank letters of credit 
issued by a U.S. bank, other than UBS NY or an affiliate thereof, or 
any combination thereof, or other collateral permitted under Prohibited 
Transaction Exemption (PTE) 81-6 (46 FR 7527, January 23, 1981) as it 
may be amended or superseded.
    (g) The market value (or in the case of a letter of credit, a 
stated amount) of the collateral on the close of business on the day 
preceding the day of the loan is initially at least 102 percent of the 
market value of the loaned securities. The applicable Loan Agreement 
gives the Client Plan a continuing security interest in and a lien on 
the collateral. The level of collateral is monitored daily (either by 
UBS NY under Plan A, or by UBS NY or another designee of the Client 
Plan under Plan B). If the market value of the collateral, on the close 
of trading on a business day is less than 100 percent of the market 
value of the loaned securities at the close of business on that day, 
the UBS Borrower is required to deliver, by the close of business on 
the next day, sufficient additional collateral to bring the level to at 
least 102 percent.
    (h) Prior to entering into a Loan Agreement, the applicable UBS 
Borrower furnishes each Client Plan its most recently available audited 
and unaudited statements to UBS NY, and in turn, such statements are 
provided to the Client Plan before the Client Plan approves the terms 
of the Loan Agreement. The Loan Agreement contains a requirement that 
the applicable UBS Borrower must give prompt notice at the time of a 
loan of any material adverse changes in its financial condition since 
the date of the most recently furnished financial statements. If any 
such changes have taken place, UBS NY does not make any further loans 
to the UBS Borrower unless an independent fiduciary of the Client Plan 
is provided notice of any material change and approves the loan in view 
of the changed financial condition.
    (i) In return for lending securities, the Client Plan either--
    (1) Receives a reasonable fee, which is related to the value of the 
borrowed securities and the duration of the loan; or
    (2) Has the opportunity to derive compensation through the 
investment of cash collateral. (Under such circumstances, the Client 
Plan may pay a loan rebate or similar fee to UBS Borrowers, if such fee 
is not greater than the fee the Client Plan would pay in a comparable 
arm's length transaction with an unrelated party.)
    (j) All procedures regarding the securities lending activities 
will, at a minimum, conform to the applicable provisions of PTEs 81-6 
and 82-63 as well as to applicable securities laws of the United 
States, Switzerland, the United Kingdom or Japan.
    (k) UBS NY agrees to indemnify and hold harmless the Client Plan in 
the United States (including the sponsor and fiduciaries of such Client 
Plan) for any transactions covered by this exemption with a UBS 
Borrower so that the Client Plan does not have to litigate, in the case 
of a UBS Foreign Borrower, in a foreign jurisdiction nor sue the UBS 
Foreign Borrower to realize on the indemnification. Such 
indemnification, by UBS NY, is against any and all reasonably 
foreseeable damages, losses, liabilities, costs and expenses (including 
attorney's fees) which the Client Plan may incur or suffer, arising 
from any impermissible use by the UBS Borrower of the loaned securities 
or the failure of the UBS Borrower to deliver loaned securities in 
accordance with the applicable Loan Agreement or to otherwise comply 
with the terms of such agreement, except to the extent that such losses 
or damages are caused by the Client Plan's own negligence.
    (1) If any event of default occurs, UBS NY, promptly and at its own 
expense (subject to rights of subrogation in, to the collateral and 
against such borrower), purchases or causes to be purchased, for the 
account of the Client Plan, securities identical to the borrowed 
securities (or their equivalent as discussed above). If the collateral 
is insufficient to accomplish such purchase, UBS NY indemnifies the 
Client Plan for any shortfall in the collateral plus interest on such 
amount and any transaction costs incurred (including attorney's fees of 
the Client Plan for legal actions arising out of the default on loans 
or failure to properly indemnify under this provision). Alternatively, 
if such replacement securities cannot be obtained on the open market, 
UBS NY pays the Client Plan the difference in U.S. dollars between the 
market value of the loaned securities and the market value of the 
related collateral on the date of the borrower's breach of its 
obligation to return the loaned securities.
    (2) If, however, the event of default is caused by the UBS 
Borrower's failure to return the securities within the designated time, 
the Client Plan has the right to purchase securities identical to the 
borrowed securities and apply the collateral to payment of the purchase 
price and any other expenses of the Plan associated with the sale and/
or purchase.
    (l) The Client Plan receives the equivalent of all distributions 
made to holders of the borrowed securities, including all interest and 
dividends on the loaned securities during the loan period.
    (m) Prior to any Client Plan's approval of the lending of its 
securities to any UBS Borrower, a copy of this exemption, if granted, 
(and the notice of pendency) are provided to the Client Plan.
    (n) Each Client Plan receives monthly reports with respect to 
securities lending transactions, including, but not limited to, the 
information described in Representation 26, so that an independent 
fiduciary of a Client Plan may monitor such transactions with the UBS 
Borrower.
    (o) Only Client Plans with total assets having an aggregate market 
value of at least $50 million are permitted to lend securities to UBS 
Borrowers; provided, however, that --
    (1) In the case of two or more Client Plans which are maintained by 
the same employer, controlled group of corporations or employee 
organization

[[Page 15454]]

(the Related Client Plans), whose assets are commingled for investment 
purposes in a single master trust or any other entity the assets of 
which are ``plan assets'' under 29 CFR 2510.3-101 (the Plan Asset 
Regulation), which entity is engaged in securities lending arrangements 
with UBS Borrowers, the foregoing $50 million requirement is deemed 
satisfied if such trust or other entity has aggregate assets which are 
in excess of $50 million; provided that, if the fiduciary responsible 
for making the investment decision on behalf of such master trust or 
other entity is not the employer or an affiliate of the employer, such 
fiduciary has total assets under its management and control, exclusive 
of the $50 million threshold amount attributable to Client Plan 
investment in the commingled entity, which are in excess of $100 
million.
    (2) In the case of two or more Client Plans which are not 
maintained by the same employer, controlled group of corporations or 
employee organization (the Unrelated Client Plans), whose assets are 
commingled for investment purposes in a group trust or any other form 
of entity the assets of which are ``plan assets'' under the Plan Asset 
Regulation, which entity is engaged in securities lending arrangements 
with UBS Borrowers, the foregoing $50 million requirement is deemed 
satisfied if such trust or other entity has aggregate assets which are 
in excess of $50 million; provided that the fiduciary responsible for 
making the investment decision on behalf of such group trust or other 
entity
    (A) Is neither the sponsoring employer, a member of the controlled 
group of corporations, the employee organization, nor an affiliate;
    (B) Has full investment responsibility with respect to Client Plan 
assets invested therein; and
    (C) Has total assets under its management and control, exclusive of 
the $50 million threshold amount attributable to Client Plan investment 
in the commingled entity, which are in excess of $100 million. (In 
addition, none of the entities described above must be formed for the 
sole purpose of making loans of securities.)
    (p) With respect to any calendar quarter, at least 50 percent or 
more of the outstanding dollar value of securities loans negotiated on 
behalf of Client Plans will be to unrelated borrowers.
    (q) In addition to the above, all loans involving UBS Foreign 
Borrowers, have the following requirements:
    (1) Such Foreign Borrower is registered as a broker-dealer with the 
Securities and Futures Authority of the United Kingdom (the SFA) in the 
case of UBS/UK, the Swiss Federal (the Swiss Banking Commission) in the 
case of UBS/Swiss, and the Ministry of Finance (the MOF), in the case 
of UBS/Japan;
    (2) Such Foreign Borrower is in compliance with all applicable 
provisions of Rule 15a-6 (17 CFR 240.15a-6) under the Securities 
Exchange Act of 1934 (the 1934 Act) which provides for foreign broker-
dealers a limited exemption from United States registration 
requirements;
    (3) All collateral is maintained in United States dollars or U.S. 
dollar-denominated securities or letters of credit;
    (4) All collateral is held in the United States and the situs of 
the securities lending agreements (either the Loan Agreement under Plan 
A or the Exclusive Borrowing Agreement under Plan B) is maintained in 
the United States under an arrangement that complies with the indicia 
of ownership requirements under section 404(b) of the Act and the 
regulations promulgated under 29 CFR 2550.404(b)-1; and
    (5) Prior to a transaction involving a UBS Foreign Borrower, the 
applicable UBS Foreign Borrower to--
    (A) Agrees to submit to the jurisdiction of the United States;
    (B) Agrees to appoint an agent for service of process in the United 
States, which may be an affiliate, (the Process Agent);
    (C) Consents to service of process on the Process Agent; and
    (D) Agrees to be indemnified in the United States for any 
transactions covered by this exemption.
    (r) UBS NY and each UBS Foreign Borrower maintain, or cause to 
maintain within the United States for a period of six years from the 
date of such transaction, in a manner that is convenient and accessible 
for audit and examination, such records as are necessary to enable the 
persons described in paragraph (s)(1) to determine whether the 
conditions of the exemption have been met 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 UBS NY and/or 
its affiliates, the records are lost or destroyed prior to the end of 
the six year period; and
    (2) No party in interest other than UBS NY or its affiliates 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 below by paragraph (s)(1).
    (s)(1) Except as provided in subparagraph (s)(2) of this paragraph 
and notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the records referred to in paragraph (r) are 
unconditionally available at their customary location during normal 
business hours by:
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and Exchange 
Commission (the SEC);
    (B) Any fiduciary of a participating Client Plan or any duly 
authorized representative of such fiduciary;
    (C) Any contributing employer to any participating Client Plan or 
any duly authorized employee representative of such employer; and
    (D) Any participant or beneficiary of any participating Client 
Plan, or any duly authorized representative of such participant or 
beneficiary.
    (s)(2) None of the persons described above in paragraphs (s)(1)(B)-
(s)(1)(D) of this paragraph (s)(1) are authorized to examine the trade 
secrets of UBS NY or its affiliates or commercial or financial 
information which is privileged or confidential.

Summary of Facts and Representations

Parties to the Proposed Transactions
    1. UBS/Swiss and UBS Securities (together, the Applicants), UBS NY, 
UBS/UK and UBS/Japan, all of which are the parties to the proposed 
transactions, are described as follows:
    (a) UBS/Swiss, a banking organization formed under Swiss law in 
1912, is a major global bank. Headquartered in Zurich, Switzerland, an 
Organization for Economic Cooperation and Development (OECD) member 
country,14 UBS/Swiss is subject to regulatory oversight by 
the Swiss Banking Commission, the Federal Reserve Board and the New 
York Superintendent of Banking. As of December 31, 1996, UBS/Swiss had 
total assets that were in excess of $324 billion.
---------------------------------------------------------------------------

    \14\ According to the Applicants, an OECD member country is 
generally viewed as having a stable and regulated financial market.
---------------------------------------------------------------------------

    (b) UBS Securities, an affiliate of UBS/Swiss, is a New York 
limited liability company. UBS Securities is registered with and 
regulated by the SEC as a broker-dealer and by the Commodity Futures 
Trading Commission as a futures commission merchant. UBS Securities is 
a member of the New York Stock Exchange, other principal securities 
exchanges in the United

[[Page 15455]]

States and the National Association of Securities Dealers. As of June 
30, 1997, UBS Securities had total assets of approximately $65.3 
billion.
    Acting as principal, UBS Securities actively engages in the 
borrowing and lending of securities, with daily outstanding loan volume 
averaging several billion dollars. UBS Securities uses borrowed 
securities to satisfy its trading requirements or to re-lend to other 
broker-dealers and others who need a particular security for various 
periods of time. All borrowings by UBS Securities must conform to 
applicable provisions of the Federal Reserve Board's Regulation 
T.15
---------------------------------------------------------------------------

    \15\ Under Regulation T (12 CFR 220.6(h)), permitted borrowing 
purposes include making delivery of securities in the case of short 
sales or failures of a broker to receive securities it is required 
to deliver.
---------------------------------------------------------------------------

    (c) UBS NY is the New York-based affiliate of UBS/Swiss. UBS NY is 
subject to regulatory oversight by the Federal Reserve Board and the 
Superintendent of Banking in New York State. It provides a variety of 
banking services to its clients and it may serve as custodian, clearing 
agent or as a directed trustee. As of June 30, 1997, UBS NY had total 
assets of approximately $19.75 billion.
    (d) UBS/UK, an affiliate of UBS Securities and a wholly owned 
subsidiary of UBS/Swiss, is located in the United Kingdom, another OECD 
member country. UBS/UK is regulated by the SFA and is registered 
thereunder as a broker-dealer. As of June 30, 1997, UBS/UK had total 
assets of approximately $26.5 billion.
    (e) UBS/Japan, an affiliate of UBS Securities and a wholly owned 
subsidiary of UBS/Swiss, is located in Tokyo, Japan, an OECD-member 
country. UBS/Japan is regulated by the MOF and is registered as a 
broker-dealer. As of June 30, 1997, UBS/Japan had total assets of 
approximately $11.6 billion.
Regulation of UBS Foreign Borrowers
    2. UBS/UK is authorized to conduct an investment business in and 
from the United Kingdom as a broker-dealer regulated by the SFA. 
Although not registered with the SEC, UBS/UK is governed by the rules, 
regulations and membership requirements of the SFA. In this regard, 
UBS/UK is subject to rules relating to minimum capitalization, 
reporting requirements, periodic examinations, client money and safe 
custody rules and books and records requirements with respect to client 
accounts. These rules and regulations set forth by the SFA, share a 
common objective: the protection of the investor by the regulation of 
the securities industry. The SFA rules require each firm which employs 
registered representatives or registered traders to have a positive 
tangible net worth and be able to meet its obligations as they may fall 
due. In addition, the SFA rules set forth comprehensive financial 
resource and reporting/disclosure rules regarding capital adequacy. 
Further, to demonstrate capital adequacy, the SFA rules impose 
reporting/disclosure requirements on broker-dealers with respect to 
risk management, internal controls, and transaction reporting and 
recordkeeping requirements to the effect that required records must be 
produced at the request of the SFA at any time. Finally, the rules and 
regulations of the SFA for broker-dealers impose potential fines and 
penalties which establish a comprehensive disciplinary system.
    3. Similarly, UBS/Swiss is regulated by the Swiss Banking 
Commission whose powers include licensing banks, issuing directives to 
address violations by or irregularities involving banks, requiring 
information from a bank or its auditor regarding supervisory matters 
and revoking bank licenses. The Swiss Banking Commission exercises 
oversight over Swiss banks such as UBS/Swiss, through independent 
auditors known as ``Recognized Auditors'' which act on behalf of the 
Commission under detailed statutory provisions. Each Swiss bank, 
including UBS/Swiss, must appoint a Recognized Auditor and notify the 
Swiss Banking Commission of an intent to change its auditor. The 
Recognized Auditor may take action within a bank as deemed necessary or 
as instructed by the Swiss Banking Commission and must inform the Swiss 
Banking Commission of supervisory matters.
    The Swiss Banking Commission ensures that UBS/Swiss has procedures 
for monitoring and controlling its worldwide activities through various 
statutory and regulatory standards. Among these standards are 
requirements for adequate internal controls, oversight, administration 
and financial resources. The Swiss Banking Commission reviews 
compliance with these limitations on operations and internal control 
requirements through an annual audit performed by the Recognized 
Auditor.
    The Swiss Banking Commission obtains information on the condition 
of UBS/Swiss and its foreign offices and subsidiaries, by requiring 
submission of periodic, consolidated financial reports and through a 
mandatory annual report prepared by the Recognized Auditor. The Swiss 
Banking Commission also receives information regarding capital 
adequacy, country risk exposure and foreign exchange exposures from 
UBS/Swiss.
    Swiss banking law mandates penalties to ensure correct reporting to 
the Swiss Banking Commission. Recognized Auditors face penalties for 
gross violations of their duties in auditing, for reporting misleading 
information, omitting essential information from the audit report, 
failing to request pertinent information or failing to report to the 
Swiss Banking Commission.
    In addition to regulation by the Swiss Banking Commission, the 
Applicants note that in approving UBS/Swiss' establishment of UBS NY, 
the Federal Reserve Board has concluded that UBS/Swiss is subject to 
comprehensive supervision and regulation by its home country 
supervisors. In making this determination, the Applicants represent 
that the Federal Reserve Board has considered, among other factors, the 
extent to which the country supervisors have (a) ensured that the bank 
has adequate procedures for monitoring and controlling its activities, 
worldwide; (b) obtained information on the condition of the bank and 
its subsidiaries and offices through regular examination reports, audit 
reports or otherwise; (c) obtained information on the dealings with and 
relationship between the bank and its affiliates, both foreign and 
domestic; (d) received from the bank financial reports that are 
consolidated on a worldwide basis, or comparable information that 
permits analysis of the bank's financial condition on a worldwide 
consolidated basis; and (e) evaluated prudential standards, such as 
capital adequacy and risk asset exposure, on a worldwide basis.
    4. UBS/Japan is regulated by the MOF which has regulatory authority 
over both broker-dealers and banks in Japan. In applying the same 
analysis as that employed with Swiss regulatory authorities, the 
Applicants represent that the Federal Reserve Board has concluded that 
the MOF provides comprehensive supervision and regulation through (a) 
periodic examinations and inspections which focus on capital adequacy, 
asset quality, management, earnings, liquidity, compliance with 
applicable laws and risk management; (b) financial reporting 
requirements; and (c) the use of administrative sanctions to ensure 
compliance with applicable law or regulations.
    5. In addition to the protections afforded by the SFA, the Swiss 
Banking Commission, the MOF, or for that matter, the Federal Reserve 
Board, UBS/UK and UBS/Japan will comply with all

[[Page 15456]]

applicable provisions of Rule 15a-6 of the 1934 Act. Rule 15a-6 
provides foreign broker-dealers with a limited exemption from SEC 
registration requirements and, as described below, offers additional 
protections. Specifically, Rule 15a-6 provides an exemption from U.S. 
broker-dealer registration for a foreign broker-dealer that induces or 
attempts to induce the purchase or sale of any security (including 
over-the-counter equity and debt options) by a ``U.S. institutional 
investor'' or a ``U.S. major institutional investor,'' provided that 
the foreign broker-dealer, among other things, enters into these 
transactions through a U.S. registered broker-dealer intermediary. The 
term ``U.S. institutional investor,'' as defined in Rule 15a-6(b)(7), 
includes an employee benefit plan within the meaning of the Employee 
Retirement Income Security Act of 1974 (the Act) if (a) the investment 
decision is made by a plan fiduciary, as defined in section 3(21) of 
the Act, which is either a bank, savings and loan association, 
insurance company or registered investment adviser, or (b) the employee 
benefit plan is a self-directed plan with investment decisions made 
solely by persons that are ``accredited investors'' as defined in Rule 
501(a)(1) of Regulation D of the Securities Exchange Act of 1933, as 
amended. The term ``U.S. major institutional investor'' is defined in 
Rule 15a-6(b)(4) as a person that is a U.S. institutional investor that 
has total assets in excess of $100 million or an investment adviser 
registered under Section 203 of the Investment Advisers Act of 1940 
that has total assets under management in excess of $100 million.
    6. The Applicants represent that under Rule 15a-6, a foreign 
broker-dealer that induces or attempts to induce the purchase or sale 
of any security by a U.S. institutional or major institutional investor 
must, among other things--
    (a) Consent to service of process for any civil action brought by, 
or proceeding before, the SEC or any self-regulatory organization;
    (b) Provide the SEC with any information or documents within its 
possession, custody or control, any testimony of any such foreign 
associated persons, and any assistance in taking the evidence of other 
persons, wherever located, that the SEC requests and that relates to 
transactions effected pursuant to Rule 15a-6; and
    (c) Rely on the U.S. registered broker-dealer through which the 
transactions with the U.S. institutional and major institutional 
investors are effected to (among other things):
    (1) Effect the transactions, other than negotiating their terms;
    (2) Issue all required confirmations and statements;
    (3) As between the foreign broker-dealer and the U.S. registered 
broker-dealer, extend or arrange for the extension of credit in 
connection with the transactions;
    (4) Maintain required books and records relating to the 
transactions, including those required by Rules 17a-3 (Records to be 
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved by 
Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
    (5) Receive, deliver and safeguard funds and securities in 
connection with the transactions on behalf of the U.S. institutional 
investor or U.S. major institutional investor in compliance with Rule 
15c3-3 of the 1934 Act (Customer Protection--Reserves and Custody of 
Securities); and
    (6) Participate in all oral communications (e.g., telephone calls) 
between the foreign associated person and the U.S. institutional 
investor (not the U.S. major institutional investor), and accompany the 
foreign associated person on all visits with both U.S. institutional 
and major institutional investors. By virtue of this participation, the 
U.S. registered broker-dealer would become responsible for the content 
of all these communications.
Securities Lending, Generally
    7. As with UBS Securities, UBS/UK, UBS Japan and UBS/Swiss (i.e., 
the UBS Foreign Borrowers), acting as principals, actively engage in 
the borrowing and lending of securities, with daily outstanding loan 
volume averaging several billion United States dollars. The UBS Foreign 
Borrowers utilize borrowed securities to satisfy their trading 
requirements, or to re-lend to other broker-dealers and banks who need 
a particular security for various periods of time.
    An institutional investor, such as a pension plan, lends securities 
in its portfolio to a broker-dealer or bank in order to earn a fee in 
addition to interest, dividends or other distributions paid on these 
securities. The lender generally requires that the security loans be 
fully collateralized and the collateral usually is in the form of cash 
or high quality liquid securities such as U.S. Government or Federal 
Agency obligations or certain bank letters of credit. When cash is the 
collateral, the lender generally invests the cash and rebates a portion 
of the earnings on the collateral to the borrower. The ``fee'' received 
by the lender will be the difference between the earnings on the 
collateral and the amount of rebate paid to the borrower. When a loan 
of securities is collateralized with securities, a fee is paid directly 
by the borrower to the lender. Institutional investors often utilize 
the services of an agent in the performance of their securities lending 
transactions. The lending agent is paid a fee for its services which 
may be calculated as a percentage of the income earned by the investor 
from its securities lending activity. The Applicants believe that the 
essential functions which define a securities lending agent are the 
identification of appropriate borrowers of securities and the 
negotiation of the terms of a loan to the borrowers. There are services 
ancillary to securities lending which may include acting as custodian 
or directed trustee of the securities being loaned, monitoring the 
level of collateral and the value of the loaned securities and 
investing the collateral in some instances.
Request for Exemptive Relief
    8. UBS/Swiss and UBS Securities request an exemption for the 
lending of securities to Client Plans under either of two distinct 
arrangements--Plan A (permitting UBS Borrowers to borrow securities 
from those Client Plans for which UBS NY will act as primary lending 
agent or sub-agent) 16 or Plan B (permitting UBS Borrowers 
to enter into Exclusive Borrowing Agreements with Client Plans), 
following disclosure of the relationship between UBS/Swiss and UBS NY 
as well as UBS NY's affiliation with the UBS Borrowers. In addition, 
the Applicants request exemptive relief from the Department to allow 
UBS NY to receive compensation in connection with these transactions.
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    \16\ For the sake of simplicity, future references to UBS NY's 
performance of services as securities lending agent should be deemed 
to include its parallel performance as securities lending sub-agent 
and references to Client Plans should be deemed to also refer to 
those Client Plans for which UBS NY is acting as sub-agent with 
respect to securities lending activities, unless otherwise indicated 
specifically or by the context of the reference.
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    Because UBS NY is a branch of UBS/Swiss, an intended borrower, and 
because each of the other UBS Borrowers is an affiliate of UBS/Swiss, 
the lending of securities to UBS Borrowers by Plans for which UBS NY 
serves as securities lending agent (or may otherwise be a service 
provider to the Plans) could be deemed to be prohibited under the Act. 
Further, because UBS NY, under Plan A, would have discretion to lend 
Plan securities to UBS Borrowers and receive a fee, and because, under 
Plan B, the Client Plan

[[Page 15457]]

will receive a fee for the Exclusive Borrowing Agreement with the UBS 
Borrower (which may not necessarily be related to the value of the 
borrowed securities and the duration of the loan) 17, and 
because all UBS Borrowers are not registered under the 1934 Act, the 
lending of securities to UBS Borrowers by Client Plans may be outside 
of the scope of relief provided by PTE 81-6 and PTE 82-63. 
18
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    \17\ The Applicants note that in an exclusive borrowing 
arrangement, the fee paid by a borrower need not necessarily be 
computed in the same manner as under a non-exclusive or Plan A 
arrangement. This is because there is additional value to a borrower 
in having an assured access to a supply of securities. Accordingly, 
the lender is able to exact different consideration, be it a 
premium, some form of a guaranteed return or otherwise.
    \18\ PTE 81-6 provides an exemption under certain conditions 
from section 406(a)(1)(A) through (D) of the Act and the 
corresponding provisions of section 4975(c) of the Code for the 
lending of securities that are assets of an employee benefit plan to 
certain broker-dealers or banks which are parties in interest.
    PTE 82-63 provides an exemption under specified conditions from 
section 406(b)(1) of the Act and section 4975(c)(1)(E) of the Code 
for the payment of compensation to a plan fiduciary for services 
rendered in connection with loans of plan assets that are 
securities. PTE 82-63 permits the payment of compensation to a plan 
fiduciary for the provision of securities lending services only if 
the loan of securities is not prohibited under section 406(a) of the 
Act.
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Plan A
    9. When acting as securities lending agent, UBS NY, pursuant to 
authorization from its client, will negotiate the terms of loans with 
borrowers and otherwise act as a liaison between the lender (and its 
custodian) and the borrower to facilitate the lending transaction. As 
securities lending agent, UBS NY will also have responsibility for 
monitoring receipt of all required collateral, marking such collateral 
to market daily so that adequate levels of collateral can be 
maintained, monitoring and evaluating on a continuing basis the 
performance and creditworthiness of the borrowers, and if authorized by 
the client, holding and investing cash collateral pursuant to 
investment guidelines established by the client. UBS NY may also act as 
a custodian or directed trustee for the Client Plan's portfolio of 
securities available to be lent. All procedures for lending securities 
will be designed to comply with applicable conditions of PTEs 81-6 and 
82-63.
    UBS NY may also be retained from time to time by primary lending 
agents to provide securities lending services in a sub-agent capacity 
with respect to portfolio securities of clients of such primary lending 
agents. As securities lending sub-agent, UBS NY's role under the 
lending transactions would parallel its role under lending transactions 
for which it acts as a primary lending agent on behalf of its clients.
    10. Where UBS NY is the direct securities lending agent, a 
fiduciary of a Client Plan who is independent of UBS NY and UBS 
Borrowers, will sign a securities lending agency agreement with UBS NY 
(the Agency Agreement) before the Client Plan participates in a 
securities lending program. The Agency Agreement will, among other 
things, describe the operation of the lending program, prescribe the 
form of securities Loan Agreement to be entered into on behalf of the 
Client Plan with borrowers, specify the securities which are available 
to be lent, specify the required margin and required daily marking-to-
market, and provide a list of permissible borrowers, including UBS 
Borrowers. The Agency Agreement will also set forth the basis and rate 
for UBS NY's compensation from the Client Plan for the performance of 
securities lending services.
    The Agency Agreement will contain provisions to the effect that if 
any UBS Borrower is designated by the Client Plan as an approved 
borrower (a) the Client Plan will acknowledge the relationship between 
the UBS Borrower and UBS NY and (b) UBS NY will represent to the Client 
Plan that each and every loan made to the UBS Borrower on behalf of the 
Client Plan will be at market rates which are no less favorable to the 
Client Plan than a loan of such securities, made at the same time and 
under the same circumstances, to an unrelated borrower.
    11. When UBS NY is lending securities under a sub-agency 
arrangement, before the Client Plan participates in the securities 
program, the primary lending agent will enter into a securities lending 
agreement (the Primary Lending Agreement) with a fiduciary of a Client 
Plan who is independent of such primary lending agent, UBS NY and UBS 
Borrowers. The primary lending agent will be unrelated to UBS NY and 
UBS Borrowers. The Primary Lending Agreement will contain substantive 
provisions akin to those in the Agency Agreement relating to the 
description of the lending program, use of an approved form of Loan 
Agreement, specification of securities which are available to be lent, 
specification of the required margin and the requirement of daily 
marking-to-market, and provision of a list of approved borrowers (which 
will include one or more UBS Borrowers). In addition, the Primary 
Lending Agreement will specifically authorize the primary lending agent 
to appoint sub-agents (which may include UBS NY), to facilitate its 
performance of securities lending agency functions. Under such 
circumstances, sub-agents may be appointed if the primary lending agent 
does not have the expertise or adequate systems to conduct securities 
lending activities or where the Client Plan desires to diversify 
lending responsibility among multiple entities. If UBS NY is to act as 
a sub-agent, the Primary Lending Agreement will expressly disclose that 
UBS NY is to so act. Further, the Primary Lending Agreement will set 
forth the basis and rate for the primary lending agent's compensation 
from the Client Plan for the performance of securities lending services 
and will authorize the primary lending agent to pay a portion of its 
fee, as the primary lending agent determines in its sole discretion, to 
any sub-agent(s) it retains (including UBS NY) pursuant to the 
authority granted under such agreement.
    Pursuant to its authority to appoint sub-agents, the primary 
lending agent will enter into a securities lending sub-agency agreement 
(the Sub-Agency Agreement) with UBS NY under which the primary lending 
agent will retain and authorize UBS NY, as sub-agent, to lend 
securities of the primary lending agent's Client Plans, subject to the 
same terms and conditions as are specified in the Primary Lending 
Agreement. Thus, for example, the form of Loan Agreement and the list 
of permissible borrowers under the Sub-Agency Agreement (which will 
include one or more UBS Borrowers) will be limited to those approved 
borrowers listed as such under the Primary Lending Agreement.
    UBS NY represents that the Sub-Agency Agreement will contain 
provisions which are in substance comparable to those described above 
in connection with an Agency Agreement in situations where UBS NY is 
the primary lending agent. In this regard, UBS NY will make the same 
representation in the Sub-Agency Agreement as described above with 
respect to arm's length dealing with UBS Borrowers. The Sub-Agency 
Agreement will also set forth the basis and rate for UBS NY's 
compensation to be paid by the primary lending agent.
    12. In all cases, UBS NY will maintain, in the United States for a 
period of six years, such records as necessary to assure compliance 
with its representations that all loans to UBS Borrowers are 
effectively at arm's length terms. Such records will be provided to the 
appropriate Client Plan fiduciary in the manner and format agreed to 
with the lending fiduciary, without charge to the Client Plan.

[[Page 15458]]

    In addition, UBS NY shall retain for six months tape recordings 
evidencing all securities loan transactions with UBS Borrowers. This 
will enable Client Plans and the Department to review UBS NY's 
adherence to its representation that all loans to UBS Borrowers are at 
arm's length.
    13. A Client Plan may terminate the Agency Agreement (or the 
Primary Lending Agreement) at any time, without penalty to the Plan, on 
five business days notice whereupon the UBS Borrowers will deliver 
certificates for securities identical to the borrowed securities (or 
the equivalent in the event of reorganization, recapitalization or 
merger of the issuer of the borrowed securities to the Client Plan 
within (a) the customary delivery period for such securities; (b) five 
business days; or
    (c) the time negotiated for such delivery by the Client Plan and 
the UBS Borrowers, whichever is less.
    14. UBS NY will enter into the same form of Loan Agreement with the 
applicable UBS Borrower on behalf of Client Plans as it does with all 
other borrowers. An independent fiduciary of the Client Plan will 
approve the terms of the Loan Agreement. The Loan Agreement will 
specify, among other things, the right of the Client Plan to terminate 
a loan at any time and the Plan's rights in the event of any default by 
a UBS Borrower. The Loan Agreement will explain the basis for 
compensation to the Client Plan for lending securities to the UBS 
Borrower under each category of collateral. The Loan Agreement also 
will contain a requirement that the UBS Borrower must pay all transfer 
fees and transfer taxes related to the security loans.
    However, before entering into the Loan Agreement, the applicable 
UBS Borrower will furnish each Client Plan its most recently available 
audited and unaudited statements to UBS NY, and in turn, such 
statements are provided to the Client Plan before the Client Plan 
approves the terms of the Loan Agreement. The Loan Agreement will 
contain a requirement that the applicable UBS Borrower must give prompt 
notice at the time of a loan of any material adverse changes in its 
financial condition since the date of the most recently furnished 
financial statements.19 If any such changes have taken 
place, UBS NY will not make any further loans to the UBS Borrower 
unless an independent fiduciary of the Client Plan approves the loan in 
view of the changed financial condition. Conversely, if the UBS 
Borrower fails to provide notice of such a change in its financial 
condition, such failure will trigger an event of default under the Loan 
Agreement.
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    \19\ With respect to capital adequacy rules, it is represented 
that UBS NY monitors the creditworthiness of all borrowers and 
adjusts exposure limits to such UBS Borrowers where necessary. Under 
the Loan Agreement, the UBS Borrower represents that it will comply, 
at all times, with all applicable laws and regulations of applicable 
regulatory and self-regulatory organizations. Noncompliance with 
required capitalization levels would constitute an event of default 
under the Loan Agreement, thereby enabling a Client Plan to exercise 
remedies by terminating the loans, liquidating the collateral and 
applying the collateral against the purchase of replacement 
securities.
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    15. As noted above, the agreement by UBS NY to provide securities 
lending services, as agent, to a Client Plan will be embodied in the 
Agency Agreement. The Client Plan and UBS NY will agree to the 
arrangement under which UBS NY will be compensated for its services as 
lending agent. This fee arrangement will generally be a percentage of 
either the return earned on cash collateral by the Client Plan or, in 
the case of non-cash collateralized loans, a percentage of the fee paid 
to the Client Plan by the UBS Borrower. Several factors may impact the 
fee structures, such as industry practices and changes in the market, 
as well as the types of securities being lent (e.g., domestic versus 
foreign securities). Such agreed upon fee arrangement will be set forth 
in the Agency Agreement and thereby will be subject to the prior 
written approval of a fiduciary of the Client Plan who is independent 
of the UBS Borrower and UBS NY. In any event, the securities lending 
fee to be paid to UBS NY will, at all times, comply with PTE 82-
63.20 In addition, an independent fiduciary of the Client 
Plan may authorize UBS NY to act as custodian or directed trustee of 
the Client Plan's portfolio of securities available for lending and to 
receive a reasonable and customary fee for such services.
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    \20\ Conditions (c) and (d) of PTE 82-63 require that the 
payment of compensation to a ``lending fiduciary'' is made under a 
written instrument and is subject to prior written authorization of 
an independent ``authorizing fiduciary.'' In the event that a 
commingled investment fund will participate in the securities 
lending program, the special rule applicable to such funds 
concerning the authorization of the compensation arrangement set 
forth in paragraph (f) of PTE 82-63 will be satisfied.
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    Similarly, with respect to arrangements under which UBS NY is 
acting as securities lending sub-agent, the agreed upon fee arrangement 
of the primary lending agent will be set forth in the Primary Lending 
Agreement, and such agreement will specifically authorize the primary 
lending agent to pay a portion of its fee (the portion to be determined 
by the primary lending agent, in its sole discretion) to any sub-agent, 
including UBS NY, which is to provide securities lending services to 
the Client Plan. The Client Plan will be provided with any reasonably 
available information which is necessary for the Plan fiduciary to make 
a determination whether to enter into or continue to participate under 
the Agency Agreement (or the Primary Lending Agreement) and any other 
reasonably available information which the Plan fiduciary may 
reasonably request.
    16. Each time a Client Plan lends securities to a UBS Borrower 
pursuant to the Loan Agreement, UBS NY will reflect in its records the 
material terms of the loan, including the securities to be loaned, the 
required level of collateral and the fee or rebate payable. The terms 
of the fee or rebate payable for each loan will be at least as 
favorable to the Client Plan as those of a comparable arm's length 
transaction between unrelated parties.
    17. The Client Plan will be entitled to the equivalent of all 
distributions made to holders of the borrowed securities, including 
interest and dividends during the loan period.21 The Loan 
Agreement will provide that the Client Plan may terminate any loan at 
any time. Upon a termination, the UBS Borrower will be contractually 
obligated to return securities identical to the borrowed securities (or 
the equivalent thereof in the event of reorganization, recapitalization 
or merger of the issuer of the borrowed securities) to the Client Plan 
within five business days of written notification of termination or, if 
sooner, within the normal settlement period in the principal market in 
which the loaned securities are traded (unless a longer period of time 
permitted pursuant to an applicable Department exemption). The Loan 
Agreement will give the Client Plan a continuing security interest in 
and a lien on the collateral. If the UBS Borrower fails to return the 
securities within the designated time, the Client Plan will have the 
right under the Loan Agreement to purchase securities identical to the 
borrowed securities and apply the collateral to payment of the purchase 
price and any other expenses of the Plan associated with the sale and/
or purchase.
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    \21\ The Applicants represent that dividends and other 
distributions on foreign securities payable to a lending Client Plan 
are subject to foreign tax withholdings. Under these circumstances, 
the applicable UBS Borrower, where necessary, will gross-up the in-
lieu-of-payment (in respect of such dividend or distribution it 
makes) to the Client Plan so that the Client Plan will receive back 
what it otherwise would have received (by way of dividend or 
distribution) had it not loaned the securities.

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[[Page 15459]]

    18. UBS NY will establish each day a written schedule of lending 
fees 22 and rebate rates 23 with respect to new 
loans of designated classes of securities, such as U.S. government 
securities, U.S. equities and corporate bonds, international fixed 
income securities and international equities, in order to assure 
uniformity of treatment among borrowing brokers and to limit the 
discretion UBS NY would have in negotiating securities loans to UBS 
Borrowers. Loans to all borrowers of a given security on that day will 
be made at rates or lending fees on the relevant daily schedules or at 
rates or lending fees which may be more advantageous to the Client 
Plans. It is represented that in no case will loans be made to UBS 
Borrowers at rates or lending fees that are less advantageous to the 
Client Plans than those on the schedule. In addition, it is represented 
that the method of determining the daily securities lending rates (fees 
and rebates), the minimum lending fees payable by UBS Borrowers and the 
maximum rebate payable to UBS Borrowers will be specified in an exhibit 
attached to the Agency Agreement to be executed between the independent 
fiduciary of the Client Plan and UBS NY in cases where UBS NY is the 
direct securities lending agent.
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    \22\ UBS NY will adopt minimum daily lending fees for non-cash 
collateral payable by UBS Borrowers to UBS NY on behalf of a Client 
Plan. Separate minimum daily lending fees will be established with 
respect to loans of designated classes of securities, such as those 
identified above. With respect to each designated class of 
securities, the minimum lending fee will be stated as a percentage 
of the principal value of the loaned securities. UBS NY will submit 
such minimum daily lending fees to an independent fiduciary of the 
Client Plan for approval before initially lending any securities to 
UBS Borrowers on behalf of such Client Plan.
    \23\ Separate maximum daily rebate rates will be established 
with respect to loans of securities within the designated classes 
identified above.
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    19. The rebate rates with respect to cash-collateralized loans made 
by Client Plans will also take into account the potential demand for 
loaned securities, the applicable benchmark cost of funds indices 
(typically, Federal Funds, overnight repo rate or the like) and 
anticipated investment return on overnight investments which are 
permitted by the relevant Client Plan fiduciary. Further, the lending 
fees with respect to loans made by Client Plans collateralized by other 
than cash will be set daily to reflect conditions as influenced by 
potential market demand.
    20. UBS NY will negotiate rebate rates for cash collateral payable 
to each borrower, including UBS Borrowers, on behalf of a Client Plan. 
Where cash collateral is derived from a loan with an expected maturity 
date (i.e., a term loan) and is intended to be invested in instruments 
with maturities corresponding generally to the maturity of the term 
loan, the aggregate rebate over the life of the loan will be less than 
the total investment return (assuming no investment default). Where 
cash collateral is derived from a loan with an overnight maturity or an 
open maturity (i.e., no specified maturity date), the aggregate rebate 
will be less than the total investment return (assuming no investment 
default) for the period during which the securities were outstanding on 
loan. For example, where cash collateral derived from an overnight loan 
is intended to be invested in a generic repurchase agreement, any 
rebate determined with respect to an overnight purchase agreement 
benchmark will be set below the ``ask'' quotation therefor.
    With respect to any loan to a UBS Borrower, UBS NY, at the 
inception of such loan, will not negotiate and agree to a rebate rate 
with respect to such loan which would produce a zero or negative return 
to the Client Plan over the life of the loan (assuming no default on 
the investments made by UBS NY where it has investment discretion over 
the cash collateral or on investments expected to be made by the Client 
Plan's designee, where UBS NY does not have investment discretion). In 
this regard, with respect to each designated class of securities, the 
maximum daily rebate rate will generally be the lower of (a) the 
overnight repo rate or Federal Funds rate, minus a stated percentage 
and (b) the actual investment rate for the relevant cash collateral, 
minus a stated percentage. As noted above, UBS NY will disclose the 
formula for determining the maximum daily rebate rate to an independent 
fiduciary of a Client Plan for approval before lending any securities 
to UBS Borrowers on behalf of the Plan.
    21. If UBS NY reduces the lending fee or increases the rebate rate 
on any outstanding loan to an affiliated borrower (except for any 
change resulting from a change in the value of any third party 
independent index with respect to which the fee or rebate is 
calculated), UBS NY, by the close of business on the date of such 
adjustment, will provide the independent fiduciary of the Client Plan 
with notice that it has reduced such fee or increased the rebate rate 
to such affiliated borrower and that the Client Plan may terminate such 
loan at any time. In addition, UBS NY will provide the independent 
fiduciary of the Client Plan with such information as the fiduciary may 
reasonably request regarding such adjustment.
    With respect to any calendar quarter, at least 50 percent or more 
of the outstanding dollar value of securities loans negotiated on 
behalf of Client Plans will be to unrelated borrowers. Thus, the 
competitiveness of the loan fee will be continuously tested in the 
marketplace. Accordingly, the Applicants believe that loans to UBS 
Borrowers should result in competitive rate income to the lending 
Client Plan.
    22. At all times, UBS NY will effect loans in a prudent and 
diversified manner. While UBS NY will normally lend securities to 
requesting borrowers on a ``first come, first served'' basis, as a 
means of assuring uniformity of treatment among borrowers, it should be 
recognized that in some cases it may not be possible to adhere to a 
``first come, first served'' allocation. This can occur, for instance 
where (a) the credit limit established for such borrower by UBS NY and/
or the Client Plan has already been satisfied; (b) the ``first in 
line'' borrower is not approved as a borrower by the particular Client 
Plan whose securities are sought to be borrowed; or (c) the ``first in 
line'' borrower cannot be ascertained, as an operational matter, 
because several borrowers spoke to different UBS NY representatives at 
or about the same time with respect to the same security. 24 
In situations (a) and (b), loans would normally be effected with the 
``second in line.'' In situation (c), securities would be allocated 
equitably among all eligible borrowers.
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    \24\ According to the Applicants, the ``first come, first 
served'' allocation would not apply where UBS NY is not acting as a 
securities lending agent, but rather is acting as, for example, a 
custodian or directed trustee to a Client Plan that has entered into 
an exclusive arrangement with the borrower as described under Plan 
B. In such a situation, the Applicants note that the UBS Borrower 
would be choosing from whom to borrow and UBS NY has no right or 
obligation to lend to the UBS Borrower the securities from other 
clients or lend the securities which are subject to such Exclusive 
Borrowing Agreements.
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    23. UBS NY agrees to indemnify and hold harmless the applicable 
Client Plan (including the sponsor and fiduciaries of such Client Plan) 
in the United States for any transactions covered by this exemption 
with the UBS Borrower so that the Client Plan does not have to 
litigate, in the case of a UBS Foreign Borrower, in a foreign 
jurisdiction nor sue the UBS Foreign Borrower to realize on the 
indemnification. Such indemnification by UBS NY will be against any and 
all reasonably foreseeable damages, losses, liabilities, costs and 
expenses (including attorney's fees) which the Client Plan may incur or 
suffer arising from any impermissible use by the UBS Borrower of the 
loaned securities. The applicable UBS Borrower

[[Page 15460]]

will also be liable to the Client Plan for breach of contract for any 
failure by such UBS Borrower to deliver loaned securities when due in 
accordance with the provisions of the Loan Agreement or to otherwise 
comply with the terms of the Loan Agreement.
    If any event of default occurs, UBS NY, promptly and at its own 
expense, will purchase, or cause to be purchased on the open market, 
for the account of the Client Plan securities identical to the borrowed 
securities (or their equivalent as discussed above). If the collateral 
is insufficient to accomplish such purchase, UBS NY will indemnify the 
Client Plan for any shortfall in the collateral plus interest on such 
amount and any transaction costs incurred (including attorney's fees of 
the Client Plan for legal actions arising out of the default on the 
loans or failure to indemnify properly under this provision). 
Alternatively, if such replacement securities cannot be obtained on the 
open market, UBS NY will pay the Client Plan the difference in dollars 
between the market value 25 of the loaned securities and the 
market value of the collateral on the date of the borrower's breach of 
its obligation to return the loaned securities.
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    \25\ In relevant part, the ``market value'' of any securities 
listed on a national securities exchange in the U.S. will be the 
last sales price on such exchange on the preceding business day (the 
Business Day) or, if there is no sale on that day, the last sale 
price on the next preceding Business Day on which there is a sale on 
such exchange, as quoted on the consolidated tape (the Consolidated 
Tape). If the principal market for securities to be valued is the 
over-the-counter market, their market value will be the closing sale 
price as quoted on the National Association of Securities Dealers 
Automated Quotation System (NASDAQ) on the preceding Business Day or 
the closing price on such Business Day if the securities are issues 
for which last sale prices are not quoted on NASDAQ. If the 
securities to be valued are not quoted on NASDAQ, their market value 
shall be the highest bid quotation appearing in The Wall Street 
Journal, National Quotation Bureau pink sheets, Salomon Brothers 
quotation sheets, quotation sheets of registered market makers and, 
if necessary, dealers' telephone quotations on the preceding 
Business Day. (In each case, if the relevant quotation does not 
exist on such day, then the relevant quotation on the next preceding 
Business Day in which there is such a quotation would be the market 
value.)
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    If, however, as noted in Representation 17, the event of default is 
caused by the UBS Borrower's failure to return the securities within 
the designated time, the Client Plan will have the right to purchase 
securities identical to the borrowed securities and apply the 
collateral to payment of the purchase price and any other expenses of 
the Plan associated with the sale and/or purchase.
    24. The Client Plan, or its designee, will receive collateral from 
each UBS Borrower by physical delivery, book entry in a U.S. securities 
depository, wire transfer or similar means by the close of business on 
or before the day the loaned securities are delivered to the UBS 
Borrower. All collateral will be received by the Client Plan, or its 
designee, in the United States. The collateral will consist of U.S. 
currency, securities issued or guaranteed by the U.S. Government or its 
agencies or instrumentalities, or irrevocable bank letters of credit 
issued by a U.S. bank other than UBS NY or an affiliate thereof, or any 
combination thereof, or other collateral permitted under PTE 81-6, as 
amended, modified, supplemented or superseded by Department exemption 
or promulgation.
    The market value (or, in the case of a letter of credit, a stated 
amount) of the collateral on the close of business on the day preceding 
the day of the loan will be at least 102 percent of the market value of 
the loaned securities. The Loan Agreement will give the Client Plan a 
continuing security interest in and a lien on the collateral. UBS NY 
will monitor the level of the collateral daily. If the market value of 
the collateral, on the close of trading on a business day, is less than 
100 percent (or such greater percentage as agreed to by the parties) of 
the loaned securities at the close of business on that day, UBS NY will 
require the UBS Borrowers to deliver by the close of business on the 
next day sufficient additional collateral to bring the level back to at 
least 102 percent.
    25. UBS NY will maintain the situs of the Loan Agreements 
(evidencing the Client Plan's right to return of the loaned securities 
and the Plan's continuing interest in and lien on the collateral) in 
the United States and, prior to a transaction involving a UBS Foreign 
Borrower, the applicable UBS Foreign Borrower will (a) agree to submit 
to the jurisdiction of the courts of the United States; (b) agree to 
appoint a Process Agent for service of process in the United States, 
which may be an affiliate; (c) consent to service of process on the 
Process Agent; and (d) agree to be indemnified in the United States for 
any transaction covered by this exemption.
    26. Unless otherwise agreed, each Client Plan participating in the 
lending program will be sent a monthly transaction report. Such report 
will provide a list of all security loans outstanding and closed for a 
specified period. The report will identify for each open loan position, 
the securities involved, the value of the security for 
collateralization purposes, the current value of the collateral, the 
rebate or loan premium (as the case my be) at which the security is 
loaned, and the number of days the security has been on loan. In 
addition, if requested by the lending customer, UBS NY will provide 
daily confirmations of securities lending transactions and weekly 
reports setting forth for each transaction made or outstanding during 
the relevant reporting period, the loaned securities, the related 
collateral, rebates and loan premiums and such other information in 
such format as shall be agreed to by the parties. Further, prior to a 
Client Plan's approval of a securities lending program, UBS NY will 
provide a Plan fiduciary with copies of the proposed exemption and 
notice granting the exemption.
    27. In order to provide the means for monitoring lending activity, 
rates on loans to UBS Borrowers compared with loans to other brokers 
and the level of collateral on the loans, it is represented that the 
monthly report will show, on a daily basis, the market value of all 
outstanding security loans to UBS Borrowers and to other borrowers as 
compared to the total collateral held for both categories of loans. 
Further, the monthly report will state the daily fees where collateral 
other than cash is utilized and will specify the details used to 
establish the daily rebate payable to all brokers where cash is used as 
collateral. The monthly report also will state, on a daily basis, the 
rates at which securities are loaned to UBS Borrowers compared with 
those at which securities are loaned to other brokers. This statement 
will give an independent fiduciary information which can be compared to 
that contained in the daily rate schedule.
    28. To ensure that any lending of securities to a UBS Borrower will 
be monitored by an independent fiduciary of above average experience 
and sophistication in matters of this kind, only Client Plans with 
total assets having an aggregate market value of at least $50 million 
are permitted to lend securities to UBS Borrowers. However, in the case 
of two or more Client Plans which are maintained by the same employer, 
controlled group of corporations or employee organization (i.e., the 
Related Client Plans), whose assets are commingled for investment 
purposes in a single master trust or any other entity the assets of 
which are ``plan assets'' under the Plan Asset Regulation, which entity 
is engaged in securities lending arrangements with UBS Borrowers, the 
foregoing $50 million requirement will be deemed satisfied if such 
trust or other entity has aggregate assets which are in excess of $50 
million. However, if the fiduciary responsible for making the 
investment decision on behalf of such master trust

[[Page 15461]]

or other entity is not the employer or an affiliate of the employer, 
such fiduciary will be required to have total assets under its 
management and control, exclusive of the $50 million threshold amount 
attributable to Client Plan investment in the commingled entity, which 
are in excess of $100 million.
    In the case of two or more Client Plans which are not maintained by 
the same employer, controlled group of corporations or employee 
organization (i.e., the Unrelated Client Plans), whose assets are 
commingled for investment purposes in a group trust or any other form 
of entity the assets of which are ``plan assets'' under the Plan Asset 
Regulation, which entity is engaged in securities lending arrangements 
with UBS Borrowers, the foregoing $50 million requirement will be 
deemed satisfied if such trust or other entity has aggregate assets 
which are in excess of $50 million. However, the fiduciary responsible 
for making the investment decision on behalf of such group trust or 
other entity (a) must not be the sponsoring employer, a member of the 
controlled group of corporations, the employee organization, or an 
affiliate; (b) must have full investment responsibility with respect to 
plan assets invested therein; and (c) must have total assets under its 
management and control, exclusive of the $50 million threshold amount 
attributable to Client Plan investment in the commingled entity, which 
are in excess of $100 million.
    In addition, none of the entities described above must be formed 
for the sole purpose of making loans of securities.
    29. The Applicants represent that the conditions set forth in this 
proposed exemption will subject UBS NY and UBS Borrowers to all of the 
conditions imposed on broker-dealers under PTE 81-6, other than 
registration under the 1934 Act with respect to the UBS Foreign 
Borrowers. The Applicants note that such conditions in PTE 81-6 include 
requirements relating to daily marking to market, setting collateral at 
100 percent of the market value of the securities, the rules for 
termination of the loan and the return of the borrowed securities.
Plan B
    30. UBS Borrowers may directly negotiate Exclusive Borrowing 
Agreements with fiduciaries of Client Plans, including Plans for which 
UBS NY will serve as custodian or directed trustee or provide other 
related services with respect to the portfolio of securities to be 
loaned, where such fiduciary is independent of the UBS Borrowers and 
UBS NY. Under such an Agreement, UBS Borrowers will have exclusive 
access for a specified period of time to borrow certain securities of 
the Client Plan pursuant to certain conditions. UBS NY will not 
participate in the negotiation of the Exclusive Borrowing Agreement. 
The involvement of UBS NY, if any, will be limited to such activities 
as holding securities available for lending, handling the movement of 
borrowed securities and collateral and investing or depositing any cash 
collateral and supplying the Client Plan with certain reports. The 
Applicants represent that, under the Exclusive Borrowing Agreement, 
neither UBS NY nor UBS Borrowers will perform for Client Plans, the 
functions which constitute the essential functions of a securities 
lending agent.
    31. On or prior to delivery of loaned securities to a UBS Borrower, 
the Client Plan or its designee, will receive from the UBS Borrower by 
physical delivery, book entry in a securities depository, wire transfer 
or similar means. The collateral will consist of those types of 
collateral permitted under PTE 81-6, as amended, modified, supplemented 
or superseded by Department exemption or promulgation.
    The market value of the collateral on the day the loan settles will 
be at least 102 percent of the market value of the loaned securities. 
The Exclusive Borrowing Agreement will give the Client Plan a 
continuing security interest in and a lien on the collateral. UBS NY, 
or another designee of the Client Plan, will monitor the level of the 
collateral daily and, if its market value falls below 100 percent, the 
UBS Borrower will deliver sufficient additional collateral by the 
following day such that the market value of all collateral will equal 
at least 102 percent of market value of the loaned securities.
    32. The UBS Borrower will maintain, or cause to be maintained, the 
situs of the Exclusive Borrowing Agreement (evidencing the Client 
Plan's right to return the loan securities and the Plan's continuing 
interest in and lien on the collateral) in the United States, and prior 
to a transaction involving a UBS Foreign Borrower, the applicable UBS 
Foreign Borrower will (a) agree to submit to the jurisdiction of the 
courts of the United States; (b) agree to appoint a Process Agent for 
service of process in the United States, which may be an affiliate; (c) 
consent to service of process on the Process Agent; and (d) agree to be 
indemnified in the United States for any transaction covered by this 
exemption.
    33. Before entering into an Exclusive Borrowing Agreement, the UBS 
Borrower will furnish to the Client Plan the most recent publicly-
available audited and unaudited statements of its financial condition. 
The Exclusive Borrowing Agreement will also contain a representation by 
the UBS Borrower that, as of each time it borrows securities, there 
have been no material adverse changes in its financial condition. 
Further, all procedures under the Exclusive Borrowing Agreement will, 
at a minimum, conform to the applicable provisions of PTE 81-6 and PTE 
82-63 (except as otherwise noted herein).
    Unless otherwise agreed, the UBS Borrower or, in the case of some 
Client Plans, UBS NY, will provide a monthly report to the Client Plan 
showing, on a daily basis, the aggregate market value of all 
outstanding security loans to each UBS Borrower and the aggregate 
market value of the collateral.
    34. With regard to those Client Plans for which UBS NY provides 
custodial, trustee, clearing and/or reporting functions relative to 
securities loans, an independent Plan fiduciary shall review and 
approve any fees which may be paid to UBS NY for such services. Any 
such fee would be in addition to any fee UBS NY has negotiated to 
receive from any such Client Plan for standard custodial or other 
services unrelated to the securities lending activity. The arrangement 
to have UBS NY provide such services relative to securities loans to a 
UBS Borrower under an Exclusive Borrowing Agreement will be terminable 
by the Client Plan within five business days of receipt of written 
notice, without penalty to the Client Plan, other than any return to 
the UBS Borrower of the portion of the fee paid by the UBS Borrower to 
the Client Plan if the Client Plan also terminates its Agreement with 
the UBS Borrower. Procedures similar to those described under Plan A 
(see Representation 13) will be followed.
    Before entering into or renewing an Exclusive Borrowing Agreement 
with a Client Plan to provide such administrative services relative to 
securities loans to UBS Borrowers, UBS NY will furnish to the Client 
Plan any publicly available information which it believes is necessary 
for the Client Plan to determine whether to enter into or renew the 
Agreement.
    35. In exchange for the exclusive right to borrow certain 
securities from a Client Plan, the UBS Borrower will pay the Client 
Plan either a flat fee, or a minimum flat fee plus a percentage (to be 
negotiated at the time the Exclusive Borrowing Agreement is entered 
into) of the total balance outstanding of borrowed securities, or a 
percentage of

[[Page 15462]]

the total balance outstanding without any flat fee. In light of this 
arrangement, all earnings generated by cash collateral will be returned 
to the UBS Borrower.
    36. As under Plan A, the Client Plan will be entitled, under Plan 
B, to the equivalent of all interest, dividends or other distributions 
on any borrowed securities that the Client Plan would have received had 
it remained the record owner of the securities (see Representation 17 
as well as the representations regarding foreign tax withholdings). In 
addition, as under Plan A, the same asset limitations and investor 
sophistication requirements that are set forth in Representation 28 as 
well as the conditions of PTE 81-6, except as otherwise noted herein, 
will be applicable.
    37. The Exclusive Borrowing Agreement may be terminated by either 
party to the agreement at any time. Each UBS Borrower will agree that 
upon termination, it will deliver any borrowed securities back to the 
Client Plan within five business days of written notification of 
termination or, if sooner, within the normal settlement period in the 
principal market in which the loaned securities are traded (unless a 
longer period is permitted pursuant to an applicable Department 
exemption). If the UBS Borrower fails to return the securities or the 
equivalent thereof, the Client Plan will have certain rights under the 
Agreement to realize upon the collateral.
    38. Under the Exclusive Borrowing Agreement, UBS NY will indemnify 
and hold harmless the Client Plan in the United States (including the 
sponsor and fiduciaries of such Client Plan) for any transactions 
covered by this exemption with a UBS Borrower so that the Client Plan 
does not have to litigate, in the case of a UBS Foreign Borrower, in a 
foreign jurisdiction nor sue the UBS Foreign Borrower to realize on the 
indemnification. Such indemnification, by UBS NY, will be against any 
and all reasonably foreseeable damages, losses, liabilities, costs and 
expenses (including attorney's fees) which the Client Plan may incur or 
suffer, arising from any impermissible use by the UBS Borrower of the 
loaned securities or the failure of the UBS Borrower to deliver loaned 
securities in accordance with the applicable Loan Agreement or to 
otherwise comply with the terms of such agreement, except to the extent 
that such losses or damages are caused by the Client Plan's own 
negligence. In the event any default occurs with respect to the 
borrowed securities, UBS NY will follow the procedures described above 
in Representation 23.
    39. In summary, the Applicants represent that the proposed 
transactions will satisfy the statutory criteria for an exemption under 
section 408(a) of the Act because:
    (a) Plan A requires that the form of the Loan Agreement pursuant to 
which any loan is effected will be approved by a fiduciary of the 
Client Plan who is independent of UBS NY and UBS Borrowers before a 
Client Plan lends any securities to UBS Borrowers, while under Plan B, 
UBS Borrowers will directly negotiate Exclusive Borrowing Agreements 
with a Client Plan, the fiduciary of which is also independent of UBS 
NY and the UBS Borrowers.
    (b) The lending arrangements under both Plan A and Plan B will 
permit Client Plans to lend to UBS Borrowers and will enable such Plans 
to diversify the list of eligible borrowers and earn additional income 
from the loaned securities on a secured basis, while continuing to 
receive dividends, interest payments and other distributions due on 
those securities.
    (c) With respect to securities lending transactions in which a UBS 
Foreign Borrower is the borrower, the proposed exemption will enable 
Client Plans to realize low-risk returns on securities that otherwise 
would remain idle, as in securities lending transactions executed 
pursuant to PTE 81-6, by broker-dealers registered in the United 
States, and the proposed exemption generally imposes terms and 
conditions upon transactions entered into by UBS Foreign Borrowers 
which are the same as or comparable to those imposed on U.S. borrowers 
under PTE 81-6, except as otherwise noted herein.
    (d) Under both Plan A and Plan B, the Client Plan will receive 
sufficient information concerning each UBS Borrower's financial 
condition before the Client Plan lends any securities to such UBS 
Borrower.
    (e) Under both Plan A and Plan B, the collateral on each loan to a 
UBS Borrower initially will be at least 102 percent of the market value 
of the loaned securities, which is in excess of the 100 percent 
collateral required under PTE 81-6, and the collateral levels will be 
monitored daily by UBS NY under Plan A and by UBS NY or another 
custodian under Plan B.
    (f) Under both Plan A and Plan B, the Client Plans will receive 
agreed upon periodic reports (prepared no less frequently than monthly) 
containing information on loan activity, fees, the level of the 
collateral and loan return/yield.
    (g) Under both Plan A and Plan B, UBS NY and UBS Borrowers will 
have no discretionary authority or control over the Client Plan's 
acquisition or disposition of securities available for loan.
    (h) Under both Plan A and Plan B, the applicable fee or rebate 
payable for each loan and other terms of the loan will be at least as 
favorable to the Client Plans as those of a comparable arm's length 
transaction between unrelated parties.
    (i) Under both Plan A and Plan B, all of the procedures under the 
proposed transactions will, at a minimum, conform to the applicable 
provisions of PTE 81-6, PTE 82-63 and Rule 15a-6, except as otherwise 
noted herein, and also will be in compliance with the applicable 
securities laws of the United States, the United Kingdom, Switzerland 
and Japan.

Notice to Interested Persons

    Notice of the proposed exemption will be provided to interested 
persons by UBS NY within five (5) days of the publication of the notice 
of proposed exemption in the Federal Register. Such notice will be 
provided to appropriate trustees or fiduciaries of Client Plans which 
have an interest in lending securities to UBS Borrowers by first-class 
mail or by hand delivery. The notice will include a copy of the notice 
of proposed exemption as published in the Federal Register and 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. Written comments and hearing requests are due within 
thirty-five (35) days of the publication of the 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.)

Beer Nuts, Inc. Profit Sharing Plan (the Plan) Located in Bloomington, 
Illinois

[Exemption Application No. D-10531]

Proposed Exemption

    The Department is considering granting a retroactive exemption 
under the authority of section 408(a) of the Act and 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 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 sale (the Sale) by the Plan of certain 
limited partnership interests (the

[[Page 15463]]

Interests) to Beer Nuts, Inc. (Beer Nuts), a party in interest and a 
disqualified person with respect to the Plan, provided that the 
following conditions were satisfied:
    (a) the terms of the Sale were at least as favorable to the Plan as 
those obtainable in an arm's length transaction with an unrelated 
party;
    (b) the Sale was a one-time transaction for cash;
    (c) the Plan paid no commissions or other expenses relating to the 
Sale; and
    (d) The Sale price was not less than the fair market value of the 
Interests as determined by a qualified independent appraiser.
    Effective Date: If granted, the proposed exemption will be 
effective as of December 30, 1996.

Summary of Facts and Representations

    1. The Plan is a profit sharing plan with 59 participants. The Plan 
is sponsored and administered by Beer Nuts, manufacturer of a specialty 
line of snack nuts. The trustees (the Trustees) of the Plan are Mr. 
James A. Shirk, President and CEO of Beer Nuts, and Mr. Russell O. 
Shirk, Chairman of the Board of Directors for Beer Nuts. As of December 
31, 1996, the Plan held assets valued at $5,413,988.
    2. Beer Nuts seeks a retroactive exemption for its December 30, 
1996 purchase of the Interests from the Plan. The Interests consisted 
of 100 units of the Balcor Equity Pension Investors I (Balcor I) 
limited partnership and 200 units of the Balcor Pension Investors VI 
(Balcor VI) limited partnership. The limited partnerships, established 
in and subject to the laws of the State of Illinois, were designed to 
invest in real estate. The general partner is the Balcor Company of 
Deerfield, Illinois.
    According to the applicant, the Plan originally purchased the 
Balcor I units in 1983 for $50,000, or $500 per unit. While holding the 
units, the Plan received $37,347, or $373.47 per unit, in total 
distributions. On December 30, 1996, Beer Nuts purchased the Balcor I 
units from the Plan for $32,067, or $320.67 per unit. Thus, the Plan 
received a total of $69,414 ($694.14 per unit) on an investment of 
$50,000.
    The Plan also purchased the 200 Balcor VI units in 1983, paying a 
total of $50,000, or $250 per unit. While holding these units, the Plan 
received $48,072, or $240.36 per unit, in total distributions. The Plan 
sold the Balcor VI units to Beer Nuts on December 30, 1996 for $19,100, 
or $95.50 per unit. Therefore, the plan received a total of $67,172 
($335.86 per unit) on an investment of $50,000.
    3. The Plan's need to sell the Interests arose primarily out of the 
decision by the Trustees to transfer the Plan's administrative duties 
to the Principal Mutual Life Insurance Company (the Principal), and to 
purchase a group annuity contract therefrom. The Interests could not be 
held under the group annuity contract, but would instead be considered 
``outside assets'' by the Principal, resulting in additional expenses 
related thereto. Furthermore, the Trustees wanted to liquidate 
underperforming assets and reinvest in an asset providing for a higher 
rate of return.
    Acting on the advice of their insurance agent, the Trustees decided 
to obtain an appraisal for the Interests and then purchase them 
directly from the Plan. Accordingly, the Trustees consulted the 
September 30, 1996 appraisal which was jointly performed by two firms, 
Valuation Counselors Group, Inc. and Darby and Associates (VCG-Darby). 
Each firm has had extensive experience in valuing partnership interests 
and was independent of Beer Nuts. VCG-Darby had been hired by the 
Balcor Company to value, on an ongoing basis, partnership interests 
issued by 16 of the Balcor Company's partnerships, including Balcor I 
and Balcor VI.
    Adjusted for the October 1996 distributions,26 the 
Balcor I units had a net value of $320.67 per unit, and the Balcor VI 
units had a net value of $95.50 per unit. Before undertaking the 
transaction, however, the Plan received an unsolicited offer for the 
Balcor I units on December 2, 1996 from an unrelated third party, the 
First Trust Company, LP (First Trust). First Trust offered to purchase 
up to 4.9% of the limited partnership interests in Balcor I at a price 
of $200 per unit. Because the amount of the offer was significantly 
lower than the VCG-Darby valuation, Beer Nuts opted to purchase the 
Interests from the Plan using VCG-Darby's figures.
---------------------------------------------------------------------------

    \26\ According to documents submitted by the applicant, the 
unadjusted September 30, 1996 VCG-Darby valuation for the Interests 
was $366 per unit for the Balcor I units and $122 per unit for the 
Balcor VI units. However, adjustments were made for subsequent 
distributions from the partnership of $45.33 per Balcor I unit and 
$26.50 per Balcor VI unit.
---------------------------------------------------------------------------

    In further support of its claim that it acted in good faith, the 
applicant points to three subsequent offers for the Interests. On 
January 1, 1997, First Trust submitted an unsolicited offer to buy up 
to 4.9% of the Balcor VI units for $61 per unit. On March 6, 1997, 
Madison Partnership Liquidity Investors CC, LLC (Madison) offered to 
purchase up to 4.9% of the Balcor I units for $110 per unit, and up to 
4.9% of the Balcor VI units for $36 per unit. Beer Nuts believes that 
the fact it paid an amount significantly in excess of the First Trust 
and Madison offers demonstrates that it conducted the transaction in a 
manner designed to protect the interests of the Plan and those of the 
participants and beneficiaries.
    4. According to the applicant, neither the Trustees of the Plan nor 
the officers of Beer Nuts involved in the transaction were aware of the 
prohibited nature of the transaction until contacting their accountant, 
Mr. Bruce Breitweiser, in early 1997 about changing the Plan year to a 
calendar year in conjunction with the transfer of the Plan's assets to 
the Principal. While reviewing the Plan's records, Mr. Breitweiser 
discovered the prohibited transaction. Upon informing the applicant, 
Mr. Breitweiser learned that the Trustees engaged in the transaction on 
the advice of their insurance agent. Soon thereafter, he contacted the 
legal department at the Principal, which agreed with his conclusion as 
to the prohibited nature of the transaction. At this point, Mr. 
Breitweiser began obtaining all of the documentation from Beer Nuts and 
the Principal pertaining to the transaction. After doing so, he 
contacted the Department about securing retroactive exemptive relief.
    5. The applicant represents that the transaction was 
administratively feasible in that it was a one-time transaction for 
cash. Furthermore, the applicant states that the transaction was in the 
interests of the Plan and its participants and beneficiaries because it 
provided for the consolidation of the Plan's assets, reduced record-
keeping costs, ensured that the Plan received a return on the Interests 
in excess of its original investment, and disposed of illiquid and 
underperforming assets facilitating the investment of the proceeds in 
an asset better suited to the needs of the Plan and its participants 
and beneficiaries. Finally, the applicant represents that the 
transaction was protective of the rights of the participants and 
beneficiaries because the Plan received for the Interests an amount 
determined by a qualified, independent appraiser.
    6. In summary, the applicant represents that the subject 
transaction satisfied the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons: (a) the terms of 
the Sale were at least as favorable to the Plan as those obtainable in 
an arm's-length transaction with an unrelated party; (b) the Sale was a 
one-time transaction for cash; (c) the Plan

[[Page 15464]]

paid no commissions or other expenses relating to the Sale; and (d) the 
Sale price was not less than the fair market value of the Interests as 
determined by a qualified, independent appraiser.

Notice to Interested Persons

    Notice of the proposed exemption shall be given 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 pendency of the exemption 
as published in the Federal Register and shall inform interested 
persons of their right to comment and request a hearing with respect to 
the proposed exemption. Comments and requests for a hearing are due on 
or before May 15, 1998.
    For Further Information Contact: Mr. James Scott Frazier of the 
Department, telephone (202) 219-8891 (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 25th day of March 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 98-8197 Filed 3-30-98; 8:45 am]
BILLING CODE 4510-29-P