[Federal Register Volume 64, Number 106 (Thursday, June 3, 1999)]
[Notices]
[Pages 29895-29920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13887]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D09708, et al.]


Proposed Exemptions; RREEF America L.L.C. (RREEF)

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

    Unless otherwise stated in the Notice of Proposed Exemption, all 
interested persons are invited to submit written comments, and with 
respect to exemptions involving the fiduciary prohibitions of section 
406(b) of the Act, requests for hearing within 45 days from the date of 
publication of this Federal Register Notice. Comments and 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, NW, Washington, DC 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, NW, Washington, DC 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.

[[Page 29896]]

RREEF America L.L.C. (RREEF), Located in San Francisco, California

[Application No. D-9708]

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.)
Part I--Exemption for Payment of Certain Fees to RREEF
    The restrictions of sections 406(b)(1) and (b)(2) of the Act and 
the taxes imposed by section 4975 of the Code, by reason of section 
4975(c)(1)(E) of the Code, shall not apply, effective as of (i) May 16, 
1994, with respect to a single client, separate account established on 
behalf of the Shell Pension Trust (the Shell Account), and (ii) the 
date the final exemption is published in the Federal Register, with 
respect to any single client, separate account (Single Client Account) 
or any multiple client account (Multiple Client Account) formed on, or 
after, such a date, to the payment of certain initial investment fees 
(the Investment Fee), annual management fees based upon net operating 
income (the Asset Management Fee), and performance fees (the 
Performance Fee) to RREEF by employee benefit plans for which RREEF 
provides investment management services (the Client Plans) 1 
pursuant to an investment management agreement (the Agreement) entered 
into between RREEF and the Client Plans either individually, through an 
establishment (or amendment) of a Single Client Account, or 
collectively as participants in a newly established Multiple Client 
Account (collectively, the Accounts), provided that the conditions set 
forth below in Part III are satisfied.
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    \1\ The Client Plans (including employee benefit plans that may 
become Client Plans in the future) consist of various pension plans 
as defined in section 3(2) of the Act and other plans as defined in 
section 4975(e)(1) of the Code with respect to which RREEF serves as 
a trustee or an investment manager.
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Part II--Exemption for Investments in a Multiple Client Account
    The restrictions of section 406(a)(1)(A) through (D) of the Act and 
the taxes imposed by section 4975(c)(1)(A) through (D) of the Code, 
shall not apply to any investment by a Client Plan in a Multiple Client 
Account managed by RREEF formed on, or after, the date the final 
exemption is published in the Federal Register, provided that the 
conditions set forth below in Part III are satisfied.
Part III--General Conditions
    (a)(1) The investment of plan assets in a Single or Multiple Client 
Account, including the terms and payment of any Investment Fee, Asset 
Management Fee and Performance Fee (collectively; the Fees), shall be 
approved in writing by a fiduciary of a Client Plan which is 
independent of RREEF and its affiliates (the Independent Fiduciary).
    (2) For purposes of the Fees, the fair market value of the 
Accounts' real property assets (other than in the case of actual sales) 
will be based on appraisals prepared by independent qualified 
appraisers that are Members of the Appraisal Institute (MAI 
Appraisers). In this regard, every agreement by which an appraiser is 
retained will include the appraiser's representation that: (1) Its 
ultimate client is the Account and its underlying Client Plan (and non-
Plan) investors, and (2) it will perform its duties in the interest of 
such Account (and investors). In addition, following the date this 
proposed exemption is granted, every agreement shall advise the 
appraiser that it owes a professional obligation to the Account when 
making an appraisal for properties held by the Account.
    (b) The terms of any investment in an Account and of the Fees, 
shall be at least as favorable to the Client Plans as those obtainable 
in arm's-length transactions between unrelated parties.
    (c) At the time any Account is established (or amended) and at the 
time of any subsequent investment of assets (including the reinvestment 
of assets) in such Account:
    (1) Each Client Plan in a Single Client Account shall have total 
net assets with a value in excess of $100 million, and each Client Plan 
that is an investor in a Multiple Client Account shall have total net 
assets with a value in excess of $50 million; and provided that 
seventy-five percent (75%) or more of the units of beneficial interests 
in a Multiple Client Account are held by Client Plans or other 
investors having total assets of at least $100 million. In addition, 50 
percent (50%) or more of the Client Plans investing in a Multiple 
Client Account shall have assets of at least $100 million. A group of 
Client Plans maintained by a single employer or controlled group of 
employers, any of which individually has assets of less than $100 
million, will be counted as a single Client Plan if the decision to 
invest in the Account (or the decision to make investments in the 
Account available as an option for an individually directed account) is 
made by a fiduciary other than RREEF, who exercises such discretion 
with respect to Client Plan assets in excess of $100 million.
    (2) No Client Plan shall invest, in the aggregate, more than 5% of 
its total assets in any Account or more than 10% of its total assets in 
all Accounts established by RREEF.
    (d) Prior to making an investment in any Account (or amending an 
existing Account), the Independent Fiduciary of each Client Plan 
investing in an Account shall have received offering materials from 
RREEF which disclose all material facts concerning the purpose, 
structure, and operation of the Account, including any Fee arrangements 
(provided that, in the case of an amendment to the Fee arrangements, 
such materials need address only the amended fees and any other 
material change to the Account's original offering materials).
    (e) With respect to its ongoing participation in an Account, each 
Client Plan shall receive the following written information from RREEF:
    (1) Audited financial statements of the Account prepared by 
independent public accountants selected by RREEF no later than 90 days 
after the end of the fiscal year of the Account;
    (2) Quarterly and annual reports prepared by RREEF relating to the 
overall financial position and operating results of the Account and, in 
the case of a Multiple Client Account, the value of each Client Plan's 
interest in the Account. Each such report shall include a statement 
regarding the amount of fees paid to RREEF during the period covered by 
such report;
    (3) Periodic appraisals (as agreed upon with the Client Plans) 
indicating the fair market value of the Account's assets as established 
by an MAI appraiser independent of RREEF and its affiliates. In the 
case of any appraisal that will serve as the basis for any ``deemed 
sale'' of such property for purposes of calculating the Performance Fee 
payable to RREEF (as discussed in paragraph (j) below), then:
    (i) In the case of any Single Client Account, such MAI appraiser 
shall be either (A) Selected by the Independent Fiduciary of the Client 
Plan subject to the affirmative approval of RREEF, or (B) selected by 
RREEF subject to approval by the Independent Fiduciary of the Client 
Plan;
    (ii) In the case of any Multiple Client Account, such MAI appraiser 
shall be approved in advance by the Responsible Independent Fiduciaries 
(as defined in Part IV(e) below) owning a majority of the interests in 
the Accounts, determined according to the latest

[[Page 29897]]

valuation of the Account's assets performed no more than 12 months 
prior to such appraisal, which approval may be by written notice and 
deemed consent by such Fiduciaries' failure to object to the appraiser 
within 30 days of such notice; and
    (iii) In either case, the selected MAI appraiser shall acknowledge 
in writing that the Client Plan(s) and other investors (in the case of 
a Multiple Client Account), rather than RREEF, is (are) its clients, 
and that in performing its services for the Account it shall act in the 
sole interest of such Client Plan(s) and other investors. In addition, 
following the date this proposed exemption is granted, every appraiser 
selected shall acknowledge that it owes a professional obligation to 
the Client Plan(s) and other investors in the Account in performing its 
services as an appraiser for properties in the Account. If an MAI 
appraiser selected by RREEF, or an appraisal performed by a previously 
approved appraiser, is rejected by the Independent Fiduciary for a 
Single Client Account or the Responsible Independent Fiduciaries for 
the Multiple Client Account, determined according to the latest 
valuation of the Account's assets performed no more than 12 months 
prior to such appraisal, the fair market value of the assets for any 
``deemed sale'', relating to the payment of a Performance Fee (as 
described in paragraphs (i) and (j) below) shall be determined as 
follows: (A) the Client Plans shall appoint a second appraiser and, if 
the value established for the property does not deviate by more than 
10% (or such lesser amount as may be agreed upon between RREEF and the 
Client Plan(s)), then the two appraisals shall be averaged; (B) if the 
values differ by more than 10%, then the two appraisers shall select a 
third appraiser, that is independent of RREEF and its affiliates, who 
will attempt to mediate the difference; (C) if the third appraiser can 
cause the first two to reach an agreement on a value, that figure shall 
be used; however, (D) if no agreement can be reached, the third 
appraiser shall determine the value based on procedures set out in the 
governing agreements of the Account or, if no such procedures are 
established, shall conduct its own appraisal and the two closest of the 
three shall be averaged;
    (4) In the case of any Multiple Client Account, a list of all other 
investors in the Account;
    (5) Annual operating and capital budgets with respect to the 
Account, to be distributed to a Client Plan within 60 days prior to the 
beginning of the fiscal year to which such budgets relate; and
    (6) An explanation of any material deviation from the budgets 
previously provided to such Client Plan for the prior year.
    (f) The total fees paid to RREEF shall constitute no more than 
``reasonable compensation'' within the meaning of section 408(b)(2) of 
the Act.
    (g) The Investment Fee shall be equal to a specified percentage of 
the net value of the Client Plan assets allocated to the Account which 
shall be payable either:
    (1) At the time assets are deposited (or deemed deposited in the 
case of reinvestment of assets) in the Account; or
    (2) In periodic installments, the amount (as a percentage of the 
aggregate Investment Fee) and timing of which have been specified in 
advance based on the percentage of the Client Plan's assets invested in 
real property as of the payment date; provided that (i) The installment 
period is no less than three months, and (ii) if the percentage of the 
Client Plan assets which have actually been invested by a payment date 
is less than the percentage required for the aggregate Investment Fee 
to be paid in full through that date (both determined on a cumulative 
basis), the Investment Fee paid on such a date shall be reduced by the 
amount necessary to cause the percentage of the aggregate Investment 
Fee paid to equal only the percentage of the Client Plan assets 
actually invested by that date. The unpaid portion of such Investment 
Fee shall be deferred to and payable on a cumulative basis on the next 
scheduled payment date (subject to the percentage limitation described 
in the preceding sentence).
    (h) The Asset Management Fee shall be payable for each quarter from 
the net operating income (NOI) of the Account. The amount of the Asset 
Management Fee, expressed as a percentage of the NOI of the Account, 
shall be established by the Agreement and agreed to by the Independent 
Fiduciaries of the Client Plans:
    (1) The Asset Management Fee for any Account will be calculated as 
follows. The Asset Management Fee for a specific Account real property 
will be based solely on items of operating income and expense that are 
identified as line items on an operating budget for such property 
disclosed to each Client Plan that participates in the Account. The 
disclosures have to be made at least 30 days in advance of the fiscal 
year to which the budget relates, and approved in the manner described 
in (2) below;
    (2) Each Client Plan must provide affirmative approval of the 
operating budget. Specifically, when the proposed budget (or any 
material deviation therefrom) is sent to a Client Plan, it will be 
accompanied by a written notice that the Client Plan may object to the 
budget or any specific line item therein, for purposes of calculating 
the Asset Management Fees for the next fiscal year. The written notice 
will contain a statement that affirmative approval of the budget is 
required prior to the end of the 30-day period following such 
disclosure. In the case of a Multiple Client Account, affirmative 
approval by a majority of investors (by interest) will constitute 
approval of the proposed budget (or deviation); and
    (3) In the event of any subsequent decrease in previously approved 
budgeted operating expenses for the fiscal year in excess of the limits 
previously described (15% for any line item, 5% overall), then the 
resulting increase in NOI (i.e., over and above the allowable 
deviation) will not be taken into account in calculating RREEF's 
management fee unless affirmative approval for the payment of such fee 
is obtained in writing from the Independent Fiduciary for the Client 
Plan in the Single Client Account or the Responsible Independent 
Fiduciaries for the Multiple Client Account.
    (i) In the case of any Multiple Client Account, the Performance Fee 
shall be payable after the Client Plan has received distributions from 
the Account in excess of an amount equal to 100% of its invested 
capital plus a pre-specified annual compounded cumulative rate of 
return (the Threshold Amount or Hurdle Rate). However, in the case of 
RREEF's removal or resignation, RREEF shall be entitled to receive a 
Performance Fee payable either at the time of removal or, in the event 
of RREEF's resignation, upon sale of the assets to which the 
Performance Fee is allocable or upon termination of the Account as the 
case may be, subject to the requirements of paragraph (l) below, as 
determined by a deemed distribution of the assets of the Account based 
on an assumed sale of such assets at their fair market value (in 
accordance with independent appraisals), only to the extent that the 
Client Plan would receive distributions from the Account in excess of 
an amount equal to the Threshold Amount at the time of RREEF's removal 
or resignation. Both the Threshold Amount and the amount of the 
Performance Fee, expressed as a percentage of the net proceeds from a 
capital event distributed (or deemed distributed) from the Account in 
excess of the Threshold Amount, shall be established by the Agreement 
and agreed to by the Independent Fiduciaries of the Client Plans.

[[Page 29898]]

    (j) In the case of any Single Client Account, the Performance Fee 
shall be determined and paid either: (1) In the same manner as in the 
case of a Multiple Client Account, as described in paragraph (i) above; 
or (2) at the end of any pre-specified period of not less than one 
year, provided that such Fee is based upon the sum of all actual 
distributions from the Account during such period, plus deemed 
distributions of the assets of the Account based on an assumed sale of 
all such assets at their fair market value as of the end of such period 
(in accordance with independent appraisals performed within 12 months 
of the calculation) which are calculated to be in excess of the 
Threshold Amount or the Hurdle Rate through the end of such period. For 
this purpose, the Performance Fee measuring period shall be established 
by the Agreement and agreed to by the Independent Fiduciary of the 
Client Plan, provided that such period is not less than one year. In 
addition, RREEF shall provide notice to the Client Plan within 60 days 
of each Performance Fee calculation for a Single Client Account that 
the Independent Fiduciary of the Client Plan has the right to request 
updated appraisals of the properties held by the Account if such 
Fiduciary determines that the existing independent appraisals 
(performed within 12 months of the calculation) are no longer 
sufficient.
    (k) The Threshold Amount for any Performance Fee shall include at 
least a minimum rate of return to the Client Plan, as defined below in 
Part IV, paragraph (f).
    (l) In the event RREEF resigns as investment manager for an 
Account, the Performance Fee shall be calculated at the time of 
resignation as described above in paragraph (i) above and allocated 
among each property, based on the appraised value of such property in 
relationship to the total appraised value of the Account. Each amount 
arrived at through this calculation shall be multiplied by a fraction, 
the numerator of which will be the actual sales price received by the 
Account on subsequent disposition of the property (or in the case of a 
property which has not been sold prior to the termination of a Multiple 
Client Account, the appraised value of the property as of the 
termination date), and the denominator of which will be the appraised 
value of the property which was used in connection with determining the 
Performance Fee at the time of resignation, provided that this fraction 
shall never exceed 1.0. The resulting amount for each property shall be 
the Performance Fee payable to RREEF upon the sale of such property or 
termination of the Multiple Client Account, as the case may be.
    (m) In cases where RREEF does have discretion to reinvest proceeds 
from capital events, the reinvested amount shall not be treated as a 
new contribution of capital by the Client Plan for purposes of the 
Investment Fee, as described above in paragraph (g), or having been 
distributed for purposes of the payment of Performance Fee as described 
above in paragraphs (i) and (j);
    (n) RREEF or its affiliates shall maintain, for a period of six 
years, the records necessary to enable the persons described in 
paragraph (o) of this Part III to determine whether the conditions of 
this exemption have been met, except that:
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of RREEF 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 RREEF, shall 
be subject to the civil penalty that may be assessed under section 
502(i) of the Act or the taxes imposed by section 4975(a) and (b) of 
the Code if the records are not maintained or are not available for 
examination as required by paragraph (o) below.
    (o)(1) Except as provided in paragraph (o)(2) and notwithstanding 
any provisions of section 504(a)(2) and (b) of the Act, the records 
referred to in paragraph (n) of this Part III shall be unconditionally 
available at their customary location for examination during normal 
business hours by:
    (i) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (ii) Any fiduciary of a Client Plan or any duly authorized employee 
or representative of such fiduciary;
    (iii) Any contributing employer to a Client Plan or any duly 
authorized employee or representative of such employer; and
    (iv) Any participant or beneficiary of a Client Plan or any duly 
authorized employee or representative of such participant or 
beneficiary;
    (2) None of the persons described above in paragraph (o)(1)(ii)-
(iv) shall be authorized to examine the trade secrets of RREEF and its 
affiliates or any commercial or financial information which is 
privileged or confidential.
    (p) RREEF shall provide a copy of the proposed exemption and a copy 
of the final exemption to all Client Plans that invest in any Single 
Client Account or any Multiple Client Account formed on, or after, the 
date the final exemption is published in the Federal Register.
Part IV--Definitions
    (a) An ``affiliate'' of a person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative of, or partner of any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (b) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (c) The term ``management services'' means:
    (1) Development of an investment strategy for the Account and 
identification of suitable real estate-related investments;
    (2) Directing the investments of the assets of the Account, 
including the determination of the structure of each investment, the 
negotiation of its terms and conditions and the performance of all 
requisite due diligence;
    (3) Determination of the timing of, and directing, the disposition 
of assets of the Account and directing the liquidation of the Account 
upon termination;
    (4) Administration of the overall operation of the investments of 
the Account, including all applicable leasing, management, financing 
and capital improvement decisions;
    (5) Establishing and maintaining accounting records of the Account 
and distributing reports to Client Plans as described in Part III; and
    (6) Selecting and directing all service providers of ancillary 
services as defined in this Part IV; provided, however, that some or 
all of the foregoing management services may be subject to the final 
discretion of the Independent Fiduciary(ies) for the Client Plan(s).
    (d) The term ``ancillary services'' means:
    (1) Legal services;
    (2) Services of architects, designers, engineers, construction 
managers, hazardous materials consultants, contractors, leasing agents, 
real estate brokers, and others in connection with the acquisition, 
construction, improvement, management and disposition of investments in 
real property;
    (3) Insurance brokerage and consultation services;
    (4) Services of independent auditors and accountants in connection 
with auditing the books and records of the Accounts and preparing tax 
returns;

[[Page 29899]]

    (5) Appraisal and mortgage brokerage services; and
    (6) Services for the development of income-producing real property.
    (e) The term ``Independent Fiduciary'' with respect to any Client 
Plan means a fiduciary (including an in-house fiduciary) independent of 
RREEF and its affiliates. With respect to a Multiple Client Account, 
the terms ``Independent Fiduciary'' or ``Responsible Independent 
Fiduciaries'' mean the Independent Fiduciaries of the Client Plans 
invested in the Account and other authorized persons acting for 
investors in the Account which are not employee benefit plans as 
defined under section 3(3) of ERISA (such as governmental plans, 
university endowment funds, etc.) that are independent of RREEF and its 
affiliates, and that collectively hold more than 50% of the interests 
in the Account.
    (f) The terms ``Threshold Amount'' or ``Hurdle Rate'' mean, with 
respect to any Performance Fee, an amount which equals all of a Client 
Plan's capital invested in an Account plus a pre-specified annual 
compounded cumulative rate of return that is at least a minimum rate of 
return determined as follows:
    (1) A ``floating'' or non-fixed rate which is at least equal to the 
lesser of seven percent, or the rate of change in the consumer price 
index (CPI), during the period from the deposit of the Client Plan's 
assets into the Account until the determination date; or
    (2) A fixed rate which is at least equal to the lesser of seven 
percent or the average rate of change in the CPI over some period of 
time specified in the Agreement, which shall not exceed 10 years.
    (g) The terms ``Net Operating Income'' or ``NOI'' means all 
operating income of the Account (i.e., rents, interest, and other 
income from day-to-day investment activities of the Account) less 
operating expenses, determined on an accrual basis in accordance with 
generally accepted accounting principles, but without regard to 
depreciation (or other non-cash) expense and capital expenditures and 
without regard to payments of interest and principal with respect to 
any acquisition indebtedness relating to the property.
    (h) The term ``Net Proceeds of a Capital Event'' means all proceeds 
from capital events of an Account (i.e., sales or non-recourse 
refinances of real property investments owned by the Account) less 
repayment of debt with respect to such property, closing expenses paid, 
and reasonable reserves established in connection therewith, whether 
such reserves are for repayment of existing or anticipated obligations 
or for contingent liabilities.

EFFECTIVE DATE: This proposed exemption, if granted, will be effective 
as of (i) May 16, 1994, with respect to the Shell Account, and (ii) the 
date the final exemption is published in the Federal Register, with 
respect to any Single Client Account and any Multiple Client Account 
formed on, or after, such date.

Summary of Facts and Representations

    1. RREEF America L.L.C. and its affiliate, RREEF Management 
Company, provide investment and property management services to 
institutional investors, including employee benefit plans and other 
tax-exempt entities, through various separate accounts and commingled 
accounts.
    On January 27, 1998, RREEF America L.L.C. and its affiliate, RREEF 
Corporation (collectively, RREEF), were acquired by RoProperty 
Services, B.V. (RoProperty), a major Dutch investment advisory firm. As 
a result, the RREEF entities were combined into a newly created 
Delaware limited liability company which continues to use the name 
``RREEF America L.L.C.'' RREEF operates as an autonomous entity which 
continues to provide investment management services, and its affiliate, 
RREEF Management Company, continues to provide property management 
services.
    2. RREEF is generally appointed as an investment manager (the 
Manager) as defined in section 3(38) of the Act with respect to each 
Client Plan that invests in a Single Client Account or a Multiple 
Client Account. Although RREEF has discretion with respect to the day-
to-day operation of each Account and, in many cases, RREEF has full 
discretion over Account acquisition and/or disposition decisions, in 
certain cases final investment authority may remain with the Client 
Plans.
    3. A Client Plan may enter into one or more separate account 
relationships with RREEF (each, a Single Client Account) pursuant to 
one or more individually negotiated investment management agreements 
with RREEF, or by investing in a commingled investment fund (Multiple 
Client Account, collectively; the Accounts) managed by 
RREEF.2 The Accounts to date have been blind investment 
relationships established for the purpose of identifying and acquiring 
real property investments that meet certain investment criteria. 
However, specified-property investment relationships may be established 
to invest in pre-identified real property investments. The 
responsibilities of RREEF in a typical blind discretionary Account 
would include:
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    \2\ The applicant represents that in some instances a Client 
Plan's investment in a Multiple Client Account that is a common or 
collective trust fund maintained by a bank would be exempt from the 
restrictions of section 406(a) of the Act by reason of section 
408(b)(8). The Department expresses no opinion herein whether all 
the conditions of section 408(b)(8) will be satisfied in such 
transactions.
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    (a) Development of an investment strategy for the Account and 
identification of suitable real estate investments.
    (b) Directing the investment of the assets of the Account, 
including the determination of the structure of each investment, the 
negotiation of its terms and conditions, and the performance of 
requisite due diligence.
    (c) Determining the timing of, and directing, the disposition of 
assets of the Account and directing the liquidation of the Account upon 
termination.
    (d) Administering the overall operation of the investments of the 
Account, including all applicable leasing, management, financing, and 
capital improvement decisions.
    (e) Establishing and maintaining accounting records of the Account, 
and distributing reports to Client Plans.
    (f) RREEF also has complete discretion in the selection and 
direction of the ancillary services (Ancillary Services) defined in 
Part IV, paragraph (d) above.3
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    \3\ RREEF or its affiliates may, from time-to-time, provide 
certain Ancillary Services to the Accounts, such as in connection 
with the development or redevelopment of real property, preparation 
of tax returns, environmental consulting, or other services. 
Occasionally, RREEF has provided construction management and 
development services with respect to non-ERISA governmental plan 
accounts. However, upon special request from a client, RREEF may 
agree to provide ancillary services, such as construction management 
or development services based upon its knowledge of the Client 
Plan's investments and its particular expertise. It represented that 
the Ancillary Services are provided in accordance with section 
408(b)(2) and the regulations thereunder (see 29 CFR 2550.408b-2). 
However, the Department expresses no opinion as to whether the 
selection of RREEF to provide Ancillary Services or the payment of 
fees for such Ancillary Services, as described herein, would meet 
the conditions of section 408(b)(2) of the Act.
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    RREEF's primary investment objective is to acquire income-producing 
real property which will generate current return through cash 
distributions and will offer a potential for profit through gain on 
resale.
    Currently, Multiple Client Accounts consist primarily of tax-exempt 
group trusts organized pursuant to IRS Revenue Ruling 81-100 and 
limited partnerships. However, other Multiple Client Accounts may be 
organized in the

[[Page 29900]]

future, including, but not limited to, title-holding corporations, real 
estate investment trusts, or limited liability corporations. In the 
case of Multiple Client Accounts that are group trusts, individual 
principals and officers of RREEF generally serve as trustees thereof. 
Similarly, RREEF principals and officers may serve as directors and/or 
officers of other vehicles. RREEF currently does not serve as general 
partner with respect to any of its limited partnership accounts that 
are subject to ERISA. Typically, the general partner is a corporation 
owned by one or more of the limited partners. However, in each case, 
the primary investment discretion is delegated to RREEF pursuant to an 
investment management agreement between RREEF and the Account (the 
Agreement).
    4. RREEF proposes to have the Client Plans pay for investment 
management services it renders to the Accounts based upon a multi-fee 
structure which will be approved in advance by the Independent 
Fiduciaries of the Client Plans.4 Each Client Plan in a 
Single Client Account shall have total net assets with a value in 
excess of $100 million, and each Client Plan that is an investor in a 
Multiple Client Account shall have total net assets with a value in 
excess of $50 million. In addition, seventy-five percent (75%) or more 
of the units of beneficial interests in a Multiple Client Account must 
be held by Client Plans or other investors having total assets of at 
least $100 million, and 50 percent (50%) or more of the Client Plans 
investing in a Multiple Client Account must have assets of at least 
$100 million. A group of Client Plans maintained by a single employer 
or controlled group of employers, any of which individually has assets 
of less than $100 million, will be counted as a single Client Plan if 
the decision to invest in the Account (or the decision to make 
investments in the Account available as an option for an individually 
directed account) is made by a fiduciary other than RREEF, who 
exercises such discretion with respect to Client Plan assets in excess 
of $100 million. No Client Plan shall invest, in the aggregate, more 
than 5% of its total assets in any Account or more than 10% of its 
total assets in all Accounts established by RREEF.
---------------------------------------------------------------------------

    \4\ Section 404 of the Act requires, among other things, that a 
plan fiduciary act prudently and solely in the interest of the 
plan's participants and beneficiaries. Thus, the Department expects 
a plan fiduciary, prior to entering into any performance based 
compensation arrangement with an investment manager, to fully 
understand the risks and benefits associated with a compensation 
formula following disclosure by the investment manager of all 
relevant information pertaining to the proposed arrangement. In 
addition, a plan fiduciary must be capable of periodically 
monitoring the actions taken by the investment manager in the 
performance of its duties. The plan fiduciary must consider prior to 
entering into any such arrangement, whether it is able to provide 
adequate oversight of the investment manager during the course of 
the arrangement.
---------------------------------------------------------------------------

    The relief provided by this proposed exemption for the multi-fee 
structures described herein will apply prospectively to any newly 
formed Multiple Client Account, if such arrangement is approved in 
advance by the appropriate Independent Fiduciaries of the Client Plans 
and other investors that invest in the Account. In addition, the relief 
provided by this proposed exemption will apply retroactively to the 
Shell Pension Trust for its existing Single Client Account (i.e., the 
Shell Account), as of May 16, 1994, and prospectively for other Single 
Client Accounts if the conditions of the exemption are met. Therefore, 
with regard to any Account, the Independent Fiduciary(ies) of the 
Client Plan(s) will have final approval as to whether the Agreement 
between the Client Plan(s) and RREEF will provide for any Investment 
Fees, Asset Management Fees, or Performance Fees. Similarly, in the 
case of any Account, the final decision to invest the assets of any 
Client Plan in such Account will be made by an Independent Fiduciary. 
RREEF will not exercise its discretion with respect to any Single 
Client Account to invest those assets in any Multiple Client Account. 
With respect to the Shell Account, RREEF represents that this Single 
Client Account has complied with all the applicable conditions 
contained herein for, among other things, approval by an Independent 
Fiduciary for investment in such an Account, the payment of any Fees to 
RREEF, the retention of any appraiser (as discussed further below) for 
the valuation of properties held in the Account,5 and the 
minimum plan asset size required for participation in such 
Accounts.6
---------------------------------------------------------------------------

    \5\ RREEF's Quarterly Report for the Shell Account, dated 
December 31, 1998, describes a portfolio consisting of the following 
six properties: (1) the Bellaire Place Apartments, a residential 
property located in Redmond, Washington, with a fair market value of 
approximately $18.6 million; (2) the San Diego Business Center, an 
industrial property located in San Diego, California, with a fair 
market value of approximately $17.7 million; (3) the West Sacramento 
Industrial Center, an industrial property located in Sacramento, 
California, which was sold on December 23, 1998 for $6.4 million; 
(4) the Broadway Business Park, an industrial property located in 
Phoenix, Arizona, with a fair market value of $26.5 million; (5) 
1627 K Street, N.W., an office building located in Washington, D.C., 
with a fair market value of approximately $9.4 million; and (6) 
Wendemere at the Ranch Apartments, a residential property located in 
Westminster, Colorado, with a fair market value of approximately $16 
million. The fair market value of the properties still held in the 
Shell Account, as of December 31, 1998, was approximately 
$88,268,000.
    \6\ The Shell Pension Trust contained approximately $5.7 billion 
in total assets, of which approximately 2% were invested in real 
estate, as of January, 1999. These real estate assets are managed by 
three primary investment managers, one of which is RREEF.
---------------------------------------------------------------------------

    5. The multi-fee structure will include: (i) The Investment Fee, a 
one-time initial fee paid either at the time the Client Plan invests 
in, or allocates additional assets to, the Account, or in periodic 
installments while such assets are invested by the Account, as 
described below; (ii) the Asset Management Fee, an annual fee for asset 
management charged as a percentage of the net operating income produced 
by properties held in the Account (defined below), which will be 
payable to RREEF without regard to the return to the Client Plans of 
their invested capital; and (iii) the Performance Fee, a fee charged 
upon actual or deemed distributions of capital proceeds from the 
Account in excess of a Client Plan's invested capital, plus a 
negotiated cumulative, compounded annual hurdle rate of return on such 
invested capital (i.e., the Threshold Amount or Hurdle Rate). In a 
Single Client Account, an Independent Fiduciary may agree to allow 
RREEF to receive a periodic Performance Fee based on the Account's 
performance prior to the Client Plan receiving actual distribution of 
capital back from the Account in amounts which exceed the prescribed 
Threshold Amounts. Such Fees will be based on deemed distributions of 
the assets in such Accounts at periodic intervals, with all property 
valuations determined by qualified real estate appraisers independent 
of RREEF and its affiliates. Any property valuation used in the 
calculation of the Performance Fee will be performed within 12 months 
of that calculation.
    6. RREEF requests an individual exemption for Client Plans that 
invest in an Account to pay an Investment Fee, Asset Management Fee, 
and a Performance Fee to RREEF under circumstances described below. 
RREEF represents that Fee rates and Threshold Amounts will be 
negotiated on an Account-by-Account basis.
    The Investment Fee will be a one-time fee intended to cover the 
expense of organizing the Account, identifying suitable investments, 
and completing the initial purchases of real properties for the 
Account, based on the assets invested by the Client Plan in the 
Account. The Investment Fee may be paid either (i) At the time the 
Client

[[Page 29901]]

Plan invests assets in the Account, or (ii) in installments at the end 
of pre-specified periods of not less than three months (over a 
specified period of years). However, if the pre-specified percentage of 
the Account's assets has not been invested by the payment date for the 
Investment Fee, the amount of such fee payable on that date will be 
reduced to reflect the percentage of assets which have been invested by 
that date. In such instances, the remainder of the Investment Fee will 
be deferred until the next pre-specified installment date. At that 
time, the Investment Fee for the current and past installment dates 
will be paid (subject to further deferral if the relevant assets in the 
Account have not been invested at that time). The Investment Fees will 
generally range from 0% to 2% of the capital committed for investment 
by the Client Plans. However, the exact percentage for any Investment 
Fee will be negotiated between RREEF and the relevant Client Plans in 
the Account.
    7. The Asset Management Fee will be paid quarterly throughout the 
term of the Account. As with the Investment Fee, the exact terms of the 
Asset Management Fee will be negotiated between RREEF and the Client 
Plan(s) prior to the initial investment of any Client Plan(s)' assets 
in the Account. The Asset Management Fee will be calculated with 
respect to the net operating income (NOI) from properties owned by the 
Account. In this regard, NOI will not include gains made on properties 
from capital events. The Asset Management Fee will be paid without 
regard to the return of the Client Plan's invested capital.
    The Asset Management Fee will compensate the Investment Manager for 
the following services: (i) Selection of properties and other assets 
for acquisition or disposition in an Account, (ii) day-to-day 
investment and administrative operations of an Account, (iii) 
performance of property management and leasing services for the 
properties held by the Account, (iv) obtaining and maintaining 
insurance for the properties and other assets in the Account, (v) 
establishing tax-exempt title-holding corporations under section 501(a) 
of the Code for the properties, (vi) obtaining independent MAI 
appraisals of the properties every three years, and performing annual 
internal valuations of the properties, as necessary; and (vii) 
preparing quarterly and annual written reports concerning assets, 
receipts, and disbursements of the Account.
    As stated above, the Asset Management Fee will be charged as a 
percentage of the NOI on the properties held by the Account for each 
quarter. The Asset Management Fees are determined by negotiation for 
each Account, but generally will be between 5% to 8% of the NOI per 
quarterly payment period for properties in the Account. NOI for an 
Account will be determined on the basis of recurring operating (non-
capital) income (i.e., rents, interest, and other income from the day-
to-day investments of the Account) less recurring operating expenses 
(i.e., utilities, taxes, insurance and maintenance) determined on an 
accrual basis in accordance with generally accepted accounting 
principles. RREEF states that these recurring revenue items and 
operating expenses will be set forth in annual budgets that are 
reviewed and approved in advance by the Client Plans and other 
investors.
    The NOI for an Account will be determined without regard to capital 
expenditures and non-cash expenditures for the Account, such as 
depreciation on properties held by the Account or amortization of 
capital expenditures. In addition, NOI will not be reduced by debt 
service. Therefore, capital items, such as debt service and non-cash 
expense items, will have no effect on RREEF's Asset Management Fees. 
Instead, as discussed more fully below, these items will be reflected 
in the Performance Fee because any capital expenditure will increase 
the Threshold Amount for purposes of any subsequent Performance Fee 
calculation, and any capital distribution will reduce the Threshold 
Amount.7
---------------------------------------------------------------------------

    \7\ As noted above, the determinations of which items are 
``operating'' and which are ``capital'' will be determined by 
generally accepted accounting principles. Such determinations are 
subject to annual review and confirmation by independent Certified 
Public Accountants retained to audit RREEF's annual financial 
statements.
---------------------------------------------------------------------------

    With respect to each Account, RREEF will prepare annual operating 
and capital budgets for each of the Account's properties, which will be 
distributed to each Client Plan invested in the Account, within 60 days 
prior to the beginning of the fiscal year to which such budgets apply. 
At the end of each year, RREEF will also distribute to each Client Plan 
an explanation of any material deviation from the budgets previously 
provided to the Client Plan for such year.
    8. RREEF agrees that in calculating its Asset Management Fee for 
any Account, the Fee for any individual real property in the Account 
will be determined solely on the basis of those items of operating 
income and expense that are identified as line items in the operating 
budget for such property, which shall be disclosed to each Client Plan 
that participates in the Account. Such disclosures have to be made at 
least 30 days in advance of the fiscal year to which the budget 
relates, and approved by the Client Plans in the manner described 
below.
    If, during such year for any previously disclosed line item of 
operating expense in the budget for a property, there is any material 
deviation between such line item and the actual amount of such expense 
for the current year, such deviation will not be taken into account in 
calculating the Asset Management Fee unless it is first disclosed to, 
and approved by, the Client Plan(s) in the same manner as the original 
budgeted line item. For this purpose, a determination of what is 
considered a ``material'' deviation will be established by the 
investment or property management agreement between RREEF and the 
Client Plan(s) for any real property held by the Account. Property 
management agreements used by RREEF permit no more than a 15% variance 
between any individual line item expense in the operating budget from 
year to year. In addition, overall budgeted expenses may vary no more 
than 5% from year to year.
    If the requisite percentage of investors in an Account fails to 
approve the proposed budget or any line item therein, then RREEF will 
continue to utilize the prior year's budget figures (generally with a 
permitted deviation of 5%). In the event of any subsequent material 
deviation from a line item expense in a previously approved budget, or 
the addition of a new line item, RREEF would use the expense figures as 
budgeted for purposes of its fee calculation, and the variance would 
have no effect on its current Asset Management Fee calculation, unless 
a revised budget reflecting the deviation (or new line item) is 
approved. Any such variance would be reflected only in the subsequent 
Performance Fee calculation (by increasing or decreasing the Threshold 
Amount).8
---------------------------------------------------------------------------

    \8\ For example, if RREEF were to budget landscaping expenses at 
$100 for an Account, but the actual figure turns out to be $80, 
unless RREEF obtains the approval of its Client Plans, the amount it 
uses for calculating its Asset Management Fee would be limited to 
$85 (applying the 15% deviation, as described above). Although the 
additional $5 cost savings directly benefits the Client Plans, it 
would not be reflected in the Asset Management Fee. Rather, to the 
extent that this cost savings increases the amount available for 
distribution to the Client Plans, it would be reflected in the 
Threshold Amount for purposes of calculating RREEF's future 
Performance Fee.
---------------------------------------------------------------------------

    The Client Plan approval for these purposes will be by an 
affirmative approval in advance by the Independent Fiduciary of a 
Single Client Account or

[[Page 29902]]

the Responsible Independent Fiduciaries for a Multiple Client Account 
representing at least a majority of the interests in such 
Account.9 Specifically, when the proposed budget (or any 
material deviation therefrom) is sent to a Client Plan, it will be 
accompanied by a written notice that the Client Plan must approve the 
budget, and any specific line item therein, for purposes of calculating 
the Asset Management Fees for the next fiscal year. The written notice 
will contain a statement that affirmative approval of the current 
budget is required prior to the end of the 30-day period following such 
disclosure. In the case of a Multiple Client Account, affirmative 
approval by a majority of investors (by interest) will constitute 
approval of the proposed budget (or deviation). In the event of any 
subsequent decrease in previously approved budgeted operating expenses 
for the fiscal year in excess of the limits previously described (15% 
for any line item, 5% overall), then the resulting increase in NOI 
(i.e., over and above the allowable deviation) will not be taken into 
account in calculating RREEF's management fee unless affirmative 
approval for the payment of such fee is obtained in writing from 
Independent Fiduciary for the Client Plan in the Single Client Account 
or the Responsible Independent Fiduciaries for the Client Plans and 
other investors in the Multiple Client Account.
---------------------------------------------------------------------------

    \9\ In this regard, the Department notes that an Independent 
Fiduciary for a Single Client Account should closely scrutinize 
budget estimates for both the NOI of the Account and the Asset 
Management Fees payable to RREEF each year based on the actual NOI. 
With respect to a Multiple Client Account, the Responsible 
Independent Fiduciaries should collectively scrutinize such budgets 
and NOI-based Fees, and raise appropriate objections to those Fees 
which result from actual operating expenses that materially deviate 
from previously approved budgets for such expenses. Thus, the 
Department emphasizes that an Independent Fiduciary for a Client 
Plan investing in either a Single or Multiple Client Account must 
adequately monitor the payment of any Asset Management Fees to RREEF 
by closely reviewing how the NOI that results from each property 
held by the Account may be affected by any actions taken by RREEF 
for such property.
---------------------------------------------------------------------------

    With respect to the Shell Account, RREEF represents that annual 
budgets have been presented to an Independent Fiduciary for the Shell 
Pension Trust for review and approval each year since May 16, 1994. In 
this regard, RREEF states that although the annual budget approvals for 
properties held in the Shell Account may not have been in writing in 
all cases, both parties (i.e., RREEF and the Independent Fiduciary for 
the Shell Account) have made contemporaneous written confirmations of 
their discussions regarding the annual budgets.
    9. The applicant states that in lieu of the Investment Fee and/or 
the Asset Management Fee, RREEF and the Client Plans may agree to an 
alternative fee arrangement for an Account (the Alternative Fee) which 
is based either upon a fixed amount or amounts, or an objective formula 
to be negotiated (in either case) between RREEF and the Client Plan 
prior to the initial investment of any Client Plan assets in an 
Account. RREEF represents that any Alternative Fee will be covered by 
section 408(b)(2) and the regulations thereunder (29 CFR 2550.408b-2). 
Accordingly, no exemption is being requested by RREEF for any 
Alternative Fees.
    10. In a Single Client Account, the Performance Fee will be 
determined and paid either (i) In the same manner as in the case of a 
Multiple Client Account, or (ii) at the end of any pre-specified period 
of not less than one-year, provided that the Fee is based upon the sum 
of all actual distributions from the Account during such period, plus 
deemed distributions of the assets of the Account based on an assumed 
sale of all such assets at their fair market value as of the end of 
such period (in accordance with independent appraisals performed within 
12 months of the calculation) which are calculated to be in excess of 
the Threshold Amount through the end of such period.
    In the case of a Multiple Client Account, the Performance Fee will 
be charged against all distributions of net proceeds from capital 
events, as defined in Part IV(h), only after the Client Plans and other 
investors have received distributions (from all sources) from the 
Account in excess of the Threshold Amount agreed to by the Responsible 
Independent Fiduciaries.
    Most of RREEF's Single Client Accounts are long-term open-ended 
relationships under which the Client Plans may continue to invest new 
funds on an ongoing basis. For this reason, RREEF states that certain 
Client Plans that invest in Single Client Accounts will negotiate for 
the payment of a Performance Fee that would be calculated and payable 
periodically, not less frequently than once a year (generally, every 
three years, commencing on the third anniversary of the first 
acquisitions of properties made by the Account). As noted above, this 
periodic Performance Fee would be based on all actual sales of 
properties by the Account and distributions made back to the investors 
during such period, as well as deemed or constructive sales of all 
properties held in the Account at their most recent appraised values, 
and the deemed distributions of the net proceeds from such constructive 
sales plus earnings which are considered to be at or above the 
Threshold Amount.10 In such instances, the periodic 
Performance Fee will take into account both realized and unrealized net 
gains on properties held in a Single Client Account, and would be 
payable to RREEF for deemed distributions of unrealized net gains on 
properties held by the Account for a pre-specified period. Therefore, 
if agreed to by the Independent Fiduciary for the Client Plan, RREEF 
would earn a Performance Fee based on the Single Client Account's 
performance which occurs prior to a return to the Client Plan of its 
invested capital plus earnings at or above the designated Threshold 
Amount or Hurdle Rate.
---------------------------------------------------------------------------

    \10\ In this regard, RREEF represents that while it anticipates 
that most Client Plans establishing a Single Client Account will 
elect to pay a periodic Performance Fee based on deemed 
distributions, RREEF will not preclude any such Client Plan from 
paying a Performance Fee only after the Client Plan has received 
actual distributions from an Account equal to its initial invested 
capital plus earnings at the Threshold Amount. However, a periodic 
Performance Fee arrangement will not be available for Multiple 
Client Accounts.
---------------------------------------------------------------------------

    11. For purposes of the Fees, the fair market value of the 
Accounts' real property assets (other than in the case of actual sales) 
will be based on appraisals prepared by independent MAI appraisers. In 
this regard, every agreement by which an appraiser is retained will 
include the appraiser's representation that: (1) Its ultimate client is 
the Account and its underlying Plan (and non-Plan) investors, and (2) 
it will perform its duties in the interest of such Account (and 
investors). The applicant states that in the case of any appraisal that 
will serve as the basis for any ``deemed sale'' of such property for 
purposes of calculating the periodic Performance Fee payable to RREEF, 
then the following procedure shall be utilized:
    (a) In the case of any Single Client Account, such MAI appraiser 
shall be either (i) Selected by the Independent Fiduciary of the Client 
Plan subject to the approval of RREEF, or (ii) selected by RREEF 
subject to the affirmative approval by the Independent Fiduciary of the 
Client Plan;
    (b) In the case of any Multiple Client Account, such MAI appraiser 
shall be approved in advance by the Responsible Independent Fiduciaries 
(as defined in Part IV(e) above) owning a majority of the interests in 
the Account according to the latest valuation of the Account's assets 
performed no more than 12 months prior to such appraisal, which

[[Page 29903]]

approval may be by written notice and deemed consent by such 
Fiduciaries' failure to object to the appraiser within 30 days of such 
notice; and
    (c) In either case, the selected MAI appraiser shall acknowledge in 
writing that the Client Plan(s) and other investors (in the case of a 
Multiple Client Account), rather than RREEF, is (are) its clients, and 
that in performing its services for the Account it shall act in the 
sole interest of such Client Plan(s) and other investors. In addition, 
following the date this proposed exemption is granted, every appraiser 
selected shall acknowledge that it owes a professional obligation to 
the Client Plans and other investors in the Account in performing its 
services as an appraiser for properties in the Account.
    If an MAI appraiser selected by RREEF, or an appraisal performed by 
a previously approved appraiser, is rejected by the Independent 
Fiduciary for a Single Client Account or the Responsible Independent 
Fiduciaries for the Client Plans owning the majority of the interests 
in the Multiple Client Account according to the latest valuation of the 
Account's assets performed no more than 12 months prior to such 
appraisal, the fair market value of the assets for any ``deemed sale'' 
relating to the payment of a Performance Fee will be determined as 
follows: (i) The Client Plans shall appoint a second appraiser and, if 
the value established for the property does not deviate by more than 
10% (or such lesser amount as may be agreed upon between RREEF and the 
Client Plan(s)), then the two appraisals shall be averaged; (ii) if the 
values differ by more than 10%, then the two appraisers shall select a 
third appraiser, that is independent of RREEF and its affiliates, who 
will attempt to mediate the difference; (iii) if the third appraiser 
can cause the first two to reach an agreement on a value, that figure 
shall be used; however, (iv) if no agreement can be reached, the third 
appraiser shall determine the value based on procedures set out in the 
governing agreements of the Account or, if no such procedures are 
established, shall conduct its own appraisal and the two closest of the 
three shall be averaged.
    In all cases, the Client Plan will retain the right to challenge 
any appraiser or appraisal. In the case of a Single Client Account, the 
frequency and timing of the required appraisals will be determined by 
the Independent Fiduciary of the Client Plan at the time it enters into 
an Account relationship with RREEF. However, all Performance Fee 
calculations will be based on contemporaneous appraisals of properties 
held by the Account, which will be performed within 12 months of the 
calculation. Thus, for example, RREEF maintains that a three year 
appraisal cycle will correspond to a three year periodic Performance 
Fee measuring period for an Account. In addition, RREEF will provide 
notice to the Client Plan within 60 days of each Performance Fee 
calculation for a Single Client Account that the Independent Fiduciary 
of the Client Plan has the right to request updated appraisals of the 
properties held by the Account if such Fiduciary determines that the 
existing independent appraisals (performed within 12 months of the 
calculation) are no longer sufficient.
    12. With respect to the calculation of any Threshold Amount for the 
payment of a Performance Fee, RREEF states that a bookkeeping account 
will be maintained for each Client Plan which will show at all times 
the amount that has to be distributed to satisfy the Threshold Amount. 
When a certain amount is invested in the Account on a particular date, 
this bookkeeping account will initially equal the invested amount and 
will thereafter be increased to reflect the hurdle/threshold rate of 
return for the Account compounded on an annual basis. Whenever a 
distribution (from any source) is made from the Account to the Client 
Plan, the amount of this bookkeeping account will be reduced by the 
full amount of the distribution. Thereafter, the Threshold Amount will 
be calculated with respect to and added to this reduced amount. Only 
when the bookkeeping account is reduced to zero will the Threshold 
Amount be satisfied. With all Multiple Client Accounts, and those 
Single Client Accounts that elect to have a Performance Fee paid only 
after actual distributions are paid from the Account, once the 
Threshold Amount has been satisfied, the Performance Fee will be 
payable to RREEF with respect to all further distributions of net 
proceeds from capital events from the Account. With respect to any 
Single Client Accounts which elect to pay periodic Performance Fees 
based upon deemed distributions of the proceeds from an assumed sale of 
the properties by the Account, any such deemed distribution would 
reduce the Threshold Amount only for purposes of such Fee payment. 
Thus, immediately after such calculation, the Threshold Amount would be 
increased by the full amount of the deemed distribution for purposes of 
determining any later Performance Fee based on either deemed or actual 
distributions to the Client Plans.
    13. The applicant submitted hypothetical examples of how the 
Performance Fee would work in a Multiple Client Account and a Single 
Client Account context.
    In the first example, RREEF establishes a Multiple Client Account 
to which the Client Plans contribute $100 million (Initial 
Contribution) and agree to pay RREEF a Performance Fee equal to 15% of 
all amounts distributable from the Account after the investors have 
received distributions equal to their initial invested capital plus a 
real (CPI-adjusted) annual Threshold Amount of return of 4%. Assuming 
that CPI remains constant at 4% annually, the nominal annual Threshold 
Amount is 8% (the Threshold Amount). The Multiple Client Account 
acquires two real properties at a cost of $90 million (Property I) and 
$10 million (Property II, collectively; the Properties). Annual cash 
flow from operations is 7% of the Initial Contribution of $100 million, 
or 7% million (Annual Cash Flow).
    For a Multiple Client Account, the Threshold Amount is calculated 
as follows: 11
---------------------------------------------------------------------------

    \11\ This example has been simplified. In reality, distributions 
would be made periodically throughout the year, reducing the amount 
on which the hurdle is calculated.

----------------------------------------------------------------------------------------------------------------
                                                                                                     Threshold
                                                                                                    amount  (in
                                                                Calculation                        millions  of
                                                                                                        $)
----------------------------------------------------------------------------------------------------------------
Year 1...................................  100.00+(.08 x 100.00)-7 =                                     $101.00
Year 2...................................  101.00+(.08 x 101.00)-7 =                                      102.08
Year 3...................................  102.08+(.08 x 102.08)-7 =                                      103.25
Year 4...................................  103.25+(.08 x 103.25)-7 =                                      104.51
Year 5...................................  104.51+(.08 x 104.51)-7 =                                      105.87

[[Page 29904]]

 
Year 6...................................  0
----------------------------------------------------------------------------------------------------------------

    At the end of year 5, Property I is sold for $110 million, and 
there is an actual distribution of $110 million. Accordingly, RREEF 
will receive a Performance Fee of 15% times $110 million less $106 
million (i.e., the approximate Threshold Amount at year 5), or 
$600,000. Numerically, this is as follows: ($110 million-$106 million) 
x  15% = $600,000. Because the Threshold Amount has been reduced to $0 
at year 6, an additional Performance Fee will be payable with respect 
to any subsequent distribution of cash from a capital event, i.e., any 
sale or refinancing of the remaining property. Accordingly, if Property 
II is sold in year 10 for $15 million, RREEF will receive an additional 
Performance Fee of 15% times $15 million, or $2.25 million. 
Numerically, as follows: $15 million  x  15% = $2.25 million. 
Therefore, the total Performance Fee received by RREEF in this example 
is $2,850,000.
    In the second example, a large Client Plan establishes a Single 
Client Account with RREEF to which it contributes $100 million (Initial 
Contribution), and agrees to pay RREEF a Performance Fee every five 
years equal to 15% of all amounts distributed or deemed distributed 
from the Account after the Client Plan has received actual or deemed 
distributions equal to its invested capital plus a real (CPI-adjusted) 
annual Threshold Amount of return of 4%. If CPI remains constant at 4% 
annually, the nominal annual rate is 8% (the Threshold Amount). The 
Account acquires two real property assets at a cost of $90 million 
(Property I) and $10 million (Property II). Annual cash flow from 
operations is 7% of the Initial Contribution of $100 million, or 7% 
million (Annual Cash Flow).
    For a Single Client Account, the Threshold Amount is calculated as 
follows:

----------------------------------------------------------------------------------------------------------------
                                                                                                     Threshold
                                                                                                    amount  (in
                                                                Calculation                        millions  of
                                                                                                        $)
----------------------------------------------------------------------------------------------------------------
Year 1...................................  100.00+(.08  x  100.00)-7 =                                   $101.00
Year 2...................................  101.00+(.08  x  101.00)-7 =                                    102.08
Year 3...................................  102.08+(.08  x  102.08)-7 =                                    103.25
Year 4...................................  103.25+(.08  x  103.25)-7 =                                    104.51
Year 5...................................  104.51+(.08  x  104.51)-7 =                                    105.87
Year 6...................................  120.00 12 +(.08  x  120.00)-7 =                                122.60
Year 7...................................  122.60+(.08  x  122.60)-7 =                                    125.41
Year 8...................................  125.41+(.08  x  125.41)-7 =                                    128.44
Year 9...................................  128.44+(.08  x  128.44)-7 =                                    131.72
Year 10..................................  131.72+(.08  x  131.72)-7 =                                    135.25
----------------------------------------------------------------------------------------------------------------

    After five years, the Threshold Amount will increase to 
approximately $106 million. At this time, if the two Properties are 
appraised for $110 million and $10 million, respectively, the deemed 
distributions are $120 million. Accordingly, at this time RREEF will 
receive a Performance Fee of: 15%  x  ($120 million--$106 million) = 
$2.1 million.
---------------------------------------------------------------------------

    \12\ $120.00 is the amount of deemed distributions.
---------------------------------------------------------------------------

    After the first periodic Performance Fee is paid out, the Threshold 
Amount is calculated as follows: First, the Threshold Amount is 
restored by the full amount of the deemed distribution, i.e., to $120 
million, for purposes of the next five-year Performance Fee 
calculation. At the end of 10 years, the Threshold Amount will be 
approximately $135 million, and no additional Performance Fee will be 
payable unless the combined appraised value of the two Properties 
exceeds that amount.
    14. All proceeds from capital events of an Account (i.e., sales or 
refinancings of real property investments owned by the Account) will be 
first applied to pay expenses of the Account. These expenses will 
include repayment of debt, payment of closing expenses, and 
establishment of reasonable reserves in connection with the Account's 
assets, whether such reserves are for repayment of existing or 
anticipated obligations or for contingent liabilities, other than the 
Performance Fee. Such proceeds, net of these expenses and reserves, 
generally will be the distributable net proceeds of capital events upon 
which the Performance Fee may be payable.
    15. With respect to its Single Client Accounts, RREEF generally 
does not have discretion to reinvest proceeds from capital events, and 
any such reinvestment will occur at the direction of the Client Plan's 
Independent Fiduciary. The amount reinvested will be treated as having 
been recontributed by the Client Plan for purposes of the Investment 
Fee and the Performance Fee. Thus, RREEF represents that where capital 
proceeds are reinvested they will be treated as new invested capital 
for the purpose of the Threshold Amount and the payment of any future 
Performance Fee. RREEF also states that where it does not have 
reinvestment discretion, capital proceeds will be distributed to the 
Client Plan, unless such Client Plan affirmatively consents to the 
reinvestment. In cases where RREEF does have discretion to reinvest 
proceeds from capital events, the reinvested amount would not be 
treated as a new contribution of capital by the Client Plan for 
purposes of the Investment Fee, or having been distributed for purposes 
of the payment of Performance Fee. Therefore, such reinvested amounts 
will not be considered distributions under the bookkeeping account 
maintained for the Client Plan for purposes of calculating whether the 
Threshold Amount has been reached.
    16. RREEF may be removed as the investment Manager for an Account 
at any time (generally upon 30 days notice), without cause, upon 
delivery of a notice of removal to RREEF by the Client Plan in the case 
of a Single Client

[[Page 29905]]

Account, or by the Client Plans owning at least a majority of the 
interests in a Multiple Client Account. In addition, a Multiple Client 
Account may terminate upon failure to appoint a replacement investment 
manager following the removal or resignation of RREEF. The details and 
mechanics of the removal or resignation process will vary from Account 
to Account. In the case of an Account procedure for removal for cause 
(e.g., breach of contract), removal generally will be immediate. In 
most cases, however, removal will result from a desire to appoint a 
replacement manager and RREEF may be asked or required to stay on for a 
period of time (e.g., up to 120 days) until a replacement is in place. 
Similarly, if RREEF resigns, it may be asked to stay on until a 
replacement is appointed.
    Upon removal of RREEF as investment Manager, RREEF will be entitled 
to receive the Performance Fee as if: (a) The assets of an Account had 
been sold at a price which is then-agreed to by RREEF and the Client 
Plan (or, with respect to a Multiple Client Account, Client Plans and 
other investors owning at least a majority of the interests in the 
Multiple Client Account); and (b) the deemed proceeds from the deemed 
sale were to be distributed from the Account. If RREEF and the Client 
Plan(s) cannot agree on a price, then the price shall be determined by 
an independent MAI appraiser mutually agreed to by RREEF and the Client 
Plan(s). If RREEF and the Client Plan(s) cannot agree on an appraiser, 
then the governing documents of the Account will provide for a means of 
selecting one or more appraisers or for seeking binding arbitration, as 
discussed more fully in paragraph 11 above.
    In addition, RREEF may generally resign as investment Manager with 
respect to any Account at any time, without cause, by providing written 
notice to the Client Plan(s) with an interest in the Account. In this 
event, the Performance Fee will be tentatively calculated in the same 
manner as if RREEF were removed as investment manager, and allocated 
among each real property investment of the Account in proportion to the 
respective differences in their appraised values from their original 
cost (i.e., deemed unrealized appreciation, if any, for each property). 
The amount of the Performance Fee tentatively allocated to each 
property will be multiplied by a fraction, the numerator of which will 
be the actual sales price of the property received by the Account upon 
the disposition/sale of the property, and the denominator of which will 
be the appraised value of the property which was used in connection 
with determining the Performance Fee at the time of resignation, 
provided that this fraction will never exceed 1.0 (that is, the 
Performance Fee may be decreased to reflect any subsequent decline in 
the value of a property, but not increased to reflect any subsequent 
increase in value).13 No Performance Fee will be payable 
until distributions (deemed or actual) from the Account exceed the 
Threshold Amount.
---------------------------------------------------------------------------

    \13\ If a Multiple Client Account is terminated prior to the 
sale of all the Account's assets (i.e., each Client Plan is 
distributed an undivided interest in each such asset), each 
remaining asset in the Account at the time of termination will be 
treated as having been sold at its then-appraised value.
---------------------------------------------------------------------------

    The Performance Fee will be calculated with respect to each 
property held by an Account at the time of resignation. However, the 
Performance Fee will not be paid for any property until the earlier of: 
(i) The sale of the property from the Account, or (ii) with respect to 
a Multiple Client Account, the termination of the Account. The 
Performance Fee will be paid only after the Client Plans have received 
their initial invested capital plus earnings at the Threshold Amounts. 
The replacement investment manager of the Account (unrelated to RREEF) 
will have discretion as to when the property is sold or when the 
Account is terminated.
    17. A Single Client Account generally may be terminated at any time 
by the Client Plan upon not more than 30 days written notice to RREEF, 
by RREEF's resignation, or by expiration of the period of years 
specified in the investment management agreement governing the Account 
(unless extended at the request of the Client Plan). In the case of a 
Single Client Account termination, the assets of the Account may be 
liquidated for cash or distributed in-kind to the Client Plan.
    A Multiple Client Account generally may be terminated upon: (a) The 
affirmative decision of the Client Plans and other investors owning at 
least a majority of the interests in the Multiple Client Account, or 
(b) expiration of the period of years specified in the Account's 
organizational documents. In addition, a Multiple Client Account may 
terminate upon failure to appoint a replacement investment manager 
following the removal or resignation of RREEF. Upon termination of a 
Multiple Client Account, RREEF is generally obligated to dispose of its 
assets and distribute net sales proceeds in an orderly fashion.
    In the case of the Multiple Client or Single Client Account 
termination, RREEF's Performance Fee would be calculated in the same 
manner as discussed above with respect to the removal of RREEF.
    18. Each Client Plan will receive throughout the term of the 
Account the following information:
    (a) Quarterly and annual reports prepared by RREEF relating to the 
overall financial position and operating results of the Account (annual 
reports are audited by independent certified public accountants as 
required by the terms of the Account's governing documents), a 
statement regarding the total amount of fees paid by the Account to 
RREEF for the period, and, in the case of a Multiple Client Account, 
the value of the Client Plan's interest in the Account;
    (b) An annual statement of the current fair market value of all 
properties owned by the Account based most recent MAI appraisals of 
such properties;
    (c) In the case of a Multiple Client Account, a list of investors 
in the Account and, when applicable, a notice of any change thereto; 
and
    (d) Operating and capital budgets for the subsequent year, plus 
(where applicable) an explanation of any material deviation from the 
prior year's budgets.
    Any fiduciary for the Client Plan, as well as other authorized 
persons described above in paragraph (o)(1) of Part III, will have 
access during normal business hours to RREEF's records concerning the 
Accounts in which such persons have an interest, subject to the 
condition that each such person agree in writing that the information 
contained in such records shall be kept confidential except to the 
extent disclosure is authorized in writing by RREEF or is necessary to 
preserve or protect the assets of an Account or the interests of the 
Client Plans. The Department and the Internal Revenue Service will have 
access to all RREEF records concerning the Accounts. The Client Plan(s) 
having an interest in an Account will also, upon request, be provided 
with a report of all compensation paid to RREEF by the Account.
    19. In summary, the applicant represents that the transaction 
satisfies the statutory criteria of section 408(a) of the Act and 
section 4975(c)(2) of the Code because:
    (a) The investment of plan assets in a Single or Multiple Client 
Account, including the terms and payment of any Investment Fee, Asset 
Management Fee and Performance Fee, shall be approved in writing by an 
Independent Fiduciary of a Client Plan which is independent of RREEF 
and its affiliates.

[[Page 29906]]

    (b) At the time any Account is established (or amended) and at the 
time of any subsequent investment of assets (including the reinvestment 
of assets) in such Account:
    (1) Each Client Plan in a Single Client Account shall have total 
net assets with a value in excess of $100 million, and each Client Plan 
that is an investor in a Multiple Client Account shall have total net 
assets with a value in excess of $50 million, subject to certain 
additional requirements as stated in paragraph (1) of Part III(c) 
above; and
    (2) No Client Plan shall invest, in the aggregate, more than 5% of 
its total assets in any Account or more than 10% of its total assets in 
all Accounts established by RREEF.
    (d) Prior to making an investment in any Account (or amending an 
existing Account), the Independent Fiduciary of each Client Plan 
investing in an Account shall have received offering materials from 
RREEF which disclose all material facts concerning the purpose, 
structure, and operation of the Account, including any Fee arrangements 
(provided that, in the case of an amendment to the Fee arrangements, 
such materials need address only the amended fees and any other 
material change to the Account's original offering materials).
    (e) With respect to its ongoing participation in an Account, each 
Client Plan shall receive the following written information from RREEF:
    (1) Audited financial statements of the Account prepared by 
independent public accountants selected by RREEF no later than 90 days 
after the end of the fiscal year of the Account;
    (2) Quarterly and annual reports prepared by RREEF relating to the 
overall financial position and operating results of the Account and, in 
the case of a Multiple Client Account, the value of each Client Plan's 
interest in the Account. Each such report shall include a statement 
regarding the amount of the Fees paid to RREEF during the period 
covered by such report;
    (3) Periodic appraisals (as agreed upon with the Client Plans) 
indicating the fair market value of the Account's assets as established 
by an MAI licensed real estate appraiser independent of RREEF and its 
affiliates, under the procedures described herein;
    (4) In the case of any Multiple Client Account, a list of all other 
investors in the Account;
    (5) Annual operating and capital budgets with respect to the 
Account, to be distributed to a Client Plan within 60 days prior to the 
beginning of the fiscal year to which such budgets relate; and
    (6) An explanation of any material deviation from the budgets 
previously provided to such Client Plan for the prior year;
    (f) The total fees paid to RREEF shall constitute no more than 
``reasonable compensation'' within the meaning of section 408(b)(2) of 
the Act.
    (g) RREEF shall provide a copy of the proposed exemption and a copy 
of the final exemption to all Client Plans that invest in any Single 
Client Account or any Multiple Client Account formed, on or after, the 
date the final exemption is published in the Federal Register.

Notice to Interested Persons

    Those persons who may be interested in the pendency of this 
exemption include the independent fiduciaries of each Client Plan that 
maintains a Single Client Account with RREEF. Thus, RREEF will provide 
notice of the proposed exemption to each such affected Client Plan, by 
first class mail, within thirty (30) days following the publication of 
the proposed exemption in the Federal Register. The notice will include 
a copy of the notice of proposed exemption as published in the Federal 
Register and as a supplemental statement, as required, pursuant to 29 
CFR 2570.43(b)(2). This supplemental statement will inform such 
interested persons of their right to comment on the proposed exemption 
and/or to request a hearing. All written comments and/or requests for a 
hearing are due within sixty (60) days of the publication of this 
notice of proposed exemption in the Federal Register.
    In addition, RREEF shall provide a copy of the proposed exemption 
and a copy of the final exemption to all Client Plans that invest in 
any Single Client Account or any Multiple Client Account formed on, or 
after, the date the final exemption is published in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department, 
telephone (202) 219-8883. (This is not a toll-free number.)

Premier Funding Group, Inc. Employees Profit Sharing Plan (the P/S 
Plan) and the Money Purchase Pension Plan for Employees of Premier 
Funding Group, Inc. (the M/P Plan, collectively; the Plans), 
Located in Arlington, Texas

[Application Nos. D-10669 and D-10670]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 C.F.R. part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of 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 as of February 1, 1999, to a lease (the Lease) of 
certain second-floor space (the Leased Premises) in a building by the 
Plans to LM Holdings, Inc., a party in interest with respect to the 
Plans; provided that the following conditions are satisfied:
    (a) All terms and conditions of the Lease are at least as favorable 
to the Plans as those which the Plans could obtain in an arm's-length 
transaction with an unrelated party;
    (b) The fair market rental amount for the Lease has been determined 
by an independent qualified appraiser;
    (c) Each Plan's allocable portion of the fair market value of both 
the Leased Premises and the building where the Leased Premises are 
located (the Building) represents no more than 20 percent (20%) of the 
total assets of each Plan throughout the duration of the Lease;
    (d) The interests of the Plans under the Lease are represented by 
an independent, qualified fiduciary (the Independent Fiduciary);
    (e) The fees received by the Independent Fiduciary, combined with 
any other fees derived from any related parties, will not exceed 1% of 
that person's annual income for each fiscal year that such person 
continues to serve in the independent fiduciary capacity with respect 
to the Lease;
    (f) The Independent Fiduciary evaluated the Lease and deemed it to 
be administratively feasible, protective and in the best interest of 
the Plans;
    (g) The Independent Fiduciary monitors the terms and the conditions 
of the exemption (if granted) and the Lease throughout its duration, 
and takes whatever action is necessary to protect the Plans' rights;
    (h) At the discretion of the Independent Fiduciary, the Lease can 
be extended for two additional five-year terms, provided that the 
Independent Fiduciary requires independent appraisals of the Leased 
Premises to be performed at the time of each extension of the Lease so 
as to ensure that LM Holdings continues to pay fair market rent, and 
such rent is not less that either the initial base rent or the amount 
paid during the most recent annual term; and
    (i) Within 90 days of publication in the Federal Register of a 
notice granting this proposed exemption, LM Holdings files with the 
Internal Revenue Service (IRS) Form 5330 (Return of Initial Excise

[[Page 29907]]

Taxes for Pension and Profit Sharing Plans) and pays all excise taxes 
applicable under section 4975(a) of the Code that are due by reason of 
the existence of the Lease as a prohibited transaction prior to 
February 1, 1999.

EFFECTIVE DATE: This exemption, if granted, will be effective as of 
February 1, 1999.

Summary of Facts and Representations

    1. The Plans are a profit sharing plan and a money purchase plan 
which were established in February, 1994. As of July 15, 1998, the 
Plans had two participants, Mr. Michael Leighty and Mr. Patrick McCarty 
(Mr. Leighty and Mr. McCarty, respectively). Mr. Leighty and Mr. 
McCarty are also the Plans' trustees. As of December 31, 1997, the P/S 
Plan and the M/P Plan had $924,350 and $616,234 in total net assets, 
respectively. Messrs. Leighty and McCarty are the only participants of 
the Plans, the only trustees of the Plans and the sole employees and 
shareholders of LM Holdings, Inc. (LM Holdings) and Premier Funding 
Group, Inc (Premier Funding).
    Premier Funding is the sponsor of the Plans. Premier Funding and LM 
Holdings are both incorporated in the State of Texas and are located in 
Arlington, Texas. Both corporations are jointly owned on a 50%-50% 
basis by Messrs. Leighty and McCarty. Premier Funding and LM Holdings 
are in the business of acquiring financial instruments, real estate and 
other assets.
    2. The Leased Premises and the Building are located at 2400 Garden 
Park Court, Arlington, Texas. The Building was owned by Ed Thulin (Mr. 
Thulin), an unrelated third party, until December 16, 1997. LM Holdings 
had leased approximately 700 square feet in the Building from Mr. 
Thulin under the terms and conditions of the subject Lease, as 
originally agreed to by the parties.
    However, on December 16, 1997, the Plans purchased the Building 
from Mr. Thulin, for $210,000. Therefore, as of December 16, 1997, the 
Lease was between the Plans and LM Holdings, which made the Lease a 
prohibited transaction under the Act.14 In this regard, the 
applicant represents that within 90 days of publication in the Federal 
Register of a notice granting this proposed exemption, LM Holdings will 
file Form 5330 (Return of Initial Excise Taxes for Pension and Profit 
Sharing Plans) with the IRS and pay all excise taxes applicable under 
section 4975(a) of the Code that are due by reason of the existence of 
the Lease prior to February 1, 1999, the effective date of this 
exemption.
---------------------------------------------------------------------------

    \14\ Section 406(a)(1)(A) of the Act prohibits, in pertinent 
part, a plan fiduciary from causing a plan to engage in a 
transaction which constitutes a leasing of property between the plan 
and a party in interest.
---------------------------------------------------------------------------

    3. After purchasing the Building, the Plans commissioned an 
appraisal (the Appraisal) of the Leased Premises by an independent, 
qualified appraiser (see paragraph 5 below). The Appraisal determined 
the fair market rental value of the Leased Premises to be approximately 
$7 per rentable square foot, or $782.25 monthly. The Lease was amended 
on May 5, 1998, whereby the original terms were modified to reflect the 
fair market rental amount as determined by the Appraisal.15
---------------------------------------------------------------------------

    \15\ However, under the Lease as amended by the parties pursuant 
to the Appraisal, the Landlord and the Tenant have agreed to round 
off this number to $785 per month.
---------------------------------------------------------------------------

    Furthermore, to comply with the fair market rental amount 
determined by the Appraisal, LM Holdings has made an additional rental 
payment of $530 to the Plans. The applicant represents that this amount 
is equal to the difference between the fair market rental value of the 
Leased Premises and the actual rent that was paid for the Leased 
Premises by LM Holdings since the beginning of the Lease. This amount 
was computed by the applicant's attorney and was based on fair market 
rental amount set forth in the Appraisal.
    4. The applicant is now requesting an individual exemption, 
effective as of February 1, 1999, which is the date that an 
independent, qualified fiduciary was appointed to represent the Plans 
for purposes of the Lease (as discussed further below). The parties to 
the Lease will be the Plans (doing business as PFGI Realty) and LM 
Holdings. Under the Lease as it now exists between the parties, the 
Leased Premises include approximately 1,341 square feet of the total 
rentable 5,196 square feet in the Building.16 LM Holdings 
(i.e., the Tenant) will pay $785 per month during the first year of the 
Lease. Thereafter, on each annual anniversary of the Lease during the 
initial term and any subsequent renewal periods (discussed more fully 
below), the rent will be adjusted by the Independent Fiduciary based on 
the percent change in the annual Consumer Price Index (CPI) as 
published in the Wall Street Journal for the previous year. This annual 
adjustment may not fall below the higher of the base rate of $785 per 
month or the amount paid on a monthly basis during the most recent 
annual term.
---------------------------------------------------------------------------

    \16\ There are three other tenants in the Building, who 
separately lease the remaining rentable space. Thus, the Leased 
Premises represent approximately 25.8% of the Building's rentable 
space.
---------------------------------------------------------------------------

    Under the terms of the Lease, LM Holdings will be responsible for 
electricity, with all other expenses being paid by the owner of the 
Building (i.e., the Plans).17 The initial term of the Lease 
is scheduled to end on May 5, 2003. At the discretion of the 
Independent Fiduciary, the Lease can be extended for two additional 
five year terms. The Independent Fiduciary will require independent 
appraisals to be performed at the time of each extension of the Lease 
so as to ensure that LM Holdings continues to pay fair market rent. 
However, the new rents for the Leased Premises set at the time of any 
extensions of the Lease will not be less than the rent received by the 
Plans during the prior leasing period.
---------------------------------------------------------------------------

    \17\ The applicant states that the terms of the Lease are 
identical to the other current leases in the Building. Furthermore, 
the applicant maintains that the remaining monthly bills for the 
Building are gas, water and lawn care. These items are not 
separately metered and are paid by the owner of the Building. The 
applicant represents that this is consistent with the comparable 
buildings analyzed in the Appraisal.
---------------------------------------------------------------------------

    Furthermore, the Lease requires that LM Holdings, as the tenant, 
provide public liability and property damage insurance for its business 
operations on the Leased Premises in the amount of $500,000. This 
insurance policy names the Plans as the insured.
    5. As stated above, the fair market rent of the Leased Premises was 
established by the Appraisal dated April 20, 1998. The Appraisal was 
prepared by Thomas S. Haines, MAI and Wayne Burgdorf, MAI of Hanes, 
Jorgensen & Burgdorf, Ltd., Diversified Real Estate Services located in 
Arlington, Texas. The Appraisal relied on eight comparable rentals in 
the surrounding area to determine the fair market rental value of the 
Leased Premises. The addendums to the Appraisal (the Addendums), dated 
May 12, 1998 and May 22, 1998, respectively, state that the fair market 
rent for the Leased Premises is $7.00/square foot fixed, which equates 
to $782.25 a month, or $9,387 a year, for a five-year lease.
    6. The Lease will be monitored by Gary J. Manny (Mr. Manny), who 
will serve as the Independent Fiduciary on behalf of the Plans for 
purposes of the Lease. Mr. Manny was appointed as the Independent 
Fiduciary on February 1, 1999, and has served in that capacity for the 
Plans since that date. Mr. Manny represents that he is an attorney who 
has general knowledge of ERISA, and the regulations thereunder. Mr. 
Manny also represents that he has acted before in a fiduciary capacity 
as a executor,

[[Page 29908]]

guardian and trustee for various clients. Thus, Mr. Manny states that 
he has experience in protecting the rights of the parties involved in 
such transactions. Mr. Manny states that he understands the duties, 
responsibilities and liabilities of acting in a fiduciary capacity for 
the Plans.
    7. Mr. Manny represents that he is independent of LM Holdings, 
Premier Funding, Mr. Leighty and Mr. McCarty (the Related Parties), and 
has no interest in any of their business activities. In this regard, 
Mr. Manny states that he has done work in the past for the Related 
Parties. However, Mr. Manny's fees from the Related Parties represented 
less than one percent (1%) of his total annual billings. Mr. Manny 
further represents that for each year that he serves as the Independent 
Fiduciary for the Plans, his fees for serving in this capacity, 
combined with any other fees from the Related Parties, will not exceed 
1% of his annual billings.
    8. Mr. Manny states that he has reviewed the Lease and the Plans' 
investment portfolios. Mr. Manny concludes that the Lease will be 
protective of the Plans and consistent with the Plans' investment needs 
and objectives. In this regard, Mr. Manny notes that the fair market 
value of the Building, and the Leased Premises, represent less than 
twenty percent (20%) of each Plan's total assets, and also of the 
combined assets of the Plans.18
---------------------------------------------------------------------------

    \18\ The applicant states that the approximate value of the 
Building is $210,495, which represents 11.5% of the P/S Plan and 
11.5% of the M/P Plan. This is because the ownership of the building 
is allocated, as all other assets in the Plans, 60% to the P/S Plan 
and 40% to the M/P Plan. The applicants represent that all rents for 
office space in the Building are allocated in the same manner.
---------------------------------------------------------------------------

    Mr. Manny states that the Lease will be in the best interest of the 
Plans and its participants. Mr. Manny believes that the Lease will be 
an appropriate investment for the Plans with adequate safeguards and 
protections.
    9. Mr. Manny will monitor the terms and conditions of the Lease 
throughout its initial term and any renewal periods. Mr. Manny 
represents that he will have access to the books and records of the 
Plans, and will make sure that rental payments under the Lease are paid 
on time. Mr. Manny will review the Lease annually to ensure that all 
annual automatic adjustments to the rent are made based on the percent 
change in the CPI Index from the previous year. Mr. Manny will ensure 
that monthly rental payments are adjusted annually, as appropriate. Mr. 
Manny will also ensure that the adjusted rental payments never fall 
below the amount paid for the Leased Premises during the most recent 
annual period. Mr. Manny will monitor the value of the Building to 
ensure that each Plan's allocable portion of the Building and the 
Leased Premises represent no more than 20% of the total assets of each 
Plan throughout duration of the Lease.
    Mr. Manny believes that the Lease is administratively feasible, in 
the best interest and protective of the Plans. As the Independent 
Fiduciary, Mr. Manny will represent the interests of the Plans at all 
times. Mr. Manny will monitor compliance by the LM Holdings, as the 
tenant, with the terms and conditions of the Lease, and will take 
whatever action is necessary to safeguard the interests of the Plans 
and its participants.19
---------------------------------------------------------------------------

    \19\ In this regard, the applicant makes a request regarding a 
successor independent fiduciary. Specifically, if it becomes 
necessary in the future to appoint a successor independent fiduciary 
(the Successor) to replace Mr. Manny, the applicant will notify the 
Department sixty (60) days in advance of the appointment of the 
Successor. Any Successor will have the responsibilities, experience 
and independence similar to those of Mr. Manny.
---------------------------------------------------------------------------

    10. In summary, the applicant represents that the transaction 
satisfies the statutory criteria of section 408(a) of the Act and 
section 4975(c)(2) of the Code because:
    (a) All terms and conditions of the Lease are at least as favorable 
to the Plans as those which the Plans could obtain in an arm's-length 
transaction with an unrelated party;
    (b) The fair market rental value of the Leased Premises has been 
determined by an independent qualified appraiser;
    (c) Each Plan's allocable portion of the fair market value of both 
the Leased Premises and the Building will represent no more than 20% of 
the total assets of each Plan throughout the duration of the Lease;
    (d) The interests of the Plans under the Lease are represented by 
the Independent Fiduciary;
    (e) The fees received by the Independent Fiduciary, combined with 
any other fees derived from any related parties, will not exceed 1% of 
that person's annual income for each fiscal year that such person 
continues to serve in the independent fiduciary capacity with respect 
to the Lease;
    (f) The Independent Fiduciary evaluated the Lease and deemed it to 
be administratively feasible, protective and in the best interest of 
the Plans;
    (g) The Independent Fiduciary will monitor the terms and the 
conditions of the exemption (if granted) and the Lease throughout its 
duration, and will take whatever action is necessary to protect the 
Plans' rights;
    (h) At the discretion of the Independent Fiduciary, the Lease can 
be extended for two additional five-year terms, provided that the 
Independent Fiduciary requires independent appraisals of the Leased 
Premises to be performed at the time of each extension of the Lease so 
as to ensure that LM Holdings continues to pay fair market rent, and 
such rent will not be less than the current base rate of $785 per 
month, or the amount paid on a monthly basis during the most recent 
annual term; and
    (i) Within 90 days of publication in the Federal Register of a 
notice granting this proposed exemption, LM Holdings will file with the 
IRS Form 5330 (Return of Initial Excise Taxes for Pension and Profit 
Sharing Plans) and pay all excise taxes applicable under section 
4975(a) of the Code that are due by reason of the existence of the 
Lease as a prohibited transaction prior to February 1, 1999.

Notice to Interested Persons

    The applicant represents that, within five (5) business days of the 
publication of the notice of proposed exemption (the Notice) in the 
Federal Register, all interested persons will receive a copy of the 
Notice, and a copy of the supplemental statement, as required by 29 CFR 
2570.43(b)(2). Comments and hearing requests on the proposed exemption 
are due thirty-five (35) days after the date of publication of the 
Notice in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department, 
telephone (202) 219-8883. (This is not a toll-free number.)

The Unaka Company, Incorporated Employees' Profit Sharing Plan and 
Trust (the Plan) Located in Greenville, Tennessee

[Application No. D-10722]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 C.F.R. part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
    If the exemption is granted the restrictions of sections 
406(a)(1)(A) through (D), 406(b)(1), and 406(b)(2) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (E) of the Code shall not 
apply to: 20
---------------------------------------------------------------------------

    \20\ For purposes of this exemption, references to specific 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
---------------------------------------------------------------------------

    (a) The assignment (the Assignment) by the Plan to the Unaka 
Company,

[[Page 29909]]

Incorporated (Unaka), the sponsoring employer and a party in interest 
with respect to the Plan, of any and all claims, demands, and/or causes 
of action which the Plan may have against certain members of the Plan 
Administrative Committee (the PAC) and other involved parties 
(collectively, the Responsible Fiduciaries) for breach of fiduciary 
duty under the Act, during the period from July 1, 1996 to July 31, 
1998;
    (b) In exchange for the Assignment, described in paragraph (a), 
above, the interest-free, non-recourse loan (the Loan) by Unaka to the 
Plan in an amount equal to the difference between $413 and the fair 
market value per share for the common stock of Unaka (the Stock) held 
by the Plan, in connection with the sale of such Stock by the Plan to 
Unaka, pursuant to the statutory exemption, as set forth in section 
408(e) of the Act; 21
---------------------------------------------------------------------------

    \21\ The Department, herein, expresses no opinion as to the 
applicability of the statutory exemption provided by section 408(e) 
of the Act to the sale by the Plan of its Unaka Stock to Unaka or as 
to whether the conditions set forth in such statutory exemption are 
satisfied in the execution of such transaction. Further, the 
Department, herein, is offering no relief for transactions other 
than those proposed.
---------------------------------------------------------------------------

    (c) The possible repayment of such Loan to Unaka from the cash 
proceeds of the recovery, if any, from a judgment or settlement of the 
litigation against the Responsible Fiduciaries;
    (d) The interest-free, non-recourse extension of credit (the 
Extension of Credit) by Unaka to the Plan of certain expenses arising 
out of the litigation against the Responsible Fiduciaries, effective as 
of, May 1, 1999, the date when expenses incurred by the Plan in 
bringing such litigation were first paid by Unaka; and
    (e) The possible receipt by Unaka of reimbursement of such 
litigation expenses from the cash proceeds of the recovery, if any, 
from a judgment or settlement of the litigation against the Responsible 
Fiduciaries; provided that the following conditions are satisfied:
    (1) The Plan will pay no interest in connection with the Loan or 
the Extension of Credit;
    (2) None of the assets of the Plan will be pledged to secure either 
the amount of the Loan or the amount of the Extension of Credit;
    (3) Repayment to Unaka of the amount of the Loan and reimbursement 
to Unaka of the amount of the Extension of Credit shall be restricted 
solely to the cash proceeds of the recovery, if any, from a judgment or 
settlement of the litigation against the Responsible Fiduciaries;
    (4) To the extent the amount of the cash proceeds, if any, from any 
judgment or settlement of the litigation against the Responsible 
Fiduciaries is equal to or less than the amount due to Unaka as 
repayment for the Loan and reimbursement of the Extension of Credit, 
the Plan shall not be liable to Unaka for any amount;
    (5) To the extent the cash proceeds, if any, from any judgment or 
settlement of the litigation against the Responsible Fiduciaries 
exceeds the total amount of the Loan, plus the amount of the Extension 
of Credit, such excess amount will be allocated to the accounts of the 
participants of the Plan; with the exception that no such allocation 
will be made to the account of Robert Austin, Jr. in the Plan;
    (6) The transactions which are the subject of this exemption do not 
involve any risk of loss either to the Plan or to any of the 
participants and beneficiaries of the Plan;
    (7) The Plan will not incur any expenses as a result of the 
transactions which are the subject of this exemption;
    (8) Notwithstanding the Assignment by the Plan of its rights 
against the Responsible Fiduciaries, the Plan does not release any 
claims, demands, and/or causes of action which it may have against 
Unaka and/or its affiliates;
    (9) All of the terms of the transactions are at least as favorable 
to the Plan as those which the Plan could obtain in similar 
transactions negotiated at arm's-length with unrelated third parties;
    (10) The Plan receives no less than the fair market value for the 
Assignment, as of the date of the closing on the transfer of the 
Assignment;
    (11) Prior to the Plan's entering the transactions, an independent, 
qualified fiduciary (the I/F), who is acting on behalf of the Plan and 
who is independent of Unaka and its affiliates, reviews, negotiates, 
and approves the terms and conditions of the Loan, the Assignment, and 
the Extension of Credit and determines that such transactions are 
prudent, administratively feasible, in the interest of the Plan and its 
participants and beneficiaries, and protective of the participants and 
beneficiaries of the Plan;
    (12) Throughout the duration of the transactions, the I/F monitors 
the prosecution of the lawsuit against the Responsible Fiduciaries, 
including but not limited to monitoring all costs and fees incurred in 
connection with any litigation related to the proposed transactions, 
monitors the division of the recovery, if any, from any judgment or 
settlement of the litigation against the Responsible Fiduciaries to 
ensure that the Plan receives the portion to which it is entitled and 
that the Plan's interests are served, and monitors the terms and 
conditions of the proposed transactions to ensure that such terms and 
conditions are at all times satisfied;
    (13) The I/F, acting on behalf of the Plan, shall have final 
approval authority over any proposed settlement of any legal 
proceedings against the Responsible Fiduciaries brought pursuant to the 
terms of the Assignment; and
    (14) In the event the I/F resigns, is removed, or for any reason is 
unable to serve, including but not limited to the death or disability 
of such I/F, or if at any time such I/F does not remain independent of 
Unaka and its affiliates, such I/F will be replaced by a successor: (i) 
Who is appointed immediately upon the occurrence of such event; (ii) 
who is independent of Unaka and its affiliates; (iii) who is qualified 
to serve as the I/F; and (iv) who assumes all the duties and 
responsibilities of the predecessor
I/F.

Summary of Facts and Representations

    1. The Plan, established on February 1, 1967, but amended and 
restated on June 29, 1995, is a defined contribution profit sharing 
plan which is designed to qualify under section 401(a) of the Code. 
Contributions to the Plan are made by Unaka and by the participants in 
the Plan. The Plan is an individual account plan which does not provide 
for participant-directed investments. All contributions to the Plan are 
invested by the trustee of the Plan, pursuant to the funding policy and 
method, as determined by Unaka and by the Plan's investment manager.
    Employees of Unaka and/or its subsidiaries are participants in the 
Plan. As of January 1, 1997, the Plan had approximately 1,142 
participants. From January 1, 1997 to February 11, 1999, distributions 
of account balances were made to 209 participants, and 104 participants 
were added to the Plan. Accordingly, as of March 1, 1999, there were 
1,037 participants in the Plan.
    As of June 30, 1998, the Plan had approximately $16.8 million in 
assets on an unaudited basis, consisting of cash, mutual fund 
interests, government and corporate bonds, and shares of stock. It is 
represented that each participant's account shares a pro-rata portion 
of the overall value of the general assets of the Plan.
    In the past, Unaka, as Plan administrator, has delegated to certain 
individuals, including, but not limited to certain officers and 
employees of Unaka, the responsibilities of administering the Plan. In 
this regard, until October 1997, the PAC

[[Page 29910]]

administered the Plan. It is represented that from June 1996 to October 
1997, the PAC was comprised of Gordon H. Newman, Jerald K. Jaynes, 
Lonnie F. Thompson, and Gary Landes. From May 1995 to June 1996, the 
PAC was comprised of Gordon H. Newman, Robert Austin, Jr., and Gordon 
Chalmers. Prior to that time the PAC members were Gordon H. Newman, 
Terry O'Donovan, Powell Johnson, Dominick Jackson, and Ray Adams.
    As discussed more fully below, in an agreement dated July 31, 1998, 
as amended March 25, 1999, and April 7, 1999, an independent, qualified 
individual was hired to serve as the trustee (the Trustee) of the Plan, 
and an institutional investment manager was engaged to manage the 
assets of the Plan and to serve as the I/F with respect to the 
transactions which are the subject of this proposed exemption.
    2. Established in 1950 in Greeneville, Tennessee, Unaka is a 
holding corporation for the diverse industries of its wholly-owned 
subsidiaries. These subsidiaries consist primarily of the MECO 
Corporation, a manufacturer of barbecue grills and folding metal 
furniture, SOPAKCO, a warehouse operator and manufacturer of packaged 
foods, and Crown Point, an international food supply company 
specializing in the buying and selling of food commodities.
    Unaka is a privately held corporation whose stock is not traded on 
any registered securities exchange. Another holding company, the Rolich 
Corporation (Rolich), owns approximately 61 percent (61%) of the 54,000 
issued and outstanding shares of the Stock of Unaka which has a $10 par 
value. The Plan owns an additional 26 percent (26%) of the issued and 
outstanding shares of Stock of Unaka. Members of the Austin family, as 
discussed below, and various other individuals own the remaining 13 
percent (13%) of the Unaka Stock.
    3. In August of 1987, Robert Austin, Sr. purchased, through Rolich, 
a controlling interest in Unaka. It is represented that at that time, 
Rolich was owned by the members of the immediate family of Robert 
Austin, Sr. In connection with Robert Austin, Sr.'s obtaining control 
of Unaka, the Plan, on December 27 and 28, 1987, acquired 2,500 and 
6,500 shares, respectively, of Unaka Stock directly from Unaka at a 
price of $220 per share. Subsequently, on October 1, 1989, the Plan 
purchased an additional 5,000 shares of Unaka Stock from Unaka at a 
price of $250 per share.22
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    \22\ Unaka represents that the acquisition by the Plan of Unaka 
Stock both in December 1987, and October 1989, satisfied the 
criteria of section 408(e) of the Act. The Department, herein, 
expresses no opinion as to the applicability of the statutory 
exemption provided by section 408(e) of the Act to the acquisition 
in 1987 and 1989 of the Unaka Stock by the Plan or as to whether the 
conditions set forth in such statutory exemption were satisfied in 
the execution of such transactions. Further, the Department, herein, 
is offering no relief for transactions other than those proposed.
---------------------------------------------------------------------------

    With the deaths in 1990, of Robert Austin, and his wife, Mary T. 
Austin, a struggle for control of Rolich and Unaka ensued among their 
three children who are the heirs to their parents' estates. In this 
regard, most of the litigation involves the struggle for control of 
Unaka and Rolich among, Robert Austin, Jr., Lisa Austin, and Christy 
Austin. Additional litigation is associated with the members of Unaka's 
former management and with other shareholder derivative and non-
derivative suits. It is anticipated that these various legal disputes 
may continue in the foreseeable future. However, it is represented that 
as of April 1997, Robert Austin, Jr. obtained majority ownership of 
Rolich and is currently serving as Chairman of the Board of Directors 
of Unaka.
    4. In October of 1996, the Plan entered into an agreement to sell 
its Unaka Stock to Nothung, Inc. (Nothung), an entity owned by Robert 
Austin, Jr., for a minimum price of $413 per share. It is represented 
that certain Responsible Fiduciaries who were members of the PAC did 
not complete the sale of the Plan's Unaka Stock, pursuant to the 
agreement with Nothung. As a result, the PAC, acting on behalf of the 
Plan, failed to sell the Plan's Unaka Stock to Nothung in October of 
1996. Subsequently, the offer to purchase the Plan's Unaka Stock, 
pursuant to the agreement with Nothung, lapsed on January 27, 1997.
    5. With regard to the $413 per share price offered, pursuant to the 
agreement with Nothung, it is represented that Mercer Capital 
Management, Inc. (Mercer), an independent, qualified appraisal, valued 
the Plan's Unaka Stock, as of May 31, 1996, on a marketable, minority 
interest basis, at $413 per share. Of the three valuation 
methodologies, Mercer employed the income approach and the asset-based 
approach, but did not consider the market approach appropriate, because 
at the time of the appraisal there had been too few arm's length 
transactions in the Unaka Stock. Further, the Mercer appraisal did not 
discount the value of the Plan's Unaka Stock for lack of marketability, 
because: (1) Mercer believed it reasonable to assume that ongoing 
negotiations with Unaka would result in an option for Plan participants 
to put the shares to Unaka or to the Plan at the appraised fair market 
value; (2) Mercer accepted that the original investment by the Plan in 
Unaka Stock was based on assurances of reasonable treatment by the 
remaining shareholders; and (3) Mercer accepted representations from 
the Plan's legal counsel that there had been an intent and practice not 
to consider marketability discounts in the valuation estimates used in 
prior years.
    6. The Plan currently holds 14,000 shares of Unaka Stock which 
Unaka has offered to purchase at a price equal to the fair market value 
of such Stock on the date the transaction is closed. It is represented 
that the proposed sale by the Plan to Unaka of the Plan's Unaka Stock 
will satisfy the criteria of section 408(e) of the Act.23
---------------------------------------------------------------------------

    \23\ See, footnote number 22, above.
---------------------------------------------------------------------------

    In anticipation of the sale of the Plan's Unaka Stock to Unaka and 
in anticipation of the transactions which are the subject of this 
proposed exemption, it is represented that an appraisal, as of June 30, 
1998, of the fair market value of the Unaka Stock was prepared by 
Bernstein, Phalon & Conklin (BP&C), an independent, qualified 
appraiser, with offices in Dallas, Texas. In determining the value of 
the Unaka Stock, BP&C considered all three approaches to value, the 
income approach, the asset-based approach, and the market approach. The 
results of these valuation techniques applied to a minority interest of 
the Plan's Unaka Stock on a closely held basis were as follows:

Income approach
    $283 per share
Asset-based approach
    $334 per share
Market approach
    $292 per share.

After giving slightly greater weight to the income approach, because 
that valuation method took into consideration the current and projected 
business operations of Unaka, BP&C determined that the fair market 
value of the equity of Unaka on a closely held, minority basis was $301 
per share, as of June 30, 1998. Based on an appraised value of $301 per 
share, approximately $4.2 million of the Plan's assets are currently 
invested in Unaka Stock which constitutes approximately 25 percent 
(25%) of the total assets held by the Plan.
    The applicant has represented that an updated appraisal of the 
Unaka Stock

[[Page 29911]]

will be obtained at the time of the closing of the sale of the Plan's 
Unaka Stock. In this regard, in the engagement letter, dated September 
11, 1998, BP&C acknowledges its responsibility for providing the fair 
market value of the Plan's Unaka Stock, as of the date of the sale of 
such shares, and for issuing a fairness opinion regarding such sale, if 
appropriate.
    7. In addition to the sale to Unaka of the Plan's Unaka Stock, it 
is represented that the Plan intends to sell, assign, transfer, and 
convey to Unaka any and all of the Plan's claims, demands, and causes 
of action (including reimbursement of reasonable legal fees, expenses, 
and costs) which the Plan may have against the Responsible Fiduciaries 
for breach of fiduciary duties during the period between July 1, 1996 
to July 31, 1998. It is represented that this time span was chosen to 
cover the period during which the Responsible Fiduciaries were in 
control of the Plan and its assets and in order to cover any and all 
potential claims or causes of action that may arise out of any acts on 
the part of the Responsible Fiduciaries. In this regard, July 1, 1996, 
is the date Robert Austin, Jr. was removed from the PAC, and July 31, 
1998, is the last date before the Trustee, who is the successor to the 
PAC, was appointed.
    Included without limitation in the Assignment are all claims as to: 
(i) The value of the Unaka Stock held by the Plan, including its 
purchase, sale, transfer, voting, valuation, and appraisal; (ii) any 
offers, attempts, or agreements to purchase, transfer, assign, vote, 
pledge, or hypothecate such Stock, including but not limited to the 
offer/agreement to purchase the Stock made by Nothung in October 1996; 
and (iii) any third party claims, demands, and causes of action arising 
therefrom. Notwithstanding the Assignment by the Plan of its rights 
against the Responsible Fiduciaries, it is represented that the 
Trustee, on behalf of the Plan, will not release any claims, demands, 
and/or causes of action which the Plan may have against Unaka and/or 
its affiliates.
    Due to the uncertainty of the outcome of the litigation between the 
Plan and the Responsible Fiduciaries, it is represented that it is 
difficult to calculate a precise value of the rights against the 
Responsible Fiduciaries which the Plan proposes to assign to Unaka. In 
this regard at the request of the I/F who is also the Plan's investment 
manager, BP&C were engaged on March 25, 1999, to express an opinion 
concerning the approximate fair market value of the Assignment. As part 
of the analysis, BP&C took into consideration: (i) The likelihood of 
the Plan prevailing successfully in the lawsuit against the Responsible 
Fiduciaries; (ii) the likelihood of collecting on any judgment awarded 
by the court; and (iii) the ability of the Plan to sell the Assignment 
to a willing buyer. Based on its analysis, BP&C concluded that the fair 
market value of the Assignment is negligible.
    8. In exchange for the Assignment, Unaka proposes to lend to the 
Plan the difference between the value of $413 per share for the Unaka 
Stock (as set forth in the agreement with Nothung and as set forth in 
the 1966 Mercer appraisal) and the fair market value, as of the date 
the proposed transactions are closed, of the Plan's Unaka Stock, as 
determined by the I/F after considering the appraised value of such 
Stock at closing. Because the offer price for the Plan's Unaka Stock 
evidenced by the agreement with Nothung was based upon the Mercer 
appraisal which did not consider a discount for lack of marketability, 
it is the position of the applicant that the $413 per share appraised 
value of the Plan's Unaka Stock includes a ``premium.'' Although at the 
time of the agreement with Nothung, the applicant maintains that the 
Plan could have obtained a control premium for the sale of its Unaka 
Stock, it is represented that the Plan has no current or foreseeable 
ability to attract such a premium in the future. Furthermore, in the 
opinion of the applicant the proposed transaction will restore this 
``premium,'' because there is no known market for the minority block of 
Unaka Stock held by the Plan.
    9. In addition to the transactions described above, involving the 
Assignment and the Loan, relief has been requested for an Extension of 
Credit between Unaka and the Plan of the expenses arising out of the 
litigation against the Responsible Fiduciaries. In this regard, Unaka 
proposes to extend credit to the Plan of an amount equal to the cost 
incurred in bringing suit against such Responsible Fiduciaries. It is 
represented that due to constraints imposed by the statute of 
limitations, it will be necessary for the Plan to begin legal 
proceedings against the Responsible Fiduciaries, prior to the date when 
a final exemption can be granted for the proposed transactions. In this 
regard, Unaka has agreed (in anticipation of the subject transactions) 
to pay on behalf of the Plan, beginning May 1, 1999, all expenses 
incurred by the Plan in filing and pursuing the litigation against the 
Responsible Fiduciaries. Accordingly, relief, if granted, for the 
Extension of Credit, as described in paragraph (d) above, has been made 
effective, as of May 1, 1999. In the event a final exemption is issued, 
it is represented that all amounts paid by Unaka, prior to the 
Assignment, to cover the expenses incurred by the Plan in filing and 
pursuing the litigation against the Responsible Fiduciaries shall be 
added to such additional amounts expended by Unaka after the Assignment 
in connection with the legal proceedings against the Responsible 
Fiduciaries. In the event a final exemption is not granted by November 
30, 1999, the Plan will have the option of continuing the litigation 
against the Responsible Fiduciaries, in its own right and at its own 
expense; but, Unaka shall not have the right to reimbursement for any 
payments made during the seven (7) months period from May 1, 1999, to 
November 30, 1999, of the Plan's expenses in connection with the 
litigation against the Responsible Fiduciaries.
    It is represented that both the Loan and the Extension of Credit 
will be without interest and without recourse against the Plan. In this 
regard, repayment to Unaka of the amount of the Loan and reimbursement 
to Unaka of the amount of the Extension of Credit shall be restricted 
solely to the cash proceeds of the recovery, if any, from a judgment or 
settlement of the litigation against the Responsible Fiduciaries. It is 
represented that to the extent the cash proceeds of any judgment or 
settlement of the litigation against the Responsible Fiduciaries 
exceeds the total amount of the Loan, plus the amount of the Extension 
of Credit, such amount will be allocated to the accounts of the 
participants of such Plan, with the exception that no such allocation 
will be made to the account of Robert Austin, Jr. in the Plan. It is 
represented that to the extent the cash proceeds of the recovery, if 
any, from such litigation is equal to or less than the aggregate amount 
of the Loan and the Extension of Credit, the Plan will not be 
responsible for any amount. In this regard, it is represented that 
Unaka will waive the repayment of any outstanding balance on the Loan 
and any balance on the Extension of Credit.24
---------------------------------------------------------------------------

    \24\ It is represented that to the extent Unaka waives repayment 
of the outstanding balance of the Loan and the Extension of Credit, 
or to the extent that the Plan receives any excess recovery over the 
aggregate amount of the Loan and the Extension of Credit, Unaka will 
amend the Plan to specify the allocation of such amounts in a manner 
so as to ensure that the Plan will not violate either section 
401(a)(4) or section 415 of the Code. Further, Unaka represents that 
it will submit an amendment to the Internal Revenue Service (the 
IRS) for a favorable determination letter for the Plan, as amended, 
by such amendment. Unaka represents that it will make any changes 
required by the IRS regarding such allocations.
    To the extent that waiving the outstanding balance of the Loan 
and the Extension of Credit is deemed to be a contribution to the 
Plan, Unaka represents that such amounts will not be treated as a 
contribution prior to the date when such amounts are either repaid 
or waived. However, Unaka represents that it intends to deduct all 
such amounts deemed to be contributions to the Plan, as of the date 
they are so deemed.

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

[[Page 29912]]

    10. As a fiduciary of the Plan and as an employer any of whose 
employees are covered by the Plan, Unaka is a party in interest with 
respect to the Plan, pursuant to section 3(14)(A) and 3(14)(C) of the 
Act. The proposed transactions will violate section 406(a)(1)(B) of the 
Act, because the execution of the Loan between Unaka and the Plan and 
the Extension of Credit by Unaka to the Plan each constitutes a lending 
of money between a plan and party in interest which is prohibited by 
the Act. In addition, the Assignment between the Plan and Unaka 
constitutes a transfer to, or use by or for the benefit of a party in 
interest of the income or assets of the Plan for which relief from 
section 406(a)(1)(D) of the Act would be necessary.
    Further, the applicant has requested relief for violations of 
section 406(b)(1) and (b)(2) of the Act that may arise from Unaka's 
status as a sponsor and administrator of the Plan. In this regard, the 
proposed transactions could involve a fiduciary dealing with the assets 
of the plan in his own interest and/or acting in his individual 
capacity on behalf of a party whose interests are adverse to the 
interests of the plan or it participants and beneficiaries.
    11. With respect to the proposed transactions, Unaka notes that a 
class exemption, Prohibited Transaction Class Exemption 80-26 (PTCE 80-
26), provides an exemption for interest-free loans by parties in 
interest to plans. However, PTCE 80-26 is applicable where loan 
proceeds are used for payment of ordinary operating expenses of a plan 
or for a period of no more than three (3) days for a purpose incidental 
to the ordinary operation of a plan. It is represented that Unaka is 
uncertain whether the proposed transactions are of the type 
contemplated by class exemption PTCE 80-26.
    However, Unaka points out that individual exemptions have been 
granted in cases involving an extension of credit from a plan sponsor 
to a plan and an assignment back from the plan to the plan sponsor of 
the plan's litigation rights and interests. In the opinion of Unaka, 
the fact that individual exemptions have been granted in similar 
circumstances indicates that the proposed transactions are in line with 
current administrative practices. Accordingly, Unaka believes that the 
request for an individual exemption is appropriate.
    12. Unaka represents that the proposed transactions are 
administratively feasible in that the nature of the transactions does 
not require ongoing supervision by the Department. In this regard, the 
Plan has engaged the Trustee and the I/F, who is also the investment 
manager of the Plan. In addition, it is represented that all necessary 
safeguards are incorporated into the documents evidencing the 
Assignment, the Loan, and the Extension of Credit between the Plan and 
Unaka.
    13. Unaka represents that the proposed transactions will preserve 
the value of retirement accounts of participants in the Plan and will 
ensure that such participants do not suffer from the failure by the 
Responsible Fiduciaries to sell the Unaka Stock, pursuant to the terms 
of the agreement with Nothung. In this regard, it is represented that 
denial of the proposed exemption would cause the participants of the 
Plan to shoulder the decline in the value of the Unaka Stock caused by 
events wholly outside their control. Further, the Plan would avoid an 
expensive and time-consuming litigation against the Responsible 
Fiduciaries the outcome of which is not assured. In addition, it is 
uncertain whether the Responsible Fiduciaries will have sufficient 
assets to satisfy a judgment, if one were to be awarded to the Plan.
    14. Unaka represents that the proposed transactions are in the 
interest of the Plan in that such transactions will reinforce the 
participants' confidence in the security of their retirement funds and 
allow for diversification of assets. In this regard, the Plan will 
immediately receive the proceeds from the Loan and can, upon receipt, 
invest such proceeds in other assets to produce additional earnings for 
the participants in the Plan. Further, the Plan will benefit in that it 
will not incur any expenses as a result of the transactions.
    15. Unaka represents that the terms of the proposed exemption 
adequately protect the rights of the participants and beneficiaries of 
the Plan. Neither the Loan nor the Extension of Credit will bear any 
interest. The assets of the Plan will not be pledged as collateral to 
secure the Loan or the Extension of Credit, nor will the assets of the 
Plan be used to repay the Loan or the Extension of Credit, other than 
solely from the cash proceeds of the recovery, if any, from a judgment 
or settlement of the litigation against the Responsible Fiduciaries. To 
the extent the amount of the cash proceeds from such recovery, if any, 
is equal to or less than the amount of the Loan and the amount of the 
Extension of Credit, it is represented that Unaka will waive the 
repayment of any outstanding balance on the Loan and any balance on the 
Extension of Credit. In short, it is represented that as a result of 
the proposed transactions, neither the Plan nor the participants will 
experience a risk of loss.
    16. As an additional safeguard, pursuant to the terms of an 
agreement signed, July 31, 1998, as amended March 25, 1999, and April 
7, 1999, the Strategic Investment Counsel Corporation (STRINCO) of 
Dallas, Texas, has agreed to serve as the I/F with respect to the 
proposed transactions and also to serve as the investment manager with 
respect to the investment and reinvestment of the assets of the Plan. 
Pursuant to the same agreement, Colin M. Henderson (Mr. Henderson), the 
President and chief investment officer of STRINCO, has accepted the 
appointment to serve, in his individual capacity, as the Trustee of the 
Plan.
    It is represented that STRINCO, as the I/F and the investment 
manager for the Plan, has agreed to serve throughout the duration of 
the proposed transactions. The Department notes that the proposed 
exemption is conditioned upon the I/F, throughout the duration of the 
transactions, monitoring the prosecution of the lawsuit against the 
Responsible Fiduciaries, including but not limited to monitoring all 
costs and fees incurred in connection with any litigation related to 
the proposed transactions, monitoring the division of the recovery, if 
any, from any judgment or settlement of the litigation against the 
Responsible Fiduciaries to ensure that the Plan receives the portion to 
which it is entitled and that its interests are served, and monitoring 
the terms and conditions of the proposed transactions to ensure that 
such terms and conditions are at all times satisfied. The exemption 
contains a further condition that specifies that in the event the I/F 
resigns, is removed, or for any reason is unable to serve, including 
but not limited to the death or disability of such I/F, or if at any 
time such I/F does not remain independent of Unaka and its affiliates, 
such I/F will be replaced by a successor: (i) Who is appointed 
immediately upon the occurrence of such event; (ii) who is independent 
of Unaka and its affiliates; (iii) who is qualified to serve as the I/
F; and (iv) who assumes all the duties and responsibilities of the 
predecessor I/F.
    STRINCO has represented that it has extensive experience as a 
service

[[Page 29913]]

provider to employee benefit plans. Further, STRINCO represents that it 
is independent of all of the parties to the proposed exemption. In this 
regard, the projected income from Unaka represent a small percentage of 
the projected revenues of STRINCO. Specifically, it is represented that 
STRINCO's revenues from fees paid by Unaka will constitute less than 3 
percent (3%) of STRINCO's projected total revenues for 1999.
    STRINCO has acknowledged its status as an independent fiduciary 
under the Act, including the responsibilities and duties of a fiduciary 
involving the assets of the Plan. Specifically, prior to the Plan's 
entering the transactions, STRINCO is responsible for reviewing, 
negotiating, and approving the terms and conditions of the Loan, the 
Assignment, and the Extension of Credit and determining whether such 
transactions are prudent, administratively feasible, in the interest of 
the Plan and its participants and beneficiaries, and protective of the 
participants and beneficiaries of the Plan. It is represented that 
STRINCO has been involved since its engagement in 1998, in the 
evaluation, analysis, and design of the proposed transactions. In this 
regard, STRINCO represents that it has at all times retained complete 
discretion as to the Plan's participation in the proposed transactions 
and has been actively involved in the negotiation of the terms of 
conditions of such transactions. Further, STRINCO represents that 
throughout the duration of the transactions, it will monitor the 
prosecution of the lawsuit against the Responsible Fiduciaries, 
including but not limited to monitoring all costs and fees incurred in 
connection with any litigation related to the proposed transactions; 
monitor the division of the recovery, if any, from any judgment or 
settlement of the litigation against the Responsible Fiduciaries to 
ensure that the Plan receives the portion to which it is entitled and 
that its interests are served; and monitor the terms and conditions of 
the proposed transactions to ensure that such terms and conditions are 
at all times satisfied. In addition, STRINCO, the I/F acting on behalf 
of the Plan, shall have final approval authority over any proposed 
settlement of any legal proceedings against the Responsible Fiduciaries 
brought pursuant to the terms of the Assignment. In this regard, it is 
represented that such final approval authority is not intended to and 
does not confer upon STRINCO, as I/F to the Plan, any authority to 
initiate settlement negotiations nor any right to negotiate any 
specific terms of settlement.
    STRINCO has analyzed each of the three proposed transactions and 
has made independent investigation of the representations made as to 
each of the transactions, including significant due diligence into the 
background surrounding the failure of the Responsible Fiduciaries to 
sell the Plan's Unaka Stock, pursuant to the agreement with Nothung. It 
is represented that Mr. Henderson, as President of STRINCO, his 
counsel, and BP&C have visited the Unaka facilities, interviewed its 
officers and reviewed documentation involving the Plan, including 
minutes of the PAC meetings and certain minutes of the meetings of the 
Board of Directors of Unaka.
    With respect to its analysis of the Loan, Assignment, and Extension 
of Credit, STRINCO states that the proposed transactions do not bind 
any of the Plan's assets as collateral. Furthermore, the proposed 
transactions, in the worst case, obtain a premium for the Plan in 
excess of any loss actually suffered by the Plan or its participants 
and beneficiaries. In this regard, STRINCO affirms that in the event no 
recovery is made in the suit against the Responsible Fiduciaries, the 
amount of Loan will be automatically forgiven, and the Plan will have 
gained a premium (i.e. cash equal to the difference between the price 
of the Plan's Unaka Stock, pursuant to the agreement with Nothung and 
the current fair market value of such shares). In the event a 
substantial amount is recovered in the suit against the Responsible 
Fiduciaries, the Plan will still gain a premium in recovering 
everything in excess of the amount of the Loan (less the expenses of 
litigation). In the opinion of STRINCO, regardless of the outcome of 
the litigation, the Loan puts the Plan and its participants and 
beneficiaries in the position they would have been in if the Unaka 
Stock had been sold to Nothung.
    In order to receive the Loan, the Plan is required to enter into 
the Assignment. In the opinion of STRINCO, the Assignment allows a suit 
to be brought against the Responsible Fiduciaries without the Plan 
assuming any risks associated with such suit and without having to 
spend any of its own funds to do so. In light of Unaka's inability to 
retain any of the proceeds of such suit, other than recoupment of the 
outstanding balance of the Loan and any expenses of such litigation, in 
the opinion of STRINCO the Assignment has minimal, if any, value in the 
hands of the assignee. Based on this reasoning, STRINCO has concluded 
the proposed transactions are at least as favorable to the Plan as any 
transaction between the Plan and a third party.
    With respect to the Extension of Credit by Unaka of the litigation 
expenses, STRINCO points out that, if the Plan were not to participate 
in the proposed transactions and instead bring suit in its own right 
against the Responsible Fiduciaries, the Plan would be required to pay 
the litigation expenses prior to any potential recovery and regardless 
of such recovery. Accordingly, STRINCO has concluded, based upon its 
analysis described above, that each of the proposed transactions 
represents a prudent and conservative course of action which is 
feasible and fair; in the best interests of the participants and 
beneficiaries; and protective of the assets of the Plan which are held 
for the exclusive benefit of the participants and beneficiaries.
    17. In summary, the applicant represents that the proposed 
transactions meet the statutory criteria for an exemption under section 
408(a) of the Act and 4975(c)(2) of the Code because:
    (1) The Plan will pay no interest in connection with the Loan or 
the Extension of Credit;
    (2) None of the assets of the Plan will be pledged to secure either 
the amount of the Loan or the amount of the Extension of Credit;
    (3) Repayment to Unaka of the amount of the Loan and reimbursement 
to Unaka of the amount of the Extension of Credit shall be restricted 
solely to the cash proceeds of the recovery, if any, from a judgment or 
settlement of the litigation against the Responsible Fiduciaries;
    (4) To the extent the amount of the cash proceeds, if any, from any 
judgment or settlement of the litigation against the Responsible 
Fiduciaries is equal to or less than the amount due to Unaka as 
repayment for the Loan and reimbursement of the Extension of Credit, 
the Plan shall not be liable to Unaka for any amount;
    (5) To the extent the cash proceeds, if any, from any judgment or 
settlement of the litigation against the Responsible Fiduciaries 
exceeds the total amount of the Loan and the amount of the Extension of 
Credit, such amount will be allocated to the accounts of the 
participants of the Plan; with the exception that no such allocation 
will be made to the account of Robert Austin, Jr. in the Plan;
    (6) The transactions which are the subject of this exemption do not 
involve any risk of loss either to the Plan or to any of the 
participants and beneficiaries of the Plan;
    (7) The Plan will not incur any expenses as a result of the 
transactions which are the subject of this exemption;

[[Page 29914]]

    (8) Notwithstanding the Assignment by the Plan of its rights 
against the Responsible Fiduciaries, the Plan, will not release any 
claims, demands, and/or causes of action which it may have against 
Unaka and/or its affiliates;
    (9) All of the terms of the transactions are at least as favorable 
to the Plan as those which the Plan could obtain in similar 
transactions negotiated at arm's-length with unrelated third parties;
    (10) The Plan receives no less than the fair market value for the 
Assignment, as of the date of the closing on the transaction;
    (11) Prior to the Plan's entering the transactions, STRINCO, who is 
acting as I/F on behalf of the Plan and who is independent of Unaka and 
its affiliates, will review, negotiate, and approve the terms and 
conditions of the Loan, the Assignment, and the Extension of Credit and 
will determine that such transactions are prudent, administratively 
feasible, in the interest of the Plan and its participants and 
beneficiaries, and protective of the participants and beneficiaries;
    (12) Throughout the duration of the transactions, STRINCO, as the 
I/F, will monitor the prosecution of the lawsuit against the 
Responsible Fiduciaries, including but not limited to monitoring all 
costs and fees incurred in connection with any litigation related to 
the proposed transactions; will monitor the division of the recovery, 
if any, from any judgment or settlement of the litigation against the 
Responsible Fiduciaries to ensure that the Plan receives the portion to 
which it is entitled and that its interests are served; and will 
monitor the terms and conditions of the proposed transactions to ensure 
that such terms and conditions are at all times satisfied;
    (13) STRINCO, the I/F acting on behalf of the Plan, shall have 
final approval authority over any proposed settlement of any legal 
proceedings against the Responsible Fiduciaries brought pursuant to the 
terms of the Assignment; and
    (14) In the event STRINCO resigns, is removed, or for any reason is 
unable to serve, or if at any time STRINCO does not remain independent 
of Unaka and its affiliates, STRINCO will be replaced by a successor: 
(i) Who is appointed immediately upon the occurrence of such event; 
(ii) who is independent of Unaka and its affiliates; (iii) who is 
qualified to serve as the I/F; and (iv) who assumes all the duties and 
responsibilities of STRINCO.

Notice to Interested Persons

    Those persons who may be interested in the pendency of the 
requested exemption include any person who presently is a participant 
in the Plan or any other person who is entitled to receive benefits 
under the Plan. It is represented that these two classes of interested 
persons will be notified through different methods.
    In this regard, it is represented that notification will be 
provided to all participants of the Plan who are present in the work 
environment of Unaka or its affiliates, within fifteen (15) calendar 
days of the date of publication of the Notice of Proposed Exemption 
(the Notice) in the Federal Register by posting on employee bulletin 
boards at those locations within the principal places of employment of 
Unaka and its affiliates 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 C.F.R. 
Sec. 2570.43(b)(2), which will advise such interested persons of their 
right to comment and to request a hearing.
    It is represented that notification will be provided to any 
interested person who is entitled to benefits but who is not present in 
the work environment of Unaka or its affiliates by mailing first class 
within fifteen (15) calendar days of 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 C.F.R. Sec. 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, through posting or mailing, a copy of the 
Notice and the Supplemental Statement.

FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the Department, 
telephone (202) 219-8883 (This is not a toll-free number.)

General Motors Hourly Rate Employes Pension Plan, General Motors 
Retirement Program for Salaried Employes, Saturn Individual 
Retirement Plan for Represented Team Members, Saturn Personal 
Choices Retirement Plan for Non-Represented Team Members, 
Employees' Retirement Plan for GMAC Mortgage Corporation 
(collectively, the Plans), Located in New York, New York

[Application Nos. D-10473 through D-10476]

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).
Part I--Covered Transactions
    If the proposed exemption is granted, the restrictions of section 
406(a)(1)(A) through (D) of the Act and the taxes imposed by section 
4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A) through 
(D) of the Code, shall not apply effective December 11, 1998, to a 
transaction between AEW Industrial, L.L.C. (the LLC), an entity which 
currently holds ``plan assets'' of the Plans, or any subsidiary of the 
LLC (as defined in Part IV(d) below) which may hold ``plan assets'' of 
the Plans in the future, as a result of investments made by the Plans 
in the LLC or any subsidiary through the First Plaza Group Trust (the 
Trust), and a party in interest with respect to any of the Plans, 
provided that the Specific Conditions set forth below in Part II and 
the General Conditions set forth in Part III are met:
Part II--Specific Conditions
    (a) In the case of a transaction by the LLC that involves the 
acquisition, financing, or disposition of any real property asset, the 
terms of the transaction are negotiated on behalf of the Plan by AEW 
Capital Management, L.P. or a successor thereto (AEW), under the 
authority and general direction of General Motors Investment Management 
Corporation (GMIMCo), a wholly-owned subsidiary of General Motors 
Corporation (GM), and GMIMCo makes the decision on behalf of the Plan 
to enter into the transaction.
    Notwithstanding the foregoing, a transaction involving an amount of 
$5 million or more, which has been negotiated on behalf of the Plans by 
AEW and approved by GMIMCo in the manner described above, will not fail 
to meet the requirements of this Part II(a) solely because GM or its 
designee

[[Page 29915]]

retains the right to veto or approve such transaction;
    (b) In the case of any transaction by the LLC that does not involve 
acquisitions, financings or dispositions of real property assets, the 
terms of the transaction are negotiated on behalf of the Plans by AEW, 
under the authority and general direction of GMIMCo, and either AEW or 
a property manager acting in accordance with written guidelines or 
business plans (including budgets), adopted with the approval of 
GMIMCo, makes the decision on behalf of the Plans to enter into the 
transaction. Notwithstanding the foregoing, a transaction involving an 
amount of $5 million or more, which has been negotiated on behalf of 
the Plans in accordance with the foregoing, will not fail to meet the 
requirements of this Part II(b) solely because GM or its designee 
retains the right to veto or approve such transaction;
    (c) The transaction is not described in--
    (1) Prohibited Transaction Exemption 81-6 (46 FR 7527, January 23, 
1981), relating to securities lending arrangements,
    (2) Prohibited Transaction Exemption 83-1 (48 FR 895, January 7, 
1983), relating to acquisitions by plans of interests in mortgage 
pools, or
    (3) Prohibited Transaction Exemption 88-59 (53 FR 24811; June 30, 
1988), relating to certain mortgage financing arrangements;
    (d) The transaction is not part of an agreement, arrangement or 
understanding designed to benefit a party in interest with respect to 
any of the Plans;
    (e) At the time the transaction is entered into, and at the time of 
any subsequent renewal or modification thereof that requires the 
consent of GMIMCo, GM, or AEW the terms of the transaction are at least 
as favorable to the Plans as the terms generally available in arm's-
length transactions between unrelated parties;
    (f) The party in interest dealing with the LLC: (1) is a party in 
interest with respect to a Plan (including a fiduciary) solely by 
reason of providing services to the Plan, or solely by reason of a 
relationship to a service provider described in section 3(14)(F), (G), 
(H) or (I) of the Act; and (2) does not have discretionary authority or 
control with respect to the investment of the Plan's assets in the 
Trust or the LLC, and does not render investment advice, within the 
meaning of 29 CFR 2510.3-21(c), with respect to the investment of those 
assets in the Trust or the LLC;
    (g) The party in interest dealing with the LLC is neither GMIMCo or 
AEW nor a person ``related'' to GMIMCo or AEW within the meaning of 
Part IV(c) below;
    (h) GMIMCo adopts written policies and procedures that are designed 
to assure compliance with the conditions of this proposed exemption; 
and
    (i) An independent auditor, who has appropriate technical training 
or experience and proficiency with the fiduciary responsibility 
provisions of the Act, and who so represents in writing, conducts an 
exemption audit, as defined in Part IV(f) below, on an annual basis. 
Following completion of the exemption audit, the auditor issues a 
written report to each Plan representing its specific findings 
regarding the level of compliance with the policies and procedure 
adopted by GMIMCo in accordance with Part II(h) above.
Part III--General Conditions
    (a) At all times during the term of this exemption (if granted), 
GMIMCo shall be--
    (1) A direct or indirect wholly owned subsidiary of GM, and
    (2) An investment adviser registered under the Investment Advisers 
Act of 1940 that, as of the last day of its most recent fiscal year, 
has under its management and control total assets attributable to Plans 
maintained by GM or its affiliates (as defined in Part IV(a) of this 
exemption) in excess of $50 million. In addition, Plans maintained by 
affiliates of GMIMCo must have, as of the last day of each plan's 
reporting year, aggregate assets of at least $250 million;
    (b) AEW or any successor, as investment manager for assets held by 
the LLC, meets the conditions for a ``qualified professional asset 
manager'' (QPAM) as set forth in section V(a) of Prohibited Transaction 
Class Exemption 84-14 (49 FR 9494, March 13, 1984);
    (c) AEW and GMIMCo, or their affiliates, shall maintain, for a 
period of six years from the date of each transaction described above, 
the records necessary to enable the persons described below in part 
III(d)(1) to determine whether the conditions of this exemption (if 
granted) have been met, except that (1) a prohibited transaction will 
not be deemed to have occurred if, due to circumstances beyond the 
control of AEW or GMIMCo, or their affiliates, the records are lost or 
destroyed prior to the end of the six-year period, and (2) no party in 
interest, other than AEW or GMIMCo, shall be subject to the civil 
penalty which may be assessed under section 502(i) of the Act or to the 
taxes imposed by sections 4975 (a) and (b) of the Code, if the records 
are not available for examination as required by section (d) below; and
    (d)(1) Except as provided in subsection (2) of this section (d), 
and notwithstanding any provisions of subsection (a)(2) and (b) of 
section 504 of the Act, the records referred to in section (c) of this 
Part III shall be made unconditionally available by GMIMCo or AEW, at 
the customary location for the maintenance and/or retention of such 
records, for examination during normal business hours by:
    (A) Any duly authorized employee or representative of the 
Department of Labor or the Internal Revenue Service;
    (B) The persons described in Part II(i) of this exemption (relating 
to an independent audit of covered transactions as discussed therein); 
and
    (C) Any fiduciary of the Plans or the Trust;
    (2) None of the persons described in subsections (1)(B) and (C) of 
this section (d) shall be authorized to examine trade secrets of AEW or 
GMIMCo, or commercial or financial information which is privileged or 
confidential in nature.
Part IV--Definitions
    For purposes of this proposed exemption:
    (a) ``Affiliate'' of GM means a member of either (1) a controlled 
group of corporations (as defined in section 414(b) of the Code) of 
which GM is a member, or (2) a group of trades or businesses under 
common control (as defined in section 414(c) of the Code) of which GM 
is a member; provided that ``50 percent'' shall be substituted for ``80 
percent'' wherever ``80 percent'' appears in Code section 414(b) or 
414(c) or the regulations thereunder.
    (b) ``Party in interest'' means a person described in section 3(14) 
of the Act and includes a ``disqualified person'' as defined in section 
4975(e)(2) of the Code.
    (c) GMIMCo or AEW are ``related'' to a party in interest with 
respect to a Plan for purposes of this proposed exemption if the party 
in interest (or a person controlling or controlled by the party in 
interest) owns a five percent (5%) or more interest in GMIMCo or AEW, 
or if GMIMCo or AEW (or a person controlling or controlled by GMIMCo or 
AEW) owns a five percent (5%) or more interest in the party in 
interest. For purposes of this definition:
    (1) ``Interest'' means with respect to ownership of an entity:
    (A) The combined voting power of all classes of stock entitled to 
vote, or the total value of the shares of all classes of stock of the 
entity, if the entity is a corporation;

[[Page 29916]]

    (B) The capital interest, or the profits interest of the entity, if 
the entity is a partnership; or
    (C) The beneficial interest of the entity, if the entity is a trust 
or unincorporated enterprise;
    (2) A person is considered to own an interest held in any capacity 
if the person has or shares the authority--
    (A) To exercise any voting rights or to direct some other person to 
exercise the voting rights relating to such interest, or
    (B) To dispose or to direct the disposition of such interest; and
    (3) ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    (d) ``Subsidiary'' means any limited liability company or other 
entity organized by the LLC, through which it acquires and holds title 
to its real property investments.
    (e) An ``exemption audit'' of each Plan's interest in the LLC must 
consist of the following:
    (1) A review of the written policies and procedures adopted by 
GMIMCo pursuant to Part II(h) for consistency with each of the 
objective requirements of this proposed exemption (as described 
herein);
    (2) A test of a representative sample of the Plan's transactions 
through investments made by the LLC, as described in Part I, in order 
to make findings regarding whether GMIMCo is in compliance with both: 
(i) The written policies and procedures adopted by GMIMCo pursuant to 
Part II(i) of this proposed exemption; and (ii) the objective 
requirements of this proposed exemption; and
    (3) Issuance of a written report describing the steps performed by 
the independent auditor during the course of its review and the 
independent auditor's findings regarding the Plan's interest in the 
LLC.
    (f) For purposes of Part IV(e), the written policies and procedures 
must describe the following objective requirements of Part II of the 
proposed exemption and the steps adopted by GMIMCo to assure compliance 
with each of these requirements:
    (1) The requirements of Part III;
    (2) The requirements of sections (a) and (b) of Part II regarding 
the discretionary authority or control of GMIMCo with respect to the 
Plan assets involved in each transaction, in negotiating the terms of 
the transaction, and with regard to the decision made on behalf of the 
Plan, as an investor in the LLC, to enter into the transaction;
    (3) The requirements of sections (a) and (b) of Part II with 
respect to any procedure for approval or veto of the transaction;
    (4) That:
    (A) The transaction is not entered into with any person who is 
excluded from relief under sections (f) or (g) of Part II; and
    (B) The transaction is not described in any of the class exemptions 
listed in section (c) of Part II.
    (g) ``Plan'' means an employee benefit plan established and 
maintained by GM or an Affiliate.

EFFECTIVE DATE: This proposed exemption, if granted, will be effective 
as of December 11, 1998.

Summary of Facts and Representations

    1. General Motors Corporation (GM) and its Affiliates currently 
maintain the following employee benefit plans (i.e., the Plans): The 
General Motors Hourly-Rate Employees Pension Plan (the GM Hourly Plan); 
(ii) the General Motors Retirement Program for Salaried Employees (the 
GM Salaried Plan); (iii) the Saturn Individual Retirement Plan for 
Represented Team Members; (iv) the Saturn Personal Choices Retirement 
Plan for Non-Represented Team Members (together, the Saturn Plans); and 
(v) the Employees' Retirement Plan for GMAC Mortgage Corporation (the 
GMAC Plan). As of December 31, 1998, the Plans had total assets of 
approximately $73.2 billion, of which approximately $4.39 million were 
invested in private real estate assets.
    2. For a portion of their assets, the Plans make investments 
through an entity known as the First Plaza Group Trust (i.e., the 
Trust), which is a group trust established pursuant to IRS Revenue 
Ruling 81-100. The trustee of the Trust, which acts as a directed 
trustee, is Chase Manhattan Bank (the Trustee). All beneficial 
interests in the Trust are held by two other trusts that hold the 
assets of the Plans. As of March 31, 1997, the Trust had total assets 
of approximately $4.1 billion. The General Motors Investment Management 
Company (i.e., GMIMCo) acts as an investment manager for the assets of 
the Plans held in the Trust (as discussed further below in paragraphs 9 
and 10).
    3. On September 13, 1996, CREA Western Investors II, L.L.C. (i.e., 
CREA II) and the Trust formed Copley West Coast Industrial, L.L.C. (now 
known as AEW Industrial, L.L.C.), a limited liability company (i.e., 
the LLC) for the purpose of jointly investing 25 in 
industrial real properties, under the terms of a Limited Liability 
Company Agreement (the LLC Agreement). The investment objective of the 
LLC is to acquire develop, lease, manage and dispose of institutional-
grade real properties, including stabilized and opportunistic 
acquisitions, build-to-suit opportunities, and developments in certain 
West Coast markets. AEW acts as an investment manager for the assets 
held by the LLC, including the disposition and sale of LLC properties, 
subject to the review and approval of GMIMCo (as discussed further 
below).
---------------------------------------------------------------------------

    \25\ The Department is expressing no opinion in this proposed 
exemption as to whether the joint investments by the Trust and CREA 
II to form the LLC, or the ongoing operation of the LLC during such 
joint investment, violated any of the fiduciary responsibility 
provisions under Part 4 of Title I of the Act.
---------------------------------------------------------------------------

    4. The LLC was initially structured to qualify as a ``real estate 
operating company'' (REOC) pursuant to the Department's regulations at 
29 CFR 2510.3-101 (the Plan Asset Regulation).26 Effective 
December 11, 1998 (the Effective Date), the Trust acquired CREA II's 
interest in the LLC. The acquisition of CREA II's interest was 
negotiated by GMIMCo in reliance upon the Prohibited Transaction Class 
Exemption (PTCE) 96-23, (61 FR 15975, April 10, 1996).27 By 
reason of the Trust's acquisition of CREA II's interest in the LLC, GM 
represents that the assets of the LLC became ``plan assets'' (within 
the meaning of the Plan Asset Regulation) as of the Effective Date, and 
the LLC and is no longer a REOC. Thus, all transactions engaged in by 
the LLC with any persons that are parties in interest with respect to 
any of the Plans invested therein became subject to the prohibited 
transaction restrictions of the Act. As a result, these transactions 
and future party in interest transactions require relief under this 
proposed exemption, pursuant to the terms and conditions described 
herein, as of the Effective Date.
---------------------------------------------------------------------------

    \26\ The Department expresses no opinion herein as to whether 
the LLC met the definition of a REOC under the Plan Asset Regulation 
at any time.
    \27\ PTCE 96-23 (a/k/a the INHAM Class Exemption) permits 
various transactions involving employee benefit plans whose assets 
are managed by an in-house asset manager, or ``INHAM'', provided 
that the conditions of the exemption are met. An INHAM is a 
registered investment adviser which is either (a) a direct or 
indirect wholly-owned subsidiary of an employer or parent of an 
employer, or (b) a membership nonprofit corporation a majority of 
whose members are officers or directors of such an employer or 
parent organization.
---------------------------------------------------------------------------

    5. CREA II is an affiliate of AEW Investment Group, Inc., a wholly-
owned subsidiary of AEW Capital Management, L.P. (AEW Capital). AEW 
Capital is an indirect, wholly-owned subsidiary of New England 
Investment Companies, L.P. (NEIC), and is the successor to the business 
operations of Aldrich, Eastman & Waltch, L.P. and Copley Real Estate

[[Page 29917]]

Advisors. AEW Capital manages in excess of $9 billion in real estate 
assets. In addition, NEIC is a publicly-traded holding company with 
approximately $90 million in assets under management through its 
subsidiaries and affiliates. Pursuant to a 1996 merger between 
Metropolitan Life Insurance Company (Metropolitan) and the New England 
Life Insurance Company, NEIC is now owned approximately 50% by 
Metropolitan.
    6. Pursuant to an agreement among AEW Capital, the Trust, and the 
LLC (the Investment Agreement), AEW Capital is required, during an 
exclusivity period specified therein, to utilize its reasonable best 
efforts to identify, for the benefit of the LLC, investments which meet 
the LLC's investment objectives. For each potential investment which is 
presented to the LLC for consideration, AEW Capital prepares a 
preliminary written proposal in accordance with the terms of the 
Investment Agreement. GMIMCo, on behalf of the Trust, then evaluates 
the potential investment for the LLC and determines whether the LLC 
should pursue the investment. If the Trust determines that the 
investment should be pursued for the benefit of the LLC, AEW Capital 
initiates a due diligence investigation of the investment. Due 
diligence and acquisition expenses can be incurred on behalf of the LLC 
only with the written consent of the Trust. If, after completion of due 
diligence, AEW Capital decides to present the potential investment to 
the LLC for acquisition, it prepares a report which includes a budget 
for all acquisition and development costs.
    7. If GMIMCo, on behalf of the Trust, determines to proceed with 
the investment, AEW Capital has the primary responsibility for 
negotiating, finalizing and closing the investment, subject to the 
approved terms and conditions for the investment, including any related 
financings. However, AEW Capital does not have the authority to bind 
the LLC to any material definitive terms with respect to any 
investment, including price, without the prior review and written 
consent of GMIMCo on behalf of the Trust.
    8. The Trust generally is not involved in the day-to-day 
management, development, or operation of LLC assets. Pursuant to the 
Advisory Agreement between AEW Capital and the LLC, AEW Capital has 
been retained by the LLC to provide certain services in connection with 
the ongoing management of the LLC, and to advise the LLC with respect 
to, and manage the disposition and sale of, LLC properties. GMIMCo, 
acting on behalf of the Trust, exercises sole discretion with respect 
to any final decisions regarding the disposition of LLC assets. Under 
the Advisory Agreement, AEW Capital is further obligated to provide 
certain services in connection with the development, operation, 
management, and leasing of LLC properties. AEW Capital is not 
responsible for directly providing management and development services 
but, rather, is responsible for engaging other parties to perform such 
services pursuant to development and property management agreements 
approved by the LLC investors.
    9. GMIMCo is a separately-incorporated, wholly-owned subsidiary of 
GM and is a registered investment adviser under the Investment Advisers 
Act of 1940, as amended. GMIMCo is the named fiduciary, within the 
meaning of section 402(a)(2) of the Act, for purposes of investment of 
``Plan assets'' for the GM Hourly Plan, the GM Salaried Plan, and the 
Saturn Plans. The named fiduciary of these four Plans for all other 
purposes is the Investment Funds Committee of the Board of Directors of 
GM (the GM I.F. Committee). With respect to the other Plans, GMIMCo 
currently operates as an investment manager with respect to the Plan 
assets to be invested in the LLC through the Trust under delegated 
authority of the named fiduciary of each Plan. The GMAC Mortgage 
Pension Committee (which is a committee of executives of the plan 
sponsor, not a board committee) is the named fiduciary of the GMAC 
Plan.
    10. GMIMCo is involved in all aspects of the management of the 
assets of the Plans. In this regard, GMIMCo is organized into several 
distinct functions, as follows: North American Equities (U.S. and 
Canada); North American Fixed Income (U.S. and Canada); International 
Investments; Real Estate and Alternative Investments; Investment 
Strategy and Asset Allocation; Motors Insurance Corporation; Investment 
Research; Business Risk Management; Information Systems; Financial 
Accounting and Controls; Human Resources; and Legal. As of December 31, 
1996, the Real Estate and Alternative Investments group (REAI) has 
approved aggregate current investments with a total value of 
approximately $4.1 billion and directly manages investments with a 
total value of approximately $1.3 billion, all of which are 
attributable to the Plans. REAI also exercises varying degrees of 
supervision over assets being managed by third party investment 
managers or invested in partnerships or other pooled funds. In 
addition, REAI selects, monitors, reviews and evaluates third party 
investment managers.
    11. On and after the Effective Date, the Advisory Agreement 
provides for the retention by the Trust, and the exercise by GMIMCo on 
behalf of the Trust, of certain powers from which AEW is completely 
excluded. These retained powers (the Retained Powers), include the 
power:
    (a) To determine whether the LLC or any subsidiary entity shall 
pursue any investment, acquisition or development;
    (b) To cause any sale, transfer, assignment, conveyance, exchange 
or other disposition of all or any substantial part of any assets of 
the LLC or of any subsidiary entity;
    (c) To cause the LLC or any subsidiary entity to borrow money, 
refinance, recast, extend, compromise or otherwise deal with any loans 
(including securing such loans) of the LLC or any subsidiary entity;
    (d) To approve the annual business plans for the LLC; and
    (e) To exercise all the powers that a member may exercise under the 
terms of the LLC operating agreement.
    12. Although GMIMCo qualifies as an in-house asset manager (i.e., 
an INHAM) for the Plans within the meaning of PTCE 96-23 (the INHAM 
Class Exemption), that exemption might not apply to transactions 
engaged in by the LLC. The applicant states that the discussion of the 
comments relating to the INHAM Class Exemption contained in section A1 
of the preamble to PTCE 96-23,28 suggests that the exemption 
does not apply to a transaction where an INHAM retains a QPAM (i.e., a 
qualified professional asset manager)29 to locate and 
negotiate the terms of a possible transaction. These comments state 
that the INHAM Class Exemption does not apply in such instances even 
though the INHAM performs its own due diligence review of each 
investment opportunity presented, and evaluates the appropriateness of 
the investment for the plan's particular investment needs. Thus, GMIMCo 
represents that there is an immediate need for this proposed exemption 
to permit transactions by the LLC.
---------------------------------------------------------------------------

    \28\ See PTCE 96-23, 61 FR at 15976.
    \29\ In this regard, see PTCE 84-14, 49 FR 9497 (March 13, 
1984). PTCE 84-14, a/k/a the QPAM Class Exemption, permits, under 
certain conditions, parties in interest to engage in various 
transactions with plans whose assets are managed by persons, defined 
for purposes of the exemption as QPAMs, which are independent of the 
parties in interest (with certain limited exceptions) and which meet 
specified financial standards.
---------------------------------------------------------------------------

    13. GM represents that GMIMCo has not committed at this time a 
specified amount of Plan assets to be invested in

[[Page 29918]]

the LLC. Rather, GM states that each approved investment by the Plans, 
through the Trust, constitutes a separate ``commitment'' of funds to 
the LLC and the fees to AEW Capital will be paid on the basis of each 
commitment, rather than on the total capital actually invested at any 
particular time. The applicant states further that all fees payable to 
AEW Capital will be reasonable and in compliance with section 408(b)(2) 
of the Act and the regulations thereunder.30
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    \30\ The Department is not providing any opinion herein as to 
whether the fee arrangements involving AEW Capital and the LLC meet 
the requirements for relief under section 408(b)(2) of the Act.
    The Department notes that section 408(b)(2) of the Act does not 
exempt the payment of fees by a plan fiduciary which would 
constitute a violation of section 406(b) of the Act, even if such 
fees would otherwise constitute reasonable compensation for the 
services performed by the fiduciary (see 29 CFR 2550.408b-2(e)).
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    14. Investment opportunities in real property assets presented by 
AEW Capital to the Trust for consideration as possible acquisitions for 
the LLC are submitted to REAI (the responsible group within GMIMCo) for 
review and approval. REAI will perform a preliminary review of the 
investment opportunity for suitability, which includes verification 
that the proposed investment satisfies the broad investment guidelines 
relating to the Plans' investments in the Trust and specific investment 
objectives of the REAI portfolio.
    15. Once AEW Capital has completed its initial due diligence review 
for the suitability of the investment and prepared its report with 
respect to a proposed acquisition of a property by the LLC, the REAI 
portfolio manager with responsibility for the LLC's investment 
portfolio (the Manager), assisted by an investment analyst, will 
conduct a quantitative and qualitative analysis of the investment 
opportunity. This analysis will form the basis for a recommendation of 
the investment to upper level officials within GMIMCo. The Manager and 
the Managing Director of REAI routinely discuss proposed investments, 
and any decision to recommend approval or to reject an investment is 
made jointly. Any rejection of an investment opportunity is recorded, 
and the reasons for such rejection are kept in a file containing the 
written materials relating to the investment. If the Manager and the 
Managing Director of REAI decide to recommend an investment to upper 
level GMIMCo officials, a written report is prepared summarizing the 
investment and briefly setting forth the reasons for such 
recommendation and the financial expectations for the investment.
    16. After a proposed investment has been reviewed, analyzed and 
favorably approved by the Manager and the Managing Director of REAI, 
the additional levels of approval required in order for the investment 
to be finally authorized depend directly upon the amount of the 
investment. If the investment is not in excess of a threshold level, 
currently $30 million, it need only be approved by the REAI Investment 
Approval Committee. However, if the investment is greater than that 
amount, it must be approved by GMIMCo's president upon the 
recommendation of the REAI Investment Approval Committee. The REAI 
Investment Approval Committee consists of the Managing Director of REAI 
(who is Committee chairman) and the four REAI portfolio managers. 
Approval by the REAI Investment Approval Committee requires the 
affirmative vote of a majority of a quorum of the Committee members, 
including the affirmative vote of the Committee chairman. Final 
approval is based on the written report described above together with 
oral discussions regarding the proposed investment. Approval may take a 
variety of forms from a simple approval to an approval conditioned upon 
the resolution of certain issues. In all cases, a written record is 
maintained with respect to the action taken at each level of approval. 
Notwithstanding the procedure for the approval of any investment for 
the LLC by GMIMCo, GM or its designee may retain the right to veto or 
approve such transaction if the amount involved exceeds $5 million.
    17. In summary, the applicant represents that the proposed 
transactions satisfy the criteria of section 408(a) of the Act for the 
following reasons: (a) The exemption, if granted, will enable the 
Plans, through investments made in the LLC by the Trust, to transact 
business with a greater number of potential parties in interest with 
respect to such Plans; (b) The Plans will save significant costs 
relating to due diligence reviews and procedures that otherwise would 
be necessary for the LLC to avoid party-in-interest transactions; and 
(c) GMIMCo will be afforded maximum flexibility in overseeing the 
activities of the LLC, and will exercise sole authority on behalf of 
the LLC with respect to the Retained Powers to ensure that the Plans' 
interests are protected.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department, 
telephone (202) 219-8883. (This is not a toll-free number.)

Gaetano Lombardo Individual Retirement Account (the IRA), Located 
in St. Louis, Missouri

[Application No. D-10749]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to 
the proposed sale by the IRA of 26,306 shares of stock (the Stock) of 
Courtesy Manufacturing Company (Courtesy) to Courtesy, a disqualified 
person with respect to the IRA, provided that the following conditions 
are satisfied: (1) The sale of Stock by the IRA is a one-time 
transaction for cash; (2) no commissions or other expenses are paid by 
the IRA in connection with the sale; and (3) the IRA receives the 
greater of: (a) the fair market value of the Stock as determined by a 
qualified independent appraiser as of October 31, 1998, or (b) the fair 
market value of the Stock as of the time of the sale.31
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    \31\ Pursuant to 29 CFR 2510.3-2(d), the IRA is not within the 
jurisdiction of Title I of the Act. However, there is jurisdiction 
under Title II of the Act pursuant to section 4975 of the Code.
---------------------------------------------------------------------------

Summary of Facts and Representations

    1. The IRA and Dr. Gaetano (Guy) Lombardo (Lombardo) currently own 
100% of the outstanding common stock of Courtesy. Courtesy is an 
Illinois corporation, located at 1300 Pratt Boulevard in Elk Grove, 
Illinois, of which Lombardo is the sole director. The IRA had total 
assets of $838,039 as of January 31, 1999. The IRA's custodian is 
Stifel, Nicolaus & Company, Inc. of St. Louis, Missouri.
    With respect to the current ownership of the outstanding shares of 
Courtesy, the IRA owns 26,306 Class A shares (i.e., the Stock) and 
Lombardo owns 2,194 Class A shares. Prior to December 29, 1998, the 
only other shareholders of Courtesy were Citicorp Venture Capital, Ltd. 
(Citicorp), which owned 12,450 shares of Class B common stock, and 
Goldman Sachs Credit Partners, LP (Goldman), which owned 7,550 shares 
of Class B common stock. The Class B shares owned by Citicorp and 
Goldman were redeemed by Courtesy on December 29, 1998. Citicorp 
received $900,000 for its shares, and Goldman received $200,000 for its 
shares.

[[Page 29919]]

    2. Lombardo and his then wife, Nancy (Nancy) were residents of 
Bloomfield Hills, Michigan in the 1980's. Lombardo was the sole 
shareholder of two Michigan consulting corporations, the Nelmar 
Corporation (Nelmar) and the Edens Corporation (Edens). Lombardo and 
Nancy were the only employees of Nelmar and Edens. Nelmar and Edens 
established the Nelmar-Edens Employees' Pension Plan (the Plan), a 
defined benefit pension plan for the employees of the two corporations 
in 1985. Nelmar and Edens merged in 1986, with Nelmar the surviving 
corporation. In February, 1988, the Plan acquired 30,000 shares of 
Class A common stock of Courtesy for $750,000 (i.e., $25 per share). 
The applicant represents that Courtesy was not a disqualified person 
with respect to the Plan.32
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    \32\ The Department is taking no position in this proposed 
exemption as to whether the Plan's acquisition and holding of 
Courtesy stock resulted in any violations of Part 4 of Title I of 
the Act.
---------------------------------------------------------------------------

    3. In December of 1988, the Plan transferred 1,500 of its Class A 
shares to Bruce Fisher (Fisher), an officer and employee of Courtesy. 
The price Fisher paid for the shares was the same price per share 
(i.e., $25 per share) that the Plan paid for the shares in February, 
1988. Fisher subsequently tendered his shares in November, 1996, to 
Courtesy, for an agreed upon price of $44,723 ($29.82 per share). These 
shares have been redeemed by Courtesy and are currently held as 
treasury shares.
    4. The Plan became overfunded and was terminated in 1989. Upon 
termination of the Plan, 2,194 shares of Courtesy reverted to Nelmar 
because of the overfunding. When distributions to the participants were 
made pursuant to the termination of the Plan, 7,022 shares of Courtesy 
were transferred to Nancy, which were rolled over into an individual 
retirement account established by her (Nancy's IRA), and 19,284 shares 
of Courtesy were transferred to Lombardo, where were rolled over into 
the IRA.
    5. Nelmar was liquidated in 1991, following Lombardo's move from 
Bloomfield Hills, Michigan to Concord, Massachusetts in 1989. The 2,194 
shares of Courtesy which had been owned by Nelmar were transferred by 
the corporation upon liquidation to Lombardo. This transfer was 
independent of the transfer of Courtesy Stock to either the IRA or 
Nancy's IRA. Lombardo and Nancy subsequently divorced, and the shares 
of Courtesy in Nancy's IRA were transferred to the IRA pursuant to a 
Qualified Domestic Relations Order.
    6. Lombardo wants to make an election for Courtesy to be taxed as a 
``Subchapter S'' Corporation under section 1362(a) of the Code. 
However, the IRA cannot be a shareholder of an ``S'' corporation. 
Accordingly, the applicant has requested an exemption to permit the IRA 
to sell all of the Stock (26,306 shares) to Courtesy for the fair 
market value of the Stock, as determined by an independent, qualified 
appraiser. This transaction would also permit the IRA to diversify its 
investment portfolio by reinvesting the proceeds of the sale of the 
Stock in a wider array of securities. The Stock currently represents 
approximately 94% of the fair market value of the assets in the 
IRA.33
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    \33\ The Department notes that the Internal Revenue Service has 
taken the position that a lack of diversification of investments may 
raise questions in regard to the exclusive benefit rule under 
section 401(a) of the Code. See, e.g., Rev. Rul. 73-532, 1973-2 C.B. 
128. The Department further notes that section 408(a) of the Code, 
which describes the tax qualification provisions for IRAs, mandates 
that the trust be created for the exclusive benefit of an individual 
or his beneficiaries. However, the Department is expressing no 
opinion in this proposed exemption regarding whether violations of 
the Code have taken place with respect to the acquisition and 
holding of the Stock by the IRA.
    In this regard, the acquisition and holding of the Stock by the 
IRA raises questions under section 4975(c)(1)(D) and (E) depending 
on the degree of Lombardo's interest in the transaction. That 
section prohibits the use by a disqualified person of the income or 
assets of an IRA or dealing by a fiduciary (i.e., Lombardo) with the 
income or assets of an IRA for his own interest or for his own 
account. An IRA participant who is the sole director and a 
shareholder of a company may have interests in the acquisition and 
holding of stock issued by such company which may affect his best 
judgment as a fiduciary of his IRA. In such circumstances, the 
holding of the stock may violate section 4975(c)(1)(D) and (E) of 
the Code. See Advisory Opinion 90-20A (June 15, 1990). Accordingly, 
to the extent there were violations of section 4975(c)(1)(D) and (E) 
of the Code with respect to the acquisition and holding of the Stock 
by the IRA, the Department is extending no relief for those 
transactions herein.
---------------------------------------------------------------------------

    7. The applicant has obtained an appraisal of the Stock as of 
October 31, 1998 from Michael A. Dorman (Mr. Dorman) of the firm of 
Blackman Kallick Bartenstein, LLP (BKB), independent certified public 
accountants and business consultants located in Chicago, Illinois. Mr. 
Dorman states that he is a qualified appraiser for the Stock with over 
9 years of experience in the valuation of closely-held corporations and 
other business entities. Mr. Dorman also states that he is independent 
of Lombardo and Courtesy. While BKB does provide accounting services to 
Lombardo and Courtesy, BKB derives less than 1% of its annual revenue 
from the provision of such services. Mr. Dorman represents that as 
October 31, 1998, the Stock had a fair market value per share of $30. 
Thus, the total value for all the shares of Stock held by the IRA would 
be $789,180. Mr. Dorman will update his appraisal as of the date of the 
proposed sale.
    8. The applicant has requested the exemption proposed herein to 
permit Courtesy to purchase all of the Stock held in the IRA. Courtesy 
will pay the greater of (i) the fair market value of the Stock as of 
October 31, 1998, as established by Mr. Dorman's appraisal, or (ii) the 
fair market value of the Stock, based on an updated independent 
appraisal as of the date of the sale. The IRA will pay no fees, 
commissions or other expenses in connection with the transaction.
    9. In summary, the applicant represent that the proposed 
transaction satisfies the criteria contained in section 4975(c)(2) of 
the Code because: (a) The proposed sale will be a one-time transaction 
for cash; (b) no commissions or other expenses will be paid by the IRA 
in connection with the sale; (c) the IRA will be receiving not less 
than the fair market value of the Stock, as determined by a qualified, 
independent appraiser; and (d) Guy Lombardo is the only participant in 
his IRA, and he has determined that the proposed transaction is 
appropriate for and in the best interest of his IRA and desires that 
the transaction be consummated with respect to his IRA.

NOTICE TO INTERESTED PERSONS: Because Lombardo is the only participant 
in the IRA, it has been determined that there is no need to distribute 
the notice of proposed exemption to interested persons. Comments and 
requests for a hearing are due 30 days after publication of this notice 
in the Federal Register.

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

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest of disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and

[[Page 29920]]

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

    Signed at Washington, DC, this 27th day of May, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 99-13887 Filed 6-2-99; 8:45 am]
BILLING CODE 4510-29-P