[Federal Register Volume 64, Number 191 (Monday, October 4, 1999)]
[Notices]
[Pages 53736-53747]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25709]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 99-38; Exemption Application No. D-
10621, et al.]


Grant of Individual Exemptions; MICO, Inc. (MICO), et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of individual exemptions.

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SUMMARY: This document contains exemptions issued by the Department of 
Labor (the Department) 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).
    Notices were published in the Federal Register of the pendency 
before the Department of proposals to grant such exemptions. The 
notices set forth a summary of facts and representations contained in 
each application for exemption and referred interested persons to the 
respective applications for a complete statement of the facts and 
representations. The applications have been available for public 
inspection at the Department in Washington, D.C. The notices also 
invited interested persons to submit comments on the requested 
exemptions to the Department. In addition the notices stated that any 
interested person might submit a written request that a public hearing 
be held (where appropriate). The applicants have represented that they 
have complied with the requirements of the notification to interested 
persons. No public comments and no requests for a hearing, unless 
otherwise stated, were received by the Department.
    The notices of proposed exemption were issued and the exemptions 
are being granted solely by the Department because, 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 proposed to the Secretary 
of Labor.

Statutory Findings

    In accordance with section 408(a) of the Act and/or section 
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon 
the entire record, the Department makes the following findings:
    (a) The exemptions are administratively feasible;
    (b) They are in the interests of the plans and their participants 
and beneficiaries; and
    (c) They are protective of the rights of the participants and 
beneficiaries of the plans.

MICO, Inc. (MICO) Located in North Mankato, Minnesota

[Prohibited Transaction Exemption 99-38; Exemption Application Number 
D-10621]

Exemption

    The restrictions of sections 406(a), 406(b)(1) and (2) of the Act 
and the sanctions resulting from the application of section 4975 of the 
Code, by reason of section 4975(c)(1)(A) through (E) of the Code, shall 
not apply to the sale (the Sale) of a certain parcel of unimproved real 
property (the Property) from the MICO, Inc. Profit Sharing Plan (the 
Plan) to MICO, a party in interest and disqualified person with respect 
to the Plan, provided that the following conditions are met:
    (a) The terms and conditions of the Sale are at least as favorable 
to the Plan as those obtainable in an arm's length transaction with an 
unrelated party;
    (b) MICO purchases the Property for $362,000, which represents the 
Property's current fair market value as determined by a qualified, 
independent appraiser;
    (c) MICO additionally pays to the Plan a premium of $36,200, as 
determined by a qualified, independent appraiser, due to MICO's 
ownership of improved real property which is located adjacent to the 
Property;
    (d) The Sale is a one-time transaction for cash; and
    (e) The Plan pays no fees or commissions in connection with the 
Sale.
    For a more complete statement of the facts and representations 
supporting this exemption, refer to the notice of proposed exemption 
published on May 27, 1999 at 64 FR 28835.

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

[[Page 53737]]

Fleet Bank (RI), National Association (Fleet)

Located in Providence, Rhode Island

[Prohibited Transaction Exemption 99-39;

Exemption Application No. D-10643]

Exemption

Section I--Transactions
    A. Effective August 11, 1999, the restrictions of sections 406(a) 
and 407(a) of the Act and the taxes imposed by section 4975(a) and (b) 
of the Code, by reason of section 4975(c)(1)(A) through (D) of the 
Code, shall not apply to the following transactions involving trusts 
and certificates evidencing interests therein:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the trust, 
the sponsor or an underwriter and an employee benefit plan subject to 
the Act or section 4975 of the Code (a plan) when the sponsor, 
servicer, trustee or insurer of a trust, the underwriter of the 
certificates representing an interest in the trust, or an obligor is a 
party in interest with respect to such plan;
    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates; 
and
    (3) The continued holding of certificates acquired by a plan 
pursuant to Section I.A.(1) or (2).
    Notwithstanding the foregoing, Section I.A. does not provide an 
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and 
407 for the acquisition or holding of a certificate on behalf of an 
Excluded Plan, as defined in Section III.K. below, by any person who 
has discretionary authority or renders investment advice with respect 
to the assets of the Excluded Plan that are invested in 
certificates.1
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    \1\ Section I.A. provides no relief from sections 406(a)(1)(E), 
406(a)(2) and 407 for any person rendering investment advice to an 
Excluded Plan within the meaning of section 3(21)(A)(ii) and 
regulation 29 CFR 2510.3-21(c).
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    B. Effective August 11, 1999, the restrictions of sections 
406(b)(1) and 406(b)(2) of the Act and the taxes imposed by section 
4975(a) and (b) of the Code, by reason of section 4975(c)(1)(E) of the 
Code, shall not apply to:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the trust, 
the sponsor or an underwriter and a plan when the person who has 
discretionary authority or renders investment advice with respect to 
the investment of plan assets in the certificates is (a) an obligor 
with respect to receivables contained in the trust constituting 0.5 
percent or less of the fair market value of the aggregate undivided 
interest in the trust allocated to the certificates of the relevant 
series, or (b) an affiliate of a person described in (a); if
    (i) The plan is not an Excluded Plan;
    (ii) Solely in the case of an acquisition of certificates in 
connection with the initial issuance of the certificates, at least 50 
percent of each class of certificates in which plans have invested is 
acquired by persons independent of the members of the Restricted Group, 
as defined in Section III.L., and at least 50 percent of the aggregate 
undivided interest in the trust allocated to the certificates of a 
series is acquired by persons independent of the Restricted Group;
    (iii) A plan's investment in each class of certificates of a series 
does not exceed 25 percent of all of the certificates of that class 
outstanding at the time of the acquisition;
    (iv) Immediately after the acquisition of the certificates, no more 
than 25 percent of the assets of a plan with respect to which the 
person has discretionary authority or renders investment advice is 
invested in certificates representing the aggregate undivided interest 
in a trust allocated to the certificates of a series and containing 
receivables sold or serviced by the same entity; 2 and
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    \2\ For purposes of this exemption, each plan participating in a 
commingled fund (such as a bank collective trust fund or insurance 
company pooled separate account) shall be considered to own the same 
proportionate undivided interest in each asset of the commingled 
fund as its proportionate interest in the total assets of the 
commingled fund as calculated on the most recent preceding valuation 
date of the fund.
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    (v) Immediately after the acquisition of the certificates, no more 
than 25 percent of the assets of a plan with respect to which the 
person has discretionary authority or renders investment advice is 
invested in certificates representing an interest in the trust, or 
trusts containing receivables sold or serviced by the same entity. For 
purposes of paragraphs B.(1)(iv) and B.(1)(v) only, an entity shall not 
be considered to service receivables contained in a trust if it is 
merely a subservicer of that trust;
    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates, 
provided that conditions set forth in Section I. B.(1)(i) and (iii) 
through (v) are met; and
    (3) The continued holding of certificates acquired by a plan 
pursuant to Section I.B.(1) or (2).
    C. Effective August 11, 1999, the restrictions of sections 406(a), 
406(b) and 407(a) of the Act and the taxes imposed by section 4975(a) 
and (b) of the Code, by reason of section 4975(c) of the Code, shall 
not apply to transactions in connection with the servicing, management 
and operation of a trust, including reassigning receivables to the 
sponsor, removing from the trust receivables in accounts previously 
designated to the trust, changing the underlying terms of accounts 
designated to the trust, adding new receivables to the trust, 
designating new accounts to the trust, the retention of a retained 
interest by the sponsor in the receivables, the exercise of the right 
to cause the commencement of amortization of the principal amount of 
the certificates, or the use of any eligible swap transactions, 
provided that:
    (1) Such transactions are carried out in accordance with the terms 
of a binding pooling and servicing agreement;
    (2) The pooling and servicing agreement is provided to, or 
described in all material respects in the prospectus or private 
placement memorandum provided to, investing plans before they purchase 
certificates issued by the trust; 3
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    \3\  In the case of a private placement memorandum, such 
memorandum must contain substantially the same information that 
would be disclosed in a prospectus if the offering of the 
certificates were made in a registered public offering under the 
Securities Act of 1933. In the Department's view, the private 
placement memorandum must contain sufficient information to permit 
plan fiduciaries to make informed investment decisions. For purposes 
of this exemption, all references to ``prospectus'' include any 
related supplement thereto, and any documents incorporated by 
reference therein, pursuant to which certificates are offered to 
investors.
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    (3) The addition of new receivables or designation of new accounts, 
or the removal of receivables in previously-designated accounts, meets 
the terms and conditions for such additions, designations or removals 
as are described in the prospectus or private placement memorandum for 
such certificates, which terms and conditions have been approved by 
Standard & Poor's Ratings Services, Moody's Investors Service, Inc., 
Duff & Phelps Credit Rating Co., or Fitch IBCA, Inc., or their 
successors (collectively, the Rating Agencies), and does not result in 
the certificates receiving a lower credit rating from the Rating 
Agencies than the then current rating of the certificates; and
    (4) The series of which the certificates are a part will be subject 
to an ``Economic Pay Out Event'' (as defined in Section III.BB.), which 
is set forth in

[[Page 53738]]

the pooling and servicing agreement and described in the prospectus or 
private placement memorandum associated with the series, the occurrence 
of which will cause any revolving period, scheduled amortization period 
or scheduled accumulation period applicable to the certificates to end, 
and principal collections to be applied to monthly payments of 
principal to, or the accumulation of principal for the benefit of, the 
certificateholders of such series until the earlier of payment in full 
of the outstanding principal amount of the certificates of such series 
or the series termination date specified in the prospectus or private 
placement memorandum.
    Notwithstanding the foregoing, Section I.C. does not provide an 
exemption from the restrictions of section 406(b) of the Act, or from 
the taxes imposed under section 4975(a) and (b) of the Code, by reason 
of section 4975(c)(1)(E) or (F) of the Code, for the receipt of a fee 
by the servicer of the trust, in connection with the servicing of the 
receivables and the operation of the trust, from a person other than 
the trustee or sponsor, unless such fee constitutes a ``qualified 
administrative fee'' as defined in Section III.U. below.
    D. Effective August 11, 1999, the restrictions of sections 406(a) 
and 407(a) of the Act and the taxes imposed by sections 4975(a) and (b) 
of the Code, by reason of sections 4975(c)(1)(A) through (D) of the 
Code, shall not apply to any transaction to which those restrictions or 
taxes would otherwise apply merely because a person is deemed to be a 
party in interest or disqualified person (including a fiduciary) with 
respect to a plan by virtue of providing services to the plan (or by 
virtue of having a relationship to such service provider as described 
in section 3(14)(F), (G), (H) or (I) of the Act or section 
4975(e)(2)(F), (G), (H) or (I) of the Code), solely because of the 
plan's ownership of certificates.
Section II--General Conditions
    A. The relief provided under Section I will be available only if 
the following conditions are met:
    (1) The acquisition of certificates by a plan is on terms 
(including the certificate price) that are at least as favorable to the 
plan as such terms would be in an arm's-length transaction with an 
unrelated party;
    (2) The rights and interests evidenced by the certificates are not 
subordinated to the rights and interests evidenced by other 
certificates of the same trust;
    (3) The certificates acquired by the plan have received a rating at 
the time of such acquisition that is either: (i) In one of the two 
highest generic rating categories from any one of the Rating Agencies; 
or (ii) for certificates with a duration of one year or less, the 
highest short-term generic rating category from any one of the Rating 
Agencies; provided that, notwithstanding such ratings, this exemption 
shall apply to a particular class of certificates only if such class 
(an Exempt Class) is at the time of such acquisition part of a series 
in which credit support is provided to the Exempt Class through a 
senior-subordinated series structure or other form of third-party 
credit support which, at a minimum, represents five (5) percent of the 
outstanding principal balance of certificates issued for the Exempt 
Class, so that an investor in the Exempt Class will not bear the 
initial risk of loss;
    (4) The trustee is not an affiliate of any other member of the 
Restricted Group. However, the trustee shall not be considered to be an 
affiliate of a servicer solely because the trustee has succeeded to the 
rights and responsibilities of the servicer pursuant to the terms of a 
pooling and servicing agreement providing for such succession upon the 
occurrence of one or more events of default by the servicer;
    (5) The sum of all payments made to and retained by the 
underwriters in connection with the distribution or placement of 
certificates represents not more than reasonable compensation for 
underwriting or placing the certificates; the consideration received by 
the sponsor as a consequence of the assignment of receivables (or 
interests therein) to the trust, to the extent allocable to the class 
of certificates purchased by a plan, represents not more than the fair 
market value of such receivables (or interests); and the sum of all 
payments made to and retained by the servicer, to the extent allocable 
to the class of certificates purchased by a plan, represents not more 
than reasonable compensation for the servicer's services under the 
pooling and servicing agreement and reimbursement of the servicer's 
reasonable expenses in connection therewith;
    (6) The plan investing in such certificates is an ``accredited 
investor'' as defined in Rule 501(a)(1) of Regulation D of the 
Securities and Exchange Commission (SEC) under the Securities Act of 
1933;
    (7) The trustee of the trust is a substantial financial institution 
or trust company experienced in trust activities and is familiar with 
its duties, responsibilities, and liabilities as a fiduciary under the 
Act (i.e. ERISA). The trustee, as the legal owner of, or holder of a 
perfected security interest in, the receivables in the trust, enforces 
all the rights created in favor of certificateholders of such trust, 
including plans;
    (8) Prior to the issuance by the trust of any new series, 
confirmation is received from the Rating Agencies that such issuance 
will not result in the reduction or withdrawal of the then current 
rating of the certificates held by any plan pursuant to this exemption;
    (9) To protect against fraud, chargebacks or other dilution of the 
receivables in the trust, the pooling and servicing agreement and the 
Rating Agencies require the sponsor to maintain a seller interest of 
not less than two (2) percent of the principal balance of the 
receivables contained in the trust;
    (10) Each receivable added to a trust is an eligible receivable, 
based on criteria of the relevant Rating Agency(ies) and as specified 
in the pooling and servicing agreement. The pooling and servicing 
agreement requires that any change in the terms of the cardholder 
agreements must be made applicable to the comparable segment of 
accounts owned or serviced by the sponsor which are part of the same 
program or have the same or substantially similar characteristics;
    (11) The pooling and servicing agreement limits the number of the 
sponsor's newly originated accounts to be designated to the trust, 
unless the Rating Agencies otherwise consent in writing, to the 
following: (i) with respect to any consecutive three-month period 
commencing in January, April, July and October of each calendar year, 
15 percent of the number of existing accounts designated to the trust 
as of the first day of the calendar year during which such monthly 
period commenced, and (ii) with respect to any calendar year, 20 
percent of the number of existing accounts designated to the trust as 
of the first day of such calendar year;
    (12) The pooling and servicing agreement requires the sponsor to 
deliver an opinion of counsel confirming the validity and perfection of 
each transfer of receivables in newly originated accounts to the trust 
for each interim addition;
    (13) The pooling and servicing agreement requires the sponsor and 
the trustee to receive confirmation from a Rating Agency that no 
Ratings Effect will result from (i) a Required Addition (as defined in 
Section III.MM.) in excess of the limits in paragraph B.(11) above, or 
(ii) any Restricted Additions (as defined in Section III.NN.);
    (14) If a particular class of certificates held by any plan 
involves a Ratings

[[Page 53739]]

Dependent or Non-Ratings Dependent Swap entered into by the trust, then 
each particular swap transaction relating to such certificates:
    (a) shall be an Eligible Swap;
    (b) shall be with an Eligible Swap Counterparty;
    (c) in the case of a Ratings Dependent Swap, shall include as an 
early payout event, as specified in the pooling and servicing 
agreement, the withdrawal or reduction by any Rating Agency of the swap 
counterparty's credit rating below a level specified by the Rating 
Agency where the servicer (as agent for the trustee) has failed, for a 
specified period after such rating withdrawal or reduction, to meet its 
obligation under the pooling and servicing agreement to:
    (i) obtain a replacement swap agreement with an Eligible Swap 
Counterparty which is acceptable to the Rating Agency and the terms of 
which are substantially the same as the current swap agreement (at 
which time the earlier swap agreement shall terminate); or
    (ii) cause the swap counterparty to establish any collateralization 
or other arrangement satisfactory to the Rating Agency such that the 
then current rating by the Rating Agency of the particular class of 
certificates will not be withdrawn or reduced;
    (d) in the case of a Non-Ratings Dependent Swap, shall provide 
that, if the credit rating of the swap counterparty is withdrawn or 
reduced below the lowest level specified in Section III.II. hereof, the 
servicer, as agent for the trustee, shall within a specified period 
after such rating withdrawal or reduction:
    (i) obtain a replacement swap agreement with an Eligible Swap 
Counterparty, the terms of which are substantially the same as the 
current swap agreement (at which time the earlier swap agreement shall 
terminate); or
    (ii) cause the swap counterparty to post collateral with the 
trustee of the trust in an amount equal to all payments owed by the 
counterparty if the swap transaction were terminated; or
    (iii) terminate the swap agreement in accordance with its terms; 
and
    (e) shall not require the trust to make any termination payments to 
the swap counterparty (other than a currently scheduled payment under 
the swap agreement) except from ``Excess Finance Charge Collections'' 
(as defined below in Section III.LL.) or other amounts that would 
otherwise be payable to the servicer or the sponsor;
    (15) Any class of certificates, to which one or more swap 
agreements entered into by the trust applies, may be acquired or held 
in reliance upon this exemption only by Qualified Plan Investors.
    B. Neither any underwriter, sponsor, trustee, servicer, insurer, 
nor any obligor, unless it or any of its affiliates has discretionary 
authority or renders investment advice with respect to the plan assets 
used by a plan to acquire certificates, shall be denied the relief 
provided under Section I, if the provision in Section II.A.(6) above is 
not satisfied for the acquisition or holding by a plan of such 
certificates, provided that:
    (1) Such condition is disclosed in the prospectus or private 
placement memorandum; and
    (2) In the case of a private placement of certificates, the trustee 
obtains a representation from each initial purchaser which is a plan 
that it is in compliance with such condition, and obtains a covenant 
from each initial purchaser to the effect that, so long as such initial 
purchaser (or any transferee of such initial purchaser's certificates) 
is required to obtain from its transferee a representation regarding 
compliance with the Securities Act of 1933, any such transferees shall 
be required to make a written representation regarding compliance with 
the condition set forth in Section II.A.(6).
Section III--Definitions
    For purposes of this exemption:
    A. ``Certificate'' means a certificate:
    (1) That (i) represents a beneficial ownership interest in the 
assets of a trust and entitles the holder to payments denominated as 
principal, interest and/or other payments made as described in the 
applicable prospectus or private placement memorandum and in accordance 
with the pooling and servicing agreement in connection with the assets 
of such trust, to the extent allocable to the series of certificates 
purchased by a plan, either currently or after a revolving period 
during which principal payments on assets of the trust are reinvested 
in new assets, or (ii) is denominated as a debt instrument that 
represents a regular interest in a financial asset securitization 
investment trust (FASIT), within the meaning of section 860L(a) of the 
Code, and is issued by and is an obligation of the trust.
    For purposes of this exemption, references to ``certificates 
representing an interest in a trust'' include certificates denominated 
as debt which are issued by a trust; and
    (2) With respect to which (a) Fleet or any of its affiliates is the 
sponsor, and (b) Fleet, any of its affiliates, or an ``underwriter'' 
(as defined in Section III.C.) is the sole underwriter or the manager 
or co-manager of the underwriting syndicate or a selling or placement 
agent.
    B. ``Trust'' means an investment pool, the corpus of which is held 
in trust and consists solely of:
    (1) Either:
    (a) Receivables (as defined in Section III.V.); or
    (b) Participations in a pool of receivables (as defined in Section 
III.V.) where such beneficial ownership interests are not subordinated 
to any other interest in the same pool of receivables; \4\
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    \4\ The Department notes that no relief would be available under 
the exemption if the participation interests held by the trust were 
subordinated to the rights and interests evidenced by other 
participation interests in the same pool of receivables.
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    (2) Property which has secured any of the assets described in 
paragraph B.(1) above; \5\
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    \5\ Fleet states that it is possible for credit card receivables 
to be secured by bank account balances or security interests in 
merchandise purchased with credit cards. Thus, the exemption should 
permit foreclosed property to be an eligible trust asset.
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    (3) Undistributed cash or permitted investments made therewith 
maturing no later than the next date on which distributions are to be 
made to certificateholders, except during a Revolving Period (as 
defined herein) when permitted investments are made until such cash can 
be reinvested in additional receivables described in paragraph B.(1)(a) 
above;
    (4) Rights of the trustee under the pooling and servicing 
agreement, and rights under any cash collateral accounts, insurance 
policies, third-party guarantees, contracts of suretyship and other 
credit support arrangements for any certificates, swap transactions, or 
under any yield supplement agreements,\6\ yield maintenance agreements 
or similar arrangements; and
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    \6\ In a series involving an accumulation period (as defined in 
Section III.Z.), a yield supplement agreement may be used by the 
Trust to make up the difference between (i) the reinvestment yield 
on permitted investments, and (ii) the interest rate on the 
certificates of that series.
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    (5) Rights to receive interchange fees received by the sponsor as 
partial compensation for the sponsor's taking credit risk, absorbing 
fraud losses and funding receivables for a limited period prior to 
initial billing with respect to accounts designated to the trust.
    Notwithstanding the foregoing, the term ``trust'' does not include 
any investment pool unless: (i) the investment pool consists only of 
receivables of the type which have been included in other investment 
pools; (ii) certificates evidencing interests in such other investment 
pools have been rated

[[Page 53740]]

in one of the two highest generic rating categories by at least one of 
the Rating Agencies for at least one year prior to the plan's 
acquisition of certificates pursuant to this exemption; and (iii) 
certificates evidencing an interest in such other investment pools have 
been purchased by investors other than plans for at least one year 
prior to the plan's acquisition of certificates pursuant to this 
exemption.
    C. ``Underwriter'' means an entity which has received from the 
Department an individual prohibited transaction exemption which 
provides relief for the operation of asset pool investment trusts that 
issue asset-backed pass-through securities to plans that is similar in 
format and substance to this exemption (each, an Underwriter 
Exemption); \7\ any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
such entity; and any member of an underwriting syndicate or selling 
group of which such firm or affiliated person described above is a 
manager or co-manager with respect to the certificates.
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    \7\ For a listing of Underwriter Exemptions, see the description 
provided in the text of the operative language of Prohibited 
Transaction Exemption (PTE) 97-34 (62 FR 39021, July 21, 1997).
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    D. ``Sponsor'' means Fleet, or an affiliate of Fleet that organizes 
a trust by transferring credit card receivables or interests therein to 
the trust in exchange for certificates.
    E. ``Master Servicer'' means Fleet or an affiliate that is a party 
to the pooling and servicing agreement relating to trust assets and is 
fully responsible for servicing, directly or through subservicers, the 
receivables in the trust pursuant to the pooling and servicing 
agreement.
    F. ``Subservicer'' means Fleet or an affiliate of Fleet, or an 
entity unaffiliated with Fleet which, under the supervision of and on 
behalf of the master servicer, services receivables contained in the 
trust, but is not a party to the pooling and servicing agreement.
    G. ``Servicer'' means Fleet or an affiliate which services 
receivables contained in the trust, including the master servicer and 
any subservicer or their successors pursuant to the pooling and 
servicing agreement.
    H. ``Trustee'' means an entity which is independent of Fleet and 
its affiliates and is the trustee of the trust. In the case of 
certificates which are denominated as debt instruments, ``trustee'' 
also means the trustee of the indenture trust.
    I. ``Insurer'' means the insurer or guarantor of, provider of other 
credit support for, or other contractual counterparty of, a trust. 
Notwithstanding the foregoing, a swap counterparty is not an insurer, 
and a person is not an insurer solely because it holds securities 
representing an interest in a trust which are of a class subordinated 
to certificates representing an interest in the same trust.
    J. ``Obligor'' means any person, other than the insurer, that is 
obligated to make payments with respect to any receivable included in 
the trust.
    K. ``Excluded Plan'' means any plan with respect to which any 
member of the Restricted Group is a ``plan sponsor'' within the meaning 
of section 3(16)(B) of the Act.
    L. ``Restricted Group'' with respect to a class of certificates 
means:
    (1) Each underwriter;
    (2) Each insurer;
    (3) The sponsor;
    (4) The trustee;
    (5) Each servicer;
    (6) Each swap counterparty;
    (7) Any obligor with respect to receivables contained in the trust 
constituting more than 0.5 percent of the fair market value of the 
aggregate undivided interest in the trust allocated to the certificates 
of a series, determined on the date of the initial issuance of such 
series of certificates by the trust; or
    (8) Any affiliate of a person described in paragraphs L.(1) through 
(7) above.
    M. ``Affiliate'' of another person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (2) Any officer, director, partner, employee, relative (as defined 
in section 3(15) of the Act), a brother, a sister, or a spouse of a 
brother or sister of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner.
    N. ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    O. A person will be ``independent'' of another person only if:
    (1) Such person is not an affiliate of that other person; and
    (2) The other person, or an affiliate thereof, is not a fiduciary 
who has investment management authority or renders investment advice 
with respect to any assets of such person.
    P. ``Sale'' includes the entrance into a forward delivery 
commitment (as defined in Section III.Q. below), provided that:
    (1) The terms of the forward delivery commitment (including any fee 
paid to the investing plan) are no less favorable to the plan than they 
would be in an arm's length transaction with an unrelated party;
    (2) The prospectus or private placement memorandum is provided to 
an investing plan prior to the time the plan enters into the forward 
delivery commitment; and
    (3) At the time of the delivery, all conditions of this exemption 
applicable to sales are met.
    Q. ``Forward Delivery Commitment'' means a contract for the 
purchase or sale of one or more certificates to be delivered at an 
agreed future settlement date. The term includes both mandatory 
contracts (which contemplate obligatory delivery and acceptance of the 
certificates) and optional contracts (which give one party the right 
but not the obligation to deliver certificates to, or demand delivery 
of certificates from, the other party).
    R. ``Reasonable Compensation'' has the same meaning as that term is 
defined in 29 CFR section 2550.408c-2.
    S. ``Pooling and Servicing Agreement'' means the agreement or 
agreements among a sponsor, a servicer and the trustee establishing a 
trust and any supplement thereto pertaining to a particular series of 
certificates. In the case of certificates which are denominated as debt 
instruments, ``pooling and servicing agreement'' also includes the 
indenture entered into by the trustee of the trust issuing such 
certificates and the indenture trustee.
    T. ``Series'' means an issuance of a class or various classes of 
certificates by the trust all on the same date pursuant to the same 
pooling and servicing agreement, and any supplement thereto and 
restrictions therein.
    U. ``Qualified Administrative Fee'' means a fee which meets the 
following criteria:
    (1) The fee is triggered by an act or failure to act by the obligor 
other than the normal timely payment of amounts owing with respect to 
the receivables;
    (2) The servicer may not charge the fee absent the act or failure 
to act referred to in paragraph U.(1) above;
    (3) The ability to charge the fee, the circumstances in which the 
fee may be charged, and an explanation of how the fee is calculated are 
set forth in the pooling and servicing agreement or described in all 
material respects in the prospectus or private placement memorandum 
provided to the plan before it purchases certificates issued by the 
trust; and
    (4) The amount paid to investors in the trust is not reduced by the 
amount of any such fee waived by the servicer.

[[Page 53741]]

    V. ``Receivables'' means secured or unsecured obligations of credit 
card holders which have arisen or arise in Accounts designated to a 
trust. Such obligations represent amounts charged by cardholders for 
merchandise and services and amounts advanced as cash advances, as well 
as periodic finance charges, annual membership fees, cash advance fees, 
late charges on amounts charged for merchandise and services and 
certain other fees (such as bad check fees, cash advance fees, and 
other fees specified in the cardholder agreements) designated by card 
issuers (other than a qualified administrative fee as defined in 
Section III.U.).
    W. ``Accounts'' are revolving credit card accounts serviced by 
Fleet or an affiliate, which were originated or purchased by Fleet or 
an affiliate, and are designated to a trust such that receivables 
arising in such accounts become assets of the trust.
    X. ``Revolving Period'' means a period of time, as specified in the 
pooling and servicing agreement, during which principal collections 
allocated to a series are reinvested in newly generated receivables 
arising in the accounts.
    Y. ``Amortization Period'' means a period of time specified in the 
pooling and servicing agreement during which a portion of the principal 
collections allocated to a series will commence to be paid to the 
certificateholders of such series in installments.
    Z. ``Accumulation Period'' means a period of time specified in the 
pooling and servicing agreement during which a portion of the principal 
collections allocated to a series will be deposited in an account to be 
distributed to certificateholders in a lump sum on the expected 
maturity date.
    AA. ``Pay Out Event'' means any of the events specified in the 
pooling and servicing agreement or supplement thereto that results (in 
some instances without further affirmative action by any party) in the 
early commencement of either an amortization period or an accumulation 
period, including (1) the failure of the sponsor or the servicer, 
whichever is subject to the relevant obligation under the pooling and 
servicing agreement, (i) to make any payment or deposit required under 
the pooling and servicing agreement within five (5) business days after 
such payment or deposit was required to be made, or (ii) to observe or 
perform any of its other covenants or agreements set forth in the 
pooling and servicing agreement, which failure has a material adverse 
effect on holders of investor certificates of the relevant series and 
continues unremedied for 60 days; (2) a breach of any representation or 
warranty made by the sponsor or the servicer in the pooling and 
servicing agreement that continues to be incorrect in any material 
respect for 60 days; (3) the occurrence of certain bankruptcy events 
relating to the sponsor or the servicer; (4) the failure by the sponsor 
to convey to the trust additional receivables to maintain the minimum 
seller interest that is required by the pooling and servicing agreement 
and the Rating Agencies; (5) the failure to pay in full amounts owing 
to investors on the expected maturity date; and (6) the Economic Pay 
Out Event.
    BB. An ``Economic Pay Out Event'' occurs automatically when the 
portfolio yield for any series of certificates, averaged over three 
consecutive months (or such other period approved by one of the Rating 
Agencies) is less than the base rate of the series averaged over the 
same period. Portfolio yield for a series of certificates for any 
period is equal to the sum of the finance charge collections and other 
amounts treated as finance charge collections less total defaults for 
the series divided by the outstanding principal balance of the investor 
certificates of the series, or such other measure approved by one of 
the Rating Agencies. The base rate for a series of certificates for any 
period is the sum of (i) amounts payable to certificateholders of the 
series with respect to interest, (ii) servicing fees allocable to the 
series payable to the servicer, and (iii) any credit enhancement fee 
allocable to the series payable to a third party credit enhancer, 
divided by the outstanding principal balance of the investor 
certificates of the series, or such other measure approved by one of 
the Rating Agencies.
    CC. ``CCA'' or ``Cash Collateral Account'' means that certain 
account established in the name of the trustee that serves as credit 
enhancement with respect to the investor certificates and holds cash 
and/or permitted investments (as defined below in Section III.KK.) 
which conform to applicable provisions of the pooling and servicing 
agreement.
    DD. ``Group'' means a group of any number of series offered by the 
trust that share finance charge and/or principal collections in the 
manner described in the applicable prospectus or private placement 
memorandum.
    EE. ``Ratings Effect'' means the reduction or withdrawal by a 
Rating Agency of its then current rating of the certificates held by 
any plan pursuant to this exemption.
    FF. ``Principal Receivables Discount'' means, with respect to any 
account designated by the sponsor, the portion of the related principal 
receivables that represents a discount from the face value thereof and 
that is treated under the pooling and servicing agreement as finance 
charge receivables.
    GG. ``Ratings Dependent Swap'' means an interest rate swap, or (if 
purchased by or on behalf of the trust) an interest rate cap contract, 
that is part of the structure of a series of certificates where the 
rating assigned by the Rating Agency to any senior class of 
certificates held by any plan is dependent on the terms and conditions 
of the swap and the rating of the swap counterparty, and if such 
certificate rating is not dependent on the existence of the swap and 
rating of the swap counterparty, such swap or cap shall be referred to 
as a ``Non-Ratings Dependent Swap''. With respect to a Non-Ratings 
Dependent Swap, each Rating Agency rating the certificates must 
confirm, as of the date of issuance of the certificates by the trust, 
that entering into an Eligible Swap with such counterparty will not 
affect the rating of the certificates.
    HH. ``Eligible Swap'' means a Ratings Dependent or Non-Ratings 
Dependent Swap:
    (1) which is denominated in U.S. Dollars;
    (2) pursuant to which the trust pays or receives, on or immediately 
prior to the respective payment or distribution date for the senior 
class of certificates, a fixed rate of interest, or a floating rate of 
interest based on a publicly available index (e.g. LIBOR or the U.S. 
Federal Reserve's Cost of Funds Index (COFI)), with the trust receiving 
such payments on at least a quarterly basis and obligated to make 
separate payments no more frequently than the swap counterparty, with 
all simultaneous payments being netted;
    (3) which has a notional amount that does not exceed either (i) the 
certificate balance of the class of certificates to which the swap 
relates, or (ii) the portion of the certificate balance of such class 
represented by receivables;
    (4) which is not leveraged (i.e., payments are based on the 
applicable notional amount, the day count fractions, the fixed or 
floating rates designated in paragraph HH.(2) above, and the difference 
between the products thereof, calculated on a one to one ratio and not 
on a multiplier of such difference);
    (5) which has a final termination date that is the earlier of the 
date on which the trust terminates or the related class of certificates 
is fully repaid; and
    (6) which does not incorporate any provision which could cause a 
unilateral alteration in any provision described in paragraphs HH.(1) 
through

[[Page 53742]]

(4) above without the consent of the trustee.
    II. ``Eligible Swap Counterparty'' means a bank or other financial 
institution which has a rating, at the date of issuance of the 
certificates by the trust, which is in one of the three highest long-
term credit rating categories, or one of the two highest short-term 
credit rating categories, utilized by at least one of the Rating 
Agencies rating the certificates; provided that, if a swap counterparty 
is relying on its short-term rating to establish eligibility hereunder, 
such counterparty must either have a long-term rating in one of the 
three highest long-term rating categories or not have a long-term 
rating from the applicable Rating Agency, and provided further that if 
the senior class of certificates with which the swap is associated has 
a final maturity date of more than one year from the date of issuance 
of the certificates, and such swap is a Ratings Dependent Swap, the 
swap counterparty is required by the terms of the swap agreement to 
establish any collateralization or other arrangement satisfactory to 
the Rating Agencies in the event of a ratings downgrade of the swap 
counterparty.
    JJ. ``Qualified Plan Investor'' means a plan investor or group of 
plan investors on whose behalf the decision to purchase certificates is 
made by an appropriate independent fiduciary that is qualified to 
analyze and understand the terms and conditions of any swap transaction 
used by the trust and the effect such swap would have upon the credit 
ratings of the certificates. For purposes of the exemption, such a 
fiduciary is either:
    (1) A ``qualified professional asset manager'' (QPAM),8 
as defined under Part V(a) of PTE 84-14 (49 FR 9494, 9506, March 13, 
1984);
---------------------------------------------------------------------------

    \8\ PTE 84-14 provides a class exemption for transactions 
between a party in interest with respect to an employee benefit plan 
and an investment fund (including either a single customer or pooled 
separate account) in which the plan has an interest, and which is 
managed by a QPAM, provided certain conditions are met. QPAMs (e.g., 
banks, insurance companies, registered investment advisers with 
total client assets under management in excess of $50 million) are 
considered to be experienced investment managers for plan investors 
that are aware of their fiduciary duties under ERISA.
---------------------------------------------------------------------------

    (2) an ``in-house asset manager'' (INHAM),9 as defined 
under Part IV(a) of PTE 96-23 (61 FR 15975, 15982, April 10, 1996); or
---------------------------------------------------------------------------

    \9\ PTE 96-23 permits various transactions involving employee 
benefit plans whose assets are managed by an INHAM, an entity which 
is generally a subsidiary of an employer sponsoring the plan which 
is a registered investment adviser with management and control of 
total assets attributable to plans maintained by the employer and 
its affiliates which are in excess of $50 million.
---------------------------------------------------------------------------

    (3) a plan fiduciary with total assets under management of at least 
$100 million at the time of the acquisition of such certificates.
    KK. ``Permitted Investments'' means investments that either (i) are 
direct obligations of, or obligations fully guaranteed as to timely 
payment of principal and interest by, the United States or any agency 
or instrumentality thereof, provided that such obligation is backed by 
the full faith and credit of the United States, or (ii) have been rated 
(or the obligor thereof has been rated) in one of the three highest 
generic rating categories by a Rating Agency; are described in the 
pooling and servicing agreement; and are permitted by the relevant 
Rating Agency(ies).
    LL. ``Excess Finance Charge Collections'' means, as of any day 
funds are distributed from the trust, the amount by which the finance 
charge collections allocated to certificates of a series exceed the 
amount necessary to pay certificate interest, servicing fees and 
expenses, to satisfy cardholder defaults or charge-offs, and to 
reinstate credit support.
    MM. ``Required Additions'' means accounts which are required to be 
added to the trust when either the seller amount is less than the 
minimum required seller amount or the principal amount is less than the 
required principal amount.
    NN. ``Restricted Additions'' means accounts which may be added to 
the trust at the discretion of the sponsor only upon confirmation from 
a Rating Agency that no Ratings Effect will result from the addition.
    The Department notes that this exemption is included within the 
meaning of the term ``Underwriter Exemption'' as it is defined in 
Section V(h) of the Grant of the Class Exemption for Certain 
Transactions Involving Insurance Company General Accounts, which was 
published in the Federal Register on July 12, 1995 (see PTE 95-60, 60 
FR 35925).
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption refer to 
the notice of proposed exemption published on August 11, 1999 at 64 FR 
43742.
    Effective Date: This exemption is effective August 11, 1999.
    For Further Information Contact: Mr. Gary H. Lefkowitz of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

UNOVA, Inc. (UNOVA), Located in Beverly Hills, California

[Prohibited Transaction Exemption No. 99-40; Exemption Application Nos. 
D-10663 and D-10664]

Exemption

    The restrictions of section 406(a), 406(b)(1) and (b)(2), and 
section 407(a) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code, shall not apply, as of December 
17, 1998, to: (1) the acquisition by the UNOVA, Inc. Pension Plan and 
the Landis Tool Pension Plan (collectively, the Plans) of certain 
improved real property (the Property) from an unrelated party for a 
sales price of $15,250,000 (the Purchase); and (2) the leasing of a 
portion of the Property (the Lease) by the Plans to UNOVA, a party in 
interest with respect to the Plans, provided that the following 
conditions are satisfied:
    (a) The Plans paid an amount for the Property which was no more 
than the fair market value of the Property at the time of the 
transaction;
    (b) The interest in the Property owned by each Plan represented no 
more than 10% of the value of either Plan's total assets at the time of 
the Purchase;
    (c) The Property, including the amount of space in the Property 
leased to UNOVA under the Lease (the Leased Space), represents no more 
than 10% of the value of either Plan's total assets throughout the 
duration of the Lease;
    (d) The terms and conditions of the Lease are at least as favorable 
to the Plans as those obtainable in an arm's-length transaction with an 
unrelated party;
    (e) The fair market rental value of the Leased Space has been, and 
every three years during the Lease will continue to be, determined by a 
qualified, independent appraiser;
    (f) The amount of rent paid by UNOVA to the Plans for the Leased 
Space throughout the duration of the Lease will be no less than the 
greater of the initial rent paid by UNOVA or the current fair market 
value of the Leased Space, as determined every three years by a 
qualified independent appraiser;
    (g) The Plans' independent fiduciary has determined that the 
Purchase and Lease are appropriate for the Plans and in the best 
interests of the Plans' participants and beneficiaries; and
    (h) The Plans' independent fiduciary will monitor the Lease, as 
well as the conditions of this exemption, and will take whatever 
actions are necessary to safeguard the interests of the Plans 
throughout the duration of the Lease.

[[Page 53743]]

    Effective Date: This exemption is effective as of December 17, 
1998.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption published on May 13, 1999 at 64 FR 
25921.
Written Comments
    The Department received approximately 69 comment letters from 
interested persons regarding the notice of proposed exemption (the 
Notice). The Department also received three comment letters from the 
applicant (i.e., UNOVA), one letter in response to the 69 comments 
submitted by interested persons, another letter requesting certain 
clarifications and modifications to the Notice, and a final letter 
which provides a further statement regarding an appropriate limitation 
on the percentage of each Plan's assets that the Property may 
represent.
    With respect to the 69 comments received by the Department from 
interested persons, approximately 58 of the letters were similar or 
identical in nature. One such letter had 22 different signatures 
endorsing the comments made therein. All of these letters expressed 
general opposition ``* * * to any plan that would allow unova inc. 
[sic] to use any funds that have been accumulated by its employees for 
retirement, for company related expenditures.'' Some of these letters 
also expressed concerns regarding ``* * * a potential conflict of 
interest'' and that ``* * * any money set aside for future retirement 
should only be used to enhance that retirement fund to the fullest 
extent possible.'' The remaining comment letters were not similar or 
identical in nature and raised more specific issues. For example, one 
comment stated that ``* * * the purchase of land from `arms length' 
parties is suspect and not in the best interest of plan participants * 
* *'' and that ``* * * investment in real property in Los Angles [sic] 
is speculative at best * * *'' Other comments suggested that it would 
have been more appropriate for UNOVA to buy the Property rather than 
the Plans. Some of these comments also suggested that the rent being 
paid by UNOVA for the Leased Space, and UNOVA's reimbursement of 
leasing expenses to the Plans, is inadequate. Finally, most of these 
comments raised concerns about the ``* * * security of the retirement 
funds'' and the need for adequate protections from any investment 
losses.
    In response to these comments, the applicant states that the 
Investment Committee of the Plans (the Committee) determined in 1998 
that real estate should be part of the investments in the Plans' 
portfolios in order to diversify the assets of the Plans. The applicant 
notes that asset diversity can reduce risk to an investment portfolio 
and can contribute to the growth of the Plans' assets. With respect to 
the Plans' investment in the Property, the applicant represents that 
the Committee determined that the Property would be an appropriate real 
estate investment for the Plans in meeting the stated goal of 
diversifying the Plans' assets into real estate. The applicant states 
that the Lease adds to the value of the Property because it adds to the 
income enjoyed by the Plans from the investment. Further, the requested 
exemption contains safeguards, such as independent fiduciary review of 
the fair market rental value of the Leased Space every three years, 
adjustment of the rent to reflect cost of living increases, and 
continued monitoring of the Lease's terms to ensure that the Lease does 
not become disadvantageous to the Plans.
    The applicant notes that the safeguards agreed to by UNOVA for the 
Lease are similar to those required in other lease transactions for 
which the Department has granted an exemption. In this regard, UNOVA 
hired an independent fiduciary for the Plans to review the terms of 
proposed transactions and to take whatever actions may be necessary to 
safeguard the best interests of the Plans and its participants and 
beneficiaries. In addition, an independent qualified real estate 
appraiser was hired to review and appraise the Property (the Appraisal) 
to determine its fair market value prior to its acquisition by the 
Plans. The appraiser that produced the Appraisal also analyzed the 
rental rate to be paid by UNOVA for the Leased Space and concluded that 
an initial rental rate of $25.20 per square foot annually represented 
the current fair market value of the Leased Space. The Appraisal was 
also reviewed by certified real estate appraisers (the Reviewers) who 
were independent of the parties involved in the transactions. The 
Reviewers determined that the rental rate to be paid by UNOVA for the 
Leased Space was at the high end of the range of rents being paid for 
similar properties in the local real estate market.
    Therefore, the applicant believes that given the goal of 
diversification of plan assets and the independent safeguards discussed 
above, the transactions are in the best interests of the Plans and 
their participants and beneficiaries.
    The Department agrees with the applicant that the conditions of the 
proposed exemption contain adequate independent safeguards to protect 
the interests of the Plans. The Department notes further that the total 
value of the Property allocated to each of the Plans represented less 
than 5% of each Plan's total assets at the time of the Purchase. 
Therefore, based on the current facts and representations, the 
Department is satisfied that the Plans' purchase of the Property and 
subsequent leasing of part of the Property to UNOVA was consistent with 
the Plans' investment objectives, and that the terms and conditions of 
the Lease (as agreed to by the parties and approved by an independent 
fiduciary) are in the interests of the Plans. Upon consideration of the 
concerns raised by the comments, the applicant has agreed by letter 
dated September 21, 1999 to further limit the percentage of each Plan's 
total assets that the Property will represent throughout the duration 
of the Lease to no more than 10%. As noted below, the Department has 
modified conditions (b) and (c) of the exemption accordingly. In 
addition, the applicant has also represented that no major expenditures 
or renovations are contemplated for the Property except for certain 
expenses associated with tenant installation.10
---------------------------------------------------------------------------

    \10\ The Department notes that any expenses for tenant 
installation, or other expenditures relating to the Property, made 
by the Plans must be consistent with the fiduciary responsibility 
provisions contained in Part 4 of Title I of the Act. In this 
regard, the Department notes that section 404(a) of the Act 
requires, among other things, that plan fiduciaries act prudently 
and solely in the interest of the plan and its participants and 
beneficiaries when making investment decisions for a plan, including 
any decisions for reasonable expenditures that are necessary to 
enhance the value of such investments.
---------------------------------------------------------------------------

    The following is a discussion of the applicant's additional 
comments regarding the Notice. These comments requested that:
    (1) relief from the restrictions of section 407(a) of the Act be 
provided in the exemption;
    (2) condition (c), which imposes a limitation on the total Plan 
assets that can be represented by the Property, be clarified; and
    (3) certain clarifications be made to the information contained in 
Paragraph 3 of the Summary of Facts and Representations in the Notice 
(the Summary).
    With respect to item (1) above, the applicant states that relief 
from section 407(a) of the Act is necessary because the Property 
represents a single parcel of ``employer real property'' (as defined in 
section 407(d)(2) of the Act) and would not be considered ``qualifying 
employer real property'' within the meaning of section 407(d)(4) of the 
Act, since such a property would not meet

[[Page 53744]]

the requirement contained therein that such properties be 
``geographically dispersed.'' Thus, in order to ensure that adequate 
relief is provided by the final exemption, the applicant requests that 
the Department clarify that the exemption provides relief from section 
407(a).
    The Department agrees with the applicant's analysis and has 
modified the exemption to provide relief from the restrictions of 
section 407(a) of the Act.
    With respect to item (2) above, the applicant states that condition 
(c) of the Notice states that:

    The Property, and the amount of space in the Property leased to 
UNOVA under the Lease (the Leased Space), represents no more than 
15% of the value of either Plans's total assets throughout the 
duration of the Lease. [emphasis added]

In this regard, the applicant asks the Department to confirm that this 
condition does not double count the value of the Property and the value 
of the Leased Space, but merely looks to the value of the Property 
(including the value of the Leased Space) when determining whether this 
condition is met.
    The Department acknowledges the applicant's comment and, in order 
to clarify the meaning of this condition in the final exemption, has 
deleted the word ``and'' and substituted the word ``including'' in the 
reference to the Leased Space contained in condition (c). In addition, 
as noted above, the Department has modified conditions (b) and (c) of 
the exemption by reducing the percentage limitation required therein 
from 15% to 10%.
    With respect to item (3) above, the applicant notes that the first 
sentence in Paragraph 3 of the Summary states that:

    After the Purchase, the Plans leased a portion of the Property 
to UNOVA, effective as of December 17, 1998 (i.e., the Lease). 
[emphasis added]

The applicant states that this sentence should state that the Plans 
leased a portion of the Property to UNOVA, effective as of February 1, 
1999.
    The Department acknowledges this clarification to the information 
contained in the Summary.
    Accordingly, based on the entire record, the Department has 
determined to grant the proposed exemption as modified herein.
    For Further Information Contact: Christopher J. Motta of the 
Department, telephone (202) 219-8194. (This is not a toll-free number.)

The Manufacturers Life Insurance Company (Manulife) Located in 
Toronto, Canada

[Prohibited Transaction Exemption 99-41; Exemption Application No. D-
10738]

Exemption

Section I. Covered Transactions
    The restrictions of section 406(a) of the Act and the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1)(A) through (D) of the Code, shall not apply, to 
(1) the receipt of common stock (the Common Shares) of Manulife 
Financial Corporation, a newly-formed company that will be the holding 
company (the Holding Company) for Manulife; or (2) the receipt of cash 
or policy credits, by any plan policyholder (the Eligible Policyholder) 
that is an employee benefit plan (the Plan), other than a policyholder 
which is a Plan established by Manulife or an affiliate for its own 
employees, in exchange for such Eligible Policyholder's membership 
interest in Manulife, in accordance with a plan of reorganization (the 
Plan of Demutualization) adopted by Manulife and implemented under the 
insurance laws of Canada and the State of Michigan.
    This exemption is subject to the conditions set forth below in 
Section II.
Section II. General Conditions
    (a) The Plan of Demutualization is implemented in accordance with 
procedural and substantive safeguards that are imposed under the 
insurance laws of Canada and the State of Michigan and is subject to 
review and/or approval in Canada by the Office of the Superintendent of 
Financial Institutions (OSFI) and the Minister of Finance (the Canadian 
Finance Minister) and, in the State of Michigan, by the Commissioner of 
Insurance (the Michigan Insurance Commissioner).
    (b) OSFI, the Canadian Finance Minister and the Michigan Insurance 
Commissioner review the terms of the options that are provided to 
Eligible Policyholders of Manulife as part of their separate reviews of 
the Plan of Demutualization. In this regard,
    (1) OSFI (i) authorizes the release of the Plan of Demutualization 
and all information to be sent to Eligible Policyholders; (ii) oversees 
each step of the demutualization process; and (iii) makes a final 
recommendation to the Canadian Finance Minister on the Plan of 
Demutualization.
    (2) The Canadian Finance Minister may consider such factors as 
whether (i) the Plan of Demutualization is fair and equitable to 
Eligible Policyholders; (ii) the Plan of Demutualization is in the best 
interests of the financial system in Canada; and (iii) sufficient steps 
had been taken to inform Eligible Policyholders of the Plan of 
Demutualization and of the special meeting on demutualization.
    (3) The Michigan Insurance Commissioner makes a determination that 
the Plan of Demutualization is (i) fair and equitable to all Eligible 
Policyholders and (ii) consistent with the requirements of Michigan 
law.
    (4) Both the Canadian Finance Minister and the Michigan Insurance 
Commissioner concur on the terms of the Plan of Demutualization.
    (c) Each Eligible Policyholder has an opportunity to vote to 
approve the Plan of Demutualization after full written disclosure is 
given to the Eligible Policyholder by Manulife.
    (d) One or more independent fiduciaries of a Plan that is an 
Eligible Policyholder receives Holding Company Common Shares, cash or 
policy credits pursuant to the terms of the Plan of Demuutualization 
and neither Manulife nor any of its affiliates exercises any discretion 
or provides investment advice with respect to such acquisition.
    (e) After each Eligible Policyholder is allocated 186 Common 
Shares, additional consideration is allocated to Eligible Policyholders 
who own eligible policies based on an actuarial formula that takes into 
account the cash value, the death benefit (in the case of life 
insurance policies and certain annuity policies) and the duration of 
each such eligible policy. The actuarial formula has been reviewed by 
the Canadian Finance Minister and the Michigan Insurance Commissioner.
    (f) All Eligible Policyholders that are Plans participate in the 
transactions on the same basis within their class groupings as other 
Eligible Policyholders that are not Plans.
    (g) No Eligible Policyholder pays any brokerage commissions or fees 
in connection with the receipt of Common Shares.
    (h) All of Manulife's policyholder obligations remain in force and 
are not affected by the Plan of Demutualization.
Section III. Definitions
    For purposes of this exemption:
    (a) The term ``Manulife'' means The Manufacturers Life Insurance 
Company and any affiliate of Manulife as defined in paragraph (b) of 
this Section III.
    (b) An ``affiliate'' of Manulife includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with Manulife. (For

[[Page 53745]]

purposes of this paragraph, the term ``control'' means the power to 
exercise a controlling influence over the management or policies of a 
person other than an individual.)
    (2) Any officer, director or partner in such person, and (3) Any 
corporation or partnership of which such person is an officer, director 
or a 5 percent partner or owner.
    (c) The term ``Eligible Policyholder'' means a policyholder who is 
eligible to vote at the special meeting on demutualization and to 
receive consideration under Manulife's Plan of Demutualization. More 
specifically, an Eligible Policyholder is a policyholder of the mutual 
insurer that had a voting policy on the day Manulife announced its 
intention to prepare a plan of demutualization (the Eligibility Date) 
or any policyholder that applied for a voting policy on or prior to 
that day. Policyholders will also be deemed Eligible Policyholders if 
they are holders of a voting policy that lapsed before the insurer's 
Eligibility Date but was reinstated on or before 90 days prior to the 
special meeting to consider demutualization. These policyholders will 
be eligible to receive benefits upon demutualization.
    (d) The term ``policy credit'' means whichever of the following is 
applicable: (1) with respect to an individual life or individual 
deferred annuity policy, and for a group policy (other than a group 
annuity), where the owner has elected a paid-up addition option, an 
increase in the paid-up addition value; (2) with respect to all other 
individual life or individual deferred annuity policies, and for all 
other group policies (other than group annuities), an increase in the 
dividend accumulation account; (3) with respect to a settlement 
annuity, a vested annuity or a group annuity, an increase in the 
periodic income payment.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption (the Notice) that was published July 
22, 1999 at 64 FR 39539.
Written Comments
    The Department received two written comments with respect to the 
Notice. One comment was submitted by a Manulife policyholder. The other 
comment was submitted by Manulife. Following is a discussion of these 
comments.

Policyholder's Comment

    The commenter expressed concern over the tax implications of the 
cash distribution that would be made by Manulife to the policyholder's 
Plan account as a result of the demutualization. The commenter 
explained that he had not sought the demutualization nor was he taking 
the distribution in his own name. Rather, he said he would reinvest the 
cash consideration received with other assets held by his Plan account. 
The commenter argued that to tax him would be unfair since the money he 
would be receiving as a result of Manulife's demutualization would not 
be in his actual possession and the tax would have to be paid to the 
taxing authorities from his present income. The commenter further 
explained that while he fully expected to pay taxes on the cash 
consideration when he took distributions from his Plan account, to tax 
him prematurely would be unfair and constitute unjust enrichment to the 
taxing authorities.
    In response to the commenter, Manulife indicated that it was 
unaware of how the commenter acquired erroneous information that the 
payment of the demutualization benefits to the commenter's Plan account 
would constitute a taxable event. Manulife explained that under current 
U.S. tax law, the payment of the demutualization benefits to a 
qualified plan would not result in current taxation to a Plan 
participant, such as the commenter, nor of the Plan, itself. To 
emphasize this point, Manulife indicated that in the Information 
Circular it mailed to policyholders on or before May 31, 1999, pages 51 
and 52 of the document specifically state that the ``[r]eceipt of 
Common Shares or cash by a pension or profit sharing trust (a plan 
covered by section 401(a) of the U.S. Tax Code) will be tax-free to the 
trust (assuming the trust is not otherwise subject to tax).''

Manulife's Comment

    In its comment, Manulife recommended modifications or 
clarifications to the operative language and the Summary of Facts and 
Representations (the Summary) of the Notice in a number of areas. 
Manulife explained that its comment was generated primarily because the 
exemption application reflected a draft version of the Plan of 
Demutualization rather than the final version that was approved by OSFI 
and the Michigan Insurance Commissioner.
    Discussed below are Manulife's concerns and the Department's 
responses with respect to these areas of concern. Also included is a 
discussion of the Department's revisions of certain typographical 
errors appearing in the Summary and the Notice to Interested Persons.
    1. Canadian Finance Minister Considerations. On page 39539 of the 
Notice, Section II(b)(2) describes the various factors the Canadian 
Finance Minister may take into account in deciding whether to approve a 
plan of demutualization. Manulife represents that the first subclause 
of Section II(b)(2) should be revised to read ``The Canadian Finance 
Minister may consider such factors as whether (i) the Plan of 
Demutualization is fair and equitable to policyholders.'' As for 
subclauses (ii) and (iii) of Section II(b)(2), Manulife states that no 
changes should be made.
    The Department concurs with this modification to Section II(b)(2) 
of the Notice.
    2. Fixed and Variable Allocations of Demutualization Benefits. On 
page 39539 of the Notice, Section II(e) states that the fixed 
allocation of demutualization benefits will equal 184 Common Shares. 
However, Manulife wishes to clarify that the fixed allocation is 
actually equal to 186 Common Shares and, in response to this comment, 
the Department has made the requested change. The Department has also 
made a corresponding revision on page 39543 of the Notice in the second 
paragraph of Representation 10 of the Summary.
    In addition, Section II(e) of the Notice describes the variable 
component of the demutualization benefits, in part, as follows: 
``additional consideration is allocated to Eligible Policyholders who 
own participating policies based on actuarial formulas that take into 
account each participating policy's contribution to the surplus of 
Manulife * * *'' Manulife represents that while some other insurance 
companies have calculated the variable component of their 
demutualization benefit in this manner, Manulife's variable allocation 
will be calculated on a different basis. In this regard, Manulife 
explains that under its Plan of Demutualization, the variable 
allocation to eligible policies that are life insurance policies will 
be calculated on the basis of the cash value, the death benefit and the 
duration of each such eligible policy. Manulife further explains that 
the variable allocation to eligible policies that are annuities will be 
calculated using the same formula that will be used for life insurance 
policies, except that the share allocation with respect to the death 
benefit will generally be zero. According to Manulife, these allocation 
formulas have been reviewed by the Canadian Finance Minister and the 
Michigan Insurance Commissioner. In

[[Page 53746]]

light of the above, Manulife suggests that Section II(e) be revised to 
read as follows:

    After each Eligible Policyholder is allocated 186 Common Shares, 
additional consideration is allocated to Eligible Policyholders who 
own eligible policies based on an actuarial formula that takes into 
account the cash value, the death benefit (in the case of life 
insurance policies and certain annuity policies) and the duration of 
each such eligible policy. The actuarial formula has been reviewed 
by the Canadian Finance Minister and the Michigan Insurance 
Commissioner.

The Department acknowledges Manulife's requested change and has 
modified Section II(e) of the Notice.
    3. Eligible Policyholder Definition. On page 39539 of the Notice, 
Section III(c) defines the term ``Eligible Policyholder'' as--

    A policyholder who is eligible to vote at annual meetings of the 
mutual insurer and to receive consideration under Manulife's Plan of 
Demutualization. More specifically, an Eligible Policyholder is a 
policyholder of the mutual insurer that had a voting policy before 
Manulife announced its intention to demutualize or any policyholder 
that applied for a voting policy prior to that day. Policyholders 
will also be deemed Eligible Policyholders if they are holders of a 
voting policy that lapsed before the insurer's announcement date but 
was reinstated on or before 90 days prior to the special meeting to 
consider demutualization. These policyholders will be eligible to 
receive benefits upon demutualization.

To reflect current revisions in its Plan of Demutualization, Manulife 
requests that the definition of ``Eligible Policyholder'' as set forth 
in Section III(c) of the Notice be revised to read as follows:

    The term ``Eligible Policyholder'' means a policyholder who is 
eligible to vote at the special meeting on demutualization and to 
receive consideration under Manulife's Plan of Demutualization. More 
specifically, an Eligible Policyholder is a policyholder of the 
mutual insurer that had a voting policy on the day Manulife 
announced its intention to prepare a plan of demutualization (the 
Eligibility Date) or any policyholder that applied for a voting 
policy on or prior to that day. Policyholders will also be deemed 
Eligible Policyholders if they are holders of a voting policy that 
lapsed before the insurer's Eligibility Date but was reinstated on 
or before 90 days prior to the special meeting to consider 
demutualization. These policyholders will be eligible to receive 
benefits upon demutualization.

    In response to this comment, the Department has made the requested 
changes to Section III(c) of the Notice.
    4. Policy Credit Definition. On page 39540 of the Notice Section 
II(d) contains the following definition of the term ``policy credit'':

    The term ``policy credit'' means whichever of the following is 
applicable: (1) with respect to an individual life insurance policy, 
an increase in the dividend accumulation amount; (2) with respect to 
an individual deferred annuity policy where the owner has elected a 
dividend accumulation option, an increase in the dividend 
accumulation amount; (3) with respect to all other individual 
deferred annuity policies, an increase in the dividend addition 
value; and (4) with respect to a settlement annuity, an increase in 
the contract reserve which shall provide for an increase in the 
monthly income payment equal to the ratio of the reserve increase to 
the then current contract reserve.

To reflect current revisions to its Plan of Demutualization, Manulife 
suggests that the definition of the term ``policy credit'' be revised 
to read as follows:

    The term ``policy credit'' means whichever of the following is 
applicable: (1) with respect to an individual life or individual 
deferred annuity policy, and for a group policy (other than a group 
annuity), where the owner has elected a paid-up addition option, an 
increase in the paid-up addition value; (2) with respect to all 
other individual life or individual deferred annuity policies, and 
for all other group policies (other than group annuities), an 
increase in the dividend accumulation account; (3) with respect to a 
settlement annuity, a vested annuity or a group annuity, an increase 
in the periodic income payment.

    The Department concurs with this clarification and has modified 
Section III(d) accordingly.
    5. Subsidiary Ownership. On page 39540 of the Notice, 
Representation 1 of the Summary states, in pertinent part, that 
Manulife indirectly owns approximately 85 percent of The Manufacturers 
Life Insurance Company of North America (Manulife/North America). 
Manulife wishes to clarify however, that as a result of ManUSA's recent 
acquisition of the 15 percent minority interest in Manulife/North 
America, Manulife now indirectly owns 100 percent of that entity.
    The Department notes this clarification to the Summary.
    6. Stock Ownership Listings. On page 39541 of the Notice, 
Representation 4 of the Summary states that Common Shares of the 
Holding Company will be listed on the Montreal, Toronto or New York 
Stock Exchanges. However, for purposes of clarification, Manulife 
represents that Common Shares will be listed on each of the ``Montreal, 
Toronto, Hong Kong, Philippines and New York Stock Exchanges.''
    The Department acknowledges this clarification.
    7. Holding Company Shares. On page 39541 of the Notice, 
Representation 6 of the Summary describes the steps that will occur in 
connection with Manulife's demutualization. Specifically, the third 
sentence of Representation 6 states the following: ``Then, all of the 
Holding Company's Common Shares held by Manulife immediately prior to 
the effective date will be canceled.'' Manulife requests that this 
sentence be revised by deleting the reference to the term ``Common 
Shares'' and replacing it with the term ``shares.'' Therefore, the 
revised sentence would read as follows: ``Then, all of the Holding 
Company's shares held by Manulife immediately prior to the effective 
date will be canceled.'' The Department does not object to this change 
and has made the requested revision.
    8. Footnote 13. On page 39542 of the Notice, Footnote 13 of the 
Summary describes the treatment of the underwriters' discount under 
Canadian law if Common Shares are sold by non-Canadian policyholders of 
Manulife in a secondary offering by the Holding Company's underwriters 
as part of the initial public offering. To clarify the language of the 
footnote, Manulife suggests that the second and third sentences be 
deleted and replaced with the following language:

    Because the payment of the underwriters' discount is treated as 
dividend in Canada, a withholding tax of 15 percent of the amount of 
the dividend will be imposed. Manulife has concluded that there is 
an applicable withholding tax exemption under the Canada/U.S. tax 
treaty and, accordingly, it will not withhold any taxes from amounts 
remitted to the Plans. Manulife has represented that even if its 
conclusion is incorrect, it will not seek reimbursement from any 
Plan policyholder under such circumstances.

    The Department concurs with these revisions and has made the 
requested changes.
    9. Footnote 19. On page 39542 of the Notice, Footnote 19 of the 
Summary discusses, in pertinent part, special rules applicable to an 
insurance policy that is issued to a trust established by Manulife. 
Because the last sentence of the second paragraph of Footnote 19 is in 
error, Manulife suggests that the sentence be revised to read as 
follows: ``The trustee of any such trust established by Manulife will 
not be considered an Eligible Policyholder or owner and will not be 
eligible to vote or receive consideration.''
    The Department acknowledges this revision and has made the 
requested change.
    10. Eligible Policyholder. On page 39543 of the Notice, 
Representation 10 of the Summary describes the criteria for an Eligible 
Policyholder under Manulife's Plan of Demutualization. To

[[Page 53747]]

clarify the second parenthetical in the first paragraph of 
Representation 10, which relates to certain status and time 
requirements for the insurance policies, Manulife suggests that the 
parenthetical be revised to read as follows:

(or applied for on or before that date or which are in lapse status 
on that date and reinstated at least 90 days prior to the special 
meeting of the Eligible Policyholders to vote on the Plan of 
Demutualization).

The Department acknowledges this revision and has modified the 
parenthetical.
    11. Cash Elections/Non-Trusteed Policies. On page 39543 of the 
Summary, the second sentence in the fourth paragraph of Representation 
10 states that the cash election that is made by an Eligible 
Policyholder who is entitled to receive Common Shares may be reduced if 
the Board of Directors of the Holding Company determines that such 
reduction is in Manulife's best interests. However, for purposes of 
clarification, Manulife suggests that this sentence be deleted and the 
following new sentence be inserted in lieu thereof:

    If, in the judgment of the Board of Directors of the Holding 
Company, it would not be in the best interests of Manulife to 
conduct a public offering that fully funds cash elections, then the 
Board of Directors shall determine the number of Common Shares by 
which the aggregate cash elections shall be reduced, and such 
reductions shall be pro-rated among all Eligible Policyholders who 
have made a cash election.

In response to this comment, the Department has made the suggested 
modification.
    In addition, the fifth paragraph of Representation 10 refers to 
Plans intending to qualify under section 403(a) of the Code as the 
recipients of policy credits. Manulife requests that the sentence 
should also make reference to Plans intending to qualify under section 
401(a) of the Code. Accordingly, Manulife suggests that the sentence 
should read as follows:

    Other Eligible Policyholders, namely owners of individual 
retirement annuities, tax sheltered annuities, certain other 
policies issued directly to Plan participants in qualified pension 
or profit sharing plans, or group policies issued in connection with 
Plans intending to qualify under section 401(a) or 403(a) of the 
Code that are not held in trust, will receive policy credits equal 
in value to the shares allocated to such Eligible Policyholders.

    The Department notes this change and has made the requested 
revision.
    12. Escrow Arrangement. On page 39543 of the Notice, Representation 
12 of the Summary describes an escrow arrangement that Manulife will 
implement in the event the exemption is not granted before the 
effective date of the demutualization. Specifically, the first sentence 
of Representation 12 provides that the escrow arrangement is subject to 
terms and conditions approved by the Superintendent of OSFI. Manulife 
wishes to clarify, however, that such terms and conditions will be 
subject to approval by the Michigan Insurance Commissioner rather than 
the Superintendent of OSFI.
    In response, the Department notes this clarification and has made 
the requested change.
    Finally, the Department has revised certain typographical errors 
appearing in the Summary and the Notice to Interested Persons. In this 
regard, on page 39543 of the Notice, references to the citation ``29 
CFR 2510.3-2(c)'' in the fifth paragraph of Representation 10 and in 
paragraph (d) of Representation 12 should be revised to read ``29 CFR 
2510.3-21(c).'' Also, the reference to ``20 CFR 2570.43(b)(2)'' in the 
Notice to Interested Persons should be revised to read ``29 CFR 
2570.43(b)(2).''
    For further information regarding the comments or other matters 
discussed herein, interested persons are encouraged to obtain copies of 
the exemption application file (Exemption Application No. D-10738) the 
Department is maintaining in this case. The complete application file, 
as well as all supplemental submissions received by the Department, are 
made available for public inspection in the Public Documents Room of 
the Pension and Welfare Benefits Administration, Room N-5638, U.S. 
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 
20210.
    Accordingly, after giving full consideration to the entire record, 
including the written comments received, the Department has decided to 
grant the exemption subject to the modifications and clarifications 
described above.

    For Further Information Contact: Ms. Jan D. Broady 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 or disqualified 
person from certain other provisions to which the exemptions does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(B) of the Act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) These exemptions are supplemental to and not in derogation of, 
any other provisions of the Act and/or the Code, including statutory or 
administrative exemptions and transactional 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
    (3) The availability of these exemptions is 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 29th day of September, 1999.
Ivan Strasfeld,
Director of Exemption Determinations,
Pension and Welfare Benefits Administration,
Department of Labor.
[FR Doc. 99-25709 Filed 10-1-99; 8:45 am]
BILLING CODE 4510-29-P