[Federal Register Volume 64, Number 204 (Friday, October 22, 1999)]
[Notices]
[Pages 57129-57154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27520]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10706 et al.]


Proposed Exemptions; Allfirst Bank, et al.

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

Notice to Interested Persons

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

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

Allfirst Bank, Located in Baltimore, Maryland

[Application No. D-10706]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, August 10, 1990).
Section I--Proposed Exemption for Receipt of Fees
    If the exemption is granted, the restrictions of section 406(a) and 
406(b) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(F) of the Code, shall not apply as of November 13, 1998, to the 
proposed receipt of fees by Allfirst from the ARK Funds, an open-end 
investment company registered under the Investment Company Act of 1940 
(the 1940 Act), for acting as an investment adviser for such Funds, as 
well as for providing other services to the ARK Funds which are 
``Secondary Services'' as defined in Section III(i), in connection with 
the investment by plans for which Allfirst serves as a fiduciary (the 
Client Plans) in shares of the ARK Funds, provided that the following 
conditions and the general conditions of Section II are met:
    (a) Each Client Plan satisfies either (but not both) of the 
following:
    (1) The Client Plan receives a cash credit of such Plan's 
proportionate share of all fees charged to the Funds by Allfirst for 
investment advisory services, including any investment advisory fees 
paid by Allfirst to third party sub-advisers, no later than the same 
day as the receipt of such fees by Allfirst. The crediting of all such 
fees to the Client Plans by Allfirst is audited by an independent 
accounting firm on at least an annual basis to verify the proper 
crediting of the fees to each Plan.
    (2) The Client Plan does not pay any Plan-level investment 
management fees, investment advisory fees, or similar fees to Allfirst 
with respect to any of the assets of such Plan which are invested in 
shares of any of the ARK Funds. This

[[Page 57130]]

condition does not preclude the payment of investment advisory or 
similar fees by the ARK Funds to Allfirst under the terms of an 
investment management agreement adopted in accordance with section 15 
of the 1940 Act, nor does it preclude the payment of fees for Secondary 
Services to Allfirst pursuant to a duly adopted agreement between 
Allfirst and the ARK Funds.
    (b) The price paid or received by a Client Plan for shares in a 
Fund is the net asset value per share at the time of the transaction, 
as defined in Section III(f), and is the same price which would have 
been paid or received for the shares by any other investor at that 
time.
    (c) Allfirst, including any officer or director of Allfirst, does 
not purchase or sell shares of the ARK Funds from or to any Client 
Plan.
    (d) No sales commissions are paid by the Client Plans in connection 
with the purchase or sale of shares of the ARK Funds, and no redemption 
fees are paid in connection with the sale of shares by the Client Plans 
to the ARK Funds.
    (e) For each Client Plan, the combined total of all fees received 
by Allfirst for the provision of services to a Client Plan, and in 
connection with the provision of services to the ARK Funds in which the 
Client Plan may invest, are not in excess of ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act.
    (f) Allfirst does not receive any fees payable pursuant to Rule 
12b-1 under the 1940 Act in connection with the transactions.
    (g) The Client Plans are not employee benefit plans sponsored or 
maintained by Allfirst.
    (h) The Second Fiduciary receives, in advance of any initial 
investment by the Client Plan in a Fund, full and detailed written 
disclosure of information concerning the ARK Funds, including but not 
limited to:
    (1) A current prospectus for each Fund in which a Client Plan is 
considering investing;
    (2) A statement describing the fees for investment advisory or 
similar services, any secondary services as defined in Section III(i), 
and all other fees to be charged to or paid by the Client Plan and by 
the ARK Funds, including the nature and extent of any differential 
between the rates of such fees;
    (3) The reasons why Allfirst may consider such investment to be 
appropriate for the Client Plan;
    (4) A statement describing whether there are any limitations 
applicable to Allfirst with respect to which assets of a Client Plan 
may be invested in the ARK Funds, and if so, the nature of such 
limitations; and
    (5) Upon request of the Second Fiduciary, a copy of the proposed 
exemption and/or a copy of the final exemption, if granted, once such 
documents are published in the Federal Register.
    (i) After consideration of the information described above in 
paragraph (h), the Second Fiduciary authorizes in writing the 
investment of assets of the Client Plan in each particular Fund and the 
fees to be paid by such ARK Funds to Allfirst.
    (j) All authorizations made by a Second Fiduciary regarding 
investments in a Fund and the fees paid to Allfirst are subject to an 
annual reauthorization wherein any such prior authorization referred to 
in paragraph (i) shall be terminable at will by the Client Plan, 
without penalty to the Client Plan, upon receipt by Allfirst of written 
notice of termination. A form expressly providing an election to 
terminate the authorization described in paragraph (i) above (the 
Termination Form) with instructions on the use of the form must be 
supplied to the Second Fiduciary no less than annually--provided that 
the Termination Form need not be supplied to the Second Fiduciary 
pursuant to this paragraph sooner than six months after such 
Termination Form is supplied pursuant to paragraph (l) below, except to 
the extent required by such paragraph in order to disclose an 
additional service or fee increase. The instructions for the 
Termination Form must include the following information:
    (1) The authorization is terminable at will by the Client Plan, 
without penalty to the Client Plan, upon receipt by Allfirst of written 
notice from the Second Fiduciary; and
    (2) Failure to return the Termination Form will result in continued 
authorization of Allfirst to engage in the transactions described in 
paragraph (i) on behalf of the Client Plan.
    (k) For each Client Plan using the fee structure described in 
paragraph (a)(1) above with respect to investments in a particular 
Fund, the Second Fiduciary of the Client Plan receives full written 
disclosure in a Fund prospectus or otherwise of any increases in the 
rates of fees charged by Allfirst to the ARK Funds for investment 
advisory services.
    (l)(1) For each Client Plan using the fee structure described in 
paragraph (a)(2) above with respect to investments in a particular 
Fund, an increase in the rate of fees paid by the Fund to Allfirst 
regarding any investment management services, investment advisory 
services, or similar services that Allfirst provides to the Fund over 
an existing rate for such services that had been authorized by a Second 
Fiduciary in accordance with paragraph (i) above; or
    (2) For any Client Plan under this proposed exemption, an addition 
of a Secondary Service (as defined in Section III(i) below) provided by 
Allfirst to the Fund for which a fee is charged, or an increase in the 
rate of any fee paid by the ARK Funds to Allfirst for any Secondary 
Service that results either from an increase in the rate of such fee or 
from the decrease in the number of kind of services performed by 
Allfirst for such fee over an existing rate for such Secondary Service 
which had been authorized by the Second Fiduciary of a Client Plan in 
accordance with paragraph (i) above;
    Allfirst will, at least 30 days in advance of the implementation of 
such additional service for which a fee is charged or fee increase, 
provide a written notice (which may take the form of a proxy statement, 
letter, or similar communication that is separate from the prospectus 
of the Fund and that explains the nature and amount of the additional 
service for which a fee is charged or of the increase in fees) to the 
Second Fiduciary of the Client Plan. Such notice shall be accompanied 
by a Termination Form with instructions as described in paragraph (i) 
above.
    (m) On an annual basis, Allfirst provides the Second Fiduciary of a 
Client Plan investing in the ARK Funds with:
    (1) A copy of the current prospectus for the ARK Funds in which the 
Client Plan invests and, upon such fiduciary's request, a copy of the 
Statement of Additional Information for such ARK Funds which contains a 
description of all fees paid by the ARK Funds to Allfirst;
    (2) A copy of the annual financial disclosure report prepared by 
Allfirst which includes information about the Fund portfolios as well 
as audit findings of an independent auditor within 60 days of the 
preparation of the report; and
    (3) Oral or written responses to inquiries of the Second Fiduciary 
as they arise.
    (n) With respect to each of the ARK Funds in which a Client Plan 
invests, in the event such Fund places brokerage transactions with 
Allfirst, Allfirst will provide the Second Fiduciary of such Plan at 
least annually with a statement specifying:
    (1) The total, expressed in dollars, of brokerage commissions of 
each Fund that are paid to Allfirst by such Fund;
    (2) The total, expressed in dollars, of brokerage commissions of 
each Fund

[[Page 57131]]

that are paid by such Fund to brokerage firms unrelated to Allfirst;
    (3) The average brokerage commissions per share, expressed as cents 
per share, paid to Allfirst by each Fund; and
    (4) The average brokerage commissions per share, expressed as cents 
per share, paid by each Fund to brokerage firms unrelated to Allfirst.
    (o) All dealings between the Client Plans and the ARK Funds are on 
a basis no less favorable to the Plans than dealings with other 
shareholders of the ARK Funds.
Section II--General Conditions
    (a) Allfirst maintains for a period of six years the records 
necessary to enable the persons described below in paragraph (b) 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 Allfirst, the 
records are lost or destroyed prior to the end of the six-year period, 
and (2) no party in interest other than Allfirst shall be subject to 
the civil penalty that may be assessed under section 502(i) of the Act 
or to the taxes imposed by section 4975(a) and (b) of the Code if the 
records are not maintained or are not available for examination as 
required by paragraph (b) below.
    (b)(1) Except as provided below in paragraph (b)(2) and 
notwithstanding any provisions of section 504(a)(2) of the Act, the 
records referred to in paragraph (a) are unconditionally available at 
their customary location for examination during normal business hours 
by--
    (i) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service,
    (ii) Any fiduciary of the Client Plans who has authority to acquire 
or dispose of shares of the ARK Funds owned by the Client Plans, or any 
duly authorized employee or representative of such fiduciary, and
    (iii) Any participant or beneficiary of the Client Plans or duly 
authorized employee or representative of such participant or 
beneficiary;
    (2) None of the persons described in paragraph (b)(1)(ii) and (iii) 
shall be authorized to examine trade secrets of Allfirst, or commercial 
or financial information which is privileged or confidential.
Section III--Definitions
    For purposes of this proposed exemption:
    (a) The term ``Allfirst'' means Allfirst Bank, and any affiliate 
thereof as defined below in paragraph (c)(1) of this section, effective 
as of June 28, 1999, the date the First National Bank of Maryland 
(First Maryland) changed its name to Allfirst Bank.
    (b) The term ``First Maryland'' refers to First National Bank of 
Maryland, and any affiliate thereof as defined below in paragraph 
(c)(1) of this section, prior to June 28, 1999.
    (c) An ``affiliate'' of a person includes:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (d) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (e) The term ``Fund'' or ``ARK Funds'' shall include the ARK Funds, 
Inc. or any other diversified open-end investment company or companies 
registered under the 1940 Act for which Allfirst serves as an 
investment adviser and may also serve as a custodian, dividend 
disbursing agent, shareholder servicing agent, transfer agent, Fund 
accountant, or provide some other ``Secondary Service'' (as defined 
below in paragraph (i) of this Section) which has been approved by such 
ARK Funds.
    (f) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and sales calculated by dividing the value of all 
securities, determined by a method as set forth in the Fund's 
prospectus and Statement of Additional Information, and other assets 
belonging to the Fund or portfolio of the Fund, less the liabilities 
charged to each such portfolio or Fund, by the number of outstanding 
shares.
    (g) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or a ``member of the family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
a sister, or a spouse of a brother or a sister.
    (h) The term ``Second Fiduciary'' means a fiduciary of a Client 
Plan who is independent of and unrelated to Allfirst. For purposes of 
this exemption, the Second Fiduciary will not be deemed to be 
independent of and unrelated to Allfirst if:
    (1) Such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with Allfirst;
    (2) Such fiduciary, or any officer, director, partner, employee, or 
relative of the fiduciary is an officer, director, partner or employee 
of Allfirst (or is a relative of such persons);
    (3) Such fiduciary directly or indirectly receives any compensation 
or other consideration for his or her own personal account in 
connection with any transaction described in this proposed exemption.
    If an officer, director, partner or employee of Allfirst (or 
relative of such persons), is a director of such Second Fiduciary, and 
if he or she abstains from participation in (i) the choice of the 
Client Plan's investment adviser, (ii) the approval of any such 
purchase or sale between the Client Plan and the ARK Funds, and (iii) 
the approval of any change in fees charged to or paid by the Client 
Plan in connection with any of the transactions described in Section I 
above, then paragraph (h)(2) of this section shall not apply.
    (i) The term ``Secondary Service'' means a service other than an 
investment management, investment advisory, or similar service, which 
is provided by Allfirst to the ARK Funds, including but not limited to 
custodial, accounting, brokerage, administrative, or any other service.
    (j) The term ``Termination Form'' means the form supplied to the 
Second Fiduciary which expressly provides an election to the Second 
Fiduciary to terminate on behalf of a Client Plan the authorization 
described in paragraph (i) of Section I. Such Termination Form may be 
used at will by the Second Fiduciary to terminate an authorization 
without penalty to the Client Plan and to notify Allfirst in writing to 
effect a termination by selling the shares of the ARK Funds held by the 
Client Plan requesting such termination within one business day 
following receipt by Allfirst of the form; provided that if, due to 
circumstances beyond the control of Allfirst, the sale cannot be 
executed within one business day, Allfirst shall have one additional 
business day to complete such sale.

EFFECTIVE DATE: The proposed exemption, if granted, will be effective 
as of November 13, 1998, the date that Dauphin Deposit Bank and Trust 
Company ceased to exist as a separate bank as a result of its 
acquisition by First Maryland.

Summary of Facts and Representations

    1. Allfirst is currently a subsidiary of First Maryland Bancorp, a 
Maryland corporation and bank holding company registered under the Bank 
Holding Company Act of 1956. Prior to June 28, 1999, Allfirst was doing 
business under the name ``First National Bank of Maryland'' (i.e., 
First Maryland). The

[[Page 57132]]

applicant represents that First Maryland changed its name to ``Allfirst 
Bank'' effective June 28, 1999. The applicant states that as of 
September 21, 1999, there have been no further name changes. Thus, all 
representations made by Allfirst are meant to apply to First Maryland 
for the period from November 13, 1998, the effective date of this 
proposed exemption, until June 28, 1999.
    First Maryland Bancorp serves, through its banking, trust company 
and investment management affiliates, as trustee, investment manager 
and/or custodian to employee benefit plans. As of December 31, 1997, 
these affiliates collectively provided trust services to approximately 
800 employee benefit trusts, and had total assets under management of 
approximately $16 billion. As of that date, First Maryland Bancorp had 
consolidated total assets of $17.8 billion.
    Prior to November 13, 1998, First Maryland Bancorp wholly-owned the 
following banks and trust companies: (i) The York Bank & Trust Company 
(a Pennsylvania-chartered bank, referred to hereafter as York Bank); 
(ii) First Omni Bank, N.A. (a national banking association); (iii) 
First National Bank of Maryland (a national banking association); (iv) 
Dauphin Deposit Bank & Trust Company (a Pennsylvania-chartered bank, 
acquired July 8, 1997, referred to hereafter as ``Dauphin''); and (v) 
FMB Trust Company, N.A. (a non-depository trust company wholly-owned by 
First Maryland).
    Effective November 13, 1998, Dauphin and York Bank were merged into 
First Maryland. Following this merger, the trust and investment 
advisory business formerly conducted by Dauphin was conducted by First 
Maryland and its trust and investment advisory subsidiaries.
    First Maryland (i.e., Allfirst, as of June 28, 1999) also owns 
First Maryland Brokerage Corp., a brokerage firm, and Allied Investment 
Advisors, Inc. (Allied), a registered investment adviser that serves as 
investment adviser to the ARK Funds. As of June 30, 1998, Allied had 
assets under management of approximately $11.1 billion.
    First Maryland Bancorp is controlled by Allied Irish Banks, p.l.c., 
which owns 100% of First Maryland Bancorp's outstanding common stock.
    2. In 1996, Dauphin obtained a prohibited transaction exemption 
from the Department (see Prohibited Transaction Exemption (PTE) 96-45 
(61 FR 28244, June 4, 1996). Section I of PTE 96-45 permits the in-kind 
transfer of assets of plans for which Dauphin acted as a fiduciary (the 
Client Plans), other than plans established and maintained by Dauphin 
(Bank Plans), that were held in certain collective investment funds 
(CIFs) maintained by Dauphin, in exchange for shares of the Marketvest 
Funds, open-end investment companies registered under the 1940 Act, in 
situations where Dauphin acted as investment advisor for such Funds, as 
well as for providing certain ``secondary services'' to such Funds (as 
defined therein), in connection with the termination of such CIFs. 
Section II of PTE 96-45 permits the receipt of fees by Dauphin from the 
Marketvest Funds, or any other diversified open-end investment company 
registered under the 1940 Act for which Dauphin serves as an investment 
adviser, for acting as an investment adviser for such Funds as well as 
for providing other services to the Funds which are ``secondary 
services'' (as defined therein), in connection with the investment by 
the Client Plans in shares of such Funds.
    In July 1997, Dauphin became a subsidiary of First Maryland, and in 
March 1998, the Marketvest Funds were merged into First Maryland's 
family of mutual funds. Dauphin ceased to exist as a separate bank as 
of November 13, 1998. Therefore, First Maryland requested a new 
exemption to enable it to obtain exemptive relief similar to the relief 
granted by the Department to Dauphin in Section II of PTE 96-45 for the 
receipt of fees by Dauphin from the Marketvest Funds. With respect to 
the relief provided to Dauphin in Section I of PTE 96-45, it should be 
noted that the Department granted a class exemption in August 1997 for 
collective investment fund conversion transactions (see PTE 97-41, 62 
FR 42830, August 8, 1997). Thus, the relief provided to Dauphin in PTE 
96-45, Section I, for in-kind transfers of CIF assets to Funds, would 
be available under PTE 97-41 to First Maryland as of November 13, 1998, 
and is available to Allfirst as of June 28, 1999, if the conditions of 
that class exemption are met.
    However, First Maryland (i.e., Allfirst), like Dauphin and as the 
acquirer of Dauphin's business, serves a number of employee benefit 
plan clients in the capacity of trustee, investment manager, and/or 
custodian. The assets of some of these plans are investment in the ARK 
Funds, a series of mutual fund portfolios advised by an affiliate of 
Allfirst, as discussed further below. As a result, this proposed 
exemption concerns the relief needed by First Maryland, as of November 
13, 1998, and Allfirst, as of June 28, 1999, for the receipt of fees by 
such entities from the ARK Funds for investment advisory and other 
services to such Funds.
    3. As noted above, Allfirst acts as a trustee, directed trustee, 
investment manager, and/or custodian for a number of plans (referred to 
herein as ``the Client Plans''). The Client Plans may include various 
pension, profit sharing, and stock bonus plans, as well as voluntary 
employees' beneficiary associations, supplemental unemployment benefit 
plans, simplified employee benefit plans, retirement plans for self-
employed individuals (i.e. Keogh Plans) and individual retirement 
accounts (IRAs). Some of the Client Plans may be participant-directed 
individual account plans.
    As custodian of a Client Plan, Allfirst is responsible for 
maintaining custody over all or a portion of the Client Plan's assets, 
for providing trust accounting and valuation services, for asset and 
transaction reporting, and for execution and settlement of directed 
transactions. Where Allfirst serves as trustee or directed trustee, it 
is responsible for ownership of the assets of the Client Plan, and may 
provide additional trust services such as benefit payments, loan 
processing, and participant accounting. Where Allfirst is also acting 
as the investment manager, Allfirst has investment discretion over the 
Client Plan's assets and is responsible for implementing the Plan's 
funding policies and investment objectives, executing transactions, and 
periodic performance measurements.
    The Client Plans pay fees in accordance with fee schedules 
negotiated with Allfirst. Fees vary from fixed amounts to asset-based 
amounts, depending on the level of services provided, and may include 
further charges for additional trust services such as processing 
benefit payments.
    The specific Client Plans of Allfirst to which this proposed 
exemption, if granted, would apply are those whose assets were invested 
in the ARK Funds as of November 13, 1998, those whose assets have been 
invested in such Funds since that date, and those whose assets will be 
invested in such Funds in the future. However, Allfirst does not seek 
relief for investments in the Funds by any employee benefit plans 
established and maintained by Allfirst for its own employees (Allfirst 
Plans).1
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    \1\ Allfirst represents that it will comply with the 
requirements of Prohibited Transaction Exemption (PTE) 77-3, 42 FR 
18734 (April 8, 1977), with respect to any investments in the Funds 
made by the Allfirst Plans. PTE 77-3 permits the acquisition or sale 
of shares of a registered, open-end investment company by an 
employee benefit plan covering only employees of such investment 
company, employees of the investment adviser or principal 
underwriter for such investment company, or employees of any 
affiliated person (as defined therein) of such investment adviser or 
principal underwriter, provided certain conditions are met. The 
Department is expressing no opinion in this proposed exemption 
regarding whether any of the transactions with the Funds by the 
Allfirst Plans would be covered by PTE 77-3.

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[[Page 57133]]

    4. The ARK Funds are registered as an open-end investment company 
with the SEC under the 1940 Act. The ARK Funds consist of a series of 
investment portfolios (each a ``Fund'') representing distinct 
investment vehicles. Each ARK Fund will have its own prospectus or a 
joint prospectus with one or more other ARK Fund(s). The shares of each 
ARK Fund will represent a proportionate interest in the assets of that 
Fund.
    The overall management of the ARK Funds, including the negotiation 
of investment advisory contracts, will rest with each Fund's Board of 
Directors, more than a majority of whose members will be independent of 
Allfirst. The Board of Directors will be elected by the shareholders of 
the Funds. Allied, which is a wholly-owned subsidiary of Allfirst, 
serves as the investment adviser to each ARK Fund and will receive 
investment advisory fees from each Fund that will vary between 0.20% 
and 1.00% of the Fund's average net assets on an annual basis, 
depending on the particular Fund. However, these fees will be subject 
to voluntary waivers by Allfirst and initially will be no more than 
0.87% of the Fund's average net assets. FMB Trust Company, another 
First Maryland subsidiary, serves as custodian of the ARK Funds, for 
which it receives a custodial services fee and also provides sub-
administration services for a fee.
    The other service-providers to the Funds will be independent of and 
unaffiliated with Allfirst. Such service-providers currently will 
include: (i) The Fund Administrator, SEI Investments Mutual Fund 
Services; (ii) the Fund Distributor, SEI Investments Distribution Co.; 
and (iii) the Transfer Agent, SEI Investments Management Corporation. 
The ARK Funds also may pay shareholder servicing fees of up to 0.15% on 
certain classes of shares.
    The Funds will be able to charge a distribution fee of 0.25% of a 
Fund's average net assets, pursuant to Rule 12b-1 under the 1940 Act, 
for certain classes of shares. However, Allfirst represents that such 
12b-1 fees will not be charged to any class of shares invested in by 
the Client Plans. Therefore, Allfirst will not receive any fees payable 
pursuant to Rule 12b-1 under the 1940 Act in connection with the 
transactions covered by this proposed exemption.
    5. Allfirst is making the ARK Funds available to the Client Plans 
because it believes that there are material advantages to the Client 
Plans from the use of the ARK Funds, and Allfirst's customers are 
interested in having mutual funds available as investment vehicles for 
their employee benefit plan trust accounts. The ARK Funds are valued on 
a daily basis, which permits: (i) Immediate investment of Plan 
contributions in varied types of investments; (ii) greater flexibility 
in transferring assets from one type of investment to another; and 
(iii) daily redemption of investments for purposes of making 
distributions. In addition, information concerning the investment 
performance of the ARK Funds is available each day in newspapers of 
general circulation, which allow Client Plan sponsors and participants 
to monitor the performance of their investments on a daily basis. 
Furthermore, shares of the ARK Funds can be given to Client Plan 
participants in plan distributions, thus avoiding the expense and delay 
of liquidating plan investments and facilitating roll-overs into IRAs. 
At the present time, Allfirst expects that the Client Plans will be 
able to continue making direct purchases of ARK Fund shares for cash on 
an ongoing basis.
    Allfirst states that the price that will be paid or received by a 
Client Plan for shares in a Fund will be the net asset value per share 
at the time of the transaction, as defined in Section III(f), and will 
be the same price which will be paid or received for the shares by any 
other investor at that time. In addition, Allfirst states that no sales 
commissions or redemption fees will be charged in connection with the 
purchase or sale of Fund shares by the Client Plans.
    6. Prior to investing any Client Plan's assets in an ARK Fund, 
Allfirst will obtain the approval of a Second Fiduciary acting for the 
Client Plan. The Second Fiduciary generally will be the Client Plan's 
named fiduciary, trustee (if other than Allfirst), or the sponsoring 
employer. Allfirst will provide the Second Fiduciary with a current 
prospectus for the Fund and a written statement giving full disclosure 
of the fee structure under which either Allfirst's investment advisory 
and other fees will be credited back to the Client Plan or the Plan-
level investment management fees will be waived. The disclosure 
statement and the letter that precedes the disclosure statement will 
describe why Allfirst believes the investment of a Client Plan's assets 
in the ARK Funds may be appropriate. Allfirst states that these 
disclosures will be based on the requirements of PTE 77-4 (42 FR 18732, 
April 8, 1977).2
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    \2\ PTE 77-4, in pertinent part, permits the purchase and sale 
by an employee benefit plan of shares of a registered, open-end 
investment company when a fiduciary with respect to the plan is also 
the investment adviser for the investment company, provided that, 
among other things, the plan does not pay an investment management, 
investment advisory, or similar fee with respect to the plan assets 
invested in such shares for the entire period of such investment. 
Section II(c) of PTE 77-4 states that this condition does not 
preclude the payment of investment advisory fees by the investment 
company under the terms of an investment advisory agreement adopted 
in accordance with section 15 of the Investment Company Act of 1940. 
Section II(c) states further that this condition does not preclude 
payment of an investment advisory fee by the plan based on total 
plan assets from which a credit has been subtracted representing the 
plan's pro rata share of investment advisory fees paid by the 
investment company.
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    On the basis of such information, the Second Fiduciary will 
authorize Allfirst to invest the Client Plan's assets in the ARK Funds 
and to receive fees from the ARK Funds.
    7. Allfirst will charge investment advisory fees to the ARK Funds 
in accordance with the investment advisory agreements between Allfirst 
and the ARK Funds. These agreements will be approved by the independent 
members of the Board of Directors of the ARK Funds, in accordance with 
the applicable provisions of the 1940 Act, and any subsequent changes 
in the fees will have to be approved by such Directors. These fees also 
will not be increased without the approval of the shareholders of the 
affected ARK Funds. The fees will be paid monthly by the ARK Funds. In 
addition, FMB Trust Company, an affiliate of Allfirst, will charge fees 
for custody services, or other services, it will provide to the ARK 
Funds in accordance with a custodial services agreement and other 
agreements negotiated with the ARK Funds.
    Allfirst will avoid charging the Client Plans duplicative 
investment management fees by either: (a) Crediting the Client Plan's 
pro rata share of the Fund advisory fees back to the Client Plan; or 
(b) waiving any investment management fee for the Client Plan at the 
Plan-level.
    The ``crediting'' fee structure will be designed to preserve the 
negotiated fee rates of the Client Plans so as to minimize the impact 
of the change to the ARK Funds on a Client Plan's fees. Allfirst will 
charge a Client Plan its standard fees as applicable to the particular 
Client Plan for serving as trustee, directed trustee, investment 
manager, or custodian. At the beginning of each month, and in no event 
later than the same day as the payment of investment advisory fees by 
the ARK

[[Page 57134]]

Funds to Allfirst for the previous month, Allfirst will credit to each 
Client Plan in cash its proportionate share of all investment advisory 
fees charged by Allfirst to the ARK Funds for the previous month. The 
credit will include the Client Plan's share of any investment advisory 
fees paid by Allfirst to third party sub-advisors.
    Allfirst states that the credit will not include the custodial fees 
payable by the ARK Funds to FMB Trust Company, or any other affiliate 
of Allfirst who may serve in that capacity in the future, because 
custodial services rendered at the Fund-level will not be duplicative 
of any services provided directly to the Client Plan. The custodial 
services to the Fund will involve maintaining custody and providing 
reporting relative to the individual securities owned by the Fund. The 
services to the Client Plan will involve maintaining custody over all 
or a portion of the Client Plan's assets (which may include Fund 
shares, but not the assets underlying the Fund shares), providing trust 
accounting and participant accounting (if applicable), providing asset 
and transaction reporting, execution and settlement of directed 
transactions, processing benefit payments and loans, maintaining 
participant accounts, valuing plan assets, conducting non-
discrimination testing, preparing Forms 5500 and other required 
filings, and producing statements and reports regarding overall plan 
and individual participant holdings. Allfirst states that these trust 
services will be necessary regardless of whether the Client Plan's 
assets are invested in the ARK Funds. Thus, Allfirst represents that 
its proposed receipt of fees for both secondary services at the Fund-
level and trustee services at the Plan-level will not involve the 
receipt of ``double fees'' for duplicative services to the Client Plans 
because a Fund will be charged for custody and other services relative 
to the individual securities owned by the Fund, while a Client Plan 
will charged for the maintenance of Plan accounts reflecting ownership 
of the Fund shares and other assets.3
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    \3\ The Department notes that although certain transactions and 
fee arrangements are the subject of an administrative exemption, a 
Client Plan fiduciary must still adhere to the general fiduciary 
responsibility provisions of section 404 of the Act. Thus, the 
Department cautions the fiduciaries of the Client Plans investing in 
the ARK Funds that they will have an ongoing duty under section 404 
of the Act to monitor the services provided to the Client Plans to 
ensure that the fees paid by the Client Plans for such services are 
reasonable in relation to the value of the services provided. Such 
responsibilities will include determinations that the services 
provided are not duplicative and that the fees are reasonable in 
light of the level of services provided.
    The Department also notes that Allfirst, as a trustee and 
investment manager for a Client Plan in connection with the decision 
to invest Client Plan assets in the ARK Funds, will have a fiduciary 
duty to monitor all fees paid by a Fund to Allfirst, its affiliates, 
and third parties for services provided to the Fund to ensure that 
the totality of such fees will be reasonable and will not involve 
the payment of any ``double'' fees for duplicative services to the 
Fund by such parties.
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    Allfirst represents that for each Client Plan, the combined total 
of all fees it will receive directly and indirectly from the Client 
Plans for the provision of services to the Plans and/or to the ARK 
Funds will not be in excess of ``reasonable compensation'' within the 
meaning of section 408(b)(2) of the Act.4
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    \4\ The Department is expressing no opinion in this proposed 
exemption as to whether the fee arrangements discussed herein will 
comply with section 408(b)(2) of the Act and the regulations 
thereunder (see 29 CFR 2550.408b-2).
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    8. Allfirst will maintain a system of internal accounting controls 
for the crediting of all fees to the Client Plans. In addition, 
Allfirst has retained the services of PricewaterhouseCoopers LLP (the 
Auditor), an independent accounting firm, to audit annually the 
crediting of fees to the Client Plans under this program. Such audits 
will provide independent verification of the proper crediting to the 
Client Plans.
    In its annual audit of the credit program, the Auditor will: (i) 
Review and test compliance with the specific operational controls and 
procedures established by Allfirst for making the credits; (ii) verify 
on a test basis the monthly credit factors transmitted to Allfirst by 
the ARK Funds; (iii) verify on a test basis the proper assignment of 
identification fields to the Client Plans; (iv) verify on a test basis 
the credits paid in total to the sum of all credits paid to each Client 
Plan; and (v) recompute, on a test basis, the amount of the credit 
determined for selected Client Plans and verify that the credit was 
made to the proper Client Plan account.
    In the event either the internal audit by Allfirst or the 
independent audit by the Auditor identifies an error made in the 
crediting of fees to the Client Plans, Allfirst will correct the error. 
With respect to any shortfall in credited fees to a Client Plan, 
Allfirst will make a cash payment to the Client Plan equal to the 
amount of the error plus interest paid at money market rates offered by 
Allfirst for the period involved. Any excess credits made to a Client 
Plan will be corrected by an appropriate deduction from the Client Plan 
account or reallocation of cash during the next payment period after 
discovery of the error to reflect accurately the amount of total 
credits due to the Client Plan for the period involved.
    9. Allfirst represents that the use of the ``crediting'' fee 
structure will be available for any investments made by Client Plans in 
the ARK Funds. The use of this fee structure must be approved prior to 
the Client Plan's initial investment in the ARK Funds by a Second 
Fiduciary acting for the Client Plan. The Second Fiduciary will receive 
full and detailed written disclosure of information concerning the ARK 
Funds in advance of any investment by the Client Plan in the ARK Funds, 
including the Fund prospectuses as well as a separate statement 
describing the crediting fee structure.
    After consideration of such information, the Second Fiduciary will 
authorize in writing the investment of assets of the Client Plan in one 
or more specified ARK Funds and the fees to be paid by the ARK Funds to 
Allfirst. In addition, the Second Fiduciary of each Client Plan 
invested in a particular Fund will receive full written disclosure, in 
a statement separate from the Fund prospectus, of any proposed 
increases in the rates of fees charged by Allfirst to the ARK Funds for 
secondary services which are above the rates reflected in the Fund 
prospectuses, at least thirty (30) days prior to the effective date of 
such increase.
    In the event that Allfirst provides an additional secondary service 
for which a fee is charged or there is an increase in the rate of fees 
paid by the ARK Funds to Allfirst for any secondary service, including 
any increase resulting from a decrease in the number or kind of 
services performed by Allfirst for such fees in connection with a 
previously authorized secondary service, Allfirst will, at least 30 
days in advance of the implementation of such additional service or fee 
increase, provide written notice to the Second Fiduciary explaining the 
nature and the amount of the additional service for which a fee will be 
charged or the nature and amount of the increase in fees of the 
affected Fund.5 Such notice

[[Page 57135]]

will be made separate from the Fund prospectus and will be accompanied 
by a Termination Form. The Second Fiduciary also will receive full 
written disclosure in a Fund prospectus or otherwise of any increases 
in the rate of fees charged by Allfirst to the ARK Funds for investment 
advisory services, even though such fees will be credited to the 
investing Client Plans.
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    \5\ With respect to increases in fees, the Department notes that 
an increase in the amount of a fee for an existing secondary service 
(other than through an increase in the value of the underlying 
assets in the ARK Funds), or the imposition of a fee for a newly-
established secondary service, shall be considered an increase in 
the rate of such fees. However, in the event a secondary service fee 
has already been described in writing to the Second Fiduciary and 
the Second Fiduciary has provided authorization for the fee, and 
such fee was temporarily waived, no further action by Allfirst would 
be required in order for the Bank to receive such fee at a later 
time. Thus, for example, no further disclosure would be necessary if 
Allfirst had received authorization for a fee for custodial services 
from Plan investors and subsequently determined to waive the fee for 
a period of time in order to attract new investors but later charged 
the fee.
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    The authorizations made by a Second Fiduciary of any Client Plan 
will be terminable at will, without penalty to the Client Plan, upon 
receipt by Allfirst of written notice of termination. A form (the 
Termination Form) expressly providing an election to terminate the 
authorization, with instructions on the use of the form, will be 
supplied to the Second Fiduciary no less than annually. However, the 
Termination Form will not need to be supplied to the Second Fiduciary 
for an annual reauthorization sooner than six months after such 
Termination Form is supplied for an additional service or for an 
increase in fees (as discussed above), unless another Termination Form 
is required to disclose additional services or fee increases. The 
Termination Form will instruct the Second Fiduciary that the 
authorization is terminable at will by the Client Plan, without penalty 
to the Client Plan, upon receipt by Allfirst of written notice from the 
Second Fiduciary, and that failure to return the Termination Form will 
result in the continued authorization of Allfirst to engage in the 
subject transactions on behalf of the Client Plan.
    The Termination Form will be used to notify Allfirst in writing to 
effect a termination by selling the shares of the ARK Funds held by the 
Client Plan, requesting such termination within one business day 
following receipt by Allfirst of the form. If, due to circumstances 
beyond the control of Allfirst, the sale cannot be executed within one 
business day, Allfirst will be obligated to complete the sale within 
the next business day.
    10. Allfirst represents that for smaller Client Plans, the Fund-
level investment advisory fees generally do not exceed the Plan-level 
investment management fees, so that the Client Plan will not benefit 
from a Fund-level fee credit. In these cases, if the Second Fiduciary 
authorizes the fee structure, Allfirst will waive the Plan-level 
investment management fees that would otherwise be charged for the 
Client Plan's assets invested in the ARK Funds, so that the Plan-level 
fees will be offset and the Client Plan will pay only one investment 
management fee for those assets, at the Fund-level. This fee structure, 
which is one of the fee structures described in PTE 77-4, will ensure 
that Allfirst does not receive any additional investment management, 
advisory or similar fee as a result of investments in the ARK Funds by 
the Client Plans.
    Disclosures, approvals, and notifications with regard to any 
changes in fees or secondary services will be handled in the same 
manner as for the fee structure described in paragraph 10 above, with 
one exception. The exception is that notifications with regard to 
increases in rates of investment advisory fees for the ARK Funds will 
conform to the procedures for increases in rates of secondary service 
fees as described above. Therefore, in such instances, there will be 
prior written notification of the fee increase to the Second Fiduciary 
for the Client Plan and a Termination Form will be provided. The reason 
for the exception is that the total fees paid by the Client Plan, under 
this fee structure, will be directly affected by any increases in Fund-
level investment advisory fees because such fees will not be credited 
back to the Client Plan.
    11. Allfirst states that a Second Fiduciary will always receive a 
written statement giving full disclosure of the fee structures prior to 
any investment in the ARK Funds. The disclosure statement will explain 
why Allfirst believes that the investment of assets of the Client Plan 
in the ARK Funds may be appropriate. The disclosure statement also will 
describe whether there are any limitations on Allfirst with respect to 
which Client Plan assets may be invested in shares of the ARK Funds 
and, if so, the nature of such limitations.6
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    \6\ See section II(d) of PTE 77-4 which requires, in pertinent 
part, that an independent plan fiduciary receive a current 
prospectus issued by the investment company and a full and detailed 
written disclosure of the investment advisory and other fees charged 
to or paid by the plan and the investment company, including a 
discussion of whether there are any limitations on the fiduciary/
investment adviser with respect to which plan assets may be invested 
in shares of the investment company and, if so, the nature of such 
limitations.
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    12. On an annual basis, the Second Fiduciary of a Client Plan 
investing in the ARK Funds will receive copies of the current Fund 
prospectuses and, upon such fiduciary's request, a copy of the 
Statement of Additional Information for such ARK Funds, as well as 
copies of the annual financial disclosure reports containing 
information about the Fund and independent auditor findings.
    In addition, if the ARK Funds obtain brokerage services in the 
future from any broker-dealers that are affiliates of Allfirst, 
Allfirst will provide at least annually to the Second Fiduciary of 
Client Plans investing in the ARK Funds written disclosures indicating 
the following: (i) The total, expressed in dollars, of brokerage 
commissions of each Fund that are paid to Allfirst by such Fund; (ii) 
the total, expressed in dollars, of brokerage commissions of each Fund 
that are paid by such Fund to brokerage firms unrelated to Allfirst; 
(iii) the average brokerage commissions per share, expressed as cents 
per share, paid to Allfirst by each Fund portfolio; and (iv) the 
average brokerage commissions per share, expressed as cents per share, 
paid by each Fund portfolio to brokerage firms unrelated to Allfirst. 
All such brokerage services would be provided in accordance with 
section 17(e) of the 1940 Act and Rule 17e-1 thereunder. Such 
provisions require, among other things, that the commissions, fees, or 
other remuneration for any brokerage services provided by an affiliate 
of an investment company's investment adviser be reasonable and fair 
compared to what other brokers receive for comparable transactions 
involving similar securities.
    13. No sales commissions will be paid by the Client Plans in 
connection with the purchase or sale of shares of the ARK Funds. In 
addition, no redemption fees will be paid in connection with the sale 
of shares by the Client Plans to the ARK Funds. Allfirst states that it 
will not receive any fees payable pursuant to Rule 12b-1 under the 1940 
Act in connection with the transactions. Allfirst states further that 
all other dealings between the Client Plans and the ARK Funds will be 
on a basis no less favorable to the Client Plans than such dealings 
will be with the other shareholders of the ARK Funds.
    14. In summary, Allfirst represents that the transactions described 
herein will satisfy the statutory criteria of section 408(a) of the Act 
because: (a) The ARK Funds will provide the Client Plans with a more 
effective investment vehicle than collective investment ARK Funds 
maintained by Allfirst without any increase in investment management, 
advisory, or similar fees paid to Allfirst; (b) Allfirst will require 
annual audits by an independent accounting firm to verify the proper 
crediting to the Client Plans of investment advisory fees charged by 
Allfirst to the ARK Funds; (c) with respect to any investments in a 
Fund by the Client Plans and the payment of any fees by the Fund to 
Allfirst, a Second Fiduciary will receive full written disclosure of 
information concerning the Fund, including a current prospectus and a 
statement describing the fee structure, and will authorize in writing 
the investment of the Client

[[Page 57136]]

Plan's assets in the Fund and the fees paid by the Fund to Allfirst; 
(d) any authorizations made by a Client Plan regarding investments in a 
Fund and fees to be paid to Allfirst, or any increases in the rates of 
fees for secondary services which will be retained by Allfirst, will be 
terminable at will by the Client Plan, without penalty to the Client 
Plan, upon receipt by Allfirst of written notice of termination from 
the Second Fiduciary; (e) no commissions or redemption fees will be 
paid by the Client Plan in connection with either the acquisition of 
Fund shares or the sale of Fund shares; (f) Allfirst will not receive 
any fees payable pursuant to Rule 12b-1 under the 1940 Act in 
connection with the transactions; and (g) all dealings between the 
Client Plans and the ARK Funds will be on a basis which is at least as 
favorable to the Client Plans as such dealings are with other 
shareholders of the ARK Funds.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams or Ms. Karin Weng of 
the Department, telephone (202) 219-8194 or 219-8881, respectively. 
(These are not toll-free numbers.)

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

[Application No. D-10718]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990).7
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    \7\ For purposes of this proposed exemption, reference to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
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Section I--Covered Transactions
    If the exemption is granted, 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 of John 
Hancock Financial Services, Inc., the holding company for John Hancock 
(the Holding Company); or (2) the receipt of cash or policy credits, by 
or on behalf of any eligible policyholder (the Eligible Policyholder) 
of John Hancock which is an employee benefit plan (the Plan), subject 
to applicable provisions of the Act and/or the Code, other than certain 
Eligible Policyholders which are Plans maintained by John Hancock or an 
affiliate for their own employees (the John Hancock Plans), in exchange 
for such Eligible Policyholder's membership interest in John Hancock, 
in accordance with the terms of a plan of reorganization (the Plan of 
Reorganization) adopted by John Hancock and implemented pursuant to 
Chapter 175 of the Massachusetts General Laws.
    In addition, the restrictions of section 406(a)(1)(E) and (a)(2) 
and section 407(a)(2) of the Act shall not apply to the receipt or 
holding, by the John Hancock Plans, of employer securities in the form 
of excess Holding Company stock, in accordance with the terms of the 
Plan of Reorganization.
    This proposed exemption is subject to the conditions set forth 
below in Section II.
Section II--General Conditions
    (a) The Plan of Reorganization is implemented in accordance with 
procedural and substantive safeguards that are imposed under 
Massachusetts Insurance Law and is subject to review and supervision by 
the Massachusetts Commissioner of Insurance (the Commissioner).
    (b) The Commissioner reviews the terms of the options that are 
provided to Eligible Policyholders of John Hancock as part of such 
Commissioner's review of the Plan of Reorganization, and the 
Superintendent only approves the Plan of Reorganization following a 
determination that such Plan of Reorganization is fair and equitable to 
all Eligible Policyholders and is not detrimental to the public.
    (c) Both the Commissioner and the Superintendent concur on the 
terms of the Plan of Reorganization.
    (d) Each Eligible Policyholder has an opportunity to vote to 
approve the Plan of Reorganization after full written disclosure is 
given to the Eligible Policyholder by John Hancock.
    (e) One or more independent fiduciaries of a Plan that is an 
Eligible Policyholder receives Holding Company stock, cash or policy 
credits pursuant to the terms of the Plan of Reorganization and neither 
John Hancock nor any of its affiliates exercises any discretion or 
provides ``investment advice,'' as that term is defined in 29 CFR 
2510.3-21(c), with respect to such acquisition.
    (f) After each Eligible Policyholder is allocated 17 shares of 
Holding Company stock, 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 John Hancock which formulas have been 
approved by the Commissioner.
    (g) With respect to a John Hancock Plan, where the consideration 
may be in the form of Holding Company stock an independent Plan 
fiduciary --
    (1) Determines whether the Plan of Reorganization is in the best 
interest of the John Hancock Plans and their participants and 
beneficiaries.
    (2) Votes at the special meeting of Eligible Policyholders on the 
proposal to approve or not to approve the Plan of Reorganization.
    (3) If the vote is to approve the Plan or Reorganization,
    (i) Decides whether the affected John Hancock Plan should receive 
Holding Company stock or cash (should the latter option be available) 
and receives such consideration on behalf of the affected John Hancock 
Plan;
    (ii) Monitors, on behalf of the affected John Hancock Plan, the 
acquisition and holding of the shares of any Holding Company stock 
received;
    (iii) Makes determinations on behalf of the John Hancock Plan with 
respect to voting and the continued holding of the shares of Holding 
Company stock received by such Plan; and
    (iv) Disposes of any Holding Company stock held by the John Hancock 
Plan which exceeds the limitation of section 407(a)(2) of the Act as 
reasonably as practicable but in no event later than six months year 
following the effective date of the demutualization;
    (v) Takes all actions that are necessary and appropriate to 
safeguard the interests of the John Hancock Plans; and
    (vi) Provides the Department with a complete and detailed final 
report as it relates to the John Hancock Plans prior to the effective 
date of the demutualization.
    (h) 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.
    (i) No Eligible Policyholder pays any brokerage commissions or fees 
in connection with their receipt of Holding Company stock or in 
connection with the implementation of the commission-free sales and 
purchase programs.
    (j) All of John Hancock's policyholder obligations remain in force 
and are not affected by the Plan of Reorganization.
Section III--Definitions
    For purposes of this proposed exemption:
    (a) The term ``John Hancock'' means The John Hancock Mutual Life 
Insurance Company and any affiliate of John Hancock as defined in 
paragraph (b) of this Section III.

[[Page 57137]]

    (b) An ``affiliate'' of John Hancock includes --
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with John Hancock (For 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 whose 
name appears on the conversion date on John Hancock's records as the 
owner of a policy under which there is a right to vote and which, on 
both the December 31 immediately preceding the conversion date and the 
date the John Hancock's Board of Directors first votes to convert to 
stock form, is in full force for its full basic benefits with no unpaid 
premiums or consideration at the expiration of any applicable grace 
period, or which is being continued under a nonforfeiture benefit and 
continues to be eligible for participation in John Hancock's annual 
distribution of divisible surplus.
    (d) The term ``policy credit'' means: (1) For an individual or 
joint ordinary life insurance policy, an increase to the paid-up 
dividend addition value; and (2) for all other individual or joint life 
policies and annuities, (i) if the policy or contract has a defined 
account value, an increase in the account value, or (ii) if the policy 
or contract does not have a defined account value, an increase to the 
dividend accumulation fund.

Summary of Facts and Representations

    1. John Hancock is a mutual life insurance company organized under 
the laws of the Commonwealth of Massachusetts on April 18, 1862. As of 
December 31, 1998, John Hancock and its subsidiaries had total assets 
in excess of $76 billion and had approximately $310 billion of 
individual life insurance in force.
    John Hancock has a number of subsidiaries and affiliates that 
provide a variety of financial services, including investment 
management and brokerage services. John Hancock and its investment 
management subsidiaries had approximately $124.4 billion in assets 
under management as of December 31, 1998. As a mutual life insurance 
company, John Hancock has no stockholders. Instead, policyholders of 
John Hancock are ``members'' of the company and in that capacity, they 
are entitled to vote to elect the directors of the company and would be 
entitled to share in the assets of the company if it were liquidated.
    2. John Hancock and its affiliates provide a variety of fiduciary 
and other services to employee benefit plans covered under relevant 
provisions of the Act and the Code. By providing these services John 
Hancock may be considered a party in interest with respect to such 
Plans under section 3(14)(A) and (B) of the Act or the related 
derivative provisions. The services provided by John Hancock and its 
affiliates to Plans include plan administration, investment management 
and related services. Many of the Plans to which John Hancock provides 
services are also John Hancock policyholders. As of December 31, 1997 
(the most recent date such information is available), John Hancock had 
issued over 27,000 outstanding policies and contracts to employee 
pension and welfare benefit plans. These Plans include defined benefit 
pension plans, defined contribution plans (such as section 401(k) 
plans), and welfare benefit plans providing welfare benefit plan 
coverage such as group life, short- and long-term disability, 
accidental death and dismemberment and group health coverage.
    3. John Hancock and its affiliates also sponsor the following 
Plans, which are collectively referred to herein as ``the John Hancock 
Plans'':
    (a) The John Hancock Mutual Life Insurance Company Pension Plan 
(the Pension Plan) is a defined benefit pension plan that benefits the 
home office and the field employees of the company as well as its 
unionized managerial agents and employees of most of John Hancock's 
domestic subsidiaries. The trustee of the Pension Plan is Investors 
Bank & Trust Company (Investors). Investment decisions for the Pension 
Plan are made by either of two internal committees within John Hancock, 
i.e., the Directors' Employee Benefits Plan Committee or the Plan 
Investment Advisory Committee. As of December 31, 1998, the Pension 
Plan had approximately 26,818 participants and total assets of 
$2,056,832,491.
    (b) The Pension Plan for Personnel in the General Agencies of John 
Hancock Mutual Life Insurance Company (the GA Pension Plan) is a 
multiple employer, defined benefit pension plan that covers statutory 
employees of John Hancock's general agencies. The trustee of the GA 
Pension Plan is Investors. The decisionmakers with respect to 
investments for the GA Pension Plan are the two internal committees 
identified above in paragraph 3(a). As of December 31, 1997 (the most 
recent date such information is available), the GA Pension Plan had 
4,668 participants and total assets of $186,343,278.
    (c) The Investment-Incentive Plan for John Hancock Employees (TIP) 
is a section 401(k) profit sharing plan covering home office employees 
of John Hancock as well as certain domestic subsidiaries. The trustee 
of TIP is Investors. Because TIP is participant-directed and intended 
to qualify under section 404(c) of the Act, its investment options are 
selected by two internal committees within John Hancock. They are the 
Directors' Employee Benefits Plan Committee and the Savings Plan 
Investment Committee. As of December 31, 1998, TIP had 8,655 
participants and total assets of $848,545,190.
    (d) The John Hancock Savings and Investment Plan (SIP) is a section 
401(k) profit sharing plan covering unionized managerial agents of John 
Hancock as well as certain other employees in the managerial agency 
system. SIP shares the same trustee and decision-making committees as 
TIP. As of December 31, 1998, SIP had 2,145 participants and total 
assets of $135,847,910.
    (e) The John Hancock Mutual Life Insurance Company Employee Welfare 
Plan (the Employee Welfare Plan) is a welfare benefit plan maintained 
by John Hancock and its employees and those of its domestic 
subsidiaries. The Employee Welfare Plan provides health, life 
insurance, dental, vision, temporary and long-term disability, and 
long-term care coverage. The Employee Welfare Plan has 3 trustees, each 
of whom is an officer of John Hancock. Investment decisions for the 
non-insurance plan assets of the Employee Welfare Plan are made by the 
same investment committees as the Pension Plan described above in 
paragraph 3(a). As of December 31, 1997, the Employee Welfare Plan had 
17,148 participants (including beneficiaries of deceased participants) 
and total assets of $87,066,100.
    (f) The GA Association Employee Welfare Plan (the GA Employee 
Welfare Plan is a multiple employer welfare benefit plan maintained by 
John Hancock to enable General Agents who are members of the John 
Hancock General Agency Association to provide benefits to personnel who 
are common law or statutory employees of the general agencies. The GA 
Employee Welfare Plan, which provides health, life, long-term 
disability and voluntary accidental death and dismemberment benefits, 
is a fully-insured arrangement. As of December 31, 1998, the GA 
Employee Welfare Plan had 3,595 participants.

[[Page 57138]]

    (g) The John Hancock Funds 401(k) Plan (the 401(k) Plan). The John 
Hancock 401(k) Plan is maintained by the Berkeley Financial Group which 
consists of a group of companies that operate John Hancock's mutual 
fund business. The John Hancock 401(k) Plan covers employees of that 
group. The John Hancock 401(k) Plan, which provides for a cash and 
deferred compensation arrangement, has 3 trustees. Investment decisions 
for the John Hancock 401(k) Plan are made by the participants. As of 
December 31, 1998, the John Hancock 401(k) Plan had 792 participants 
and total assets of $26,590,219.
    (h) The John Hancock Property & Casualty Money Purchase Pension 
Plan (the Property & Casualty Plan). John Hancock holds a small 
guaranteed investment contract on behalf of the Property & Casualty 
Plan which was established for its former property and casualty 
subsidiary. The Property & Casualty Plan, which formerly provided 
retirement benefits until it was frozen, has one trustee who is 
responsible for making investment decisions affecting such Plan. As of 
December 31, 1998, the Property & Casualty Plan had 1,311 participants 
and total assets of $670,147.
    In addition to the above, John Hancock holds a group life policy on 
behalf of certain retirees of Unigard Property and Casualty Company. 
Although this company was sold recently, John Hancock retains certain 
benefit responsibilities with respect to its retiree population.
    3. John Hancock's Board of Directors authorized its management to 
develop a plan of demutualization (i.e., the Plan of Reorganization) 
pursuant to which John Hancock would be converted from a mutual life 
insurance company to a stock life insurance company. On August 31, 
1999, John Hancock's Board of Directors formally adopted the Plan of 
Reorganization.
    In order to implement the Plan of Reorganization, John Hancock 
requests an individual exemption from the Department that would cover 
the receipt of Holding Company stock, cash or policy credits by 
Eligible Policyholders that are Plans in exchange for their existing 
membership interests in John Hancock. Although John Hancock is not 
requesting an exemption for distributions of Holding Company stock to 
the Pension Plan, the GA Pension Plan, TIP, SIP, the 401(k) Plan and 
the Property & Casualty Plan because it believes such stock would 
constitute ``qualifying employer securities'' within the meaning of 
section 407(d)(5) of the Act and that section 408(e) would apply to 
such distributions,8 it is nevertheless requesting exemptive 
relief from the Department to the extent that John Hancock Plans, such 
as the Employee Welfare Plan and the GA Employee Welfare Plan, receive 
Holding Company stock which results in violations of section 
406(a)(1)(E) and (a)(2) of the Act and section 407(a)(2) of the 
Act.9 Since the Holding Company stock that will be held by 
these John Hancock Plans will exceed 10 percent of the fair market 
value of the assets of such Plans, John Hancock has retained U.S. Trust 
Company, N.A. (U.S. Trust) to serve as the independent fiduciary for 
these Plans as well as for any other John Hancock Plan whose Holding 
Company Stock exceeds 10 percent of such Plan's assets.
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    \8\ The Department expresses no opinion herein on whether the 
Holding Company stock will constitute qualifying employer securities 
and whether such distributions will satisfy the terms and conditions 
of section 408(e) of the Act.
    \9\ Section 406(a)(1)(E) of the Act prohibits the acquisition by 
a plan of any employer security which would be in violation of 
section 407(a) of the Act. Section 406(a)(2) of the Act states that 
no fiduciary who has authority or discretion to control the assets 
of a plan shall permit the plan to hold any employer security if he 
[or she] knows that holding such security would violate section 
407(a) of the Act. Section 407(a)(1) of the Act prohibits the 
acquisition by a plan of any employer security which is not a 
qualifying employer security. Section 407(a)(2) of the Act provides 
that a plan may not acquire any qualifying employer security, if 
immediately after such acquisition, the aggregate fair market value 
of such securities exceeds 10 percent of the fair market value of 
the plan's assets.
    In addition to the above, section 407(f) of the Act, which is 
applicable to the holding of a qualifying employer security by a 
plan other than an eligible individual account plan, requires that: 
(a) Immediately following its acquisition by a plan, no more than 25 
percent of the aggregate amount of stock of the same class issued 
and outstanding at the time of acquisition is held by the plan; and 
(b) at least 50 percent of the stock be held by persons who are 
independent of the issuer. John Hancock notes, however, that the 
holding by the John Hancock Plans of shares of Holding Company stock 
will not violate the provisions of section 407(f) of the Act.
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    4. John Hancock proposes to convert from a mutual life insurance 
company to a stock life insurance company under Massachusetts Insurance 
Law. The principal purposes for the reorganization are to enhance John 
Hancock's access to capital markets and raise capital that would permit 
it and the Holding Company to expand their existing business and 
develop new business opportunities in the insurance and financial 
services industries. Growth will enable John Hancock to reduce its unit 
expenses through economies of scale. This growth will be facilitated by 
John Hancock's ability to acquire other companies using its own stock 
as acquisition currency. Additionally, access to capital markets will 
enable John Hancock to invest in new technology, improved customer 
service, new products and channels of distribution. John Hancock will 
also obtain more financial flexibility with which to maintain its 
ratings and financial stability.
    In addition, the reorganization of John Hancock pursuant to the 
Plan of Reorganization will provide Eligible Policyholders with shares 
of common stock of the Holding Company, cash or policy credits in 
exchange for their illiquid membership interests. Thus, Eligible 
Policyholders will realize economic value from their membership 
interests that is otherwise unavailable to them. However, the 
demutualization will not, in any way, reduce the benefits, values, 
guarantees or dividend eligibility of existing policies or contracts 
issued by John Hancock.
    As part of the reorganization, the Holding Company will be 
established and will become the stock holding company for John Hancock 
and its subsidiaries. Therefore, after the reorganization, John 
Hancock, as a stock insurer and a subsidiary of the Holding Company, 
will have access through the Holding Company to the capital markets, 
enabling John Hancock to obtain capital from a variety of sources. The 
Holding Company will also own 100 percent of two new holding companies 
being established to own existing Canadian subsidiaries of John Hancock 
and most other foreign insurance subsidiaries, respectively. Most 
foreign operations are being separated from the domestic operations of 
John Hancock to achieve improved financial ratios for John Hancock and 
maximize performance results for policyholders and shareholders.
    John Hancock's management believes that the holding company 
structure will provide several benefits to John Hancock. In this 
regard, this structure will afford increased flexibility in raising 
additional capital in the form of debt and equity financings and in 
pursuing growth in John Hancock's current and future insurance and non-
insurance business. The new organization will benefit from increased 
flexibility in allocating capital and resources among the various 
subsidiaries of John Hancock. Further, the transfer of the 
international subsidiaries to the Holding Company will provide a 
distinct focus for the foreign operations of John Hancock while also 
improving its risk-based capital ratio.
    5. The terms of the Plan of Reorganization are subject to the 
approval of the Commissioner of Insurance of the Commonwealth of

[[Page 57139]]

Massachusetts. However, market conditions, regulatory requirements and 
business considerations may also influence the final sequence of 
events. Subject to the foregoing, under John Hancock's internal working 
proposal for carrying out the demutualization, it is currently expected 
that the following steps will occur pursuant to the Plan of 
Demutualization:
    (a) Formation of a Stock Life Insurance Company. John Hancock will 
demutualize and become a stock life insurance company by operation of 
section 19E of Chapter 175 of the General Laws of the Commonwealth of 
Massachusetts. Under the Plan of Reorganization, each policyholder's 
membership interest in John Hancock will be extinguished. As 
compensation for their membership interests, Eligible Policyholders 
will receive shares of Holding Company stock, cash or policy credits. 
John Hancock will become a stock company and a wholly owned subsidiary 
of the Holding Company. The Holding Company will also own the 
outstanding shares of two newly-formed holding companies which will own 
John Hancock's Canadian business and most of its international 
businesses, respectively.
    (b) Initial Public Offering (the IPO). The Holding Company will 
sell new Holding Company shares in an underwritten IPO, on the date of 
the demutualization of John Hancock. It is expected that the 
demutualization will occur during early February 2000. However, the 
effective date may be extended for a period of up to six months if 
requested by John Hancock subject to approval by the Commissioner. At 
present, the size of the IPO is not known.
    (c) Contribution to the Capital of John Hancock. Following the 
transactions described above, the Holding Company will contribute cash 
raised in the IPO (after the payment of transaction expenses) to John 
Hancock in an amount at least equal to the amount required for John 
Hancock to maintain a risk-based capital ratio of not less than 200 
percent following the payment and crediting of cash and establishment 
of reserves for policy credits called for by the Plan of Reorganization 
and the payment of expenses resulting from the transactions 
contemplated by the Plan of Reorganization.
    6. In addition to providing enhanced capital markets, it is 
anticipated that the demutualization will provide the flexibility to 
cause John Hancock's non-insurance operations to become direct holdings 
of an ``upstream'' holding company. Further, the conversion will enable 
John Hancock to use stock options or other equity-based compensation 
arrangements in order to attract and retain talented employees.
    John Hancock believes these consequences of the conversion will 
benefit all of its policyholders. John Hancock further explains that 
its insurance policies will remain in force and policyholders will be 
entitled to receive the benefits under their policies and contracts to 
which they would have been entitled if the Plan of Reorganization had 
not been adopted.
    7. As noted above, John Hancock will demutualize under 
Massachusetts Insurance Law. Section 19E of the Massachusetts 
demutualization law establishes an approval process for the 
demutualization of a life insurance company organized under 
Massachusetts law. Specifically, Section 19E requires that the 
demutualization plan be filed with, and approved by, the Massachusetts 
Commissioner of Insurance. The Commissioner may approve the 
demutalization plan only after notice is given to the insurer, its 
directors, officers, employees and policyholders and a hearing on such 
plan is held. All persons to whom notice is given have the right to 
appear and be heard at the hearing and to present oral or written 
comments.10
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    \10\ Final approval by the Commissioner is expected to occur on 
or about January 15, 2000. The public hearing regarding the proposed 
Plan of Reorganization is expected to occur around November 25, 
1999.
---------------------------------------------------------------------------

    After the hearing, John Hancock explains that the Commissioner will 
approve the demutualization plan if she determines that the plan is not 
prejudicial to the insurer's policyholders or to the ``insuring 
public.'' The Commissioner must also determine that the demutualization 
plan conforms to the provisions of Section 19E. In pertinent part, 
Section 19E requires--

    (a) that reasonable notice of and the procedure for vote of the 
policyholders have been provided;
    (b) that the plan gives each eligible policyholder, in exchange 
for his or her membership interests in the insurer, appropriate 
consideration determined under a fair and reasonable formula, which 
is based upon the insurer's entire surplus as adjusted according to 
paragraph 3 of section 19E;
    (c) that, subject to certain exceptions, the plan gives each 
eligible policyholder a preemptive right to acquire his or her 
proportionate part of all of the proposed capital stock of the 
insurer within a reasonable time period, and to apply the amount of 
his or her consideration to the purchase of such stock, provided 
that, under certain circumstances, the Commissioner has the power to 
approve a plan which does not include preemptive rights;
    (d) that if, applicable, shares are offered to policyholders at 
a price not greater than they are offered under the plan to others;
    (e) that the plan provides for the payment to each policyholder 
of consideration which may consist of cash, securities, a 
certificate of contribution, additional life insurance or annuity 
benefits, increased dividends or other consideration or any 
combination of such forms of consideration;
    (f) that the plan, when completed, shall provide for the 
converted insurer's paid-in capital stock to be in an amount not 
less than the minimum paid-in capital stock and the net cash surplus 
required of a new domestic stock insurer upon initial authorization 
to transact like kinds of insurance;
    (g) that the insurer's management has not, through reduction in 
volume of new business written, or cancellation or through any other 
means, sought to reduce, limit or affect the number or identity of 
the insurer's policyholders to be entitled to participate in the 
demutualization plan, or to otherwise secure for individuals 
comprising management any unfair advantage through such 
demutualization plan; and
    (h) if applicable, that the classifications of management and 
employee groups to be offered shares not subscribed for by 
policyholders in the preemptive offering are reasonable.

    Section 19E permits the Commissioner to employ staff personnel and 
to engage outside consultants to assist her in determining whether a 
demutualization plan meets the requirements of section 19E and any 
other relevant provisions of chapter 175 of Massachusetts General Laws. 
A decision by the Commissioner to approve a demutualization plan under 
section 19E is subject to judicial review in the Massachusetts courts.
    In addition to being approved by the Commissioner, John Hancock 
represents that the demutualization plan must be approved by the 
policyholders of the insurer. In this regard, under section 19E, 
policyholders must be provided with notice of a meeting convened for 
the purpose of voting on whether to approve the demutualization plan. 
Moreover, the demutalization plan must be approved by a vote of not 
less than two-thirds of the votes of approximately 3 million 
policyholders who may vote in person, by proxy or by mail.11
---------------------------------------------------------------------------

    11 The notice of the policyholder meeting were mailed during the 
week of September 13, 1999. The policyholder meeting is scheduled to 
be convened on or about November 30, 1999.
---------------------------------------------------------------------------

    8. John Hancock represents that it is licensed to transact business 
in all fifty states. However, only the State of New York requires that 
a foreign insurance company that is planning to demutualize file a copy 
of its demutualization plan with state insurance authorities. In this 
regard, John Hancock explains that section 1106(i) of the New York 
Insurance Law

[[Page 57140]]

[Section 1106(i)] authorizes the Superintendent to review the 
demutualization plan of a foreign life insurer licensed in New York and 
to specify the conditions that the Superintendent would impose in order 
for the foreign insurer to retain its New York license following its 
demutualization. Specifically, Section 1106(i) requires that a foreign 
life insurer licensed in New York file with the Superintendent a copy 
of the demutualization plan at least 90 days prior to the earlier of 
(a) the date of any public hearing required to be held on the plan of 
reorganization by the insurer's state of domicile and (b) the proposed 
date of the demutualization.
    If, after examining the plan of reorganization, the Superintendent 
finds that the plan is not fair or equitable to the New York 
policyholders of the insurer, the Superintendent must set forth the 
reasons for his findings. In addition, the Superintendent must notify 
the insurer and its domestic state insurance regulator of his findings 
and his reasons for such findings and advise of any requirements he 
considers necessary for the protection of current New York 
policyholders in order to permit the insurer to continue to conduct 
business in New York as a stock life insurer after the demutualization. 
In the event the Superintendent has any objections to the Plan of 
Reorganization, John Hancock represents that it will amend the Plan so 
that it will meet the approval of the Superintendent or otherwise, work 
out a satisfactory solution with the Superintendent.
    9. John Hancock's Plan of Reorganization will provide for Eligible 
Policyholders to receive common stock of the Holding Company, cash or 
policy credits as consideration for the termination of their membership 
interests in the mutual company, which interests will be extinguished 
as a result of the demutualization. For this purpose, an Eligible 
Policyholder is essentially a policyholder whose name appears on the 
conversion date on the insurer's records as owner of a policy under 
which there is a right to vote. On both the December 31 immediately 
preceding the conversion date and the date the insurer's board of 
directors first votes to convert to stock form, the policy must be in 
full force for its full basic benefits with no unpaid premiums or 
consideration at the expiration of any applicable grace period. 
Alternatively, the policy must be continued under a nonforfeiture 
benefit. In any event, the insurance policy must continue to be 
eligible for participation in the insurer's annual distribution of 
divisible surplus.
    Solely for purposes of calculating the amount of Holding Company 
stock, cash or policy credits that will be given to an Eligible 
Policyholder in exchange for his or her membership interest, John 
Hancock will allocate to each Eligible Policyholder (but not 
necessarily issue) shares of Holding Company stock equal to the sum of: 
(a) A fixed component of consideration consisting of 17 shares of 
Holding Company stock; and (b) if applicable, a variable component of 
consideration based on the contributions to surplus made by the 
Eligible Policyholder's in-force policies. The allocation methodology 
must be fair and reasonable, a finding that the Commissioner is 
required to make after the hearing. The allocation formulas are also 
subject to review by the Superintendent.
    10. Section 7.3 of John Hancock's Plan of Reorganization provides 
that an Eligible Policyholder will be entitled to receive Holding 
Company stock if such Policyholder affirmatively elects, on a form 
provided to such Eligible Policyholder that has been properly completed 
and received by John Hancock prior to the date of the special 
policyholder meeting, a preference to receive stock. Holding Company 
stock will also be issued to an Eligible Policyholder, regardless of 
such Policyholder's election, to the extent funds available are 
inadequate to pay cash to all such Eligible Policyholders who will be 
receiving the same number of shares.12
---------------------------------------------------------------------------

    \12\ John Hancock's Plan of Reorganization provides that, as an 
optional method, each non-trusteed, qualified pension or profit 
sharing plan that is entitled to receive Holding Company stock may 
direct John Hancock to place the stock received as a result of the 
demutualization in a master trust (the Master Trust) established by 
John Hancock for this express purpose. It is represented that the 
John Hancock Plans will not participate in the Master Trust because 
they will have their own trusts in place.
    The Master Trust, which will be incorporated through the 
Adoption Agreement as part of each participating Plan, will have an 
indefinite duration. The trustee (the Trustee) of the Master Trust 
will be independent of John Hancock. The Trustee will hold the 
shares of Holding Company stock for the benefit of the participating 
Plan. The stock will remain in the Master Trust until the Plan 
fiduciary instructs the Trustee either to sell the stock on the open 
market or to distribute the stock to the Plan. A participating Plan 
may, under no circumstances, direct the Trustee to sell its shares 
of Holding Company stock to the Holding Company. Each Plan will be 
responsible for its share of the fees and expenses of the Master 
Trust as well as for the payment of brokerage commissions incurred 
in connection with the sale of Holding Company Stock after the 
termination of the commission-free sales program described in 
Representation 13 provided such program has been available to the 
Plan.
    It is anticipated that all stock dividends that are received by 
a Plan will be held in the Master Trust subject to withdrawal by the 
Plan at any time. However, cash dividends will be paid by the 
Trustee to the applicable Plan. It is also anticipated that all 
voting rights will be passed through to the participating Plans.
---------------------------------------------------------------------------

    In addition, Section 7.3 of John Hancock's Plan of Reorganization 
states that an Eligible Policyholder will be entitled to receive cash 
in lieu of allocable Holding Company stock where such Eligible 
Policyholder's address for mailing purposes, as shown on John Hancock's 
records: (a) Is an address where mail is undeliverable or is deemed to 
be undeliverable in accordance with guidelines approved by the 
Commissioner; or (b) is located outside of the United States. Further, 
an Eligible Policyholder will be entitled to receive cash instead of 
allocable Holding Company stock to the extent that his or her insurance 
policy is subject to a lien or bankruptcy proceeding.
    Finally, Section 7.3 of John Hancock's Plan of Reorganization 
provides that an Eligible Policyholder will receive policy credits 
instead of allocable Holding Company stock with respect to any policy 
that is: (a) An individual retirement annuity contract within the 
meaning of section 408(b) of the Code or a taxsheltered annuity 
contract within the meaning of section 403(b) of the Code; (b) an 
individual annuity contract that has been issued pursuant to a plan 
qualified plan under section 401(a) of the Code directly to the plan 
participant; or (c) an individual life insurance policy that has been 
issued pursuant to a plan qualified under section 401(a) of the Code 
directly to the plan participant.
    The cash or policy credits will have a value equal the greater of 
the price per share of Common Stock in the IPO, which will occur at the 
time of the demutualization or the average closing price of the Common 
Stock as reflected on the New York Stock Exchange for the first twenty 
days of trading, subject to a maximum of 120 percent of the initial 
stock price.13 This will ensure that

[[Page 57141]]

Eligible Policyholders who receive cash or policy credits will have an 
opportunity to benefit from any potential appreciation in the stock 
price during the initial trading period.
---------------------------------------------------------------------------

    \13\ John Hancock represents that under paragraph 5 of Section 
19E of Massachusetts Insurance Law, the policyholder eligible to 
participate in the distribution of Holding Company stock, cash or 
policy credits resulting from the Plan of Reorganization is ``the 
person whose name appears * * * on the insurer's records as owner'' 
of the policy. John Hancock further represents that an insurance or 
annuity policy that provides benefits under an employee benefit 
plan, typically designates the employer that sponsors the plan, or a 
trustee acting on behalf of the plan, as the owner of the policy. In 
regard to insurance or annuity policies that designate the employer 
or trustee as owner of the policy, John Hancock represents that it 
is required under the foregoing provisions of Massachusetts 
Insurance Law and the Plan of Reorganization to make distributions 
resulting from such Plan to the employer or trustee as owner of the 
policy, except as provided below.
    Notwithstanding the foregoing, John Hancock's Plan of 
Reorganization provides a special rule applicable to an insurance 
policy issued to a trust established by John Hancock. This rule 
applies whether or not the trust, or any arrangement established by 
any employer participating in the trust, constitutes an employee 
benefit plan subject to the Act. Under this special rule, the holder 
of each individual ``certificate'' issued in connection with the 
insurance policy is treated as the policyholder and owner for all 
purposes under the Plan of Reorganization, including voting rights 
and the distribution of consideration. The trustee of any such trust 
established by John Hancock will not be considered a policyholder or 
owner and will not be eligible to vote or receive consideration.
    In general, it is the Department's view that, if an insurance 
policy (including an annuity contract) is purchased with assets of 
an employee benefit plan, including participant contributions, and 
if there exist any participants covered under the plan (as defined 
at 29 CFR 2510.3-3) at the time when John Hancock incurs the 
obligation to distribute Holding Company stock, cash or policy 
credits, then such consideration would constitute an asset of such 
plan. Under these circumstances, the appropriate plan fiduciaries 
must take all necessary steps to safeguard the assets of the plan in 
order to avoid engaging in a violation of the fiduciary 
responsibility provisions of the Act.
---------------------------------------------------------------------------

    One or more fiduciaries of a Plan which is independent of John 
Hancock will receive the consideration and neither John Hancock nor any 
of its affiliates will exercise discretion or provide ``investment 
advice,'' as that term is defined in 29 CFR 2510.3-21(c) with respect 
to any such acquisition. Further, no Eligible Policyholder will pay 
brokerage commissions or fees in connection with the receipt of Holding 
Company stock.
    11. As noted above, in the case of the John Hancock Plans, U.S. 
Trust will represent their interests. U.S. Trust will determine whether 
the Plan of Reorganization is in the best interest of such Plan and 
their participants and beneficiaries; vote at the special meeting of 
Eligible Policyholders on the proposal to approve or not to approve the 
Plan of Reorganization. If the vote is to approve the Plan of 
Reorganization, U.S. Trust will decide whether the affected John 
Hancock Plan should receive Holding Company stock or cash (should the 
latter option be available) and receives such consideration on behalf 
of the affected John Hancock Plan; monitor, on behalf of the affected 
John Hancock Plan, the acquisition and holding of the shares of any 
Holding Company stock received; make determinations on behalf of the 
John Hancock Plan with respect to voting and the continued holding of 
the shares of Holding Company stock received by such Plan; dispose of 
any Holding Company stock held by the John Hancock Plan which exceeds 
the limitation of section 407(a)(2) of the Act as reasonably as 
practicable but in no event later than six months following the 
effective date of the demutualization; and take all actions that are 
necessary and appropriate to safeguard the interests of the John 
Hancock Plans. Further, U.S Trust will provide the Department with a 
complete and detailed final report as it relates to the John Hancock 
Plans prior to the effective date of the demutualization. Finally, U.S. 
Trust states that it has conducted a preliminary review of John 
Hancock's Plan of Reorganization and it sees nothing in the Plan that 
would preclude the Department of Labor from proposing the requested 
exemption.
    12. The Plan of Reorganization also provides for the establishment 
of a commission-free sales program whereby Eligible Policyholders who 
receive between 99 or fewer shares of Holding Company stock will be 
given the opportunity to sell, at prevailing market prices, all of 
their Holding Company stock received without the payment of any 
brokerage commissions. The commission-free sales program will 
concurrently offer Eligible Policyholders the opportunity to purchase 
an additional number of shares necessary to bring their respective 
total number of shares up to 100. Again, Eligible Policyholders will 
not be required to pay any brokerage commissions or similar fees to 
John Hancock. Moreover, John Hancock and its affiliates will not 
provide ``investment advice'' as described in 29 CFR 2510.3-21(c) with 
regard to the operation of the program. The commission-free sales 
program will commence on the first business day after the six month 
anniversary of the effective date of the reorganization and will 
continue for 90 days thereafter. Such program may be extended with the 
approval of the Commissioner if the Board of Directors of the Holding 
Company determines such extension would be appropriate and in the best 
interest of the Holding Company and its stockholders.
    13. In summary, it is represented that the proposed transactions 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) The Plan of Reorganization will be implemented in accordance 
with stringent procedural and substantive safeguards that are being 
imposed under Massachusetts law and will be subject to the review and 
supervision of the Commissioner.
    (b) The Commissioner will review the terms of the options that are 
provided to Eligible Policyholders of John Hancock as part of such 
Commissioner's review of the Plan of Reorganization following a 
determination that such Plan of Reorganization is not prejudicial to 
all Eligible Policyholders.
    (c) The Plan of Reorganization will be filed with the New York 
Superintendent who will determine whether the Plan of Reorganization is 
fair and equitable to Eligible Policyholders from New York.
    (d) The Plan of Reorganization will receive the concurrence of both 
the Commissioner and the Superintendent before it is implemented.
    (e) One or more independent Plan fiduciaries will have an 
opportunity to determine whether to vote to approve the terms of the 
Plan of Reorganization and will be solely responsible for all such 
decisions after receiving full and complete disclosure.
    (f) The proposed exemption will allow Eligible Policyholders that 
are Plans to acquire Holding Company stock, cash or policy credits in 
exchange for their membership interests in John Hancock and neither 
John Hancock nor its affiliates will exercise any discretion or provide 
``investment advice,'' as that term is defined in 29 CFR 2510.3-21(c) 
with respect to such acquisition.
    (g) No Eligible Policyholder will pay any brokerage commissions or 
fees in connection with such Eligible Policyholder's receipt of Holding 
Company stock or with respect to the implementation of the commission-
free sales and purchase programs.
    (h) The Plan of Reorganization will not change premiums or reduce 
policy benefits, values, guarantees or other policy obligations of John 
Hancock to its policyholders and contractholders.

Notice to Interested Persons

    John Hancock will provide notice of the proposed exemption to 
Eligible Policyholders that are Plans within 14 days of the publication 
of the notice of pendency in the Federal Register. Such notice will be 
provided to interested persons by first class mail and will include a 
copy of the notice of proposed exemption as published in the Federal 
Register as well as a supplemental statement, as required pursuant to 
29 CFR 2570.43(b)(2), which shall inform interested persons of their 
right to comment on the proposed exemption. Comments with respect to 
the notice of proposed exemption are due within 44 days of the 
publication of this pendency notice in the Federal Register.

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

[[Page 57142]]

Bankers Trust Company (BT), Located in New York, NY

[Application No. D-10756]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Section I.--Covered Transactions
    If the exemption is granted, the restrictions of sections 
406(a)(1)(A) through (D) and 406(b)(1) and (2) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (E) of the Code, shall not 
apply to: (1) The lending of securities to affiliates of BT, a wholly 
owned subsidiary of Deutsche Bank AG (DB), which are: (i) Either banks, 
supervised by the United States or by a State within the United States, 
or broker-dealers registered under the Securities Exchange Act of 1934 
(the 1934 Act); or (ii) certain foreign affiliates (the Foreign 
Affiliates) of BT and DB which are broker-dealers or banks in 
jurisdictions specified in this proposed exemption (collectively, the 
Affiliated Borrowers), by employee benefit plans (the Client Plans), 
including commingled investment funds holding Client Plan assets, for 
which BT, DB, or either of their current or future affiliates or 
successors acts as securities lending agent (or sub-agent) (the DB 
Lending Agent); and (2) the receipt of compensation by the DB Lending 
Agent in connection with these transactions, provided the general 
conditions set forth below in Section II are met.
Section II.--General Conditions
    (a) For each Client Plan, neither the DB Lending Agent nor an 
Affiliated Borrower, nor an affiliate of either, has or exercises 
discretionary authority or control with respect to the investment of 
Client Plan assets involved in the transaction, or renders investment 
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to 
those assets.
    (b) Any arrangement for a DB Lending Agent to lend Client Plan 
securities to an Affiliated Borrower in either an agency or sub-agency 
capacity is approved in advance by a Client Plan fiduciary who is 
independent of the DB Lending Agent.14 In this regard, the 
independent Client Plan fiduciary also approves the general terms of 
the securities loan agreement (the Loan Agreement) between the Client 
Plan and the Affiliated Borrowers, although the specific terms of the 
Loan Agreement are negotiated and entered into by the DB Lending Agent 
and the DB Lending Agent acts as a liaison between the lender and the 
borrower to facilitate the lending transaction.
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    \14\ The Department, herein, is not providing exemptive relief 
for securities lending transactions engaged in by primary lending 
agents, other than the DB Lending Agent, beyond that provided 
pursuant to Prohibited Transaction Exemption (PTE) 81-6 (46 FR 7527, 
January 23, 1981, as amended at 52 FR 18754, May 19, 1987) and PTE 
82-63 (47 FR 14804, April 6, 1982).
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    (c) The terms of each loan of securities by a Client Plan to the 
Affiliated Borrowers is at least as favorable to such Client Plans as 
those of a comparable arm's length transaction between unrelated 
parties.
    (d) A Client Plan may terminate the agency or sub-agency 
arrangement at any time without penalty to such Client Plan on five 
business days notice, whereupon the Affiliated Borrowers will deliver 
securities identical to the borrowed securities (or the equivalent in 
the event of reorganization, recapitalization or merger of the issuer 
of the borrowed securities) to the Client Plan within: (1) The 
customary delivery period for such securities; (2) five business days; 
or (3) the time negotiated for such delivery of by the Client Plan and 
the Affiliated Borrowers, whichever is less.
    (e) The Client Plan receives from the Affiliated Borrower (either 
by physical delivery or by book entry in a securities depository 
located in the United States, wire transfer or similar means) by the 
close of business on or before the day the loaned securities are 
delivered to the Affiliated Borrower, collateral consisting of cash, 
securities issued or guaranteed by the United States Government or its 
agencies or instrumentalities, or irrevocable United States bank 
letters of credit issued by a person other than the DB Lending Agent or 
an affiliate thereof, or any combination thereof, or other collateral 
permitted under PTE 81-6, as it may be amended or superseded.
    (f) As of the close of business on the preceding business day, the 
fair market value of the collateral initially equals at least 102 
percent of the market value of the loaned securities and, if the market 
value of the collateral falls below 100 percent, the applicable 
Affiliated Borrower delivers additional collateral on the following day 
such that the market value of the collateral again at least equal to 
102 percent.
    (g) Prior to entering into the lending program, the Affiliated 
Borrower furnishes the DB Lending Agent its most recently available 
audited and unaudited statements, which are, in turn, provided to a 
Client Plan, as well as a representation by such Affiliated Borrower, 
that as of each time it borrows securities, there has been no material 
adverse change in its financial condition since the date of the most 
recently-furnished statement that has been disclosed to such Client 
Plan; provided, however, that in the event of a material adverse 
change, the DB Lending Agent does not make any further loans to such 
Affiliated Borrower unless an independent fiduciary of the Client Plan 
is provided notice of any material adverse change and approves the loan 
in view of the changed financial condition.
    (h) In return for lending securities, the Client Plan either --
    (1) Receives a reasonable fee, which is related to the value of the 
borrowed securities and the duration of the loan; or
    (2) Has the opportunity to derive compensation through the 
investment of cash collateral. (Under such circumstances, the Client 
Plan may pay a loan rebate or similar fee to an Affiliated Borrower, if 
such fee is not greater than the fee the Client Plan would pay in a 
comparable arm's length transaction with an unrelated party.)
    (i) All procedures regarding the securities lending activities 
conform to the applicable provisions of PTE 81-6 and PTE 82-63 as such 
class exemptions may be amended or superseded as well as to applicable 
securities laws of the United States or the jurisdiction in which the 
Foreign Affiliate is domiciled, as appropriate.
    (j) The DB Lending Agent or an affiliate which is domiciled in the 
United States will indemnify and hold harmless each lending Client Plan 
in the United States against any shortfall in the collateral, as set 
forth in the applicable lending agreement (the Loan Agreement), plus 
interest and any transaction costs incurred (including attorney's fees 
of the Client Plan arising out of the default on the loans or the 
failure to indemnify properly under this provision) which the Client 
Plan may incur or suffer directly arising out of the lending of 
securities of such Client Plan to such Affiliated Borrower, to the 
extent permitted by law.15 In the event that an Affiliated 
Borrower defaults on a loan, the DB Lending Agent will liquidate the 
loan collateral to purchase identical securities for the Client Plan. 
If the collateral is insufficient to

[[Page 57143]]

accomplish such purchase, the DB Lending Agent or the applicable 
affiliate will indemnify the Client Plan for any shortfall in the 
collateral, as set forth in the Loan Agreement, plus interest on such 
amount and any transaction costs incurred (including attorney's fees of 
the Client Plan arising out of the default on the loans or the failure 
to indemnify properly under this provision). Alternatively, if such 
identical securities are not available on the market, the DB Lending 
Agent or the applicable affiliate will pay the Client Plan cash equal 
to: (1) The market value of the borrowed securities as of the date they 
should have been returned to the Client Plan, plus (2) all the accrued 
financial benefits derived from the beneficial ownership of such loaned 
securities as of such date, plus (3) interest from such date to the 
date of payment.
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    \15\ Where the law prohibits such indemnification by the DB 
Lending Agent, the Affiliated Borrower will provide the identical 
indemnification.
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    (k) The Client Plan receives the equivalent of all distributions 
made to holders of the borrowed securities during the term of the loan, 
including, but not limited to, cash dividends, interest payments, 
shares of stock as a result of stock splits and rights to purchase 
additional securities, or other distributions.
    (l) The DB Lending Agent provides to Client Plans, prior to any 
Client Plan's approval of the lending of its securities to an 
Affiliated Borrower, copies of the notice of proposed exemption (the 
Notice) and the final exemption.
    (m) Each Client Plan receives monthly reports with respect to its 
securities lending transactions, including, but not limited to, the 
information described in Representation 31 of the Notice, so that an 
independent fiduciary of the Client Plan may monitor such transactions 
with Affiliated Borrowers.
    (n) Only Client Plans with total assets having an aggregate market 
value of at least $50 million are permitted to lend securities to 
Affiliated Borrowers; provided, however, that--
    (1) In the case of two or more Client Plans which are maintained by 
the same employer, controlled group of corporations or employee 
organization (the Related Client Plans), whose assets are commingled 
for investment purposes in a single master trust or any other entity 
the assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the 
Plan Asset Regulation), which entity is engaged in securities lending 
arrangements with a DB Lending Agent, the foregoing $50 million 
requirement shall be deemed satisfied if such trust or other entity has 
aggregate assets which are in excess of $50 million; provided that if 
the fiduciary responsible for making the investment decision on behalf 
of such master trust or other entity is not the employer or an 
affiliate of the employer, such fiduciary has total assets under its 
management and control, exclusive of the $50 million threshold amount 
attributable to plan investment in the commingled entity, which are in 
excess of $100 million.
    (2) In the case of two or more Client Plans which are not 
maintained by the same employer, controlled group of corporations or 
employee organization (the Unrelated Client Plans), whose assets are 
commingled for investment purposes in a group trust or any other form 
of entity the assets of which are ``plan assets'' under the Plan Asset 
Regulation, which entity is engaged in securities lending arrangements 
with a DB Lending Agent, the foregoing $50 million requirement is 
satisfied if such trust or other entity has aggregate assets which are 
in excess of $50 million (excluding the assets of any Client Plan with 
respect to which the fiduciary responsible for making the investment 
decision on behalf of such group trust or other entity or any member of 
the controlled group of corporations including such fiduciary is the 
employer maintaining such Plan or an employee organization whose 
members are covered by such Plan). However, the fiduciary responsible 
for making the investment decision on behalf of such group trust or 
other entity--
    (i) Has full investment responsibility with respect to plan assets 
invested therein; and
    (ii) Has total assets under its management and control, exclusive 
of the $50 million threshold amount attributable to plan investment in 
the commingled entity, which are in excess of $100 million.

In addition, none of the entities described above are formed for the 
sole purpose of making loans of securities.
    (o) With respect to each successive two-week period, on average, at 
least 50 percent or more of the outstanding dollar value of securities 
loans negotiated on behalf of Client Plans will be to unrelated 
borrowers.
    (p) In addition to the above, all loans involving a Foreign 
Affiliate have the following supplemental requirements:
    (1) As applicable, such Foreign Affiliate is registered as a 
broker-dealer or bank with--
    (i) The Securities and Futures Authority (the SFA) or the Financial 
Services Authority (the FSA) in the United Kingdom;
    (ii) The Deutsche Bundesbank and/or the Federal Banking Supervisory 
Authority, i.e., der Bundesaufsichsamt fuer das Kreditwesen (the BAK) 
or the Bundesaufsichtsamt fur den Wertpapierhandel (the BAWe) in 
Germany;
    (iii) The Ministry of Finance (the MOF) and/or the Tokyo Stock 
Exchange in Japan;
    (iv) The Ontario Securities Commission (the OSC) and/or the 
Investment Dealers Association (the IDA), or the Office of the 
Superintendent of Financial Institutions (the OSFI) in Canada;
    (v) The Swiss Federal Banking Commission in Switzerland; and
    (vi) The Australian Prudential Regulation Authority (APRA) or the 
Australian Securities and Investments Commission (ASIC), and/or the 
Australian Stock Exchange Limited (ASEL) in Australia.
    (2) Such broker-dealer or bank is in compliance with all applicable 
provisions of Rule 15a-6 (17 CFR 240.15a-6) under the 1934 Act which 
provides for foreign broker-dealers a limited exemption from United 
States registration requirements;
    (3) All collateral is maintained in United States dollars or 
dollar-denominated securities or letters of credit (unless an 
applicable exemption provides otherwise);
    (4) All collateral is held in the United States (unless an 
applicable exemption provides otherwise) and the situs of the 
securities Loan Agreements are maintained in the United States under an 
arrangement that complies with the indicia of ownership requirements 
under section 404(b) of the Act and the regulations promulgated under 
29 CFR 2550.404(b)-1; and
    (5) Each Foreign Affiliate provides the DB Lending Agent a written 
consent to service of process in the United States and to the 
jurisdiction of the courts of the United States for any civil action or 
proceeding brought in respect of the securities lending transaction, 
which consent provides that process may be served on such borrower by 
service on the DB Lending Agent.
    (q) The DB Lending Agent and its affiliates maintain, or cause to 
be maintained within the United States for a period of six years from 
the date of such transaction, in a manner that is convenient and 
accessible for audit and examination, such records as are necessary to 
enable the persons described in paragraph (r)(1) to determine whether 
the conditions of the exemption have been met, except that--
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of the DB Lending 
Agent and/or its affiliates, the records are lost or

[[Page 57144]]

destroyed prior to the end of the six year period; and
    (2) No party in interest other than the DB Lending Agent and/or its 
affiliates shall be subject to the civil penalty that may be assessed 
under section 502(i) of the Act, or to the taxes imposed by section 
4975(a) and (b) of the Code, if the records are not maintained, or are 
not available for examination as required below by paragraph (r)(1).
    (r)(1) Except as provided in subparagraph (r)(2) of this paragraph 
and notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the records referred to in paragraph (q) are 
unconditionally available at their customary location during normal 
business hours by:
    (i) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and Exchange 
Commission (the SEC);
    (ii) Any fiduciary of a participating Client Plan or any duly 
authorized representative of such fiduciary;
    (iii) Any contributing employer to any participating Client Plan or 
any duly authorized employee representative of such employer; and (iv) 
Any participant or beneficiary of any participating Client Plan, or any 
duly authorized representative of such participant or beneficiary.
    (r)(2) None of the persons described above in paragraphs 
(r)(1)(ii)-(r)(1)(iv) of this paragraph (r)(1) are authorized to 
examine the trade secrets of the DB Lending Agent or commercial or 
financial information which is privileged or confidential.
III--Definitions
    For purposes of this proposed exemption,
    (a) The term ``affiliate'' means any entity now or in the future, 
directly or indirectly controlling, controlled by or under common 
control with BT, DB or their successors.
    (b) The term ``Affiliated Borrower'' means an affiliate of BT or DB 
that is a bank, as defined in section 202(a)(2) of the Investment 
Advisers Act of 1940 (the Advisers Act), that is supervised by the 
United States or a State, or a broker-dealer registered under the 1934 
Act, or any Foreign Affiliate.
    (c) The term ``Foreign Affiliate'' means an affiliate of BT or DB 
that is a broker-dealer or bank that is supervised by: (1) The SFA or 
the FSA in the United Kingdom; (2) the Deutsche Bundesbank and/or the 
BAK, or the BAWe in Germany; (3) the MOF and/or the Tokyo Stock 
Exchange in Japan; (4) the OSC, the IDA, and/or OSFI in Canada; (5) the 
Swiss Federal Banking Commission in Switzerland; and (6) APRA, ASIC, 
and/or ASEL in Australia.

EFFECTIVE DATE: If granted, this proposed exemption will be effective 
as of April 9, 1999.

Summary of Facts and Representations

    1. BT (also referred to herein as ``the Applicant'') is a New York 
banking corporation and a leading commercial bank, whose parent, 
Bankers Trust Corporation, is wholly owned by DB, a banking corporation 
organized under the laws of the Federal Republic of Germany and the 
largest banking institution in the world, based on assets.
    2. The Applicant provides a wide variety of banking, fiduciary, 
recordkeeping, custodial, brokerage and investment services to 
corporations, institutions, governments, employee benefit plans, 
governmental retirement plans and private investors. Its affiliates 
actively engage in the borrowing of securities. All borrowings by U.S. 
broker-dealer affiliates from pension plans conform to the Federal 
Reserve Board's Regulation T. Since its merger with DB, the Applicant 
has Foreign Affiliates worldwide that are engaged in the business of 
trading securities. Among the Applicant's current affiliated banks and 
broker-dealers are Foreign Affiliates based in--
    (a) The United Kingdom (Affiliated Borrower/U.K.), which includes, 
but is not be limited to, Bankers Trust International PLC and the 
London Branch of Deutsche Bank;
    (b) Japan (Affiliated Borrower/Japan), which includes, but is not 
be limited to, Japan Bankers Trust Ltd. and the Tokyo Branch of 
Deutsche Bank;
    (c) Germany (Affiliated Borrower/Germany), which includes, but is 
not limited to, Deutsche Bank;
    (d) Australia (Affiliated Borrower/Australia), which includes, but 
is not limited to, BT Australia Limited and the Sydney Branch of 
Deutsche Bank;
    (e) Canada (Affiliated Borrower/Canada), which includes, but is not 
limited to, Deutsche Bank Canada and Deutsche Bank Securities Limited; 
and
    (f) Switzerland (Affiliated Borrower/Switzerland), which includes, 
but is not limited to, Deutsche Bank (Suisse) S.A.
    3. The Applicant and its affiliates actively engage in the 
borrowing and lending of securities, with daily outstanding loan volume 
averaging billions of dollars. The Affiliated Borrowers utilize 
borrowed securities to satisfy their trading requirements or to re-lend 
to other broker-dealers and others who need a particular security for 
various periods of time.
    4. The Applicant's U.S. affiliates are either U.S. registered 
broker-dealers or banks supervised by the U.S. or a State. Affiliated 
Borrower/U.K. is either authorized to conduct an investment business in 
and from the United Kingdom as a broker-dealer regulated by the SFA or 
as a deposit-taking institution or merchant bank regulated by the FSA. 
Affiliated Borrower/Japan is authorized to conduct an investment 
business in Japan as a broker-dealer or bank regulated by the MOF and/
or the Tokyo Stock Exchange. Affiliated Borrower/Switzerland is 
authorized to conduct an investment business as a broker-dealer or bank 
in Switzerland by the Swiss Federal Banking Commission. Affiliated 
Borrower/Germany is authorized to conduct business in Germany as a bank 
or broker-dealer by the Deutsche Bundesbank and/or the BAK, or the 
BAWe.16 Affiliated Borrower/Australia is either authorized 
to conduct an investment business in Australia as a bank or broker-
dealer by the APRA, the ASIC and/or the Australian Stock Exchange 
Limited. Affiliated Borrower/Canada is authorized to conduct an 
investment business in Canada as a bank or broker-dealer by the OSC 
and/or the IDA or the OSFI.
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    \16\ The BAWe is a German federal agency that enforces German 
securities laws. Each German state has a state government agency 
which regulates broker-dealers operating in that state. All broker-
dealers report directly to the appropriate state agency by filing, 
within four months after the end of the fiscal year, audited 
financial statements supplemented by quarterly earnings reports. In 
addition, each German stock exchange admits broker-dealers to 
membership and may revoke such membership. The stock exchanges limit 
broker-dealer member transactions based on core capital or the 
equivalent thereof, and additional security provided, based on their 
exposure to risk from transactions on the exchange. Any change in 
core capital having the effect of reducing the transaction limit 
must be reported to the stock exchange immediately.
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    5. Although not registered with the United States SEC as broker-
dealers, the Foreign Affiliates that are broker-dealers are subject to 
the rules, regulations and membership requirements of their respective 
governmental regulators and/or the self-regulatory organizations listed 
above, relating to minimum capitalization, reporting requirements, 
periodic examinations, client money and safe custody rules and books 
and records requirements with respect to client accounts. These rules 
and regulations share a common objective: the protection of the 
investor by the regulation of the securities industry. While these 
rules and regulations vary from country to country, they require each 
firm which employs registered representatives or registered traders to 
have a tangible net worth and be able to meet their obligations as they 
may fall

[[Page 57145]]

due. In addition, these rules and regulations set forth comprehensive 
financial resource and reporting/disclosure rules regarding capital 
adequacy. Further, to demonstrate capital adequacy, the rules may 
impose reporting/disclosure requirements on broker-dealers with respect 
to risk management, internal controls, and transaction reporting and 
recordkeeping requirements to the effect that required records must be 
produced at the request of the respective regulators at any time. 
Finally, these rules and regulations impose potential fines and 
penalties on broker-dealers which establish a comprehensive 
disciplinary system.
    6. Similarly, the banks comprising the Foreign Affiliates are 
subject to rules and regulations of their respective governmental 
regulators. For example, Affiliated Borrower/U.K. banks are subject to 
regulation in the United Kingdom by the FSA, the successor to the Bank 
of England. The FSA issues licenses to banks in the United Kingdom, 
issues directives to address violations by or irregularities involving 
banks, requires information from a bank or its auditors regarding 
supervisory matters and revokes bank licenses. In addition, the FSA has 
established procedures for monitoring the activities of the DB Lending 
Agent and its affiliates in the United Kingdom through various 
regulatory standards. Among those standards are requirements for 
adequate internal controls, oversight and administration. On a 
recurring basis, the DB Lending Agent and its affiliates will be 
required to provide the FSA with information regarding its activities 
in the United Kingdom, profit and loss, balance sheet, large exposures, 
foreign exchange exposures and country risk exposures. The Board of 
Directors of the Federal Reserve System in the United States or the BAK 
in Germany supervises the DB Lending Agent and its affiliates with 
respect to capital adequacy.
    In addition, the APRA, which has taken over the bank supervisory 
duties of the Reserve Bank of Australia, licenses and regulates 
Affiliated Borrower/Australia locally-incorporated banks. The APRA has 
the power to issue and revoke bank licenses. In addition, the APRA may 
issue directives to address violations by or irregularities involving 
banks and it requires information from a bank or its auditors regarding 
supervisory matters. The APRA has established procedures for monitoring 
the activities of Affiliated Borrower/Australia banks in Australia 
through various statutory and regulatory standards. Among those 
standards are requirements for capital adequacy, internal controls, 
oversight and administration. On a recurring basis, Affiliated 
Borrower/Australia banks that are locally-incorporated will be required 
to provide the APRA with information regarding its activities in 
Australia, profit and loss, balance sheets and large exposures.
    The APRA's licensing and supervision of Affiliated Borrower/
Australia foreign bank branches is similar to that of locally-
incorporated banks. While the APRA monitors credit risk concentrations 
of foreign bank branches, endowed capital in Australia and capital-
based large risk exposure limits are the responsibility of the home 
supervisor which is either the Board of Governors of the Federal 
Reserve System in the United States or the BAK in Germany.
    Further, banks comprising Affiliated Borrower/Canada are subject to 
the rules of the OSFI, an entity that licenses and regulates Affiliated 
Borrower/Canada banks established in Canada as deposit-taking 
subsidiaries. The OSFI licenses banks, issues directives to address 
violations by or irregularities involving the bank, requires 
information from the bank or its auditors regarding supervisory matters 
and revokes bank licenses.
    In addition, the OSFI has established procedures for monitoring the 
activities of Affiliated Borrower/Canada banks in Canada through 
various statutory and regulatory standards. Among those standards are 
requirements for capital adequacy, adequate internal controls, 
oversight and administration. On a recurring basis, Affiliated 
Borrower/Canada banks will be required to provide the OSFI with 
information regarding its activities in Canada, profit and loss, 
balance sheet, large exposures and foreign exchange exposures.
    Where a foreign bank establishes a branch in Canada, the Minister 
of Finance authorizes the establishment of the branch and the OSFI 
licenses the bank branch to carry on business and may revoke the 
license. The bank branch must have a minimum amount of unencumbered 
assets in Canada equal to a percentage of branch liabilities and must 
satisfy capital adequacy rules. Branches accepting deposits are subject 
to a yearly audit by an external auditor and examination by the 
OSFI.17
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    \17\ For a description of the Bundesbank and BAK regime of 
regulation applicable to banks comprising Affiliated Borrower/
Germany, refer to Representation 2 of the Summary of Facts and 
Representations in the Notice (63 FR 53703, 53706, October 6, 1998) 
for Salomon Smith Barney, Inc. Similarly, for descriptions of the 
Swiss Federal Banking Commission and the MOF, which regulate both 
banks and broker-dealers comprising Affiliated Borrower/Switzerland 
and Affiliated Borrower/Japan, respectively, see Representations 3 
and 4 of the Notice for the Union Bank of Switzerland and UBS 
Securities, LLC (63 FR 15452, 15455, March 31, 1998).
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    7. Aside from the protections afforded by the regulators in each 
foreign jurisdiction, the Applicant represents that the Foreign 
Affiliates will comply with all applicable provisions of Rule 15a-6 of 
the 1934 Act. Rule 15a-6 provides foreign broker-dealers with a limited 
exemption from SEC registration requirements and, as described below, 
offers additional protections. Specifically, Paragraph (a)(4)(i) of 
Rule 15a-6 provides an exemption from U.S. broker-dealer registration 
for a foreign broker-dealer that effects transactions in securities 
with or for, or induces or attempts to induce the purchase or sale of 
any security by ``a registered broker or dealer, whether the registered 
broker or dealer is acting as principal for its own account or as agent 
for others, or a bank acting in a broker-dealer capacity as permitted 
by U.S. law.'' 18 In engaging in borrowing activities, each 
Foreign Affiliate, relying on the Paragraph (a)(4)(i) exemption will be 
interacting solely with the Applicant, each of which is such a 
``registered broker or dealer'' or ``bank,'' and will not be 
interacting with the Applicant's underlying Client Plans.
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    \18\ Section 3(a)(4) of the 1934 Act defines ``broker'' to mean 
``any person engaged in the business of effecting transactions in 
securities for the account of others, but it does not include a 
bank. Section 3(a)(5) of the 1934 Act provides a similar exclusion 
for ``banks'' in the definition of the term ``dealer.'' However, 
section 3(a)(6) of the 1934 Act defines ``bank'' to mean a banking 
institution organized under the laws of the United States or a State 
of the United States. Further, Rule 15a-6(b)(3) provides that the 
term ``foreign broker or dealer'' means ``any non-U.S. resident 
person * * * whose securities activities, if conducted in the United 
States, would be described by the definition of ``broker'' or 
``dealer'' in sections 3(a)(4) or 3(a)(5) of the [1934] Act.'' 
Therefore, the test of whether an entity is a ``foreign broker'' or 
``dealer'' is based on the nature of such foreign entity's 
activities and, with certain exceptions, only banks that are 
regulated by either the United States or a State of the United 
States are excluded from the definition of the term ``broker'' or 
``dealer.'' Thus, for purposes of this exemption request, the 
Applicant is willing to represent that its Foreign Affiliates will 
comply with the applicable provisions and relevant SEC 
interpretations and amendments of Rule 15a-6.
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    Paragraph (a)(3) of Rule 15a-6 provides an exemption from U.S. 
broker-dealer registration for a foreign broker-dealer that induces or 
attempts to induce the purchase or sale of any security (including 
over-the-counter-equity and debt options) by a ``U.S. institutional 
investor'' or a ``major U.S. institutional investor,'' provided that 
the foreign broker-dealer, among other things, enters into these 
transactions through a U.S. registered broker-dealer intermediary. The 
term ``U.S.

[[Page 57146]]

institutional investor,'' as defined in Rule 15a-6(b)(7), includes an 
employee benefit plan within the meaning of the Employee Retirement 
Income Security Act of 1974 (the Act) if (a) the investment decision is 
made by a plan fiduciary, as defined in section 3(21) of the Act, which 
is either a bank, savings and loan association, insurance company or 
registered investment adviser, or (b) the employee benefit plan has 
total assets in excess of $5 million, or (c) the employee benefit plan 
is a self-directed plan with investment decisions made solely by 
persons that are ``accredited investors'' as defined in Rule 501(a)(1) 
of Regulation D of the Securities Exchange Act of 1933, as 
amended.19 The term ``major U.S. major institutional 
investor'' is defined in Rule 15a-6(b)(4) as a person that is a U.S. 
institutional investor that has total assets in excess of $100 million 
or an investment adviser registered under Section 203 of the Advisers 
Act that has total assets under management in excess of $100 
million.20
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    \19\ To the extent permitted by applicable U.S. securities law, 
the Foreign Affiliates may rely on a U.S. bank or trust company to 
perform this role.
    \20\ See also SEC No-Action Letter issued to Cleary, Gottlieb, 
Steen & Hamilton on April 9, 1997 (hereinafter, the April 9, No-
Action Letter), expanding the definition of the term ``major U.S. 
institutional investor.''
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    8. The Applicant represents that under Rule 15a-6, a foreign 
broker-dealer that, in reliance on the Paragraph (a)(3) exemption, 
induces or attempts to induce the purchase or sale of any security by a 
U.S. institutional or major U.S. institutional investor must, among 
other things--

    (a) Consent to service of process for any civil action brought 
by, or proceeding before, the SEC or any self-regulatory 
organization;
    (b) Provide the SEC (upon request or pursuant to agreements 
reached between any foreign securities authority, including any 
foreign government, and the SEC or the U.S. Government) with any 
information or documents within the possession, custody or control 
of the foreign broker-dealer, any testimony of any such foreign 
associated persons, and any assistance in taking the evidence of 
other persons, wherever located, that the SEC requests and that 
relates to transactions effected pursuant to the Rule;
    (c) Rely on the U.S. registered broker-dealer through which the 
transactions with the U.S. institutional and major U.S. 
institutional investors are effected to (among other things):
    (1) Effect the transactions, other than negotiating their terms;
    (2) Issue all required confirmations and statements;
    (3) As between the foreign broker-dealer and the U.S. registered 
broker-dealer, extend or arrange for the extension of credit in 
connection with the transactions;
    (4) Maintain required books and records relating to the 
transactions, including those required by Rules 17a-3 (Records to be 
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved 
by Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
    (5) Receive, deliver and safeguard funds and securities in 
connection with the transactions on behalf of the U.S. institutional 
investor or major U.S. institutional investor in compliance with 
Rule 15c3-3 of the 1934 Act (Customer Protection--Reserves and 
Custody of Securities); 21 and
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    \21\ Under certain circumstances described in the April 9, 1997 
No-Action Letter (e.g., clearance and settlement transactions), 
there may be direct transfers of funds and securities between the 
Client Plan and an Affiliated Borrower. The Applicant notes that in 
such situations, the U.S. registered broker-dealer will not be 
acting as a principal with respect to any duties it is required to 
undertake pursuant to Rule 15a-6.
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    (6) Participate in certain oral communications (e.g., telephone 
calls) between the foreign associated person and the U.S. 
institutional investor (not the major U.S. institutional investor), 
and accompany the foreign associated person on certain visits with 
both U.S. institutional and major institutional 
investors.22
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    \22\ Under certain circumstances, the foreign associated person 
may have direct communications and contact with the U.S. 
institutional investor. See April 9 SEC No-Action Letter.

    9. As the DB Lending Agent, the Applicant provides securities 
lending services on an agency basis to institutional clients. The DB 
Lending Agent, pursuant to authorization from its client, will 
negotiate the terms of loans with borrowers pursuant to a client-
approved form of Loan Agreement and will act as a liaison between the 
lender (i.e., the Client Plan and its custodian) and the borrower to 
facilitate the lending transaction. No loans of futures contracts will 
be involved. The DB Lending Agent will have responsibility for 
monitoring receipt of all required collateral and marking such 
collateral to market daily so that adequate levels of collateral are 
maintained. The DB Lending Agent also will monitor and evaluate on a 
continuing basis the performance and creditworthiness of the borrowers. 
The DB Lending Agent may or may not act as a custodian or directed 
trustee with respect to the client's portfolio of securities being 
loaned. The DB Lending Agent may be authorized, from time to time, by a 
Client Plan to receive and hold pledged collateral and invest cash 
collateral pursuant to guidelines established by such Client Plan. All 
of the DB Lending Agent's procedures for lending securities will be 
designed to comply with the applicable conditions of PTE 81-6 and PTE 
82-63 (as such PTEs may be amended or superseded).23
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    \23\ PTE 81-6 provides an exemption under certain conditions 
from section 406(a)(1)(A) through (D) of the Act and the 
corresponding provisions of section 4975(c) of the Code for the 
lending of securities that are assets of an employee benefit plan to 
certain broker-dealers or banks which are parties in interest. PTE 
82-63 provides an exemption under specified conditions from section 
406(b)(1) of the Act and section 4975(c)(1)(E) of the Code for the 
payment of compensation to a plan fiduciary for services rendered in 
connection with loans of plan assets that are securities.
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    10. The DB Lending Agent may be retained occasionally by other 
primary securities lending agents to provide securities lending 
services in a sub-agent capacity with respect to portfolio securities 
of clients of such primary lending agents. As securities lending sub-
agent, the DB Lending Agent's role under the lending transactions 
(i.e., negotiating the terms of loans with borrowers pursuant to a 
client-approved form of Loan Agreement and monitoring receipt of, and 
marking to market, required collateral) parallels those under lending 
transactions for which the DB Lending Agent acts as primary lending 
agent on behalf of its clients.24
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    \24\ As noted previously, the Department is not providing 
exemptive relief herein for securities lending transactions that are 
engaged in by primary lending agents, other than the DB Lending 
Agent and its affiliates, beyond that provided by PTEs 81-6 and 82-
63.
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    11. When a loan is collateralized with cash, the cash will be 
invested for the benefit and at the risk of the Client Plan, and 
resulting earnings (net of a rebate to the borrower) comprise the 
compensation to the Client Plan in respect of such loan, which is split 
between the Client Plan and the securities lending agent. Where 
collateral consists of obligations other than cash, the borrower pays a 
fee (loan premium), which is split between the Client Plan and the 
securities lending agent.
    12. Accordingly, the Applicant requests an administrative exemption 
from the Department with respect to: (a) The lending of securities 
owned by certain Client Plans for which the DB Lending Agent will serve 
as securities lending agent or sub-agent to its Affiliated Borrowers 
(both current and future) 25 following disclosure of their 
affiliation with the DB Lending Agent; and (b) the receipt of 
compensation by the DB Lending Agent in connection

[[Page 57147]]

with such transactions. For each Client Plan, neither the DB Lending 
Agent nor any affiliate will have discretionary authority or control or 
render investment advice over Client Plans' decisions concerning the 
acquisition or disposition of securities available for loan. The DB 
Lending Agent's discretion will be limited to activities such as 
negotiating the terms of the securities loans with the Affiliated 
Borrowers and (to the extent granted by the Client Plan fiduciary) 
investing any cash collateral received in respect of the loans. 
Because, under the proposed arrangement, the DB Lending Agent would 
have discretion to lend Client Plan securities to an Affiliated 
Borrower, and because the Affiliated Borrower is an affiliate of the DB 
Lending Agent, the lending of securities to Affiliated Borrowers by a 
Client Plan for which the DB Lending Agent serves as securities lending 
agent (or sub-agent) may be outside the scope of relief provided by PTE 
81-6 and PTE 82-63. Moreover, loans to the Foreign Affiliates would be 
outside of the relief granted in PTE 81-6 (because it limits its relief 
to banks and U.S. registered broker-dealers). Therefore, several 
safeguards, described more fully below, are incorporated in the 
application in order to ensure the protection of the Client Plan assets 
involved in the transactions. In addition, the proposed lending program 
will incorporate the conditions contained in PTE 81-6 and PTE 82-63 and 
will be in compliance with all securities laws of the United States, to 
the extent applicable.
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    \25\ For the sake of simplicity, future references to the DB 
Lending Agent's performance of services as securities lending agent 
should be deemed to include its parallel performance as securities 
lending sub-agent and references to Client Plans should be deemed to 
refer to Plans for which the DB Lending Agent is acting as sub-agent 
with respect to securities lending activities, unless otherwise 
indicated specifically or by the context of the reference.
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    13. Where a DB Lending Agent is the direct securities lending 
agent, a fiduciary of a Client Plan which is independent of the DB 
Lending Agent will sign a securities lending agency agreement with the 
DB Lending Agent (the Agency Agreement) before the Client Plan 
participates in a securities lending program. The Agency Agreement and 
the explanatory material accompanying such agreement will, among other 
things, describe the operation of the lending program, prescribe the 
form of securities Loan Agreement to be entered into on behalf of the 
Client Plan with borrowers, specify the securities which are available 
to be lent, required margin and daily marking-to-market, and provide a 
list of permissible borrowers, including the Affiliated Borrowers. The 
Agency Agreement will also set forth the basis and rate for the DB 
Lending Agent's compensation from the Client Plan for the performance 
of securities lending services.
    14. The Agency Agreement will contain provisions to the effect that 
if the Affiliated Borrowers are designated by the Client Plan as 
approved borrowers: (a) The Client Plan will acknowledge that the 
Affiliated Borrowers are affiliates of the DB Lending Agent; and (b) 
the DB Lending Agent will represent to the Client Plan that each and 
every loan made to the Affiliated Borrowers on behalf of the Client 
Plan will be at market rates which are no less favorable to the Client 
Plan than a loan of such securities, made at the same time and under 
the same circumstances, to an unaffiliated borrower.
    15. When the DB Lending Agent is lending securities under a sub-
agency arrangement, the primary lending agent will enter into a 
securities lending agency agreement (the Primary Lending Agreement) 
with a fiduciary of a Client Plan who is independent of such primary 
lending agent, the DB Lending Agent or an Affiliated Borrower, before 
the Client Plan participates in the securities lending program. The 
primary lending agent will be unaffiliated with the DB Lending Agent or 
its affiliates. The DB Lending Agent will not enter into a sub-agent 
arrangement unless the Primary Lending Agreement contains substantive 
provisions akin to those in the Agency Agreement relating to the 
description of the operation of the lending program, use of an approved 
form of Loan Agreement, specification of securities which are available 
to be lent, required margin and daily marking-to-market, and provision 
of a list of approved borrowers (which will include Affiliated 
Borrowers). The Primary Lending Agreement will specifically authorize 
the primary lending agent to appoint sub-agents, to facilitate its 
performance of securities lending agency functions. Where the DB 
Lending Agent is to act as such a sub-agent, the Primary Lending 
Agreement will expressly disclose that the DB Lending Agent is to so 
act. The Primary Lending Agreement will also set forth the basis and 
rate for the primary lending agent's compensation from the Client Plan 
for the performance of securities lending services and will authorize 
the primary lending agent to pay a portion of its fee, as the primary 
lending agent determines in its sole discretion, to any sub-agent(s) it 
retains pursuant to the authority granted under such agreement.
    Pursuant to its authority to appoint sub-agents, the primary 
lending agent will enter into a securities lending sub-agency agreement 
(the Sub-Agency Agreement) with the DB Lending Agent under which the 
primary lending agent will retain and authorize the DB Lending Agent as 
sub-agent, to lend securities of the primary lending agent's Client 
Plans, subject to the same terms and conditions as are specified in the 
Primary Lending Agreement. Thus, for example, the form of Loan 
Agreement will be the same as that approved by the Client Plan 
fiduciary in the Primary Lending Agreement and the list of permissible 
borrowers under the Sub-Agency Agreement (which will include the 
Affiliated Borrowers) will be limited to those approved borrowers 
listed as such under the Primary Lending Agreement.
    The Applicant states that the Sub-Agency Agreement will contain 
provisions which are in substance comparable to those described above, 
which would appear in an Agency Agreement in situations where the DB 
Lending Agent is the primary lending agent. In this regard, the DB 
Lending Agent will make the same representation in the Sub-Agency 
Agreement as described above in Representation 14 with respect to arm's 
length dealings with the Affiliated Borrowers. The Sub-Agency Agreement 
will also set forth the basis and rate for the DB Lending Agent's 
compensation to be paid by the primary lending agent.26
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    \26\ The agreement setting forth the respective rights and 
obligations of the parties in a sub-agency arrangement may be a 
tripartite agreement among the Primary Lending Agent, the Client 
Plan and the DB Lending Agent.
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    16. In all cases, the DB Lending Agent will maintain transactional 
and market records sufficient to assure compliance with its 
representation that all loans to the Affiliated Borrowers are 
effectively at arm's length terms. Such records will be provided to the 
appropriate Client Plan fiduciary in the manner and format agreed to 
with the such Client Plan fiduciary, without charge to the Client Plan. 
A Client Plan may terminate the Agency Agreement (or the Primary 
Lending Agreement) at any time, without penalty to the Client Plan, on 
five business days notice. In addition, the DB Lending Agent will make 
and retain for six months, tape recordings evidencing all securities 
loan transactions with Affiliated Borrowers.
    17. The DB Lending Agent will negotiate the Loan Agreement with the 
Affiliated Borrowers on behalf of Client Plans as it does with all 
other borrowers. An independent fiduciary of the Client Plan will 
approve the terms of the Loan Agreement. The Loan Agreement will 
specify, among other things, the right of the Client Plan to terminate 
a loan at any time and the Plan's rights in the event of any default by 
an Affiliated Borrower. The Loan Agreement will explain the basis for

[[Page 57148]]

compensation to the Client Plan for lending securities to the 
Affiliated Borrowers under each category of collateral. The Loan 
Agreement also will contain a requirement that the Affiliated Borrowers 
must pay all transfer fees and transfer taxes related to the security 
loans.
    18. Before authorizing the program permitting loans to Affiliated 
Borrowers, a Client Plan will be furnished, upon request, the most 
recently available audited and unaudited financial statements of the 
Affiliated Borrowers. The Loan Agreement will contain a requirement 
that the Affiliated Borrower must give prompt notice at the time of a 
loan of any material adverse changes in its financial condition since 
the date of the most recently furnished financial 
statements.27 If any such changes have taken place, the DB 
Lending Agent will not make any further loans unless an independent 
fiduciary of the Client Plan has approved the loan in view of the 
changed financial condition. Conversely, if the Affiliated Borrower 
fails to provide notice of such a change in its financial condition, 
such failure will trigger an event of default under the Loan Agreement.
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    \27\ Like broker-dealers registered with the SEC, the Foreign 
Affiliates are subject to capital adequacy provisions of their 
respective regulatory entities. It is represented that such rules 
require the Foreign Affiliates to maintain, at all times, financial 
resources in excess of its financial resources requirement (the 
Financial Resources Requirement). For this purpose, financial 
resources include equity capital, approved subordinated debt and 
retained earnings, less deductions for illiquid assets. The 
Financial Resources Requirement includes capital requirements for 
market risk, credit risk, foreign exchange risk and large exposures. 
These regulatory authority rules require that if a firm's financial 
resources fall below a certain percentage, the regulatory authority 
must be notified so that it can examine the terms of the firm's 
financial position and require an infusion of more capital, if 
needed. In addition, a breach of the requirement to maintain 
financial resources in excess of the Financial Resources Requirement 
may lead to sanctions. If the breach is not promptly resolved, the 
firm's activities may be restricted.
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    19. As noted above, the agreement by the DB Lending Agent to 
provide securities lending services, as agent, to a Client Plan will be 
embodied in the Agency Agreement. The Client Plan and the DB Lending 
Agent will agree to the arrangement under which the DB Lending Agent 
will be compensated for its services as lending agent, including 
services as custodian, where applicable, and manager of the cash 
collateral received, where applicable, prior to the commencement of any 
lending activity. The securities lending fee arrangement will be set 
forth in the Agency Agreement and thereby will be subject to the prior 
written approval of a fiduciary of the Client Plan who is independent 
of the DB Lending Agent. Similarly, with respect to arrangements under 
which the DB Lending Agent is acting as securities lending sub-agent, 
the agreed upon fee arrangement of the primary lending agent will be 
set forth in the Primary Lending Agreement or the tripartite agreement, 
and such agreement will specifically authorize the primary lending 
agent to pay a portion of such fee, as the primary lending agent and 
sub-agent may agree, to any sub-agent, including the DB Lending Agent, 
which is to provide securities lending services to the Client 
Plan.28 The Client Plan will be provided with any reasonably 
available information which is necessary for the Client Plan fiduciary 
to make a determination whether to enter into or continue to 
participate under the Agency Agreement (or the Primary Lending 
Agreement or the tripartite agreement) and any other reasonably 
available information which the Client Plan fiduciary may reasonably 
request.
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    \28\ The foregoing provisions describe arrangements comparable 
to conditions (c) and (d) of PTE 82-63 which require that the 
payment of compensation to a ``lending fiduciary'' is made under a 
written instrument and is subject to prior written authorization of 
an independent authorizing fiduciary. In the event that a commingled 
investment fund will participate in the securities lending program, 
the special rule applicable to such funds concerning the 
authorization of the compensation arrangement set forth in condition 
(f) of PTE 82-63 will be satisfied.
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    20. Each time a Client Plan lends securities to an Affiliated 
Borrower pursuant to the Loan Agreement, the DB Lending Agent will 
reflect in its records the material terms of the loan, including the 
securities to be loaned, the required level of collateral, and the fee 
or rebate payable. The terms of the fee or rebate payable for each loan 
will be at least as favorable to the Client Plan as those of a 
comparable arm's length transaction between unrelated parties.
    21. The Client Plan will be entitled to the equivalent of all 
interest, dividends and distributions on the loaned securities during 
the loan period. The Loan Agreement will provide that the Client Plan 
may terminate any loan at any time without penalty to such Client Plan. 
Upon a termination, the Affiliated Borrower will be contractually 
obligated to return the loaned securities to the Client Plan within 
five business days of notification (or such longer period of time 
permitted pursuant to a class exemption). If the Affiliated Borrower 
fails to return the securities within the designated time, the Client 
Plan will have the right under the Loan Agreement to purchase 
securities identical to the borrowed securities and apply the 
collateral to payment of the purchase price and any other expenses of 
the Client Plan associated with the sale and/or purchase.
    22. The DB Lending Agent will establish each day a written schedule 
of lending fees 29 and rebate rates 30 in order 
to assure uniformity of treatment among borrowing brokers and to limit 
the discretion the DB Lending Agent would have in negotiating 
securities loans to the Affiliated Borrowers. Loans to all borrowers of 
a given security on that day will be made at rates or lending fees on 
the relevant daily schedules or at rates or lending fees which may be 
more advantageous to the Client Plans. It is represented that in no 
case will loans be made to Affiliated Borrowers at rates or lending 
fees that are less advantageous to the Client Plans than those on the 
schedule. The daily schedule of rebate rates will be based on the 
current value of the Client Plan's reinvestment vehicles and on market 
conditions, as reflected by demand for securities by borrowers other 
than the Affiliated Borrowers. As with rebate rates, the daily schedule 
of lending fees will also be based on market conditions, as reflected 
by demand for securities by borrowers other than the Affiliated 
Borrowers, and will generally track the rebate rates with respect to 
the same security or class of security.
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    \29\ The DB Lending Agent will adopt minimum daily lending fees 
for non-cash collateral payable by the Affiliated Borrowers to the 
DB Lending Agent on behalf of a Client Plan. The DB Lending Agent 
will submit the method for determining such minimum daily lending 
fees to an independent fiduciary of the Client Plan for approval 
before initially lending any securities to the Affiliated Borrower 
on behalf of such Client Plan.
    \30\ The DB Lending Agent will adopt separate maximum daily 
rebate rates with respect to securities loans collateralized with 
cash collateral. Such rebate rates will be based upon an objective 
methodology which takes into account several factors, including 
potential demand for loaned securities, the applicable benchmark 
cost of fund indices, and anticipated investment return on overnight 
investments permitted by the Client Plan's independent fiduciary. 
The DB Lending Agent will submit the method for determining such 
maximum daily rebate rates to such fiduciary before initially 
lending any securities to an Affiliated Borrower on behalf of the 
Client Plan.
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    23. The rebate rates (in respect of cash-collateralized loans made 
by Client Plans) which are established will also take into account the 
potential demand for loaned securities, the applicable benchmark cost 
of funds indices (typically, Federal Funds, overnight repo rate or the 
like) and anticipated investment return on overnight investments which 
are permitted by the relevant Client Plan fiduciary. Further, the 
lending fees (in respect of loans made by Client Plans collateralized 
by other than cash) which are established

[[Page 57149]]

will be set daily to reflect conditions as influenced by potential 
market demand.
    24. The DB Lending Agent will negotiate rebate rates for cash 
collateral payable to each borrower, including the Affiliated 
Borrowers, on behalf of a Client Plan. With respect to each designated 
class of securities, the maximum daily rebate rate will generally be 
the lower of (a) the overnight repo rate or Federal Funds rate, minus a 
stated percentage, and (b) the actual investment rate for the cash 
collateral, minus a stated percentage. Where cash collateral is derived 
from a loan with an expected maturity date (term loan) and is intended 
to be invested in instruments with similar maturities, the maximum 
rebate fee will be less than the expected investment return (assuming 
no investment default). With respect to any loan to an Affiliated 
Borrower, the DB Lending Agent will not negotiate a rebate rate with 
respect to such loan which would be expected, at the time of the loan, 
to produce a zero or negative return to the Client Plan (assuming no 
default on the investments related to the cash collateral from such 
loan). The Applicant represents that the written rebate rate 
established daily for cash collateral under loans negotiated with the 
Affiliated Borrower will not exceed the rebate rate which would be paid 
to a similarly situated unrelated borrower with respect to a comparable 
securities lending transaction. The DB Lending Agent will disclose the 
method for determining the maximum daily rebate rate as described above 
to an independent fiduciary of a Client Plan for approval before 
lending any securities to an Affiliated Borrower on behalf of the 
Client Plan.
    25. For collateral other than cash, the applicable loan fee in 
respect of any outstanding loan is reviewed daily for competitiveness 
and adjusted, where necessary, to reflect market terms and conditions. 
With respect to each successive two-week period, on average, at least 
50 percent or more of the outstanding dollar value of securities loans 
negotiated on behalf of Client Plans will be to unrelated borrowers. 
This will ensure that the competitiveness of the loan fee will be 
tested in the marketplace. Accordingly, loans to an Affiliated Borrower 
should result in competitive rate income to the lending Client Plan. At 
all times, the DB Lending Agent will effect loans in a prudent and 
diversified manner. While the DB Lending Agent will normally lend 
securities to requesting borrowers on a ``first come, first served'' 
basis, as a means of assuring uniformity of treatment among borrowers, 
it should be recognized that in some cases it may not be possible to 
adhere to a ``first come, first served'' allocation. This can occur, 
for instance where: (a) The credit limit established for such borrower 
by the DB Lending Agent and/or the Client Plan has already been 
satisfied; (b) the ``first in line'' borrower is not approved as a 
borrower by the particular Client Plan whose securities are sought to 
be borrowed; and (c) the ``first in line'' borrower cannot be 
ascertained, as an operational matter, because several borrowers spoke 
to different DB Lending Agent representatives at or about the same time 
with respect to the same security. In situations (a) and (b), loans 
would normally be effected with the ``second in line.'' In situation 
(c), securities would be allocated equitably among all eligible 
borrowers.
    26. The method of determining the daily securities lending rates 
(fees and rebates), the minimum lending fees payable by the Affiliated 
Borrowers and the maximum rebate payable to the Affiliated Borrower 
will be specified in the Agency Agreement or a tripartite agreement.
    27. If the DB Lending Agent reduces the lending fee or increases 
the rebate rate on any outstanding loan to an Affiliated Borrower 
(except for any change resulting from a change in the value of any 
third party independent index with respect to which the fee or rebate 
is calculated), the DB Lending Agent, by the close of business on the 
date of such adjustment, will provide the independent fiduciary of the 
Client Plan with notice that it has reduced such fee or increased the 
rebate rate to such Affiliated Borrower and that the Client Plan may 
terminate such loan at any time. In addition, the DB Lending Agent will 
provide the independent fiduciary of the Client Plan with such 
information as the fiduciary may reasonably request regarding such 
adjustment.
    28. The DB Lending Agent or an affiliate which is domiciled in the 
United States (for purposes of this paragraph ``the Deutsche Entity''), 
will indemnify and hold harmless each lending Client Plan in the United 
States against any shortfall in the collateral, as clearly set forth in 
the applicable lending agreement, plus interest and any transaction 
costs incurred (including attorney's fees of the Client Plan arising 
out of the default on the loans or the failure to indemnify properly 
under this provision) which the Client Plan may incur or suffer 
directly arising out of the lending of securities of such Client Plan 
to such Affiliated Borrowers, to the extent permitted by law, except to 
the extent that such losses or damages are caused by the Client Plan's 
negligence.
    In the event the Affiliated Borrower defaults on a loan, the DB 
Lending Agent will liquidate the loan collateral to purchase identical 
securities for the Client Plan. If the collateral is insufficient to 
accomplish such purchase, the DB Lending Agent, or in the case of 
affiliates which are U.S. broker-dealers, that broker-dealer or another 
Deutsche Entity 31 will indemnify the Client Plan for any 
shortfall in the collateral plus interest on such amount and any 
transaction costs incurred (including attorney's fees of the Client 
Plan arising out of the default on the loans or failure to indemnify 
properly under this provision). Alternatively, if such identical 
securities are not available on the market, the DB Lending Agent (or 
the affiliated U.S. broker-dealer or Deutsche Entity) will pay the 
Client Plan cash equal to the market value of the borrowed securities 
as of the date they should have been returned to the Client Plan plus 
all interest and accrued financial benefits derived from the beneficial 
ownership of such loaned securities. Under such circumstances, the DB 
Lending Agent (or the affiliated U.S. broker-dealer or a Deutsche 
Entity) will pay the Client Plan an amount equal to (a) the value of 
the securities as of the date such securities should have been returned 
to the Client Plan plus (b) all of the accrued financial benefits 
derived from the beneficial ownership of such loan securities as of 
such date, plus (c) interest from such date through the date of 
payment.
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    \31\ It is represented that U.S. banking law prohibits the 
indemnification of certain affiliates.
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    29. The Client Plan will receive collateral from the Affiliated 
Borrower by physical delivery, book entry in a U.S. securities 
depository, wire transfer or similar means by the close of business on 
or before the day the loaned securities are delivered to the Affiliated 
Borrower. The collateral will consist of cash, securities issued or 
guaranteed by the U.S. Government or its agencies or irrevocable U.S. 
bank letters of credit (issued by a person other than an affiliate of 
the DB Lending Agent) or such other types of collateral which might be 
permitted by the Department under a class exemption. The market value 
of the collateral on the close of business on the day preceding the day 
of the loan will be at least 102 percent of the market value of the 
loaned securities. The Loan Agreement will give the Client Plan a 
continuing security interest in and a lien on or title to the 
collateral. The DB Lending Agent

[[Page 57150]]

will monitor the level of the collateral daily. If the market value of 
the collateral falls below 100 percent (or such greater percentage as 
agreed to by the parties) of that of the loaned securities, the DB 
Lending Agent will require the Affiliated Borrower to deliver, by the 
close of business the next day, sufficient additional collateral to 
bring the level back to at least 102 percent.
    30. With respect to loans involving Foreign Affiliates, the 
following additional conditions will be applicable: (a) All collateral 
will be maintained in United States dollars or dollar-denominated 
securities or letters of credit; (b) all collateral will be held in the 
United States and the DB Lending Agent will maintain the situs of the 
securities loan agreements in the United States under an arrangement 
that will comply with the indicia of ownership requirements under 
section 404(b) of the Act and the regulations promulgated under 29 CFR 
2550.404b-1; and (c) a written consent to service of process in the 
United States for any civil action or proceeding brought in respect of 
the securities lending transaction, which consent provides that process 
may be served on the DB Lending Agent.
    31. Each Client Plan participating in the lending program will be 
sent a monthly transaction report. The monthly report will provide a 
list of all security loans outstanding and closed for a specified 
period. The report will identify for each open loan position, the 
securities involved, the value of the security for collateralization 
purposes, the current value of the collateral, the rebate or loan 
premium (as the case may be) at which the security is loaned, and the 
number of days the security has been on loan. In addition, if requested 
by the lending customer, the DB Lending Agent will provide more 
frequent confirmations of securities lending transactions, and, with 
respect to monthly reports, if requested by the customer, the DB 
Lending Agent will provide weekly or daily reports, setting forth for 
each transaction made or outstanding during the relevant reporting 
period, the loaned securities, the related collateral, rebates and loan 
premiums and such other information in such format as shall be agreed 
to by the parties. Further, prior to a Client Plan's approval of a 
securities lending program, the DB Lending Agent will provide a Client 
Plan fiduciary with a copy of the proposed exemption and the notice 
granting the exemption.
    32. In order to provide the means for monitoring lending activity, 
the monthly report will reflect rates on loans by the Client Plans to 
Affiliated Borrowers and rates on loans to other brokers as well as the 
level of collateral on the loans. In this regard, the monthly report 
will show, on a daily basis, the market value of all outstanding 
security loans to the Affiliated Borrowers and to other borrowers. In 
addition, the monthly report will state the daily fees where collateral 
other than cash is utilized and will specify the details used to 
establish the daily rebate payable to all brokers where cash is used as 
collateral. Further, the monthly report will state, on a daily basis, 
the rates at which securities are loaned to the Affiliated Borrowers 
and those at which securities are loaned to other brokers. This 
statement will give an independent fiduciary information which can be 
compared to that contained in the daily rate schedule.
    33. Only Client Plans with total assets having an aggregate market 
value of at least $50 million are permitted to lend securities to the 
Affiliated Borrowers. In the case of two or more Client Plans which are 
maintained by the same employer, controlled group of corporations or 
employee organization (i.e., the Related Client Plans), whose assets 
are commingled for investment purposes in a single master trust or any 
other entity the assets of which are ``plan assets'' under the Plan 
Asset Regulation), which entity is engaged in securities lending 
arrangements with the DB Lending Agent, the foregoing $50 million 
requirement will be satisfied if such trust or other entity has 
aggregate assets which are in excess of $50 million. However, if the 
fiduciary responsible for making the investment decision on behalf of 
such master trust or other entity is not the employer or an affiliate 
of the employer, such fiduciary must have total assets under its 
management and control, exclusive of the $50 million threshold amount 
attributable to plan investment in the commingled entity, which are in 
excess of $100 million.
    In the case of two or more Client Plans which are not maintained by 
the same employer, controlled group of corporations or employee 
organization (i.e., the Unrelated Client Plans), whose assets are 
commingled for investment purposes in a group trust or any other form 
of entity the assets of which are ``plan assets'' under the Plan Asset 
Regulation, which entity is engaged in securities lending arrangements 
with the DB Lending Agent, the foregoing $50 million requirement will 
be satisfied if such trust or other entity has aggregate assets which 
are in excess of $50 million (excluding the assets of any Client Plan 
with respect to which the fiduciary responsible for making the 
investment decision on behalf of such group trust or other entity or 
any member of the controlled group of corporations including such 
fiduciary is the employer maintaining such Client Plan or an employee 
organization whose members are covered by such Client Plan). However, 
the fiduciary responsible for making the investment decision on behalf 
of such group trust or other entity: (a) Must have full investment 
responsibility with respect to plan assets invested therein; 
32 and (b) must have total assets under its management and 
control, exclusive of the $50 million threshold amount attributable to 
plan investment in the commingled entity, which are in excess of $100 
million.
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    \32\ For purposes of this proposed exemption, the term ``full 
investment responsibility'' means that the fiduciary responsible for 
making investment decisions on behalf of the group trust or other 
form of entity, has and exercises discretionary management authority 
over all of the assets of the group trust or other plan assets 
entity.
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    In addition, none of the entities described above must be formed 
for the sole purpose of making loans of securities.
    34. In summary, the Applicant represents that the described 
transactions have satisfied or will satisfy the statutory criteria for 
an exemption under section 408(a) of the Act because:
    (a) The form of the Loan Agreement pursuant to which any loan is 
effected has been or will be approved by a fiduciary of the Client Plan 
which is independent of the DB Lending Agent before a Client Plan lends 
any securities to an Affiliated Borrower.
    (b) The lending arrangements (1) will permit the Client Plans to 
lend to the Affiliated Borrowers and (2) will enable the Client Plans 
to diversify the list of eligible borrowers and earn additional income 
from the loaned securities on a secured basis, while continuing to 
receive any dividends, interest payments and other distributions due on 
those securities.
    (c) The Client Plans have received or will receive sufficient 
information concerning the Affiliated Borrowers' financial condition 
before the Client Plan lends any securities to any of those entities.
    (d) The collateral on each loan to the Affiliated Borrowers 
initially will be at least 102 percent of the market value of the 
loaned securities, which is in excess of the 100 percent collateral 
required under PTE 81-6, and has been and will be monitored daily by 
the DB Lending Agent.
    (e) The Client Plans have received and will receive a monthly 
report which provides an independent fiduciary of

[[Page 57151]]

the Client Plans with information on loan activity, fees, loan return/
yield and the rates on loans to the Affiliated Borrowers as compared 
with loans to other brokers and the level of collateral on the loans.
    (f) Neither the DB Lending Agent nor any affiliate has or will have 
discretionary authority or control over the Client Plan's acquisition 
or disposition of securities available for loan.
    (g) The terms of the fee or rebate payable for each loan have been 
and will be at least as favorable to the Client Plans as those of a 
comparable arm's length transaction between unrelated parties.
    (h) All of the procedures under the transactions have conformed or 
will conform to the applicable provisions of PTE 81-6 and PTE 82-63 and 
also have been and will be in compliance with the applicable securities 
laws of the United States and the local laws of the Foreign Affiliates.

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

Information Systems Development, Inc. Employees Profit Sharing Plan 
(the Plan), Located in Cincinnati, Ohio

[Application No. D-10787]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to the proposed sale by the Plan of certain 
illiquid limited partnership interests (collectively; the Interests) to 
CONVERGYS Information Management Group Inc. (the Company), the sponsor 
of the Plan and a party in interest with respect to the Plan, provided 
that the following conditions are met:
    (1) The sale is a one-time transaction for cash;
    (2) The Plan receives an amount equal to the greater of: (a) The 
Plan's cost for the Interests, less all cash distributions received as 
a result of owning the Interests (i.e., the adjusted cost), (b) the 
fair market value of the Interests on the date of the sale, as 
established by a qualified independent appraiser, or (c) the estimated 
value of the Interests, as determined by the general partner of each 
partnership and reported on the most recent account statements 
available at the time of the sale;
    (3) The Plan pays no commissions or any other expenses relating to 
the sale; and
    (4) The Plan suffers no loss, as a result of its acquisition and 
holding of the Interests, taking into account all cash distributions 
received by the Plan as a result of owning the Interests.

Summary of Facts and Representations

    1. The Plan is a 401(k) defined contribution, profit sharing plan 
with approximately 43 participants and $2,487,682.52 in total assets as 
of March 31, 1999. Approximately 1.16% of the Plan's total assets will 
be involved in the proposed transaction. Mr. James Dahmus, a Senior 
Vice President and Controller of the Company, is the trustee of the 
Plan.
    The Plan was originally established and maintained by Information 
Systems Development, Inc. (ISD). The Company acquired ISD effective 
January 1, 1996, and as a result became the sponsor of the Plan. The 
Company is in the business of providing billing and customer support 
solutions for the communications industry, both domestically and 
internationally.
    2. Among the assets of the Plan are investments in five limited 
partnerships (i.e., the Interests): (i) Pegasus Aircraft Partners, L.P. 
(Pegasus I); (ii) Pegasus Aircraft Partners II, L.P. (Pegasus II); 
(iii) Paine Webber Equity Partners Two Limited Partnership (PW Equity); 
(iv) Paine Webber Preferred Yield Fund, L.P. (PW Yield); and (v) 
Geodyne Energy Income Ltd. Partnership II D (Geodyne).
    3. Pegasus I was formed in June, 1988, for the purpose of acquiring 
a specified portfolio of used commercial aircraft and leasing them to 
commercial airlines. The managing general partner is Pegasus Aircraft 
Management Corporation, located in San Francisco, California.
    On December 21, 1988, the Plan purchased its Interests for cash 
during the original offering to the public through Paine Webber 
Incorporated (Paine Webber), a sales agent.33 Specifically, 
the Plan purchased 255 units in Pegasus I at a price of $20 per unit, 
for a total purchase price of $5,100. The Plan's interest in Pegasus I 
represents a 0.006% interest in the partnership. As of December 31, 
1998, the Plan had received total distributions from Pegasus I in the 
amount of $4,917.
---------------------------------------------------------------------------

    \33\ The Plan's account relating to the holding of the Interests 
is currently serviced through a Paine Webber office located in Fort 
Lauderdale, Florida. The Interests were purchased by the Plan 
through Paine Webber's office in Plantation, Florida, but this 
office has now closed.
---------------------------------------------------------------------------

    4. Pegasus II was formed in April, 1989, also for the purpose of 
acquiring a specified portfolio of used commercial aircraft and leasing 
them to commercial airlines. The managing general partner is Pegasus 
Aircraft Management Corporation, located in San Francisco, California.
    On December 21, 1989, the Plan purchased for cash from Paine Webber 
1,000 units in Pegasus II at a price of $20 per unit, for a total 
purchase price of $20,000. The Plan's interest represents a 0.136% 
interest in Pegasus II. As of December 31, 1998, the Plan had received 
distributions from Pegasus II in the amount of $15,380.
    5. PW Equity was formed in May, 1986, for the purpose of investing 
in a diversified portfolio of existing, newly-constructed, or to-be-
built, income-producing real properties such as apartments, shopping 
centers, hotels, office buildings and industrial buildings. The 
managing general partner is Second Equity Partners, Inc., located in 
Boston, Massachusetts.
    On June 30, 1987, the Plan purchased for cash from Paine Webber 
35,000 units in PW Equity at a price of $1.00 per unit, for a total 
purchase price of $35,000. The Plan's interest represents a 0.026% 
interest in PW Equity. As of May 15, 1998, the Plan received 
distributions from PW Equity totaling $21,675.81.
    6. PW Yield was formed in December, 1989, for the purpose of 
acquiring a portfolio of equipment for leasing to unaffiliated parties. 
PW Yield's portfolio of equipment includes industrial, materials 
handling, mining, medical, research and development, transportation, 
store fixtures, manufacturing testing and office technology equipment. 
The managing general partner is CAI Equipment Leasing II Corp., located 
in Denver, Colorado.
    On October 30, 1990, the Plan purchased for cash from Paine Webber 
37 units in PW Yield at a price of $500 per unit for a total purchase 
price of $18,500. The Plan's interest in PW Yield represents a 0.026% 
interest in the partnership. As of December 31, 1998, the Plan had 
received distributions from the partnership totaling $19,340.
    7. Geodyne was formed in May, 1988, for the purpose of engaging in 
the business of owning interests in producing oil and gas properties 
located in the continental United States. The general partner is 
Geodyne Resources, Inc., located in Tulsa, Oklahoma.
    On April 15, 1988, the Plan purchased for cash from Paine Webber 
250 units in

[[Page 57152]]

Geodyne at a price of $100 per unit for a total purchase price of 
$25,000. The Plan's interest represents a 0.079% interest in Geodyne. 
As of May 15, 1998, the Plan had received distributions from Geodyne 
totaling $22,022.
    8. The partnerships and their general partners are unrelated to 
ISD, the Company and the Plan. As noted above, the five limited 
partnerships (the Partnerships) were organized and marketed by Paine 
Webber.34 The Partnerships and their underlying assets are 
valued semiannually by an independent appraiser.
---------------------------------------------------------------------------

    \34\ The applicant represents that Paine Webber is not the 
general partner of any of the Partnerships; however, Paine Webber's 
parent company, Paine Webber Group Inc., is the parent company of 
the following general partners:
    Pegasus I--Air Transport Leasing, Inc. (Administrative general 
partner)
    Pegasus II--Air Transport Leasing, Inc. (Administrative general 
partner)
    PW Yield--General Equipment Management, Inc. (Administrative 
general partner)
    PW Equity--Second Equity Partners, Inc. (Managing general 
partner)
---------------------------------------------------------------------------

    9. The applicant represents that there is no ready market for the 
Partnerships, and the general partners are under no obligation to aid 
in the sale of the Interests. The Company's efforts to find a buyer for 
the Interests have been unsuccessful. As a result, the Plan now 
proposes to sell the Interests to the Company. The Company will 
purchase the Interests for the greater of: (i) The cost of the 
Interests less the distributions received by the Plan from each 
Partnership (i.e., the adjusted cost); (ii) fair market value of the 
Interests, as determined on the date of the proposed sale by an 
independent, qualified appraiser; or (iii) the estimated value of the 
Interests, as determined by the general partner of each partnership and 
reported on the most recent account statements available at the time of 
the sale.
    10. Valuations of the Interests are provided to Paine Webber by 
independent valuation services twice a year. Pegasus I, Pegasus II, PW 
Equity and PW Yield are valued by the Valuation Group (VG), an 
independent qualified appraisal firm located in Memphis, Tennessee, and 
Geodyne is valued by Stanger & Company (SC), an independent qualified 
appraisal firm located in Shrewsbury, New Jersey. The VG and SC are 
independent of each Partnership, the Plan and the Company.
    In the reports dated June 22, 1999 (the VG Reports), Michael D. 
Phelan (Mr. Phelan), the president of VG, stated that the aggregate 
fair market value of: the Pegasus I Interests is $1,173 ($4.60 per 
unit); the Pegasus II Interests is $4,690 ($4.69 per unit); the PW 
Equity Interests is $5,600 ($0.16 per unit); and the PW Yield Interests 
is $481 ($13 per unit). The VG Reports indicate that these investments 
are generally illiquid, non-tradeable investment vehicles designed to 
be held by the original investors until the partnership sponsor elects 
to sell the underlying assets and make liquidating distributions to 
limited partners. Although there is no readily available market for the 
Interests, VG conducts a partnership valuation process involving the 
following procedures: (i) Financial statement analysis and review of 
the partnership's legal structure and related issues; (ii) research of 
the underlying assets; and (iii) analysis related to the market for 
limited partnership interests and similar traded securities.
    11. The fair market value determination for Geodyne was prepared by 
SC on March 31, 1999 and states that the fair market value per each 
Geodyne Interest is $18.00 per unit for 250 units for a total price of 
$4500 (SC Report). SC Report states that in estimating the value of a 
business or its securities, consideration is typically given to the 
following approaches to value: the Asset Accumulation or Net Asset 
Approach, the Capital Market Valuation Approach and the Income 
Approach.
    12. On August 1, 1994, the Plan appointed Fidelity Trust Management 
Company (Fidelity) as trustee and record-keeper for the Plan's assets 
(excluding the Interests). The applicant represents that Fidelity did 
not accept trusteeship over the Interests because, due to their 
illiquid nature, they could not be valued on the same basis as the 
Plan's other investments.35 ISD, the prior Plan sponsor, at 
that time determined that the Interests had no value and ceased 
allocations to the participants' accounts with respect to the 
Interests.36 The applicant states that it subsequently 
determined that this approach was incorrect. Therefore, the Company 
filed an application with the Internal Revenue Service (IRS) on April 
21, 1997, under its Voluntary Compliance Resolution Program (VCR 
Program). A compliance statement was issued in September of 1997, 
approving the correction methodology of allocating the value of the 
Interests on a pro rata basis to the participants' accounts.
---------------------------------------------------------------------------

    \35\ Paine Webber is currently the custodian of the Interests.
    \36\ The Department is providing no opinion herein regarding 
whether ISD's determinations with respect to the Interests violated 
any provision of Part 4 of Title I of the Act.
---------------------------------------------------------------------------

    The Company now desires to purchase the Interests from the Plan for 
cash in order to allow the Plan to accomplish this allocation. The Plan 
allows its participants to access their account valuations, and to 
direct the investment of their accounts, on a daily basis. However, the 
applicant states that the Interests are illiquid and incompatible with 
the Plan's daily valuation system. The sale of the Interests to the 
Company would allow the participants to receive an allocation of cash 
which they could invest in other investment vehicles offered under the 
Plan, and would facilitate distributions from the Plan.
    13. The Company proposes to pay the Plan the greater of: (i) The 
original purchase price of the Interests less distributions received 
from the Partnerships (i.e., adjusted cost); (ii) the fair market value 
as of the date of the sale, as established by a qualified independent 
appraiser; or (iii) the estimated value of the Interests, as determined 
by the general partner of each Partnership and reported on the most 
recent account statements available at the time of the sale. With 
respect to the valuations noted in item (ii) above, the applicant 
represents that fair market value of the Interests is determined twice 
a year by an independent, qualified valuation firm and provided to 
Paine Webber for the purpose of issuing account statements. The Paine 
Webber account statements also include an estimated value provided by 
the general partner of each Partnership, which indicate the amounts 
noted in item (iii) above. Based on the most recent Paine Webber 
statements, the Company would buy the Interests for the purchase price 
shown in the table below.

----------------------------------------------------------------------------------------------------------------
                                                                                 Fair
                           Partnership                             Adjusted     market      Issuer     Purchase
                                                                   cost \37\     value    value \38\     price
----------------------------------------------------------------------------------------------------------------
Pegasus I.......................................................        $183      $1,173      $1,877      $1,877
Pegasus II......................................................       4,620       4,690       7,210       7,210
PW Equity.......................................................      13,324       5,600       9,450      13,324
PW Yield........................................................       (840)         481         777         777

[[Page 57153]]

 
Geodyne.........................................................       2,998       4,500       5,783       5,783
                                                                 -----------------------------------------------
    Total.......................................................  ..........  ..........  ..........      28,971
----------------------------------------------------------------------------------------------------------------

    14. Certain Repurchase Offers for the Interests. The applicant 
states that the general partner of Geodyne is obligated by the terms of 
the Partnership agreement to annually issue a repurchase offer which is 
based on the estimated future net revenues from the Partnership's 
reserves. The most recent repurchase offer was for an amount which was 
less than either the third party determination of fair market value, or 
the issuer estimated value. The current repurchase price is in the 
process of being determined.
---------------------------------------------------------------------------

    \37\ The adjusted cost is the cost of the Interests less 
distributions received by the Plan from each Partnership.
    \38\ This is the estimated value of the Interests as determined 
by the general partner of each Partnership.
---------------------------------------------------------------------------

    Three purchase offers were made in 1998 to the limited partners in 
PW Equity. First Commercial Guarantee, in an offer dated May 8, 1998, 
was seeking to acquire up to 0.8% of the outstanding Interests for 
$0.28 per Interest. Madison Partnership Liquidity Investors 27, LLC, in 
an offer dated April 29, 1998, was seeking to acquire up to 4.9% of the 
outstanding Interests for $0.21 per interest. Smithtown Bay, LLC, in an 
offer dated March 11, 1998, was seeking to acquire approximately 4.9% 
of the outstanding Interests for $0.20 per Interest. The applicant 
represents, however, that the managing general partner advised the 
limited partners of PW Equity that it did not support these offers 
because such offers were financially inadequate as compared to the 
managing general partner's recent estimate of the Partnership's value.
    A repurchase offer was recently made to the limited partners in 
Pegasus II. Madison Liquidity Investors 102, LLC, in an offer dated 
March 23, 1999, was seeking to acquire up to 4.9% of the outstanding 
Interests for $3.50 per Interest. The offer expired April 30, 1999. The 
purchase price of $3.50 per Interest was less than the general partners 
estimate and a third party estimate of value.
    15. The applicant represents that the proposed transaction is 
administratively feasible, and in the best interest and protective of 
the Plan. The transaction will be for cash and the Plan will pay no 
costs or commissions associated with the sale. Furthermore, the 
applicant represents that the Interests are the subject of a Compliance 
Statement between the IRS and the Company. The Compliance Statement 
states that the participants' accounts would be credited with their pro 
rata share of the value of the Interests. Therefore, cash received from 
the sale of the Interests will be allocated to the participants' 
accounts in the Plan. Additionally, the Plan has changed to daily 
recordkeeping, and the Interests cannot be valued on the daily basis. 
The applicant represents that the Interests are incompatible with the 
Plan's current investment environment, which allows the participants to 
obtain the value of their accounts and direct the investment of their 
accounts on the daily basis. Therefore, liquidating the Interests would 
generate cash to the Plan that would facilitate any required 
distributions to the Plan's participants and beneficiaries. The 
applicant states that if the Interests were sold to an unrelated third 
party, the Plan would receive substantially less than the amounts the 
Company is proposing to pay for the Interests. Furthermore, the 
applicant represents that any amounts received by the Plan as a result 
of the proposed transaction, which are in excess of the fair market 
value of the Interests will be treated as a contribution to the Plan, 
but that this contribution will not exceed limitations of section 415 
of the Internal Revenue Code.
    16. In summary, the applicant represents that the proposed 
transaction satisfies the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons: (a) The sale will 
be a one-time transaction for cash; (b) the Plan will pay no 
commissions or any other expenses relating to the sale; (c) the Plan 
will receive an amount equal to the greater of: (i) The Plan's cost for 
the Interests, less all cash distributions received as a result of 
owning the Interests (i.e., the adjusted cost), (ii) the fair market 
value of the Interests on the date of the sale, as established by a 
qualified independent appraiser, or (iii) the estimated value of the 
Interests, as determined by the general partner and reported on the 
most recent account statements available at the time of the sale; and 
(d) the sale will enhance the liquidity and diversification of the 
Plan's assets and facilitate any required distributions to the 
participants and beneficiaries.

Tax Consequences of Transaction

    The Department of Treasury has determined that if a transaction 
between a qualified employee benefit plan and its sponsoring employer 
(or an affiliate thereof) results in the plan either paying less or 
receiving more than fair market value, such excess may be considered a 
contribution by the sponsoring employer to the plan, and therefore must 
be examined under the applicable provisions of the Internal Revenue 
Code, including sections 401(a)(4), 404 and 415.

Notice to Interested Persons

    Notice of the proposed exemption will be given to all interested 
parties (participants and beneficiaries) by first class mail or inter-
office mail within ten (10) days of the date of publication of this 
notice of pendency in the Federal Register. Such notice will include a 
copy of the notice of proposed exemption as published in the Federal 
Register and a supplemental statement, as required pursuant to 29 CFR 
2570.43(b)(2). This supplemental statement will inform all interested 
persons of their right to comment on the proposed exemption and to 
request a hearing. All written comments and requests for a hearing are 
due within forty (40) days of the publication of this notice of 
proposed exemption 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.)

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

[[Page 57154]]

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

    Signed at Washington, DC, this 18th day of October, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 99-27520 Filed 10-21-99; 8:45 am]
BILLING CODE 4510-29-P