[Federal Register Volume 65, Number 174 (Thursday, September 7, 2000)]
[Notices]
[Pages 54303-54315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22854]



[[Page 54303]]

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10781, et al.]


Proposed Exemptions; Journal Company, Inc. 401(k) Savings Plan, 
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

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
requests for a hearing should state: (1) The name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing.

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, NW., 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 the Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-5638, 200 Constitution Avenue, NW., 
Washington, DC 20210.

Notice to Interested Persons

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

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), 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.

Journal Company, Inc. 401(k) Savings Plan (the Plan) Located in 
Trenton, New Jersey

[Application No. D-10781]

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 406(a) and 406(b)(1), 406(b)(2), and 
406(b)(3) 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 to: (a) the receipt by certain 
affiliates and predecessors of Journal Register East, Inc. (JRE), by 
Boatmen's Trust Company (the Bank), and by certain individuals alleged 
in a complaint to have been or to be fiduciaries of the Plan 
(collectively, the Defendants) of releases signed by participants in 
the Plan, in which such participants waive their rights to sue in 
connection with the acquisition and retention in such participants' 
accounts in the Plan of interests in certain guaranteed investment 
contracts (GICs) issued by Confederation Life Insurance Company (CLI); 
and (b) the payment by the corporate Defendants of a settlement amount 
to be allocated to the accounts of participants in the Plan in exchange 
for release from liability obtained from such participants; provided 
that the following conditions are satisfied:
    (a) The payment of the settlement amount is a one-time cash 
transaction;
    (b) Each participant whose account in the Plan has an interest in 
the GICs decides whether, in exchange for the settlement amount, to 
waive his or her right to sue in connection with the acquisition and 
retention in such participant's account in the Plan of interests in 
such GICs; or to opt out of such settlement and retain all such rights 
and causes of action;
    (c) Pursuant to the terms of the settlement, the account of each 
participant in the Plan who waives his or her right to sue receives an 
amount of the settlement proceeds in proportion to the interest each 
such account has in the GICs;
    (d) Pursuant to the terms of the settlement, the corporate 
Defendants are responsible for paying the attorneys' fees to the law 
firm representing the plaintiffs (the Plaintiffs);
    (e) A portion of the fees that would have been due and payable to 
the Plaintiffs' attorneys will be withheld from the settlement proceeds 
by JRE, an employer of employees covered by the Plan, and paid to the 
Plaintiffs' in cash based on each Plaintiff's share of the amount of 
the settlement proceeds allocated to all of the Plaintiffs;
    (f) Notwithstanding the waiver by any participant of his or her 
right to sue, the Plan does not release any claims, demands, and/or 
causes of action which it may have in connection with the acquisition 
and retention in participants' accounts in the Plan of interests in the 
GICs;
    (g) No expenses are incurred by the Plan as a result of the 
settlement;
    (h) The Plaintiffs' attorneys and each participant who signs the 
release and waives his or her right to sue will monitor the payment of 
the settlement proceeds by the corporate Defendants and the allocation 
of the proper amounts into such participants' accounts in the Plan, in 
order to ensure compliance with the terms of the settlement agreement; 
and
    (i) All terms and conditions of the transaction are no less 
favorable than those obtainable at arm's length with unrelated third 
parties.
    Effective Date: The proposed exemption is effective upon the date 
that the Defendants enter into a settlement of the lawsuit with the 
Plaintiffs, as described below.

[[Page 54304]]

Summary of Facts and Representations

    1. The applicant, JRE, is a corporation organized under the laws of 
the State of Delaware with its principal place of business in Trenton, 
New Jersey. JRE is the wholly-owned subsidiary of Journal Register 
Company (JRC). JRC is a publicly traded corporation engaged in the 
publishing business. In this regard, JRC owns and operates eighteen 
(18) daily newspapers and 118 non-daily publications throughout the 
United States.
    2. In December of 1993, JRC acquired ownership of the Evening Call 
Publishing Company (Evening Call). At the time of the acquisition, 
Evening Call was the publisher of a newspaper in Woonsocket, Rhode 
Island, and the sponsor of the Evening Call Publishing Company Savings 
Plan (the Evening Call Plan).
    Established in August 1985, the Evening Call Plan was a defined 
contribution plan in which individual accounts were established and 
maintained for the benefit of eligible participants. Such accounts 
consisted of voluntary contributions deducted from participants' wages 
on a pre-tax or post-tax basis with matching contributions from Evening 
Call. Certain employees of Evening Call served as trustees and 
fiduciaries of the Evening Call Plan. Either Evening Call served as 
plan administrator or delegated that responsibility to various 
individuals who held the position as publisher of the newspaper.
    It is represented that the plan administrator selected CLI, as 
funding agent for the Evening Call Plan. At that time, CLI was a 
Canadian corporation doing business as an insurance company in the 
United States through branches in Michigan and Georgia. Further, it is 
represented that the plan administrator selected as investment options 
for the Evening Call Plan an equity fund and a guaranteed investment 
fund, both of which were managed by CLI. Participants in the Evening 
Call Plan could specify how the assets allocated to their individual 
accounts would be invested. In this regard, the Evening Call Plan 
provided that all or a portion of the assets in a participant's account 
could be directed into either or both investment options. The 
guaranteed investment fund consisted entirely of investments in one or 
more GICs issued by CLI.
    It is represented that participants were informed that investments 
in the GICs, made between August 1, 1986, and July 31, 1988, were 
guaranteed a rate of return of 9.10% per annum, compounded through July 
31, 1996. Under the terms and conditions of the GICs, participants who 
directed assets from their accounts in the Evening Call Plan into such 
GICs could not change investment options until the GICs matured in 1995 
and 1996. Further, it is represented that the GICs were illiquid, and 
that there was no secondary market for such GICs.
    3. The Journal Company, Inc. 401(k) Savings Plan (the Plan), which 
is the subject of this exemption, is the successor in interest to the 
Evening Call Plan. The Evening Call Plan was merged into the Plan in 
December 1993. In this regard, it is represented that the assets held 
by the Evening Call Plan in the form of the GICs were allocated to 
separate accounts for those participants in the Plan who formerly were 
participants in the Evening Call Plan.
    JRE is the employer and sponsor of the Plan. Other participating 
employers in the Plan are all members of the same controlled group of 
corporations and include affiliates, divisions, or subsidiaries of JRE 
or JRC. The Plan is an individual account plan into which employees of 
such participating employers defer salary. It is represented that there 
were approximately 939 participants and beneficiaries in the Plan, as 
of March 31, 1999. As of June 30, 1999, the estimated fair market value 
of the assets in the Plan was $15,868,776.
    The Bank, a Delaware corporation with principal offices in St. 
Louis, Missouri, served, for the period from April 1, 1994, until 
January 28, 1998, as trustee and administrator of the Plan. The current 
trustee of the Plan is Merrill Lynch Trust Co.
    4. In 1994, CLI was placed in receivership. In this regard, on 
August 11, 1994, Canadian insurance regulatory authorities placed CLI 
into a liquidation and winding-up process. Further, on August 12, 1994, 
the insurance authorities of the State of Michigan commenced legal 
action to place the United States operations of CLI into 
rehabilitation; thereby freezing the investments in GICs held by the 
participants' individual accounts in the Plan. At that time, CLI 
proceeded to liquidate its assets under a plan of liquidation approved 
by the Circuit Court for the County of Ingham, Michigan. It is 
represented that on or about March 1997, of three (3) distribution 
options, the Plan selected the one which provided the most immediate 
payment to participants in the Plan. In April of 1997, CLI began making 
payments on behalf of the GICs.
    It is represented that seventy-five (75) participants in the Plan 
had interests in the GICs in their accounts which had been frozen. In 
early June 1997, the Plan received notice of distribution from the 
estate of CLI on behalf of such participants' accounts. In July 1997, 
payments made by CLI were allocated to the accounts of such 
participants in the Plan. The application states that when the accounts 
were unfrozen, the participants received earnings from the CLI 
investment that were lower than would have been received pursuant to 
the terms of the GICs, if such terms had been honored by CLI.
    5. On August 11, 1997, twenty-six (26) individuals filed suit in 
the United States District Court for the District of New Jersey against 
the Defendants. The Defendants listed in the complaint included the 
Bank, JRC, Evening Call, and Journal Register Newspaper's, Inc. (JRN), 
the former parent of Evening Call, and certain individuals alleged to 
be trustees and fiduciaries of the Evening Call Plan or members of the 
Board of Directors of JRC and its subsidiaries, JRN and Evening Call. 
Some of the individual Defendants are also participants in the Plan 
whose accounts now hold interests in the GICs.
    All of the individual Plaintiffs were employees of Evening Call and 
are or were employees of JRE or its affiliates. All of the Plaintiffs 
are members of a single bargaining unit represented by Local 128 of the 
Woonsocket Newspaper Guild, AFL-CIO. The Plaintiffs were all 
participants in the Evening Call Plan and are participants whose 
accounts in the Plan hold interests in the GICs. Further, the accounts 
in the Plan of other participants, who are neither Plaintiffs nor 
Defendants, also hold interests in the GICs.
    The Plaintiffs filed suit against the Defendants for breach of 
fiduciary duty. In this regard, the complaint alleged that the 
Defendants breached their fiduciary duties to the Plaintiffs by failing 
to exercise prudence in the selection of Plan investments, by failing 
to monitor the continued retention of the GICs in the Plan, by failing 
to disclose relevant information to the Plaintiffs with respect to the 
GICs on a timely basis, by failing to create and maintain a system 
through which participants could direct investments in their accounts 
consistent with section 404(c) of the Act, and by failing to adequately 
diversify Plan assets.
    As relief, the complaint demands that the Defendants make whole the 
Plaintiffs' and other participants' individual accounts in the Plan 
from all losses and damages suffered as a result of the Defendants' 
breaches of fiduciary duties and violations of the Act. In addition, 
Plaintiffs seek pre-judgment and post-judgment interest on amounts

[[Page 54305]]

awarded, reasonable attorneys fees, costs and expenses, and all other 
legal, equitable, or remedial relief, as deemed appropriate by the 
court.
    As of August 1999, the Defendants had not filed a formal answer to 
the complaint. Notwithstanding the Plaintiffs' allegations, the 
Defendants maintain that there was no breach of fiduciary duty involved 
in the decision to select or retain the GICs in the Plan or in the 
handling of such GICs. Rather, the Defendants argue that losses, if 
any, that may have occurred as a result of the Plan's holding of the 
GICs were inherent risks associated with the higher returns available 
from such an investment, and that no compensable injury occurred. 
Further, JRE maintains that some of the individuals named as Defendants 
were not, in fact, fiduciaries with respect to the issues raised in the 
complaint.
    The applicant also represents that the Bank contends it was not a 
fiduciary with respect to the issues raised in the complaint. In this 
regard, the applicant states that the Bank was the directed trustee of 
the Plan until January 28, 1998, and thereafter, was not currently a 
directed trustee or fiduciary of the Plan. Further, it is represented 
that the Bank is not now a party in interest with respect to the Plan.
    6. The two (2) corporate Defendants, JRC and the Bank, have 
proposed a settlement of the litigation with the Plaintiffs. In this 
regard, within fifteen (15) days of the publication of a final 
exemption on the subject transactions, each of the corporate Defendants 
proposes to deliver to the trustee of the Plan a bank or certified 
check representing its respective share of the settlement amount. JRC 
will pay $253,125, plus interest, of the settlement amount; and the 
Bank will pay $50,000, plus interest, of the settlement amount. The 
entire settlement amount in the aggregate is equal to $303,125, plus 
interest. Of this settlement amount, $258,125, plus interest, is 
allocated for payments to the accounts of participants who accept the 
settlement terms; and, as discussed more fully below, $45,000, plus 
interest, is allocated for payment of the fees of the attorneys for the 
Plaintiffs.
    It is represented that the settlement amount was reached based on 
the costs and risks of litigation and represents a compromise between 
the conflicting positions of the Plaintiffs and Defendants. None of the 
individual named Defendants who are also participants in the Plan will 
contribute any funds toward the settlement amount. The settlement is 
contingent on all named Plaintiffs executing releases. It is expected 
that all Plaintiffs will do so, on the recommendation of their counsel.
    In the proposed settlement agreement, the Defendants will 
specifically deny all claims and contentions alleged by the Plaintiffs 
and will not admit any wrongdoing or liability. Pursuant to the terms 
of the settlement, an escrow account will be established into which a 
settlement payment in the amount of $258,125, plus interest, will be 
deposited.\1\ Each of the seventy-five (75) Plan participants whose 
accounts have an interest in the GICs (including those who are not 
named as Plaintiffs, and those who are named as Defendants) will be 
informed of the settlement and its terms, and will be asked to execute 
and return a release of all actual or potential claims against the 
named Defendants, all of their affiliates, predecessors, officers, 
directors, and employees serving as fiduciaries, arising out of the 
acquisition and holding of interests in the GICs by individual 
participant accounts in the Plan.
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    \1\ The applicant anticipates treating the amounts paid under 
the settlement agreement, as restorative payments. In this regard, 
the applicant is relying on certain private letter rulings by the 
Internal Revenue Service that a restorative payment made to a 
defined contribution plan in response to claims of fiduciary breach 
made by participants: (a) Will not constitute a ``contribution'' or 
other payment subject to the provisions of either section 404 or 
section 4972 of the Code; (b) will not adversely affect the 
qualified status of such plan, pursuant to either section 401(a)(4) 
of section 415 of the Code; and (c) will not, when made to such 
plan, result in taxable income to the plan participants and 
beneficiaries. The Department, herein, is offering no opinion on 
whether the amounts received by the participants, pursuant to the 
terms of the settlement agreement, constitute restorative payments 
under the Code.
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    Under the proposed settlement, each Plan participant whose account 
has an interest in the GICs must decide whether to accept the proposed 
settlement, or to opt out of it and retain whatever rights and causes 
of actions he or she may have. Each participant who chooses to accept 
the proposed settlement must release all claims arising from the 
matters involved in the litigation. It is represented that no fiduciary 
of the Plan will exercise discretion or provide advice to, or otherwise 
assist, any other participant with respect to the decision as to 
whether to accept the proposed settlement.
    To the extent a participant agrees to release all actual or 
potential claims arising out of the acquisition and holding of 
interests in the GICs by his or her account in the Plan, it is 
represented that a proportional amount of the escrow shall be paid to 
the Plan (in proportion to the amount each such participant's account 
had invested in the GICs) and that such amount shall be allocated to 
such participant's account under the Plan. For example, if a 
participant's account held a one percent (1%) interest in the GICs, 
that participant's account would receive one percent (1%) of the 
$258,125, plus interest, out of the settlement proceeds. It is 
represented that named Defendants whose accounts in the Plan also hold 
interests in the GICs by reason of such Defendants' status as plan 
participants will receive the same treatment as all other non-plaintiff 
plan participants. If a participant who signed the release does not 
cash the distribution check or cannot be located at the time a 
distribution from the individual participant accounts would be 
appropriate under the Plan, standard provisions of the Plan will apply. 
Such provisions generally provide that the plan administrator will use 
the appropriate ``lost participant'' facilities to locate the 
participant, and if the participant cannot be located, the assets in 
the individual's account will be forfeited to the Plan, subject to 
restoration to the individual upon location of such missing 
participant.
    Any participants who do not sign a release will not receive an 
allocation into their account from the settlement proceeds. As a 
result, the funds that otherwise would have been allocated to such 
participant's account from the settlement proceeds, had the participant 
signed the release, will be returned to the settling Defendants.
    As described above, $258,125, plus interest, of the settlement 
amount is allocated for payment to the accounts of participants who 
accept the settlement terms; and, $45,000, plus interest, is allocated 
for payment to the law firm representing the Plaintiffs to cover 
attorneys' fees and expenses in connection with the law suit. In this 
regard, the law firm representing the Plaintiffs has agreed to waive a 
portion of such attorneys' fees. It is anticipated that of the sum of 
$45,000, plus interest, that otherwise would have been paid out of the 
settlement proceeds to the attorneys of the Plaintiffs, JRE will 
withhold approximately $16,000, plus interest, representing the portion 
of such attorneys' fees that will be waived. The portion of the 
Plaintiffs' attorneys' fees that is waived by the Plaintiffs' attorneys 
will be paid by JRE to the Plaintiffs in cash, based on each 
Plaintiffs' share of the amount of the settlement proceeds allocated to 
all of the Plaintiffs. In this regard, it is represented that it is an 
accepted practice to reimburse individuals, such as the Plaintiffs, for 
the time, effort, and financial resources they expended in

[[Page 54306]]

bringing the litigation and negotiating the settlement.
    7. The applicant recognizes that the proposed settlement could be 
deemed to be an indirect exchange between a plan and a party in 
interest in violation of section 406 of the Act; and accordingly, has 
requested administrative relief.
    8. It is represented that the proposed exemption is in the best 
interests of the Plan and its participants, because the accounts of 
participants which have interests in the GICs will receive an immediate 
and substantial portion of the return on such GICs. In this regard, 
when combined with amounts already received upon the liquidation of 
CLI, each participant's account in the Plan will receive more than 128% 
of the face value of their share of the GICs, including interest earned 
to maturity. When frozen on August 12, 1994, the GICs were valued at 
approximately $1,442,113. The latest maturity date of the Plan's GICs 
is represented to be July 31, 1996. If allowed to mature on schedule, 
the value would have grown to an estimated $1,497,646. In this regard, 
the difference (approximately $50,000) between the value on the date of 
the freeze and at maturity is attributable to the fact that a 
substantial number of the GICs began to reach their maturity dates not 
long after the freeze was imposed. In July 1997, the Plan received 
approximately $1,620,053 from CLI, which amount was distributed to the 
participants' accounts in the Plan. The settlement of the litigation in 
1999 will add $303,125 to that amount, resulting in an amount (ignoring 
lost opportunity costs) that is equal to $425,532 above the value of 
the GICs at maturity.
    With respect to compensating the Plaintiffs for any lost 
opportunity, while the funds were frozen, to invest in a mix of options 
heavily weighted in favor of equities, it is the Defendants' position 
that this would give rise to a claim for more than the actual loss. In 
this regard, although it is now known that the stock market performed 
well during the freeze period, the Defendants maintain: (a) That the 
Plaintiffs had demonstrated risk aversion by investing in the fixed-
income option offered by the GICs; and (b) that once the GICs matured 
the Plaintiffs would have invested their accounts in a similar fixed-
income option which would have earned far less than the equity-weighted 
mix, as suggested by their counsel.
    Further, the applicant maintains that if the proposed exemption is 
not granted, the litigation may not be settled, and it is not possible 
to determine if the Plaintiffs would be successful in pursuing their 
claims to a judgment. Furthermore, it is possible that those 
participants who are not named Plaintiffs will never be able to obtain 
any recovery, because the litigation is not styled as a class action, 
and it is likely that the statute of limitations will run on the claims 
of the participants who are not Plaintiffs. Even if the Plaintiffs were 
to be successful in their suit, any recovery would be delayed 
substantially, and may prove to be a lesser amount than that offered as 
part of the proposed settlement.
    9. The requested exemption is administratively feasible because it 
involves a one-time payment of cash to the participants' accounts in 
Plan in exchange for releases of liability from such participants. In 
this regard, it is represented that once the settlement amounts have 
been distributed, no further actions are contemplated under the 
settlement, and no further review or monitoring will be required. 
Further, no expenses will be incurred by the Plan as a result of the 
settlement. JRE will bear the costs of the exemption application and of 
notifying interested persons.
    10. It is represented that the proposed exemption contains 
sufficient safeguards for the protection of the rights of the 
participants and beneficiaries of the Plan. In this regard, Plaintiffs' 
attorneys and each participant who signs the release and waives his or 
her right to sue will monitor the payment of the settlement proceeds by 
the corporate Defendants and the allocation of the proper amounts into 
such participants' accounts in the Plan, in order to ensure compliance 
with the terms of the settlement agreement. The Plaintiffs' attorney 
will receive a listing of the allocation for each of the Plaintiffs and 
will be able to confirm that the allocation has been properly 
performed. Further, accompanying the notification of settlement, each 
participant whose account holds an interest in the GICs will receive a 
statement that includes a calculation of the allocation of the 
settlement amount and a description of how such amount was calculated. 
Thereafter, regular statements from the trustee will reflect the 
allocation of the settlement amount into the account of the Plan 
participants who accept the settlement terms. It is further represented 
that the settlement provides that any breach of the settlement 
agreement can be remedied by the district court judge overseeing such 
litigation.
    11. In summary, the applicant represents that the proposed 
transactions will meet the statutory criteria of section 408(a) of the 
Act and 4975(c)(2) of the Code because:
    (a) The payment of the settlement amount will be a one-time cash 
transaction;
    (b) Each participant whose account in the Plan has an interest in 
the GICs will decide whether to waive his or her right to sue the 
Defendants in exchange for the settlement amount; or to opt out of such 
settlement and retain all such rights and causes of action against the 
Defendants;
    (c) Pursuant to the terms of the settlement, the account of each 
participant in the Plan who waives his or her right to sue the 
Defendants will receive an amount of the settlement proceeds in 
proportion to the interest each such account has in the GICs;
    (d) Pursuant to the terms of the settlement, the corporate 
Defendants are responsible for paying the attorneys' fees of the law 
firm representing the Plaintiffs;
    (e) A portion of the fees that would have been due and payable to 
the Plaintiffs' attorneys will be withheld from the settlement proceeds 
by JRE, the employer, and paid to the Plaintiffs in cash based on each 
Plaintiff's share of the amount of the settlement proceeds allocated to 
all of the Plaintiffs;
    (f) Notwithstanding the waiver by any participant of his or her 
right to sue the Defendants, the Plan will not release any claims, 
demands, and/or causes of action which it may have against the 
Defendants;
    (g) No expenses will be incurred by the Plan as a result of the 
settlement;
    (h) The Plaintiffs attorneys and each participant of the Plan who 
signs the release and waives his or her right to sue the Defendants 
shall monitor the payment of the settlement proceeds by the corporate 
Defendants and the allocation of the proper amounts into such 
participants' accounts in the Plan, in order to ensure compliance with 
the terms of the settlement;
    (i) All terms and conditions of the transaction will be no less 
favorable than those obtainable at arm's length with unrelated third 
parties; and
    (j) As a result of the settlement, the participants whose accounts 
hold an interest in the GICs will receive an immediately and 
substantial portion of the investment return guaranteed by such GICs.

Notice to Interested Persons

    Included among those persons who may be interested in the pendency 
of the requested exemption are all participants and beneficiaries in 
the Plan who have an interest in the GICs. It is represented that 
within ten (10) days after the publication of the Notice of Proposed 
Exemption (the Notice) in

[[Page 54307]]

the Federal Register, JRE will notify interested persons by mailing 
first class to the last known mailing address of such persons a copy of 
the Notice and a copy of the supplemental statement, as required, 
pursuant to 29 CFR 2570.43(b)(2) to each participant and beneficiary in 
the Plan who has an interest in the GICs. All interested persons are 
invited to submit written comments or requests for a hearing on this 
proposed exemption to the Department. Comments and requests for a 
hearing must be received by the Department within 45 days of 
publication of the Notice in the Federal Register.
    For Further Information Contact: Ms. Angelena C. Le Blanc of the 
Department, telephone (202) 219-8883. (This is not a toll-free number.)

Sun Life Assurance Company of Canada (Sun Life), Located in 
Toronto, Ontario, Canada

[Application No. D-10814]

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).\2\
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    \2\ For purposes of this proposed exemption, references 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, effective March 22, 2000, to the (1) receipt of 
common stock (Common Shares) issued by Sun Life Financial Services of 
Canada, Inc., the holding company for Sun Life (the Holding Company), 
or (2) the receipt of cash (Cash) or policy credits (Policy Credits), 
by or on behalf of any eligible policyholder (the Eligible 
Policyholder) of Sun Life which is an employee benefit plan (the Plan), 
subject to applicable provisions of the Act and/or the Code, including 
any Eligible Policyholder which is a Plan established by Sun Life or an 
affiliate for their own employees (the Sun Life Plans), in exchange for 
such Eligible Policyholder's membership interest in Sun Life, in 
accordance with the terms of a plan of conversion (the Conversion Plan) 
adopted by Sun Life and implemented under the insurance laws of Canada 
and the State of Michigan.
    This proposed exemption is subject to the conditions set forth 
below in Section II.

Section II. General Conditions

    (a) The Conversion Plan was implemented in accordance with 
procedural and substantive safeguards that were imposed under the 
insurance laws of Canada and the State of Michigan and was subject to 
review and/or approval in Canada by the Office of the Superintendent of 
Financial Institutions (OSFI) and the Minister of Finance (the Canadian 
Finance Minister) and, in the State of Michigan, by the Commissioner of 
Insurance (the Michigan Insurance Commissioner).
    (b) OSFI, the Canadian Finance Minister and the Michigan
    Insurance Commissioner reviewed the terms of the options that were 
provided to Eligible Policyholders of Sun Life as part of their 
separate reviews of the Conversion Plan. In this regard,
    (1) OFSI (i) authorized the release of the Conversion Plan and all 
information to be sent to Eligible Policyholders; (ii) oversaw each 
step of the conversion process (the Conversion); and (iii) made a final 
recommendation to the Canadian Finance Minister on the Conversion Plan.
    (2) The Canadian Finance Minister, in his sole discretion, could 
consider such factors as whether: (i) The Conversion Plan was fair and 
equitable to Eligible Policyholders; (ii) whether the Conversion Plan 
was in the best interests of the financial system in Canada; and (iii) 
sufficient steps had been taken to inform Eligible Policyholders of the 
Conversion Plan and of the special meeting (the Special Meeting) on the 
Conversion.
    (3) The Michigan Insurance Commissioner made a determination that 
the Conversion Plan was (i) fair and equitable to all Eligible 
Policyholders and (ii) consistent with the requirements of Michigan 
law.
    (4) Both the Canadian Finance Minister and the Michigan Insurance 
Commissioner concurred on the terms of the Conversion Plan.
    (c) Each Eligible Policyholder had an opportunity to vote to 
approve the Conversion Plan after full written disclosure was given to 
the Eligible Policyholder by Sun Life.
    (d) One or more independent fiduciaries of a Plan that was an 
Eligible Policyholder received Common Shares, Cash or Policy Credits 
pursuant to the terms of the Conversion Plan and neither Sun Life nor 
any of its affiliates exercised any discretion or provided ``investment 
advice,'' as that term is defined in 29 CFR 2510.3-21(c), with respect 
to such acquisition.
    (e) After each Eligible Policyholder was allocated 75 Common 
Shares, additional consideration was allocated to an Eligible 
Policyholder who owned an eligible policy based on an actuarial formula 
that took into account such factors as the total cash value, the base 
premium and the duration of such eligible policy. The actuarial formula 
was reviewed by the Canadian Finance Minister and the Michigan 
Insurance Commissioner.
    (f) With respect to a Sun Life Plan, where the consideration was in 
the form of Cash or Common Shares, an independent Plan fiduciary --
    (1) Determined that the Conversion Plan was in the best interest of 
the Sun Life Plans and their participants and beneficiaries;
    (2) Voted for the Conversion Plan on behalf of the Sun Life Plans;
    (3) Received either Common Shares or Cash on behalf of a Sun Life 
Plan;
    (4) Determined that the transactions did not violate the investment 
objectives and policies of the Sun Life Plans;
    (5) Negotiated on behalf of the contributory Sun Life Plans and 
determined a reasonable allocation of proceeds between Sun Life and the 
participants in the Sun Life Plans; and
    (6) Took (and will continue to take until the proposed exemption 
becomes final) all actions that were (or will be) necessary and 
appropriate to safeguard the interests of the Sun Life Plans.
    (g) All Eligible Policyholders that were Plans participated in the 
transactions on the same basis within their class groupings as other 
Eligible Policyholders that were not Plans.
    (h) No Eligible Policyholder paid any brokerage commissions or fees 
to Sun Life or its affiliates in connection with their receipt of 
Common Shares or with respect to the implementation of the initial 
public offering (the IPO) in which an Eligible Policyholder could elect 
to sell such Common Shares for cash.
    (i) All of Sun Life's policyholder obligations will remain in force 
and will not be affected by the Conversion Plan.

Section III. Definitions

    For purposes of this proposed exemption:
    (a) The term ``Sun Life'' means Sun Life Assurance Company of 
Canada and any affiliate of Sun Life as defined in paragraph (b) of 
this Section III.
    (b) An ``affiliate'' of Sun Life includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under

[[Page 54308]]

common control with Sun Life; (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.) or
    (2) Any officer, director or partner in such person.
    (c) The term ``Eligible Policyholder'' means a policyholder who--
    (i) On January 27, 1998 (the Eligibility Day) was the owner of a 
voting policy;
    (ii) Was the holder of a voting policy issued by Sun Life, if the 
policy was applied for by that person on or before the Eligibility Day 
and the application was received by Sun Life within a period specified 
by Sun Life in the Conversion Plan;
    (iii) Was the holder of a voting policy, issued to the holder by 
Sun Life, that lapsed before Sun Life's Eligibility Day and was 
reinstated during the period beginning on the Eligibility Day and 
ending 90 days before the day on which Sun Life's Special Meeting was 
held; or
    (iv) Was named by Sun Life in its Conversion Plan as an Eligible 
Policyholder under subsection 4(4) of the Conversion Regulations.
    (d) The term ``Policy Credit'' means--
    (1) For an individual or joint ordinary life insurance policy, an 
increase in the paid-up dividend additional cash value or dividend 
accumulation value;
    (2) For a policy that is in force as extended term life insurance 
pursuant to a nonforfeiture provision of a life insurance policy, an 
extension of the coverage expiry date;
    (3) For a policy which is a deferred annuity certificate, an 
increase in the deferred annuity payment; and
    (5) For a policy which is an individual accumulation annuity, an 
increase in the account value.
    Effective Date: If granted, this proposed exemption will be 
effective as of March 22, 2000.

Summary of Facts and Representations

    1. Sun Life is an insurance company that is incorporated under the 
laws of Canada. Formerly, Sun Life was a mutual life insurance company 
that had no issued or outstanding capital stock. On March 22, 2000 (the 
Effective Date), Sun Life changed its business structure from a mutual 
life insurance company to a stock life insurance company through a 
process called ``demutualization'' (also referred to herein as the 
``Conversion'').\3\
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    \3\ By a special act of the Canadian Parliament that was 
ratified in 1865, Sun Life originally had a corporate existence as a 
stock life insurance company. However, it was converted to a mutual 
life insurance company in 1962 and it remained that way until March 
22, 2000, at which time it became a stock life insurance company 
once again.
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    Sun Life is subject to the Insurance Companies Act of Canada (ICA). 
Its United States branch, which functions as a business unit through 
which the insurer engages in the business of insurance in the United 
States, is subject to the insurance laws of the State of Michigan. Sun 
Life maintains its headquarters at 150 King Street West, Toronto, 
Ontario, Canada M5H IJ9.
    Sun Life, which has a Standard & Poor's rating of ``AA+'' and a 
Duff & Phelps rating of ``AAA,'' carries on its insurance business in 
Canada and internationally through its branches in the United States, 
the United Kingdom, Hong Kong, Bermuda and the Philippines. In 
addition, Sun Life carries on the business of life insurance, 
investment management, mutual fund management, banking, and the 
provision of trust services through various subsidiaries in Canada and 
internationally. The insurance business in which Sun Life and its 
international operations are engaged include the sale of various 
insurance products, which include individual, group life, disability 
and health insurance, as well as annuities and pensions.
    Sun Life's principal place of business in the United States is One 
Sun Life Executive Park, Wellesley Hills, Massachusetts. The insurer 
uses Michigan as its port of entry in the United States. Consequently, 
the Michigan Department of Insurance (the Michigan Insurance 
Department) has the principal insurance regulatory authority over Sun 
Life in the United States.
    2. Sun Life and its affiliates provide a variety of fiduciary and 
other services to pension and welfare plans that are covered under 
relevant provisions of the Act and/or the Code. These services include, 
but are not limited to, investment management and contract 
administrative services, such as the payment of benefits and the 
preparation of reports and schedules as required by law. By providing 
these services, Sun Life may be considered a party in interest with 
respect to such Plans under section 3(14)(A) and (B) of the Act or 
other related provisions of section 3(14).
    3. Sun Life sponsors several Plans which received distributions in 
the Conversion that were allocated to Plan participants. These Plans 
are referred to collectively as ``the Sun Life Plans'' and are 
described below.
    (a) The Sun Life United States Agents' and Salaried Field 
Representatives' Retirement Plan (the Retirement Plan) is a pension 
plan that has both defined benefit and defined contribution components. 
As of December 31, 1999, the defined benefit component of the 
Retirement Plan had $30,991,406 and 506 participants (336 retirees and 
254 terminated vested participants). Also as of December 31, 1999, the 
defined contribution component of the Retirement Plan had $3,519,425 in 
total assets and 184 participants. A pension committee currently 
exercises investment discretion over the assets of this Plan.
    (b) The Sun Life Staff Life Insurance Plan (the Staff Life 
Insurance Plan) is a welfare plan that is a term life plan. The Staff 
Life Insurance Plan has no assets other than policies of insurance that 
provide benefits to participants. As of December 31, 1999, the Staff 
Life Insurance Plan had 1,680 participants who received life insurance, 
670 participants who received optional benefits and 125 retirees.
    (c) The Sun Life United States Staff Group Life Insurance Plan (the 
Group Life Insurance Plan) is also a welfare plan that is a term life 
plan. The sole assets of the Group Life Insurance Plan consist of 
insurance policies that provide benefits to participants. As of 
December 31, 1999, the Group Life Insurance Plan had 237 participants.
The Decision To Demutualize
    4. As a mutual insurer, Sun Life had no stockholders. However, 
certain of its policyholders were considered owners of the company. In 
this capacity, the policyholders had certain rights, including the 
right to elect directors of the company. These membership interests are 
referred to herein as ``Ownership Interests.''
    In November 1998, a bill was introduced in the Canadian Parliament 
to amend the ICA to set forth the statutory rules that for the first 
time would allow the demutualization of Canadian mutual life insurance 
companies with assets in Canada of CDN$7.5 billion or more. When the 
bill was introduced, the Canadian Department of Finance reported that 
Canada's four largest mutual life insurance companies already had 
announced their intention to develop demutualization plans.
    The Canadian Department of Finance released Mutual Company (Life 
Insurance) Conversion Regulations (the Conversion Regulations), which 
became effective on March 12, 1999 and which implemented the new 
legislation. On January 27, 1998, Sun Life issued a press release 
stating that its Board of Directors had requested Sun Life's management 
to develop a plan to convert Sun Life from a mutual life insurance 
company to a publicly-traded stock company.

[[Page 54309]]

    5. The principal purpose of the Conversion was to create a 
corporate structure that would allow Sun Life to position itself for 
long-term growth and increased financial strength in ways that were not 
then available. Sun Life believed that as a result of the flexibility 
to be offered by the stock company structure and the access to capital 
markets, it would be in a position to enhance its market leadership, 
financial strength and strategic position. In addition, Sun Life 
believed that it would be able to pursue opportunities for growth, 
thereby providing greater protection to policyholders.
    As a result of the Conversion, Sun Life became a stock insurer and 
a subsidiary of Sun Life Financial Services of Canada, Inc., a newly-
formed holding company. In addition, the Conversion provided economic 
value to Eligible Policyholders in the form of Common Shares (which are 
traded on the Toronto, New York, London and Philippines stock 
exchanges),\4\ Cash or Policy Credits, in return for their respective 
Ownership Interests in Sun Life.
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    \4\ Eligible Policyholders who received Common Shares were 
accorded the following rights after the Conversion: (a) The right to 
vote on matters submitted to such participating policyholders; (b) 
the right to participate in the distribution of Sun Life's profits; 
(c) the right to participate in the distribution of Conversion 
benefits; and (d) the right to participate in the distribution of 
any remaining surplus after satisfaction of all obligations in the 
event Sun Life is liquidated.
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    6. Therefore, Sun Life requests a retroactive administrative 
exemption from the Department that would apply, effective March 22, 
2000, to the receipt of Common Shares, Policy Credits or Cash by 
Eligible Policyholders which are Plans, including the Sun Life Plans 
identified above, in exchange for their mutual membership interests in 
Sun Life. To represent the interests of the Sun Life Plans with respect 
to the Conversion, Sun Life has retained U.S. Trust Company, N.A. (U.S. 
Trust) to serve as the independent Plan fiduciary.\5\
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    \5\ Sun Life also requested that the exemption cover the 
acquisition and holding of Common Shares by the Sun Life Plans where 
such transactions were in violation of sections 406(a)(1)(E) and 
(a)(2) and 407(a)(2) of the Act. However, as discussed in 
Representation 16, U.S. Trust determined that there were no such 
violations because of the forms of consideration it had elected for 
the various Sun Life Plans. In particular, U.S. Trust elected Cash 
consideration for the Staff Life Insurance Plan and the Group Life 
Insurance Plan, and Common Shares for the Retirement Plan.
    The Department notes that no opinion is being provided herein 
regarding whether the receipt of Common Shares by the Retirement 
Plan, once U.S. Trust made the election, was covered by the 
statutory exemption provided under section 408(e) of the Act.
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    The proposed exemption includes a requirement that all Eligible 
Policyholders that were Plans participated in the transactions on the 
same basis within their class groupings as other Eligible Policyholders 
that were not Plans. Thus, Sun Life did not treat Plan policyholders 
any differently from non-Plan policyholders within their respective 
class groupings.
Regulatory Supervision
    7. The various steps of the Conversion were subject to the approval 
of Sun Life's Board of Directors, OSFI, which had oversight 
responsibility for the entire conversion process, the Canadian Finance 
Minister, the Michigan Insurance Commissioner, and other regulatory 
authorities in Canada, the United Kingdom, Hong Kong, and the 
Philippines (collectively referred to as the Regulators). In pertinent 
part, the Conversion Regulations require that the conversion of a 
mutual life insurance company be implemented in accordance with a 
detailed proposal that sets forth the terms and means of effecting the 
Conversion.
    In accordance with this requirement, Sun Life's Board of Directors 
adopted the Conversion Plan on September 28, 1999. A draft of the 
Conversion Plan was submitted to OSFI, as principal Regulator, along 
with certain specified information, including, among other things, 
opinions of Sun Life's actuary and an independent actuary and opinions 
of a valuation expert and a financial market expert.
    After reviewing and commenting on the Conversion Plan, OSFI 
authorized Sun Life to send approximately one million Eligible 
Policyholders (of which less than one percent were Plans) notice of the 
Special Meeting to consider the Conversion Plan. Policyholder 
Information Statements were mailed to Eligible Policyholders on October 
20, 1999. Eligible Policyholders voted in favor of the Conversion Plan 
at the Special Meeting which was convened on December 15, 1999 in 
Toronto, Ontario, Canada. Each Eligible Member was entitled to cast one 
vote. Because the Conversion Plan was approved by the Eligible 
Policyholders at the Special Meeting,\6\ Sun Life's Board of Directors 
applied to the Canadian Finance Minister for approval of the Conversion 
Plan and the issuance of Letters Patent of Conversion in order to 
effect the Conversion. On March 22, 2000, the Canadian Finance Minister 
approved the Conversion Plan and issued the Letters Patent of 
Conversion.
---------------------------------------------------------------------------

    \6\ Such approval required the affirmative vote of not less than 
two-thirds of the votes cast by the Eligible Policyholders voting in 
person or by proxy.
---------------------------------------------------------------------------

    It should be noted that Canadian law does not require that the 
Canadian Finance Minister make any particular findings in deciding 
whether to approve the Conversion Plan. Therefore, approval was 
entirely within the discretion of the Canadian Finance Minister. 
However, the Canadian Finance Minister, in deciding whether to approve 
the Conversion Plan, could consider such factors as: (a) Whether the 
Conversion Plan was fair and equitable to policyholders; (b) whether 
the Conversion Plan was in the best interest of the financial system in 
Canada; and (c) whether sufficient steps had been taken to inform 
policyholders of the Conversion Plan and of the special meeting on the 
Conversion.
    8. Because Sun Life operates in the United States through its U.S. 
branch under the Michigan state of entry statute, the demutualization 
law of Michigan (the Michigan Demutualization Law) also applied to Sun 
Life's proposed Conversion. The Michigan Demutualization Law's 
requirements are similar to those of the ICA and the Conversion 
Regulations. Among other things, the statute requires that the 
Conversion Plan be submitted to the Michigan Insurance Commissioner 
prior to a vote by Sun Life's Eligible Policyholders. In addition, the 
Conversion Plan cannot become effective without the approval of the 
Michigan Insurance Commissioner following a public hearing, and such 
Conversion Plan cannot be amended without the prior approval of the 
Michigan Insurance Commissioner.
    The Michigan Insurance Commissioner is authorized to retain, and 
did subsequently retain, independent legal and actuarial advisers to 
assist in reviewing the proposal. Under the Michigan Demutualization 
Law, the Michigan Insurance Commissioner must approve or disapprove the 
Conversion Plan within 90 days after its submission, and cannot approve 
it unless he or she finds the Conversion Plan ``does not prejudice the 
interests of its members, is fair and equitable, and is not 
inconsistent with the purpose and intent of the Michigan 
Demutualization Law.'' If approved, the Conversion would take effect as 
of the Effective Date specified in the Conversion Plan (i.e., on March 
22, 2000).
    On November 22, 1999, a public hearing was held with respect to the 
Conversion Plan in Lansing, Michigan. On December 8, 1999, the Michigan

[[Page 54310]]

Insurance Commissioner entered an order approving such Plan.
The Transaction
    9. As noted above, the Conversion Plan provided for Sun Life to 
demutualize and convert to a stock life insurance company pursuant to 
section 237 et seq. of the ICA, the Conversion Regulations and the 
terms of the Conversion Plan. Specifically, in advance of the 
Conversion, Sun Life incorporated the Holding Company in Canada under 
the ICA as a new stock life insurance company. Specifically, in 
September 1999, Sun Life purchased shares of the Holding Company for 
CDN$10 million, as required under the ICA.
    At the Effective Date of the Conversion, Section 2.2 of the 
Conversion Plan provides for the following transactions, which among 
others, took place as part of the Conversion:

     All policyholder rights with respect to, and interests 
in, Sun Life ceased;
     Sun Life issued its common shares to the Holding 
Company;
     The Holding Company issued its Common Shares to 
Eligible Policyholders who were issued such shares in exchange for 
their Ownership Interests and other Eligible Policyholders received 
Policy Credits or Cash in accordance with Article 4 of the 
Conversion Plan; and
     Sun Life surrendered to the Holding Company, and the 
Holding Company purchased for cancellation, for consideration equal 
to the initial issue price thereof, all of the Common Shares Sun 
Life held immediately before the Effective Date.

    10. The applicant represents that the Conversion did not (and will 
not) affect the terms of any of Sun Life's policies. Rather, all 
policies will continue in force with Sun Life in accordance with their 
current terms notwithstanding the Conversion. In particular, the 
Conversion will not affect the level of premiums, coverage or benefits 
payable under any Policies, and dividends will continue to be declared 
with respect to participating policies at the discretion of Sun Life's 
Board of Directors. Accordingly, the Conversion will not adversely 
affect the contractual rights of any participating policyholder. 
However, all policyholder rights with respect to, and interests in, Sun 
Life as a mutual company ceased upon the Conversion.
    In connection with the Conversion, Eligible Policyholders became 
entitled to their benefits (in whatever form) on the Effective Date 
(i.e., March 22, 2000). Share certificates, which entitled Eligible 
Policyholders to Common Shares, were mailed prior to the Effective Date 
and became ``live'' certificates upon the closing of the Conversion. 
Policy Credits were also credited to other Eligible Policyholders on 
the Effective Date. On March 23, 2000, a public offering of the Holding 
Company's Common Shares (i.e., the IPO) was closed, at which time the 
Holding Company paid Cash to Eligible Policyholders who were entitled 
to receive consideration in this form.
    11. Specifically, Policy Credits were posted to each Eligible 
Policyholder in the United States whose participating policy was--

     An individual retirement annuity contract within the 
meaning of section 408(b) [of the Code] or a tax sheltered annuity 
contract within the meaning of section 403(b) of the Code, including 
for this purpose, custodial accounts under section 403(b)(7) and 
retirement income accounts under section 403(b)(9);
     An individual annuity contract that had been issued 
directly to the Plan participant pursuant to a Plan qualified under 
section 401(a) of the Code or pursuant to a Plan described in 
section 403(a) [of the Code] directly to the Plan participant; or
     An individual life insurance Policy that had been 
issued directly to the Plan participant pursuant to a Plan qualified 
under section 401(a) [of the Code]; \7\

    \7\ In certain circumstances, Policy Credits could also be 
posted to Eligible Policyholders who did not reside in the United 
States or where the Board of Directors had determined that the 
receipt of Common Shares would be disadvantageous to the 
policyholders.
---------------------------------------------------------------------------

    Notwithstanding the above, Common Shares were paid to policyholders 
of individual annuity contracts who were in pay status or whose 
policies had been terminated and the payment of Common Shares would not 
raise qualification issues under the Code. Similarly, Common Shares 
were paid in connection with individual retirement annuities covered 
under section 408(b) of the Code where the receipt of Common Shares 
would also not raise qualification issues under the Code.\8\
---------------------------------------------------------------------------

    \8\ If an Eligible Policyholder was in ``pay status,'' Sun Life 
states that the policyholder would have reached an age where he or 
she would be entitled to receive a distribution under his or her Sun 
Life policy. Under these circumstances, any distribution of Common 
Shares or Cash to such policyholder would not be considered 
premature and would not trigger adverse consequences, such as the 
disqualification of the Plan.
---------------------------------------------------------------------------

    Finally, the Holding Company made a direct cash payment to each 
Eligible Policyholder who would be subject to a mandatory cash-out, if 
Sun Life knew that the policyholder's Participating Policy was subject 
to a lien or to a bankruptcy proceeding or to certain other title 
restrictions.\9\
---------------------------------------------------------------------------

    \9\ Sun Life anticipated that fewer than 10 percent of the 
Eligible Policyholders would receive demutualization benefits in the 
form of Cash or Policy Credits and that at least 90 percent of the 
Eligible Policyholders would be issued common Shares.
---------------------------------------------------------------------------

    12. Eligible Policyholders whose addresses are unknown to the 
Holding Company have been classified as ``Lost Policyholders.'' Lost 
Policyholders who have been issued Common Shares in connection with the 
Conversion will have such shares recorded in their names on the Holding 
Company's share register. Common Shares issued to a Lost Policyholder 
who do not take certain specified actions \10\ within 35 months of the 
Effective Date will revert to the Holding Company together with any 
dividends paid on such shares. However, after such reversion, the 
Holding Company will be required to deliver the Common Shares and 
accumulated dividends (without interest) \11\ to the Lost Policyholder 
if he or she subsequently claims them.
---------------------------------------------------------------------------

    \10\ In order to cease being a Lost Policyholder, a policyholder 
must take one of the following actions: (a) Respond to a letter from 
Sun Life or the Holding Company requesting confirmation of his or 
her current address; (b) contact Sun Life or the Holding Company and 
confirm his or her current address; (c) inform Sun Life or the 
Holding Company of a change of address; or (d) otherwise confirm his 
or her current address to Sun Life or the Holding Company in a 
manner satisfactory to Sun Life or the Holding Company, as 
applicable.
    \11\ Sun Life represents that it does not propose to pay 
interest on accumulated dividends to Lost Policyholders because it 
is not the standard practice among insurance companies to do so, 
whether in the context of demutualizations, or more generally, of 
shareholders who are late in claiming dividends.
---------------------------------------------------------------------------

    13. About 40 percent of Sun Life's Eligible Policyholders were 
Canadian residents, 15 percent were U.S. residents, and 45 percent were 
residents of other countries. While United States residents would 
comprise roughly 15 percent of the total number of Eligible 
Policyholders, such policyholders would receive approximately 25 
percent of the total Common Shares distributed in Sun Life's 
Conversion.\12\
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    \12\ The differences between the relative numbers of Eligible 
Policyholders residing in each country and the estimated percentages 
of total Common Shares to be distributed to such Eligible 
Policyholders who resided in each covered country were attributable 
to the fact that Conversion benefits would be allocated in part 
based on such factors as the type, duration, face amount and cash 
surrender value of an eligible policy, and not simply on a per 
capita basis.
---------------------------------------------------------------------------

    14. As required by the Conversion Regulations, the Conversion Plan 
was accompanied by an opinion prepared by the actuary for Sun Life and 
an opinion prepared by an independent actuary that the allocation of 
benefits to Eligible Policyholders in the Conversion was fair and 
equitable. Eligible Policyholders who were issued Common Shares in the 
Conversion could elect, by February 16, 2000, to have some or all of 
those shares (the Electing Shares) sold for cash in the

[[Page 54311]]

IPO.\13\ The purchasers of the Electing Shares were required to be 
either independent investment dealers or investment banks (the 
Underwriters) who had entered into underwriting agreements with Sun 
Life and the Holding Company with respect to the IPO. In regard to 
purchases of Electing Shares by the Holding Company, Plans that were 
covered under the provisions of the Act were not permitted to engage in 
such transactions as the transactions were considered prohibited 
transactions. No commissions or fees were charged to Eligible 
Policyholders seeking to sell Electing Shares.\14\
---------------------------------------------------------------------------

    \13\ In other words, if an Eligible Policyholder was a resident 
of the United States and was issued less than 1,000 Common Shares, 
the policyholder was required to make a cash election for all of 
such shares. However, if the Eligible Policyholder was issued 1,000 
or more Common Shares in the IPO, the policyholder could make a cash 
election to sell any of such shares.
    \14\ The offering price for the Common Shares was CDN$12.50 per 
share and U.S.$8.50 per share. These were equivalent amounts using 
the exchange rate on the date of the pricing, which occurred on 
March 22, 2000. The Canadian dollar price applied to Common Shares 
that were sold in Canada and the U.S. dollar price applied to shares 
that were sold both in the United States and internationally.
---------------------------------------------------------------------------

    A total of 143,602,914 Common Shares were sold in the IPO.\15\ The 
total number of Common Shares sold in the IPO was set by the Holding 
Company and the Underwriters prior to the IPO. The Holding Company also 
paid the Underwriters' fees that were associated with the Underwriters' 
purchase of the Common Shares from Eligible Policyholders \16\ and the 
sale of the Common Shares in the IPO.\17\
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    \15\ Of this total, Canadian Eligible Policyholders received 
93,341,894 Common Shares, U.S. Eligible Policyholders received 
35,900,729 Common Shares and International Eligible Policyholders 
received 14,360,291 Common Shares.
    \16\ Sun Life concluded (and it advised its Eligible 
Policyholders and the Internal Revenue Service) that its payment of 
the Underwriters' fee for Eligible Policyholders who sold their 
Common Shares in the IPO would be treated as a dividend for Canadian 
tax purposes. Sun Life further advised its Eligible Policyholders 
that Canadian non-resident withholding tax would apply to such 
deemed dividend, and that the rate would generally be 15 percent. 
The amount of the tax would be withheld from the proceeds of the 
sale of the Common Shares and would be remitted to the Canadian tax 
authorities. Finally, Sun Life advised its Eligible Policyholders 
that they could take the amount of the Canadian withholding tax into 
account as a credit or a deduction in determining their United 
States income tax.
    \17\ Consistent with sections 1 and 4(1)(e)(i) of the Conversion 
Regulations, the Conversion Plan generally provides that the 
policyholder eligible to participate in the distribution of Common 
Shares, Cash or Policy Credits resulting from the Conversion Plan is 
the ``owner'' of the policy, and that the ``owner'' of any policy 
shall generally be determined on the basis of the records of Sun 
Life. Sun Life 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, Sun Life represents that it is 
required under the foregoing provisions of Canadian law and the 
Conversion Plan to make distributions resulting from such Plan to 
the employer, or trustee as owner of the policy, except as provided 
below.
    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 Sun Life incurred the 
obligation to distribute Common Shares, 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.
---------------------------------------------------------------------------

    Except for a very small number of Common Shares that were sold to 
fund mandatory direct Cash payments (as distinguished from Cash 
elections), and Policy Credits, all of the Common Shares sold in the 
IPO represented shares allocated to Eligible Policyholders who decided 
to redeem their shares for Cash. (All Eligible Policyholder Cash 
requests were honored, i.e., no policyholder who elected Cash received 
Common Shares.)
    On March 31, 2000, each Underwriter exercised an ``overallotment 
option'' granted to them in their respective Underwriting Agreements. 
The option permitted the Underwriters to purchase an additional 
21,540,437 Common Shares from the Holding Company that were equal to 15 
percent of the main offering. The sale of the Common Shares closed on 
April 4, 2000. As a result, Canadian Eligible Policyholders received 
14,001,284 Common Shares, U.S. Eligible Policyholders received 
5,385,109 Common Shares and International Eligible Policyholders 
received 2,154,044 Common Shares.
    CIBC Mellon Trust Company, or its successors or assigns, is serving 
as the registrar and transfer agent (the Transfer Agent) for the Common 
Shares. The Transfer Agent will record the Common Shares on a share 
register on behalf of the Holding Company. The Transfer Agent also will 
be responsible for transmitting dividend payments from the Holding 
Company to the Holding Company shareholders.
    15. In addition to allowing Eligible Policyholders to sell their 
Electing Shares in the IPO, Sun Life has established a service, 
effective March 23, 2000, which affords Eligible Policyholders, 
including U.S. Eligible Policyholders, who hold Common Shares in their 
Sun Life Share Accounts, the opportunity to sell such shares after the 
IPO. The sales are being executed through TD Waterhouse Investor 
Services (TD Waterhouse), an unrelated broker-dealer. All sales through 
TD Waterhouse are being treated as ordinary brokerage transactions that 
are made at prevailing market prices on the New York Stock Exchange and 
are subject to TD Waterhouse's normal commission rates. Sun Life 
represents that no time limit has been imposed on sales of Common 
Shares through TD Waterhouse. \18\
---------------------------------------------------------------------------

    \18\ Sun Life initially proposed to offer a share selling 
service (the Share Selling Service) to recipients of Common Shares. 
Under the Share Selling Service, Eligible Policyholders would be 
permitted to sell their Common Shares at prevailing market prices 
without the payment of fees or commissions. Sun Life represents that 
it was unable to offer the Share Selling Service to Eligible 
Policyholders residing in the United States because the New York 
Stock Exchange and the Securities Exchange Commission would have 
required Sun Life to issue Common Shares to Eligible Policyholders 
in non-certificated form provided the Common Shares had been 
included in Depository Trust Company's Direct Registration System 
(the DRS). Because Sun Life's registrar and transfer agent did not 
have the equipment and systems necessary to access the DRS, Sun Life 
decided to issue Common Shares to Eligible Policyholders in 
certificated form. Nevertheless, for technical and logistical 
reasons, Sun Life declined to offer the Share Selling Service using 
physical share certificates.
---------------------------------------------------------------------------

    16. Following the Conversion, a participating account mechanism 
(the Participating Account) will be implemented by Sun Life, as 
provided for in the Conversion Plan. With respect to the participating 
policies in force at the date of the Conversion, the Participating 
Account will operate like a closed block. In other words, a set of 
assets for such policies (e.g., bonds, mortgages, real estate, cash and 
cash equivalents), that are designed to meet Sun Life's contractual 
obligations and policyholder reasonable dividend expectations with 
respect to those policies, will be earmarked. Sun Life represents that 
the Participating Account will not alter, diminish, reduce, or in any 
way affect a policyholders' contractual rights. Although the details of 
the Participating Account have been developed by Sun Life in 
conjunction with OSFI and the Michigan Insurance Department, Sun Life's 
actuaries and the actuarial advisers to OSFI have not yet determined 
the specific dollar amount of assets that will be placed in the 
Participating Account. \19\
---------------------------------------------------------------------------

    \19\ The Participating Account, which includes polices issued 
both before and after the Conversion, responds to concerns that a 
demutualization will adversely affect the value of dividend-paying 
policies since Sun Life's profits, following the Conversion will be 
shared with the shareholders. It is represented that traditionally, 
insurers have addressed the concern over the value of dividend-
paying policies by segregating pre-demutualization participating 
policies in a ``closed block'' containing assets sufficient to cover 
the liabilities associated with those policies in order to protect 
the policies from the demands of shareholders. In effect, experience 
and investment gains and losses associated with policies in the 
closed block will only affect the closed block. Thus, the block will 
be closed in two contexts--(a) no new policies can be added and (b) 
the block will be ``closed off'' from the rest of the insurer's 
business.
    With respect to Sun Life's Participating Account which operates 
like the closed block, an appointed actuary, who reports to OSFI, 
will certify that the assets placed in the Participating Account are 
sufficient to cover the liabilities associated with the pre- and 
post-demutualization participating policies, including the 
reasonable dividend expectations of those policyholders. Sun Life is 
required to place additional assets in the Participating Account, if 
necessary, and may transfer amounts out of such account after five 
years only if the appointed actuary determines that the assets are 
more than sufficient to cover the liabilities of the participating 
policies.

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

[[Page 54312]]

    Under the ICA, participating policyholders also will have rights 
upon completion of the Conversion that are accorded to participating 
policyholders of a stock life insurance company in Canada. Such rights 
include the right to elect at least one-third of the Sun Life's 
Directors as well as the right to any dividends that are declared.
    17. As noted above, in the case of the Sun Life Plans, U.S. Trust 
is representing their interests and it has acknowledged and accepted 
the duties, responsibilities and liabilities required of an independent 
fiduciary. In this regard, U.S. Trust represents that it is an 
affiliate of United States Trust Company of New York (USTC). USTC was 
founded in New York in 1853 and is subject to regulation as a trust 
company by the State of New York. USTC is the principal subsidiary of 
U.S. Trust Corporation, a member of the Federal Reserve System and the 
Federal Deposit Insurance Corporation, and an entity having 
approximately $4.1 billion in assets as of December 31, 1999. USTC has 
over $75 billion in assets under management, a significant percentage 
of which consists of the assets of Plans that are covered by the Act 
and/or Code.
    In addition, U.S. Trust has served as an independent fiduciary for 
numerous Plans that acquire or hold employer securities and it has 
managed, at various times, over $16 billion in employer securities that 
have been held by such Plans. In managing these investments, U.S. Trust 
has acted as a fiduciary in a number of transactions involving the 
acquisition, retention and disposition of employer securities.
    U.S. Trust is independent of Sun Life and its affiliates. In this 
respect, it has no business, ownership or control relationship, nor is 
it affiliated with Sun Life and its affiliates. In addition, U.S. Trust 
derives less than one percent of its annual income from Sun Life and 
its affiliates.
    U.S. Trust states that it was retained by Sun Life to consider, on 
behalf of the Sun Life Plans, whether to approve the Conversion Plan 
and, if approved, whether to receive consideration in the form of 
Common Shares or Cash. Specifically, U.S. Trust determined, pursuant to 
its engagement letter with Sun Life and subject to satisfaction of 
certain contingencies, that the consummation of the transactions would 
be prudent for each of the Sun Life Plans. In particular, U.S. Trust: 
(a) Determined that the Conversion Plan was in the best interest of the 
Sun Life Plans and their participants and beneficiaries; (b) voted for 
the Conversion Plan on behalf of the Sun Life Plans; (c) received 
either Common Shares or Cash on behalf of a Sun Life Plans; (d) 
determined that the transactions would not violate the investment 
objectives and policies of the Sun Life Plans; (e) negotiated a 
reasonable allocation of proceeds between Sun Life and the participants 
in the Sun Life Plans based upon employee and employer contributions 
made to such Sun Life Plans over a three year period; and (f) took (and 
will continue to take until the proposed exemption becomes final) all 
actions that were (or will be) necessary and appropriate to safeguard 
the interests of the Sun Life Plans.
    U.S. Trust states that the aforementioned determinations were based 
upon its analyses of Sun Life's Conversion Plan and financial 
performance. In addition, U.S. Trust explains that its determinations 
were based upon the assumption that the exemption would be granted. 
Further, U.S. Trust notes that the consummation of the transactions was 
conditioned upon approval by Eligible Policyholders of the Conversion 
Plan, including the receipt of Canadian and Michigan regulatory 
approvals, and other conditions set forth in the Conversion Plan.
    As a general matter, U.S. Trust states that its determinations 
regarding the proposed transactions were based upon its economic 
analysis of the consideration to be acquired by the Sun Life Plans. In 
this connection, U.S. Trust represents that it performed a 
comprehensive analysis of Sun Life in the context of prevailing market 
conditions and concluded that the proposed aggregate consideration that 
would be received by the Sun Life Plans was fair to such Plans from 
financial point of view. In forming its conclusion, U.S. Trust asserts 
that it reviewed various documents, including but not limited to, (a) 
Sun Life's annual reports and related financial information; (b) a 
Statement of Actuarial Opinion regarding the methodology used to 
allocate the demutualization benefits among the policyholders; (c) 
opinions of the appointed actuary; and (d) ratings of Sun Life by 
Standard & Poor's and Duff & Phelps. In addition, U.S. Trust represents 
that it hired independent legal counsel and reviewed all relevant 
information regarding the Plans and public documents provided by the 
Michigan Insurance Commissioner.
    On December 15, 1999, U.S. Trust states that its Special Fiduciary 
Committee (the Special Fiduciary Committee), including representatives 
from corporate counsel and other bank management, met and determined 
that the transactions were in the best interests of the participants 
and beneficiaries of the Sun Life Plans. Then, on February 9, 2000, the 
Special Fiduciary Committee convened again and determined to elect to 
receive compensation in the form of 139,787 Common Shares for the 
Retirement Plan, and to elect to receive Cash for the Staff Life 
Insurance Plan (i.e., the cash equivalent of 53,144.5 shares) and the 
Group Life Insurance Plan (i.e. the cash equivalent of 34,573.5 
shares).
    Both the Staff Life Insurance Plan and the Group Life Insurance 
Plan provide for employee contributions.\20\ Therefore, U.S. Trust 
represents that it asked Sun Life to describe whether and how 
participants in those Plans would be assured of enjoying benefits equal 
to that portion of the demutualization consideration allocated to each 
Plan that was attributable to past participant contributions.
---------------------------------------------------------------------------

    \20\ U.S. Trust did not address the allocation of Common Shares 
to the Retirement Plan in its independent fiduciary report. Sun Life 
represents that because the Retirement Plan has both a defined 
benefit and a defined contribution component, the Common Shares that 
were received as a result of the Conversion were pursuant to an 
investment in the defined benefit component. Therefore, the Common 
Shares are being held with the other assets of the Retirement Plan.
---------------------------------------------------------------------------

    With respect to the Staff Life Insurance Plan under which 
participants make contributions solely to pay for optional benefits and 
Sun Life makes contributions for basic benefits, U.S. Trust explains 
that the proportion of total premiums paid by participants was 38 
percent. Therefore, Sun Life proposed to allocate 38 percent of the 
demutualization proceeds to pay for optional participant benefits under 
the Staff Life Insurance Plan. According to U.S. Trust, Sun Life 
expects that the demutualization proceeds would be sufficient to pay 
for a 1.5 year ``premium holiday'' for participants

[[Page 54313]]

with respect to the optional benefit based on a sale of the Common 
Shares at the assumed IPO price and current premium costs.
    Under the Group Life Insurance Plan, U.S. Trust notes that 
participants contributed 54 percent of the total premiums paid by this 
Plan until 1997, after which time the Plan became totally 
noncontributory. U.S. Trust points out that Sun Life proposed to 
increase the benefit levels of the current participants so that these 
participants would be able to share in the demutualization proceeds in 
a manner proportionate to their past contributions. In this regard, 
benefits for participants in the Group Life Insurance Plan would be 
enhanced by 54 percent of the Conversion consideration received, 
thereby representing the same ratio participant premium payments bore 
to the total premiums paid. Although Sun Life expected the 
demutualization proceeds would be sufficient to pay for two years of 
the benefit enhancement based on a sale of the Common Shares at the 
assumed IPO price and current premium costs,\21\ U.S. Trust explains 
that the Group ife Plan would remain noncontributory.
---------------------------------------------------------------------------

    \21\ In this proposed exemption, the Department is not 
commenting on or providing exemptive relief with respect to the 
allocation methodology utilized by U.S. Trust.
---------------------------------------------------------------------------

    In evaluating Sun Life's proposed methods of providing benefits to 
participants equal to the portion of the demutualization consideration 
received by each Sun Life Plan that was attributable to participant 
contributions, U.S. Trust states that it took into account such factors 
as: (a) The practical impossibility of allocating benefits directly to 
the participants whose contributions contributed to the demutualization 
proceeds;\22\ (b) the substantial overlap between the groups of 
participants making such contributions and the participants receiving 
benefits; (c) the use of an allocation method involving participant 
contributions over a period of years rather than a single year; and (d) 
the economic value to participants of the proposed ``premium holiday.'' 
Based upon these factors, U.S. Trust determined that the proposed 
method for allocating benefits to each Sun Life Plan was reasonable and 
fair to the respective Plan participants as a group.
---------------------------------------------------------------------------

    \22\ According to U.S. Trust, both the Staff Life Insurance Plan 
and the Group Life Insurance Plan will bear the cost of allocating 
demutualization proceeds among participants based on actual 
contributions.
---------------------------------------------------------------------------

    18. In summary, it is represented that the transactions satisfied 
or will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) The Conversion Plan, which was implemented pursuant to 
stringent procedural and substantive safeguards imposed under Canadian 
and Michigan law, will not require any ongoing supervision by the 
Department.
    (b) One or more independent Plan fiduciaries, including U.S. Trust, 
which is representing the interests of the Sun Life Plans, had an 
opportunity to determine whether to vote to approve the Conversion Plan 
and was responsible for all such decisions.
    (c) Eligible Policyholders that were Plans were allowed to acquire 
Common Shares, Cash or Policy Credits, in exchange for and in 
extinguishment of, their membership interests in Sun Life, and no 
Eligible Policyholder paid any brokerage commissions or fees to Sun 
Life or its affiliates in connection with their receipt of Common 
Shares or with respect to the sale of Electing Shares in the IPO.
    (d) Neither Sun Life nor its affiliates exercised discretion with 
respect to voting on the Conversion Plan or with respect to an election 
made by any Eligible Policyholder which was a Plan, nor did Sun Life or 
its affiliates provide ``investment advice,'' as that term is defined 
in 29 CFR 2510.3-21(c) with respect to any election made by such Plan 
policyholder.
    (e) The Conversion did not (and will not) reduce policy benefits, 
values or guarantees, or increase premiums, in any way, and dividend-
paying policies will continue to receive dividends if and when 
declared.

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

IRA FBO Floyd A. Ross (the IRA), Located in Ukiah, California

[Application No. D-10871]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570 Subpart B (55 FR 32836, 32847, 
August 10, 1990). If the exemption is granted, the sanctions resulting 
from the application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code, shall not apply to the proposed 
purchase by the IRA of certain closely held common stock (the Stock) 
from the Ross Family Trust (the Family Trust), a disqualified person 
with respect to the IRA,\23\ provided that the following conditions are 
satisfied:
---------------------------------------------------------------------------

    \23\ Pursuant to 29 CFR 2510.3-2(d), the IRA is not within the 
jurisdiction of Title I of the Act. However, there is jurisdiction 
under Title II of the Act, pursuant to section 4975 of the Code.
---------------------------------------------------------------------------

    (a) The purchase is a one-time transaction for cash;
    (b) The terms and conditions of the purchase are at least as 
favorable to the IRA as those available in a comparable arm's length 
transaction with an unrelated party;
    (c) The IRA pays a purchase price that is no greater than the fair 
market value of the Stock at the time of the transaction, as 
established by a qualified, independent appraiser;
    (d) The IRA pays no commissions nor other expenses in connection 
with the purchase; and
     The fair market value of the Stock represents no more than 25 
percent of the total assets of the IRA at the time of the transaction.

Summary of Facts and Representations

    1. The IRA is an individual retirement account, as described under 
section 408(a) of the Code. The IRA was established by Floyd A. Ross, 
who is the sole participant. As of June 30, 2000, the IRA had total 
assets of $373,222.91. The trustee of the IRA is the Capital Guardian 
Trust Co.
    2. It is proposed that the IRA purchase shares of the Stock from 
the Family Trust, established October 23, 1985, with Mr. Ross and his 
wife as the grantors and co-trustees.\24\ All of the community property 
of the grantors and their separate property as husband and wife have 
been conveyed to the Family Trust.
---------------------------------------------------------------------------

    \24\ Section 4975(e)(2)(G) of the Code defines the term 
``disqualified person'' to include a trust of which (or in which) 50 
percent or more of the beneficial interest of such trust is owned, 
or held by, a fiduciary of a plan.
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    The Stock consists of shares of the Savings Bank of Mendocino 
County (the Bank), a state chartered bank headquartered in Ukiah, 
California. Mr. Ross is the Executive Vice President of the Bank. 
According to the applicant, the Bank was established in 1903, and a 
majority of the 100,000 shares outstanding of the Stock is held by a 
descendant of one of the Bank's founders, who is not related to Mr. 
Ross. There are a total of 265 registered shareholders of the Stock. 
The Family Trust holds 1,332 shares of the Stock. Mr. Ross does not own 
any shares of the Stock in his personal capacity. The Stock has paid 
quarterly dividends every year and has paid $4.50 per share each 
quarter of the current year.
    3. The Stock has been appraised by F. D. Grothe, a qualified, 
independent

[[Page 54314]]

appraiser. Mr. Grothe is a Certified General Real Estate Appraiser 
licensed in the State of California and maintains his appraisal 
business in Lakeport, California. He also serves as the California 
Probate Referee for Lake and Mendocino Counties in Northern California, 
which encompass the areas served by the Bank. In an appraisal report, 
dated April 7, 2000, Mr. Grothe states that, in his duties as Probate 
Referee, he is required to appraise all assets, including closely held 
stock, in probate estate cases heard in the Superior Courts of the 
State of California for Lake and Mendocino Counties. In this capacity, 
he is required to value the Bank's Stock two to four times a year, upon 
the death of one of the Stock's shareholders. Thus, Mr. Grothe is 
familiar with the appropriate valuation methodologies for determining 
the fair market value of the Stock.
    Mr. Grothe concluded that the fair market value of the Stock was 
$755.00 per share, as of April 7, 2000. He states that the Bank is 
nationally ranked among the top one percent of small banks. Mr. Grothe 
attached to his report a list of the last five sales of the Stock. He 
states that these sales are market-driven and are higher than the 
average book value of the Stock, which, according to the 1999 Annual 
Report, was $635.80 per share. He also states that the market for 
stocks in small, independent banks is driven by larger banks wanting to 
expand into certain areas. It has been Mr. Grothe's experience that 
most merger sales are at two to two and one-half times book value. 
Thus, in Mr. Grothe's opinion, the $775.00 per share market price could 
be very conservative, in the event of a merger or buyout.
    4. Accordingly, the applicant represents that the Stock is an 
excellent investment opportunity for the IRA. Thus, it is proposed that 
25 percent of the IRA's assets ($93,305.73) be used to purchase 
approximately 120 shares (assuming a value of $775.00 per share) of the 
1332 shares of the Stock held by the Family Trust.\25\ The Stock to be 
acquired by the IRA will represent less than one percent of the total 
outstanding shares of the Stock at the time of the transaction.
---------------------------------------------------------------------------

    \25\ See ERISA Advisory Opinion 2000-10A (July 27, 2000) for a 
recent discussion of the Department's views regarding co-investing 
by an IRA and certain disqualified persons in a limited partnership. 
The Department notes that no relief is being provided in this 
proposed exemption beyond the IRA's initial purchase of the Stock 
for any additional prohibited transactions that may occur as a 
result of co-investing by the IRA and the Family Trust in shares of 
the Stock.
---------------------------------------------------------------------------

    The IRA's purchase price will be the fair market value of the Stock 
at the time of the transaction, based upon an updated independent 
appraisal. The IRA will pay no commissions nor other expenses in 
connection with the purchase. The applicant represents that, although 
the Stock is closely held, there is a definite market for the Stock. 
Therefore, the applicant states that the proposed purchase of the Stock 
by the IRA will not adversely affect the liquidity needs of the IRA.
    5. In summary, the applicant represents that the proposed 
transaction will satisfy the statutory criteria for an exemption under 
section 4975(c)(2) of the Code because: (a) The purchase will be a one-
time transaction for cash; (b) the terms and conditions of the purchase 
will be at least as favorable to the IRA as those available in a 
comparable arm's length transaction with an unrelated party; (c) the 
IRA will pay a purchase price that is no greater than the fair market 
value of the Stock at the time of the transaction, as established by a 
qualified, independent appraiser; (d) the IRA will pay no commissions 
nor other expenses in connection with the purchase; and (e) the fair 
market value of the Stock will represent no more than 25 percent of the 
total assets of the IRA at the time of the transaction.

Notice to Interested Persons

    Because Mr. Ross is the sole participant in his IRA, it has been 
determined that there is no need to distribute the notice of proposed 
exemption to interested persons. Comments and requests for a hearing 
with respect to the proposed exemption are due within 30 days of the 
date of publication of this notice in the Federal Register.
    For Further Information Contact: Ms. Karin Weng of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Platt Orthopedics Retirement Plan (the Plan), Located in Rancho 
Mirage, California

[Application No. D-10875]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to 
the proposed sale by the Plan of certain improved real property (the 
Property) to Morris and Arthur Platt, disqualified persons with respect 
to the Plan,\26\ provided that the following conditions are satisfied: 
(1) The sale is a one-time transaction for cash; (2) the Plan pays no 
commissions nor other expenses relating to the sale; and (3) the Plan 
receives an amount equal to the average of two independent appraisals 
of the Property's fair market value, as of the date of the sale.
---------------------------------------------------------------------------

    \26\ Because Morris and Arthur Platt, who are owner-employees, 
and Arthur Platt's wife are the only participants in the Plan, the 
Plan is not within the jurisdiction of Title I of the Act. However, 
there is jurisdiction under Title II of the Act, pursuant to section 
4975 of the Code.
---------------------------------------------------------------------------

Summary of Facts and Representations

    1. The Plan, which is a defined contribution profit sharing plan 
sponsored by Platt Orthopedics (the Employer), has three participants, 
Morris and Arthur Platt and Arthur Platt's wife. Morris and Arthur 
Platt, orthopedic surgeons, are the owners of the Employer and the 
trustees of the Plan. Their practice was formerly in the State of New 
York but was relocated to Rancho Mirage, California. The fair market 
value of the assets of the Plan was $762,832, as of December 31, 1998, 
the date of the Plan's most recently available financial statement.
    2. The Property consists of a five-story commercial building on a 
2,319 sq. ft. lot, located at 165 Orchard Street, Borough of Manhattan, 
New York, New York. The building is vacant and boarded up and in need 
of renovation. The adjacent lots are owned by persons unrelated to the 
Plan, the Employer, and the Platts.
    3. The Property was acquired by the Plan from Orcho Realty, an 
unrelated party, in 1996, for a total purchase price of $435,000. Orcho 
Realty also financed the purchase of the Property, which the Plan now 
owns free and clear. The applicants represent that the following 
amounts were expended by the Plan at various times from September 3, 
1996 to December 31, 1999 in connection with the purchase of the 
Property (mortgage and interest payments), plus expenses (maintenance, 
taxes, and insurance): $206,381.25 in 1996; $60,100 in 1997; $98,347 in 
1998; and $134,023 in 1999. Thus, including the $435,000 purchase 
price, the Plan has made total expenditures of $498,851.25 with respect 
to the Property from 1996 to 1999. The applicants represent that the 
Property has not been leased to, nor used by, by anyone, including a 
disqualified person with respect to the Plan, at any time since its 
acquisition by

[[Page 54315]]

the Plan. The Property has produced no income for the Plan.
    4. The applicants have obtained two appraisals of the Property by 
qualified, independent appraisers, both certified in the State of New 
York. The first appraiser is Eric A. Sterling, IFA, ASA, GAA, of 
Sterling Appraisals Associates, Inc. (the Sterling Appraisal), located 
in Bronx, New York. The Sterling Appraisal, relying on the Direct Sales 
Comparison Approach to valuation, estimated that the fair market value 
of the Property was $460,000, as of September 23, 1999. The second 
appraiser is John M. Watch, of JW Consulting (the Watch Appraisal), 
located in Flushing, New York. The Watch Appraisal utilized the Market 
Approach and Cost Approach and concluded that the fair market value of 
the Property was $525,000, as of September 24, 1999.
    The Sterling Appraisal examined four recent sales of comparable 
properties, while the Watch Appraisal examined five recent sales of 
comparable properties, in the local real estate area, in making a 
determination of the fair market value of the Property. The zoning of 
the Property is ``C6-1, Commercial.'' Both appraisals noted that the 
improvements are in poor condition and that the Property needs to be 
restored before it can attain its highest and best use, which likely 
would be a ``Mixed Use'' apartment building with retail space on the 
ground level.
    5. The applicants represent that they have attempted to sell the 
Property on the open market but were advised by a broker that, because 
the Property needs extensive renovation, it would be difficult to sell 
at all, except for a bargain price. The applicants propose, therefore, 
to purchase the Property from the Plan for an amount in cash equal to 
the fair market value of the Property, as of the date of the sale. This 
amount would be based upon an average of the two independent appraisals 
referred to in Item 4, above, because of a significant disparity in the 
valuations. This amount was $492,500, as of September, 1999. The 
appraisals will be updated at the time of the transaction. The Plan 
would pay no commissions nor other expenses relating to the sale.
    The applicants represent that the exemption will be in the best 
interests of the Plan because the sale will allow the Plan to divest 
itself of a non-income producing, illiquid asset. In addition, the sale 
proceeds will be reinvested in other assets that will increase 
diversification of the Plan's assets, achieve a higher overall rate of 
return for the Plan's assets, and facilitate the payment of retirement 
benefits.
    6. In summary, the applicants represent that the proposed 
transaction satisfies the statutory criteria for an exemption under 
section 4975(c)(2) of the Code for the following reasons: (a) The sale 
will be a one-time transaction for cash; (b) the Plan will pay no 
commissions nor other expenses relating to the sale; (c) the Plan will 
receive an amount equal to the average of two independent appraisals of 
the Property's fair market value, as of the date of the sale; and (d) 
the sale will allow the Plan to reinvest the sale proceeds in other 
assets that will achieve greater diversification and a higher overall 
rate of return for the Plan's assets.

Notice to Interested Persons

    Because Morris and Arthur Platt, and Arthur Platt's wife, are the 
only participants in the Plan to be affected by the subject 
transaction, it has been determined that there is no need to distribute 
the notice of proposed exemption to interested persons. Comments and 
requests for a hearing with respect to the proposed exemption are due 
within 30 days of the date of publication of this notice in the Federal 
Register.
    For Further Information Contact: Ms. Karin Weng of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which, among other things, require a fiduciary 
to discharge his duties respecting the plan solely in the interest of 
the participants and beneficiaries of the plan and in a prudent fashion 
in accordance with section 404(a)(1)(b) of the Act; nor does it affect 
the requirement of section 401(a) of the Code that the plan must 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries, and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete, and that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 31st day of August, 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 00-22854 Filed 9-6-00; 8:45 am]
BILLING CODE 4510-29-P