[Federal Register Volume 66, Number 132 (Tuesday, July 10, 2001)]
[Notices]
[Pages 36002-36017]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17146]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10911, et al.]


Proposed Exemptions; Deferred Profit Sharing Plan of the Penske 
Corporation (the 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, DC 
20210. Attention: Application No. ______, stated in each Notice of 
Proposed Exemption. The applications for exemption and the comments 
received will be available for public inspection in the Public 
Documents Room of the Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-5638,

[[Page 36003]]

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.

Deferred Profit Sharing Plan of the Penske Corporation (the Plan) 
Located in Charlotte, North Carolina

[Application No. D-10911]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
and 407(a) of the Act and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(E) of the Code, shall not apply, (1) effective June 15, 2000, to the 
acquisition and holding by the Plan of interests (the Interests) in the 
Penske Company, LLC (the LLC), a wholly owned subsidiary of the Plan 
sponsor, the Penske Corporation (Penske), which were distributed (the 
Distribution) as dividends to the Plan as a shareholder of Penske 
common stock (Penske Stock); and (2) the proposed redemption, by the 
LLC, of the Interests held by the Plan for the greater of $3.37 per-
unit or their fair market value at the date of the redemption, provided 
that the following conditions were or will be met:
    (a) The Interests were acquired by the Plan pursuant to Plan 
provisions for individually-directed investment of participant 
accounts;
    (b) The Plan's receipt and holding of the Interests occurred in 
connection with the Distribution;
    (c) The Plan's acquisition of the Interests resulted from an 
independent act of Penske as a corporate entity, such that all holders 
of the Penske Stock, including the Plan, were treated in the same 
manner;
    (d) Within 15 business days after the date the notice granting the 
final exemption is published in the Federal Register, the LLC will 
redeem the Interests held by the Plan for not less than $3.37 per unit;
    (e) The price received by the Plan for the Interests is not less 
than the fair market value of the Interests on the date that the 
redemption occurs; and
    (f) The Plan paid no fees or commissions in connection with the 
acquisition and holding of the Interests nor will it pay any fees or 
commissions in connection with the redemption of the Interests.
    Effective Date: If granted, this proposed exemption will be 
effective as of June 15, 2000, with respect to the acquisition and 
holding by the Plan of the Interests. In addition, this exemption will 
be effective as of the date the final exemption is granted with respect 
to the LLC's redemption of the Interests held by the Plan.

Summary of Facts and Representations

    1. Penske, the sponsor of the Plan, is a Delaware corporation 
engaged in the transportation services industry. Penske maintains its 
principal place of business in Detroit, Michigan and is more than 50% 
owned by RSP (RSP). The Plan is a qualified retirement plan described 
under section 401(a) of the Code and features a qualified cash or 
deferred compensation arrangement described in section 401(k) of the 
Code.
    As of December 31, 2000, the Plan had a total of 1,174 participants 
and assets with an approximate aggregate fair market value of 
$35,477,000. Also as of December 31, 2000, 47.9% (or $16,997,073) of 
the fair market value of the total assets of the Plan was invested in 
Penske Stock. The shares of Penske Stock are held by 401 Plan 
Participants. Before June 15, 2000, the Plan held 5,601 shares of 
Penske Corporation Class B Voting Common Stock and 106,166 shares of 
Penske Corporation Class C Non-Voting Common Stock. In total, the Plan 
owns 111,767 shares (5,601 shares + 106,166 shares) of Penske. This 
represented 3.33 percent of the total 3,355,685 shares of Penske Stock 
outstanding at that time (treating the convertible preferred stock as 
fully converted) (111,767 shares  3,355,685 shares).
    2. First Union National Bank (First Union), of Charlotte, North 
Carolina, serves as a directed trustee of the Plan. As such, First 
Union has no investment discretion over the Plan's assets.
    3. A variety of funds have been established under the Plan for the 
investment of the Plan assets, including Fund E, the Penske Corporation 
Stock Fund. These funds are mutual funds, with the exception of Fund E 
and the two subfunds that have been established with Fund E--the Penske 
Subfund and the LLC Subfund. Fund E is invested principally in Penske 
Stock, and is available for investment only with respect to amounts 
attributable to profit-sharing contributions (the Contributions) that 
were made under the Plan by participants prior to January 1, 1996. 
Participants may periodically reallocate amounts attributable to the 
Contributions (including amounts invested in Fund E) among any of the 
other funds, but they may not reallocate any amounts to Fund E. 
Furthermore, under Section 6.1 of the Plan, as currently drafted, any 
income derived or net proceeds received from the sales of assets in 
Fund E is invested among the other funds established in accordance with 
the participant's investment direction.
    4. The LLC is in the business of the management, operation, 
acquisition, and disposition of companies engaged in transportation-
related services, such as manufacturers and suppliers to the heavy-duty 
truck and automotive industries and on-line electronic commerce 
enterprises. The LLC was formed by Penske on April 13, 2000 as a 
Delaware limited liability company. Penske contributed $9,900 in cash 
and a trust maintained for the benefit of RSP contributed $100 in cash 
to the LLC on, in exchange for all of the LLC Interests. On May 1, 
2000, Penske purchased the trust's Interests in the LLC for $100 in 
cash, so that Penske owned all of the Interests. This resulted in the 
LLC being a wholly owned subsidiary of Penske. On June 15, 2000, Penske 
made a pro rata distribution of the Interests, which are not publicly-
traded, to all of Penske's shareholders of record as of June 14, 2000. 
The Plan, as a

[[Page 36004]]

shareholder of Penske Stock, also received a distribution of the 
Interests from Penske in proportion to its ownership interest in Penske 
Stock. As a result of the pro rata distribution of the Interests, the 
Plan received 5,601 Class B Voting Common Units in the LLC and 106,166 
Class C Non-Voting Common Units in the LLC out of the total number of 
units issued--3,355,685 (treating the convertible preferred units as 
fully converted). Similarly, RSP received Interests in the LLC which 
corresponded with those received by the Plan. The Plan paid no fees or 
commissions to Penske in connection with the Distribution.
    The Interests have been held on behalf of the Plan within Fund E in 
the LLC Subfund. Participants with accounts invested in Fund E have 
received information from Penske about the nature, risks and potential 
rewards of holding the Interests as an investment. This information was 
given in the form of an information statement (the Statement) provided 
by the employee benefits department of Penske. The Statement was sent 
only to participants in the Plan with accounts invested in Fund E.
    5. Section 406(a)(1)(A) of the Act prohibits a fiduciary from 
causing a plan to engage in a transaction which the fiduciary knows (or 
should know) constitutes a sale or exchange of any property between the 
plan and a party in interest. Penske, as an employer any of whose 
employees are covered by the Plan, is a party in interest with respect 
to the Plan under section 3(14)(C) of the Act. The LLC is also a party 
in interest with respect to the Plan under section 3(14)(G) of the Act. 
Since 100% of this entity was owned directly by Penske and more than 
50% of the LLC is currently owned indirectly by RSP, the LLC is a party 
in interest under section 3(14)(G) of the Code with respect to the 
Plan.
    Because Penske believes that the LLC is an affiliate of Penske for 
purposes of section 407(d)(7) of the Act,\1\ Penske represents that the 
Interests held by the Plan would constitute an ``employer security'' 
within the meaning of 407(d)(1) of the Act \2\ but not a ``qualifying 
employer security'' under section 407(d)(5) of the Act \3\ inasmuch as 
the Interests do not fall within any of the covered categories.
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    \1\ Section 407(d)(7) of the Act defines a corporation as an 
affiliate of an employer if it is a member of any controlled group 
of corporations (as defined in sectin 1563(a) of the Code, except 
that ``applicable percentage'' shall be substituted for ``80 
percent'' wherever the latter percentage appears in such section) of 
which the employer maintains the plan is a member. For purposes of 
the preceding sentence, the term ``applicable percentage'' means 50 
percent, or such lower percentage as the Secretary of Labora may 
prescribe by regulation.
    \2\ Section 407(d)(1) of the Act defines a ``qualifying employer 
security'' as a security issued by an employer of employees covered 
by the plan, or by an affiliate of such employer.
    \3\ Section 407(d)(5) of the Act defines a ``qualifying employer 
security'' as an employer security which is (a) stock; (b) a 
marketable obligation; or (c) an interest in a publicly-traded 
partnership, but only if such partnership is an existing 
partnership.
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    Therefore, Penske states that exemptive relief is needed with 
respect to the acquisition and continued holding of the Interests by 
the Plan to the extent there have been violations of sections 406(a), 
406(b)(1) and (b)(2), and section 407(a) of the Act. In addition, 
Penske represents that the redemption of the Plan's Interests by the 
LLC violates section 406(a)(1)(A) and section 406(b)(1) and (b)(2) of 
the Act. Accordingly, Penske requests an administrative exemption from 
the Department.
    If granted, the exemption will be effective as of June 15, 2000 
with respect to the acquisition and holding by the Plan of the 
Interests. In addition, this exemption will be effective as of the date 
the notice granting the exemption is published in the Federal Register 
with respect to the redemption of the Plan's Interests by the LLC.
    6. McDonald Investments Inc. (McDonald), a company which is 
customarily engaged in the valuation of businesses and their securities 
in connection with mergers and acquisitions, negotiated underwritings, 
competitive biddings, secondary distributions of listed and unlisted 
securities, private placements and valuations for estate, corporate and 
other purposes, valued all of the Interests as of June 15, 2000. 
McDonald represents that it is independent of Penske, the LLC and RSP.
    In connection with rendering this valuation, McDonald reviewed and 
analyzed, among other things, the following: (i) The historical 
financial information concerning the LLC's investments; (ii) certain 
other internal information, primarily financial in nature including 
projections concerning the business and operation of the LLC's 
investments furnished to it by the LLC's management for the purposes of 
the analysis; (iii) certain publicly-available information with respect 
to other companies that McDonald believed to be comparable to the LLC's 
investments and the trading markets for other comparable companies' 
securities; and (iv) certain publicly-available information concerning 
the nature and terms of other transactions that McDonald considered 
relevant to its inquiry. McDonald also met with certain officers and 
employees of Penske and the LLC to discuss the respective businesses 
and prospects of the LLC's investments, as well as other matters 
McDonald believed relevant to the valuation. McDonald concluded that 
the fair market value of the LLC, on an equity basis, was in a range of 
$7.3 million to $15.3 million, with a mid-point of $11.3 million. For 
purposes of determining the redemption price for the Interests, 
McDonald represented that the midpoint price of $11.3 million was 
acceptable as the fair market value of the LLC as of June 15, 2000. As 
a result of the appraisal the per-unit of the Interest was valued at 
$3.37 ($11.3 million  3,355,685 units). Based upon this 
valuation, the Plan will receive a minimum of $376,654.79 (111,767 
units  x  $3.37) as a result of the redemption.
    7. The LLC was also valued by McDonald as of October 31, 2000. The 
second appraisal was based on the same criteria utilized in the first 
appraisal. McDonald concluded that the fair market value of the LLC, on 
an equity basis, was in a range of $2.9 million to $6.4 million, with a 
mid-point of $4.7 million.Therefore, for purposes of determining the 
redemption price for the Interests, McDonald represented that the 
midpoint price of $4.7 million was acceptable as the fair market value 
of the LLC as of October 31, 2000. As a result of the appraisal the 
per-unit of the Interest was valued at $1.40 ($4.7 million  
3,355,685 units).
    8. The LLC was valued for a third time by McDonald as of December 
31, 2000. This appraisal was based on the same criteria utilized in the 
two prior appraisals. McDonald concluded that the fair market value of 
the LLC, on an equity basis, was in a range of $5.8 million to $10.1 
million, with a mid-point of $8 million. Therefore, for purposes of 
determining the redemption price for the Interests, McDonald 
represented that the midpoint price of $8 million was acceptable as the 
fair market value of the LLC as of December 31, 2000. As a result of 
the appraisal the per-unit of the Interest was valued at $2.38 ($8 
million  3,355,685 units).
    10. On the basis of the foregoing, within 15 business days after 
the date the notice granting the final exemption is published in the 
Federal Register, the LLC will redeem the Interests held by the Plan 
for the greater of $3.37 per-unit (which represents the highest of the 
independent appraisals of the LLC) or the fair market value of the 
Interests on the date that the redemption occurs. The proceeds of the 
redemption will be reallocated among the other funds

[[Page 36005]]

available for investment under the Plan pursuant to the participants' 
current investment elections for new Plan contributions. Penske states 
that the proposed redemption is in the interests of the Plan and its 
participants and beneficiaries because the redemption will be a one-
time cash transaction allowing the Plan to divest itself of the 
Interests and reinvest the proceeds of the redemption in assets that 
will be diversified and generate higher rates of return.
    11. In summary, the applicant represents that the transactions have 
satisfied or will satisfy the statutory criteria for an exemption under 
section 408(a) of the Act because:
    (a) The Interests were acquired by the Plan pursuant to Plan 
provisions for individually-directed investment of participant 
accounts;
    (b) The Plan's receipt and holding of the Interests occurred in 
connection with the Distribution;
    (c) The Plan's acquisition of the Interests resulted from an 
independent act of Penske as a corporate entity, such that all holders 
of the Penske Stock, including the Plan, were treated in the same 
manner;
    (d) Within 15 business days after the date the notice granting the 
final exemption is published in the Federal Register, the LLC will 
redeem the Interests held by the Plan for not less than $3.37 per-unit;
    (e) The price received by the Plan for the Interests will not be 
less than the fair market value of the Interests on the date that the 
redemption occurs; and
    (f) The Plan paid no fees or commission in connection with the 
acquisition and holding of the Interests nor will the Plan pay any fees 
or commissions in connection with the redemption of the Interests.
    For Further Information Contact: Khalif Ford of the Department, 
telephone (202) 219-8883. (This is not a toll-free number).

Development Company Funding Corporation Located in the District of 
Columbia

[Application No. D-10926]

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 section 4975(c)(2) of 
the Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, August 10, 1990).
Section I. Transactions
    A. If the proposed exemption is granted, effective August 25, 2000, 
the restrictions of sections 406(a) and 407(a) of the Act, and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (D) of the Code, shall not 
apply to the following transactions involving Trusts and Certificates 
evidencing interests therein:
    (1) The direct or indirect sale, exchange or transfer of 
Certificates in the initial issuance of Certificates between the 
Underwriter of the Certificates and an employee benefit plan when the 
SBA, the Fiscal Agent, the Selling Agent, the Central Servicing Agent, 
the Trustee, the Underwriter, or an Obligor is a party in interest with 
respect to such plan;
    (2) The direct or indirect acquisition or disposition of 
Certificates by a plan in the secondary market for such Certificates; 
and
    (3) The continued holding of Certificates acquired by a plan 
pursuant to subsection I.A.(1) or (2).
    Notwithstanding the foregoing, Section I.A. does not provide an 
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and 
407 of the Act for the acquisition or holding of a Certificate on 
behalf of an Excluded Plan, by any person who has discretionary 
authority or renders investment advice with respect to the assets of 
that Excluded Plan.\4\
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    \4\ Section I.A. provides no relief from sections 406(a)(1)(E), 
406(a)(2) and 407 of the Act for any person rendering investment 
advice to an Excluded Plan within the meaning of section 
3(21)(A)(ii) of the Act and regulation 29 CFR section 2510.3-21(c).
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    B. If the proposed exemption is granted, effective August 25, 2000, 
the restrictions of section 406(b)(1) and (b)(2) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(E) of the Code, shall not apply to:
    (1) The direct or indirect sale, exchange or transfer of 
Certificates in the initial issuance of Certificates between the 
Underwriter and a plan, when the person who has discretionary authority 
or renders investment advice with respect to the investment of plan 
assets in the Certificates is (a) an Obligor with respect to 5 percent 
or less of the fair market value of the 504 Program Loans underlying 
the Debentures related to that Series of Certificates, or (b) an 
affiliate of a person described in (a); if
    (i) The plan is not an Excluded Plan;
    (ii) Solely in the case of an acquisition of Certificates in 
connection with the initial issuance of the Certificates, at least 50 
percent of each Series of Certificates in which plans have invested is 
acquired by persons independent of the members of the Restricted Group, 
and at least 50 percent of the aggregate interest in the Series is 
acquired by persons independent of the Restricted Group.
    (iii) A plan's investment in each Series of Certificates does not 
exceed 25 percent of all of the Certificates of that Series outstanding 
at the time of the acquisition; and
    (iv) Immediately after the acquisition of the Certificates, no more 
than 25 percent of the assets of a plan with respect to which the 
person has discretionary authority or renders investment advice are 
invested in Certificates representing an interest in a Trust containing 
assets sold or serviced by the same entity.\5\ For purposes of this 
subparagraph (iv) only, an entity will not be considered to service 
assets contained in a Trust if it is merely a subservicer of that 
Trust.
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    \5\ For purposes of this exemption, each plan participating in a 
commingled fund (such as a bank collective trust fund or insurance 
company pooled separate account) shall be considered to own the same 
proportionate undivided interest in each asset of the commingled 
fund as its proportionate interest in the total assets of the 
commingled fund as calculated on the most recent preceding valuation 
date of the fund.
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    (2) The direct or indirect acquisition or disposition of 
Certificates by a plan described in paragraph B.(1) in the secondary 
market for such Certificates, provided that conditions set forth in 
paragraphs B.(1)(i), (iii) and (iv) are met; and
    (3) The continued holding of Certificates acquired by a plan 
pursuant to subsection I.B.(1) or (2).
    C. If the proposed exemption is granted, effective August 25, 2000, 
the restrictions of sections 406(a), 406(b) and 407(a) of the Act, and 
the sanctions resulting from the application of section 4975 of the 
Code, by reason of section 4975(c) of the Code, shall not apply to 
transactions in connection with the servicing, management and operation 
of a Trust, provided:
    (1) Such transactions are carried out in accordance with the terms 
of a binding Trust Agreement; and
    (2) The Trust Agreement is provided to, or described in all 
material respects in the offering circular or other disclosure document 
provided to the investing plans before they purchase Certificates 
issued by the Trust.\6\
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    \6\ The offering circular or other disclosure document must 
contain substantially the same information that would be disclosed 
in a prospectus if the offering of the Certificates were made in a 
registered public offering under the Securities Act of 1933. In the 
Department's view, the offering circular or other disclosure 
document must contain sufficient information to permit plan 
fiduciaries to make informed investment decisions.

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[[Page 36006]]

    D. If the proposed exemption is granted, effective August 25, 2000, 
the restrictions of sections 406(a) and 407(a) of the Act, and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (D) of the Code, shall not 
apply to any transaction to which those restrictions or sanctions would 
otherwise apply merely because a person is deemed to be a party in 
interest or disqualified person (including a fiduciary) with respect to 
a plan by virtue of providing services to the plan (or by virtue of 
having a relationship to such service provider described in section 
3(14)(F), (G), (H), or (I) of the Act or section 4975(e)(2)(F), (G), 
(H), (I) of the Code), solely because of the plan's ownership of 
Certificates.
Section II. Conditions
    The relief provided under Section I is available only if the 
following conditions are met:
    A. The acquisition of Certificates by a plan is on terms (including 
the Certificate price) that are at least as favorable to the plan as 
such terms would be in an arm's-length transaction with an unrelated 
party;
    B. The rights and interests evidenced by the Certificates are not 
subordinated to the rights and interests evidenced by other 
Certificates in the same Series;
    C. The Certificates and Debentures are guaranteed as to the timely 
payment of principal and interest by the SBA, and are therefore backed 
by the full faith and credit of the United States;
    D. The Trustee is not an affiliate of any other member of the 
Restricted Group.
Section III. Definitions
    For purposes of this exemption:
    A. ``Certificate'' means a certificate:
    (1) That represents a beneficial ownership interest in a discrete 
pool of Debentures and all payments thereon, held in Trust by the 
Trustee pursuant to the Trust Agreement;
    (2) That entitles the holder to pass-through payments of principal, 
interest, and/or other payments made with respect to the discrete pool 
of Debentures held as part of such Trust; and
    (3) That is issued by the Trustee as agent for the SBA and 
guaranteed by the SBA as to timely payment of principal and interest 
pursuant to section 505 of the Small Business Investment Act of 1958, 
as amended (the Small Business Investment Act).
    B. ``Trust'' means the trust created pursuant to the Trust 
Agreement, under which, with respect to each Series of Certificates, 
the Trustee holds in Trust for the benefit of the certificate holders 
of the Series the following property:
    (1) The discrete pool of Debentures related to the Series;
    (2) A debenture guarantee agreement executed by the SBA pursuant to 
section 503 of the Small Business Investment Act pursuant to which the 
SBA guarantees timely payment of principal and interest on the 
Debentures related to the Series; and
    (3) The certificate account maintained by the Central Servicing 
Agent for such Series into which the Central Servicing Agent deposits 
payments due in respect of the Debentures on each semiannual debenture 
payment date.
    C. ``Debentures'' means debentures issued by a certified 
development company and guaranteed as to timely payment of principal 
and interest by the SBA pursuant to section 503 of the Small Business 
Investment Act.
    D. ``504 Program Loans'' means loans made by a certified 
development company to a small business concern and funded with the 
proceeds of a Debenture pursuant to section 503 of the Small Business 
Investment Act.
    E. ``SBA'' refers to the U.S. Small Business Administration.
    F. ``Underwriter'' means an entity which has received an individual 
prohibited transaction exemption from the Department that provides 
relief for the operation of asset pool investment trusts that issue 
``asset-backed'' pass-through securities to plans, that is similar in 
format and structure to this exemption (the Underwriter Exemptions); 
\7\ any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
such entity; and any member of an underwriting syndicate or selling 
group of which such firm or person described above is a manager or co-
manager with respect to the Certificates.
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    \7\ For a listing of the Underwriter Exemptions, see the 
description provided in footnote 1 of Prohibited Transaction 
Exemption 2000-58 (65 FR 67765, November 13, 2000).
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    G. ``Fiscal Agent'' means the entity that has contracted with the 
SBA to assess the financial markets, arrange for the production of 
required documents, and monitor the performance of the Trustee and the 
Underwriter.
    H. ``Selling Agent'' means the entity appointed by a certified 
development company to select Underwriters, negotiate the terms and 
conditions of Debenture offerings with the Underwriters, and direct and 
coordinate Debenture sales.
    I. ``Central Servicing Agent'' means the entity that has entered 
into a master servicing agreement with the SBA to support the orderly 
flow of funds among borrowers, certified development companies and the 
SBA.
    J. ``Trustee'' means an entity that is the trustee of the Trust.
    K. ``Obligor'' means any person that is obligated to make payments 
under a Section 504 Loan related to a Debenture contained in the Trust.
    L. ``Excluded Plan'' means any employee benefit plan with respect 
to which any member of the Restricted Group is a ``plan sponsor'' 
within the meaning of section 3(16)(B) of the Act.
    M. ``Restricted Group'' with respect to a class of Certificates 
means:
    (1) Each Underwriter;
    (2) The Fiscal Agent;
    (3) The Selling Agent;
    (4) The Trustee;
    (5) The Central Servicing Agent;
    (6) Any Obligor with respect to loans relating to Debentures 
included in the Trust constituting more than 5 percent of the aggregate 
unamortized principal balance of the assets in the Trust, determined on 
the date of the initial issuance of Certificates by the Trust;
    (7) The SBA; or
    (8) Any affiliate of a person described in (1)-(7) above.
    N. ``Affiliate'' of another person includes:
    (1) Any person, directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
such other person;
    (2) Any officer, director, partner, employee, relative (as defined 
in section 3(15) of the Act), brother, sister, or spouse of a brother 
or sister of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner.
    O. ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    P. A person will be ``independent'' of another person only if:
    (1) Such person is not an affiliate of that other person; and
    (2) The other person, or an affiliate thereof, is not a fiduciary 
that has investment management authority or renders investment advice 
with respect to assets of such person.
    Q. ``Sale'' includes the entrance into a Forward Delivery 
Commitment, provided:
    (1) The terms of the Forward Delivery Commitment (including any fee 
paid to

[[Page 36007]]

the investing plan) are no less favorable to the plan than they would 
be in an arm's-length transaction with an unrelated party;
    (2) The offering circular or other disclosure document is provided 
to an investing plan prior to the time the plan enters into the Forward 
Delivery Commitment; and
    (3) At the time of the delivery, all conditions of this exemption 
applicable to Sales are met.
    R. ``Forward Delivery Commitment'' means a contract for the 
purchase or sale of one or more Certificates to be delivered at an 
agreed future settlement date. The term includes both mandatory 
contracts (which contemplate obligatory delivery and acceptance of the 
Certificates) and optional contracts (which give one party the right 
but not the obligation to deliver Certificates to, or demand delivery 
of Certificates from, the other party).
    S. ``Trust Agreement'' means that trust agreement by and among the 
SBA, the Fiscal Agent and the Trustee, as amended, establishing the 
Trust and, with respect to each Series of Certificates, the supplement 
to the trust agreement pertaining to such Series.
    T. ``Series'' means any particular series of Certificates issued 
pursuant to the Trust Agreement that, in the aggregate, represent the 
entire beneficial interest in a discrete pool of Debentures held by the 
Trustee pursuant to the Trust Agreement.

Summary of Facts and Representations

    1. The Small Business Administration (the SBA) is an agency 
established on July 30, 1953, pursuant to the Small Business Act. It is 
under the general direction and supervision of the President of the 
United States, and is not within or affiliated with any other agency or 
department of the federal government. The SBA was created to further 
Congressional policy that the government should aid, counsel, assist 
and protect the interests of small businesses to preserve free 
competitive enterprise and strengthen the country's economy.
    The SBA was authorized by the Small Business Investment Act to 
establish a program (the 504 program) to provide financing to small 
businesses for projects that further one or more economic development 
objectives and meet certain eligibility criteria specified in the 504 
program regulations. The 504 program is intended to foster economic 
development, create or preserve job opportunities, and stimulate growth 
of small businesses.
    2. Under the 504 program, financing is provided to small businesses 
by certified development companies (CDCs). A CDC is generally a not-
for-profit corporation or limited liability company that has been 
certified by the SBA, although a CDC certified by the SBA before 
January 1, 1987 may be a for-profit corporation. Each CDC must serve a 
designated area of operations identified by the CDC and approved by the 
SBA; there also may be one statewide CDC in a state, responsible for 
fostering economic development throughout the state and for providing 
loans under the 504 program in areas not adequately served by other 
CDCs. SBA regulations prescribe the number of members and the interests 
that must be represented by the members, the composition and activities 
of the board of directors and the staffing requirements of the CDC. 
They also impose an application process for certification as a CDC, 
including a public notice and comment period, and a probationary 
period.
    In addition to marketing the 504 program, a CDC may furnish other 
financial and technical assistance to small businesses, or may assist 
them in obtaining such assistance. A CDC must generate at least two 504 
program loan approvals every fiscal year, and its loan portfolio must 
meet certain standards of job creation or job preservation prescribed 
in regulations. CDCs submit annual and interim reports, as well as 
other information, to the SBA.
    3. A small business applies for 504 program assistance to the CDC 
serving the area in which the project is located. If the SBA approves 
the project, permanent financing is arranged generally consisting of at 
least a 10% contribution from the small business; a loan from the CDC 
for up to 40% of the project costs and certain administrative costs, 
collateralized by a second lien on the project property; and a private 
sector loan for the balance, collateralized by a first lien on the 
project property. The minimum contribution from the small business is 
15% if the borrower has operated for two years or less or if the 
project involves a limited or single purpose building or structure and 
is 20% if both conditions are met. Interim financing for everything 
except the borrower's contribution is often obtained from the private 
sector lender that will participate in the permanent financing.
    The CDC's contribution to the project financing is raised by the 
CDC's issuance of a debenture. Under authority granted in 15 U.S.C. 
697(a), the SBA guarantees the timely payment of all principal and 
interest as scheduled on this debenture; the full faith and credit of 
the United States is pledged to the payment of these guaranteed 
amounts.\8\
---------------------------------------------------------------------------

    \8\ A small percentage of debentures are issued to fund the 
acquisition of property by a CDC that the CDC then leases to a small 
business concern. The lease payments are structured so as to be 
sufficient to service and retire the debenture. In the event of an 
automatic event of default on a lease, the lease may be terminated, 
but the SBA is not required to accelerate the related debenture so 
long as the CDC or the SBA continues to pay principal and interest 
when due on the debenture.
---------------------------------------------------------------------------

    4. The term of both the underlying loan and the debenture is either 
10 or 20 years. The interest rate of the loan and of the debenture are 
set by the SBA and approved by the Secretary of the Treasury. The loan 
underlying the debenture is generally for a minimum of $50,000, 
although it may, for good cause shown, be as small as $25,000. The 
total 504 program assistance to a borrower and its affiliates may not 
exceed $750,000 (or $1,000,000 in the case of projects meeting certain 
public policy goals). The amount of the underlying note and of the 
debenture equals the amount of the underlying loan plus administrative 
costs, including the SBA guarantee fee, a funding fee to cover the cost 
of the public issuance of securities and the trustee, the CDC 
processing fee, closing costs, and the underwriter's fee.
    The underlying loan is secured by a junior lien on project 
property, which is comprised of one or more long term fixed assets, 
such as land, buildings, machinery, and equipment, acquired or improved 
with 504 program financing for use in business operations. The 
debentures are not secured. In its discretion, the SBA may permit a 
debenture to be subordinated to other obligations of the CDC, but not 
to debt incurred by the CDC to obtain funds to loan to the borrower to 
be used as the borrower's contribution to the project financing.
    An event of default under the 504 program note may require 
automatic acceleration or may permit forbearance of acceleration while 
a cure is attempted, depending upon the terms of the note. Automatic 
acceleration may be required upon the appointment of a receiver or 
liquidator for the borrower, the filing of a petition by or against the 
borrower under federal or state bankruptcy or insolvency law, the 
making of an assignment for the benefit of the borrower's creditors, or 
the failure by the borrower to comply with certain SBA regulations; 
however, the SBA may postpone acceleration if the SBA determines that 
timely payment is likely in the future. In the case of discretionary 
defaults, the SBA's policy is to seek to resolve the default, while 
making scheduled payments on the related debenture pursuant to its 
guarantee. If

[[Page 36008]]

the note is accelerated, the debenture that funded it is automatically 
accelerated, and the SBA pays 100% of the principal balance, plus 
interest to the payment date, pursuant to its guarantee. The SBA 
generally recovers its guarantee payments from the CDC, although, 
except in the case of fraud, negligence, or misrepresentation by the 
CDC, its recovery is limited to the amount the CDC has received on the 
loan and to the collateral.
    If the 504 program loan is prepaid, the corresponding debenture is 
prepaid with interest and any applicable premium. If the debenture is 
in a pool, as discussed below, the investors in the pool are paid pro 
rata, and the SBA's guarantee of the pool is proportionately reduced. 
If the entire pool is prepaid, the SBA may redeem the certificates 
backed by the pool. The payment of any prepayment premium to the 
trustee is not subject to the SBA guarantee, although the distribution 
of any prepayment premium is guaranteed. Recovery of any acquisition 
premium paid by an investor to acquire a participation certificate in 
the secondary market also is not guaranteed.
    5. The debentures are issued under section 503 of the Small 
Business Investment Act, added in 1980 by P.L. 96-302. Until June 1989, 
the debentures were usually sold to the Federal Financing Bank, an 
instrumentality of the United States under the general supervision of 
the Secretary of the Treasury. However, in 1986, section 505, 
authorizing the creation of trusts that consist solely of guaranteed 
debentures and that issue certificates guaranteed by the SBA as to 
timely payment of principal and interest, was added to the Small 
Business Investment Act by Public Law 99-272.
    Each debenture bears interest at a stated fixed rate per annum, and 
is a self-amortizing debt instrument calling for level payments of 
principal and interest at semiannual intervals over its term to 
maturity. A debenture may be prepaid in whole, but not in part, on any 
semiannual payment date for a specified prepayment price. The 
prepayment price may include a premium over the outstanding principal 
amount of the debenture. The premium declines with the passage of time 
and is eliminated after one-half of the stated term to maturity for the 
debenture has elapsed.
    A selling agent for the CDCs agrees to sell a specified amount of 
SBA-guaranteed debentures (the debenture pool) to the underwriters 
under a Debenture Purchase, Pooling and Exchange Agreement. All 
debentures within a debenture pool have identical stated interest 
rates, payment dates, and terms to maturity. The underwriters assign 
the debenture pool to the trustee in exchange for participation 
certificates.
    The trustee issues the participation certificates as a series of 
the trust established by the 1986 trust agreement, as amended, pursuant 
to a supplement to the trust agreement. The supplement sets out the 
payment terms for the debentures and certificates. Each series of 
certificates relates to a discrete debenture pool and is issued 
pursuant to a discrete supplement to the trust agreement.
    Each certificate represents an undivided beneficial ownership 
interest in each debenture in the related debenture pool and is 
entitled to a ratable share of all payments made on each debenture in 
that debenture pool. Thus, the interest rate, payment terms, and 
maturity date of a certificate will correspond to those of the 
debentures in the related pool.
    With respect to each series of certificates, the certificates and 
the debentures in the related debenture pool are issued simultaneously. 
Each debenture pool is closed upon the simultaneous issuance of the 
series of certificates and the related debentures. The trust does not 
hold any assets that are not associated with a particular series.
    Certificates issued under this program have a term of 10 or 20 
years, must have a face value of at least $25,000, and are issued in 
registered form and transferred only by entry on the central registry 
maintained by the trustee. The statute and regulations governing the 
504 program do not provide for issuance of subordinated certificates.
    The SBA agrees to issue its guarantee on the certificates. The 
Department of the Treasury approves the negotiated sale price and 
coupon on the certificates. The underwriters sell the certificates to 
investors and the proceeds, less an underwriting commission, are 
distributed to the CDC's selling agent, acting through a servicing 
agent, which transfers the funds to the CDC to fund the 504 program 
loans.
    The certificates are not rated by a rating agency because of the 
SBA guarantee, which applies to both the certificates and the 
debentures that serve as collateral for the certificates, and which is 
backed by the full faith and credit of the United States. Because of 
this guarantee, the Applicant represents that the only risks to an 
investor in the participation certificates are the risk that prepayment 
of the certificate may affect its yield, and the de minimis risk that 
the United States, acting through the SBA, may default on its 
obligation.
    Participation certificates issued under the 504 program will prepay 
if any debenture included in the related pool (1) is accelerated or 
terminated in connection with an event of default under the related 504 
program note or notes or (2) is prepaid at the option of the related 
CDC, usually in connection with the prepayment of the related 504 
program note or notes. Each offering circular for the participation 
certificates contains tables which disclose prepayment experience for 
the debentures in connection with accelerations and prepayments since 
the second half of 1986.
    The acquisition of certificates by employee benefit plans will be 
on terms (including the certificate price) that are at least as 
favorable to the plan as such terms would be in an arm's-length 
transaction with an unrelated party.
    7. As of February 16, 2000, there had been 161 issues of 20-year 
certificates and 65 issues of 10-year certificates. Offerings of 20-
year certificates have been made monthly since November 1986, and the 
aggregate amount of such certificates sold as of February 16, 2000 was 
$10,453,821,000. Ten-year certificates were first offered in December 
1986; they were offered quarterly from January 1987 until January 1995, 
and have been offered bi-monthly since January 1995; the aggregate 
amount of such certificates sold as of February 16, 2000 was 
$558,669,000.
    8. Regulations issued under the Small Business Investment Act 
require the SBA and CDC to appoint a selling agent to select 
underwriters, negotiate the terms of debenture offerings with the 
underwriters, and direct and coordinate debenture sales; regulations 
likewise require the appointment of a fiscal agent to assess the 
financial markets, arrange for the production of documents required for 
offering certificates, and monitor the performance of the trustee and 
the underwriters. Development Company Funding Corporation (DCFC) has 
been appointed as fiscal agent for the SBA under a Fiscal Agency 
Agreement with the SBA dated as of August 12, 1999 (superseding 
agreements dated as of December 1, 1986 and September 30, 1988) and as 
selling agent for CDCs that issue debentures which DCFC sells to 
underwriters pursuant to a Selling Agency Agreement with the SBA dated 
as of August 12, 1999 (superseding agreements dated as of December 1, 
1986 and September 30, 1988). DCFC is a District of Columbia not-for-
profit

[[Page 36009]]

corporation that was created to facilitate 504 program transactions. 
DCFC shares some of its facilities and staff with the National 
Association of Development Companies, a not-for-profit trade 
organization. It is paid by the SBA for its services as fiscal agent, 
and is paid its necessary expenses for staff and overhead, net of other 
income, by the SBA for its services as selling agent. Payments to DCFC 
of its fees as fiscal agent and selling agent are made from the master 
reserve account, described below.
    9. The regulations provide for the designation by the SBA of a 
central servicing agent to support the orderly flow of funds among the 
borrowers, CDCs and SBA. SBA has engaged Colson Services Corp. (Colson) 
to act as central servicing agent, receiving and disbursing funds wired 
by the underwriters, and servicing payments on the debentures. Colson 
collects a monthly servicing fee from the borrower of each 504 program 
loan.
    Colson was awarded the contract to act as central servicing agent 
through a competitive bidding process. Colson is required by regulation 
to provide a fidelity bond or insurance in an amount that fully 
protects the government, and the master servicing agreement between 
Colson and the SBA requires that Colson carry a fidelity bond or 
similar insurance in an amount commensurate with the level of funds in 
its possession, but not less than $10 million. In addition, the master 
servicing agreement requires Colson to maintain a standard Banker's 
Blanket Bond insurance policy in an amount ``customary and sufficient'' 
to protect against loss caused by actions of Colson, its employees or 
agents.
    10. The master servicing agreement requires Colson to maintain 
certain accounts to hold funds that are in Colson's custody in 
connection with the 504 program. The master servicing agreement 
specifies the accounts to be maintained and the payments to be made, 
and imposes timing and other performance requirements. Colson maintains 
accounts required under the master servicing agreement at J.P. Morgan 
Chase & Co., which recently purchased Colson. The master servicing 
agreement limits the investment of funds in these accounts to debt 
obligations issued or guaranteed by the U.S. government and money 
market funds that hold these types of investments. Investment earnings 
are sufficient to pay the trustee and investment management fees 
charged in connection with the account, and a fee to Colson for record-
keeping services that Colson provides for the accounts. Investment 
earnings in excess of these fees are disbursed semiannually to the 
CDCs.
    Colson maintains a master reserve account through which all funds 
related to the 504 program loans and the debentures flow. The master 
reserve account is funded by the guarantee fee and a funding fee 
collected from the borrower of a 504 program loan, and by principal and 
interest payments on 504 program loans. Interest on loan payments that 
accrues in the account between the date of receipt of each monthly 
payment and its disbursement by the trustee to certificateholders must 
be paid by Colson to the CDC servicing the loan, at the direction of 
the SBA.
    The master servicing agreement requires Colson to deliver periodic 
status reports to the SBA, and requires independent audits of Colson's 
financial statements and operations each year. It also provides for a 
contracting officer to administer the contract on behalf of SBA and for 
a contracting officer's technical representative to monitor all 
technical aspects of and to assist in administering the contract. SBA 
and its authorized representatives have the right of access and 
inspection of Colson's facilities and records relating to the 
operations of the 504 program. Colson may forfeit its right to its fees 
if, in the determination of the SBA, it has not submitted required 
reports or performed required services, unless the failure is beyond 
its control and without its fault. In addition, SBA may terminate the 
contract for default by Colson, including Colson's failure to perform 
its obligations in a timely manner, as well as Colson's insolvency or 
the filing of a petition in bankruptcy by or against Colson if the 
petition is not dismissed or withdrawn within 90 days.
    11. The regulations also require appointment of a trustee to issue 
and transfer the certificates, maintain registries of the debentures 
and the certificates, hold the debentures for the benefit of the SBA 
and the certificateholders, receive payments on the debentures and 
disburse payments on the certificates. None of the administrative fees 
paid by the borrower (including the SBA guarantee fee, funding fee, the 
CDC processing fee, closing costs and the underwriter's fee) are paid 
out of the trust. The trustee, as holder of a debenture guarantee 
agreement with the SBA with respect to any pool of debentures, has the 
right to enforce the SBA's guarantee for the benefit of the holders of 
the certificates in the related series. Harris Trust Company of New 
York (Harris Trust) was appointed as trustee and entered into a trust 
agreement dated as of December 1, 1986 with the SBA and with DCFC as 
fiscal agent. Effective May 8, 2000, The Bank of New York succeeded 
Harris Trust as trustee. Under the trust agreement, as amended, the 
trustee is compensated by the SBA from time to time as shall be agreed.
    As a condition of the exemption, the trustee may not be an 
affiliate of the underwriter, fiscal agent, selling agent, central 
servicing agent, any obligor with respect to loans relating to 
debentures included in the trust constituting more than 5 percent of 
the aggregate unamortized principal balance of the assets in the trust 
(determined on the date of the initial issuance of certificates by the 
trust), the SBA, or any of their affiliates.
    12. Each agent must provide a fidelity bond or insurance sufficient 
to fully protect the interest of the government, and must furnish the 
SBA with access to all books, records and other documents relating to 
SBA-guaranteed debentures.
    13. In connection with the original issuance of participation 
certificates, an offering circular is furnished to all investors, 
including investing plans. The participation certificates are exempt 
from the requirements of the Securities Act of 1933 and the Securities 
Exchange Act of 1934. However, the SBA, like most other government 
agencies that issue certificates or debt securities, seeks to conform 
to market convention, and therefore complies, to the extent possible, 
with the disclosure requirements generally applicable to offerings of 
participation certificates. Therefore, the participation certificates 
are issued pursuant to offering circulars that, in general, contain:
    (a) Information concerning the payment terms of the participation 
certificates, and any material risk factors with respect to the 
participation certificates;
    (b) a description of the SBA guarantee;
    (c) identification of the trustee;
    (d) a description of the SBA 504 program and the debentures held by 
the trust;
    (e) a description of the servicing arrangements set forth in the 
trust agreement, including a description of periodic statements that 
are provided to or made available to investors by the trustee;
    (f) a description of the events that constitute events of default 
under the governing agreements and a description of the trustee's and 
the investors' remedies incident thereto;
    (g) a general discussion of the principal Federal income tax 
consequences of the purchase,

[[Page 36010]]

ownership and disposition of the participation certificates by a 
typical investor;
    (h) a description of the underwriters' or placement agents' plan 
for distributing the participation certificates to investors; and
    (i) information about the scope and nature of the secondary market, 
if any, for the participation certificates. Reports indicating the 
amount of payments of principal and interest are provided to investors 
as frequently as distributions are made to investors.
    No information about the characteristics of the borrowers of the 
underlying collateral is included; investors generally evaluate the 
credit quality of the collateral solely on the basis of the SBA's full 
faith and credit guarantee.
    Under the authorizing legislation, the SBA must require disclosure 
by a seller, prior to any sale, of ``information on the terms, 
conditions, and yield'' of the participation certificates; regulations 
add the requirement to provide information on the premium and any other 
characteristics not guaranteed by the SBA. (15 U.S.C. 697b(f)(1)(C), 13 
CFR 120.941.) Thus, each seller, whether in the initial offering or the 
secondary market, must inform its purchaser of the economic terms and 
risks of the investment, as modified by the price at which each sale is 
made.
    14. The underwriters are permitted, but not required, to engage in 
certain transactions that may stabilize the price of the participation 
certificates. In general, it is the policy of many underwriters to 
attempt to make a market for securities for which they are the lead or 
co-managing underwriter.
    15. The participation certificates are generally priced at a spread 
above the interest rate on Treasury notes of comparable maturity. The 
spread reflects the risk of prepayment. Historically, the spread has 
been similar to that of certain comparable guaranteed governmental 
mortgage-backed securities.
    16. The Applicant represents that the participation certificates 
are an extremely high-quality investment, benefitting from an SBA 
guarantee, backed by the full faith and credit of the United States, on 
both the certificates and on the debentures that constitute the 
collateral for the certificates. The certificates are acceptable as 
security for the deposit of public moneys subject to the control of the 
United States, and as collateral for Treasury Tax and Loan Accounts. 
National banks, and, if permitted by state law, state banks that are 
members of the Federal Reserve System may deal in, underwrite and 
purchase the certificates for their own account without limitation. The 
certificates are legal investments for federal savings and loan 
associations, federal savings banks, and federal credit unions. They 
are legal investments for surplus and reserve funds of Federal Home 
Loan Banks to the same extent as they are legal investments for 
fiduciary and trust funds under the laws of the state in which the 
Federal Home Loan Bank is located. In the discretion of each Federal 
Reserve Bank, they may be used as security for advances to depositary 
institutions by Federal Reserve Banks. Under the laws of many states, 
they are legal for investment by savings banks, savings and loan 
associations, credit unions, insurance companies, trustees and other 
fiduciaries.
    17. In summary, the Applicant represents that the proposed 
transactions will satisfy the statutory criteria of section 408(a) of 
the Act because:
    (a) The decision to acquire certificates will be made by a plan 
fiduciary after receipt of full and detailed disclosure of all material 
features of the trust and the certificates, including all applicable 
fees and charges.
    (b) The transactions may easily be audited by a plan fiduciary and 
all the records necessary to review the transactions will be kept for 
six years. No further review by the Department is required.
    (c) The debentures and the certificates are guaranteed as to 
principal and interest by the United States of America.
    (d) Each series of certificates relates to a discrete debenture 
pool, which pool is closed upon the simultaneous issuance of the series 
of certificates and the related debentures. The trust does not hold any 
assets that are not associated with a particular series.
    (e) All actions by the SBA, the fiscal agent and the trustee with 
respect to the trust, the assets of the trust, the certificates and 
certificateholders will be governed by the trust agreement, which will 
be available to plan fiduciaries for their review prior the plan's 
investment in certificates.

Notice to Interested Persons

    The Applicant represents that because those potentially interested 
participants and beneficiaries cannot all be identified, the only 
practical means of notifying such participants and beneficiaries of 
this proposed exemption is by the publication of this notice in the 
Federal Register. Comments and requests for a hearing must be received 
by the Department not later than 45 days from the date of publication 
of this notice of proposed exemption in the Federal Register.

For Further Information Contact: Karen Lloyd of the Department, 
telephone (202) 219-8194. (This is not a toll-free number.)

J.P. Morgan Chase & Co. (Morgan Chase) and its Affiliates 
(Collectively, the Applicants) Located in New York, New York

[Application Number D-10998]

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 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).\9\
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    \9\ For purposes of this exemption, references to Title I of the 
Act, unless otherwise noted herein, refer also to corresponding 
provisions of the Code.
---------------------------------------------------------------------------

Section I. Covered Transactions
    If the exemption is granted, the restrictions of section 
406(a)(1)(A) through (D) of the Act and the sanctions resulting from 
the application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (D) of the Code, shall not apply to: (1) The 
proposed purchase or sale by employee benefit plans (the Plans), other 
than Plans sponsored and maintained by the Applicants, of publicly-
traded debt securities (the Debt Securities) issued by the Applicants; 
and (2) the extension of credit by the Plans to the Applicants in 
connection with the holding of the Debt Securities.
    This proposed exemption is subject to the general conditions that 
are set forth below in Section II.
Section II. General Conditions
    (a) The Debt Securities are made available by the Applicants in the 
ordinary course of their business to Plans as well as to customers 
which are not Plans.
    (b) The decision to invest in the Debt Securities is made by a Plan 
fiduciary (the Independent Plan Fiduciary) or a participant in a Plan 
that provides for participant-directed investments (the Plan 
Participant), which is independent of the Applicants.
    (c) The Applicants do not have any discretionary authority or 
control or provide any investment advice, within the meaning of 29 CFR 
2510.3-21(c), with respect to the Plan assets involved in the 
transactions.
    (d) The Plans pay no fees or commissions to the Applicants in

[[Page 36011]]

connection with the transactions covered by the requested exemption, 
other than the mark-up for a principal transaction permissible under 
Part II of Prohibited Transaction Class Exemption (PTCE) 75-1 (40 FR 
50845, October 31, 1975).\10\
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    \10\ The Department is providing no opinion herein as to whether 
any principal transactions involving debt securities would be 
covered by PTCE 75-1, or whether any particular mark-up by a broker-
dealer for such transaction would be permissible under Part II of 
PTCE 75-1.
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    (e) The Applicants agree to notify Plan investors in the prospectus 
(the Prospectus) for the Debt Securities that, at the time of 
acquisition, no more than 15 percent of a Plan's assets should be 
invested in any of the Debt Securities.
    (f) The Debt Securities do not have a duration which exceeds 9 
years from the date of issuance.
    (g) Prior to a Plan's acquisition of any of the Debt Securities, 
the Applicants fully disclose, in the Prospectus, to the Independent 
Plan Fiduciary or Plan Participant, all of the terms and conditions of 
such Debt Securities, including, but not limited to, the following:
    (1) A statement to the effect that the return calculated for the 
Debt Securities will be denominated in U.S. dollars;
    (2) The specified index (the Index) or Indexes on which the rate of 
return on the Debt Securities is based;
    (3) A numerical example, designed to be understood by the average 
investor, which explains the calculation of the return on the Debt 
Securities at maturity and reflects, among other things, (i) a 
hypothetical initial value and closing value of the applicable Index, 
and (ii) the effect of any adjustment factor on the percentage change 
in the applicable Index;
    (4) The date on which the Debt Securities are issued;
    (5) The date on which the Debt Securities will mature and the 
conditions of such maturity;
    (6) The initial date on which the value of the Index is calculated;
    (7) Any adjustment factor or other numerical methodology that would 
affect the rate of return, if applicable;
    (8) The ending date on which interest is determined, calculated and 
paid;
    (9) Information relating to the calculation of payments of 
principal and interest, including a representation to the effect that, 
at maturity, the beneficial owner of the Debt Securities is entitled to 
receive the entire principal amount, plus an amount derived directly 
from the growth in the Index (but in no event less than zero);
    (10) All details regarding the methodology for measuring 
performance;
    (11) The terms under which the Debt Securities may be redeemed;
    (12) The exchange or market where the Debt Securities are traded or 
maintained; and
    (13) Copies of the proposed and final exemptions relating to the 
exemptive relief provided herein, upon request.
    (h) The terms of a Plan's investment in the Debt Securities are at 
least as favorable to the Plan as those available to an unrelated non-
Plan investor in a comparable arm's length transaction at the time of 
such acquisition.
    (i) In the event the Debt Securities are delisted from any 
nationally-recognized securities exchange, the Applicants will apply 
for trading through the National Association of Securities Dealers 
Automated Quotations System (NASDAQ), which requires that there be 
independent market-makers establishing a market for such securities in 
addition to the Applicants. If there are no independent market-makers, 
the exemption will no longer be considered effective.
    (j) The Debt Securities are rated in one of the three highest 
generic rating categories by at least one nationally-recognized 
statistical rating service at the time of their acquisition.
    (k) The rate of return for the Debt Securities is objectively 
determined and, following issuance, the Applicants retain no authority 
to affect the determination of the return for such security, other than 
in connection with a ``market disruption event'' (the Market Disruption 
Event) that is described in the Prospectus for the Debt Securities.
    (l) The Debt Securities are based on an Index that is--
    (1) Created and maintained \11\ by an entity that is unrelated to 
the Applicants and is a standardized and generally-accepted Index of 
securities; or
---------------------------------------------------------------------------

    \11\ For purposes of this exemption, the term ``maintain'' means 
that all calculations relating to the securities in the Index, as 
well as the rate of return of the Index, are made by an entity that 
is unrelated to the Applicants.
---------------------------------------------------------------------------

    (2) Created by the Applicants, but maintained by an entity that is 
unrelated to the Applicants,
    (i) Consists either of standardized and generally-accepted Indexes 
or an Index comprised of publicly-traded securities that are not issued 
by the Applicants, are designated in advance and listed in the 
Prospectus for the Debt Securities (Under either circumstance, the 
Applicants may not unilaterally modify the composition of the Index, 
including the methodology comprising the rate of return.),
    (ii) Meets the requirements for an Index in Rule 19b-4 (Rule 19b-4) 
under the Securities Exchange Act of 1934 (the 1934 Securities Act), 
and
    (iii) The index value (the Index Value) for the Index is publicly-
disseminated through an independent pricing service, such as Reuters 
Group, PLC (Reuters) or Bloomberg L.P. (Bloomberg), or through a 
national securities exchange.
    (m) The Applicants do not trade in any way intended to affect the 
value of the Debt Securities through holding or trading in the 
securities which comprise an Index.
    (n) The Applicants maintain, for a period of six years, the records 
necessary to enable the persons described in paragraph (o) of this 
section to determine whether the conditions of this proposed exemption 
have been met, except that--
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of the Applicants, 
the records are lost or destroyed prior to the end of the six year 
period; and
    (2) No party in interest other than the Applicants shall be subject 
to the civil penalty that may be assessed under section 502(i) of the 
Act, or to the taxes imposed by section 4975(a) and (b) of the Code, if 
the records are not maintained, or are not available for examination as 
required by paragraph (o) below.
    (o)(1) Except as provided in section (o)(2) of this paragraph and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (n) are 
unconditionally available at their customary location during normal 
business hours by:
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and Exchange 
Commission (the SEC);
    (B) Any fiduciary of a participating Plan or any duly authorized 
representative of such fiduciary;
    (C) Any contributing employer to any participating Plan or any duly 
authorized employee representative of such employer; and
    (D) Any Plan Participant or beneficiary of any participating Plan, 
or any duly authorized representative of such Plan Participant or 
beneficiary.
    (o)(2) None of the persons described above in subparagraphs(B)-(D) 
of paragraph (o)(1) are authorized to examine the trade secrets of the 
Applicants or commercial or financial information which is privileged 
or confidential.

[[Page 36012]]

Summary of Facts and Representations

    1. Morgan Chase is a financial holding company incorporated under 
Delaware law in 1968 and headquartered in New York City. As of December 
31, 2000, after giving effect to the merger described below, Morgan 
Chase was the second largest banking institution in the United States, 
with approximately $715 billion in assets and approximately $42 billion 
in stockholders' equity. On December 31, 2000, J.P. Morgan & Co. 
Incorporated merged with and into The Chase Manhattan Corporation. Upon 
completion of the merger, its name was changed to ``J.P. Morgan Chase & 
Co.'' (i.e., Morgan Chase). The merger was accounted for as a pooling 
of interests. Morgan Chase is a global financial services firm with 
operations in over 60 countries, and has as its principal bank 
subsidiaries: The Chase Manhattan Bank (Chase Bank) and Morgan Guaranty 
Trust Company of New York (Morgan Guaranty), each of which is a New 
York banking corporation headquartered in New York City; and Chase 
Manhattan Bank USA, National Association, headquartered in Delaware. 
The principal non-bank subsidiary of Morgan Chase is its investment 
bank subsidiary, J.P. Morgan Securities Inc. (J.P. Morgan Securities). 
Chase Bank is expected to merge with Morgan Guaranty in late 2001.
    2. The activities of Morgan Chase will be internally organized, for 
management reporting purposes, into five major businesses:
     Investment Banking, which includes securities underwriting 
financial advisory, trading, mergers and acquisitions advisory, and 
corporate lending and syndication businesses;
     Investment Management and Private Banking, which includes 
an asset management business, including mutual funds; institutional 
money management and cash management businesses; and a private bank, 
which provides wealth management solutions for a global client base of 
high net worth individuals and families;
     Treasury and Securities Services, which provides 
information and transaction processing services, and moves trillions of 
dollars daily in securities and cash for its wholesale clients. 
Treasury and Securities Services includes custody, cash management, 
trust and other fiduciary service businesses;
     J.P. Morgan Partners, which is one of the world's largest 
and most diversified private equity investment firms, with total funds 
under management in excess of $20 billion; and
     Retail and Middle Market Banking, which serves over 30 
million consumers, small business and middle-market customers 
nationwide. Retail and Middle Market Banking offers a wide variety of 
financial products and services, including customer banking, credit 
cards, mortgage services and consumer finance services, through a 
diverse array of distribution channels, including the internet and 
branch and ATM networks.
    3. The Plans will consist of employee benefit plans that are 
covered under the provisions of Title I of the Act, as amended, and/or 
subject to section 4975 of the Code. For purposes of this proposed 
exemption, the Plans will not consist of plans that are sponsored and 
maintained by the Applicants for their own employees. In the case of 
the Applicants' in-house plans, Morgan Chase represents that the 
acquisition and holding of the Debt Securities by such plans would be 
covered under the statutory exemption that is provided under section 
408(e) of the Act.\12\
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    \12\ The Department expresses no opinion herein on whether the 
acquisition and holding of the Debt Securities by the Applicants' 
in-house plans are covered under the provisions of section 408(e) of 
the Act. In this regard, interested persons should refer to the 
conditions contained in section 408(e), as well as the definitions 
of the terms ``qualifying employer security'' (see section 407(d)(5) 
of the Act) and ``marketable obligations'' (see section 407(e) of 
the Act).
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    4. The Applicants represent that broker-dealers routinely need 
additional capital in order to maintain inventories of securities for 
their market-making and other business activities. As a result, the 
Applicants maintain a continuous need to borrow funds from various 
institutional and individual investors for use in their business 
operations. In response to this need, certain of the Applicants may 
from time to time issue (the Issuers) various high-quality, publicly-
offered debt securities (i.e., the Debt Securities), rated in one of 
the three highest generic rating categories by nationally recognized 
rating firms, offering varying levels of risk and potential return. 
Among the debt securities offered by the Applicants are publicly-
offered, unsecured, SEC-registered Debt Securities, with terms that are 
no longer in duration than nine (9) years. The Debt Securities will be 
U.S. dollar-denominated so that no foreign currency conversions will be 
required in the calculation of the rate of return. Further, the Debt 
Securities will offer varying levels of risk and rates of return. The 
Debt Securities would be listed on at least one major stock exchange, 
and they would be issued in denominations of $10 per principal unit, 
with the minimum purchase being one unit.
    The Debt Securities may be offered on a variety of terms and 
formulas under which rates of return are objectively determined in 
accordance with certain Indexes by the calculation agent. A registered 
broker-dealer Applicant would act as calculation agent. The Applicants 
represent that since small Plans will likely invest in the Debt 
Securities, the formulas used to calculate the rates of return will be 
designed to be understood by the average investor and clearly described 
in the ``plain English'' summary of the Debt Securities in the 
Applicants' prospectus.
    5. The Applicants represent that their activities are subject to 
various levels of oversight and regulation by the Securities and 
Exchange Commission (SEC), the Commodities Futures Trading Commission, 
and other federal and state regulatory agencies. The Applicants also 
represent that their activities are subject to the oversight of self-
regulatory organizations such as the NYSE and the AMEX. The Applicants 
further represent that J.P. Morgan Securities, as a registered broker-
dealer and member of the NYSE, is subject to the Net CapitalRule 15c3-1 
of the 1934 Act, which specifies the minimum net capital requirement of 
a broker-dealer.
    6. Due to the affiliation between an Issuer and J.P. Morgan 
Securities or its Affiliates, as a service provider to the Plans, the 
Applicants represent that they are likely to be parties in interest, as 
defined in section 3(14)(B) or (H) of the Act, with respect to a high 
percentage of Plans that purchase, sell, or hold these Debt Securities 
regardless of whether the Debt Securities are purchased directly from 
the Applicants.\13\ Thus, the Applicants represent that an Issuer may 
be a party in interest to a Plan solely because of its affiliation with 
a service provider to the Plan, and as the counterparty to the Plan in 
a transaction where the Plan holds a Debt Security issued by an 
Affiliate. Further, other Affiliates may be service providers to Plans 
on account of their roles as trustees, custodians, investment advisors, 
or broker-dealers for such Plans. These relationships would make an 
Issuer a party in interest to those Plans and would create potential 
prohibited transactions in the event

[[Page 36013]]

such Plans acquire and hold the Debt Securities.\14\
---------------------------------------------------------------------------

    \13\ In this regard, the Applicants represent that PTCE 75-1 
does not directly address transactions where, as here, there is a 
continuing extension of credit as a result of a sale to a plan by a 
broker-dealer of debt securities issued by the broker-dealer's 
affiliates.
    \14\ In ERISA Advisory Opinion 88-09A (April 15, 1988), a bank 
that sponsored self-directed master and prototype IRAs requested an 
opinion from the Department as to whether purchases of stock issued 
by the parent corporation of the bank directly from such parent by 
the self-directed IRAs would violate section 4975 of the Code.
    Section 4975 of the Code prohibits, in part, the sale or 
exchange of property between a plan and a disqualified person 
(4975(c)(1)(A)) and the use by or for the benefit of a disqualified 
person of the income or assets of a plan (4975(c)(1)(D)). Section 
4975(e)(2) of the Code defines the term ``disqualified person'' to 
include a plan fiduciary and a person providing services to a plan.
    ERISA Advisory Opinion 88-09A concluded that, although the bank 
is a disqualified person with respect to the IRAs by reason of the 
provision of services, the corporate parent of the bank is not a 
disqualified person with respect to the IRAs solely by reason of its 
ownership of the bank. In this regard, interested persons should 
contrast section 3(14)(H) of the Act with section 4975(e)(2)(H) of 
the Code. The question of whether the corporate parent is a 
disqualified person under any other provision of section 4975(e)(2) 
of the Code would require an examination of the particular facts and 
circumstances. The Advisory Opinion further concluded that, to the 
extent that the corporate parent is not a disqualified person with 
respect to the IRAs, purchases of stock from the parent by the bank 
on behalf of the IRAs, at the direction of the IRA participant, 
would not involve transactions described in section 4975(c)(1)(A) of 
the Code. However, while the corporate parent of such bank may not 
be a disqualified person with respect to the IRAs, purchases of 
parent stock by the IRAs would raise issues under section 
4975(c)(1)(D) of the Code if a transaction was part of a broader 
overall agreement, arrangement or understanding designed to benefit 
disqualified persons.
---------------------------------------------------------------------------

    The Applicants are requesting an administrative exemption to enable 
Plans to invest in the Debt Securities, under the terms and conditions 
described herein, and to avoid liability for prohibited transactions 
resulting from investment by Plans in the Debt Securities.
    7. The Applicants believe that while Part II of PTCE 75-1 provides 
relief for principal transactions between a broker-dealer and a Plan, 
and would cover a purchase of the broker-dealer affiliates' securities 
by such Plans (if the conditions required therein were met), it is 
questionable whether that class exemption would cover the continuing 
extension of credit related to the holding of any Debt Securities by a 
Plan.\15\
---------------------------------------------------------------------------

    \15\ The Department is providing no opinion herein as to whether 
any principal transaction involving Debt Securities would be covered 
by PTCE 75-1, or whether any particular mark-up by a broker-dealer 
for such transaction would be permissible under Part II of PTCE 75-
1.
---------------------------------------------------------------------------

    The Applicants note that some independent Plan fiduciaries have 
expressed concern regarding the application of PTCE 75-1 to broker-
dealer sales of broker-affiliated debt to Plans either as a part of an 
original issue of the securities or in the secondary market. Moreover, 
the Applicants represent that PTCE 96-23 (61 FR 15975, April 10, 1996) 
\16\ is unavailable to participant-directed, defined contribution Plans 
and other small Plans because these Plans, due to their size, are 
unlikely to have INHAMs responsible for making investment decisions 
relating to the acquisition, holding and disposition of securities in 
which the Plans invest.
---------------------------------------------------------------------------

    \16\ PTCE 96-23 permits various transactions involving employee 
benefit plans whose assets are managed by an in-house asset manager 
(the INHAM). An INHAM is an entity which is generally a subsidiary 
of an employer sponsoring the plan. It is also a registered 
investment adviser with management and control of total assets 
attributable to plans maintained by the employer and its affiliates 
which are in excess of $50 million.
---------------------------------------------------------------------------

    Similarly, the Applicants note that while PTCE 84-14 \17\ minimizes 
the risk of inadvertent prohibited transactions for Plans whose assets 
are managed by a QPAM, they believe it is unlikely that participant-
directed, defined contribution Plans or small Plans would incur the 
expense of a QPAM for the purchase and continued holding of the Debt 
Securities. The Applicants also believe that the additional cost of a 
QPAM for a small Plan with a small investment would not be cost-
effective. The Applicants further explain that this cost would be 
uneconomical here because the QPAM would be required to continue its 
services for the entire period during which the Debt Securities are 
held by the Plan since the potential prohibited transaction is not just 
a sale or exchange under section 406(a)(1)(A) of the Act, but is also 
an extension of credit under section 406(a)(1)(B) of the Act. 
Accordingly, the Applicants state that the absence of a QPAM would 
preclude small Plans from being able to purchase the Debt Securities 
without creating the risk of a prohibited transaction.
---------------------------------------------------------------------------

    \17\ PTCE 84-14 provides a class exemption for transactions 
between a party in interest with respect to an employee benefit plan 
and an investment fund (including either a single customer or pooled 
separate account) in which the plan has an interest, and which is 
managed by a qualified professional asset manager (the QPAM), 
provided certain conditions are met. QPAMs (e.g., banks, insurance 
companies, registered investment advisers with total client assets 
under management in excess of $50 million) are considered to be 
experienced investment managers for plan investors that are aware of 
their fiduciary duties under the Act.
---------------------------------------------------------------------------

    8. The Applicants propose to continue offering the Debt Securities 
to non-Plan investors and maintain that these investors will continue 
to constitute a substantial market for such securities. However, for 
each Plan investor, the Applicants represent that the terms of the 
Plan's investment in the Debt Securities will be at least as favorable 
to the Plan as those available to an unrelated non-Plan investor in a 
comparable arm's-length transaction at the time the Debt Securities are 
acquired by the Plan. Additionally, the Applicants represent that no 
Plan will pay the Applicants any fees or commissions in connection with 
transactions involving the Debt Securities, except for the mark-up for 
a principal transaction permitted under PTCE 75-1.
    In addition to the aforementioned requirements, the Applicants 
represent that a Plan's investment in the Debt Securities will be 
restricted to those Plans for which the Applicants have no 
discretionary authority and do not provide investment advice with 
respect to the investment in the Debt Securities. In this regard, the 
decision to invest in the Debt Securities will be made by an 
Independent Plan Fiduciary or a Plan Participant, which is independent 
of the Applicants. Moreover, the Applicants represent that the 
Prospectus for each of the Debt Securities that are offered to the 
Plans will contain a recommendation that no more than 15 percent of a 
Plan's assets should be invested in the Debt Securities at the time 
such security is acquired by a Plan.\18\
---------------------------------------------------------------------------

    \18\ In this regard, the Applicants propose to include 
substantially the following statement in the Prospectus for each of 
the Debt Securities, under a heading entitled ``Employer-Sponsored 
Plan Considerations'':
    These [Debt Securities] Securities are being sold to Plans 
pursuant to an exemption issued by the Department of Labor. In 
accordance with the terms of that exemption, the Issuer is required 
to inform such Plans that no more than 15 percent of plan (or 
individual participant) assets, at the time of acquisition, should 
be invested in the Debt Securities. Please note, however, that it is 
the responsibility of the person making the investment decision to 
determine whether the purchase is a prudent investment for the plan 
(or participant-directed account).
---------------------------------------------------------------------------

    9. The Debt Securities will be rated in one of the three highest 
generic rating categories by a nationally-recognized rating firm at the 
time of acquisition by a Plan. There will be no triggering events or 
early amortization events if the Applicants' credit rating drops below 
a certain level established by a rating agency. Throughout the term of 
any of the Debt Securities, the Plans will be able to access the latest 
bid and asked price quotations for all of the Applicants' Debt 
Securities by calling a broker or any electronic service with a 
recognized price quotation delivery system. If a Plan wishes to 
terminate any Debt Securities investment prior to maturity, such 
investor may do so by selling the Debt Security on the open market at 
the prevailing market price. However, the Issuer may not unilaterally 
terminate the Debt Securities prior to maturity unless the

[[Page 36014]]

Debt Securities are callable at a specific price which will be 
disclosed in the Prospectus. Assuming the Debt Securities are callable, 
the Applicants represent that there will be no loss of principal.
    10. The rate of return for the Debt Securities may be fixed or 
variable. The prospectus or prospectus supplement covering the Debt 
Securities would set forth the annual interest rate for fixed rate 
Securities, and, for variable rate Securities, the formula to be 
applied to determine the interest payable at maturity. The formula will 
include identification of the specified Index for the Debt Securities. 
Such Index may be either (a) created and maintained by an entity that 
is unrelated to the Applicants or (b) created by the Applicants, but 
maintained by an unrelated entity.
    (a) Index Created and Maintained by an Entity Unrelated to the 
Applicants. This Index, which will be created by an entity that is 
unrelated to the Applicants, will consist of a standardized and 
generally-accepted index of securities, such as the Nikkei 225 Index 
Tokyo Stock Exchange or the Standard & Poor's 500 Index. In addition, 
this Index will be maintained by such unrelated entity. In other words, 
all calculations relating to the securities in the Index, as well as 
the rate of return of the Index, will be made by an entity other than 
the Applicants.
    (b) Index Created by the Applicants, but Maintained by an Unrelated 
Entity. This Index will be created by the Applicants. However, it must 
be maintained by an entity that is unrelated to the Applicants, such as 
the stock exchange on which the Debt Security is listed. In addition, 
the Index will consist either of standardized and generally-accepted 
Indexes or it will be an Index comprised of publicly-traded securities 
that are not issued by the Applicants, are designated in advance and 
listed in the Prospectus for the Debt Securities. Under either 
circumstance, the Applicants will not be permitted to make any 
modifications to the composition of the Index, including the 
methodology comprising the rate of return, unilaterally.
    Further, the Index will meet the requirements for an Index in 
accordance with Rule 19b-4 of the 1934 Securities Act, which imposes 
regulatory standards on the entity maintaining the Index. Under Rule 
19b-4, a self-regulatory organization, such as a securities exchange, 
is required to adopt trading rules, procedures and listing standards 
for the product classes relating to any security that the exchange 
proposes to list. In addition, the self-regulatory organization must 
maintain a surveillance program for a class of securities. If the SEC 
has not approved the self-regulatory organization's rules, procedures 
and standards, the self-regulatory organization must make a filing with 
the SEC prior to listing the security. According to the Applicants, 
this procedure provides adequate safeguards so that any Debt Securities 
that are created by the Applicants will meet the listing and trading 
standards approved by the self-regulatory organization.
    Finally, the Index Value of the Index will be publicly-disseminated 
through an independent pricing service, such as Reuters or Bloomberg, 
or through a national securities exchange.
    11. Price quotations with respect to the Debt Securities will be 
available on a daily basis from market reporting services, such as 
Bloomberg or Reuters, and the daily financial press, such as The Wall 
Street Journal. In the event the Debt Securities are delisted, the 
Issuer(s) will apply for trading through the NASDAQ, which requires 
that there be independent market-makers establishing a market for the 
securities in addition to the Issuer(s). In the event there are no 
independent market-makers, the Applicants represent that the exemption 
will no longer be considered effective.
    12. The terms of each of the Debt Securities will be set forth with 
specificity. Therefore, in addition to the description of the formula 
for computing the rate of return, the Prospectus will include, but will 
not be limited to, the following information:
     A statement to the effect that the return calculated for 
the Debt Securities will be denominated in U.S. dollars;
     The specified Index or Indexes on which the rate of return 
on the Debt Securities is based;
     A numerical example, designed to be understood by the 
average investor, which explains the calculation of the return on the 
Debt Securities at maturity and reflects, among other things, (i) a 
hypothetical initial value and closing value of the applicable Index, 
and (ii) the effect of any adjustment factor on the percentage change 
in the applicable Index;
     The date on which the Debt Securities will be issued;
     The date on which the Debt Securities will mature and the 
conditions of such maturity;
     The initial date on which the value of the Index is 
calculated;
     Any adjustment factor or other numerical methodology that 
would affect the rate of return, if applicable;
     The ending date on which interest will be determined, 
calculated and paid;
     Information relating to the calculation of payments of 
principal and interest, including a representation to the effect that, 
at maturity, the beneficial owner of the Debt Securities will be 
entitled to receive the entire principal amount, plus an amount derived 
directly from the growth in the Index (but in no event less than zero);
     All details regarding the methodology for measuring 
performance;
     The terms under which the Debt Securities may be redeemed;
     The exchange or market where the Debt Securities are 
traded or maintained; and
     Copies of the proposed and final exemptions relating to 
the exemptive relief provided herein, upon request.
    Aside from the Prospectus, the Applicants do not contemplate making 
any ongoing communications to the investors in the Debt Securities 
except to the extent required under applicable securities laws.
    13. With respect to variable rate Debt Securities, the Applicants 
represent that the interest rate will be objectively determined. Where 
any of the Applicants acts as ``Calculation Agent'' for determining 
applicable rates of return, such calculation will be made using a 
formula fully disclosed in the prospectus or prospectus supplement 
relating to the Debt Security. Following the issuance of such Debt 
Security, the Applicants will retain no authority to affect the 
determination of such interest rate absent a Market Disruption Event. 
The determination that a Market Disruption Event may have occurred can 
have the effect of eliminating the affected trading day from 
calculation of the value of the underlying Index. The Calculation Agent 
is responsible for determining whether such Event has, in fact, 
occurred. Where the variable rate of a Debt Security is tied to a 
basket of equity securities, for example, a ``Market Disruption Event'' 
is typically defined as any of the following events, with certain 
exceptions: \19\
---------------------------------------------------------------------------

    \19\ For purposes of determining whether a Market Disruption 
Event has occurred, a limitation on the hours in a trading day and/
or number of days of trading will not constitute a Market Disruption 
Event if it results from an announced change in the regular business 
hours of the relevant exchange.
---------------------------------------------------------------------------

    (a) the suspension or material limitation of trading in 20% or more 
of the underlying stocks which then comprise the Index, in each case, 
for more than two hours of trading or during the one-half hour period 
preceding the close of trading on the NYSE or any other applicable 
organized U.S. exchange. For purposes of this definition, limitations 
on trading during

[[Page 36015]]

significant market fluctuations imposed pursuant to NYSE Rule 80B (or 
any applicable successor or similar rule or regulation promulgated by 
any self-regulatory organization or the SEC) shall be considered 
``material.''
    (b) the suspension or material limitation, in each case, for more 
than two hours of trading or during the one-half hour period preceding 
the close of trading (whether by reason of movements in price otherwise 
exceeding levels permitted by the relevant exchange or otherwise) in 
(A) futures contracts related to the Index which are traded on the 
Chicago Mercantile Exchange or any other major U.S. exchange, or (B) 
options contracts related to the Index which are traded on any major 
U.S. exchange.
    (c) the unavailability, through a recognized system of public 
dissemination of transaction information, for more than two hours of 
trading or during the one-half hour period preceding the close of 
trading, of accurate price, volume or related information in respect of 
20% or more of the underlying stocks which then comprise the Index or 
in respect of futures contracts related to the Index, options on such 
futures contracts or options contracts related to the Index, in each 
case traded on any major U.S. exchange.
    14. The Applicants represent that the principal amount of the Debt 
Securities that are the subject of this exemption, if granted, will be 
protected regardless of the performance of the applicable Index. 
Although the return on a Debt Security may go up or down in the same 
direction as the performance of the applicable Index, the interest rate 
floor is set at zero. Thus, even where the value of the applicable 
Index decreases, there will be no invasion of principal if the Debt 
Securities are held until maturity.\20\ However, if a Plan must sell 
the Debt Securities on the open market prior to their maturity, the 
market price will reflect the market's perception of the potential 
yield on such securities based on the current yield and interest rates 
for other debt securities of the same duration. This market price may 
result in a loss of principal value of the investment in the Debt 
Securities in the same fashion as would occur for other debt 
securities.
---------------------------------------------------------------------------

    \20\ The Applicants have provided the following example to 
illustrate this principle by describing the return at maturity on 
each $10 principal investment in the Debt Securities that are the 
subject of this proposed exemption:
     Where the value of the applicable Index increases by 50 
percent, the Plan is entitled to receive $15 at maturity ($10 
principal plus $5 interest) because the rate of return moves in the 
same direction as the growth in the applicable Index;
     Where the value of the applicable Index remains 
unchanged during the applicable period, the Plan is entitled to 
receive $10 at maturity ($10 principal plus $0 interest) because the 
rate of return moves in the same direction as the growth in the 
applicable Index; and
     Where the value of the applicable Index decrease by 50 
percent, the Plan is entitled to receive $10 at maturity ($10 
principal and $0 interest) because the rate of return moves in the 
same direction as the growth in the applicable Index but in no event 
drops below zero.
    While the foregoing examples are simplistic, it should be noted 
that for some of the Debt Securities, such as those tied to the 
Standard & Poor's 500 Index, the interest payments shown above may 
be reduced on a daily basis by an adjustment factor (the Adjustment 
Factor), equal to a stated percent per year. On the maturity date of 
the Debt Securities, the annual application of the Adjustment Factor 
will reduce the Plan investor's overall interest payments. This 
information will be disclosed prominently in the Prospectus.
---------------------------------------------------------------------------

    15. The Applicants represent that they will exercise no discretion 
with respect to the Indexes. Further, the Applicants represent that 
they will not trade in any way intended to affect the value of the Debt 
Securities through holding or trading in the securities which comprise 
these Indexes. The securities of the Applicants may comprise part of 
the Index (e.g., Morgan Chase's common stock is included in the S&P 500 
Index, which is one of the Indexes that may be used in the Applicants' 
variable rate Debt Securities). In addition, the Applicants may reserve 
the right to purchase or sell positions in the Index, or in all or 
certain of the assets by reference to which the Index is calculated 
(Underlying Assets), or derivatives relating to the Index. The 
Applicants do not believe, however, that their hedging activity will 
have a material impact on the value of the Index, the Underlying 
Assets, or any derivative or synthetic instrument relating to the 
Index. The Applicants will maintain written records of all of the Debt 
Securities transactions for a period of six years.
    16. The Applicants represent that the Debt Securities may be 
included among assets acquired by a Plan to comprise the underlying 
portfolio of a ``synthetic'' guaranteed investment contract (Synthetic 
GIC), whereby the Plan's beneficial interest in one or more debt 
instruments is combined with a guarantee of future value. In this 
regard, the Applicants represent that they will not be the issuer, 
guarantor, or ``wrapper'' provider in connection with a Synthetic GIC. 
The Applicants represent that they are not requesting any relief for 
extensions of credit to such Plans and the Plan Participants, other 
than extensions of credit resulting from such Plan's holding of the 
Debt Securities. Accordingly, the Applicants are not requesting 
specific exemptive relief with respect to any additional prohibited 
transactions that may relate to any Synthetic GICs.
    17. In summary, the Applicants represent that the proposed 
transactions will satisfy the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons:
    (a) The Debt Securities will be made available by the Applicants in 
the ordinary course of their business to customers which are not Plans.
    (b) The Applicants will not have any discretionary authority or 
control, or provide any ``investment advice,'' within the meaning of 29 
CFR 2510.3-21(c), with respect to the assets of Plans which are 
invested in the Debt Securities.
    (c) The Plans will pay no fees or commissions to the Applicants in 
connection with the transactions covered by the requested exemption, 
other than the mark-up for a principal transaction permissible under 
PTCE 75-1.
    (d) The decision to invest in the Debt Securities will be made by 
an Independent Plan Fiduciary or a Plan Participant, which is 
independent of the Applicants.
    (e) In connection with a Plan's acquisition of any of the Debt 
Securities, the Applicants will disclose to the Independent Plan 
Fiduciary, or, if applicable, the Plan Participant, in the Prospectus, 
all of the material terms and conditions concerning the Debt 
Securities.
    (f) A Plan will acquire the Debt Securities on terms that are at 
least as favorable to the Plan as those available to an unrelated non-
Plan investor in a comparable arm's length transaction.
    (g) The Debt Securities will be rated in one of the three highest 
generic rating categories by at least one nationally-recognized 
statistical rating service at the time of such security's acquisition 
by the Plan.
    (h) The rate of return for the Debt Securities will be objectively 
determined and the Applicants will retain no authority to affect the 
determination of such return, other than in connection with a Market 
Disruption Event that is described in the Prospectus for the Debt 
Securities.
    (i) The Index will be: (1) Created and maintained by an entity that 
is unrelated to the Applicants and consist of a standardized and 
generally-accepted Index; or (2) created by the Applicants, but 
maintained by an entity that is unrelated to the Applicants, and (i) 
will consist either of standardized and generally-accepted Indexes or 
will be an Index comprised of publicly-

[[Page 36016]]

traded securities that are not issued by the Applicants, are designated 
in advance, and listed in the Prospectus for the Debt Securities,(ii) 
will meet the requirements for an Index as set forth in SEC Rule 19b-4, 
and (iii) the Index Value for such Index will be publicly-disseminated 
through an independent pricing service or a national securities 
exchange.

Notice to Interested Persons

    The Applicants represent that because those potentially interested 
Plans proposing to engage in the covered transactions cannot all be 
identified, the only practical means of notifying Independent Plan 
Fiduciaries or Plan Participants of such affected Plans is by 
publication of the proposed exemption in the Federal Register. 
Therefore, any comments from interested persons must be received by the 
Department no later than 30 days from the publication of this notice of 
proposed exemption in the Federal Register.
    For Further Information Contact: Mr. Gary H. Lefkowitz of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

Wagner, Doxey and Company Money Purchase Plan (the Plan) Located in 
San Francisco, California

[Application No. D-11003]

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 of certain improved real property (the Property) by 
the individual account of Warren L. Wagner (the Account) in the Plan, 
to Mr. Wagner, who is a disqualified person with respect to the 
Plan,\21\ provided that the following conditions are satisfied: (a) The 
sale is a one-time transaction for cash; (b) the Account pays no 
commissions nor other expenses relating to the sale; (c) the Account 
receives an amount that is the greater of $750,000, or the fair market 
value of the Property as of the date of the sale, as determined by a 
qualified, independent appraiser; (d) within 30 days of publication in 
the Federal Register of the notice granting this proposed exemption, 
Mr. Wagner reimburses the Account for the fair market rental value of 
the Property with respect to his past and present use of such Property, 
including a reasonable rate of interest for the period from the date 
such amounts were due to the Account to the date of payment; and (e) 
within 30 days of publication in the Federal Register of the notice 
granting this proposed exemption, Mr. Wagner files Form 5330 with the 
Internal Revenue Service (the Service) and pays all applicable excise 
taxes due by reason of the above prohibited transactions.
---------------------------------------------------------------------------

    \21\ Because Warren L. Wagner and Robert J. Doxey, who are 
partners, are the only participants in the Plan, the Plan is not 
within the jurisdiction of Title I of the Act, pursuant to 29 CFR 
2510.3-3(b). 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 money purchase pension 
plan sponsored by Wagner, Doxey and Company (the Company), provides for 
mandatory employer contributions only. The Company is a partnership 
that originally was a registered broker-dealer in the business of 
trading government securities. However, in November 1999, the Company 
ceased its broker-dealer activities, and Mr. Wagner and his partner 
Robert J. Doxey, who are the only Plan participants, limited their 
activities to managing their own investments. Mr. Wagner is a trustee 
of the Plan. The Plan provides for individually directed accounts. As 
of December 31, 2000, the fair market value of all the assets of the 
Plan was $1,966,977. As of that date, Mr. Wagner's Account had assets 
equal to $1,062,939.03.
    2. The Property consists of a three-bedroom condominium located at 
30 West Lake Blvd., #112, Tahoe City, California. It is in a suburban 
condominium development known as Tahoe Tavern. The Property has 1,552 
square feet. The applicant represents that the Property is not adjacent 
to, nor close to, any other real property owned by Mr. Wagner.
    3. The Property was acquired by the Account on June 22, 1998 from 
McClain Johnston and Annabelle D. Johnston, who are unrelated parties, 
for investment purposes. The Account paid cash in the amount of 
$377,230.72 (including fees and commissions) for the Property. The 
applicant represents that all expenses relating to the Property since 
its acquisition have been paid by the Account, including taxes, 
insurance, association, and property management fees, totalling 
$74,056.40. The Property has also been rented out to unrelated parties 
for vacations through the property management services of Tahoe Tavern 
and has produced income totalling $28,980.00 for the Account.
    4. The applicant states that Mr. Wagner made personal use of the 
Property in 1998, 1999, and 2000, and that he currently occupies the 
Property.\22\ On June 15, 2001, Mr. Wagner made a lump sum payment in 
the amount of $46,790.00 to the Account for the fair market rental 
value of the Property with respect to his past use of such Property, 
through June, 2001. This amount was determined based on the rental 
value of similar condominiums in Tahoe Tavern during the relevant time 
periods, provided by the property manager. Assuming that rent was to be 
paid to the Account in advance on a quarterly basis, Mr. Wagner will 
pay an additional $3345.69 in interest, based on the average Federal 
Funds Rate, for the period from the date rent was due to the date of 
payment, i.e., June 15, 2001. Further, concurrently with filing an 
exemption application with the Department, Mr. Wagner also filed Form 
5330 with the Service for Plan years 1998, 1999, and 2000 and paid all 
applicable excise taxes that were due, a total of $5,404.50, by reason 
of the past prohibited transactions. Finally, within 30 days of 
publication in the Federal Register of the notice granting this 
proposed exemption, Mr. Wagner will reimburse the Account, with 
interest, using the same methodology described above, with respect to 
his present use of the Property until the date of the proposed sale, as 
well as filing Form 5330 with the Service and paying any additional 
excise taxes that are due for Plan year 2001.
---------------------------------------------------------------------------

    \22\ Mr. Wagner used the Property during the following periods 
and paid the following rental amounts.
    1998: 9/27 to 9/29--three days @ $160.00 per day = $480.00; 10/2 
to 10/4--three days @ $160.00 per day = $480.00; 11/5 to 11/7--three 
days @ $160.00 per day = $480.00; Total; $1440.00 (as corrected upon 
recomputation).
    1999: 5/14 to 5/16--three days @ $185.00 per day = $555.00; 5/21 
to 5/23--three days @ $185.00 per day = $555.00; 5/27 to 5/28--two 
days @ $185.00 per day = $370; 6/12 to 6/26--two weeks @ $2065.00 
per week = $4130.00; 8/29 to 12/31--four months and three days @ 
$7380; Total: $12,990.00.
    2000: 1/1 to 12/31 @ $1800.00 per month; Total: $21,600.00.
    2001: Mr. Wagner currently uses the Property and has paid rent 
for the period from 1/1 to 6/30 @ $1800.00 per month = $10,800.00.
---------------------------------------------------------------------------

    5. The Property has been appraised by Ossi Korkeila of Korkeila & 
Associates, located in Truckee, California, a qualified, independent 
appraiser certified in the State of California. Relying on the market 
data approach, Mr. Korkeila concluded that the fair market value of the 
Property was approximately $750,000, as of

[[Page 36017]]

September 26, 2000. Mr. Korkeila examined three recent sales of 
comparable properties in the local real estate area in making his 
determination.
    6. Mr. Wagner proposes to purchase the Property for cash from his 
own Account for an amount that is the greater of $750,000, or the fair 
market value of the Property as of the date of the sale, based on an 
updated independent appraisal. The Account will pay no commissions nor 
other expenses relating to the sale.
    The applicant represents that the Property was originally purchased 
by the Account solely for investment purposes, in light of the 
Property's significant appreciation and income-generating potential. 
However, due to an abrupt change in both his career plans and personal 
life, namely, the cessation of his broker-dealer securities business 
and the need to move from San Francisco to Tahoe City for family 
reasons, Mr. Wagner now desires to purchase the Property himself for 
use as a personal residence in retirement.
    In addition, the applicant represents that the exemption will be in 
the best interests of the Account because it will enable the Account to 
quickly sell the Property without paying any brokerage commissions or 
other transaction costs and to reinvest the sale proceeds in other 
investments that will achieve greater diversification.
    7. In summary, the applicant represents 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 Account will pay no 
commissions nor other expenses relating to the sale; (c) the Account 
will receive an amount that is the greater of $750,000, or the fair 
market value of the Property as of the date of the sale, as determined 
by a qualified, independent appraiser; (d) within 30 days of 
publication in the Federal Register of the notice granting this 
proposed exemption, Mr. Wagner will reimburse the Account for the fair 
market rental value of the Property with respect to his past and 
present use of such Property, including a reasonable rate of interest 
for the period from the date such amounts were due to the Account to 
the date of payment; (e) within 30 days of publication in the Federal 
Register of the notice granting this proposed exemption, Mr. Wagner 
will file Form 5330 with the Service and pay all applicable excise 
taxes due by reason of the above prohibited transactions; and (f) the 
Account will be divested of an illiquid asset and achieve greater 
diversification of assets.

Notice to Interested Persons

    Because the only Plan assets involved in the proposed transaction 
are those in Mr. Wagner's Account, and he is the only participant to be 
affected, 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 5th day of July, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 01-17146 Filed 7-9-01; 8:45 am]
BILLING CODE 4510-29-P