[Federal Register Volume 66, Number 146 (Monday, July 30, 2001)]
[Notices]
[Pages 39351-39372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-18682]



[[Page 39351]]

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10848, et al.]


Proposed Exemptions; Bank of America Corporation (BAC) 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, 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.

Bank of America Corporation (BAC) Located in Dallas, Texas

[Application No. D-10848]

Proposed Exemption

Section I--Exemption for In-Kind Redemption of Assets

    The restrictions of section 406(a) and 406(b) of ERISA and the 
sanctions resulting from the application of section 4975 of the Code by 
reason of section 4975(c)(1)(A) through (F) of the Code shall not 
apply, effective August 1, 2001,\1\ to certain in-kind redemptions (the 
Redemptions) by the NationsBank Cash Balance Plan (the In-house Plan) 
of shares (the Shares) of proprietary mutual funds (the Portfolios) 
offered by investment companies for which Bank of America, N.A. (Bank 
of America) or an affiliate thereof provides investment advisory and 
other services (the Nations Funds), provided that the following 
conditions are met:
    (A) The In-house Plan pays no sales commissions, redemption fees, 
or other similar fees in connection with the Redemptions (other than 
customary transfer charges paid to parties other than Bank of America 
and affiliates of Bank of America (Bank of America Affiliates));
    (B) The assets transferred to the In-house Plan pursuant to the 
Redemptions consist entirely of cash and Transferrable Securities. 
Notwithstanding the foregoing, Transferrable Securities which are odd 
lot securities, fractional shares and accruals on such securities may 
be distributed in cash;
    (C) With certain exceptions defined below, the In-house Plan 
receives a pro rata portion of the securities of the Portfolio upon a 
Redemption that is equal in value to the number of Shares redeemed for 
such securities, as determined in a single valuation performed in the 
same manner and as of the close of business on the same day in 
accordance with the procedures set forth in Rule 17a-7 under the 
Investment Company Act of 1940, as amended from time to time (the 1940 
Act) (using sources independent of Bank of America and Bank of America 
Affiliates);
    (D) Bank of America, or any affiliate thereof, does not receive any 
fees, including any fees payable pursuant to Rule 12b-1 under the 1940 
Act in connection with any redemption of the Shares;
    (E) Prior to a Redemption, Bank of America provides in writing to 
an independent fiduciary, as such term is defined in Section II (an 
Independent Fiduciary), a full and detailed written disclosure of 
information regarding the Redemption;
    (F) Prior to a Redemption, the Independent Fiduciary provides 
written authorization for such Redemption to Bank of America, such 
authorization being terminable at any time prior to the date of the 
Redemption without penalty to the In-house Plan, and such termination 
being effectuated by the close of business following the date of 
receipt by Bank of America of written or electronic notice regarding 
such termination (unless circumstances beyond the control of Bank of 
America delay termination for no more than one additional business 
day);
    (G) Before authorizing a Redemption, based on the disclosures 
provided by the Portfolios to the Independent Fiduciary, the 
Independent Fiduciary determines that the terms of the Redemption are 
fair to the participants of the In-house Plan, and comparable to and no 
less favorable than terms obtainable at arms-length between 
unaffiliated parties, and that the Redemption is in the best interest 
of the In-house Plan and its participants and beneficiaries;
    (H) Not later than thirty (30) business days after the completion 
of a Redemption, the relevant Fund will provide to an independent 
fiduciary acting on behalf of the Plan (the Independent Fiduciary) a 
written confirmation regarding such Redemption containing:

[[Page 39352]]

    (i) the number of Shares held by the In-house Plan immediately 
before the Redemption (and the related per Share net asset value and 
the total dollar value of the Shares held),
    (ii) the identity (and related aggregate dollar value) of each 
security provided to the In-house Plan pursuant to the Redemption, 
including each security valued in accordance with Rule 17a-7(b)(4),
    (iii) the current market price of each security received by the In-
house Plan pursuant to the Redemption, and
    (iv) the identity of each pricing service or market-maker consulted 
in determining the value of such securities;
    (I) The value of the securities received by the In-house Plan for 
each redeemed Share equals the net asset value of such Share at the 
time of the transaction, and such value equals the value that would 
have been received by any other investor for shares of the same class 
of the Portfolio at that time;
    (J) Subsequent to a Redemption, the Independent Fiduciary performs 
a post-transaction review which will include, among other things, a 
random sampling of the pricing information supplied by Bank of America; 
and
    (K) Each of the In-house Plan's dealings with: the Nations Funds, 
the investment advisors to the Nations Funds (the Investment Advisers), 
the principal underwriter for the Nations Funds, or any affiliated 
person thereof, are on a basis no less favorable to the In-house Plan 
than dealings between the Nations Funds and other shareholders holding 
shares of the same class as the Shares;
    (L) The Bank maintains, or causes to be maintained, for a period of 
six years from the date of any covered transaction such records as are 
necessary to enable the persons described in paragraph (M) below to 
determine whether the conditions of this exemption have been met, 
except that (i) a prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of Bank of 
America, the records are lost or destroyed prior to the end of the six-
year period, (ii) no party in interest with respect to the In-house 
Plan other than Bank of America 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 such records are not 
maintained or are not available for examination as required by 
paragraph (M) below.
    (M)(1) Except as provided in subparagraph (2) of this paragraph 
(M), and notwithstanding any provisions of section 504(a)(2) and (b) of 
the Act, the records referred to in paragraph (L) above are 
unconditionally available at their customary locations for examination 
during normal business hours by (i) any duly authorized employee or 
representative of the Department of Labor, the Internal Revenue 
Service, or the Securities and Exchange Commission, (ii) any fiduciary 
of the In-house Plan or any duly authorized representative of such 
fiduciary, and (iii) any participant or beneficiary of the In-house 
Plan or duly authorized representative of such participant or 
beneficiary.
    (2) None of the persons described in paragraphs (M)(1)(ii) and 
(iii) shall be authorized to examine trade secrets of Bank of America 
or the Nations Funds, or commercial or financial information which is 
privileged or confidential.

Section II--Definitions

    For purposes of this proposed exemption,
    (A) The term ``affiliate'' means:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (B) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (C) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and sales calculated by dividing the value of all 
securities, determined by a method as set forth in the Portfolio's 
prospectus and statement of additional information, and other assets 
belonging to the Portfolio, less the liabilities charged to each such 
Portfolio, by the number of outstanding shares.
    (D) The term ``Independent Fiduciary'' means a fiduciary who is: 
(i) Independent of and unrelated to Bank of America and its affiliates, 
and (ii) appointed to act on behalf of the In-house Plan with respect 
to the in-kind transfer of assets from one or more Portfolios to or for 
the benefit of the In-house Plan. For purposes of this exemption, a 
fiduciary will not be deemed to be independent of and unrelated to Bank 
on America if: (i) Such fiduciary directly or indirectly controls, is 
controlled by or is under common control with Bank of America, (ii) 
such fiduciary directly or indirectly receives any compensation or 
other consideration in connection with any transaction described in 
this exemption; except that an independent fiduciary may receive 
compensation from Bank of America in connection with the transactions 
contemplated herein if the amount or payment of such compensation is 
not contingent upon or in any way affected by the independent 
fiduciary's ultimate decision, and (iii) more than 1 percent (1%) of 
such fiduciary's gross income, for federal income tax purposes, in its 
prior tax year, will be paid by Bank of America and its affiliates in 
the fiduciary's current tax year.
    (E) The term ``Transferable Securities'' shall mean securities (1) 
for which market quotations are readily available as determined under 
Rule 17(a)-7 of the 1940 Act; and (2) which are not: (i) Securities 
which may not be publicly offered or sold without registration under 
the 1933 Act; (ii) securities issued by entities in countries which (a) 
restrict or prohibit the holding of securities by non-nationals other 
than through qualified investment vehicles, such as the Nations Funds, 
or (b) permit transfers of ownership or securities to be effected only 
by transactions conducted on a local stock exchange; (iii) certain 
portfolio positions (such as forward foreign currency contracts, 
futures and options contracts, swap transactions, certificates of 
deposit and repurchase agreements) that, although they may be liquid 
and marketable, involve the assumption of contractual obligations, 
require special trading facilities or can only be traded with the 
counter-party to the transaction to effect a change in beneficial 
ownership; (iv) cash equivalents (such as certificates of deposit, 
commercial paper and repurchase agreements; and (v) other assets which 
are not readily distributable (including receivables and prepaid 
expenses), net of all liabilities (including accounts payable).
    (F) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of ERISA (or a ``member of the family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
sister, or a spouse of a brother or a sister.

Summary of Facts and Representations

    1. BAC is a bank holding company headquartered in Charlotte, North 
Carolina and organized as a Delaware corporation. Bank of America, a 
federally chartered bank and trust company also headquartered in 
Charlotte, North Carolina, is an indirect, wholly-owned subsidiary of 
BAC. As of August 31, 1999, Bank of America had approximately 
$231,300,000 in total fiduciary assets under management.

[[Page 39353]]

    2. Bank of America is the trustee of the In-house Plan. The In-
house Plan is a cash balance plan maintained by BAC for certain current 
and former employees of BAC and Bank of America Affilates. As of April 
14, 2000, the In-house Plan had approximately 204,000 participants and 
$8.2 billion in assets.
    3. According to the applicant, in 1992, BAC's Corporate Benefits 
Committee (the Committee) determined that the In-house Plan would 
benefit from the investment of its assets in the Portfolios. The 
Portfolios are mutual fund portfolios organized within the Nations 
Funds. The Nations Funds are open-end investment companies registered 
under the 1940 Act with respect to which a BAC subsidiary acts as an 
investment adviser and an investment sub-adviser.
    At the time, the Committee considered the Portfolios to be an 
appropriate vehicle for diversifying the In-House Plan's assets. In 
addition, the Committee determined that investment in the Portfolios by 
the In-house Plan would allow the In-house Plan to continue to use 
certain in-house investment management services which otherwise might 
not have been available. As a result, the Committee decided to invest 
In-house Plan assets in the Portfolios in accordance with Prohibited 
Transaction Exemption 77-3 (PTE 77-3, 42 FR 18734 (1977)).\2\
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    \2\ The applicant has not requested exemptive relief with 
respect to any investment in the Nations Funds by the In-house Plan. 
The applicant notes that the In-house Plan may acquire or redeem 
shares in the Nations Funds pursuant to PTE 77-3. In this regard, 
PTE 77-3 permits the acquisition or sale of shares of a registered, 
open-end investment company by an employee benefit plan covering 
only employees of such investment company, employees of the 
investment adviser or principal underwriter for such investment 
company, or employees of any affiliated person (as defined therein) 
of such investment adviser or principal underwriter, provided 
certain conditions are met. The Department is expressing no opinion 
in this proposed exemption regarding whether any transactions with 
the Nations Funds by the In-house Plan is covered by PTE 77-3.
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    4. The applicant states that the Committee recently decided to 
reconsider the investment strategy implemented on behalf of the In-
house Plan. Such reconsideration was the result, in large part, of a 
substantial increase in the total amount of assets held by the In-house 
Plan. In this regard, the applicant states that several defined benefit 
plans have recently merged into the In-house Plan. For example, on 
December 31, 1998, the Bank America Pension Plan merged with the In-
house Plan, nearly doubling the amount of assets held by the In-house 
Plan.
    Ultimately, the Committee and Bank of America determined that given 
the current size of the In-house Plan's assets, Bank of America may now 
separately manage the assets underlying the Shares on a cost-effective 
basis.\3\ Such management would avoid, the applicant notes, the mutual 
fund fees and regulatory costs paid by the In-house Plan in association 
with its investment in SEC-registered mutual fund portfolios. Thus, 
following a Redemption, Bank of America intends to provide direct in-
house investment management services with respect to the In-house 
Plan's assets.
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    \3\ BAC represents that in the event that this exemption is not 
granted, or in the event that the Independent Fiduciary does not 
give a favorable opinion with respect to the Redemptions, BAC 
intends to proceed with a redemption of the Shares for cash, and, 
thereafter, BAC intends to subsequently reinvest the proceeds.
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    5. The applicant represents that the Redemptions, as proposed, are 
the appropriate means of effectuating this shift in investment 
strategy. In this regard, the applicant represents that effecting 
redemptions of the Shares for cash, as provided for in PTE 77-3, 
followed by the reinvestment of such cash for securities similar to the 
securities underlying the redeemed Shares, would cause the In-house 
Plan to incur certain costs, including potentially large brokerage 
expenses. As a result, BAC represents that the proposed Redemptions, 
being on an in-kind basis having no associated brokerage commission or 
other fees or expenses (other than customary transfer charges paid to 
parties other than Bank of America Affiliates), are a cost-effective 
means of implementing the investment strategy sought by Bank of 
America.
    6. If this proposed exemption is granted, BAC anticipates the 
immediate Redemption of certain Portfolio Shares offered by two of the 
Nations Funds. Such Portfolios are both advised and subadvised by a BAC 
subsidiary. In this regard, Bank of America Advisors, Inc. (BAAI), a 
wholly-owned subsidiary of BAC, serves as investment adviser to each of 
the affected Portfolios, and TradeStreet Investment Associates, Inc. 
(TradeStreet), another wholly-owned subsidiary of BAC, serves as 
investment sub-adviser to each of the affected Portfolios. BAAI and 
TradeStreet (collectively, the Investment Advisers) are each registered 
under the Investment Advisers Act of 1940 (the Advisers Act). The 
applicant describes these immediately affected Nations Funds and 
Portfolios as follows:
    (A) The Nations Fund Trust (NFT), a Massachusetts business trust, 
is an open-end management investment company registered under the 1940 
Act. NFT is currently comprised of 37 portfolios including the 
following seven Portfolios:
    (i) Nations Capital Growth Fund
    (ii) Nations Value Fund
    (iii) Nations Disciplined Equity Fund
    (iv) Nations Managed Index Fund
    (v) Nations Equity Index Fund
    (vi) Nations Emerging Growth Fund
    (vii) Nations Managed SmallCap Value Index Fund
    (B) The Nations Fund, Inc. (NFI), a Maryland corporation, is an 
open-end management investment company registered under the 1940 Act. 
NFI is currently comprised of seven portfolios including the following 
Portfolio:
    (i) Nations Small Company Growth Fund
    As previously noted, BAAI serves as investment adviser and 
TradeStreet serves as investment subadviser to each of the Portfolios 
listed above. The applicant represents that, in addition, Bank of 
America and Bank of America Affiliates provide other services to the 
Nations Funds and the Portfolios, including co-administration and sub-
transfer agency services.
    7. The applicant also represents that, as of August 31, 1999:
    (i) A total of approximately $144,071,000 in In-house Plan assets 
was invested in the Nations Capital Growth Fund (representing a 17% 
ownership in such Portfolio);
    (ii) A total of approximately $364,266,000 in In-house Plan assets 
was invested in the Nations Value Fund (representing a 17% ownership 
interest in such Portfolio);
    (iii) A total of approximately $215,182,000 in In-house Plan assets 
was invested in the Nations Disciplined Equity Fund (representing a 40% 
ownership interest in such Portfolio);
    (iv) A total of approximately $320,642,000 in In-house Plan assets 
was invested in the Nations Managed Index Fund (representing a 45% 
ownership interest in such Portfolio);
    (v) A total of approximately $424,183,000 in In-house Plan assets 
was invested in the Nations Equity Index Fund (representing a 41% 
ownership interest in such Portfolio);
    (vi) A total of approximately $112,622,000 in In-house Plan assets 
was invested in the Nations Emerging Growth Fund (representing a 50% 
ownership interest in such Portfolio);
    (vii) A total of approximately $40,322,000 in In-house Plan assets 
was invested in the Nations Managed SmallCap Value Index Fund 
(representing a 20% ownership interest) in such Portfolio; and
    (viii) A total of approximately $216,341,000 in In-house Plan 
assets

[[Page 39354]]

was invested in the Nations Small Company Growth Fund representing a 
43% ownership interest in such Portfolio).\4\
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    \4\ As previously noted, the Department is expressing no opinion 
regarding the applicability of PTE 77-3 to the acquisition of the 
Shares by the In-house Plan. In addition, the Department is 
expressing no opinion as to the applicability of section 404 of 
ERISA to the acquisition of the Shares by the In-house Plan. In this 
regard, the Department directs the applicant's attention to an 
advisory opinion issued to Federated Investors [Advisory Opinion 98-
06A (July 30, 1998)], in which the Department noted that if the 
decision by a plan fiduciary to enter into a transaction is not 
``solely in the interest'' of the plan's participants and 
beneficiaries, e.g., if the decision is motivated by the intent to 
generate seed money that facilitates the marketing of the mutual 
fund, then the plan fiduciary would be liable for any loss resulting 
from such breach of fiduciary responsibility, even if the 
acquisition of mutual fund shares was exempt by reason of PTE 77-3.
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    8. BAC represents that it is possible that the In-house Plan 
fiduciaries may at a later date determine that it is in the best 
interest of the In-house Plan and its participants and beneficiaries to 
redeem the In-house Plan's interest in Portfolios, other than those 
described in Paragraphs 6 and 7 above, for which a BAC subsidiary 
provides investment advisory services. Consequently, in the event that 
this proposed exemption is granted, and to the extent that all of the 
terms and conditions of the exemption, as granted, are met, the relief 
requested herein shall apply to any such future redemption.
    9. The applicant states that the proposed Redemptions involve 
ministerial transactions to be performed in accordance with pre-
established objective procedures. As a result, the applicant represents 
that the proposed transactions do not permit the trustee or any 
affiliate of the trustee to use its influence or control to purchase 
particular securities from the Portfolios.\5\ In addition, the 
applicant states that all Portfolio Shares are offered and sold 
exclusively through the use of prospectuses and materials provided 
pursuant to the requirements of the Securities Act of 1933 and the 1940 
Act and the rules and regulations thereunder.
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    \5\ BAC represents that Bank of America's predecessor, 
NationsBank, N.A., determined to discontinue offering discretionary 
trustee and investment management services to third party employee 
benefit plans in September of 1997. As a result, all but a de 
minimus amount of third party employee plan assets have been 
redeemed from the Nations Funds.
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    10. The applicant states that, to the extent possible, the In-house 
Plan will transfer Shares in return for a proportionate share of the 
securities held by each Portfolio. According to the applicant, the In-
house Plan will receive only cash and Transferrable Securities pursuant 
to any Redemption. In this regard, each Transferrable Security subject 
to a Redemption will be transferred in-kind to the In-house Plan. 
However odd lot securities, fractional shares and accruals on such 
securities may be transferred in cash. In addition, securities which 
are not Transrrable Securities will be transferred in cash. The 
applicant states that the proposed Redemptions will be therefore be 
carried out, to the extent possible, on a pro rata basis as to the 
number and kind of securities transferred to the In-house Plan.\6\
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    \6\ According to the applicant, the securities actually 
transferred from any particular Portfolio may have different 
purchase dates and tax bases attached to them as compared with 
otherwise identical securities remaining in the Portfolio.
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    11. The applicant represents that, for purposes of the Redemptions, 
the values of the Portfolio securities will be determined based on the 
current market price of such securities as of the close of business on 
the date of the Redemption request (the Valuation Date). The value of 
the securities in each Portfolio will be determined by using the 
valuation procedures described in Rule 17a-7 under the 1940 Act. In 
this regard, the ``current market price'' for specific types of 
securities held by the Nations Funds will be determined as follows:
    a. If the security is a ``reported security'' as the term is 
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934 (the 
1934 Act), the last sale price with respect to such security reported 
in the consolidated transaction reporting system (the Consolidated 
System) for the Valuation Date; or, if there are no reported 
transactions in the Consolidated System that day, such price will equal 
the average of the highest current independent bid and the lowest 
current independent offer for such security (reported pursuant to Rule 
11Ac1-1 under the 1934 Act), as of the close of business on the 
Valuation Date.
    b. If the security is not a reported security, and the principal 
market for such security is an exchange, the ``current market price'' 
will equal the price of the last sale on such exchange on the Valuation 
Date or, if there were no reported transactions on such exchange that 
day, such price will equal the average of the highest current 
independent bid and lowest current independent offer on the exchange as 
of the close of business on the Valuation Date.
    c. If the security was not a reported security and was quoted in 
the NASDAQ system, the ``current market price'' will equal the average 
of the highest current independent bid and lowest current independent 
offer reported on NASDAQ as of the close of business on the Valuation 
Date.
    d. For all other securities, the ``current market price'' will 
equal the average of the highest current independent bid and lowest 
current independent offer, as of the close of business on the Valuation 
Date, determined on the basis of reasonable inquiry. For securities in 
this category, BAC intends to obtain quotations from at least three 
sources that are broker-dealers or pricing services independent of and 
unrelated to BAC. When more than one valid quotation is available, BAC 
intends to use the average of the quotations to value the securities, 
in conformance with interpretations by the SEC and practices under Rule 
17a-7.
    12. The applicant represents that, not later than 30 business days 
after completion of a Redemption, the Nations Funds will confirm in 
writing to the Independent Fiduciary the following: (i) The number of 
Portfolio shares held by the In-house Plan immediately before the 
Redemption (and the related per Share net asset value and the aggregate 
dollar value of the shares held); (ii) the identity (and related 
aggregate dollar value) of each security provided to the In-house Plan 
upon the Redemption, including each security that was valued in 
accordance with Rule 17a-7(b)(4), as described above; (iii) the price 
of each such security for purposes of the Redemption; and (iv) the 
identity of each pricing service or market-maker consulted in 
determining the value of such securities. In accordance with the 
conditions of this proposed exemption, similar procedures will be 
implemented with respect to any future Redemptions of Shares of the 
Portfolios by an employee benefit plan maintained by BAC for the 
benefit of certain of its employees or the employees of its affiliates.
    13. BAC represents that Independent Fiduciary Services, Inc. (IFS), 
a registered investment adviser under the 1940 Act, has confirmed its 
independence from BAC and is qualified to serve as an independent 
fiduciary as that term is defined in Section II. IFS, in turn, 
represents that it understands and will accept the duties, 
responsibilities and liabilities in acting as a fiduciary under the Act 
for the In-house Plan.
    IFS represents that, initially, it was responsible for: (i) 
analyzing, from an investment perspective, the fairness and 
reasonableness of the methodology used with respect to each Redemption, 
and (ii) giving its opinion as to the fairness and reasonableness of 
such

[[Page 39355]]

methodology, as compared with a redemption for cash and subsequent 
reinvestment of such cash, based on such analysis. This analysis and 
opinion was set forth in a written report (the Report) dated March 1, 
2000.\7\ Specifically, in the Report, IFS stated that:
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    \7\ The Redemptions, as originally proposed and with respect to 
which IFS expressed an opinion, included the redemption of In-house 
Plan shares of the International Growth Fund (offered by NFI) and 
the International Value Fund (offered by Nations Reserves, an open 
end investment management company advised by BAAI). Bank of America 
subsequently determined not to include the redemption of such shares 
as part of the proposed Redemptions.
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    (a) the Redemptions would likely avoid certain transactions costs 
otherwise incurred in a cash redemption; \8\
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    \8\ The Report states that if the In-house Plan were to receive 
cash rather than securities pursuant to the transaction, 
substantially all of that cash would be reinvested in securities 
which would result in brokerage commissions and a buy-sell spread, 
the costs of which would be incurred by the Plan. The Report states 
further that depending on the form and timing of the Redemptions, 
part of the Portfolios' selling costs might be absorbed by the In-
house Plan as a shareholder in the Portfolios. Therefore, according 
to IFS, to the extent that the In-house Plan effects the Redemption 
for retained securities, those costs will be avoided. IFS notes, 
however, that the In-house Plan may sell up to $400 million of the 
redeemed securities within a few months of the Redemptions. In this 
regard, the Department notes that the fiduciaries must determine, 
consistent with their fiduciary duties under section 404 of ERISA, 
whether it is prudent to accept an in-kind redemption of Shares of 
the Portfolios where the In-house Plan may incur transaction costs 
in connection with the disposition of such redeemed securities 
shortly after receipt.
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    (b) The Shares and cash associated with the proposed Redemptions 
will be calculated based on the Portfolios' respective statements of 
assets and liabilities, valued in accordance with Rule 17a-7. In this 
regard, IFS has reviewed a sample spreadsheet developed by BAC to 
calculate the exact number of Shares and the residual cash to be 
transferred, and believes the information provided to be conceptually 
and mathematically correct;
    (c) All securities held by the Portfolios, other than the non-
Transferrable Securities, are qualifying securities. The securities 
held by the Portfolios will be identified from a listing supplied by 
the Nations Funds' custodian, the Bank of New York. The Bank of New 
York has stated that the Portfolios that will be subject to the 
Redemptions currently holds no bonds or other securities (that are not 
non-Transferrable Securities) whose value is normally quoted as a 
percent of par, or in any way other than price per share.
    (d) The proposed transactions would be in compliance with the In-
house Plan's investment guidelines.
    The Independent Fiduciary represents that, if this proposed 
exemption is granted and the Redemptions are thereafter undertaken, it 
will be responsible for updating its findings and opinions to confirm 
whether such findings and opinions are applicable as of the anticipated 
date(s) of the Redemptions. In this regard, IFS states that it will 
review each Redemption and confirm in writing whether such Redemption 
was effectuated consistent with the required criteria and procedures 
set forth in the Report. In carrying out this duty, IFS represents 
that, if the proposed exemption is granted, it will conduct a post-
exemption review, which will include: (i) Reviewing the In-house Plan's 
current investment policy guidelines, (ii) reviewing the In-house 
Plan's investment portfolio and the Portfolios' assets as of the most 
recent common date for which such data is available, (iii) estimating 
whether the Excluded Assets are consistent with the types of securities 
so defined, and whether the amount of these securities might be 
material, and (iv) ascertaining whether the policies, procedures and 
controls established for effectuating the transfers remain unchanged. 
Moreover, IFS represented that it will conduct a post-transfer review 
to provide an additional safeguard to the In-house Plan. In this 
regard, IFS will evaluate and test whether the transfer was effectuated 
consistent with the required criteria and procedures and confirm this 
in writing. Consistent with this, IFS represents that if exemption is 
granted, it will update the findings and opinions as set forth in the 
Report so as to confirm whether they still apply as of the expected 
date(s) of the transfer(s).
    In the Report, IFS stated its opinion that the proposed Redemption 
methodologies are fair to the In-house Plan and reasonable in all 
material respects. In addition, IFS stated that the proposed 
Redemptions are in the interests of the participants and beneficiaries 
of the In-house Plan since the anticipated costs savings is likely to 
be material. IFS concluded that if the exemption is granted, and all 
other essential facts and circumstances of the Redemptions remain 
materially unchanged at the time Bank of America seeks to effectuate 
the Redemptions, it will issue a favorable recommendation regarding the 
commencement of such effectuation.
    13. In summary, it is represented that the proposed Redemptions 
satisfy the statutory criteria for an exemption under section 408(a) of 
the Act for the following reasons:
    (A) The In-house Plan pays no sales commissions, redemption fees, 
or other similar fees in connection with the Redemptions (other than 
customary transfer charges paid to parties other than Bank of America 
and Bank of America Affiliates);
    (B) The assets transferred to the In-house Plan pursuant to the 
Redemptions consist entirely of cash and Transferrable Securities. 
Notwithstanding the foregoing, odd lot securities, fractional shares 
and accruals on such securities may be distributed in cash;
    (C) With certain exceptions defined below, the In-house Plan 
receives a pro rata portion of the securities of the Portfolio upon a 
Redemption that is equal in value to the number of Shares redeemed for 
such securities, as determined in a single valuation performed in the 
same manner and as of the close of business on the same day in 
accordance with the procedures set forth in Rule 17a-7 under the 1940 
Act (using sources independent of Bank of America and Bank of America 
Affiliates);
    (D) Bank of America, or any affiliate thereof, does not receive any 
fees, including any fees payable pursuant to Rule 12b-1 under the 1940 
Act, in connection with any redemption of the Shares.
    (E) Prior to a Redemption, Bank of America provides in writing to 
IFS a full and detailed written disclosure of information regarding the 
Redemption;
    (F) Prior to a Redemption, IFS provides written authorization for 
such Redemption to Bank of America, such authorization being terminable 
at any time prior to the date of the Redemption without penalty to the 
In-house Plan, and such termination being effectuated by the close of 
business following the date of receipt by Bank of America of written or 
electronic notice regarding such termination (unless circumstances 
beyond the control of Bank of America delay termination for no more 
than one additional business day);
    (G) Before authorizing a Redemption, based on the disclosures 
provided by the Portfolios to IFS, IFS determines that the terms of the 
Redemption are fair to the participants of the In-house Plan, and 
comparable to and no less favorable than terms obtainable at arms-
length between unaffiliated parties, and that the Redemption is in the 
best interest of the In-house Plan and its participants and 
beneficiaries;
    (H) Not later than 30 business days after the completion of a 
Redemption, the relevant Fund will provide to IFS a written 
confirmation regarding such Redemption containing:

[[Page 39356]]

    (i) the number of Shares held by the In-house Plan immediately 
before the Redemption (and the related per Share net asset value and 
the total dollar value of the Shares held),
    (ii) the identity (and related aggregate dollar value) of each 
security provided to the In-house Plan pursuant to the Redemption, 
including each security valued in accordance with Rule 17a-7(b)(4),
    (iii) the current market price of each security received by the In-
house Plan pursuant to the Redemption, and
    (iv) the identity of each pricing service or market-maker consulted 
in determining the value of such securities;
    (I) The value of the securities received by the In-house Plan for 
each redeemed Share equals the net asset value of such Share at the 
time of the transaction, and such value equals the value that would 
have been received by any other investor for shares of the same class 
of the Portfolio at that time;
    (J) Subsequent to a Redemption, IFS performs a post-transaction 
review which will include, among other things, a random sampling of the 
pricing information supplied by Bank of America; and
    (K) Each of the In-house Plan's dealings with: the Nations Funds, 
the Investment Advisers, the principal underwriter for the Nations 
Funds, or any affiliated person thereof, are on a basis no less 
favorable to the In-house Plan than dealings between the Nations Funds 
and other shareholders holding shares of the same class as the Shares.
    Notice to Interested Persons: The applicant represents that because 
those potentially interested participants and beneficiaries cannot all 
be identified, the most practical means of notifying such participants 
and beneficiaries of this proposed exemption, in addition to the 
publication of this notice in the Federal Register, is by notifying 
active participants by an individual direct interoffice mailing, and by 
notifying participant retirees in pay status. The applicant represents 
such notification covers more than 160,000 of the In-house Plan's 
204,000 and that the time and expense of notifying the remaining 
participants would be substantial. Comments and requests for a hearing 
must be received by the Department not later than 60 days from the date 
of publication of this notice of proposed exemption in the Federal 
Register.
    For Further Information Contact: Mr. Christopher J. Motta of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

Sierra Health Services, Inc. Profit Sharing Plan (the Plan) Located 
in Las Vegas, Nevada

[Applicant No. D-10884]

Proposed Exemption

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

Summary of Facts and Representations

    1. The Employer is a diversified health care company that, through 
its subsidiaries, provides and administers the delivery of managed care 
benefit plans for employers, government groups, and individuals. The 
Employer is the sponsor of the Plan. The Plan is a defined contribution 
profit sharing plan. The Plan has 4,570 participants with account 
balances and approximately $70,964,714.73 in total assets, as of 
September 30, 2000. The non-liquid assets consist of the four limited 
partnership units, the Interests.
    2. Prior to the second quarter of 1999, Dreyfus Management, Inc. 
(Dreyfus) acted as the trustee of the Plan holding only the employees' 
contributions while the Employer acted as the trustee of the Plan 
holding the Employer's contributions to the Plan. During the second 
quarter of 1999, assets held in the Employer directed account were 
transferred to Dreyfus. As of December 1999, the Employer combined the 
previously segregated Employer contributions with employee's 
contributions into a single fund under the control of an independent 
trustee, with the exception of the Interests. A group of employees 
makes up the 401(k) committee, which approves the guidelines for 
investment of the Employer directed fund. The 401(k) committee retains 
control over the assets involved in the proposed exemption transaction.
    The Employer and the 401(k) committee represents that there is no 
ready market for the Interests. The trustee fees for holding the 
Interests temporarily until they can be disposed of is $15 per 
participant, per year, which amounts to $29,190 annually based upon 
1,946 participants as of December 31, 1998. Allowing the Employer to 
purchase the Interests would eliminate the trustee fees to the 
participants and the current administrative burden upon the Employer 
caused by having to account for the illiquid assets outside of the Plan 
administrator's custody. The Employer's efforts to find a buyer for the 
Interests have been unsuccessful. As a result, the Plan now proposes to 
sell the Interests for the greater of: (i) The ``adjusted cost basis'' 
of the Plan's investment in each Interest (the Adjusted Cost); (ii) the 
fair market value of the Interests, as determined on the date of the 
proposed sale by an independent, qualified, appraiser; or (iii) the 
estimated value of the Interests, as determined by the general partner 
of each partnership and reported on the most recent account statements 
available at the time of the sale. The partnerships and their general 
partners are unrelated to the Employer.
    3. The Interests consist of:
    (a) A 4.92% interest in the Centennial Parkway/Buffalo Drive 
Limited Partnership (Centennial LP), holding 10 acres of unimproved 
land in Clark County, Nevada. The Interest has not been used by the 
Plan. The Interest was acquired by the Plan for investment purposes on 
October 1, 1983 for $13,548.54 from the Centennial LP, an unrelated 
party. The Centennial LP has generated $8,359 in income and incurred a 
total of $3,422 in expenses. Therefore, the Adjusted Cost of Centennial 
LP is $18,485.54 as of June 26, 2000 ($13,548.54 + $8,359 - $3,422 = 
$18,485.54);
    (b) A 5.74% interest in the Great North Limited Partnership (Great 
North LP) holding 37.66 acres of unimproved

[[Page 39357]]

land in Clark County, Nevada. The Interest has not been used by the 
Plan. The Interest was acquired by the Plan for investment purposes on 
August 12, 1981 for $41,670 from the Great North Limited Partnership, 
an unrelated party. The Great North LP has generated $19,057 in income 
and incurred a total of $9,137 in expenses. Therefore, the Adjusted 
Cost of Great North LP is $51,590 as of June 26, 2000 ($41,670 + 
$19,057 - $9,137 = $51,590); and
    (c) A 4.92% interest in the Nevada Rainbow Limited Partnership 
(Nevada Rainbow LP) holding 38.39 acres of unimproved land in Clark 
County, Nevada. The Interest has not been used by the Plan. The 
Interest was acquired by the Plan for investment purposes on October 1, 
1983 for $43,891.18 from the Nevada Rainbow Limited Partnership, an 
unrelated party. The Plan received $30,000 on December 31, 1999. The 
Nevada Rainbow LP has generated $6,155 in income and incurred a total 
of $8,767 in expenses. Therefore, the Adjusted Cost of Nevada Rainbow 
LP is $41,279.18 as of June 26, 2000 ($43,891.18 + $6,155 - $8,767 = 
$41,279.18).
    The value of the Interests, as determined by the Adjusted Cost is 
$111,354.72 ($18,485.54 + $51,590 + $41,279.18 = $111,354.72).
    4. William P. Geary (Mr. Geary), an accredited appraiser with 
R.O.I. Appraisal, Ltd., located in Henderson, Nevada, performed the 
appraisal (the Appraisal) of the Interest on June 26, 2000. Mr. Geary 
states that he is a full time qualified, independent, appraiser, as 
demonstrated by his status as a Certified General Appraiser, licensed 
by the State of Nevada. In addition, Mr. Geary represents that both he 
and his firm are independent of the employer.
    In the Appraisal, Mr. Geary estimated the fair market value of each 
of the Interests, taking into account commissions, expenses, and 
discounts for the partial interest nature of these assets. Mr. Geary 
analyzed the net asset value of each of the real estate limited 
partnerships, based upon standard deductions for expenses, including 
commissions, return of principal, preferred returns to limited 
partners, preferred returns to general partners, and the remaining 
profits to limited partners. Mr. Geary also analyzed the net asset 
value on a per unit basis for each of the Interests owned by the Plan. 
After analyzing all relevant data, Mr. Geary determined that the fair 
market value of Centennial LP is $57,210, the fair market value of 
Great North LP is $114,450, and the fair market value of Nevada Rainbow 
LP is $112,990. Therefore, the Appraisal value is $284,650 as of June 
26, 2000 ($57,210 + $114,450 + $112,990 = $284,650).
    5. The value of the Interests, as determined by the general 
partners (GPs) of each partnership as of December 31, 1999 is the 
following:
    (a) Centennial LP = $73,250;
    (b) Great North LP = $111,056; and
    (c) Nevada Rainbow LP = $121,500.

Therefore the price of Interests as valued by the GPs is $305,806 
($73,250 + $111,056 + $121,500 = $305,806).
    6. The Interests have been evaluated as follows:

----------------------------------------------------------------------------------------------------------------
                                                                   Adjusted cost     Appraisal     GPs valuation
----------------------------------------------------------------------------------------------------------------
Centennial LP...................................................      $18,485.54         $57,210         $73,250
Great North LP..................................................          51,590         114,450         111,056
Nevada Rainbow LP...............................................       41,279.18         112,990         121,500
----------------------------------------------------------------------------------------------------------------

    7. After selecting the greater price of the (i) the Appraisal, (ii) 
the GPs valuation, or (iii) the Adjusted Cost, the sales price of the 
Interests is $309,200 ($73,250 + $114,450 + $121,500 = $309,200).
    8. The Employer represents that the subject transaction is in the 
interest of the Plan because the Plan could not at this time sell the 
Interests to an unrelated third party at other than a substantial 
discount.
    9. In summary, the Employer represents that the subject transaction 
satisfies the statutory criteria for an exemption under section 408 of 
the Act for the following reasons: (a) The sale will be a one-time 
transaction for cash; (b) the Plan will not pay commissions nor other 
expenses relating to the sale; (c) the Plan suffers no loss, as a 
result of its acquisition and holding of the Interests, taking into 
account all cash distributions received by the Plan as a result of 
owning the Interests; and (d) the sale price for each Interest will be 
the greater of: (i) The fair market value of the Interests as 
determined by a qualified, independent, appraiser, (ii) the value as 
determined by the general partner of each partnership and reported on 
the most recent account statements available at the time of the sale, 
or (iii) the Adjusted Cost.
    Notice to Interested Persons: Notice of the proposed exemption 
shall be given to all interested persons by personal delivery and by 
first-class mail within 10 days of publication of the notice of 
pendency in the Federal Register. Such notice shall include a copy of 
the notice of prosed exemption as published in the Federal Register and 
shall inform interested persons of their right to comment and/or 
request a hearing with respect to the proposed exemption. Comments and 
requests for a hearing are due within 40 days of the date of 
publication of the notice in the Federal Register.
    For Further Information Contact: Mr. Khalif I. Ford of the 
Department, telephone (202) 219-8883. (This is not a toll-free number.)

Riggs Bank N.A., Located in Washington, D.C.

[Exemption Application No. D-10928]

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 in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

Section I--Transactions

    If the exemption is granted, the restrictions of section 406(a) of 
the Act, and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the 
Code, shall not apply to: (a) The extension of credit (the Advance or 
Advances) by Riggs Bank N.A. (Riggs) to a participant-directed 
individual account plan (Plan); and (b) the Plan's repayment of an 
Advance or Advances, plus accrued interest.

Section II--Conditions

    The relief provided under Section I is available only if the 
following conditions are met:
    (a) Each Advance is made in connection with the administration of a 
portion of the Plan's assets by Riggs as a unitized fund (Unitized 
Fund) in order to facilitate redemptions from the Unitized Fund.
    (b) Each Advance is made in accordance with the terms of a written 
agreement (the Agreement) that describes terms and procedures for the

[[Page 39358]]

Advances, including standing instructions addressing the initiation, 
amount, repayment and formula or method for determining the interest 
rate payable with respect to each Advance and is approved in writing by 
a fiduciary of the Plan who is independent of and not an affiliate of 
Riggs (Independent Plan Fiduciary).
    (c) Interest payable by the Plan on each Advance is determined in 
accordance with an objective formula or method described in the 
Agreement.
    (d) The Plan repays each Advance and accrued interest in accordance 
with the terms of the Agreement within ten (10) business days after the 
initiation of the Advance.
    (e) Each Advance is unsecured.
    (f) The aggregate amount advanced on any business day that an 
Advance is initiated does not, after the Advance is made, exceed 25% of 
the total market value of the Unitized Fund.
    (g) On the date that an Advance is initiated, Riggs provides the 
Independent Plan Fiduciary with notice of the amount of the Advance and 
the actual interest rate to be applied.
    (h) Within ten (10) days after an Advance is fully repaid, Riggs 
provides the Independent Plan Fiduciary with a confirmation statement 
which includes the date of repayment, the amount of the Advance, the 
actual interest rate applied, and the total amount of interest paid by 
the Plan.
    (i) The Agreement may be terminated by the Independent Plan 
Fiduciary at any time, subject to the Plan's repayment of any 
outstanding Advances.
    (j) The Advances are made on terms at least as favorable to the 
Plan as those the Plan could obtain in an arm's-length transaction with 
an unrelated party.
    (k) Neither Riggs nor its affiliate has or exercises any 
discretionary authority or control with respect to the initiation of an 
Advance, the amount of an Advance, the interest rate payable on an 
Advance, or the repayment of the Advance.
    (l) The fair market value of the assets in the Unitized Fund is 
determined by an objective method specified in the Agreement. In the 
case of employer stock, such stock must be stock for which market 
quotations are readily available from independent sources.
    (m) Riggs or its affiliate is not (i) a trustee of the Plan (other 
than a nondiscretionary trustee who does not render investment advice 
with respect to the assets of the Unitized Fund), (ii) a plan 
administrator (within the meaning of section 3(16)(A) of the Act and 
Code section 414(g)), (iii) a fiduciary who is expressly authorized in 
writing to manage, acquire or dispose of on a discretionary basis any 
assets of the Unitized Fund, or (iv) an employer any of whose employees 
are covered by the Plan.
    (n) (a) Riggs will maintain or cause to be maintained for a period 
of six years from the date of the granting of the exemption proposed 
herein the records necessary to enable the persons described in 
paragraph (b) to determine whether the conditions of this exemption 
have been met, except that:
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of Riggs, the 
records are lost or destroyed prior to the end of the six-year period; 
and
    (2) No party in interest, other than Riggs, shall be subject to the 
civil penalty that may be assessed under section 502(i) of the Act, or 
to the taxes imposed by section 4975(a) and (b) of the Code, if the 
records are not maintained, or are not available for examination as 
required by paragraph (b); and
    (b)(1) Except as provided in paragraph (b)(2) and notwithstanding 
any provisions of subsections (a)(2) and (b) of section 504 of the Act, 
the records referred to in paragraph (a) are unconditionally available 
at their customary location for examination during normal business 
hours by: (A) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service; (B) Any fiduciary of the 
Plan, or any duly authorized employee or representative of such 
fiduciary; and (C) Any participant or beneficiary of the Plan or duly 
authorized representative of such participant or beneficiary.
    (2) None of the persons described in paragraph (b)(1)(B) and 
(b)(1)(C) shall be authorized to examine trade secrets of Riggs or 
commercial or financial information which is privileged or 
confidential.

Section III--Definitions

    (a) The term ``affiliate'' means (i) any person directly or 
indirectly, through one or more intermediaries, controlling, controlled 
by, or under common control with such other person; (ii) any officer, 
director, or partner, employee or relative (as defined in section 3(15) 
of the Act) of such other person; and (iii) any corporation or 
partnership of which such other person is an officer, director or 
partner.
    (b) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    Effective Date: If the proposed exemption is granted, the exemption 
will be effective as of September 11, 2000.

Summary of Facts and Representations

    1. Riggs is a wholly-owned subsidiary of Riggs National 
Corporation, a Washington, DC-based financial services holding company 
incorporated in the State of Delaware. Riggs provides diverse products 
and services within the financial services industry, including 
traditional banking services to retail, corporate and commercial 
customers, international banking, trust services, and investment 
management services. In 1999, Riggs earned $31.6 million in net income 
and had total assets of $5.7 billion at year-end, with more than 1,500 
employees.
    In addition to its traditional banking services, Riggs provides 
fiduciary and administrative services to employee benefit plans through 
its financial services division, Riggs & Company. Riggs's employee 
benefit plan customers include tax-qualified defined benefit plans and 
welfare plans, and, as here relevant, tax-qualified defined 
contribution plans (e.g., 401(k) plans) that offer participants the 
opportunity to direct the investment of their individual accounts among 
a selection of investment options (Plans). Riggs's services to Plans 
include trustee and custodial services, recordkeeping, and other 
administrative services, including as here relevant, unitization 
services.
    As described more fully below, unitization services facilitate 
daily trading between investment options offered under a plan by 
permitting daily trading of plan investment options that would 
otherwise not be able to be traded or settled within one day. A 
Unitized Fund would generally consist of an investment that is not 
traded on a daily basis (e.g., company stock) and liquid investments 
(e.g., money market fund shares). Unitization services permit daily 
transactions by establishing ``units'' representing undivided interests 
in all of the assets of the Unitized Fund. Riggs establishes a daily 
unit value by dividing the market value of the Unitized Fund by the 
number of units held by participants, and on a daily basis, processes 
participant contributions to and withdrawals from the Unitized Fund as 
purchases and sales of units at the daily unit value. When cash is 
required to settle transactions in units resulting from participant 
withdrawals and exchanges of units from the Unitized Fund, the cash 
requirements are satisfied first from the liquid investments of the 
Unitized Fund and then, shares of the

[[Page 39359]]

Unitized Fund investments may be sold to restore the liquidity. Riggs 
proposes to offer Plans the opportunity to receive short-term cash 
advances (Advance or Advances) from Riggs if the cash portion of a 
Unitized Fund is insufficient to cover unit redemption requests on a 
particular business day.
    2. Riggs's services to participant-directed Plans are provided 
primarily in connection with the DCXchange trading system. 
DCXchange is a proprietary system owned by PFPC Inc., the 
fund servicing subsidiary of PNC Bank Corp., and is unrelated to Riggs. 
DCXchange is maintained and operated by PFPC Distributors, a 
registered broker-dealer and a PFPC Inc. affiliate.
    Generally, Plans participate in DCXchange through a 
third-party administrator or other service provider that performs the 
Plan's recordkeeping services (the recordkeeper). DCXchange 
provides an automated link between the recordkeeper's participant 
recordkeeping system and mutual fund transfer agents. This linkage 
allows participant investment transactions (e.g., contributions, 
withdrawals and exchanges between investment options) to be transmitted 
to and processed by mutual funds on a daily basis.
    DCXchange is linked to more than 700 different mutual 
funds and also can be linked to other types of investments, if the 
investment is administered to permit daily trading. For example, 
investments available for daily trading through DCXchange 
include interests in certain collective trust funds maintained by 
banks. In providing unitization services, Riggs administers other types 
of Plan investments to permit daily trading on DCXchange.
    3. Riggs provides a variety of services to Plans participating in 
DCXchange. Where a Plan engages Riggs to serve as a trustee 
or custodian and as recordkeeper to provide participant recordkeeping 
services, Riggs uses DCXchange to process the Plan's 
investment transactions. Plans receiving trust or custodial and 
recordkeeping services from Riggs may invest among a broad selection of 
mutual funds, including mutual funds advised by Riggs Investment 
Management Corporation (RIMCO), a Riggs affiliate, as well as mutual 
funds not affiliated with Riggs.
    In other cases, Riggs may be engaged as trustee or custodian to a 
Plan that has engaged a recordkeeper that is not affiliated with Riggs. 
In still other cases, another bank or trust company that maintains the 
direct contractual relationship with the Plan and provides participant 
recordkeeping (or engages a recordkeeper for the Plan) may subcontract 
with Riggs to provide custodial services.\9\ In these cases, the 
recordkeeper maintains participant records, receives participant 
investment instructions, and submits the Plan's investment transactions 
through DCXchange. Riggs, as trustee or custodian, holds the 
Plan's assets and transfers and receives Plan funds as needed to settle 
the Plan's investment transactions in accordance with 
DCXchange procedures.\10\
---------------------------------------------------------------------------

    \9\ Banks and trust companies ``outsource'' custody and 
settlement responsibilities to Riggs because Riggs has developed 
computer systems and internal expertise that allow Riggs to provide 
custody and transaction settlement services efficiently in 
connection with DCXchange trading platform.
    \10\ Riggs also serves as a ``master custodian'' for Plan assets 
as funds are transferred between Plans and mutual funds to settle 
investment transactions through DCXchange. In this regard, 
trustees of Plans that participate in DCXchange engage 
Riggs to act as master custodian under a standardized master custody 
agreement to hold Plan funds in certain ``master'' accounts 
maintained in connection with DCXchange. A master 
contributions account temporarily holds new contributions pending 
investment (DCXchange does not process orders for 
purchases of mutual funds shares unless the purchase amount is on 
deposit in the contributions account). A master disbursement account 
holds redemption proceeds from mutual funds temporarily until the 
proceeds are reinvested or forwarded to a Plan trustee for 
distribution to participants in accordance with the Plan terms. 
Riggs's services as master custodian are separate and apart from its 
provision of unitization and other services to Plans.
---------------------------------------------------------------------------

    Riggs may provide unitization services to Plans where Riggs is a 
trustee or custodian (whether or not Riggs is recordkeeper). In some 
cases, Riggs may be engaged by the Plan solely to provide unitization 
services and Riggs would have custody of the Plan's assets only to the 
extent required for the administration of the Unitized Fund.
    4. Because participant-directed Plans generally offer mutual funds 
as investment options, procedures for investments, exchanges and 
redemptions under these Plans (including procedures established for 
DCXchange) accommodate mutual fund trading practices. Under 
procedures established for DCXchange, participant investment 
transactions would generally be processed as follows:
    (a) After the close of business on each trade date, mutual fund 
transfer agents calculate the daily net asset value (NAV) at which 
shares may be purchased or redeemed for each mutual fund; recordkeepers 
receive the daily NAV for each mutual fund through the 
DCXchange system;
    (b) The recordkeeper processes participant instructions for 
exchanges between investment options and Plan withdrawals that are 
submitted to the recordkeeper before a cut-off time (e.g., 3 p.m.) on 
any business day (the trade date or T), and purchase orders resulting 
from new Plan contributions received on the trade date, using the daily 
NAV provided for each mutual fund at the close of business on that 
trade date;
    (c) The recordkeeper aggregates participant transaction information 
to create a single Plan purchase or redemption order for each mutual 
fund offered as a Plan investment option. The recordkeeper submits 
these orders to the mutual funds through DCXchange during the 
night, or possibly, very early on the next business day (T+1);
    (d) On T+1, the purchase and redemption transactions are settled 
through DCXchange by the transfer of money from the master 
contributions account for purchases to the mutual funds and the 
collection of the redemption proceeds from the mutual funds which are 
held in the master disbursement account. Redemption proceeds are 
reinvested on T+1 if the redemption transaction is processed as part of 
an exchange between Plan investment options, or transferred to the Plan 
trustee if withdrawn from the Plan;
    (e) In the case of an exchange between investment options offered 
under a Plan, the recordkeeper may process the exchange as a 
simultaneous redemption and purchase transaction on T, and both 
transactions are settled on T+1.
    These procedures are successful because mutual funds meet two 
important requirements: The transfer agent establishes a daily NAV for 
processing purchases and redemptions; and mutual funds maintain 
liquidity that permits payment of redemption proceeds on T+1. Interests 
in collective trust funds also may be traded on a daily basis under 
these procedures if administered to allow daily contributions and 
withdrawals.
    Some investment options that Plan sponsors may wish to offer 
participants do not meet requirements for daily trading. For example:
    (a) Purchase and sale transactions involving employer stock owned 
by a Plan typically settle on a ``T+3'' basis, which means that 
proceeds upon the sale of employer stock may not be received for three 
business days after the day of a sale transaction.
    (b) ``Stable value funds'' typically hold insurance company 
guaranteed investment contracts (GICs) or other investments that 
provide a benefit-responsive guarantee (e.g., so-called ``alternative'' 
stable value contracts, such as ``synthetic GICs''), which may require 
up to ten (10) days notice for withdrawals.

[[Page 39360]]

    (c) Withdrawals from a Plan account managed by an investment 
manager within the meaning of section 3(38) of the Act (managed 
account) might require sales of securities owned in the managed 
account. Like employer stock, sales of securities from a managed 
account generally would settle on a ``T+3'' basis.
    Unitization services provided by Riggs allow participants to engage 
in daily transactions involving these types of Plan investment options 
by providing a daily price and liquidity that permits withdrawals on 
any business day.
    5. Unitized Fund administration is a ministerial service that Riggs 
performs under specific instructions from a Plan fiduciary independent 
of Riggs (Independent Plan Fiduciary). The Independent Plan Fiduciary 
may be the Plan administrator described in section 3(16)(A) of the Act, 
another Plan fiduciary responsible for determining the Plan's 
investment options, or an investment manager described in section 3(38) 
of the Act appointed for a Plan. All of the Independent Plan 
Fiduciary's instructions are provided in, or in accordance with, a 
written unitization agreement (the Agreement) made between Riggs and 
the Independent Plan Fiduciary. Among other things, the Agreement 
provides standing instructions addressing the initiation, amount, 
repayment and formula or method for determining the interest rate 
payable with respect to each Advance. The terms of the Agreement are 
approved in writing by the Independent Plan Fiduciary.
    Riggs has developed criteria to determine when unitization is 
appropriate, which include factors such as Plan asset size, number of 
Plan participants, the size of the Unitized Fund, and the type and 
nature of the Unitized Fund assets (e.g., whether exchange-traded and 
readily available, or less liquid). In the case of employer stock, the 
stock must be a ``qualifying employer security'' as described in 
section 407(d)(5) of the Act and the Plan's ownership of the employer 
stock must be permitted under section 407 of the Act. Additionally, 
such employer stock must be stock for which market quotations are 
readily available from independent sources.
    Under the Agreement, the Independent Plan Fiduciary directs Riggs 
to establish a Unitized Fund consisting of the assets that are the 
primary investment under the Plan investment option to be unitized and 
cash, or cash equivalent investments, that provide liquidity for the 
Unitized Fund (the cash portion) in order to facilitate daily trading. 
For example, a unitized employer stock fund would consist of shares of 
employer stock and a cash portion; a unitized stable value fund would 
consist of GICs and/or alternative stable value contracts and a cash 
portion, and a unitized managed account would consist of investments 
selected and managed by the Plan's investment manager and a cash 
portion. In addition, if a Plan wishes to offer a mutual fund that does 
not participate in DCXchange, the Independent Plan Fiduciary 
may direct Riggs to establish a Unitized Fund consisting of shares of 
the mutual fund and a cash portion.
    In most cases, the Independent Plan Fiduciary directs Riggs to 
invest the cash portion in shares of the Riggs Prime Money Market Fund 
(the RIMCO Money Market Fund), a unit investment trust managed by 
RIMCO. In this regard, Riggs is able to submit redemption orders for 
shares of the RIMCO Money Market Fund on any business day and receive 
cash on the Plan's behalf on the same business day, which allows Riggs 
to transfer funds to settle redemptions from the Unitized Fund on T+1 
as required under the DCXchange procedures. The Independent 
Plan Fiduciary may direct Riggs to invest the cash portion of a 
Unitized Fund in investments other than the RIMCO Money Market Fund, 
provided that the investment offers similar liquidity.
    Riggs's fees for unitization services are also described in the 
Agreement. Generally, the fees may include an initial set-up charge and 
an annual administration charge which may be a fixed amount, a fee 
based on the value of assets in the unitized account, or a combination 
of both.
    In no event will Riggs have any discretionary authority or control 
or provide any investment advice (as described by section 3(21) of the 
Act and regulations thereunder) with respect to the selection of the 
assets of a Unitized Fund. In this regard, the Independent Plan 
Fiduciary or an investment manager appointed in accordance with Plan 
terms and independent of Riggs would be solely responsible for 
determining the investments of the Unitized Fund, and as further 
described below, providing Riggs with specific instructions regarding 
the operation of the Unitized Fund. In addition, Riggs does not provide 
any asset allocation or other services that may affect or influence 
participant transactions involving a Unitized Fund.
    6. To establish a Unitized Fund, the Independent Plan Fiduciary 
directs Riggs in the Agreement to calculate the market value of assets 
owned by the Plan in connection with the investment option to be 
unitized (e.g., the employer stock or other investments of the option 
and the cash portion) on the first day that the option is unitized (the 
unitization date) and then establish ``units'' of the Unitized Fund by 
dividing the market value by a proposed initial unit value. Typically, 
an initial number of units is determined by dividing the current market 
value of the combined assets by $10. On the unitization date, the 
recordkeeper allocates the units to participant accounts based on each 
participant's pro rata interest in the Unitized Fund.
    Each business day after the unitization date, the Agreement 
requires Riggs to establish a daily unit price based on the current 
market value of the Unitized Fund. Procedures for determining current 
market value are specified in the Agreement and would require an 
objective method so that Riggs does not have any discretion in 
determining the market value of the Unitized Fund or unit price. For 
example, in the case of employer stock, the Agreement may require Riggs 
to value the stock at the closing price on the New York Stock Exchange. 
Securities issued by mutual funds would be valued at the daily net 
asset value published by the mutual fund. In the case of GICs or 
alternative stable value contracts, the Agreement would generally 
direct Riggs to use book value as reported by the contract issuer. In 
the case of a managed account, the investment manager may value the 
managed account, or Riggs may determine the value if Riggs has custody 
of the managed account assets.
    Riggs provides the daily unit price for each Unitized Fund to 
DCXchange after the close of each business day. 
DCXchange makes the unit price available to the Plan's 
recordkeeper for purposes of processing new participant investments in 
the Unitized Fund, withdrawals from the Unitized Fund, and participant-
directed exchanges involving the Unitized Fund.
    7. Each business day, the Plan's recordkeeper aggregates all 
participant investment transactions involving the Unitized Fund to 
create a Plan purchase and redemption order for units of the Unitized 
Fund. The recordkeeper submits the purchase and redemption orders to 
DCXchange on the same basis that the recordkeeper submits 
orders for the mutual fund investment options offered under the Plan. 
DCXchange then transmits the orders to Riggs.\11\
---------------------------------------------------------------------------

    \11\ Generally, the Plan's recordkeeper is party to the 
Agreement and agrees to process participant investment transactions 
involving the Unitized Fund in accordance with requirements that 
accommodate Riggs's provision of unitization services, as described 
by the Agreement. In the case of a managed account, the investment 
manager may also be party to the Agreement and would agree to assist 
Riggs in providing untization services by, e.g., providing daily 
valuation information and selling assets of the managed account when 
required for liquidity purposes.

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

[[Page 39361]]

    Upon receipt of a purchase order through DCXchange , 
Riggs increases the total number of units of the Unitized Fund by the 
number of units purchased and accepts funds transferred to Riggs to pay 
for the units purchased. Upon receipt of a unit redemption order, Riggs 
reduces the number of units accordingly and forwards funds to settle 
the unit redemptions.
    8. The Agreement includes specific instructions for the management 
of liquidity of a Unitized Fund. Specifically, the Independent Plan 
Fiduciary must specify a ``target liquidity,'' which specifies the 
intended size of the cash portion in comparison with the total assets 
of a Unitized Fund. The target liquidity would be established at a 
level that reasonably provides enough cash to accommodate the expected 
volume of redemption transactions generated by participants in the 
ordinary course. A typical target liquidity may range from 1% to 10%, 
depending on factors such as the size of the Unitized Fund, the average 
trading volume of assets held in the Unitized Fund, the number of 
participants with an interest in the Unitized Fund, and the relative 
size of each participant's interest in the Unitized Fund.
    The Agreement also specifies a ``liquidity variance'' that defines 
the range within which the actual value of the cash portion as compared 
to total value of the Unitized Fund (actual liquidity) may vary from 
the target liquidity. If the actual liquidity exceeds the target 
liquidity by more than the liquidity variance, excess amounts must be 
immediately invested. If the actual liquidity is less than the target 
liquidity by more than the target variance, then some Unitized Fund 
investments must be liquidated to increase the cash portion.
    The Agreement always provides Riggs with specific instructions for 
making new investments on behalf of the Unitized Fund or liquidating 
investments of a Unitized Fund. In the case of employer stock, Riggs is 
generally directed to place a purchase or sell order to restore the 
Unitized Fund to target liquidity on the business day that the excess 
liquidity or liquidity shortfall is identified. For unitized stable 
value funds, the Independent Plan Fiduciary must provide Riggs with 
specific instructions as to which contracts Riggs should make deposits 
to or request withdrawals from. In the case of a managed fund, the 
Agreement generally requires Riggs to notify the Plan's investment 
manager of excess liquidity or a liquidity shortfall and the manager is 
responsible for buying or selling account assets to restore the actual 
liquidity of the managed account to the permitted range.
    9. Whenever the actual liquidity of a Unitized Fund falls below the 
target liquidity by more than the liquidity variance, assets of the 
Unitized Fund must be liquidated to restore the target liquidity. If 
employer stock or other securities, which settle on a ``T+3'' basis, 
are sold, the sale proceeds usually would be received after three 
business days. Some transactions may take longer to settle, for 
example, withdrawals from GICs or alternative stable value contracts 
may require up to ten days. Nevertheless, as long as the cash portion 
of the Unitized Fund is sufficient to cover unit redemption requests 
submitted to Riggs on each business day, unit redemptions can be 
processed and settled on a daily basis in accordance with DCXchange 
 procedures.
    From time to time, the actual liquidity of a Unitized Fund may not 
provide sufficient liquidity for the unit redemption requests on a 
business day. If requests for redemptions exceed the actual liquidity 
of the Unitized Fund, the Agreement generally requires Riggs to reject 
all requests for unit redemptions submitted to the Unitized Fund for 
that business day and immediately proceed to sell assets to obtain the 
liquidity necessary to satisfy the rejected requests. Once actual 
liquidity is increased to the amount required to satisfy the rejected 
unit redemption requests, Riggs notifies the recordkeeper to resubmit 
the redemption orders through DCXchange . The redemptions are 
processed at the unit price established the business day on which the 
redemptions are resubmitted.\12\
---------------------------------------------------------------------------

    \12\ Generally, the Agreement would instruct Riggs to continue 
to accept unit purchase orders even if unit redemption orders have 
been rejected.
---------------------------------------------------------------------------

    Riggs's experience is that it is expensive and burdensome to Plans 
and participants to reject unit redemptions due to insufficient 
liquidity for several reasons. First, the reversal of a transaction is 
an exception from typical administrative procedures and, therefore, 
must be processed and reconciled manually rather than on automated 
recordkeeping systems; this increases recordkeeping expenses incurred 
by Plans and participants and increases the opportunity for 
recordkeeping and reconciliation errors. Second, until the reversed 
transaction is posted to participant accounts, participant account 
records (which are available to participants on a daily basis) will be 
inaccurate.
    Most important, the unit redemption requests are likely to be 
requested in connection with a participant's request for an exchange 
from a Unitized Fund to another Plan investment option. If the Unitized 
Fund redemption requests cannot be settled, the corresponding purchases 
of shares or units of the other Plan investment options also must be 
reversed. As noted, Riggs does not receive unit redemption orders from 
DCXchange  until T+1, by which time, a corresponding purchase 
order would also have been received by the mutual fund transfer agent. 
In many cases, it is not possible to stop a purchase of mutual fund 
shares. Instead, the shares must be resold at the then current market 
price. If there has been a one-day change in share price, the Plan may 
be liable for the difference.
    One way to reduce the risk that any unit redemptions may be 
rejected is to increase the Unitized Fund's target liquidity. In this 
regard, the Agreement generally requires Riggs to notify the 
Independent Plan Fiduciary each time that unit redemptions are rejected 
so that the Independent Plan Fiduciary can evaluate whether target 
liquidity is appropriate and increase target liquidity as needed. 
However, increasing target liquidity affects the risk and return 
characteristics of the Unitized Fund, which is an undesirable result in 
the view of many Plan fiduciaries. In many cases, increases in the 
portion of a fund invested in cash and cash equivalents reduces the 
fund's investment return over the long-term as compared to the return 
that could be obtained by a fund with a smaller cash portion.
    10. To avoid the administrative difficulties and expense that may 
result from rejecting unit redemptions and reversing corresponding 
purchases from a mutual fund or Unitized Fund, Riggs proposes to offer 
Plans Advances from Riggs if the cash portion of a Unitized Fund is 
insufficient to cover unit redemption requests on a particular business 
day. The proposed exemption requires the Plan to repay the principal 
amount of an Advance and accrued interest within ten business days 
after the initiation of the Advance.
    As a service provider to Plans, Riggs is a party in interest to 
such Plans. Therefore, Riggs represents that Advances by Riggs to Plans 
in connection with its unitization services, and the receipt by Riggs 
of interest

[[Page 39362]]

thereon, may raise issues under section 406(a) of the Act. To resolve 
this issue, Riggs is requesting an exemption from the prohibitions of 
section 406(a) of the Act that would permit Riggs to make Advances to 
Plans to facilitate the administration of a Unitized Fund, and to earn 
interest on the Advances.
    11. The Advances would be available under procedures reviewed and 
approved by the Independent Plan Fiduciary and incorporated into the 
Agreement. The Agreement will describe the terms and procedures for the 
Advances, including standing instructions addressing the initiation, 
amount, repayment and formula or method for determining the interest 
rate payable with respect to each Advance. For example, the Agreement 
might specify a formula for determining the interest on Advances based 
on a published indexed interest rate established by an independent 
third party (e.g., the London Interbank Offered Rate or the U.S. 
Federal Reserve's Cost of Funds Index) and provide for daily accrual of 
interest until the Advance is repaid. Riggs will not have or exercise 
any discretion with respect to how the rate is determined under the 
formula or method. Interest on Advances will be an operating expense of 
a Unitized Fund and will be paid from the assets of the Unitized Fund.
    12. The Agreement governing the Advances will limit the total 
amount that Riggs may advance to a Plan to 25% of the total market 
value of the Unitized Fund on the business day that any Advance is 
made. Such limits will be imposed because Advances are intended to 
facilitate the administration of a Unitized Fund in the ordinary course 
of business. If the liquidity needed to settle redemption requests on a 
particular business day exceeds a limit set on Advances, Plan 
fiduciaries would wish to review whether the Plan should continue 
``daily trading'' in participant interests in the Unitized Fund. The 
fair market value of the assets of the Unitized Fund is determined by 
an objective method specified in the Agreement.
    13. Advances will not be secured or collateralized. Riggs will 
generally be directed under the Agreement to automatically sell or 
redeem assets of a Unitized Fund on any business day that the actual 
liquidity of a Unitized Fund falls below the target liquidity by more 
than the liquidity variance. Further, Riggs generally will be directed 
by the Agreement to automatically collect the amount of an Advance and 
accrued interest from proceeds received upon the sale or redemption of 
those assets.
    14. The Agreements are not expected to include provisions governing 
actions to be taken if an Advance is not repaid. Riggs does not 
anticipate that a situation would arise in which Riggs would not be 
repaid from the proceeds of the sale or redemption of assets for the 
unitized account in accordance with the Agreement.
    15. Riggs will provide notice to the Independent Plan Fiduciary 
about each Advance at the time the Advance is made and after the 
Advance is repaid. Specifically, on the date that an Advance is 
initiated, Riggs will notify the Independent Plan Fiduciary of the 
principal amount of the Advance and the interest rate to be applied. 
Within ten days after an Advance is fully repaid, Riggs will provide 
the Independent Plan Fiduciary with a confirmation including the date 
of repayment, the amount of the Advance, the actual interest rate 
applied, and the total amount of interest paid by the Plan.
    16. The Agreement may be terminated by the Independent Plan 
Fiduciary at any time, subject to the Plan's repayment of any 
outstanding Advances made as required by the terms of the Agreement. 
The Advances will be made on terms at least as favorable to the Plan as 
those the Plan could obtain in an arm's-length transaction with an 
unrelated party.
    17. Neither Riggs nor an affiliate may have or exercise any 
discretionary authority or control with respect to the initiation of an 
Advance, the amount of an Advance, the interest rate payable on an 
Advance, or the repayment of an Advance. These circumstances are 
determined by the Independent Plan Fiduciary and are set forth in the 
Agreement. In addition, Riggs or an affiliate may not be (i) a trustee 
of the Plan (other than a nondiscretionary trustee who does not render 
investment advice with respect to the assets of the Unitized Fund), 
(ii) a Plan administrator, (iii) a fiduciary who is expressly 
authorized in writing to manage, acquire, or dispose of, on a 
discretionary basis, any assets of the Unitized Fund, or (iv) an 
employer any of whose employees are covered by the Plan.
    18. In summary, the applicant represents that the subject 
transactions satisfy the criteria contained in section 408(a) of the 
Act for the following reasons:
    (a) The requested exemption will be administratively feasible 
because the Advances will be monitored by the Independent Plan 
Fiduciary of each Plan. Thus, the level of oversight required by the 
Department will be minimal.
    (b) The requested exemption will be in the interests of Plan 
participants and beneficiaries because it will allow Plans to avoid 
rejections of the Unitized Fund redemption transactions because of 
insufficient liquidity. This will protect Plan participants and 
beneficiaries from the expense, inconvenience, possible recordkeeping 
errors, and potential Plan exposure for trading losses on corresponding 
purchase transactions for other Plan investments, which could result if 
Unitized Fund liquidity is insufficient to settle the redemption on a 
requested business day.
    (c) The requested exemption will protect participants' and 
beneficiaries' rights because (i) the terms and conditions of Advances 
will be clearly disclosed in a written Agreement between Riggs and an 
Independent Plan Fiduciary, which will specifically describe the 
procedures under which Advances will be made and repaid, the amount of 
each Advance, and the formula or method for determining interest; (ii) 
the terms on which Advances would be made must be at least as favorable 
to the Plan as a similar third-party arm's-length transaction; (iii) 
the Agreement permitting the Advances can be terminated by the 
Independent Plan Fiduciary at any time, without penalty; (iv) Riggs 
will provide to the Independent Plan Fiduciary on the business day that 
an Advance is made, a notice describing the amount of the Advance and 
the interest rate payable, and within 10 business days of the repayment 
of each Advance, notice confirming the amount of the Advance, the date 
of repayment and the actual amount of interest paid by the Plan. These 
notices provide an Independent Plan Fiduciary the ability to monitor 
each Advance and ensure the Advances are appropriate and in the best 
interest of the Plan's participants and beneficiaries; and (v) Riggs 
will not have or exercise any discretionary authority or control over 
the assets of the Plan invested in a Unitized Fund and will act solely 
at the direction of an Independent Plan Fiduciary. In addition, Riggs 
may not have a relationship to a Plan receiving Advances that might 
provide Riggs any discretionary authority or control with respect to 
the investment of the assets of the Unitized Fund or Advances to be 
made to the Plan.

FOR FURTHER INFORMATION CONTACT: Karen Lloyd of the Department, 
telephone (202) 219-8194. (This is not a toll-free number).

[[Page 39363]]

The Savings Plan for Employees of Florida Progress Corporation (the 
Plan) Located in St. Petersburg, FL

[Application No. D-10953]

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 (or ERISA) 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 section 407(a) of the Act and the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1)(A) through (E) of the Code, shall not apply, 
effective November 30, 2000, to (1) the receipt, by the Plan, of 
contingent value obligations (the CVOs), as a result of the Plan's 
ownership of certain common stock (the Florida Progress Stock) in 
Florida Progress Corporation (Florida Progress), the Plan sponsor; (2) 
the continued holding of the CVOs by the Plan; and the (3) potential 
resale of the CVOs by the Plan to Progress Energy, Inc. (Progress 
Energy), a party in interest with respect to the Plan.
    This proposed exemption is subject to the following conditions:
    (a) The Plan received one CVO for each share of Florida Progress 
Stock on the effective date of the share exchange between Florida 
Progress and CP&L Energy, Inc. (CP&L Energy), the predecessor entity to 
Progress Energy.
    (b) All Florida Progress shareholders, including Plan participants, 
received the CVOs in the same manner, so that the Plan participants and 
beneficiaries were not in a less advantageous position than other 
Florida Progress shareholders.
    (c) The Plan's receipt of the CVOs, including other share exchange 
consideration consisting of cash and/or shares of CP&L Energy stock 
(the CP&L Energy Stock), resulted from shareholder approval and did not 
relate to any unilateral exercise of discretion by a Plan fiduciary.
    (d) Salomon Smith Barney, Inc. (Salomon Smith Barney) advised 
Florida Progress that the consideration to be received by Florida 
Progress shareholders in exchange for their shares of Florida Progress 
Stock was ``fair,'' from a financial point of view.
    (e) The Plan did not pay any fees or commissions in connection with 
the acquisition of the CVOs, nor will it pay any fees or commissions in 
connection with the holding or potential sale of the CVOs to Progress 
Energy.
    (f) An independent fiduciary, United States Trust Company, N.A. 
(U.S. Trust)--
    (1) Has overseen, and continues to oversee, the Plan's holding or 
disposition of any CVOs for which the Plan does not receive any 
investment direction and determines whether it is appropriate for the 
Plan to sell the CVOs; and
    (2) Retains the services of an independent appraiser to calculate 
the price at which the CVOs are sold to Progress Energy in order to 
ensure that adequate consideration is received.
    (g) Plan participants have the same rights and flexibility as 
unrelated parties and they may sell their CVOs at any time.
    Effective Date: If granted, this proposed exemption will be 
effective as of November 30, 2000.

Summary of Facts and Representations

    1. Florida Progress is a Florida corporation with its principal 
offices located in St. Petersburg, Florida. Florida Progress is a 
diversified electric utility holding company. Florida Power Corporation 
(Florida Power), a subsidiary of Florida Progress, is a regulated 
public utility that is engaged in the generation, purchase, 
transmission, distribution and sale of electricity. Florida Power 
provides electric services to approximately of 1.3 million customers in 
central and north Florida. In 1999, Florida Power accounted for 68 
percent of the consolidated revenues of Florida Progress, 77 percent of 
that company's assets and 84 percent of its net income. As of March 31, 
2000, Florida Progress had total consolidated assets of approximately 
$6.5 billion and total consolidated common stock equity of 
approximately $2.0 billion. In addition, as of September 30, 2000, 
Florida Progress had 98,616,919 shares of Florida Progress Stock issued 
and outstanding.
    Besides Florida Power, Florida Progress has diversified, non-
utility operations which are owned, directly or indirectly, through 
Progress Capital Holdings, Inc., a Florida corporation and another 
wholly owned subsidiary of Florida Progress. The diversified, non-
utility operations segment includes Electric Fuels Corporation, an 
energy and transportation company, which owns and operates four 
synthetic fuel plants (the EARTHCO Plants).
    2. The Plan, which is sponsored by Florida Progress, is a defined 
contribution plan. As of September 30, 2000, the Plan had 6,471 
participants and assets having an aggregate fair market value of the 
$624.6 million. Of the Plan's total assets, $152.8 million (24.5 
percent) consisted of 2,887,714 shares of Florida Progress Stock which 
represented 2.9 percent of the shares of such stock that were issued 
and outstanding.
    The trustee (the Trustee) of the Plan is The Vanguard Group, Inc., 
a mutual fund company, which provides trustee services to the Plan 
through its affiliate, the Vanguard Fiduciary Trust Company. A Plan 
investment committee, comprised of principals of Florida Progress, has 
the authority to manage and control the assets, operation and 
administration of the Plan.
    The Plan provides participants with a variety of investment 
options, one of which is a fund invested solely in Florida Progress 
Stock (the Florida Progress Stock Fund). Each participant may direct 
the Trustee to invest or reinvest his or her account in each available 
fund on a daily basis.
    3. Progress Energy, which was formerly known as ``CP&L Energy, 
Inc.'' (or CP&L Energy as otherwise defined herein), is a North 
Carolina corporation and the holding company for Carolina Power & Light 
Company (CP&L). Progress Energy is engaged in the utility business and 
it operates primarily through various direct and indirect subsidiaries. 
At the time of the share exchange transaction described in this 
proposed exemption, Progress Energy, then known as CP&L Energy, 
operated through three subsidiaries, CP&L, North Carolina Natural Gas 
Corporation (NCNGA), and Interpath Communications, Inc. (ICI). Also, 
prior to the closing date of the transaction, none of these entities 
were related to Florida Progress or its affiliates.
    CP&L, which currently has a 90 percent interest in two of the 
EARTHCO Plants, is a North Carolina public service corporation that 
provides electricity and energy-related services to more than 1.2 
million customers in North Carolina and South Carolina. NCNGC, a wholly 
owned subsidiary of CP&L, provides natural gas, propane and related 
service to approximately 178,000 customers in south-central and eastern 
North Carolina. ICI, also a wholly owned subsidiary of CP&L, is 
primarily engaged in providing internet-based services.
    As of March 31, 2000, CP&L Energy had total consolidated assets of 
approximately $9.4 billion and total consolidated shareholders' equity 
of approximately $3.4 billion.
    4. On March 3, 2000, Florida Progress entered into an Amended and 
Restated Agreement and Plan of Exchange (the

[[Page 39364]]

Exchange Agreement) with CP&L Energy and CP&L. The Exchange Agreement 
provided for the acquisition, by CP&L Energy, of all of the outstanding 
shares of Florida Progress Stock pursuant to a statutory share 
exchange. The share exchange was structured so that Florida Progress 
and its affiliates would all become subsidiaries of Progress Energy. 
The terms of the Exchange Agreement were negotiated on an arm's length 
basis by the parties and approved by the shareholders of both Florida 
Progress and CP&L Energy.
    5. In accordance with the terms of the Exchange Agreement, each 
Florida Progress shareholder could elect to receive (for each share of 
Florida Progress Stock he or she owned) (a) $54.00 per share in cash; 
or (b) a specified number of shares of CP&L Energy Stock equal to an 
exchange ratio (the Exchange Ratio) \13\ designed to provide Florida 
Progress shareholders with CP&L Energy Stock having a fair market value 
of $54.00, subject to certain adjustments; or (c) a combination of cash 
and CP&L Energy Stock.
---------------------------------------------------------------------------

    \13\ According to the Joint Proxy Statement/Prospectus issued by 
CP&L Energy and Florida Progress, the Exchange Ratio was determined 
by dividing $54.00 by the average of the closing sale price per 
share of CP&L Energy Stock as reported on the New York Stock 
Exchange Composite Tape on each 20 consecutive trading days ending 
with the fifth trading day before the closing of the share exchange. 
The Exchange Ratio was also subject to adjustment if the average 
closing price of CP&L Energy Stock exceeded $45.39 or fell below 
$37.13. However, the 20 day average closing price of CP&L Energy 
Stock was $40.08. This amount was well within the high and low 
figures. Thus, the Exchange Ratio was determined by dividing $54 by 
$40.08, i.e., 1.3473. On November 30, 2000, the closing price for 
CP&L Energy Stock on the New York Stock Exchange was $43 per share.
---------------------------------------------------------------------------

    In addition to the cash and/or stock consideration, each Florida 
Progress shareholder would be entitled to receive one CVO for each 
share of Florida Progress Stock surrendered. The CVOs are general, 
unsecured, contingent payment obligations of CP&L Energy and its 
successor, Progress Energy, that are subordinate in right of payment to 
all senior indebtedness of these entities. The CVOs were issued in 
accordance with the terms of the Contingent Value Obligation Agreement 
(the CVO Agreement) which was entered into between CP&L Energy and The 
Chase Manhattan Bank, N.A. (Chase), as CVO trustee on November 30, 
2000. Each CVO represents the right of its holder to receive contingent 
payments based on the net after-tax cash flow to CP&L Energy and its 
affiliates (and later, to Progress Energy and its affiliates) that is 
generated by the EARTHCO Plants. As noted in the exemption application, 
both Florida Progress and CP&L Energy believed that the EARTHCO Plants 
were qualifying synthetic fuel plants which would entitle their owners 
to federal income tax credits based on the barrel of oil equivalent of 
the synthetic fuel produced and sold by the plants.
    6. Although it was not possible to calculate precisely the value of 
the CVOs at the time of the share exchange (a per unit value of $0.545 
was ultimately determined \14\) or to predict their potential 
marketability, in the aggregate, the holders of the CVOs would be 
entitled to receive payments equal to 50 percent of any net after-tax 
cash flow generated by the EARTHCO Plants in excess of $80 million per 
year for each of the years 2001 through 2007. However, the total amount 
of the net after-tax cash flow for any year would depend upon the final 
determination of the income tax savings realized and income taxes 
incurred after completion of income tax audits of CP&L Energy and its 
affiliates (and later, Progress Energy and its affiliates), as owners 
of the EARTHCO Plants.
---------------------------------------------------------------------------

    \14\ The CVO value of $0.545 on November 30, 2000 represented 
the average of the reported high and low trading prices on the OTC 
Bulletin Board on that date.
---------------------------------------------------------------------------

    As of March 15 of each year from 2002 through 2008, Progress Energy 
will estimate the total net after-tax cash flow attributable to the 
EARTHCO Plants for the prior year and will deposit with Chase an amount 
equal to 50 percent of the excess of that amount over $80 million. 
After Progress Energy files its tax returns for the prior year, both it 
and Chase will adjust the amount on deposit with Chase. Holders of CVOs 
will be entitled to receive accumulated earnings on the amounts held on 
deposit with Chase and quarterly reports describing the results of 
operations for the EARTHCO Plants for the prior quarter and updating 
material developments.
    In the event Progress Energy fails to pay amounts when due on the 
CVOs, all unpaid amounts will bear interest at a rate equal to the 
three month London Interbank Offered Rate (as published in The Wall 
Street Journal) plus 300 basis points. Except for payments made as a 
result of the sale of all or a portion of the EARTHCO Plants, payments 
on the CVOs will not be made until Progress Energy's tax audit matters 
are resolved. Progress Energy anticipates payments on the CVOs will not 
begin before 2007.
    The CVOs are generally freely tradable by their holders. Although 
there is no commitment to have the CVOs listed on a national stock 
exchange or to cause them to be included in any interdealer quotation 
system, until issued on the effective date of the share exchange (i.e., 
November 30, 2000, as discussed in Representation 8), the CVOs were 
traded on a ``when, as and if issued'' basis on the OTC Bulletin 
Board.\15\ The CVOs are not subject to redemption, in whole or in part. 
Progress Energy may, however, acquire the CVOs on the open market or in 
privately-negotiated purchases.
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    \15\ According to Florida Progress, the phrase ``when, as and if 
issued'' and its abbreviated form ``when issued,'' refers to a 
conditional transaction wherein a security is authorized for 
issuance but is not actually issued. Because the CVOs were issued in 
connection with the closing, Florida Progress represents that the 
term no longer applies.
    Florida Progress states that the OTC Bulletin Board is a 
regulated quotation service that displays real-time quotes, last-
sale prices and volume information in over-the-counter equity 
securities. An OTC equity security generally includes any equity 
that is not listed or traded on the NASDAQ or a national securities 
exchange. The OTC Bulletin Board, which was approved by the 
Securities and Exchange Commission on a permanent basis in April 
1997, provides access to more than 6,500 securities, includes more 
than 400 participating market makers, electronically transmits real-
time quote, price and volume information on domestic securities, 
foreign securities and American Depository Receipts, and displays 
indications of interest.
---------------------------------------------------------------------------

    7. An independent investment banking firm, i.e., Salomon Smith 
Barney, advised Florida Progress that the consideration, consisting of 
cash and/or CP&L Energy Stock, and CVOs, which was to be received by 
Florida Progress shareholders in exchange for their shares of Florida 
Progress Stock was ``fair,'' from a financial point of view.\16\ In 
making its determinations, Salomon Smith Barney, among other things, 
(a) reviewed the Exchange Agreement and the CVO Agreement; (b) held 
discussions with senior officers, directors, representatives and 
advisers of Florida Progress, and CP&L concerning the respective 
businesses, operations and prospects of Florida Progress and CP&L (c) 
examined financial forecasts and other information and data for both 
companies; (d) reviewed the financial terms of the share exchange as 
set forth in the Exchange Agreement and the CVO Agreement; (e) reviewed 
current and historical market prices and trading volumes of both 
Florida Progress Stock and CP&L Energy Stock; (f) reviewed the 
historical and projected earnings and other operating data of both 
entities; (g) reviewed the capitalization and financial condition of 
Florida Progress and CP&L and (g) conducted other analyses and 
examinations and considered other financial, economic

[[Page 39365]]

and market criteria as it deemed appropriate in arriving at is opinion.
---------------------------------------------------------------------------

    \16\ Similarly, Merrill Lynch, Pierce, Fenner & Smith 
Incorporated advised CP&L Energy and CP&L that the consideration to 
be paid by CP&L Energy pursuant to the exchange was ``fair,'' from a 
financial point of view to these entities.
---------------------------------------------------------------------------

    In rendering its opinion, Salomon Smith Barney assumed and relied, 
without independent verification, upon the accuracy and completeness of 
all information provided. Salomon Smith Barney also assumed, with the 
consent of Florida Progress, that the exchange with CP&L Energy and 
CP&L would be effected in accordance with its terms and that in the 
course of obtaining regulatory approvals from various federal and state 
governmental agencies for the share exchange, no limitations, 
restrictions or conditions would be imposed that would have an adverse 
material effect on the contracting parties or to the combined company. 
Further, Salomon Smith Barney assumed that the terms of the CVOs would 
not differ materially from the terms set forth in a draft CVO 
Agreement. Finally, Salomon Smith Barney did not make (and it was not 
provided with) an independent evaluation of the financial status of 
Florida Progress or CP&L or did it physically inspect the properties or 
assets owned by these entities.
    Salomon Smith Barney's opinion and analyses were one of the many 
factors considered by Florida Progress' Board of Directors in its 
evaluation of the merits of the share exchange. The Board of Directors 
ultimately voted that the stock exchange was fair and in the best 
interests of the shareholders, and recommended that the shareholders 
approve the exchange transaction.
    8. Thus, as a result of approval by the shareholders of the share 
exchange, on November 30, 2000, each holder of Florida Progress Stock 
received cash and/or CP&L Energy Stock consideration, plus one CVO for 
each share of Florida Progress Stock tendered. A total of 87,191,315 
shares of Florida Progress Stock was actually tendered by Florida 
Progress shareholders. Those shareholders who elected ``all cash'' 
consideration received cash while those shareholders who elected stock 
consideration, received an approximately 94.7 percent distribution of 
CP&L Energy Stock and the remainder in cash. Those shareholders who did 
not submit an election received ``all cash'' consideration.\17\ 
However, as noted above, all shareholders received CVOs in addition to 
cash and/or CP&L Energy Stock.
---------------------------------------------------------------------------

    \17\ For those shareholders not tendering their Florida Progress 
Stock at the time of the share exchange, the amount of cash and CVOs 
attributable to such shareholders was placed in an escrow account. 
This amount is to be paid out upon the actual tender of shares of 
Florida Progress Stock.
---------------------------------------------------------------------------

    Plan participants were given the same consideration options as the 
other shareholders of Florida Progress. At the time of the share 
exchange, the Plan received $84,970,701.43 in cash, 1,247,340 shares of 
CP&L Energy Stock (valued at approximately $67.3 million, and 2,499,339 
CVOs (valued at approximately $1.3 million). Of the total consideration 
received, it is estimated that approximately 40 percent of the Plan 
participants elected to receive CP&L Energy Stock and approximately 60 
percent of the participants elected (either by an actual election or by 
a failure to return the election form in a timely manner) to receive 
cash. It is further represented that the Plan's receipt of the share 
exchange consideration resulted from shareholder approval of the 
Exchange Agreement and it did not result from a unilateral exercise of 
discretion by any Plan fiduciary.
    9. However, prior to the share exchange, each individual 
participant who had invested in Florida Progress Stock through the Plan 
received a notice, dated September 28, 2000. The special notice 
explained that on the effective date of the share exchange, any Florida 
Progress Stock held on behalf of the participant in the Plan would be 
exchanged, in accordance with the election of the participant \18\ for 
the right to receive one CVO and either (a) cash, (b) shares of CP&L 
Energy Stock, or (c) a combination of cash and CP&L Energy Stock. The 
notice to participants further explained that for each share of Florida 
Progress Stock held on the effective date of the exchange, the 
participant would receive one CVO.
---------------------------------------------------------------------------

    \18\ In accordance with the terms of the Exchange Agreement, all 
Florida Progress shareholder elections regarding whether the 
shareholder wished to receive cash, CP&L Energy Stock or a 
combination thereof in exchange for Florida Progress Stock was 
subject to allocation and proration to achieve an overall mix of 65 
percent cash and 35 percent CP&L Energy Stock. Such proration would 
not have any impact on the receipt of CVOs by Florida Progress 
shareholders on the date of the exchange.
---------------------------------------------------------------------------

    After receipt of the September 28, 2000 notice and prior to the 
effective date of the exchange, Plan participants had the opportunity, 
to transfer funds held on their behalf in the Florida Progress Stock 
Fund to other investment funds under the Plan if the participant did 
not wish to receive the CVOs and the CP&L Energy Stock. Because no 
other investment funds hold shares of Florida Progress Stock, no CVOs 
could be received by such funds.
    10. Accordingly, an administrative exemption is requested on behalf 
of the Plan \19\ and the Investment Committee for the Plan (together, 
the Applicants) with respect to (a) the receipt by the Plan of the CVOs 
as a result of its ownership of Florida Progress Stock; (b) the 
continued holding of the CVOs by the Plan; and
---------------------------------------------------------------------------

    \19\ For purposes of this exemption, the term ``Plan'' is meant 
to include The Savings Plan for Employees of Florida Progress 
Corporation and any successors to the current Plan that may be 
established by Progress Energy or an entity within Progress Energy's 
controlled group, into which the Plan is merged or which receives a 
transfer of accounts (including CVOs) from the Plan. Progress Energy 
and Florida Progress are contemplating the transfer of some accounts 
from the plan to another qualified plan maintained by Progress 
Energy. To simplify administrative and employee communication 
issues, both Progress Energy and Florida Progress would like the 
ability to transfer CVOs to the new plan.
---------------------------------------------------------------------------

    (c) the potential resale of the CVOs to Progress Energy. The 
Applicants are not requesting exemptive relief for the receipt of the 
CP&L Energy Stock by the Plan because, at the time of the share 
exchange, CP&L Energy and its affiliates were not parties in interest 
with respect to the Plan.\20\ Therefore, exemptive relief is requested 
effective November 30, 2000.
---------------------------------------------------------------------------

    \20\ The Applicants note, however, that after the share 
exchange, CP&L Energy and its successor, Progress Energy, would be 
considered parties in interest with respect to the Plan and that the 
CP&L Energy Stock received by the Plan, which is currently referred 
to as ``Progress Energy, Inc. common stock,'' would constitute a 
``qualifying employer security'' within the meaning of section 
407(d)(5) of the Act, as stock.
---------------------------------------------------------------------------

    The Applicants also represent that it is unclear whether the 
statutory exemption contained in section 408(e) of the Act, which 
permits plans to acquire and sell qualifying employer securities,\21\ 
would apply to the Plan's receipt of the CVOs.\22\ Although a CVO would 
likely qualify as a ``security,'' as such term is defined in section 
2(1) of the Securities Exchange Act of 1933 (the 1933 Act) and section 
3(20) of the Act, the Applicants represent that it is not clear whether 
such securities would fall

[[Page 39366]]

within the definition of ``qualifying employer securities,'' as defined 
in section 407(d)(5) of the Act.\23\
---------------------------------------------------------------------------

    \21\ In relevant part, section 408(e) of the Act provides that 
sections 406 and 407 of the Act shall not apply to the acquisition 
or sale by a plan of qualifying employer securities (as defined in 
section 407(d)(5) if such acquisition is for adequate consideration 
(or in the case of a marketable obligation, at a price not less 
favorable to the plan than the price determined under section 
407(e)(1)), (2) if no commission is charged with respect thereto, 
and (3) if--(A) the plan is an eligible individual account plan (as 
defined in section 407(d)(3)), or (B) in the case of an acquisition 
by a plan which is not an eligible individual account plan, the 
acquisition is not prohibited under section 407(a) of the Act.
    \22\ Section 3(20) of the Act states that the term ``security'' 
has the same meaning as such term has under section 2(1) of the (the 
1933 Act) [15 U.S.C. 77b(1)]. The term ``security'' is defined in 
the Securities Act as ``any note, stock, treasury stock, bond, 
debenture, evidence of indebtedness, * * * or, in general, any 
interest or instrument commonly known as a `security'.''
    \23\ As noted in part previously, a ``qualifying employer 
security'' means an employer security which is either ``stock,'' a 
``marketable obligation,'' or an ``interest in a publicly-traded 
partnership,'' under section 407(d)(5) of the Act. Section 407(e) of 
the Act defines the term ``marketable obligation'' to mean a bond, 
debenture, note, certificate, or other evidence of indebtedness, if 
such obligation is acquired: (A) On the market, either (i) at the 
prevailing price of a national securities exchange, or (ii) if the 
obligation is not traded on a national securities exchange, at a 
price not less favorable to the plan than the offering price for the 
obligation as established by current bid and asked prices quoted by 
persons independent of the issuer; (B) from an underwriter, at a 
price (i) not in excess of the public offering price for the 
obligation as set forth in a prospectus or offering circular filed 
with the Securities and Exchange Commission, and (ii) at which a 
substantial portion of the same issue is acquired by persons 
independent of the issuer; or (C) directly from the issuer, at a 
price not less favorable to the plan than the price paid currently 
for a substantial portion of the same issue by persons independent 
of the issuer.
---------------------------------------------------------------------------

    According to the Applicants, the CVOs do not constitute ``shares of 
stock, or a bond, debenture, note, certificate or other evidence of 
indebtedness'' but represent a right to receive certain contingent 
payments based upon the net after-tax cash flow to CP&L Energy (and 
later to Progress Energy) generated by the EARTHCO Plants. Therefore, 
the Applicants do not believe the CVOs can be characterized as a 
``qualifying employer security.'' Thus, the Applicants believe that the 
acquisition and holding of the CVOs by the Plan would violate sections 
406 and 407 of the Act.
    11. Following the exchange and receipt of the CVOs by the Plan, 
participants have been given the opportunity to direct the Trustee to 
sell the CVOs held on their behalf, at any time. In this regard, an 
independent fiduciary, U.S. Trust, has been appointed by the Trustees 
to oversee the Plan's holding or sale of any CVOs for which the Plan 
does not receive any investment direction from the participants. The 
CVOs are being held by the Trustee in a separate unitized fund (the CVO 
Fund) for which U.S. Trust will determine liquidity needs based on 
information provided by Florida Progress and to effect such liquidity 
when it reasonably deems it prudent.
    The CVO Fund will be valued and traded on a periodic basis by U.S. 
Trust. If a CVO is to be sold at a time when there is no liquid market, 
as determined by U.S. Trust, Progress Energy has agreed to purchase 
CVOs to be sold by the Plan. Under such circumstances, U.S. Trust will 
retain an independent appraiser to determine the fair market value of 
the CVOs in order to ensure that the Plan receives adequate 
consideration for any CVOs sold. It is possible that, in the future, 
Progress Energy may purchase directly CVOs being sold by the Plan, 
whether at the direction of a Plan participant or U.S. Trust. If a 
participant receives a cash distribution in the future related to the 
holding of the CVO, the cash received will be invested in a separate 
money market fund. The Plan will not be required to pay any fees or 
commissions in connection with any sales of the CVOs to Progress 
Energy.
    12. Because the Plan received the CVOs automatically as a result of 
the share exchange between Florida Progress and CP&L Energy, it is 
represented that the Plan could have avoided acquiring or holding the 
CVOs if it sold all of its shares of Florida Progress Stock prior to 
the share exchange, in the absence of participant direction. 
Alternatively, the Plan could have sold its right to receive the CVOs 
prior to the effective date of the share exchange. However, Salomon 
Smith Barney advised Florida Progress, in an opinion letter dated July 
5, 2000 to the company's Board of Directors, that due to the low 
trading volume in the ``when, as and if issued'' market, a mass sale of 
the CVOs by the Plan would likely depress the value of the CVOs, 
thereby adversely affecting the interests of the Plan participants.
    13. As stated above, U.S. Trust is serving on behalf of the Plan as 
the independent fiduciary with respect to the holding or sale of any 
CVOs for which the Plan does not receive participant direction. U.S. 
Trust is the principal subsidiary of U.S. Trust Corporation, which was 
founded in 1853 and is subject to regulation as a trust company by the 
State of New York. U.S. Trust is a member of the Federal Reserve System 
and the Federal Deposit Insurance Corporation. As of December 31, 1999, 
U.S. Trust had approximately $5 billion in assets and over $75 billion 
in assets under management. Of those assets under management, a 
significant portion consisted of the assets of ERISA-covered Plans. 
U.S. Trust has served as an independent fiduciary for a number of Plans 
that have acquired or held employer securities and it has managed over 
$20 billion in employer securities held by such Plans. In managing such 
investments, U.S. Trust has exercised discretionary authority over many 
transactions involving the acquisition, retention and disposition of 
employer securities. More specifically, U.S. Trust has served as an 
independent fiduciary, performing similar duties to those contemplated 
herein on at least ten previous occasions.
    U.S. Trust represents that it is independent of Florida Progress 
and its affiliates. In this regard, U.S. Trust asserts that it has no 
business, ownership or control relationship, nor is it otherwise 
affiliated with Florida Progress. Further, U.S. Trust represents that 
it derives less than one percent of its annual income from Florida 
Progress.
    U.S. Trust states that it has agreed to act, and is currently 
acting as independent fiduciary for the Plan with respect to the CVOs. 
U.S. Trust represents that it is monitoring the value of the CVOs and 
will dispose of them (unless they are disposed of sooner pursuant to 
directions of the participants) in the event a determination is made 
that it is in the interest of Plan participants to do so in accordance 
with the prudence standards of section 404 of the Act.
    In the event U.S. Trust determines to sell the remaining CVOs in 
the Plan on behalf of the participants, or if at any time it determines 
there is a lack of liquidity in the market that would adversely affect 
the interests of Plan participants, U.S. Trust has arranged for 
Progress Energy to purchase the CVOs from the Plan. In connection with 
this type of sales transaction, U.S. Trust explains that it will engage 
the services of an independent appraiser to determine the fair market 
value or the range of fair market values for the CVOs. As the 
independent fiduciary, U.S. Trust states that it will make the final 
decision on an sale of the CVOs to Progress Energy, based upon the 
independent appraisal.
    14. In summary, it is represented that the transactions have 
satisfied or will satisfy the statutory criteria for an exemption under 
section 408(a) of the Act because:
    (a) The Exchange Agreement provided for the acquisition by CP&L 
Energy of the outstanding shares of Florida Progress in accordance with 
the share exchange. Consequently, the CVOs were issued pursuant to the 
terms of the Exchange Agreement and the CVO Agreement.
    (b) The Exchange Agreement was negotiated on an arm's length basis 
by and among Florida Progress, CP&L Energy and CP&L, and approved by 
the shareholders of these entities.
    (c) Salomon Smith Barney, an independent investment adviser, opined 
to Florida Progress that the consideration to be received by Florida 
Progress shareholders in exchange for their shares of Florida Progress 
Stock was ``fair,'' from a financial point of view.
    (d) Under the terms of the Plan, participants had the authority to 
transfer

[[Page 39367]]

their investments out of the Florida Progress Stock Fund prior to their 
receipt of the CVOs.
    (e) For purposes of the share exchange, and with respect to any 
future dispositions of the CVOs, the Plan was treated and will be 
treated in the same manner as any other shareholder of Florida Progress 
Stock.
    (f) Progress Energy will purchase the CVOs being sold by the Plan 
either at the direction of a Plan participant or by U.S. Trust, the 
independent fiduciary, if no participant direction is given.
    (g) If U.S. Trust determines that a sale of the CVOs is 
appropriate, it will retain an independent appraiser to calculate the 
price at which the CVOs should be sold to Progress Energy.
    (h) Plan participants will continue to have authority to sell any 
CVOs that are held in their participant accounts in the CVO Fund.

Notice to Interested Persons

    Florida Progress will provide notice of the proposed exemption to 
all participants and beneficiaries in the Plan by either personal 
delivery or first class mail within 20 days of the date of publication 
of the notice of proposed exemption in the Federal Register. Florida 
Progress will provide notice to active participants in the Plan, who 
hold CVOs in their Plan accounts, by posting copies of the proposed 
exemption on bulletin boards normally used for employee notices of this 
nature. For terminated or retired employees, holding CVOs in their Plan 
accounts, Florida Progress will give notice to such interested persons 
by first class mail. The notice will include a copy of the proposed 
exemption, as published in the Federal Register, and a supplemental 
statement, as required pursuant to 29 CFR 2570.43(b)(2), which will 
inform interested persons of their right to comment on and/or to 
request a hearing with respect to the proposed exemption. Comments 
regarding the proposed exemption are due within 50 days of the date of 
publication of the notice of pendency in the Federal Register.
    For Further Information Contact: Ms. Jan D. Broady of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

Columbia Savings Plan (the Plan) Located in Wilmington, DE

[Application No. D-10977]

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 (or ERISA) 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 section 407(a) of the Act and the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1)(A) through (E) of the Code, shall not apply, 
effective November 1, 2000, to (1) the receipt, by the Plan, of Stock 
Appreciation Income Linked Securities (SAILS), in exchange for common 
stock in Columbia Energy Group (Columbia Energy), the Plan sponsor; (2) 
the extension of credit by the Plan to NiSource, Inc. (NiSource), a 
party in interest, in connection with the receipt of the zero coupon 
bond (the Debenture) portion of the SAILS; (3) the continued holding of 
the SAILS by the Plan; and (4) the potential sale of the SAILS by the 
Plan to Nisource.
    This proposed exemption is subject to the following conditions:
    (a) The Plan automatically received the SAILS in exchange for its 
shares of Columbia Energy common stock, in accordance with the terms of 
an agreement and plan of merger (the Merger Agreement), and it paid no 
fees or commissions in connection with its receipt of the SAILS and 
other merger consideration.
    (b) All Columbia Energy shareholders, including Plan participants, 
received SAILS in the same manner, so that the Plan participants and 
beneficiaries were not in a less advantageous position than other 
Columbia Energy shareholders.
    (c) The Plan's receipt of the SAILS resulted from shareholder 
approval and did not relate to any unilateral exercise of discretion by 
a Plan fiduciary.
    (d) Morgan Stanley (Morgan Stanley) and Salomon Smith Barney, Inc. 
(Salomon Smith Barney) advised Columbia Energy that the consideration 
consisting of NiSource common stock, SAILS and cash for Columbia Energy 
common stock was ``fair,'' from a financial point of view.
    (e) Duff & Phelps, Inc. (Duff & Phelps) provided Fidelity 
Investments, Inc., the Plan trustee (the Trustee), and the Plan's 
Savings Plan Committee with independent financial advice concerning the 
valuation of the SAILS.
    (f) The Plan did not pay any fees or commissions in connection with 
the acquisition and holding of the SAILS, nor will it pay any fees or 
commissions if any SAILS are sold to NISource.
    (g) An independent fiduciary, United States Trust Company, N.A. 
(U.S. Trust)--
    (1) Has overseen, and continues to oversee, the Plan's holding and 
disposition of the SAILS;
    (2) Determines whether it is appropriate for the Plan to dispose of 
the SAILS (either on the open market or through a direct sale to 
NiSource) and instructs the Trustee regarding such disposition;
    (3) Determines, in the event of a sale of any SAILS to NiSource, 
the fair market value of such SAILS either (i) based on their closing 
price on the New York Stock Exchange (the NYSE) on the date of the 
transaction, or (ii) retains an independent appraiser if the SAILS are 
not carried on the NYSE or, in the event it concludes that the closing 
price on the NYSE is not representative of the fair market value of the 
SAILS as of the transaction date; and
    (4) Anticipates disposing of all SAILS held by the Plan by the end 
of calendar year 2001.
    (h) The Plan does not pay any fees or commissions in the event any 
SAILS are sold to NiSource.
    Effective Date: If granted, this proposed exemption will be 
effective as of November 1, 2000.

Summary of Facts and Representations

    1. Columbia Energy is a public utility holding company whose 
operating subsidiaries are engaged in natural gas transmission, 
distribution, exploration and production of natural gas and oil, other 
energy services, and the telecommunications business. Columbia Energy 
owns approximately 16,250 miles of interstate pipelines extending from 
offshore in the Gulf of Mexico to Lake Erie, New York and the Eastern 
seaboard. Columbia Energy's distribution subsidiaries provide natural 
gas to commercial and residential customers in Ohio, Pennsylvania, 
Virginia, Kentucky and Maryland.
    Columbia Energy also explores for, develops, gathers and produces 
natural gas and oil in Appalachia and Canada. Further, Columbia Energy 
sells propane products at wholesale and retail prices to customers in 
31 states and the District of Columbia. The company owns and operates 
petroleum assets in five states and owns an unregulated electric 
generation plant whose primary focus is the development, ownership and 
operation of clean, natural gas-fueled power projects.
    Columbia Energy's principal executive offices are currently located 
in Wilmington, Delaware. As of October 31, 2000, Columbia Energy had 
79,512,137 shares of common stock that were issued and outstanding. 
Such stock was publicly-held and listed on the NYSE.

[[Page 39368]]

    2. NiSource is an energy and public utility holding company 
maintaining its principal executive offices in Merrillville, Indiana. 
NiSource's operating subsidiaries engage in most phases of the natural 
gas business, the electric utility business and other energy-related 
and utility-related services, primarily in northern Indiana and New 
England. NiSource also owns businesses that install, repair and 
maintain underground pipelines and invests in real estate and venture 
capital projects. Further, NiSource develops unregulated power projects 
and markets products and services, such as propane, energy efficiency 
design and energy advisory services, in various states.
    3. The Plan is a defined contribution plan with 9,051 participants 
as of October 31, 2000. Prior to November 1, 2000 (the Transaction 
Date), the Plan held shares of common stock of Columbia Energy. As of 
October 31, 2000, the aggregate fair market value of the total assets 
of the Plan was $686,077,606, of which $262,236,210 was invested in a 
unitized company stock fund holding 3,626,555 shares of Columbia Energy 
common stock, or approximately 5 percent of the then outstanding shares 
of Columbia Energy.
    Fidelity Investments serves as the independent Trustee of the Plan. 
In addition, a five member Savings Plan Committee, presently consisting 
of officers and employees of NiSource, serves as the Plan administrator 
and has investment discretion over the Plan's assets.
    4. On February 27, 2000, Columbia Energy entered into an agreement 
and plan of merger (which was subsequently amended and restated as of 
March 31, 2000 and is referred to herein as the ``Merger Agreement'') 
with NiSource and certain of its subsidiaries. The Merger Agreement 
provided for the acquisition by NiSource of Columbia Energy.\24\ Under 
the terms of the Merger Agreement, Columbia Energy shareholders had the 
right to elect to receive for their Columbia Energy shares either--
---------------------------------------------------------------------------

    \24\ Specifically, the merger involved the creation of a new 
holding company (New NiSource) and also included two separate, but 
concurrent mergers. One wholly owned subsidiary of New NiSource 
merged into NiSource and another wholly owned subsidiary merged into 
Columbia Energy. NiSource and Columbia Energy were the surviving 
corporations in both mergers and became wholly owned by New 
NiSource. New NiSource then changed its name to ``NiSource, Inc.'' 
and it serves as the holding company for Columbia Energy and its 
subsidiaries as well as the subsidiaries of NiSource.
---------------------------------------------------------------------------

    (a) Cash and SAILS \25\ Consideration consisting of $70 per share 
for each share of Columbia Energy common stock held by the shareholder 
and SAILS, having a face value of $2.60 per unit; or
---------------------------------------------------------------------------

    \25\ SAILS and ``Stock Appreciation Income Linked Securities'' 
are service marks of Credit Suisse First Boston Corporation.
---------------------------------------------------------------------------

    (b) Stock Consideration consisting of a specified number of 
NiSource common shares equal to $74 divided by the average closing 
price of NiSource common shares for the 30 trading days ending two 
trading days before the completion of the merger, but never more than 
4.44848 shares. If Columbia Energy shareholders made stock elections 
for more than an aggregate of 30 percent of the outstanding Columbia 
Energy shares, only a portion of the Columbia Energy common stock 
covered by the stock elections could be converted into the stock 
consideration. Thus, to the extent Columbia Energy shareholder 
elections exceeded the 30 percent maximum, the elections would be 
subject to proration and the Columbia Energy shareholders would be 
entitled to receive cash and SAILS, in addition to shares of NiSource 
common stock.
    Regardless of the form of consideration elected by Columbia Energy 
shareholders, a penalty would apply to NiSource if the merger was not 
completed by February 27, 2001. Under such circumstances, the merger 
consideration would also include additional cash equal to interest at 7 
percent per annum on the specified amount of $72.29 \26\ for the period 
beginning on February 27, 2001 and ending on the day before the 
completion of the merger, minus all cash dividends paid on Columbia 
Energy common stock having a record date after February 27, 2001.
---------------------------------------------------------------------------

    \26\ It is represented that $72.29 was a negotiated amount based 
upon the advice of investment bankers. Because the merger was 
consummated on November 1, 2000, the penalty was never imposed.
---------------------------------------------------------------------------

    5. Each SAILS is a unit consisting of two components--(a) a zero 
coupon debt security (i.e., the Debenture), and (b) a forward equity 
(or share purchase) contract. The entire principal amount of the 
Debenture portion of the SAILS will mature and become due and payable, 
together with accrued and unpaid interest, on November 1, 2006, the 
sixth anniversary of the Transaction Date. The share purchase contract 
represents the SAILS holder's obligation to purchase, for $2.60 in 
cash, a number of newly-issued shares of NiSource common stock (for 
each SAILS unit held) on November 1, 2004, the fourth anniversary of 
the Transaction Date (unless the purchase contract expires prior to 
that date). The Debenture is pledged to secure that obligation. Such 
purchases will occur at the following settlement rates:


     If the Applicable Market Value \27\ is equal to or 
greater than $23.10, then each purchase contract will be settled for 
0.1126 shares of NiSource common stock.

    \27\ The ``Applicable Market Value'' refers to the average of 
the closing prices of NiSource common stock on each of the 30 
consecutive trading days ending on the third trading day preceding 
November 1, 2004, the purchase contract settlement date.
---------------------------------------------------------------------------

     If the Applicable Market Value is less than $23.10 but 
greater than $16.50, then each purchase contract will be settled for 
a number of NiSource common stock determined by dividing the stated 
amount of $2.60 by the Applicable Market Value (carried to four 
decimal places).
     If the Applicable Market Value is less than $16.50, 
then each purchase contract will be settled for 0.1576 shares of 
NiSource common stock.

    Until a holder of SAILS acquires shares of NiSource common stock 
upon settlement of the SAILS units, the holder will have no rights with 
respect to the NiSource shares. SAILS holders are also not permitted to 
settle the share purchase contract prior to November 1, 2004, except 
where there is a change in control of NiSource. As noted above, the 
number of shares to be received at settlement is dependent upon the 
Applicable Market Value and is subject to antidilution adjustments.
    Unless a SAILS holder chooses to make a cash payment of $2.60 to 
settle the purchase contract portion of the SAILS, the Debenture that 
is pledged as collateral will be remarketed, i.e., sold to the public 
on the third business day before November 1, 2004, and the proceeds 
will be used to pay the amount the holder otherwise would owe under the 
purchase contract. If the holder elects to pay cash to settle the 
purchase contract, the Debenture will not be remarketed and the holder 
will continue to own it after November 1, 2004, free of any pledge 
related to the SAILS.
    If the effort to remarket the SAILS is successful, the proceeds 
received from the sale will be delivered to NiSource as payment under 
the purchase contract. If the remarketing agent cannot remarket the 
Debentures, NiSource will exercise its rights as a secured party and 
take possession of the Debentures. Under either circumstance, the 
holder's obligation to purchase will be fully satisfied since the 
holder will not be required to expend additional money in order to 
receive shares of NiSource common stock.

[[Page 39369]]

    The SAILS were initially traded on the over-the-counter market. 
However, on November 2, 2000, they commenced being traded on the NYSE 
under the ticker symbol ``NSE,'' on a ``when-issued'' basis.
    6. The terms of the Merger Agreement were negotiated on an arm's 
length basis between Columbia Energy and NiSource. Two independent 
investment banking firms, Morgan Stanley and Salomon Smith Barney, 
rendered opinions to Columbia Energy to the effect that the 
consideration, consisting of NiSource shares, SAILS and cash, for the 
Columbia Energy shares was ``fair,'' from a financial point of 
view.\28\ In making separate determinations, Salomon Smith Barney and 
Morgan Stanley, among other things, (a) reviewed publicly-available 
financial statements and other information about Columbia Energy and 
NiSource; (b) met with Columbia Energy and NiSource executive staff and 
others to discuss matters relating to the past and current operations 
of Columbia Energy and NiSource, the financial conditions of these 
entities, and the prospects of these companies; (c) reviewed 
information concerning the trading activity for NiSource common stock; 
(d) reviewed the Merger Agreement and related documents; and (e) 
performed other analyses and considered such other factors as they 
deemed appropriate.
---------------------------------------------------------------------------

    \28\ Similarly, Credit Suisse First Boston Corporation advised 
NiSource that the merger consideration was fair to NiSource, from a 
financial point of view.
---------------------------------------------------------------------------

    In rendering their opinions, both Salomon Smith Barney and Morgan 
Stanley assumed and relied, without independent verification, upon the 
accuracy of the information provided. In this regard, the advisers did 
not make independent valuations or appraisals of the assets or 
liabilities of Columbia Energy, or for that matter, of NiSource.
    Both Morgan Stanley and Salomon Smith Barney noted that their 
opinions did not address the prices at which NiSource common stock or 
the SAILS would trade following the merger. Moreover, neither firm 
expressed an opinion or recommendation as to how shareholders of 
Columbia Energy should vote at the shareholder's meeting held in 
connection with the merger or the transactions contemplated thereby. 
Based on the foregoing, Salomon Smith Barney and Morgan Stanley 
concluded that the merger consideration was ``fair,'' from a financial 
point of view, to the holders of Columbia Energy common stock.
    In addition to the opinions offered to Columbia Energy by Morgan 
Stanley and Salomon Smith Barney, Duff & Phelps was retained jointly by 
the Trustee and the Savings Plan Committee to provide independent 
financial advice concerning the valuation of the SAILS. In part, Duff & 
Phelps opined that both ``* * * the cash election and the stock 
election [would] provide no less than adequate consideration as defined 
under section 3(18) of ERISA.''
    7. The Merger Agreement was approved by the shareholders of both 
companies in early June 2000. On October 30, 2000, the Columbia Energy 
shareholder election period expired and the right to make an election 
was passed through to Plan participants, who were entitled to provide 
instruction to the Trustee concerning which form of merger 
consideration each participant wished to receive. On November 1, 2000, 
the Transaction Date, the contemplated merger was consummated following 
regulatory approval.
    Because of the issue concerning whether each SAILS unit constituted 
a qualifying employer security which the Plan could hold, the Plan's 
independent Trustee determined that, in accordance with applicable law, 
it was required to override all Plan participant elections to receive 
cash and SAILS and to elect, in the alternative, to receive NiSource 
common stock in exchange for all Columbia Energy common stock held by 
the Plan.\29\ The Trustee reportedly made this decision in an effort to 
avoid receiving SAILS on behalf of the Plan.
---------------------------------------------------------------------------

    \29\ The Department expresses no opinion in this proposed 
exemption on whether the Trustee's decision to receive NiSource 
common stock on behalf of the Plan was consistent with the 
provisions of Part 4 of Title I of the Act.
---------------------------------------------------------------------------

    8. Columbia Energy shareholders holding approximately 61.3 million 
shares of Columbia Energy common stock, which represented approximately 
77.3 percent of the outstanding Columbia Energy shares, elected to 
receive NiSource stock. Because this percentage (i.e., 77.3 percent) 
exceeded the 30 percent limitation contained in the Merger Agreement, 
the stock elections were prorated and only 38.944476 percent of the 
Columbia Energy common stock for which valid stock elections were made 
could ultimately be exchanged for NiSource common stock, at an exchange 
ratio of 3.04414 NiSource shares for each Columbia Energy share 
exchanged. The balance of the Columbia Energy common stock covered by 
the stock elections, as well as all Columbia Energy common stock for 
which no election was made, were exchanged, on a per share basis, for 
$70 in cash and $2.60, representing the face amount of each SAILS unit.
    Notwithstanding the Plan's election to receive shares of NiSource 
common stock, because the total amount of shareholder elections to 
receive NiSource common stock exceeded 30 percent of the outstanding 
shares of Columbia Energy common stock, on November 9, 2000, the Plan 
received, as a result of the proration, 2,214,213 SAILS units (valued 
at $5,756,953.80 or $2.60 per unit face value) \30\, $154,994,851 in 
cash, and 4,299,366 shares of NiSource common stock (valued at $24 per 
share or $102,183,784). The Plan was treated in the same manner as any 
other shareholder of Columbia Energy common stock who had made a valid 
stock election. Moreover, the Plan did not pay any fees or commissions 
in connection with its receipt of the merger consideration.
---------------------------------------------------------------------------

    \30\ The SAILS represented approximately .8 of one percent or 
.008 of the Plan's total assets.
---------------------------------------------------------------------------

    Currently, the SAILS are being held on behalf of the Plan in a 
separate fund which is not subject to participant-directed investment.
    9. Thus, based upon the foregoing description of the Plan's 
involvement in the merger, the Trustee and the Savings Plan Committee 
(together, the Applicants) request an administrative exemption from the 
Department with respect to (a) the receipt, by the Plan, of the SAILS 
as a result of the Plan's ownership of Columbia Energy common stock; 
(b) the extension of credit by the Plan to NiSource in connection with 
the Plan's receipt of the Debenture portion of the SAILS; (c) the 
continued holding of the SAILS by the Plan; and (d) the Plan's 
potential resale of the SAILS to NiSource. The Applicants are not 
requesting exemptive relief with respect the Plan's acquisition and 
holding of NiSource common stock. The Applicants note that NiSource and 
its affiliates became parties in interest with respect to the Plan on 
the Transaction Date. Therefore, they state that the NiSource common 
stock would constitute a ``qualifying employer security'' within the 
meaning of section 407(d)(5) of the Act, as ``stock,'' a ``marketable 
obligation,'' or an ``interest in a publicly-traded partnership,'' The 
Applicants further explain that the acquisition and holding of the 
NiSource common stock by the Plan would be statutorily exempt under 
section 408(e) of the Act.\31\
---------------------------------------------------------------------------

    \31\ However, the Department expresses no opinion herein on 
whether such stock is a qualifying employer security or the 
acquisition and holding of NiSource common stock by the Plan 
satisfies the terms and conditions of section 408(e) of the Act.
    In relevant part, section 408(e) of the Act provides that 
sections 406 and 407 of the Act shall not apply to the acquisition 
or sale by a plan of qualifying employer securities (as defined in 
section 407(d)(5)(1) if such acquisition is for adequate 
consideration (or in the case of a marketable obligation, at a price 
not less favorable to the plan than the price determined under 
section 407(e)(1)), (2) if no commission is charged with respect 
thereto, and (3) if--(A) the plan is an eligible individual account 
plan (as defined in section 407(d)(3), or (B) in the case of an 
acquisition by a plan which is not an eligible individual account 
plan, the acquisition is not prohibited under section 407(a) of the 
Act.

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

[[Page 39370]]

    However, the Applicants represent that it is unclear whether the 
statutory exemption contained in section 408(e) of the Act would apply 
to the Plan's receipt and holding of the SAILS. Although each SAILS 
would likely qualify as a ``security,'' as such term is defined in 
section 2(1) of the Securities Exchange Act of 1933 (the 1933 Act) and 
section 3(20) of the Act, the Applicants explain that it is unclear 
whether the SAILS would fall within the definition of ``qualifying 
employer securities,'' as defined in section 407(d)(5) of the Act.\32\
---------------------------------------------------------------------------

    \32\ As noted previously, a ``qualifying employer security'' 
means an employer security which is either ``stock,'' a ``marketable 
obligation,'' or an ``interest in a publicly-traded partnership,'' 
under section 407(d)(5) of the Act. Section 407(e) of the Act 
defines the term ``marketable obligation'' to mean a bond, 
debenture, note, certificate, or other evidence of indebtedness, if 
such obligation is acquired: (A) On the market, either (i) at the 
prevailing price of a national securities exchange, or (ii) if the 
obligation is not traded on a national securities exchange, at a 
price not less favorable to the plan than the offering price for the 
obligation as established by current bid and asked prices quoted by 
persons independent of the issuer; (B) from an underwriter, at a 
price (i) not in excess of the public offering price for the 
obligation as set forth in a prospectus or offering circular filed 
with the Securities and Exchange Commission, and (ii) at which a 
substantial portion of the same issue is acquired by persons 
independent of the issuer; or (C) directly from the issuer, at a 
price not less favorable to the plan than the price paid currently 
for a substantial portion of the same issue by persons independent 
of the issuer.
---------------------------------------------------------------------------

    10. According to the Applicants, although the Debenture portion of 
the SAILS appears to meet the definition of a ``marketable obligation'' 
contained in section 407(d)(5) of the Act, that portion of the SAILS 
consisting of a forward equity or share purchase contract does not 
constitute either ``stock'' or a ``marketable obligation'' under 
section 407(d)(5) of the Act. Therefore, the Applicants state that the 
SAILS do not appear to meet the definition of a qualifying employer 
security and they conclude that the statutory exemption contained under 
section 408(e) of the Act would not be applicable to the Plan's 
receipt, holding and sale of both the equity and debt portions of the 
SAILS, including any extension of credit relating to the Debenture 
portion of the SAILS.
    If granted, the proposed exemption will be effective as of November 
1, 2000.
    11. As noted above, U.S. Trust has been retained to serve on behalf 
of the Plan as the independent fiduciary with respect to (a) reviewing 
and monitoring the subject transactions; (b) determining, on behalf of 
the Plan, the appropriate retention and disposition strategy for the 
SAILS, by taking into consideration the liquidity requirements of the 
Plan and any restrictions imposed by the Department pursuant to the 
request for the prohibited transaction exemption; and (c) based on the 
outcome of the exemption request, instructing the Trustee as to the 
disposition of the SAILS. U.S. Trust is the principal subsidiary of 
U.S. Trust Corporation, which was founded in 1853 and is subject to 
regulation as a trust company by the State of New York. U.S. Trust is a 
member of the Federal Reserve System, the Federal Deposit Insurance 
Corporation, and an entity having approximately $5 billion in assets as 
of December 31, 1999. In addition, U.S. Trust Corporation is a wholly 
owned subsidiary of the Charles Schwab Corporation and currently has 
over $73 billion in assets under management, a significant percentage 
of which consists of ERISA retirement plan assets. U.S. Trust has 
served as an independent fiduciary for numerous employee benefit plans 
that acquire or hold employer securities and has managed, at various 
times, over $18 billion in employer securities held by various plans. 
In managing these investments, U.S. Trust has exercised discretionary 
authority over transactions involving the acquisition, retention and 
disposition of employer securities.
    U.S. Trust represents that it is independent of Columbia Energy and 
its affiliates. In this regard, U.S. Trust asserts that it has no 
business, ownership or control relationship, nor is it otherwise 
affiliated with Columbia Energy. U.S. Trust represents that its only 
relationship with Columbia Energy relates to its engagement as the 
independent fiduciary for the Plan. U.S. Trust further asserts that it 
derives less than one percent of its annual income from Columbia 
Energy.
    Subject to the terms of an engagement letter dated November 7, 2000 
by and between it and Columbia Energy, U.S. Trust states that it has 
agreed to act, and is currently acting as independent fiduciary for the 
Plan with respect to the holding and the disposition of the SAILS. In 
its capacity as independent fiduciary, U.S. Trust represents that it 
has monitored the daily trading value of the SAILS on the NYSE, has 
been directing the Trustee to sell SAILS on a daily basis since the 
time of its engagement, and has instructed the Trustee to dispose of 
all remaining SAILS held by the Plan by the end of calendar year 2001. 
Generally, such sales will take place on the open market. However, 
SAILS will be sold to NiSource only if U.S. Trust determines that there 
is no viable market and that it would be in the best interest of the 
Plan for a sale to be effected to NiSource.
    For purposes of valuation, the fair market value of the SAILS is 
based upon their market price as listed on the NYSE at the time of the 
transaction. Should U.S. Trust determine that a disposition of the 
remaining SAILS to NiSource would be in the best interest of the Plan, 
it will determine the fair market value of the SAILS based upon their 
closing price on the NYSE as of the transaction date. However, if U.S. 
Trust concludes that the closing price is not representative of the 
fair market value of the SAILS, the sales price will be determined by a 
qualified, independent appraiser.\33\ (U.S. Trust will also secure a 
valuation from an independent appraiser if the SAILS are delisted on 
the NYSE.) A sale to NiSource will be for cash and will not involve the 
payment of any fees or commissions by the Plan. Any cash received upon 
disposition of all of the SAILS held by the Plan will be allocated to 
Plan participant accounts and the special fund currently holding the 
SAILS on the Plan's behalf will be dissolved.
---------------------------------------------------------------------------

    \33\ It is represented that U.S. Trust will not be exclusively 
guided by the price of the SAILS as quoted on the NYSE. The 
exception to U.S. Trust's reliance on the NYSE for determining the 
price of the SAILS will be if the securities become so thinly-traded 
as to no longer constitute a ``generally-recognized market'' within 
the meaning of section 3(18) of the Act, thereby requiring an 
independent valuation. As trading has developed with respect to the 
SAILS, U.S. Trust believes this circumstance will be extremely 
remote.
---------------------------------------------------------------------------

    12. In summary, it is represented that the transactions have 
satisfied or will satisfy the statutory criteria for an exemption under 
section 408(a) of the Act because:
    (a) The Plan automatically received SAILS in exchange for its 
shares of Columbia Energy common stock in accordance with the terms of 
the Merger Agreement and it paid no commissions or fees in connection 
with its receipt of the SAILS and other merger consideration.
    (b) The Merger Agreement was negotiated on an arm's length basis by 
Columbia Energy and NiSource, and subsequently approved by the 
shareholders of these entities.
    (c) Morgan Stanley and Salomon Smith Barney, an independent

[[Page 39371]]

investment advisers, opined to Columbia Energy that the consideration 
consisting of NiSource common stock, SAILS and cash for Columbia Energy 
common stock was ``fair,'' from a financial point of view.
    (d) Duff & Phelps provided independent financial advice to the 
Trustee and the Savings Plan Committee concerning the valuation of the 
SAILS.
    (e) For purposes of the merger, and with respect to any future 
dispositions of the SAILS, the Plan was treated and will be treated in 
the same manner as any other shareholder of Columbia Energy common 
stock that made a valid election.
    (f) As independent fiduciary, U.S. Trust (i) has overseen and will 
continue to oversee, the Plan's holding and disposition of the SAILS; 
(ii) will determine whether it is appropriate for the Plan to dispose 
of the SAILS (either on the open market or through a direct sale of any 
remaining SAILS to NiSource) and will instruct the Trustee regarding 
such disposition; (iii) will determine, in the event of a sale of any 
SAILS to NiSource, the fair market value of such SAILS either based on 
their closing market price on the NYSE on the date of the transaction, 
or, it will retain an independent appraiser if the SAILS are delisted 
on the NYSE or if it concludes that the closing price on the NYSE as of 
the transaction date is not representative of the fair market value of 
the SAILS; and (iv) will require the disposal of all SAILS held by the 
Plan by the end of calendar year 2001.
    (g) The Plan will not pay any fees or commissions in the event any 
SAILS are sold to NiSource.

Notice to Interested Persons

    Columbia Energy will provide notice of the proposed exemption to 
all participants and beneficiaries in the Plan by first class mail 
within 20 days of the date of publication of the notice of proposed 
exemption in the Federal Register. The notice will include a copy of 
the proposed exemption, as published in the Federal Register, and a 
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2), 
which will inform interested persons of their right to comment on and/
or to request a hearing with respect to the proposed exemption. 
Comments regarding the proposed exemption are due within 50 days of the 
date of publication of the notice of pendency in the Federal Register.
    For Further Information Contact: Ms. Jan D. Broady of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

Miller International, Inc. Profit Sharing Plan (the Plan) Located 
in Denver, Colorado

[Application No. D-10980]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to the proposed sale of a certain three-acre 
parcel of vacant land (the Property) by the Plan to Miller 
International, Inc. (Miller), the sponsor of the Plan and a party in 
interest with respect to the Plan; provided that the following 
conditions are satisfied:
    (a) The proposed sale is a one-time cash transaction;
    (b) The Plan receives the current fair market value for Property, 
as established by an independent qualified appraiser at the time of the 
sale; and
    (c) the Plan pays no commissions or other expenses associated with 
the sale.

Summary of Facts and Representations

    1. The Plan is a qualified profit-sharing plan. As of February, 
2001, the Plan had 39 participants and beneficiaries. As of December 
31, 2000, the Plan had $2,781,338 in total assets. Miller 
International, Inc. (Miller) is the sponsor of the Plan. The Plan's 
trustees are Seymour Simmons, Jr., Marvin Levy and Ronald G. Schmitz. 
Miller is a subchapter ``C'' State of Colorado corporation which is in 
the business of manufacturing and distributing clothing.
    2. In August, 1971, the Plan purchased the Property from Coogan and 
Walters, a Colorado Partnership, which was an unrelated third party. 
The cost of the Property was $15,800 in cash, which represented 
approximately 1.37% of the Plan's assets at that time. The Property is 
adjacent to another property owned by Miller.\34\ It is represented 
that the Trustees made the decision to purchase the Property as an 
investment for the Plan. As of December 31, 2000, the Property 
represented approximately 8.6% of the total value of the Plan's assets.
---------------------------------------------------------------------------

    \34\ The Department is not providing any opinion in this 
proposed exemption as to whether the acquisition and holding of the 
Property by the Plan violated any of the provisions of Part 4 of 
Title I of the Act.
---------------------------------------------------------------------------

    3. The applicant represents that since it was originally acquired 
by the Plan, the Property has not been used or leased by anyone, 
including the parties in interest described herein. Since it was 
originally acquired by the Plan in 1971, the Property has not been an 
income-producing asset. The applicant represents that the only expense 
incurred by the Plan with respect to the Property was in 1994, when 
$3,950 was paid to install a storm sewer drain. The property tax on the 
Property has been paid by Miller on an annual basis.
    4. The Property, located at the northwest corner of Umatilla Street 
and West 85th Avenue, Federal Heights, Colorado, was appraised on May 
15, 2001 (the Appraisal). The Appraisal was prepared by A. Mark Dyson, 
MAI, CCIM (Mr. Dyson) and by Steven A. Tromly, MAI (Mr. Tromly, 
collectively; the Appraisers), who are independent state certified 
appraisers. The Appraisers are with DYCO Real Estate Inc., located at 
15710 West Colfax Avenue, Suite 204, in Golden, Colorado. The 
Appraisers relied solely on the sales comparison approach in valuing 
the Property. The Appraisers determined that the fair market value of 
the Property was $290,000, as of May 10, 2001. In addition, since the 
Property is adjacent to other property owned by Miller, the Appraisers 
considered whether the adjacency factor would merit a premium above 
fair market value in any sale of the Property to Miller. However, the 
Appraisers determined that no adjustments to the value of the Property 
are necessary for the adjacent property ownership by Miller.
    5. The applicant now proposes that Miller purchase the Property 
from the Plan in a one-time cash transaction. The applicant represents 
that the proposed transaction would be in the best interest and 
protective of the Plan because, among other things, the Plan would pay 
no commissions or other expenses associated with the sale. In addition, 
Miller will pay the Plan the current fair market value of the Property, 
as established by an independent qualified real estate appraiser at the 
time of the sale. In this regard, the Appraisers will update the 
Appraisal at the time of the transaction to ensure that the Plan 
receives the then current fair market value for the Property. Finally, 
the applicant states that the proposed sale of the Property to Miller 
will increase the liquidity of the Plan's current investment portfolio 
by allowing the Plan to sell an illiquid, non-income producing asset. 
The sale will enable the Trustees to further diversify the

[[Page 39372]]

assets of the Plan by reinvesting the sale proceeds in other assets.
    6. In summary, the applicant represents that the proposed 
transaction will satisfy the statutory criteria of section 408(a) of 
the Act and section 4975(c)(2) of the Code because:
    (a) The sale will be a one-time cash transaction;
    (b) The Plan will receive the current fair market value for the 
Property, as established by an independent, qualified real estate 
appraiser at the time of the sale;
    (c) The Plan will pay no commissions or other expenses associated 
with the sale; and
    (d) The sale will enable the Plan to sell an illiquid, non-income 
producing asset and further diversify the Plan's current portfolio by 
reinvesting the sale proceeds in other assets.
    Further Information Contact: Ekaterina A. Uzlyan of the Department 
at (202) 219-8883. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest 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 23rd day of July 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 01-18682 Filed 7-27-01; 8:45 am]
BILLING CODE 4510-29-P