[Federal Register Volume 67, Number 24 (Tuesday, February 5, 2002)]
[Notices]
[Pages 5305-5316]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-2640]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10891, et al.]


Proposed Exemptions; Connecticut Plumbers and Pipefitters Pension 
Fund (the Pension Fund), Connecticut Pipe Trades Local No. 777 Annuity 
Fund (the Annuity Fund); Connecticut Pipe Trades Health Fund (the 
Health Fund) (Collectively the Funds)

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 
requests 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 requests for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration (PWBA), 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. Interested persons are also invited to submit 
comments and/or hearing requests to PWBA via e-mail or FAX. Any such 
comments or requests should be sent either by e-mail to: 
``[email protected]'', or by FAX to (202) 219-0204 by the end of 
the scheduled comment period. 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-1513, 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.

Connecticut Plumbers and Pipefitters Pension Fund (the Pension 
Fund), Connecticut Pipe Trades Local No. 777 Annuity Fund (the 
Annuity Fund); Connecticut Pipe Trades Health Fund (the Health 
Fund) (Collectively the Funds), Located in Manchester, 
Massachusetts

[Exemption Application Nos. D-10891; D-10892 and L-10893]

Proposed Exemption

    The Department of Labor (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), and 
406(b)(2) of the Act and the sanctions resulting from the application 
of section 4975(a) and (b) of the Code, by reason of section 
4975(c)(1)(A) through (D) of the Code, shall not apply to the purchase 
on September 1, 1999 (the Purchase) by the Health Fund of the common 
stock of Employee Benefit Administrators, Inc. (EBPA Stock) from 
Michael W. Daly and Virginia S. Daly (the Dalys), parties in interest 
with respect to the Health Fund, and the subsequent reallocation of the 
purchase price (the Reallocation) among the Funds, including 
``makewhole'' payments (Makewhole Payments) representing lost earnings 
in connection with the Purchase, provided that the following conditions 
are satisfied:
    (a) The Purchase was a one-time transaction for a lump sum cash 
payment;
    (b) The Purchase price was no more than the fair market value of 
EBPA Stock as of the date of the Purchase;

[[Page 5306]]

    (c) The fair market value of the EBPA Stock was determined by an 
independent, qualified, appraiser;
    (d) The Funds paid no commissions or other expenses relating to the 
Purchase;
    (e) The proposed Reallocation will be made in connection with the 
original payment by the Pension Fund and the Annuity Fund for EBPA 
Stock resulting from the original allocation (the Original Allocation);
    (f) The Makewhole Payments to be made by the Health Fund to the 
Pension Fund and the Annuity Fund represent an amount to provide the 
Pension Fund and the Annuity Fund with a rate of return equal to the 
total accrued but unpaid interest due as of the date of grant of this 
exemption as a result of the Original Allocation on September 1, 1999; 
and
    (g) An independent fiduciary has negotiated, reviewed, and approved 
the terms of the Reallocation and will ensure the current and future 
payments by the Funds in connection with services provided by the 
administrative affiliate will reflect actual expenditures by the Funds.
    Effective Date of Exemption: The effective date of this exemption 
is September 1, 1999.

Summary of Facts and Representations

    1. The Annuity Fund is a defined contribution employee pension plan 
located in Manchester, Connecticut. It provides for contributions by 
employers, and permits the participants to invest the contributions in 
alternatives provided by Putnam Investments, the Annuity Fund's 
recordkeeper. At the time of the transaction, the Annuity Fund had 
1,518 participants and assets as of January 31, 1999 of $21,540,687.33.
    The Pension Fund is a non-contributory defined benefit plan located 
in Manchester, Connecticut. The Pension Fund employs 13 investment 
managers for the assets. At the time of the transaction, the Pension 
Fund had 1,587 plan participants and assets as of January 31, 1999 of 
$209,288,337.71.
    The Health Fund is non-contributory and has 2,263 plan 
participants. The assets are maintained at Salomon Smith Barney, and 
Olson, Mobeck & Associates, Inc. acts as investment manager. At the 
time of the transaction, the fair market value of the Health Fund's 
assets was $20,651,136.78.
    At the time of the Purchase, less than approximately 1% of the 
total assets of each respective plan were involved in the subject 
transaction. The Funds are multiemployer plans within the meaning of 
section 3(37)(A) of the Act, and were established and are maintained 
pursuant to section 302(c)(5) of the Labor Management Relations Act of 
1947. The Funds are jointly managed by an equal number of Trustees 
appointed by management and the union.
    2. Prior to September 1, 1999, the Funds employed two outside 
administrators. One administrator, Insurance Programmers, Inc. (IPI) 
provided services to the Annuity Fund and the Pension Fund. For the 
Pension Fund, IPI processed contributions and pension applications, 
issued monthly pension checks and quarterly statements and provided 
information for the annual actuarial valuation. Its charges totaled 
$105,600 in the last year of its retention. For the Annuity Fund, IPI 
processed contributions, posted receipts to Putnam Investments, 
performed recordkeeping duties, and processed withdrawal applications. 
IPI's charges for the Annuity Fund were $84,500. The second 
administrator, EBPA provided services to the Health Fund. It processed 
contributions, determined eligibility, paid both health and disability 
claims, maintained claims records, coordinated pre-admission 
certifications and utilization reviews and did COBRA administration. 
Its annual charges were $424,500.
    In 1998, the Trustees of the Annuity and Pension Funds decided to 
explore alternatives for the Funds' administration. Since some of the 
Trustees of the Annuity and Pension Funds also served as Trustees of 
the Health Fund, and the Funds collectively served roughly the same 
group of participants and beneficiaries, the Trustees decided to 
consider unified administration for the Funds. Accordingly, the 
Trustees decided to bring the administration in-house. Due to concern 
about potential disruption to participants and beneficiaries, the 
Trustees further decided to explore the retention of existing 
administrative personnel through the purchase of EBPA, which had the 
most day-to-day contact with participants and beneficiaries.
    The Trustees sought advice from the Segal Company (Segal), a 
nationally known actuarial and benefits consulting firm that represents 
mutliemployer trust funds. On April 29, 1998, Segal released a 
feasibility study to the Trustees, which concluded that, from a 
financial and operational perspective, the purchase of EBPA made good 
business sense.
    3. The Trustees represent that the motivation for the Funds 
Purchase of EBPA was solely to benefit the Funds' interests. The 
Trustees further represent that (i) the annual operating expenses with 
in-house administration would be approximately $454,450 versus the 
$614,600 paid by the Funds for outside administration in 1998; (ii) in-
house administration would give the Funds more direct control over the 
administrative process and better access to data so that the Trustees 
could more easily shift priorities or make changes in the 
administrative processes; and (iii) the in-house staff would be 
employees of the Funds, customer service should be more sensitive and 
responsive to the needs of the participants and beneficiaries, problems 
could be solved more quickly, and the Trustees would not have to 
coordinate between different vendors.
    4. The Trustees obtained the services of Marenna, Pia and 
Associates, LLC (MPA), to perform an appraisal of the EBPA Stock. The 
valuation was performed by Kenneth Pia, a principal of MPA. Mr. Pia is 
the Director of Valuation and Litigation Services at MPA, a certified 
public accountant, an Accredited Senior Appraiser of the American 
Society of Appraisers, and a Certified Valuation Analyst of the 
National Association of Certified Valuation Analysts. Mr. Pia 
represents that he and his firm are independent of the parties involved 
the Purchase.
    The appraisal sought the fair market value of EBPA, which it 
defined as the price at which the property would change hands between a 
willing buyer and willing seller, neither being under a compulsion to 
transact and both having reasonable knowledge of all relevant facts and 
circumstances. In arriving at the value, the appraisal considered all 
of the factors set forth in Revenue Ruling 59-60. As for the primary 
methodology, Mr. Pia chose the earnings-based approach, specifically 
the capitalization of forecasted next year earnings method. MPA 
concluded that the fair market value of 100 percent of the stock of 
EBPA was $277,000.
    5. The Funds and the Dalys reached an agreement on the sale of the 
EBPA Stock and terms of the Dalys employment on September 1, 1999. The 
Funds purchased for cash, 100 percent of the EBPA Stock at a price of 
$250,000. Mr. Dalys annual salary was set at $105,000. The ownership of 
the EBPA stock also enabled the Funds to acquire the tangible assets, 
primarily office equipment and fixtures, used by EBPA in the 
administration of the Health Fund's business. The Funds and the Dalys 
also agreed upon an employment contract for a term of five years, which 
provides for termination upon just cause prior to that time.
    6. The Trustees represent they were not aware that the Purchase 
would

[[Page 5307]]

constitute a violation of the prohibited transaction provisions of the 
Act, nor were they advised of the violation at the time of the 
transaction. \1\ The Trustees relied upon the advice of Vincent F. 
OHara of Holm & O'Hara who was counsel to the Trustees regarding ERISA 
matters throughout the process of self-administration. Only after the 
Purchase did the Trustees legal counsel conclude that the trustees 
needed a prohibited transaction exemption. Subsequently, the Trustees 
retained outside counsel to file an application for a retroactive 
exemption with the Department.
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    \1\ The Department wishes to note that ERISA's general standards 
of fiduciary conduct would apply to the Purchase by the Funds. In 
this regard, section 404(a) of the Act requires, among other things, 
that a plan fiduciary discharge his duties with respect to a plan 
solely in the interest of the plans's participants and beneficiaries 
in a prudent fashion.
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    7. The Funds allocated the purchase price pursuant to an allocation 
study based on the projected comparative administrative needs of each 
of each of the Funds (the Original Allocation) performed by Segal. 
Specifically, the Health Fund paid $110,000, the Pension Fund paid 
$97,500 and the Annuity Fund paid $42,500. \2\ The Department reviewed 
the Original Allocation and discovered that Segal's analysis did not 
include the cost to the Funds of paying the claims.
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    \2\ The Dalys made certain representations concerning the 
business and the Funds withheld $20,000 from the sale proceeds in 
order to assure that the representations were accurate. The escrow 
was released in four annual installments, which began May 1, 2000, 
and will end May 1, 2003.
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    8. As a result of the Original Allocation's deficiencies, the 
Trustees engaged Peter D. Graeb, CPA (Mr. Graeb) of Beers, Hamerman & 
Company, P.C. (BHC) to determine the Reallocation of the Purchase 
price. BHC determined that the Reallocation should yield the following 
allocation of the Purchase price: Health Fund 77%; Pension fund 18%; 
and the Annuity Fund 5%. Applying the Reallocation methodology, the 
allocation of the purchase price will be: Health Fund paying $192,500; 
the Pension Fund paying $45,000 and the Annuity Fund paying $12,500.
    Furthermore, as a result of the Department's review and 
determination that the Original Acquisition was not allocated equitably 
among the Funds, it has been determined that the Makewhole Payment 
should be made by the Health Fund to the Pension Fund and the Annuity 
Fund representing lost earnings to the Funds as a result of the 
Original Allocation. The Makewhole Payment will consist of the Health 
Fund paying an additional $82,500 of the purchase price of EBPA, with 
the Pension Fund receiving $52,500 and the Annuity Fund receiving 
$30,000 of the additional $82,500 paid by the Health Fund. Mr. Graeb 
also calculated the lost earnings in connection with the Original 
Acquisition. Mr. Graeb's calculation of the lost earnings or Makewhole 
Payment concluded that the Health Fund earned a return for the 23-month 
period between August 1, 1999 through June 30, 2001 of 11.02%. This was 
based on the net investment return, per audited financial statement for 
the fiscal year August 1, 1999 through June 30, 2001 and the 
preliminary accounting for the fiscal year ending June 30, 2001. 
Applying that return yields the following numbers: the Health Fund 
earned $9,092 on the $85,000 it underpaid. Sharing that amount in the 
percentages derived from the Original Allocation study would yield 
$52,500 and interest of $5,786 to the Pension Fund and $30,000 and 
$3,306 to the Annuity Fund from the period August 1, 1999 through June 
30, 2001. Therefore, the Makewhole Payments will represent an amount 
that provides the Pension Fund and the Annuity Fund with a rate of 
return equal to the total accrued but unpaid interest due at the time 
of grant of this exemption as a result of the Original Allocation.
    9. An independent party, Robert Nagle (Mr. Nagle), will serve as 
the independent fiduciary for the Funds with respect to the purposed 
Reallocation between the Funds. Mr. Nagle has experience with employee 
benefit plans and has served as a court ordered fiduciary in several 
cases, including service at the behest of the Department. Mr. Nagle has 
no prior connection to the Trustees. Mr. Nagle will assure that the 
Reallocation accurately reflects the Funds' respective equity interest 
in the administrative subsidiary and that the Health Fund has 
reimbursed the Pension Fund and the Annuity Fund for the difference 
between their original investments and the reallocated amounts, plus 
the Makewhole Payments. In addition, Mr. Nagle will confirm on an 
annual basis that the expenses of the administrative subsidiary are 
being properly allocated to the Funds based on actual expenditures of 
each Fund.
    10. In summary, the Trustees represent that the requested 
retroactive individual exemption will satisfy the criteria of section 
408(a) of the Act for the following reasons:
    (a) The Purchase was a one-time transaction for a lump sum cash 
payment;
    (b) The Purchase price was no more than the fair market value of 
EBPA Stock as of the date of the Purchase;
    (c) The fair market value of the EBPA Stock was determined by an 
independent, qualified, appraiser;
    (d) The Funds paid no commissions or other expenses relating to the 
Purchase;
    (e) The proposed Reallocation will be made in connection with the 
original payment by the Pension Fund and the Annuity Fund for EBPA 
Stock resulting from the Original Allocation;
    (f) The Makewhole Payments to be made by the Health Fund to the 
Pension Fund and the Annuity Fund represent an amount to provide the 
Pension Fund and the Annuity Fund with a rate of return equal to the 
total accrued but unpaid interest due as of the date of grant of this 
exemption as a result of the Original Allocation on September 1, 1999; 
and
    (g) An independent fiduciary has negotiated, reviewed, and approved 
the terms of the Reallocation and will ensure the current and future 
payments by the Funds in connection with services provided by the 
administrative affiliate will reflect actual expenditures by the Funds.
    Notice to Interested Persons: Notice of the proposed exemption 
shall be given to all interested persons in the manner agreed upon by 
the Trustees and Department within 15 days of the date of publication 
in the Federal Register. Comments and requests for a hearing are due 
forty-five (45) days after publication of the notice in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Khalif Ilias Ford of the Department, 
telephone (202) 693-8540. (This is not a toll-free number.)

Pacific Investment Management Company, LLC (PIMCO), Located in 
Newport Beach, CA

[Application No. D-11005]

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).\3\
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    \3\ For purposes of this proposed exemption, references to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to corresponding provisions of the Code.
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Section I. Proposed Exemption for the Purchase of Fund Shares With 
Assets Transferred in Kind From a Plan Account

    If the exemption is granted, the restrictions of section 406(a) and 
section

[[Page 5308]]

406(b) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(F) of the Code, shall not apply, effective February 5, 2002, to the 
purchase of shares of one or more open-end management investment 
companies (the PIMCO Mutual Funds) registered under the Investment 
Company Act of 1940 (the ICA), to which PIMCO or any affiliate of PIMCO 
(the PIMCO Affiliate) \4\ serves as investment adviser and may provide 
other services, by an employee benefit plan (the Plan or Plans), whose 
assets are held by PIMCO, as trustee, investment manager or 
discretionary fiduciary, in exchange for securities held by the Plan in 
an account (the Account) or sub-Account with PIMCO (the Purchase 
Transaction), provided that the following conditions are met:
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    \4\ Unless otherwise noted, ``PIMCO'' refers to ``PIMCO'' and to 
any ``PIMCO Affiliates'' and the term ``PIMCO Mutual Funds'' refers 
to any registered investment funds that are managed or advised by 
PIMCO or a PIMCO Affiliate.
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    (a) A fiduciary who is acting on behalf of each affected Plan and 
who is independent of and unrelated to PIMCO, as defined in paragraph 
(g) of Section III below (the Second Fiduciary), provides, prior to the 
first Purchase Transaction, the written approval described in paragraph 
(b) or (c) of this Section I, as applicable, following the disclosure 
of written information concerning the PIMCO Mutual Funds, which 
includes the following:
    (1) A current prospectus or offering memorandum for each PIMCO 
Mutual Fund which has been approved by the Second Fiduciary for that 
Plan's Account; \5\
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    \5\ In the case of a private placement memorandum, such 
memorandum must contain substantially the same information that 
would be disclosed in a prospectus if the offering of the securities 
were made in a registered public offering under the Securities 
Exchange Act of 1933 (the 1933 Act). In the Department's view, the 
private placement memorandum must contain sufficient information to 
permit Second Fiduciaries to make informed investment decisions.
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    (2) A statement describing the fees to be charged to, or paid by, 
the Plan and the PIMCO Mutual Funds to PIMCO, including the nature and 
extent of any differential between the rates of the fees paid by the 
PIMCO Mutual Fund and the rates of the fees otherwise payable by the 
Plan to PIMCO;
    (3) A statement of the reasons why PIMCO considers Purchase 
Transactions to be appropriate for the Plan;
    (4) A statement on whether there are any limitations on PIMCO with 
respect to which Plan assets may be invested in the PIMCO Funds, and if 
so, the nature of such limitations;
    (5) In the case of a Plan having total assets that are less than 
$200 million, the identity of all securities that are deemed suitable 
by PIMCO for transfer to the PIMCO Mutual Funds; and
    (6) Upon such Second Fiduciary's request, copies of the proposed 
and final exemptions pertaining to the exemptive relief provided herein 
for Purchase Transactions occurring after the date of the final 
exemption.
    (b) On the basis of the foregoing information, in paragraph (a) of 
this Section I, the Second Fiduciary of a Plan having total assets that 
are at least $200 million, gives PIMCO a standing written approval 
(subject to unilateral revocation by the Second Fiduciary at any time) 
for--
    (1) The Purchase Transactions, consistent with the 
responsibilities, obligations, and duties imposed on fiduciaries by 
Part 4 of Title I of the Act;
    (2) The investment guidelines for the Account (the Strategy) and 
the management, by PIMCO, of client Plan assets in separate Accounts in 
the implementation of the Strategy;
    (3) The investment of a certain portion (or portions) of the 
Accounts in specified PIMCO Mutual Funds, as part of PIMCO's ongoing 
implementation of the Strategy;
    (4) The acquisition of shares of PIMCO Mutual Funds in cash or in 
kind, from time to time; and
    (5) The receipt of confirmation statements with respect to the 
Purchase Transactions in the form of written reports to the Second 
Fiduciary.
    (c) On the basis of the foregoing information in paragraph (a) of 
this Section I, the Second Fiduciary of a Plan having total assets that 
are less than $200 million, gives PIMCO--
    (1) A standing written approval (subject to unilateral revocation 
by the Second Fiduciary at any time) for--
    (i) The Strategy and the management, by PIMCO, of client Plan 
assets in separate Accounts in the implementation of the Strategy;
    (ii) The investment of a certain portion (or portions) of the 
Accounts in specified PIMCO Mutual Funds, as part of PIMCO's ongoing 
implementation of the Strategy; and
    (iii) The acquisition of shares of PIMCO Mutual Funds in cash or in 
kind, from time to time.
    (2) Advance written approval for--
    (i) Each Purchase Transaction, consistent with the 
responsibilities, obligations and duties imposed on fiduciaries by Part 
4 of Title I of the Act; and
    (ii) The receipt of confirmation statements with respect to 
Purchase Transactions in the form of written reports to the Second 
Fiduciary.
    (d) No sales commissions or other fees are paid by a Plan in 
connection with a Purchase Transaction.
    (e) All transferred assets are securities for which market 
quotations are readily available.
    (f) The transferred assets consist of assets transferred to the 
Plan's Account at the direction of the Second Fiduciary.
    (g) With respect to assets transferred in kind, each Plan receives 
shares of a PIMCO Mutual Fund which have a total net asset value that 
is equal to the value of the assets of the Plan exchanged for such 
shares, based on the current market value of such assets at the close 
of the business day on which such Purchase Transaction occurs, using 
independent sources in accordance with the procedures set forth in Rule 
17a-7b under the ICA (Rule 17a-7), as amended from time to time or any 
successor rule, regulation or similar pronouncement, and the procedures 
established by the PIMCO Mutual Funds pursuant to Rule 17a-7 for the 
valuation of such assets. Such procedures must require that all 
securities for which a current market price cannot be obtained by 
reference to the last sale price for transactions reported on a 
recognized securities exchange or NASDAQ be valued based on an average 
of the highest current independent bid and lowest current independent 
offer, as of the close of business on the day of the Purchase 
Transaction determined on the basis of reasonable inquiry from at least 
two sources that are market makers or pricing services independent of 
PIMCO.
    (h) PIMCO sends by regular mail, express mail or personal delivery 
or, if applicable, by facsimile or electronic mail to the Second 
Fiduciary of each Plan that engages in a Purchase Transaction, a report 
containing the following information about each Purchase Transaction:
    (1) A list (or lists, if there are multiple Purchase Transactions) 
identifying each of the securities that has been valued for purposes of 
the Purchase Transaction in accordance with Rule 17a-7(b)(4) of the 
ICA;
    (2) The current market price, as of the date of the Purchase 
Transaction, of each of the securities involved in the Purchase 
Transaction;
    (3) The identity of each pricing service or market maker consulted 
in determining the value of such securities;
    (4) The aggregate dollar value of the securities held in the Plan 
Account immediately before the Purchase Transaction; and
    (5) The number of shares of the PIMCO Mutual Funds that are held by

[[Page 5309]]

the Account following the Purchase Transaction (and the related per 
share net asset value and the aggregate dollar value of the shares 
received) immediately following the Purchase Transaction.
    (Such report is disseminated by PIMCO to the Second Fiduciary by 
regular mail, express mail or personal delivery, or if applicable, by 
facsimile or electronic mail, no later than 30 business days after the 
Purchase Transaction.)
    (i) With respect to each of the PIMCO Mutual Funds in which a Plan 
continues to hold shares acquired in connection with a Purchase 
Transaction, PIMCO provides the Second Fiduciary with--
    (1) A copy of an updated prospectus or offering memorandum for such 
PIMCO Mutual Fund, at least annually; and
    (2) Upon request of the Second Fiduciary, a report or statement 
(which may take the form of the most recent financial report, the 
current Statement of Additional Information, or some other statement) 
containing a description of all fees paid by the PIMCO Mutual Fund to 
PIMCO.
    (j) As to each Plan, the combined total of all fees received by 
PIMCO for the provision of services to the Plan, and in connection with 
the provision of services to a PIMCO Mutual Fund in which the Plan 
holds shares acquired in connection with a Purchase Transaction, is not 
in excess of ``reasonable compensation'' within the meaning of section 
408(b)(2) of the Act.
    (k) All dealings in connection with a Purchase Transaction between 
a Plan and a PIMCO Mutual Fund are on a basis no less favorable to the 
Plan than dealings between the PIMCO Mutual Fund and other 
shareholders.
    (l) No Plan may enter into Purchase Transaction with the PIMCO 
Mutual Funds prior to the date the proposed exemption is published in 
the Federal Register.
    (m) PIMCO maintains for a period of six years, in a manner that is 
accessible for audit and examination, the records necessary to enable 
the persons, as described in paragraph (n) of this Section I, to 
determine whether the conditions of this proposed exemption have been 
met, except that--
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of PIMCO, the 
records are lost or destroyed prior to the end of the six year period; 
and
    (2) No party in interest, other than PIMCO, 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 (m) of this Section I.
    (n)(1) Except as provided in paragraph (n)(2) of this Section I and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (m) of Section I 
above are unconditionally available at their customary location for 
examination during normal business hours by--
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service (the Service), or the 
Securities and Exchange Commission (the SEC);
    (B) Any fiduciary of each of the Plans who has authority to acquire 
or dispose of shares of any of the PIMCO Mutual Funds owned by such a 
Plan, or any duly authorized employee or representative of such 
fiduciary; and
    (C) Any participant or beneficiary of the Plans or duly authorized 
employee or representative of such participant or beneficiary.
    (2) None of the persons described in paragraph (n)(1)(B) or (C) of 
this Section I shall be authorized to examine the trade secrets of 
PIMCO or commercial or financial information which is privileged or 
confidential.

Section II. Availabilty of Prohibited Transaction Exemption (PTE) 
77-4 \6\

    Any purchase of PIMCO Mutual Fund shares by a Plan that complies 
with the conditions of Section I of this proposed exemption shall be 
treated as a ``purchase or sale'' of shares of an open-end investment 
company for purposes of PTE 77-4 and shall be deemed to have satisfied 
paragraphs (a), (d) and (e) of Section II of PTE 77-4.
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    \6\ In relevant part, PTE 77-4 (42 FR 18732 (April 8, 1977) 
permits the purchase and sale by an employee benefit plan of shares 
of a registered open-end investment company when a fiduciary with 
respect to such plan is also the investment adviser for the mutual 
fund. Section II(a) of PTE 77-4 requires that a plan does not pay a 
sales commission in connection with such purchase or sale. Section 
II(d) describes the disclosures that are to be received by an 
independent plan fiduciary. For example, the plan fiduciary must 
receive a current prospectus for the mutual fund as well as full and 
detailed written disclosure of the investment advisory and other 
fees that are charged to or paid by the plan and the investment 
company. Section II(e) requires that the independent plan fiduciary 
approve purchases and sales of mutual fund shares on the basis of 
the disclosures given.
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Section III. Definitions

    For purposes of this proposed exemption,
    (a) The term ``PIMCO'' means Pacific Investment Management Company 
LLC, any successors thereto, and affiliates of PIMCO (as defined in 
paragraph (b) of this Section III), including Nicholas-Applegate 
Capital Management, PIMCO Equity Advisers, Cadence Capital Management, 
NFJ Investment Group, Value Advisors LLC, Allianz of America, Inc., 
Pacific Specialty Markets LLC, PIMCO/Allianz International Advisors 
LLC, OpCap Advisors and Oppenheimer Capital, and their existing and 
future affiliates.
    (b) An ``affiliate'' of a person includes:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The term ``PIMCO Mutual Fund'' or ``PIMCO Mutual Funds'' means 
any open-end investment company or companies registered under the ICA 
for which PIMCO serves as investment adviser, administrator, or 
investment manager. The term is also meant to include a PIMCO Affiliate 
Mutual Fund in which a PIMCO Affiliate serves as an investment adviser 
or investment manager.
    (e) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and redemptions calculated by dividing the value 
of all securities, determined by a method as set forth in a PIMCO 
Mutual Fund's prospectus and statement of additional information, and 
other assets belonging to each of the portfolios in such PIMCO Mutual 
Fund, less the liabilities charged to each portfolio, by the number of 
outstanding shares.
    (f) The term ``relative'' means a relative as that term is defined 
in section 3(15) of the Act (or a ``member of the family'' as that term 
is defined in section 4975(e)(6) of the Code), or a brother, a sister, 
or a spouse of a brother or a sister.
    (g) The term ``Second Fiduciary'' means a fiduciary of a plan who 
is independent of and unrelated to PIMCO. For purposes of this 
exemption, the Second Fiduciary will not be deemed to be independent of 
and unrelated to PIMCO if --
    (1) Such Second Fiduciary directly or indirectly controls, is 
controlled by, or is under common control with PIMCO;

[[Page 5310]]

    (2) Such Second Fiduciary, or any officer, director, partner, 
employee, or relative of such Second Fiduciary is an officer, director, 
partner, or employee of PIMCO (or is a relative of such persons); or
    (3) Such Second Fiduciary directly or indirectly receives any 
compensation or other consideration from PIMCO for his or her own 
personal account in connection with any transaction described in this 
proposed exemption.
    If an officer, director, partner, or employee of PIMCO (or a 
relative of such persons), is a director of such Second Fiduciary, and 
if he or she abstains from participation in (A) the choice of the 
Plan's investment manager/adviser; (B) the written authorization 
provided to PIMCO for the Purchase Transactions; (C) the Plan's 
decision to continue to hold or to redeem shares of the PIMCO Mutual 
Funds held by such Plan; and (D) the approval of any change of fees 
charged to or paid by the Plan, in connection with the transactions 
described above in Section I, then paragraph (g)(2) of this Section 
III, shall not apply.
    (h) The term ``Strategy'' refers to the set of investment 
guidelines that have been established in advance to govern the Account. 
The Strategy is created by PIMCO in collaboration with the Second 
Fiduciary of a client Plan and may be mutually amended, from time to 
time.

Summary of Facts and Representations

Description of the Parties

    1. PIMCO (i.e., Pacific Investment Management Company, LLC), an 
investment counseling firm located in Newport Beach, California, is a 
subsidiary of PIMCO Advisors, L.P. (PALP). A controlling interest in 
PALP is indirectly held by Allianz A.G., a European-based multinational 
insurance and financial services holding company. An indirect, minority 
equity interest in PALP is held by Pacific Life Insurance Company, a 
California-based insurance company.
    PIMCO provides investment management and advisory services to the 
private accounts of institutional clients and to mutual funds, 
including the separate portfolios of the PIMCO Mutual Funds. PIMCO and 
its affiliates\7\ currently provide the PIMCO Mutual Funds described 
below with overall investment management services, including, but not 
limited to, the selection and supervision of investment advisers and 
regulatory reporting. PIMCO also acts as the dividend disbursing agent 
with respect to certain classes of shares and as the investment adviser 
to certain PIMCO Mutual Fund portfolios. PIMCO currently serves as 
administrator to the PIMCO Mutual Funds and provides the PIMCO Mutual 
Funds with certain administrative and shareholder services necessary 
for PIMCO Mutual Fund operations. Additionally, PIMCO is responsible 
for the supervision of other PIMCO Mutual Fund service providers.
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    \7\ Another wholly owned subsidiary of PIMCO, PIMCO Funds 
Distributors LLC, serves as the principal underwriter and 
distributor of the PIMCO Mutual Funds.
---------------------------------------------------------------------------

    PIMCO also provides investment management and asset allocation 
services to a variety of clients, including the Plans described below. 
In the course of implementing each Plan's investment strategy (i.e., 
the Strategy) and to the extent authorized in the investment management 
agreement (the Investment Management Agreement) or separate investment 
guidelines for each Plan, PIMCO may utilize the separate investment 
portfolios of the PIMCO Mutual Funds as the Plans' investment vehicles.
    2. The Plans will consist of retirement plans qualified under 
section 401(a) of the Code which constitute ``pension plans'' as 
defined in section 3(2) of the Act, certain welfare plans as defined 
under section 3(1) of the Act [e.g., voluntary employees' beneficiary 
association trusts exempt from tax under Code section 501(c)(9)]; and/
or ``plans'' as defined in section 4975(e)(1) of the Code, and with 
respect to which PIMCO serves or will serve as an investment manager. 
The Plans will not include employee benefit plans that are sponsored by 
PIMCO or its affiliates. As a precondition to participating in the 
Purchase Transactions that are described herein, each Plan will have 
total assets of at least $100 million.
    3. The PIMCO Mutual Funds to which the requested exemption will 
cover consist of investment companies registered under the ICA. A 
representative group of PIMCO Mutual Funds which have been currently 
authorized by the Plans adopting one or more Strategies is the Private 
Account Portfolio Series (the Private Account Portfolios), which is a 
subset of the Pacific Investment Management Series (otherwise referred 
to as ``the PIMS Trust''). The Private Account Portfolios are being 
offered to institutional investors. Any Plan investments in the Private 
Account Portfolios (or any other PIMCO Mutual Fund offered for the 
purpose of Purchase Transactions described herein) will be subject to 
the terms and conditions of this exemption.
    The Private Account Portfolios invest at least 65 percent of their 
assets in bonds or debt securities, including, but not limited to, 
securities issued or guaranteed by the U.S. Government; corporate debt 
of U.S. and non-U.S. issuers; asset-backed securities; and notes, 
repurchase agreements and other obligations of governmental issuers. 
The Private Account Portfolios currently consist of the following 16 
separate mutual funds:

 Short-Term Portfolio
 Short-Term Portfolio II
 U.S. Government Sector Portfolio
 U.S. Government Sector Portfolio II
 Mortgage Portfolio
 Mortgage Portfolio II
 Investment Grade Corporate Portfolio
 Real Return Bond Portfolio
 Asset-Backed Securities Portfolio
 Asset-Backed Securities Portfolio II
 High Yield Portfolio
 Municipal Sector Portfolio
 International Portfolio
 Short-Term Emerging Markets Portfolio
 Emerging Markets Portfolio
 Select Investment Portfolio

    These PIMCO Mutual Funds pay PIMCO an annualized advisory fee of 
0.02 percent in return for providing investment advisory services. 
Aside from the Private Account Portfolios, PIMCO also proposes that the 
Purchase Transactions contemplated herein will also apply to PIMCO 
Mutual Funds that are equity mutual funds.
    5. PIMCO also serves as the administrator of all of the PIMCO 
Mutual Funds and it receives an annualized administrative fee from the 
PIMCO Mutual Funds under a fixed fee structure. For example, in the 
case of the Private Account Portfolios, PIMCO receives an annualized 
administrative fee ranging from 0.028 percent for the Real Return Bond 
Portfolio to 0.04 percent for the International Portfolio. In return 
for these fixed fees, PIMCO provides administrative services for 
shareholders of the Private Account Portfolios and it also bears 
certain costs of various third party services such as audits, custodial 
services, portfolio accounting, as well as legal, transfer agency and 
printing costs.\8\
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    \8\ At the present time, PIMCO represents that it does not know 
how many PIMCO Mutual Funds it will offer to client Plans. PIMCO 
notes that its fee structure for the Private Account Portfolios is 
not unusual given the fact that the client Plans pay a Plan-level 
investment advisory fee based on the amount of assets managed for 
them by PIMCO. Because PIMCO manages many large client Plans, which 
place a minimum of $600 million with PIMCO, the size of the Plan-
level investment advisory fees will vary in inverse proportion to 
the size of the client Plan's Account with PIMCO. As noted in 
Representation 12 of the proposed exemption, PIMCO will utilize the 
fee crediting mechanism described in PTE 77-4 to offset its Fund-
level investment advisory fees from its Plan-level investment 
advisory and/or management fees.

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[[Page 5311]]

    As both administrator and investment adviser of the PIMCO Mutual 
Funds, PIMCO makes overall investment decisions with respect to the 
assets of each PIMCO Mutual Fund's investment program.
    6. The PIMCO Mutual Funds are offered and sold in full compliance 
with regulations promulgated by the SEC. As mandated by the SEC, 
shareholders of the PIMCO Mutual Funds receive the following 
disclosures concerning the PIMCO Mutual Funds:
    (a) A copy of the prospectus or offering memorandum, which is 
updated at least annually; (b) an annual report containing audited 
financial statements of the PIMCO Mutual Funds and information 
regarding the PIMCO Mutual Funds' performance (unless such performance 
is included in the prospectus for the PIMCO Mutual Funds); and (c) a 
semi-annual report containing unaudited financial statements. With 
respect to the Plans, PIMCO or National Financial Data Services, Inc., 
the transfer agent for the PIMCO Mutual Funds, reports all transactions 
involving shares of the PIMCO Mutual Funds in periodic account 
statements provided to each Plan's trustee or custodian bank.
    As indicated above in the operative language, PIMCO requests that 
the exemption cover Purchase Transactions involving the Private Account 
Portfolios as well as other ICA-registered mutual funds that are 
advised by PIMCO, in which Plans invests. (As noted above, these PIMCO 
Mutual Funds may also include equity mutual funds.) Similarly, PIMCO 
requests that the exemption cover Purchase Transactions involving PIMCO 
Affiliate Mutual Fund shares by client Plans whose assets are managed 
by investment managers which are PIMCO Affiliates, such as Applegate 
Capital Management, PIMCO Equity Advisors, Cadence Capital Management, 
NFJ Investment Group, Value Advisors LLC, Allianz of America, Inc., 
Pacific Specialty Markets LLC, PIMCO/Allianz International Advisors 
LLC, OpCap Advisors or Oppenheimer Capital.\9\
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    \9\ As noted in the operative language of this proposed 
exemption, unless otherwise stated, references to ``PIMCO'' or to a 
``PIMCO Mutual Fund'' refer also to a ``PIMCO Affiliate'' or to a 
``PIMCO Affiliate Mutual Fund.
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    If granted, the proposed exemption will be effective as of the date 
the notice of proposed exemption is published in the Federal Register 
such that no Plan may enter into Purchase Transaction with the PIMCO 
Mutual Funds prior to this time.

PIMCO's Investment Strategy

    7. As noted above, PIMCO serves as investment manager to certain 
Plans. PIMCO will consult with a Second Fiduciary of the Plan to 
develop an investment strategy, which is then approved and adopted by 
the Second Fiduciary to serve as the investment guidelines for the 
investment of a Plan Account.
    According to PIMCO, the term ``Strategy'' refers to the set of 
investment guidelines that have been established in advance to govern 
an Account. The Strategy is created by PIMCO, in collaboration with the 
Second Fiduciary of a client Plan and may be unilaterally amended, from 
time to time.
    The development of the Strategy will include the selection of broad 
asset classes and the designation of a percentage of Plan assets to be 
allocated among such broad asset classes by use of separate Plan 
Accounts. For example, a Plan may desire to allocate 10 percent of its 
total assets for investment in global funds under PIMCO's management. 
Therefore, the Plan will transfer 10 percent of its assets to a Global 
Bond Account with PIMCO that is designed only to invest in such assets, 
and at the same time indicate how much of that Account may be invested 
in PIMCO Mutual Funds with the same investment focus. Later or at the 
same time, the Plan may establish other Accounts with PIMCO with a 
different investment focus, i.e., Stable Value, High Yield, Total 
Return, etc. Thus, any Plan may have more than one Account governed by 
the Strategy. Such investments will be carried out in accordance with 
PTE 77-4.
    The Strategy can only be modified with the approval of the Second 
Fiduciary. While a Plan may retain PIMCO to manage various Accounts 
separately (even though they all may be governed by the Strategy), the 
fee for all such management services is included within PIMCO's Plan-
level investment management fee.

Implementation of the Strategy

    8. The Strategy will be implemented by PIMCO in various situations. 
In the case of a new client Plan, PIMCO may be asked to take over an 
existing portfolio of securities, and that portfolio will have already 
been created by some other investment manager fiduciary using an asset 
allocation strategy developed by the Plan's in house fiduciaries or 
outside consultants. Another situation will occur when an existing 
client Plan allocates additional assets to PIMCO as investment manager 
for an Account. Further, a Second Fiduciary of an existing client Plan 
may transfer additional assets to a new sub-Account established 
specifically for the purpose of investing in a particular Strategy 
(i.e., adding new asset classes). If a Plan retains PIMCO to manage 
only its International Account, the Strategy will provide for 
allocation solely among international mutual funds.
    The Second Fiduciary may decide later to expand the scope of 
PIMCO's management authority to include total return fixed income 
mutual funds, in which case, PIMCO will establish a sub-Account for the 
purpose of investing in the total return fixed income Strategy. At a 
later date, the Second Fiduciary may decide to retain PIMCO to manage 
mortgage-backed securities.
    In each of the foregoing situations, PIMCO will not become a 
fiduciary until after the Second Fiduciary has specified which portion 
of the Plan's assets (including which specific assets and which 
specific PIMCO Mutual Funds may be authorized for investment) will be 
allocated to a sub-Account under PIMCO's management. Having obtained 
the initial authorization of the Second Fiduciary, however, PIMCO will 
invest the assets of the client Plan, from time to time, among the 
PIMCO Mutual Funds which the Second Fiduciary has authorized.
    Also, in each of the above situations, the client Plan's existing 
portfolio of securities frequently may include securities that are 
suitable for investment by the PIMCO Mutual Funds. PIMCO believes that 
it may be appropriate, in such cases, to transfer these securities in 
kind, directly to the relevant PIMCO Mutual Funds in order to avoid 
transaction costs and potential market disruption that may occur from a 
sale of those securities by the Plan and the subsequent repurchase of 
those securities by the PIMCO Mutual Funds. Plan securities which are 
compatible with the investment guidelines for the PIMCO Mutual Funds, 
and which can be transferred in compliance with procedures adopted by 
such Funds, will be transferred in kind to the PIMCO Mutual Funds in 
exchange for Fund shares, pursuant to prior client authorization of the 
Plans investment in such Funds. Any securities which are not 
transferred in kind will continue to be held and actively-managed by 
PIMCO, as directed by the client Plan's Second Fiduciary, outside of 
the PIMCO Mutual Funds in a separate account maintained such Plan.
    9. PIMCO maintains that the in kind transfers of Account assets in 
exchange for shares of the PIMCO Mutual Funds will be ministerial 
transactions performed in accordance with pre-

[[Page 5312]]

established objective procedures which are approved by the Board of 
Trustees of the PIMS Trust. Such procedures require that assets 
transferred to a PIMCO Mutual Fund (a) be consistent with the 
investment objectives, policies and restrictions of the corresponding 
portfolios of the PIMCO Mutual Fund, as determined by PIMCO; (b) 
satisfy the applicable requirements of the ICA and the Code; and (c) 
have a readily ascertainable market value, as determined pursuant to 
SEC Rule 17a-7. Further, a Second Fiduciary for each Plan will be 
required to give PIMCO prior written authorization and approve the 
transfer of the Plan's assets to the PIMCO Mutual Funds (which Funds 
have been approved for investment by the Plan's Account), and the 
transfer of such assets on an in kind basis.
    Although PIMCO intends that multiple Purchase Transactions will 
occur per Plan, after each transaction is completed, PIMCO will 
continue to manage the Account in accordance with the exemptive relief 
provided under PTE 77-4. In order to implement the Strategy for each 
Account (and various sub-Accounts), PIMCO will be guided by its 
investment process in its management of the Accounts.

Advance Disclosure/Approval

    10. Under the Investment Management Agreement, a Second Fiduciary 
will receive all of the disclosures required by PTE 77-4. In this 
regard, such information includes, but is not limited to, (a) a current 
prospectus or offering memorandum for each PIMCO Mutual Fund which has 
been approved by the Second Fiduciary for that Plan's Account; (b) a 
statement describing the fees to be charged to, or paid by, the Plan 
and the PIMCO Mutual Fund to PIMCO, including the nature and extent of 
any differential between the rates of the fees paid by the such Fund 
and the rates of the fees otherwise payable by the Plan to PIMCO; (c) a 
statement of the reasons why PIMCO considers Purchase Transactions to 
be appropriate for the Plan; (d) a statement on whether there are any 
limitations on PIMCO with respect to which Plan assets may be invested 
in the PIMCO Mutual Funds; and (e) in the case of a Plan having total 
assets that are less than $200 million, the identity of all securities 
that are deemed suitable by PIMCO for transfer to the PIMCO Mutual 
Funds. In addition, PIMCO will provide copies of the proposed and final 
exemptions to the Second Fiduciary, upon such fiduciary's request.
    Based on these disclosures, the Second Fiduciary of a Plan having 
total assets that are at least $200 million, by executing the 
Investment Management Agreement, will give PIMCO a standing written 
approval, which will be unilaterally revocable by such Second Fiduciary 
at any time. Such standing written approval will apply to all future 
Purchase Transactions that involve the transfer of a Plan's assets to 
the corresponding PIMCO Mutual Funds in exchange for shares, as 
appropriate, and PIMCO's receipt of fees for providing services to the 
PIMCO Mutual Funds. Further, the Second Fiduciary will approve (a) the 
Strategy for the Account and the management of client Plan assets in 
separate Accounts in the implementation of such Strategy; (b) the 
investment of a certain portion or portions of the Accounts in 
specified PIMCO Mutual funds, as part of the ongoing implementation of 
the Strategy;\10\ (c) the acquisition of shares of PIMCO Mutual Funds 
in cash or in kind, from time to time; and (d) the receipt of 
confirmation statements with respect to the Purchase Transactions in 
the form of written reports to the Second Fiduciary.
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    \10\ It is represented that the parameters of such blanket 
approval will be documented by letter agreement between PIMCO and 
the Plan.
---------------------------------------------------------------------------

    In the case of a Plan having total assets that are less than $200 
million, the Second Fiduciary will also give PIMCO standing written 
approval, which will be unilaterally revocable by the Second Fiduciary 
at any time, and will similarly apply to all future Purchase 
Transactions. However, such standing approval will cover (a) the 
Strategy and the management, by PIMCO, of client Plan assets in 
separate Accounts in the implementation of such Strategy; (b) the 
investment of a certain portion (or portions) of the Accounts in 
specified PIMCO Mutual Funds, as part of PIMCO's ongoing implementation 
of such Strategy; and (c) the acquisition of shares of PIMCO Mutual 
Funds in cash or in kind, from time to time. In addition, the Second 
Fiduciary will be required to provide PIMCO with written approval, 
prior to each Purchase Transaction, with respect to such transaction, 
consistent with the responsibilities, obligations and duties imposed on 
fiduciaries by part 4 of Title I of the Act.
    Moreover, the Second Fiduciary will be required to authorize the 
receipt of confirmation statements from PIMCO, with respect to Purchase 
Transactions, in the form of written reports to such Second Fiduciary.
    Under either Plan size scenario, if the Second Fiduciary does not 
approve the use of the PIMCO Mutual Funds as Plan investments, it will 
not allow PIMCO the investment discretion to invest in the PIMCO Mutual 
Funds.

Valuation Procedures

    11. The assets transferred by an Account to the Funds in connection 
with a Purchase Transaction will consist of securities for which there 
is a recognized market. The value of the securities to be transferred 
in kind from an Account in such Purchase Transactions will be 
determined based on market value as of the close of business on the day 
of the Purchase (the Account Valuation Date). The current market price 
for specific types of Account securities transferred to the PIMCO 
Mutual Funds in exchange for shares in a Purchase Transaction on the 
Account Valuation Date will be determined in a single valuation using 
the valuation procedures described in Rule 17a-7 under the ICA 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 
(1934 Act), the last sale price with respect to such security 
reported in the consolidated transaction reporting system (the 
Consolidated System) for the Account Valuation Date; or if there are 
no reported transactions in the Consolidated System that day, 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 
Account Valuation Date; or
    (b) If the security is not a reported security, and the 
principal market for such security is an exchange, then the last 
sale on such exchange on the Account Valuation Date; or if there is 
no reported transaction on such exchange that day, the average of 
the highest current independent bid and lowest current independent 
offer on such exchange as of the close of business on the Account 
Valuation Date; or
    (c) If the security is not a reported security and is quoted in 
the NASDAQ system, then the average of the highest current 
independent bid and lowest current independent offer reported on 
Level 1 of NASDAQ as of the close of business on the Account 
Valuation Date; or
    (d) For all other securities, the average of the highest current 
independent bid and lowest current independent offer as of the close 
of business on the Account Valuation Date, determined on the basis 
of reasonable inquiry. For securities in this category, PIMCO 
intends to obtain quotations from at least two sources that are 
broker-dealers or pricing services independent of and unrelated to 
PIMCO, using the average of the quotations to value the securities, 
in conformance with interpretations by the SEC and practice under 
Rule 17a-7.\11\

    \11\ Securities of non-U.S. issuers may be traded on U.S. 
exchanges or the NASDAQ, directly or in the form of ADRs, or may be 
acquired on foreign exchanges or foreign over-the-counter markets. 
In the latter case, valuation will be in accordance with 
Representation 11 above.

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[[Page 5313]]

    In addition, if the asset is a short-term investment having a 
maturity of 60 days or less, the asset will be valued at its amortized 
cost.\12\ If the asset is an exchange traded option or an option on a 
future, the asset will be valued at the settlement price determined by 
the exchange.\13\ Securities and assets originally valued in currencies 
other than the U.S. dollar will be converted to U.S. dollars using 
exchange rates obtained from independent pricing services.
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    \12\ In PTE 96-54 (61 FR 37933, July 22, 1996), involving the 
Wells Fargo Bank, N.A. (Wells Fargo), the ``amortized cost'' method 
referred to an approach to valuing debt securities that were 
recognized in different contexts by various regulatory agencies and 
accounting standard boards. Wells Fargo noted that the amortized 
cost method is a permitted, rather than required, valuation approach 
and that the term also refers to the value of a security derived 
from the methodology. For example, Wells Fargo explained that the 
SEC's ``Codification of Financial Policies,'' describes in detail 
the use of the amortized cost methodology and recognizes that a 
mutual fund's board of directors may determine in good faith that, 
except in unusual circumstances, amortized cost approximates the 
fair market value of debt securities with remaining maturities of 60 
days or less (based on the cost for securities acquired within 60 
days of maturity or fair market value on the 61st day prior to 
maturity for securities already owned). PIMCO represents that it 
concurs with Wells Fargo's understanding of the amortized cost 
method.
    \13\ PIMCO represents that trading in options and futures on 
options are among the strategies typically employed by managers of 
fixed income mutual funds, such as the Private Account Portfolios. 
Any options not traded on an exchange will be valued in the same 
manner as other securities which are not traded on an exchange. In 
addition, PIMCO notes that settlement prices for the options are 
continuously available during the trading day for exchange-traded 
options.
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    The Account securities received by a transferee PIMCO Mutual Fund 
in a Purchase Transaction will be valued by such portfolio for purposes 
of the transfer in the same manner and as of the same day as such 
securities will be valued by the corresponding transferor Account. The 
value per share of the PIMCO Mutual Funds issued to the Accounts will 
be based on the net asset value per share of such PIMCO Mutual 
Fund.\14\
    Rule 17a-7 (or the Rule) of the ICA requires a mutual fund 
registered under the ICA to adopt procedures reasonably designed to 
ensure that all transaction with such mutual fund have satisfied the 
conditions of the Rule. The board of directors of such registered 
mutual fund must, on a quarterly basis, review all transactions 
conducted under the Rule and make a determination that all such 
purchases or sales made during the quarter have complied with the 
procedures adopted by such fund.
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    \14\ For purposes of pricing purchases, net asset value is 
determined by dividing the value of all securities and assets of 
each portfolio, less the liabilities charged to each portfolio, by 
the number of each portfolio's outstanding shares.
---------------------------------------------------------------------------

    As required by the Rule, reports will be prepared and presented to 
the board of directors of any PIMCO Mutual Fund that has engaged in 
transactions covered by such Rule. In addition, PIMCO will provide the 
reports (with respect to Purchase Transactions affecting the client 
Plan's Account) to any Second Fiduciary of a client Plan which has 
engaged in a Purchase Transaction with a PIMCO Mutual Fund during the 
period in question. Such reports will be disseminated by PIMCO to 
Second Fiduciaries of client Plans by regular mail, express mail or 
personal delivery, or if applicable, by facsimile or electronic mail, 
no later than 30 business days after the Purchase Transaction.
    The reports will serve both a confirmation and reporting function. 
Such reports will contain the following information: (a) A list (or 
lists, if there are multiple Purchase Transactions) identifying each of 
the securities that was valued for purposes of the Purchase Transaction 
in accordance with Rule 17a-7(b)(4) of the ICA; (b) the current market 
price, as of the date of the Purchase Transaction, of each of the 
securities involved in the Purchase Transaction; (c) the identity of 
each pricing service or market maker consulted in determining the value 
of such securities; (d) the aggregate dollar value of the securities 
held in the Plan Account immediately before the Purchase Transaction; 
and (e) the number of shares of the PIMCO Mutual Funds that are held by 
the Account following the Purchase Transaction (and the related per 
share net asset value and the aggregate dollar value of the shares 
received) immediately following the Purchase Transaction.

PIMCO's General Compliance with PTE 77-4

    12. As noted above, it is anticipated that the Purchase 
Transactions will occur not only when a new client Plan retains PIMCO 
as a discretionary fiduciary under the Investment Management Agreement 
in connection with an existing portfolio of assets, but where PIMCO, 
while implementing a Strategy for an ongoing client Plan, determines 
that it is appropriate to invest Plan assets in the PIMCO Mutual Funds 
under the terms of PTE 77-4. Any individual Plan (or Plan sponsor) that 
retains PIMCO as an investment manager will pay directly to PIMCO a 
Plan-level investment management fee in exchange for all investment 
management services provided to it by PIMCO. PIMCO's fee is usually 
based on a percentage of the market value of assets under management. 
For example, if a Plan Account has less than $600 million in aggregate 
assets, PIMCO's investment management fee will be computed as follows: 
0.50 percent on the first $25 million, 0.375 percent on the next $25 
million and 0.25 percent thereafter. If the Account has total assets 
that are in excess of $600 million, PIMCO's investment management fees 
will reflect 0.25 percent on the first $600 million, 0.20 percent on 
the next $700 million and 0.15 percent thereafter.
    In addition, certain of PIMCO's fee schedules may include 
incentive-based fee structures, if agreed to by the client Plan's 
Second Fiduciary.\15\ Under a typical incentive fee arrangement, PIMCO 
will earn its annual base fee of 20 basis points. Thereafter, PIMCO 
will earn an additional 20 percent of the excess of an Account's 
performance over a designated independent index, such as the Lehman 
Aggregate Bond Index.
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    \15\ PIMCO represents that if the Plan-level investment 
management fees includes an incentive fee which is calculated and 
payable to it or to the PIMCO Affiliates, such fee will be in 
accordance with advisory opinions issued by the Department to 
Batterymarch Financial Management (see ERISA Advisory Opinion 86-
20A, August 29, 1986); BDN Advisers, Inc. (see ERISA Advisory 
Opinion 86-21A, August 29, 1986); and Alliance Capital Management 
Corporation (see ERISA Advisory Opinion 89-28A, September 25, 1989). 
However, in this proposed exemption, the Department expresses on 
opinion on whether the PIMCO's contemplated fee arrangements are in 
compliance with the aforementioned advisory opinions.
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    Further, client Plans may request customized products and services, 
and fees for such services may be separately negotiated. As mentioned 
above, the size of the fee will vary in inverse proportion to the size 
of the Plan's Account with PIMCO. Fees are normally paid on a quarterly 
basis, with some accounts being billed during the quarter for services 
which are provided, using the asset value at the beginning of the 
quarter. However, the periods over which fees are calculated and their 
method of payment will be negotiated in advance and will depend upon 
the requirements of the individual client.
    With respect to any Plan with assets invested in the PIMCO Mutual 
Funds, PIMCO follows PTE 77-4, under which all investment advisory fees 
payable to PIMCO by the PIMCO Mutual Funds (currently, 0.02 percent for 
the Private Account Portfolios) that are attributable to that Plan's 
investment in the PIMCO Mutual Funds are credited against such Plan's 
Plan-level investment management fees. The net result of the

[[Page 5314]]

credit to the Plan is that, with respect to any Plan investments, PIMCO 
receives only a Plan-level investment management fee. Therefore, the 
investment of Plan assets in the PIMCO Mutual Funds will not result in 
additional investment management fees to PIMCO or to the PIMCO 
Affiliates.\16\
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    \16\ The total annual operating expenses of the portfolios for 
the PIMCO Mutual Funds are set forth in the offering materials and 
disclosures given to Plan clients in connection with an investment 
in such Funds. As noted above, the Private Account Portfolios of the 
PIMCO Mutual Funds impose an annualized administrative fee, which 
currently ranges (after appropriate credits) from 0.028 percent for 
the Real Return Bond Portfolio to 0.04 percent for the International 
Portfolio.
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    PIMCO may also receive other Fund-level fees for administrative, 
transfer, accounting, and other secondary services (the Secondary 
Services)\17\ provided to a PIMCO Mutual Fund or to the distributor of 
shares of the PIMCO Mutual Funds and its affiliates. However, no such 
fees will be paid to PIMCO pursuant to a 12b-1 Plan. PIMCO represents 
that the trustees of the PIMCO Mutual Funds and the shareholders of 
such Funds approve the compensation that PIMCO receives from the PIMCO 
Mutual Funds. In addition, the trustees of the PIMCO Mutual Funds 
approve any changes in the compensation paid to PIMCO for services 
rendered to the PIMCO Mutual Funds.
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    \17\ The term ``Secondary Service'' means a service, other than 
an investment management, investment advisory or similar service 
which is provided by PIMCO to the Funds, including, but not limited 
to, custodial, accounting, administrative, or legal services.
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    Currently, PIMCO credits all or a portion of the Fund-level fees it 
receives from the Private Account Portfolios for Secondary Services 
that are administrative in nature to the participating Plans in the 
same manner as PIMCO credits back its Fund-level advisory fees. For 
certain of these PIMCO Mutual Funds, PIMCO is retaining a portion of 
such administrative fees in accordance with the Department's advisory 
opinions involving PNC Financial Corp. (ERISA Advisory Opinion 93-12A, 
April 27, 1993) and the Frank Russell Company (ERISA Advisory Opinion 
93-13A, April 27, 1993).\18\
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    \18\ PIMCO represents that the PIMCO Mutual Fund portfolios for 
which it presently credits back fees for Secondary Services are the 
Short-Term Fund, the Short-Term II Fund, the U.S. Government Sector 
II Fund, the Mortgage Fund, the Mortgage II Fund, and the Investment 
Grade Corporate Fund.
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    Finally, PIMCO represents that the combined total of all Plan-level 
and Fund-level fees received by PIMCO for the provision of services to 
such Plans and to the PIMCO Mutual Funds, respectively, is not in 
excess of ``reasonable compensation'' within the meaning of section 
408(b)(2) of the Act.

Conditions for Exemption

    13. If granted, this proposed exemption will be subject to the 
satisfaction of certain conditions that will further protect the 
interests of the Plans. For example, the proposed Purchase Transactions 
are subject to the prior written authorization of an independent Second 
Fiduciary, acting on behalf of each of the Plans, who has been provided 
with full and written disclosure by PIMCO. The Second Fiduciary will 
generally be the administrator, sponsor, or a committee appointed by 
the sponsor to act as a named fiduciary for a Plan.
    With respect to disclosure, the Second Fiduciary of such Plan will 
receive full and written disclosure of information concerning the PIMCO 
Mutual Funds as set forth in the Investment Management Agreement, 
including (a) a current prospectus or offering memorandum (containing 
the same information as the prospectus for securities registered under 
the 1933 Act) for each PIMCO Fund to which the Plan's assets may be 
transferred; (b) a statement describing the fees to be charged to, or 
paid by, the Plan and the PIMCO Mutual Funds to PIMCO, including the 
nature and extent of any differential between the rates of the fees 
paid by the Fund and the rates of the fees otherwise payable by the 
Plan to PIMCO; (c) a statement of the reasons why PIMCO considers 
Purchase Transactions to be appropriate for the Plan; (d) a statement 
on whether there are any limitations on PIMCO with respect to which 
Plan assets may be invested in the Funds, and if so, the nature of such 
limitations; and (e) in the case of a Plan having total assets that are 
less than $200 million, the identity of all securities that are deemed 
suitable by PIMCO for transfer to the PIMCO Mutual Funds.
    On the basis of the information disclosed, the Second Fiduciary, in 
the Investment Management Agreement for a client Plan, or in separate 
Investment Guidelines provided to PIMCO, will authorize in writing the 
investment of assets of the Plans in shares of the PIMCO Mutual Funds 
in connection with the Purchase Transactions set forth herein and the 
compensation received by PIMCO in connection with its services to the 
PIMCO Mutual Funds. The Second Fiduciary's written authorization will 
extend to those portfolios of the PIMCO Mutual Funds that are 
specifically referenced in the Plan's Investment Management Agreement 
with PIMCO or in separate Investment Guidelines given to PIMCO by the 
client Plan. (As noted above in Representation 10, such authorization 
by the Second Fiduciary may include either blanket approval or 
transactional approval, depending upon the size of the Plan.) Having 
obtained the authorization of the Second Fiduciary, PIMCO will invest 
the assets of a Plan, from time to time, among such portfolios of the 
PIMCO Mutual Funds and in the manner provided in the Investment 
Management Agreement and the Strategy, subject to satisfaction of the 
other terms and conditions of this proposed exemption.
    In addition to the disclosures provided to the Plan prior to 
investment in any of the PIMCO Mutual Funds, PIMCO will routinely 
provide at least annually to the Second Fiduciary of the Plan, updated 
prospectuses of the PIMCO Mutual Funds or offering memoranda in 
accordance with the requirements of the ICA and the SEC rules 
promulgated thereunder. Further, the Second Fiduciary of a Plan will be 
supplied, upon request, with a report or statement (which may take the 
form of the most recent financial report of the PIMCO Mutual Funds, the 
current statement of additional information (or offering memoranda 
supplement), or some other written statement) which contains a 
description of all fees paid by the PIMCO Mutual Fund to PIMCO.
    In addition to the disclosures provided to the Plan prior to 
investment in any of the PIMCO Mutual Funds, it is represented that (a) 
Plans and other investors will purchase or redeem shares in the Funds 
in accordance with standard procedures adopted by each Fund's board of 
directors; (b) Plans will pay no sales commissions, redemption fees, or 
Rule 12b-1 Fees in connection with purchase or redemption of shares in 
the Funds by the Plans; (c) PIMCO will not purchase from or sell to any 
of the Plans shares of any of the Funds; (d) PIMCO will maintain for a 
period of six years, in a manner that is capable for audit and 
examination, records necessary to enable certain designated persons, 
such as Plan fiduciaries, Plan participants, or duly authorized 
employees or representatives of the Department, the Service or the SEC, 
to determine whether the conditions of the exemption have been met; (e) 
all dealings in connection with a Purchase Transaction will be on a 
basis that is no less favorable to a Plan than dealings between the 
PIMCO Mutual Fund and other shareholders; and (f) the price paid or 
received by the Plans for shares of the Funds will be the net asset 
value per share at the time of such purchase or redemption and will be 
the same

[[Page 5315]]

price as any other investor would have paid or received at that time.
    The value of the Funds' shares and the value of each Funds' 
portfolios are determined on a daily basis. Assets are valued at fair 
market value, as required by Rule 17a-7.\19\ Net asset value per share, 
for purposes of pricing purchases and redemptions, is determined by 
dividing the value of all securities and other assets of each 
portfolio, less the liabilities charged to each portfolio, by the 
number of each portfolio's outstanding shares.
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    \19\ However, if the use of a money market fund is authorized by 
a client Plan, the assets would instead be valued based on the 
amortized cost method authorized by SEC Rule 2a-7 in order to 
maintain the net asset value at $1.00 per share.
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    It is represented that the receipt of fees, as described above, is 
generated by a Plan's investment in the PIMCO Mutual Funds. These 
investments are the result of purchases of shares with cash and the 
exchanges of assets of the Plans, including those in Accounts, for 
shares of the PIMCO Mutual Funds. With respect to such Purchase 
Transactions, it is represented that Plans and other investors will 
purchase or redeem shares of the PIMCO Mutual Funds in accordance with 
standard procedures described in the prospectus (or offering 
memorandum) for each portfolio of the PIMCO Mutual Funds.
    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) Depending upon the size of an investing Plan, a Second 
Fiduciary has authorized or will authorize, in writing, a Purchase 
Transaction prior to its consummation either by blanket approval or by 
transactional approval after such Second Fiduciary has received full 
written disclosure of information concerning the Plan's investment in a 
PIMCO Mutual Fund.
    (b) Each Plan has received or will receive shares of a PIMCO Mutual 
Fund, in connection with a Purchase Transaction, that are equal in 
value to the assets of the Plan exchanged for such shares, 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 ICA, as amended from time to time or 
any successor rule, regulation or similar pronouncement.
    (c) Not later than 30 business days after a Purchase Transaction, a 
Second Fiduciary of a Plan that has engaged in a Purchase Transaction 
has received or will receive a report containing the following 
information: (1) The identity of each of the securities that was valued 
for purposes of a Purchase Transaction in accordance with Rule 17a-
7(b)(4) of the ICA; (2) the current market price, as of the date of the 
Purchase Transaction, of each of the securities involved in the 
Purchase Transaction; (3) the identity of each pricing service or 
market maker consulted in determining the value of such securities; (4) 
the aggregate dollar value of the securities held in the Plan Account 
immediately before the Purchase Transaction; and (5) the number of 
shares of the PIMCO Mutual Funds that are held by the Account following 
the Purchase Transaction (and the related per share net asset value and 
the aggregate dollar value of the shares received) immediately 
following the Purchase Transaction.
    (d) The price that has been paid or received or will be paid or 
received by the Plans for shares in the PIMCO Mutual Funds is the net 
asset value per share at the time of the transaction and will be the 
same price for the shares which will be paid or received by any other 
investor for shares of the same class at that time.
    (e) As to each individual Plan, the combined total of all fees 
received by PIMCO for the provision of services to a Plan, and in 
connection with the provision of services to any of the Funds in which 
the Plan may invest, has not been in excess, nor will be in excess of 
``reasonable compensation,'' within the meaning of section 408(b)(2) of 
the Act.
    (f) No sales commissions, redemption fees, or Rule 12b-1 Fees have 
been paid or will be paid by a Plan in connection with a Purchase 
Transaction.
    (g) With respect to each Purchase Transaction, the Second Fiduciary 
has received or will receive a full and detailed written disclosure of 
information concerning a PIMCO Mutual Fund, including a current 
prospectus and a statement describing the fee structure, and such 
Second Fiduciary has authorized or will authorize, in writing, the 
investment of the Plan's assets in the Fund and the fees paid by the 
Fund to PIMCO.
    (h) In accordance with the requirements of PTE 77-4 and advisory 
opinions issued by the Department thereunder, (1) the Plans have 
received or will receive a full credit against Plan-level fees of any 
investment management, investment advisory or similar fees paid to 
PIMCO with respect to any of the assets of such Plans that are or will 
be invested in shares of any of the Funds; and (2) PIMCO may retain 
fees for certain Secondary Services it performs on behalf of the Funds.
    (i) PIMCO will provide ongoing disclosures (e.g., updated 
prospectuses or offering memoranda) to Second Fiduciaries of Plans so 
that such fiduciaries may, among other things, verify the fees charged 
by PIMCO to the PIMCO Mutual Funds.
    (j) All dealings between the Plans and any of the PIMCO Mutual 
Funds have been or will be on a basis that is no less favorable to such 
Plans than dealings between the PIMCO Mutual Funds and other 
shareholders holding shares of the same class as the Plans.

Notice to Interested Persons

    PIMCO represents that because client Plans that may be potentially 
interested in engaging in the aforementioned Purchase Transactions 
cannot be identified at this time, the only practical means of 
notifying the Second Fiduciaries of such Plans is by the publication of 
this notice of proposed exemption in the Federal Register. Therefore, 
comments and requests for a hearing must be received by the Department 
no later than 30 days from the date of publication of this notice of 
proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 693-8556. (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;

[[Page 5316]]

    (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 30th day of January, 2002.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits, 
Administration, U.S. Department of Labor.
[FR Doc. 02-2640 Filed 2-4-02; 8:45 am]
BILLING CODE 4510-29-P