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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Rockford Corporation 401(k) Retirement Savings Plan (the Plan) et al. [Notices] [12/13/2001]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Rockford Corporation 401(k) Retirement Savings Plan (the Plan) et al. [12/13/2001]

[PDF Version]

Volume 66, Number 240, Page 64459-64480

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10852, et al.]

 
Proposed Exemptions; Rockford Corporation 401(k) Retirement 
Savings Plan (the Plan) et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

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

ADDRESSES: All written comments and 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: 
moffittb@pwba.dol.gov, 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).

[[Page 64460]]


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.

Rockford Corporation 401(k) Retirement Savings Plan (the Plan) 
Located in Tempe, AZ

[Application No. D-10852]

Proposed Exemption

    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).\1\ If the exemption is granted, the restrictions of sections 
406(a)(1)(D), 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)(D) and (E) of the Code, shall not apply, 
effective December 30, 1999 until March 15, 2000, to an arrangement, by 
Rockford Corporation (Rockford), the Plan sponsor, for the reversal of 
the original purchase of debt securities (the Debentures) previously 
issued by Rockford (the Reversal Transactions), involving the following 
transactions affecting the individually-directed accounts in the Plan 
(the Plan Accounts) of certain Plan participants (the Participants): 
(1) The purchase, by the Participants, from their Plan Accounts of the 
Debentures; (2) the distribution in kind of the Debentures by the Plan 
Accounts to the Participants; (3) the rollover of the Debentures, if 
distributed in kind to the Participants, into self-directed individual 
retirement accounts (the IRAs) established by the Participants; and (4) 
any benefit that may have inured to Rockford by not having to 
repurchase the Debentures held by the Plan Accounts.
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    \1\ For purposes of this proposed exemption, references to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
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    This proposed exemption is subject to the following conditions:
    (a) A Form 5330 was filed by Rockford with the Internal Revenue 
Service (the Service) and all appropriate excise taxes were paid with 
respect to the Plan's acquisition and holding of the Debentures, as 
well as for the extension of credit by the Plan to Rockford resulting 
therefrom.
    (b) With respect to each Debenture,
    (1) Rockford offered to repurchase such Debentures from each 
affected Participant's account in the Plan (the Plan Account), at their 
fair market value, as determined by Arthur Andersen LLP (Arthur 
Andersen), a qualified, independent appraiser; and
    (2) By March 15, 2000 each Debenture was either--(i) repurchased by 
Rockford; (ii) purchased by or distributed in kind to each Participant 
whose Plan Account had held such Debentures; and (iii) rolled over, at 
the election of the Participant, into the Participant's self-directed 
IRA.
    (c) At the time of the Reversal Transactions, each Plan Account 
received no less than fair market value for the Debentures, which was 
in excess of their initial cost.
    (d) The Plan Accounts paid no fees or commissions in connection 
with the Reversal Transactions.
    (e) Rockford advised each affected Participant in advance of any 
transaction of the various options available with respect to the 
divestment of the Debentures from the Participant's Plan Account.
    (f) Rockford has maintained, or will cause to be maintained, for a 
period of six years from the date of such transactions, in a manner 
capable for audit and examination, such records as are necessary to 
enable the persons described below in paragraph (g) to determine 
whether the conditions of this exemption have been met, except that a 
prohibited transaction will not be considered to have occurred if, due 
to circumstances beyond the control of Rockford, the records are 
destroyed prior to the end of the six year period.
    (g)(1) Except as provided in paragraph (2) of this section (g) and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (f) 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 Service;
    (B) Any fiduciary of the Plan or any duly authorized employee or 
representative of such fiduciary; and
    (C) Any Participant or beneficiary or duly authorized employee or 
representative of such Participant or beneficiary.
    (g)(2) None of the persons described in subparagraphs (g)(1)(B)-
(g)(1)(C) shall be authorized to examine the trade secrets of Rockford 
or commercial or financial information which is privileged or 
confidential.
    Effective Date: If granted, this proposed exemption will be 
effective between December 30, 1999 and March 15, 2000.

Summary of Facts and Representations

    1. The Plan is a self-directed individual account plan intended to 
meet the requirements under section 404(c) of the Act. As of February 
28, 2001, the Plan had 365 participants who exercised investment 
discretion over their Plan Accounts and total assets of $5,895,662.
    2. The Plan is sponsored by Rockford, a designer, manufacturer and 
distributor of high performance car audio systems. Rockford is 
incorporated in the State of Arizona and it maintains its principal 
place of business at 648 S. River Road, Tempe, Arizona. As of December 
31, 2000, Rockford had total assets of $66.9 million and shareholders' 
equity of $46.3 million.
    3. On May 1, 1995, Rockford issued a class of convertible 
subordinated debentures (i.e., the Debentures) worth $1 million to its 
shareholders which included certain Participants who were also senior 
employees and officers of Rockford.\2\ The Debentures have a maturity 
date of May 1, 2002 and provide for quarterly payments of interest, at 
the annualized rate of 8.5 percent. At maturity, the Debentures require 
a full return of principal. The Debentures are also convertible into 
common stock at any time before their redemption or maturity at a face 
value of $10.50 per share.
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    \2\ Because of the requirements of the securities laws, the 
Debentures could only be offered to Rockford's current shareholders 
or option holders.
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    4. The Participants were free to acquire the Debentures with their 
personal funds, other savings, or the balances in their Plan Accounts. 
However, because these Participants did not have sufficient funds to 
purchase the securities in their personal capacity, they suggested that 
Rockford amend the Plan's investment options to permit

[[Page 64461]]

such investments by certain Plan Accounts. Therefore, Rockford amended 
the Plan and only 20 Participants acquired the Debentures for their 
respective Plan Accounts. It is represented that the acquisition of the 
Debentures by each Plan Account was based on the exercise of control by 
the Participant who directed such purchase and was not motivated or 
influenced by Rockford.
    The Debentures were issued in amounts based upon the original 
principal amounts invested. There was no minimum amount required in 
connection with such purchases. As noted in the following table, some 
Participants invested over 25 percent of the assets in their Plan 
Accounts in the Debentures.\3\
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    \3\ The Department is not providing retroactive exemptive relief 
with respect to the original acquisition of the Debentures by the 
Plan Accounts. As stated later in this proposal, Rockford has 
already paid excise taxes to the Service with respect to prohibited 
transactions arising in connection with the original acquisition and 
holding of the Debentures by the Plan Accounts, including prohibited 
extensions of credit by the Plan Accounts to Rockford.

----------------------------------------------------------------------------------------------------------------
                                                                   Plan account   Purchase price
                                                                    balance or       paid for       Percent of
                           Participant                               employee     debentures  or      vested
                                                                     rollover       face value        balance
----------------------------------------------------------------------------------------------------------------
R. Trout........................................................      $41,668.65      $10,000.00              24
A. Zimmerman....................................................       58,984.16       15,755.00              27
G. Church.......................................................       12,936.47        3,521.00              27
T. Coulson......................................................       23,095.67          704.00               3
H. Kane.........................................................       17,402.39        3,521.00              20
W. Turner.......................................................       50,301.94        3,521.00               7
A. Gitch........................................................       21,441.30       11,056.00              52
H. Parvin (Chris)...............................................       36,896.55        5,000.00              14
J. Harris II (Wayne)............................................       53,251.36       39,500.00              74
M. Williams.....................................................       12,408.85          704.00               6
R. Gentry.......................................................       14,048.23        1,760.00              13
M. Lowe.........................................................        8,342.00        2,112.00              25
M. Rudolph......................................................        2,589.73        1,300.00              50
L. Ferris.......................................................        9,975.33        5,000.00              50
M. Albers.......................................................       40,300.31        3,520.00               9
J. Thompson; Rollover...........................................       50,000.00       50,000.00             100
D. Hammerle.....................................................        5,338.90        1,789.00              34
D. Boshes.......................................................       13,326.13        7,042.00              53
D. Boshes; Rollover.............................................       13,000.00       13,000.00             100
V. Hodson.......................................................          114.88          114.00              99
D. Richards.....................................................        7,580.02        4,250.00              56
----------------------------------------------------------------------------------------------------------------

    In the aggregate, the Plan Accounts purchased approximately 18 
percent (or $183,169.54) of the $1 million issue while Rockford's other 
shareholders purchased the remaining 82 percent of the Debentures. The 
Plan Accounts paid no fees or commissions to Rockford in connection 
with such acquisitions.
    5. During the course of a routine audit of the Plan in March 1999, 
Ernst & Young, LLP (Ernst & Young), the Plan's accountants, questioned 
whether the Debentures constituted ``qualifying employer securities'' 
within the meaning of section 407(d)(5) of the Act.\4\ Based upon a 
variety of legal advice, Rockford considered this question and 
subsequently determined that the Debentures failed to meet the 
requirements of section 407(e)(2)(B) of the Act because 50 percent of 
the Debentures were not held by persons which were independent of 
Rockford.\5\ Therefore, Rockford filed a Form 5330 with the Service on 
April 7, 2000 and paid excise taxes on July 6, 2000 to cover the 
prohibited transactions arising from the acquisition and holding of the 
Debentures by the Plan Accounts, as well as in connection with 
prohibited extensions of credit by the Plan Accounts to Rockford.
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    \4\ Section 407(d)(5)(B) of the Act states that the term 
``qualifying employer security'' means an employer security which is 
a marketable obligation (as defined in section 407(e) of the Act). 
Section 407(e) of the Act states that, for purposes of section 
407(d)(5) of the Act, the term ``marketable obligation'' means a 
bond, debenture, note, or certificate, or other evidence of 
indebtedness if--
    (1) such obligation is acquired--
    (A) on the market, either (i) at the price of the obligation 
prevailing on a national securities exchange which is registered 
with the Securities and Exchange Commission, or (ii) if the 
obligation is not traded on such national securities exchange, at a 
price not less favorable to the plan than the offering price for the 
obligation as established by the 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;
    (2) immediately following acquisition of such obligation--
    (A) not more than 25 percent of the aggregate amount of 
obligations issued in such issue and outstanding at the time of 
acquisition is held by the plan, and
    (B) at least 50 percent of the aggregate amount referred to in 
subparagraph (A) is held by persons independent of the issuer; and
    (3) immediately following acquisition of the obligation, not 
more than 25 percent of the assets of the plan is invested in 
obligations of the employer or an affiliate of the employer.
    \5\ According to the exemption application, the purchase of the 
Debentures was noted in the 1995 financial statements without 
comment. In the 1996 financial statements, Ernst & Young reportedly 
questioned whether the Debentures had been offered to a 
nondiscriminatory group, as required under Code qualification rules. 
The comment was repeated in the 1997 and 1998 financial statements. 
In March 1999, Ernst & Young decided to review various regulatory 
issues related to the Debentures and retained legal counsel for 
consultation on the discrimination issue and qualifying employer 
securities matter. However, these issues were resolved with the 
Service in a closing agreement dated July 19, 2001.
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    6. It is represented that the Debentures were never in default or 
delinquency and they appreciated significantly in value following their 
acquisition by the Plan Accounts. Between May 1, 1995 and March 15, 
2000, the Participants earned interest payments as follows with respect 
to the Debentures:

[[Page 64462]]



----------------------------------------------------------------------------------------------------------------
                                                   2d Q '95  (in   3d Q '95--4th                  Total interest
                   Participant                          $s)       Q '99  (in $s)     1st Q '00        (in $s)
----------------------------------------------------------------------------------------------------------------
R. Trout........................................          141.67        3,825.00          223.20        3,966.67
A. Zimmerman....................................          223.20        6,026.22           31.59        6,472.62
G. Church.......................................           49.88        1,346.76            4.32        1,428.23
T. Coulson......................................            9.97          269.28           31.59          298.53
H. Kane.........................................           49.88        1,346.76  ..............        1,428.23
W. Turner.......................................           49.88        1,346.76           62.53        1,396.64
A. Gitch........................................          156.63        4,228.92          106.25        4,447.90
H. Parvin (Chris)...............................           70.83        1,912.50  ..............        2,089.58
J. Harris II (Wayne)............................          559.58       15,108.84            2.16       15,668.42
M. Williams.....................................            9.97          269.28            5.40          281.41
R. Gentry.......................................           24.93          673.20            6.48          703.53
M. Lowe.........................................           29.92          807.84            7.98          844.24
M. Rudolph......................................           18.42          497.34  ..............          523.74
L. Ferris.......................................           70.83        1,912.50  ..............        1,983.33
M. Albers.......................................           49.87        1,346.40  ..............        1,396.27
J. Thompson; Rollover...........................  ..............       19,125.00           10.98       19,125.00
D. Hammerle.....................................           25.35          684.36  ..............          720.69
D. Boshes.......................................           99.76        4,972.50  ..............        5,072.26
D. Boshes; Rollover.............................  ..............        2,603.52  ..............        2,603.52
V. Hodson.......................................            1.62           43.56  ..............           45.18
D. Richards.....................................           60.21        1,625.76  ..............       1,685.97
----------------------------------------------------------------------------------------------------------------
\1\ Figures are approximate.

    In addition, an annual fee of $1,000 was either paid by Rockford or 
the Plan's forfeiture account to The Principal Financial Group, the 
Plan administrator and recordkeeper, as well as an unrelated party, in 
connection with the holding of the Debentures by the Plan Accounts.
    7. The Debentures were valued on December 16, 1999 by Messrs. James 
C. Gari, CFA, Manager, Financial Valuation, and Andrew W. Fernandez, 
Consultant, Financial Valuation, both of whom are employed by the 
Chicago, Illinois office of Arthur Andersen, which was retained by 
Rockford as a qualified, independent appraiser. The fees received by 
Arthur Andersen in connection with the appraisal were paid by Rockford 
and they represented less than one percent of Arthur Andersen's annual 
gross income.
    In their appraisal report, the appraisers treated the Debentures as 
a minority interest in the common stock of Rockford because the 
convertibility feature of the Debentures would permit their conversion 
into a total of 94,742 shares \6\ of common stock (of which 17,435 
shares of common stock were allocated to the Plan Accounts), at any 
time before redemption or maturity. The value of the common stock had 
increased significantly in value, thus, resulting in a substantial 
appreciation in the value of the Debentures. Thus, utilizing the Income 
Approach's discounted cash flow analysis to valuation, the appraisers 
placed the fair market value of the stock at $20.50 per share, as of 
November 1, 1999.
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    \6\ The 94,742 shares of common stock representing the 
Debentures constituted 2 percent of Rockford's common stock.
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    Based on the Arthur Andersen appraisal, the total fair market value 
of the minority interest relating to all of the Debentures was 
$1,942,211. Of this amount, $357,417.50 was attributed to the 
Debentures held by the Plan Accounts which can be broken down as 
follows for each affected Participant:

----------------------------------------------------------------------------------------------------------------
                                                                                    Fair market      Number of
                           Participant                              Face value         value          shares
----------------------------------------------------------------------------------------------------------------
R. Trout........................................................      $10,000.00      $19,516.00             952
A. Zimmerman....................................................       15,755.00       30,750.00           1,500
G. Church.......................................................        3,521.00        6,867.00             335
T. Coulson......................................................          704.00        1,373.50              67
H. Kane.........................................................        3,521.00        6,867.50             335
W. Turner.......................................................        3,521.00        6,867.50             335
A. Gitch........................................................       11,056.00       21,566.00           1,052
H. Parvin (Chris)...............................................        5,000.00        9,758.00             476
J. Harris II (Wayne)............................................       39,500.00       77,100.50           3,761
M. Williams.....................................................          704.00        1,373.50              67
R. Gentry.......................................................        1,760.00        3,423.50             167
M. Lowe.........................................................        2,112.00        4,120.50             201
M. Rudolph......................................................        1,300.00        2,521.50             123
L. Ferris.......................................................        5,000.00        9,758.00             476
M. Albers.......................................................        3,520.00        6,867.50             335
J. Thompson; Rollover...........................................       50,000.00       97,600.50           4,761
D. Hammerle.....................................................        1,789.15        3,485.00             170
D. Boshes.......................................................        7,042.00       13,735.00             670
D. Boshes; Rollover.............................................       13,000.00       25,379.00           1,238
V. Hodson.......................................................          114.00          205.00              10

[[Page 64463]]


D. Richards.....................................................        4,250.39        8,282.00             404
                                                                 -----------------------------------------------
    Totals......................................................      183,169.54      357,417.50          17,435
----------------------------------------------------------------------------------------------------------------

    8. Rockford believed that Participants whose Plan Accounts were 
invested in the Debentures could consider themselves to be adversely 
affected if the transaction were reversed by Rockford's repurchase of 
the Debentures. This was because the Participants would lose the future 
potential increase in value that they had hoped to realize by reason of 
such investment. Therefore, Rockford advised each Participant, whose 
Plan Account had been invested in the Debentures, that he or she could 
elect to (a) have Rockford purchase the Debentures from their 
respective Plan Account, at fair market value, as determined by a 
qualified, independent appraiser; (b) purchase the Debentures from his 
or her respective Plan Account at fair market value or receive an in 
kind distribution of the Debentures from the Participant's Plan 
Account; or (c) rollover the Debentures at their fair market value into 
the Participant's self-directed IRA, if the distribution was in kind. 
The Participants were further advised that although the choice of 
alternatives was entirely up to them, the Debentures could not remain 
in the Plan.\7\
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    \7\ It is represented that the sale of the Debentures to 
Rockford would not raise any tax issues for the Participants 
inasmuch as the transaction was simply the reversal of a prior 
prohibited transaction. It is also represented that the distribution 
option offered to Participants would pose income tax consequences 
while the rollover option would not.
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    To facilitate a Participant's purchase of Debentures from his or 
her Plan Account, Rockford also offered to make market rate loans to 
the Participants. However, no Participants took advantage of Rockford's 
offer.
    For purposes of repurchasing the Debentures, Rockford and the 
Participants relied upon the Arthur Andersen appraisal to determine 
fair market value. Thus, between December 30, 1999 and March 15, 2000, 
the Debentures held by the Plan Accounts were either (a) repurchased by 
Rockford; (b) purchased by the Participant or distributed in kind to 
the Participant; or
    (c) rolled over, at the election of such Participant, into a self-
directed IRA, if the distribution was in kind. The transactions can be 
summarized as follows:

----------------------------------------------------------------------------------------------------------------
                                                            Fair market
               Participant                  Face value         value                    Disposition
----------------------------------------------------------------------------------------------------------------
R. Trout................................      $10,000.00      $19,516.00  Rollover \1\.
A. Zimmerman............................       15,755.00       30,750.00  Rollover.
G. Church...............................        3,521.00        6,867.00  Rep. Rockford.\2\
T. Coulson..............................          704.00        1,373.50  Rep. Rockford.
H. Kane.................................        3,521.00        6,867.50  Rep. Rockford.
W. Turner...............................        3,521.00        6,867.50  Rep. Rockford.
A. Gitch................................       11,056.00       21,566.00  Rep. Rockford.
H. Parvin (Chris).......................        5,000.00        9,758.00  Rollover.\2\
J. Harris II (Wayne)....................       39,500.00       77,100.50  Roll/Rep. Part.\3\
M. Williams.............................          704.00        1,373.50  Rep. Rockford.
R. Gentry...............................        1,760.00        3,423.50  Rep. Rockford.
M. Lowe.................................        2,112.00        4,120.50  Rep. Rockford.
M. Rudolph..............................        1,300.00        2,521.50  Rep. Rockford.
L. Ferris...............................        5,000.00        9,758.00  Rollover.
M. Albers...............................        3,520.00        6,867.50  Rollover.
J. Thompson Rollover....................       50,000.00       97,600.50  Rollover.
D. Hammerle.............................        1,789.15        3,485.00  Rep. Rockford.
D. Boshes...............................        7,042.00       13,735.00  Rollover.
D. Boshes Rollover......................       13,000.00       25,379.00  Rollover.
V. Hodson...............................          114.00          205.00  Rollover.
D. Richards.............................        4,250.39        8,282.00  Rollover.
                                         --------------------------------
    Total...............................      183,169.54     357,417.50
----------------------------------------------------------------------------------------------------------------
\1\ Rollovers include distributions in kind.
\2\ Repurchased by Rockford.
\3\ Rollover/Repurchased by Participant.

    The Plan Accounts paid no fees or commissions in connection with 
the Reversal Transactions.
    9. Rockford believes that its repurchase of the Debentures from the 
Plan Accounts can be viewed as a ``correction'' of a prior prohibited 
transaction under section 4975 of the Code.\8\ Rockford has, however, 
requested an administrative exemption from the Department with respect 
to its arrangement whereby Participants were permitted to (a) purchase 
the Debentures directly from their Plan Accounts, (b) receive 
distributions in kind of such Debentures from their Plan Accounts, or 
(c) roll over such Debentures into self-directed IRAs, if the 
distribution was in kind. Rockford states that exemptive relief is 
required to the extent the initial acquisition and

[[Page 64464]]

holding of the Debentures by the Plan Accounts (including the extension 
of credit transaction) were not ``corrected,'' within the meaning of 
section 4975 of the Code, by the subsequent Participant actions. 
Additionally, exemptive relief is required to the extent Rockford 
received a benefit by not having to repurchase any of the Debentures 
held by the Plan Accounts.
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    \8\ In this regard, the Department has no jurisdiction with 
respect to the meaning of ``correction'' under section 53.4941(e)-
1(c)(1) of the Foundation Excise Tax Regulations, which applies to 
prohibited transactions under section 4975 of the Code by reason of 
Temporary Pension Excise Tax Regulation 141.4975-13. Under section 
53.4941(e)-1(c)(1), any correction pursuant to section 4941 of the 
Code is not a prohibited act of self-dealing. Therefore, the 
Department expresses no opinion herein on whether the repurchase of 
the Debentures by Rockford from the affected Plan Accounts was a 
correction within the meaning of 53.4941(e)-1(c)(1).
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    10. To document each Reversal Transaction, Rockford is maintaining 
for a period of six years from the date of such transaction, records 
that will enable certain persons, such as employees of the Department 
or the Service, Plan fiduciaries, Participants or their beneficiaries, 
to determine whether the conditions of the exemption have been met. 
Such records are being made available at their customary location for 
examination during normal business hours.
    11. In summary, it is represented that the arrangement satisfied 
the statutory criteria for an exemption under section 408(a) of the Act 
because:
    (a) Rockford filed a Form 5330 with the Service and paid 
appropriate excise taxes that were due with respect to the transactions 
arising during the Plan's ownership of the Debentures;
    (b) Rockford offered to repurchase the Debentures from each 
affected Participant's Plan Account, and by March 15, 2000, each 
Debenture was either (i) repurchased by Rockford; (ii) purchased by a 
Participant whose Plan Account had been invested in the Debentures, or 
(iii) distributed in kind to a Participant whose Plan Account had held 
the Debentures; or (iii) rolled over, at the election of the 
Participant into a self-directed IRA, if the distribution was in kind.
    (c) Each Plan Account received fair market value for the 
Debentures, which was an amount in excess of their initial cost.
    (d) The fair market value of the Debentures, which was equated to 
the value of a minority interest in Rockford common stock, was 
determined by Arthur Andersen, a qualified, independent appraiser.
    (e) Rockford will maintain for a period of six years from the date 
of each Reversal Transaction, in a manner capable for audit and 
examination, records of the transaction in order that certain persons, 
such as employees of the Department or the Service, Plan fiduciaries, 
Participants or their beneficiaries, can determine that the conditions 
of the exemption have been met.
    For Further Information Contact: Ms. Jan D. Broady, U.S. Department 
of Labor, (202) 219-8881. (This is not a toll-free number.)

Massachusetts Mutual Insurance Company (MassMutual) Located in 
Springfield, Massachusetts

[Application No. D-10869]

Proposed Exemption

    The Department is considering the grant of the following exemption 
under the authority of section 408(a) of the Act and section 4975(c)(2) 
of the Code, and in accordance with the procedures set forth in 29 CFR 
Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

Section I. Retroactive Exemption for the Purchase of Fund Shares

    For the period from April 1, 1995 until the date this proposed 
exemption is granted, the restrictions of sections 406(a) and 406(b) of 
the Act and the taxes imposed by section 4975 of the Code, by reason of 
section 4975(c)(1)(A) through (F) of the Code, shall not apply to the 
purchase by an employee benefit plan (the Client Plan) (directly or 
through a single customer or pooled separate account or other pooled 
vehicle) of shares of one or more diversified open-end management 
investment companies (Fund or Funds) in exchange for Client Plan assets 
transferred in-kind to a Fund from a single customer or pooled separate 
account or other pooled vehicle holding plan assets maintained by 
MassMutual (a Separate Account), where MassMutual or its affiliate is 
the Fund's investment adviser and a Client Plan fiduciary, provided the 
following conditions have been met: \9\
---------------------------------------------------------------------------

    \9\ The Department notes that the proposed exemption would not 
provide relief for any prohibited transactions that may arise in 
connection with terminating a separate investment account, or 
permitting certain plans to withdraw from a separate investment 
account that is not terminating, or liquidating or transferring any 
plan assets held by the separate investment account.
---------------------------------------------------------------------------

    (a) No sales commissions, redemption fees, or other fees are paid 
by the Client Plan in connection with the purchase of Fund shares by a 
Client Plan.
    (b) All transferred assets are either cash or securities for which 
market quotations are readily available.
    (c) The assets transferred in-kind to the Funds constitute the 
Client Plan's pro rata portion of the assets held by the Separate 
Account immediately prior to the transfer.
    (d) The Client Plan receives Fund shares having a total net asset 
value equal to the value of the assets transferred by the Client Plan 
on the date of the transfer, as determined in a single valuation 
performed in the same manner at the close of the same business day with 
respect to all Client Plans participating in the transaction on such 
date, in accordance with the procedures set forth in Rule 17a-7 of the 
Investment Company Act of 1940 (the 1940 Act) (using sources 
independent of MassMutual and the Fund) and the procedures established 
by the Funds pursuant to Rule 17a-7 for the valuation of such assets.
    (e) An Independent Fiduciary with respect to each Client Plan 
receives advance written notice of an in-kind transfer and purchase of 
assets and full written disclosure of information concerning the Funds, 
including:
    (1) A current prospectus for each Fund to which the Separate 
Account's assets may be transferred, updated as necessary;
    (2) A statement describing the investment advisory and other fees 
to be charged to, or paid by, a Client Plan and the Funds to the Fund 
Adviser, including the nature and extent of any differential between 
the rates of the fees paid by the Fund and the rates of the fees paid 
by the Client Plan in connection with the Client Plan's investment in 
the Separate Account;
    (3) A statement of the reasons why MassMutual considers such 
investment to be appropriate for the Client Plan; and
    (4) A statement describing whether there are any limitations 
applicable to MassMutual with respect to which Client Plan assets may 
be invested in Fund shares, including the nature of the limitations.
    (f) The Independent Fiduciary may: (1) Opt-out of the in-kind 
transfer of the Client Plan's interest in the Separate Account for 
shares of the Funds (including by selling its interest in a pooled 
vehicle) without penalty; or (2) approve the in-kind transfer (on the 
basis of the prospectus and disclosure referred to in paragraph (e) of 
this Section) consistent with the responsibilities, obligations, and 
duties imposed on fiduciaries by Part 4 of Title I of the Act. Approval 
for the in-kind transfer of a Client Plan's interest in the Separate 
Account in exchange for Fund shares may be presumed notwithstanding 
that MassMutual does not receive any response from a Client Plan 
pursuant to MassMutual's two written requests (one by certified mail) 
for such approval, provided that the first such request occurs at least 
90 days before the in-kind transfer and the second such request occurs 
within 45 days thereafter.
    (g) MassMutual sends a written confirmation by regular mail or 
personal delivery to the Independent Fiduciary of

[[Page 64465]]

each Client Plan participating in the in-kind transfer, no later than 
105 days after completion of each purchase, containing:
    (1) The number of Separate Account units held by the Client Plan 
immediately before the transfer, and the related per unit value and the 
total dollar amount of such units; and
    (2) The number of Fund shares held by the separate account 
immediately following the transfer, and the related per share net asset 
value and the total dollar amount of such shares.
    (h) All other dealings between the Client Plan and the Funds are on 
a basis no less favorable to the Client Plan than dealings between the 
Funds and other shareholders holding the same class of shares as the 
Client Plans.
    (i) Conditions (a) and (f) of Section III have been met.

Section II. Prospective Exemption for the Purchase of Fund Shares

    If this proposed exemption is granted, the restrictions of sections 
406(a) and 406(b) of the Act and the taxes imposed by section 4975 of 
the Code, by reason of section 4975(c)(1) (A) through (F) of the Code, 
shall not apply to the purchase by a Client Plan (directly or through a 
single customer or pooled separate account or other pooled vehicle) of 
shares of one or more Fund(s) in exchange for Client Plan assets 
transferred in-kind to a Fund from a Separate Account, where MassMutual 
or its affiliate is the Fund's investment adviser and a Client Plan 
fiduciary, provided that the following conditions are met:
    (a) The assets transferred in-kind to the Funds constitute the 
Client Plan's pro rata portion of the assets held by the Separate 
Account immediately prior to the transfer. Notwithstanding the 
foregoing, the allocation among Client Plans of fixed-income securities 
held by a Separate Account on the basis of each Client Plan's pro rata 
share of the aggregate value of such securities will not fail to meet 
the requirements of this subsection if:
    (1) The aggregate value of the fixed-income securities does not 
exceed one percent of the total value of the assets held by the 
Separate Account immediately prior to the transfer; and
    (2) Such securities have the same coupon rate and maturity, and at 
the time of the transfer, the same credit ratings from nationally 
recognized statistical rating agencies.
    (b) An Independent Fiduciary with respect to each Client Plan 
receives advance written notice of the in-kind transfer and purchase 
and full written disclosure of information concerning the Funds 
including:
    (1) The identity of the securities that will be valued in 
accordance with Rule 17a-7(b)(4) under the 1940 Act;
    (2) The identity of any fixed-income securities allocated on the 
basis of each Client Plan's pro rata share of the aggregate value of 
such securities pursuant to Section II (a);
    (3) Upon request of the Independent Fiduciary, a copy of the 
proposed exemption and/or a copy of the final exemption, once such 
documents are published in the Federal Register; and
    (4) The date on which the in-kind purchase will take place.
    (c) MassMutual sends by regular mail or personal delivery to the 
Independent Fiduciary of each Client Plan that purchases Fund shares 
pursuant to the in-kind transfer:
    (1) not later than 30 days after the completion of the purchase, a 
written confirmation containing:
    (A) The identity of each security valued in accordance with Rule 
17a-7(b)(4) under the 1940 Act;
    (B) The current market price, as of the date of the in-kind 
transfer, of each such security involved in the purchase of Fund 
shares; and
    (C) The identity of each pricing service or market-maker consulted 
in determining the current market price of such securities; and
    (2) not later than 90 days after each in-kind transfer, a written 
confirmation which contains:
    (A) the number of Separate Account units held by such affected 
Client Plan immediately before the in-kind transfer (and the related 
per unit value and the aggregate dollar value of the units 
transferred); and
    (B) the number of shares in the Funds that are held by such 
affected Client Plan following the in-kind transfer (and the related 
per share net asset value and the aggregate dollar value of the shares 
received).
    (d)(1) MassMutual provides the Independent Fiduciary of each Client 
Plan holding shares of the Funds with--
    (A) A copy of an updated prospectus of such Fund, at least 
annually; and
    (B) Upon request of the Independent 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 written 
statement) containing a description of all fees paid by the Fund to 
MassMutual or its affiliates.
    (2) With respect to each of the Funds in which a Client Plan 
invests, in the event such Fund places brokerage transactions with an 
affiliate of MassMutual, MassMutual will provide the Independent 
Fiduciary of such Client Plan at least annually with a statement 
specifying:
    (A) The total, expressed in dollars, of brokerage commissions of 
each Fund's investment portfolio that are paid to an affiliate of 
MassMutual by such Fund;
    (B) The total, expressed in dollars, of brokerage commissions of 
each Fund's investment portfolio that are paid by such Fund to 
brokerage firms unrelated to MassMutual;
    (C) The average brokerage commissions per share, expressed as cents 
per share, paid to an affiliate of MassMutual by each portfolio of a 
Fund; and
    (D) The average brokerage commissions per share, expressed as cents 
per share, paid by each portfolio of a Fund to brokerage firms 
unrelated to MassMutual.
    (e) The Independent Fiduciary may: (1) opt-out (including by 
selling its interest in a pooled vehicle) of the in-kind exchange of 
the Client Plan's interest in the Separate Account for shares of the 
Funds without penalty; or (2) approve the in-kind transfer (on the 
basis of the prospectus and disclosure referred to in paragraph (b) of 
this Section and paragraph (e) of Section I) consistent with the 
responsibilities, obligations, and duties imposed on fiduciaries by 
Part 4 of Title I of the Act. Approval for the in-kind transfer of a 
Client Plan's interest in the Separate Account in exchange for Fund 
shares may be presumed notwithstanding that MassMutual does not receive 
any response from a Client Plan pursuant to MassMutual's two written 
requests (one by certified mail) for such approval, provided that the 
first such request occurs at least 90 days before the in-kind transfer 
and the second such request occurs within 45 days thereafter.
    (f) All of a Client Plan's assets held in a Separate Account (other 
than Fund shares already held in the Account) are transferred in-kind 
to one or more of the Funds in exchange for Fund shares, except that 
any Plan assets in the Separate Account which are not suitable for 
acquisition by the Funds shall be liquidated as soon a reasonably 
practicable, and the cash proceeds shall be invested directly in shares 
of the Funds.
    (g) The authorization described in paragraph (e) of this section is 
terminable at will by the Independent Fiduciary of a Client Plan, 
without penalty to such Client Plan. Such termination will be effected 
by MassMutual redeeming the shares of the Fund(s) held by the affected 
Client Plan or selling its interest in a Separate Account, in one 
business day, provided

[[Page 64466]]

that if, due to circumstances beyond the control of MassMutual, the 
redemption cannot be executed within one business day, MassMutual shall 
have one additional business day to complete such redemption.
    (h) Conditions (a), (b), (d), (e), and (h) of Section I, Conditions 
(a) and (e) of Section III, and Conditions (a) and (b) of Section V 
have been met.

Section III. Retroactive Exemption for the Receipt of Fees

    For the period from April 1, 1995 until the date this proposed 
exemption is granted, the restrictions of sections 406(a) and 406(b) of 
the Act and the taxes imposed by section 4975 of the Code, by reason of 
section 4975(c)(1) (A) through (F) of the Code, shall not apply to the 
receipt of fees by MassMutual from the Funds for acting as an 
investment adviser for such Funds, as well as for providing other 
services to the Funds which are ``Secondary Services'', as defined in 
Section VI(i), in connection with the investment by the Client Plans 
for which MassMutual serves as a fiduciary in shares of the Funds, 
provided that the following conditions are met:
    (a) As to each Client Plan, the combined total of all fees received 
by MassMutual for the provision of services to the Client Plan, and for 
the provision of services to a Fund in which a Client Plan holds 
shares, is not in excess of ``reasonable compensation'' within the 
meaning of section 408(b)(2) of the Act.
    (b) The price paid or received by a Client Plan for shares in a 
Fund is the net asset value of such shares, as defined in Section 
VI(g), at the time of the transaction and is the same price that would 
have been paid or received for the shares by any other investor at that 
time.
    (c) Neither MassMutual, other than in its capacity as agent for the 
Funds, nor any officer or director of MassMutual, purchases or sells 
shares of the Funds from or to any Client Plan.
    (d) The Independent Fiduciary approves the fees to be paid by the 
Funds to MassMutual as such fees relate to:
    (1) Fund shares purchased by a Client Plan for cash;
    (2) Fund shares purchased by a Client Plan pursuant to an in-kind 
transfer (upon the Independent Fiduciary's consideration of the 
information described in paragraph (e) of Section I);
    (3) the addition of a Secondary Service (as defined in Section V 
(i)) provided by MassMutual to the Fund for which a fee is charged, or 
an increase in the rate of any fee paid by the Funds to MassMutual for 
any Secondary Service that results either from an increase in the rate 
of such fee or from a decrease in the number or kind of services 
performed by MassMutual for such fee over an existing rate for such 
Secondary Service that had been authorized by the Independent Fiduciary 
of a Client Plan. The approvals required in this paragraph may be 
presumed notwithstanding that MassMutual does not receive any response 
from a Client Plan to MassMutual's two written requests (one by 
certified mail) for approval of a change in the rates of fees provided 
that the first such request occurs at least 90 days before the in-kind 
transfer and the second such request occurs within 45 days thereafter. 
Such approval may be limited solely to the investment advisory and 
other fees paid by the mutual fund in relation to the fees paid by a 
Client Plan and need not relate to any other aspects of such 
investment.
    (e) The Fund Adviser does not receive any fees payable pursuant to 
Rule 12b-1 under the 1940 Act in connection with the acquisition of 
Fund shares in exchange for Client Plan assets.
    (f) The Plan does not pay any plan-level investment management, 
investment advisory or similar fee with respect to the Client Plan 
assets invested in such shares for the entire period of such 
investment. This condition does not preclude the payment of investment 
advisory fees by an investment company under the terms of its 
investment advisory agreement adopted in accordance with section 15 of 
the Investment Company Act of 1940.
    (g) On an annual basis, MassMutual provides the Independent 
Fiduciary of each Client Plan holding shares of the Funds with--
    (1) A copy of an updated prospectus of such Fund; and
    (2) Upon request of the Independent 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 written 
statement) containing a description of all fees paid by the Fund to 
MassMutual or its affiliates.
    (3) Oral or written responses to inquiries of the Independent 
Fiduciary as they arise.
    (h) Conditions (a), (e), (h) and (i) of section I, Condition (b) of 
Section II, and Conditions (a) and (b) of Section V have been met.

Section IV. Prospective Exemption for the Receipt of Fees

    If this proposed exemption is granted, the restrictions of sections 
406(a) and 406(b) of the Act and the taxes imposed by section 4975 of 
the Code, by reason of section 4975(c)(1) (A) through (F) of the Code, 
shall not apply to the receipt of fees by MassMutual from the Funds for 
acting as an investment adviser for such Funds, as well as for 
providing other services to the Funds which are ``Secondary Services,'' 
as defined in Section VI(i), in connection with the investment by the 
Client Plans for which MassMutual serves as a fiduciary in shares of 
the Funds, provided that the following conditions are met:
    (a) For each Client Plan using the fee structure described in 
paragraph (d)(2) of this Section with respect to investments in a 
particular Fund, the Independent Fiduciary of the Client Plan receives 
full written disclosure in a Fund prospectus or otherwise of any 
increases in the rates of fees charged by MassMutual to the Funds for 
investment advisory services.
    (b) All authorizations made by an Independent Fiduciary regarding 
investments in a Fund and the fees paid to MassMutual are subject to an 
annual reauthorization, wherein any such prior authorization referred 
to in Section
III(d) shall be terminable at will by the Client Plan, without penalty 
to the Client Plan, upon receipt by MassMutual of written notice of 
termination. The Independent Fiduciary must be supplied with a 
Termination Form, at the times specified in paragraph (c) of this 
Section, with instructions on the use of the form, including the 
following information:
    (1) The authorization is terminable at will by any of the Client 
Plans, without penalty to such Client Plans, upon receipt by MassMutual 
of written notice from the Independent Fiduciary; and
    (2) Failure by the Independent Fiduciary to return the Termination 
Form on behalf of a Client Plan will be deemed to be an approval of the 
additional Secondary Service for which a fee is charged or increase in 
the rate of any fees, if such Termination Form is supplied pursuant to 
the requirements of this Section, and will result in the continuation 
of the authorizations of MassMutual to engage in the transactions on 
behalf of such Client Plan.
    (c) The Independent Fiduciary is supplied with a Termination Form 
no less than annually; provided that the Termination Form need not be 
supplied to the Independent Fiduciary pursuant to this paragraph sooner 
than six months after such Termination Form is supplied pursuant to 
paragraph (e) below, except to the extent required to disclose an 
additional service or an increase in fees.

[[Page 64467]]

    (d) Each Client Plan satisfies either (but not both) of the 
following:
    (1) For a Client Plan for which MassMutual serves as a non-
discretionary trustee, the Plan does not pay any Plan-level investment 
management fees, investment advisory fees, or similar fees to 
MassMutual with respect to Client Plan assets invested in shares of the 
Funds. This condition does not preclude the payment of investment 
advisory fees, or similar fees, by a Fund to MassMutual under the terms 
of its investment advisory agreement adopted in accordance with section 
15 of the 1940 Act, nor does it preclude the payment of fees for 
Secondary Services to MassMutual pursuant to a duly adopted agreement 
between MassMutual and the Funds.
    (2) For a Client Plan for which MassMutual serves as a 
discretionary fiduciary (i.e., a trustee or investment manager), such 
Client Plan pays MassMutual an investment advisory fee based on total 
Client Plan assets from which a credit had been subtracted representing 
such Client Plan's pro rata share of all investment advisory fees paid 
by the Funds. This condition does not preclude the payment of fees for 
Secondary Services to MassMutual pursuant to a duly adopted agreement 
between MassMutual and the Funds.
    (e)(1) For each Client Plan using the fee structure described in 
paragraph (d)(1) of this Section with respect to investments in a 
particular Fund, an increase in the rate of fees paid by the Fund to 
MassMutual regarding any investment management services, investment 
advisory services, or similar services that MassMutual provides to the 
Fund over an existing rate for such services that had been authorized 
by an Independent Fiduciary in accordance with paragraph (d) of Section 
III; or
    (2) For any Client Plan under this exemption, an addition of a 
Secondary Service (as defined in Section V (i)) provided by MassMutual 
to the Fund for which a fee is charged, or an increase in the rate of 
any fee paid by the Funds to MassMutual for any Secondary Service that 
results either from an increase in the rate of such fee or from a 
decrease in the number or kind of services performed by MassMutual for 
such fee over an existing rate for such Secondary Service that had been 
authorized by the Independent Fiduciary of a Client Plan in accordance 
with paragraph (d) of Section III--
    MassMutual will, at least 30 days in advance of the implementation 
of such additional service for which a fee is charged or fee increase, 
provide a written notice (which may take the form of a proxy statement, 
letter, or similar communication that is separate from the prospectus 
of the Fund and which explains the nature and amount of the increase in 
fees) to the Independent Fiduciary of the Client Plan. Such notice 
shall be accompanied by a Termination Form with instructions as 
described above.
    (f) Conditions (a), (e) and (h) of Section I, Conditions (b) and 
(d) of Section II, Conditions (a), (b), (c), (d), (e), and (g) of 
Section III, and Conditions (a) and (b) of Section V have been met.

Section V. General Conditions

    (a) MassMutual maintains for a period of six years the records 
necessary to enable the persons described in paragraph (b) of this 
section to determine whether the conditions of this exemption, and the 
proper crediting of fees described in paragraph (d)(2) of Section IV, 
have been met, except that:
    (1) a prohibited transaction will not be deemed to have occurred 
if, due to circumstances beyond the control of MassMutual, the records 
are lost or destroyed prior to the end of the six-year period; and
    (2) no party in interest other than MassMutual shall be subject to 
the civil penalty that may be assessed under section 502(i) of the Act, 
or to the taxes imposed by section 4975(a) and (b) of the Code, if the 
records are not maintained or are not available for examination as 
required by paragraph (b) below.
    (b)(1) Except as provided in paragraph (b)(2) below and 
notwithstanding any provisions of section 504(a)(2) of the Act, the 
records referred to in paragraph (a) in this section are 
unconditionally available at their customary location for examination 
during normal business hours by--
    (i) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the Securities and 
Exchange Commission,
    (ii) Any fiduciary of the Client Plans who has authority to acquire 
or dispose of shares of the Funds owned by the Client Plans, or any 
duly authorized employee or representative of such fiduciary, and
    (iii) Any participant or beneficiary of the Client Plans or duly 
authorized employee or representative of such participant or 
beneficiary;
    (2) None of the persons described in paragraph (b)(1)(ii) and (iii) 
above shall be authorized to examine trade secrets of MassMutual, or 
commercial or financial information that is privileged or confidential.

Section VI. Definitions

    For purposes of this proposed exemption:
    (a) 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 or relative of such person, 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 ``Client Plan'' means a pension plan described in 29 
CFR 2510.3-2, a welfare benefit plan described in 29 CFR 2510.3-1, and 
a plan described in section 4975(e)(1) of the Code.
    (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 ``fixed income security'' means any interest-bearing 
or discounted government or corporate debt security with a face amount 
of $1,000 or more that obligates the issuer to pay the holder a 
specified sum of money, and to repay the principal amount of the loan 
at maturity.
    (e) The term ``Fund'' or ``Funds'' means any diversified open-end 
management investment company or companies registered under the 
Adviser's Act for which MassMutual or its affiliates serves as an 
investment adviser, and may also serve as a custodian, shareholder 
servicing agent, transfer agent or provide some other secondary service 
(as defined in paragraph (j) of this section).
    (f)(1) The term ``Independent Fiduciary'' means a fiduciary of a 
Client Plan who is unrelated to, and independent of, MassMutual. For 
purposes of this exemption, a Client Plan fiduciary will be deemed to 
be unrelated to, and independent of, MassMutual if such fiduciary 
represents that neither such fiduciary, nor any individual responsible 
for the decision to authorize or terminate authorization for 
transactions described in Section I, II, III, or IV is an officer, 
director, or highly compensated employee (within the meaning of section 
4975(e)(2)(H) of the Code) of MassMutual and represents that such 
fiduciary shall advise MassMutual if those facts change.
    (2) Notwithstanding anything to the contrary in this Section VI(f), 
a fiduciary is not independent if:
    (i) such fiduciary directly or indirectly controls, is controlled 
by, or

[[Page 64468]]

is under common control with the Insurer;
    (ii) such fiduciary directly or indirectly receives any 
compensation or other consideration from MassMutual for his or her own 
personal account in connection with any transaction described in this 
exemption;
    (iii) any officer, director, or highly compensated employee (within 
the meaning of section 4975(e)(2)(H) of the Code) of MassMutual, 
responsible for the transactions described in Section I, II, III or IV 
is an officer, director, or highly compensated employee (within the 
meaning of section 4975(e)(2)(H) of the Code) of the Client Plan 
sponsor or of the fiduciary responsible for the decision to authorize 
or terminate authorization for transactions described in Section I, II, 
III or IV. However, if such individual is a director of MassMutual or 
of the responsible fiduciary and if he or she abstains from 
participation in the decision to authorize or terminate authorization 
for transactions described in Section I, II, III or IV, then Section 
VI(f)(2)(iii) shall not apply.
    (g) The term ``Net Asset Value'' means the amount calculated by 
dividing the value of all securities, determined by a method as set 
forth in a Fund's prospectus and Statement of Additional Information, 
and other assets belonging to each of the portfolios in such Fund, less 
the liabilities chargeable to each portfolio, by the number of 
outstanding shares.
    (h) The term ``pooled separate account'' means a pooled investment 
fund maintained by MassMutual or an affiliate for the collective 
investment of assets attributable to two or more plans maintained by 
unrelated employers.
    (i) The term ``secondary service'' means a service provided by 
massMutual or an affiliate to a Fund other than investment management, 
investment advisory or similar services.
    (j) The term ``security'' shall be defined by section 2(36) of the 
Adviser's Act, as amended, 15 U.S.C. 80a-2(36) (1996).
    (k) The term ``Fund Adviser'' means (i) any affiliate of MassMutual 
which serves as an investment adviser to a Fund, and (ii) any affiliate 
of an investment adviser identified in subsection (i).
    (l) The term ``Termination Form'' means the form supplied to the 
Independent Fiduciary, at the times specified above, which expressly 
provides an election to the Independent Fiduciary to terminate on 
behalf of the Client Plans the authorizations described in Paragraph 
(b) of Section IV. Such Termination Form may be used at will by the 
Independent Fiduciary to terminate such authorization without penalty 
to the Client Plans and to notify MassMutual in writing to effect such 
termination by redeeming the shares of the Fund held by the Client 
Plans requesting termination by the close of the business day following 
the date of receipt by MassMutual, whether by mail, hand delivery, 
facsimile or other available means at the option of the Independent 
Fiduciary, of written notice of such request for termination; provided 
that if, due to circumstances beyond the control of MassMutual, the 
redemption cannot be executed within one business day, MassMutual shall 
have one additional business day to complete such redemption.

Summary of the Facts and Representations

    1. The applicant is MassMutual, a mutual life insurance company 
organized in 1851. MassMutual, either directly or through its 
affiliates, offers, among other things, asset accumulation products, 
employee benefit services, and investment management services. 
MassMutual is registered under the Investment Advisers Act of 1940, as 
amended (the Advisers Act) and is an adviser for certain mutual funds.
    MassMutual maintains numerous separate investment accounts in which 
certain plan participants invest. These accounts are advised and/or 
subadvised by MassMutual, or by a MassMutual affiliate such as 
OppenheimerFunds, Inc., HarbourView Asset Management Corporation, 
Trinity Investment Management Corporation, and David L. Babson and 
Company. MassMutual represents that, while its separate investment 
accounts purchase portfolio securities directly, most separate 
investment accounts also purchase mutual fund shares, including shares 
of Funds advised by non-affiliated third party managers. The applicant 
states that as the investment performances of the unaffiliated Funds 
change over time, MassMutual may desire to replace the manager of such 
a Fund. This involves, MassMutual states, selling shares of the 
unaffiliated Fund (and incurring certain transaction costs) and 
acquiring shares of a different Fund (and thus incurring additional 
transaction costs).
    MassMutual represents that, in light of the above, it is more 
economical, more efficient, and less unwieldy to keep the assets of a 
separate investment account in proprietary Funds and, to the extent 
necessary, change the Funds' subadvisers. The preferable way to 
accomplish this, MassMutual states, is to: (1) Take a distribution of 
the unaffiliated Fund shares in-kind; (2) transfer the unaffiliated 
Fund shares to a proprietary Fund; and (3) either: (i) hire the prior 
adviser as a subadviser; (ii) hire a new adviser as the subadiviser; or 
(iii) manage the assets of the proprietary Fund through affiliates.\10\ 
The applicant states that no brokerage commissions or other 
remuneration is charged to the Client Plans in connection with such an 
asset transfer as any such costs or expenses are paid by MassMutual.
---------------------------------------------------------------------------

    \10\ The Department is expressing no opinion in this proposed 
exemption regarding the application of ERISA to the in-kind 
distribution of unaffiliated Fund shares.
---------------------------------------------------------------------------

    2. The applicant therefore seeks an exemption to permit the in-kind 
transfer of the assets held by separate investment accounts maintained 
by MassMutual in exchange for shares of certain mutual funds for which 
MassMutual or its affiliates serves as an investment adviser or may 
provide some other secondary service. This involves, therefore, the in-
kind transfer of portfolio securities (representing the Client Plans' 
interest in certain separate investment accounts) to the Funds in 
exchange for the transfer of shares of the Funds to the separate 
investment accounts.\11\ The applicant also seeks relief for the 
receipt of fees by MassMutual for acting as an investment adviser for 
the Funds, and for providing certain ``secondary services'' to the 
Funds.\12\
---------------------------------------------------------------------------

    \11\ MassMutual represents that an in-kind transfer may involve, 
for example, a separate investment account's receipt of securities 
(pursuant to an in-kind distribution) from a mutual fund maintained 
by unaffiliated parties; followed by the transfer of such securities 
from the separate investment account to mutual funds advised by 
affiliates of MassMutual (an potentially subadvised by an 
unaffiliated investment adviser.
    \12\ The applicant represents that there will be no increase in 
fees paid by the Client Plans as a result of the in-kind transfer.
---------------------------------------------------------------------------

    MassMutual represents that the in-kind transfer transactions 
described herein are designed to comply with the Adviser's Act and 
Prohibited Transaction Exemption (PTE) 77-4 and PTE 97-41, as 
applicable.\13\ MassMutual notes, however, that such transactions 
involve circumstances which differ slightly from those presented in 
either PTE 77-4 or PTE 97-41.\14\ In this regard,

[[Page 64469]]

the applicant points out that, for purposes of the exemption as 
proposed, approval of an in-kind transfer by an Independent Fiduciary 
may occur in writing and, additionally, approval may be in the form of 
``negative consent''. Under the ``negative consent'' arrangement, 
approval for the in-kind transfer of a Client Plan's interest in the 
Separate Account will be presumed if MassMutual does not receive any 
response from a Client Plan to MassMutual's two written requests (one 
by certified mail) for such approval to the extent such requests are 
made prior to an in-kind transfer.
---------------------------------------------------------------------------

    \13\ MassMutual represents that while collective investment 
funds and other registered investment advisers have been granted 
exemptions to permit similar in-kind transfers, many insurance 
companies have relied on PTE 77-4 or other exemptions to convert 
separate investment accounts to mutual funds. In this regard, the 
Department is expressing no view as to the availability of this 
class exemption for the in-kind transfer of separate investment 
account assets in exchange for mutual fund shares.
    \14\ PTE 77-4, 42 FR 18732 (Apr. 8, 1977) permits the purchase 
or sale by a plan of shares of a registered investment company in 
situations where the investment adviser of the investment company is 
also a fiduciary with respect to the plan. PTE 97-41, 62 FR 42830 
(Aug. 8, 1997), permits a plan to purchase shares of a registered 
open-end investment company in an in-kind exchange for the plan's 
collective investment fund assets where the bank or plan adviser of 
the fund is also a fiduciary of the plan.
---------------------------------------------------------------------------

    3. MassMutual notes that, with respect to the types of transactions 
described herein, the Securities and Exchange Commission (SEC) Rule 
17a-7 (Rule 17a-7) permits transfers involving only those securities 
for which market quotations are readily available and which do not 
include restricted securities (such as those described by SEC Rule 144) 
or other securities for which market quotations are not readily 
available.\15\ Therefore, MassMutual represents that, to the extent the 
Independent Fiduciary of a Client Plan approves the investment in the 
Funds, the purchase of Fund shares by the separate investment account 
has been/will be accomplished in accordance with Rule 17a-7 and the 
procedures adopted by the Fund's board of directors pursuant to such 
Rule.
---------------------------------------------------------------------------

    \15\ MassMutual retains ongoing responsibilities under ERISA's 
general standards of fiduciary conduct with respect to plans 
electing to remain as investors in the separate investment account 
and with respect to other aspects of the transfers.
---------------------------------------------------------------------------

    Among the conditions of Rule 17a-7 is the requirement that the 
transaction be effected at the ``independent current market price'' for 
the security involved.\16\ In this regard, MassMutual represents that 
the ``independent current market price'' for the types of separate 
investment account securities involved in the transaction is determined 
as follows:
---------------------------------------------------------------------------

    \16\ Rule 17a-7 also includes the following requirements: (a) 
the transaction must be consistent with the investment objectives 
and policies of the Fund, as described in its registration 
statement; (b) the security that is the subject of the transaction 
must be one for which market quotations are readily available; (c) 
no brokerage commissions or other remuneration may be paid in 
connection with the transaction; and (d) the Fund's board of 
directors (including a majority of those directors who are 
independent of the Fund's investment adviser) must adopt procedures 
to ensure that the requirements of Rule 17a-7 are followed, and 
determined no less frequently than quarterly that the transactions 
during the preceding quarter were in compliance with such 
procedures.
---------------------------------------------------------------------------

    (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 
'34 Act) (17 CFR 240.11Aa3-1), the last sale price with respect to such 
security reported in the consolidated transaction reporting system (the 
Consolidated System); 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 '34 Act) (17 CFR 
240.11Ac1-1), as of the close of business on the separate investment 
account valuation date.
    (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 or, if there is no reported transactions on such exchange that 
day, the average of the highest current independent bid and the lowest 
current independent offer on the exchange as of the close of business 
on the separate investment account valuation date.
    (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 the lowest current independent offer reported on Level 1 of NASDAQ 
as of the close of business on the separate investment account 
valuation date.
    (D) For all other securities, the average of the highest current 
independent bid and the lowest current independent offer determined on 
the basis of reasonable inquiry from at least three independent sources 
as of the close of business on the separate investment account 
valuation date.
    MassMutual represents that these valuation conditions are objective 
and allow for review by independent parties. The applicant additionally 
states that the same values are used to determine the amount of 
securities transferred from a separate investment account and the 
amount of securities received by a Fund. Therefore, according to the 
applicant, the total net asset value of the Fund shares received by the 
separate investment account, or the separate investment account on 
behalf of the approving Client Plans, is equal in value to the Client 
Plan's share of the assets of the separate investment account exchanged 
for shares of the Fund on the date of transfer.
    4. MassMutual represents that, to the extent an Independent 
Fiduciary does not approve the transaction, a reasonable period of time 
is given for the liquidation of the Client Plan's interest in the 
separate investment account. According to the applicant, this may be 
done either in cash, in-kind or through the transfer to another 
separate investment account.\17\ Thereafter, MassMutual states, the 
remaining separate investment account assets are transferred to the 
corresponding Funds on behalf of the Client Plans approving the 
transaction.
---------------------------------------------------------------------------

    \17\ In these situations, Client Plans will receive, prior to 
the transfer date, cash or their pro rata portions of each separate 
investment account asset. To the extent a Client plan seeks to 
transfer its interest to another separate investment account, such 
transfer will occur without cost or penalty.
---------------------------------------------------------------------------

    5. Although MassMutual will generally divide the assets held in a 
separate investment account among the Client Plans on a pro rata basis, 
in some instances, the separate investment account may hold ``small 
investments'' in fixed-income securities that are not divisible, or 
that can be divided only at substantial cost.\18\ In these situations, 
solely for purposes of the prospective relief requested herein, 
MassMutual will treat equivalent ``small investment'' fixed income 
securities as fungible for allocation purposes if such securities have 
the same coupon rates, maturities and credit ratings at the time of the 
transaction.\19\ MassMutual will allocate such fixed-income securities 
among the Client Plans in a manner such that each receives its pro rata 
share of the value of such securities.\20\
---------------------------------------------------------------------------

    \18\ This would apply in the case of a separate investment 
account which held portfolio securities and did not purchase shares 
of a mutual fund. These investments will typically be issued in 
units of $1,000 or more.
    \19\ In order to establish what constitutes ``small 
investments'' MassMutual proposes that this exception from the 
general pro rata division rule be available only for investment 
positions in fixed-income securities which, in the aggregate, 
constitute no more than one (1) percent of the separate investment 
account's assets. This one (1) percent limit will ensure that the 
``small investment'' positions in the fixed-income securities will 
represent a de minimis portion of the overall assets held by the 
separate investment account at the time of the transactions.
    \20\ MassMutual represents that the valuation of fixed income 
securities will be performed in accordance with Rule 17a-7.
---------------------------------------------------------------------------

    6. MassMutual represents that the proposed exemption is in the 
interest of participants and beneficiaries because it provides for 
Client Plan investment in Fund shares and allows for such Funds to be 
managed by different managers over time, without requiring the costs 
attendant to asset liquidation. MassMutual additionally represents that 
the proposed exemption is protective of participants and beneficiaries 
in that it requires notice to, and consent of, an independent 
fiduciary. MassMutual

[[Page 64470]]

represents that the exemption is administratively feasible in that the 
values given the Fund shares and the separate account securities are 
objectively calculated in accordance with securities laws and in 
accordance with procedures approved by the Fund's board of directors 
pursuant to such laws.
    7. MassMutual requests retroactive relief for the purchase by the 
Client Plan (directly or through a single customer or pooled separate 
account or other pooled vehicle) of shares of one or more Funds in 
exchange for assets of the Client Plan transferred in-kind from a 
Separate Account. MassMutual states that such purchases met the 
criteria of section 408(a) of the Act since, among other things:
    (a) No sales commissions, redemption fees, or other fees were paid 
by the Client Plan.
    (b) All transferred assets were either cash or securities for which 
market quotations were readily available.
    (c) The assets transferred in-kind to the Funds constituted the 
Client Plan's pro rata portion of the assets held by the Separate 
Account immediately prior to the transfer.
    (d) The Client Plan received Fund shares having a total net asset 
value equal to the value of the assets transferred by the Client Plan 
on the date of the transfer, as determined in a single valuation 
performed in the same manner at the close of the same business day with 
respect to all Client Plans participating in the transaction on such 
date, in accordance with the procedures set forth in Rule 17a-7 of the 
1940 Act (using sources independent of MassMutual and the Fund) and the 
procedures established by the Funds pursuant to Rule 17a-7 for the 
valuation of such assets.
    (e) An Independent Fiduciary with respect to each Client Plan 
received advance written notice of an in-kind transfer and purchase of 
assets and full written disclosure of information concerning the Funds, 
including:
    (1) A current prospectus for each Fund to which the Separate 
Account's assets may be transferred, updated as necessary;
    (2) A statement describing the investment advisory and other fees 
to be charged to, or paid by, a Client Plan and the Funds to the Fund 
Adviser, including the nature and extent of any differential between 
the rates of the fees paid by the Fund and the rates of the fees paid 
by the Client Plan in connection with the Client Plan's investment in 
the Separate Account;
    (3) A statement of the reasons why MassMutual considered such 
investment to be appropriate for the Client Plan; and
    (4) A statement describing whether there were any limitations 
applicable to MassMutual with respect to which Client Plan assets would 
be invested in Fund shares, including the nature of the limitations.
    (f) The Independent Fiduciary was allowed the opportunity to: (1) 
Opt-out (including by selling its interest in a pooled vehicle) of the 
in-kind transfer of the Client Plan's interest in the Separate Account 
for shares of the Funds without penalty; or (2) approve the in-kind 
transfer (on the basis of the prospectus and disclosure referred to in 
paragraph (e) of Section I) consistent with the responsibilities, 
obligations, and duties imposed on fiduciaries by Part 4 of Title I of 
the Act. In this regard, approval for the in-kind transfer of a Client 
Plan's interest in the Separate Account was presumed notwithstanding 
that MassMutual did not receive any affirmative response from a Client 
Plan pursuant to MassMutual's two written requests (one by certified 
mail) for such approval, provided that the first such request occurred 
at least 90 days before the in-kind transfer and the second such 
request occurred within 45 days thereafter.
    (g) MassMutual sent a written confirmation by regular mail or 
personal delivery to the Independent Fiduciary of each Client Plan 
participating in the in-kind transfer, no later than 105 days after 
completion of each purchase, containing:
    (1) The number of Separate Account units held by the Client Plan 
immediately before the transfer, and the related per unit value and the 
total dollar amount of such units; and
    (2) The number of Fund shares held by the separate account 
immediately following the transfer, and the related per share net asset 
value and the total dollar amount of such shares.
    (h) All other dealings between the Client Plan and the Funds were 
on a basis no less favorable to the Client Plan than dealings between 
the Funds and other shareholders holding the same class of shares as 
the Client Plans.
    8. MassMutual also requests prospective relief for the purchase by 
the Client Plan (directly or through a single customer or pooled 
separate account or other pooled vehicle) of shares of one or more 
Funds in exchange for assets of the Client Plan transferred in-kind 
from a Separate Account. MassMutual states that such a purchase meets 
the criteria of section 408(a) of the Act since, among other things:
    (a) The assets transferred in-kind to the Funds will constitute the 
Client Plan's pro rata portion of the assets held by the Separate 
Accounts immediately prior to the transfer. Notwithstanding the 
foregoing, the allocation among Client Plans of fixed-income securities 
held by a Separate Account on the basis of each Client Plan's pro rata 
share of the aggregate value of such securities will not fail to meet 
the requirements of this subsection if:
    (1) The aggregate value of the fixed-income securities does not 
exceed one percent of the total value of the assets held by the 
Separate Account immediately prior to the transfer; and
    (2) Such securities have the same coupon rate and maturity, and at 
the time of the transfer, the same credit ratings as provided from 
nationally recognized statistical rating agencies.
    (b) An Independent Fiduciary with respect to each Client Plan will 
receive advance written notice of the in-kind transfer and purchase and 
full written disclosure of information concerning the Funds including:
    (1) The identity of the securities that will be valued in 
accordance with Rule 17a-7(b)(4) under the 1940 Act;
    (2) The identity of any fixed-income securities allocated on the 
basis of each Client Plan's pro rata share of the aggregate value of 
such securities;
    (3) Upon request of the Independent Fiduciary, a copy of the 
proposed exemption and/or a copy of the final exemption, once such 
documents are published in the Federal Register; and
    (4) The date on which the in-kind purchase will take place.
    (c) MassMutual will send by regular mail or personal delivery to 
the Independent Fiduciary of each Client Plan that purchases Fund 
shares pursuant to the in-kind transfer:
    (1) Not later than 30 days after the completion of the purchase, a 
written confirmation containing:
    (A) The identity of each security valued in accordance with Rule 
17a-7(b)(4) under the 1940 Act;
    (B) The current market price, as of the date of the in-kind 
transfer, of each such security involved in the purchase of Fund 
shares; and
    (C) The identity of each pricing service or market-maker consulted 
in determining the current market price of such securities; and
    (2) Not later than 90 days after each in-kind transfer, a written 
confirmation which contains:
    (A) The number of Separate Account units held by such affected 
Client Plan immediately before the in-kind transfer (and the related 
per unit value and the

[[Page 64471]]

aggregate dollar value of the units transferred); and
    (B) The number of shares in the Funds that are held by such 
affected Client Plan following the in-kind transfer (and the related 
per share net asset value and the aggregate dollar value of the shares 
received).
    (d)(1) MassMutual will provide the Independent Fiduciary of each 
Client Plan holding shares of the Funds with--
    (A) A copy of an updated prospectus of such Fund, at least 
annually; and
    (B) Upon request of the Independent 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 written 
statement) containing a description of all fees paid by the Fund to 
MassMutual or its affiliates.
    (2) With respect to each of the Funds in which a Client Plan 
invests, in the event such Fund places brokerage transactions with an 
affiliate of MassMutual, MassMutual will provide the Independent 
Fiduciary of such Client Plan at least annually with a statement 
specifying:
    (A) The total, expressed in dollars, of brokerage commissions of 
each Fund's investment portfolio that are paid to an affiliate of 
MassMutual by such Fund;
    (B) The total, expressed in dollars, of brokerage commissions of 
each Fund's investment portfolio that are paid by such Fund to 
brokerage firms unrelated to MassMutual;
    (C) The average brokerage commissions per share, expressed as cents 
per share, paid to an affiliate of MassMutual by each portfolio of a 
Fund; and
    (D) The average brokerage commissions per share, expressed as cents 
per share, paid by each portfolio of a Fund to brokerage firms 
unrelated to MassMutual.
    (e) The Independent Fiduciary may: (1) Opt-out (including by 
selling its interest in a pooled vehicle) of the in-kind exchange of 
the Client Plan's interest in the Separate Account for shares of the 
Funds without penalty; or (2) approve the in-kind transfer (on the 
basis of the prospectus and disclosure referred to in paragraph (b) of 
section II and paragraph (e) of Section I) consistent with the 
responsibilities, obligations, and duties imposed on fiduciaries by 
Part 4 of Title I of the Act. In this regard, approval for the in-kind 
transfer of a Client Plan's interest in the Separate Account in 
exchange for Fund shares may be presumed notwithstanding that 
MassMutual does not receive any response from a Client Plan pursuant to 
MassMutual's two written requests (one by certified mail) for such 
approval, provided that the first such request occurs at least 90 days 
before the in-kind transfer and the second such request occurs within 
45 days thereafter.
    (f) All of a Client Plan's assets held in a Separate Account (other 
than Fund shares already held in the Account) will be transferred in-
kind to one or more of the Funds in exchange for Fund shares, except 
that any Plan assets in the Separate Account which are not suitable for 
acquisition by the Funds will be liquidated as soon a reasonably 
practicable, and the cash proceeds will be invested directly in shares 
of the Funds.
    (g) The authorization described in paragraph (e) of Section II will 
be terminable at will by the Independent Fiduciary of a Client Plan, 
without penalty to such Client Plan. Such termination will be effected 
by MassMutual redeeming the shares of the Fund(s) held by the affected 
Client Plan or selling its interest in a Separate Account in one 
business day, provided that if, due to circumstances beyond the control 
of MassMutual, the redemption cannot be executed within one business 
day, MassMutual will have one additional business day to complete such 
redemption.
    9. MassMutual requests retroactive relief for the receipt of fees 
by MassMutual from the Funds, for acting as an investment adviser for 
such Funds, as well as for providing other services to the Funds which 
are ``Secondary Services,'' as defined in Section VI(i), in connection 
with the investment by the Client Plans for which MassMutual serves as 
a fiduciary in shares of the Funds. MassMutual states that such receipt 
of fees meets the criteria of section 408(a) of the Act since, among 
other things:
    (a) As to each Client Plan, the combined total of all fees received 
by MassMutual for the provision of services to the Client Plan, and for 
the provision of services to a Fund was not in excess of ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act.
    (b) The price paid or received by a Client Plan for shares in a 
Fund was the net asset value of such share, as defined in Section 
VI(g), at the time of the transaction and was the same price that would 
have been paid or received for the shares by any other investor at that 
time.
    (c) Neither MassMutual, other than in its capacity as agent for the 
Funds, nor any officer or director of MassMutual, purchases or sells 
shares of the Funds from or to any Client Plan.
    (d) The Independent Fiduciary approved the fees to be paid by the 
Funds to MassMutual as such fees related to:
    (1) Fund shares purchased by a Client Plan for cash;
    (2) Fund shares purchased by a Client Plan pursuant to an in-kind 
transfer (upon the Independent Fiduciary's consideration of the 
information described in paragraph (e) of Section I and paragraph (b) 
of Section II);
    (3) The addition of a Secondary Service (as defined in Section V 
(i)) provided by MassMutual to the Fund for which a fee is charged, or 
an increase in the rate of any fee paid by the Funds to MassMutual for 
any Secondary Service that resulted either from an increase in the rate 
of such fee or from a decrease in the number or kind of services 
performed by MassMutual for such fee over an existing rate for such 
Secondary Service that had been authorized by the Independent Fiduciary 
of a Client Plan. In this regard, such approvals were presumed 
notwithstanding that MassMutual did not receive any response from a 
Client Plan to MassMutual's two written requests (one by certified 
mail) for approval of a change in the rates of fees provided that the 
first such request occurred at least 90 days before the in-kind 
transfer and the second such request occurred within 45 days 
thereafter. Such approval may have been limited solely to the 
investment advisory and other fees paid by the mutual fund in relation 
to the fees paid by a Client Plan and did not relate to any other 
aspects of such investment.
    (e) The Fund Adviser did not receive any fees payable pursuant to 
Rule
12b-1 under the 1940 Act in connection with the transactions.
    (f) The Plan did not pay any plan-level investment management, 
investment advisory or similar fee with respect to the Client Plan 
assets invested in such shares for the entire period of such 
investment. This condition did not preclude the payment of investment 
advisory fees by an investment company under the terms of its 
investment advisory agreement adopted in accordance with section 15 of 
the Investment Company Act of 1940.
    (g) On an annual basis, MassMutual provided the Independent 
Fiduciary of each Client Plan holding shares of the Funds with--
    (1) A copy of an updated prospectus of such Fund; and
    (2) Upon request of the Independent 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

[[Page 64472]]

written statement) containing a description of all fees paid by the 
Fund to MassMutual or its affiliates.
    (3) Oral or written responses to inquiries of the Independent 
Fiduciary as they arose.
    10. MassMutual also requests prospective relief for the receipt of 
fees by MassMutual from the Funds, for acting as an investment adviser 
for such Funds, as well as for providing other services to the Funds 
which are ``Secondary Services,'' as defined in Section VI(i), in 
connection with the investment in shares of the Funds by the Client 
Plans for which MassMutual serves as a fiduciary. MassMutual states 
that such receipt of fees meets the criteria of section 408(a) of the 
Act since, among other things:
    (a) For each Client Plan using the nondiscretionary fee structure 
described in paragraph (d)(2) of Section IV with respect to investments 
in a particular Fund, the Independent Fiduciary of the Client Plan will 
receive full written disclosure in a Fund prospectus or otherwise of 
any increases in the rates of fees charged by MassMutual to the Funds 
for investment advisory services.
    (b) All authorizations made by an Independent Fiduciary regarding 
investments in a Fund and the fees paid to MassMutual will be subject 
to an annual reauthorization, wherein any such prior authorization 
referred to in Section III(d) shall be terminable at will by the Client 
Plan, without penalty to the Client Plan, upon receipt by MassMutual of 
written notice of termination. The Independent Fiduciary will be 
supplied with a Termination Form, at the times specified in paragraph 
(c) of Section IV, with instructions on the use of the form, including 
the following information: (1) The authorization is terminable at will 
by any of the Client Plans, without penalty to such Client Plans, upon 
receipt by MassMutual of written notice from the Independent Fiduciary; 
and (2) Failure by the Independent Fiduciary to return the Termination 
Form on behalf of a Client Plan will be deemed to be an approval of the 
additional Secondary Service for which fee is charged or increase in 
the rate of any fees, if such Termination Form is supplied pursuant to 
the requirements of Section IV, and will result in the continuation of 
the authorizations of MassMutual to engage in the transactions on 
behalf of such Client Plan.
    (c) The Independent Fiduciary will be supplied with a Termination 
Form annually; provided that the Termination Form need not be supplied 
to the Independent Fiduciary pursuant to this paragraph sooner than six 
months after such Termination Form is supplied pursuant to paragraph 
(e) of Section IV, except to the extent required to disclose an 
additional service or an increase in fees.
    (d) Each Client Plan will satisfy either (but not both) of the 
following:
    (1) For a Client Plan for which MassMutual serves as a non-
discretionary trustee, the Plan will not pay any Plan-level investment 
management fees, investment advisory fees, or similar fees to 
MassMutual with respect to Client Plan assets invested in the Funds. 
This condition will not preclude the payment of investment advisory 
fees, or similar fees, by a Fund to MassMutual under the terms of its 
investment advisory agreement adopted in accordance with section 15 of 
the 1940 Act, nor will it preclude the payment of fees for Secondary 
Services to MassMutual pursuant to a duly adopted agreement between 
MassMutual and the Funds.
    (2) For a Client Plan for which MassMutual serves as a 
discretionary fiduciary (i.e., a trustee or investment manager), such 
Client Plan will pay MassMutual an investment advisory fee based on 
total Client Plan assets from which a credit had been subtracted 
representing such Client Plan's pro rata share of investment advisory 
fees paid by the Funds. This condition will not preclude the payment of 
fees for Secondary Services to MassMutual pursuant to a duly adopted 
agreement between MassMutual and the Funds.
    (e)(1) For each Client Plan using the fee structure described in 
paragraph (d)(1) of Section IV with respect to investments in a 
particular Fund, an increase in the rate of fees paid by the Fund to 
MassMutual regarding any investment management services, investment 
advisory services, or similar services that MassMutual provides to the 
Fund over an existing rate for such services that had been authorized 
by an Independent Fiduciary in accordance with paragraph (d) of Section 
III; or
    (2) For any Client Plan under this exemption, an addition of a 
Secondary Service (as defined in Section V (i)) provided by MassMutual 
to the Fund for which a fee is charged, or an increase in the rate of 
any fee paid by the Funds to MassMutual for any Secondary Service that 
results either from an increase in the rate of such fee or from a 
decrease in the number or kind of services performed by MassMutual for 
such fee over an existing rate for such Secondary Service that had been 
authorized by the Independent Fiduciary of a Client Plan in accordance 
with paragraph (d) of Section III, MassMutual will, at least 30 days in 
advance of the implementation of such increase, provide a written 
notice (which may take the form of a proxy statement, letter, or 
similar communication that is separate from the prospectus of the Fund 
and which explains the nature and amount of the increase in fees) to 
the Independent Fiduciary of the Client Plan. Such notice shall be 
accompanied by a Termination Form with instructions as described in 
Section IV.
    Notice to Interested Persons: The applicant represents that the 
potentially interested participants and beneficiaries cannot all be 
identified and therefore the only practical means of notifying such 
participants and beneficiaries of this proposed exemption is by the 
publication of this notice in the Federal Register. Comments and 
requests for a hearing must be received by the Department not later 
than 45 days from the date of publication of this notice of proposed 
exemption in the Federal Register.

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

State Farm Mutual Automobile Insurance Company and State Farm VP 
Management Corp.

[Exemption Application No. D-10961]

Proposed Exemption

    The Department of Labor 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).\21\
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    \21\ For purposes of this proposed exemption, references to 
specific provisions of Title I of the Act, unless otherwise 
specified, refer to the corresponding provisions of the Code.
---------------------------------------------------------------------------

Section I: Transactions

    If the exemption is granted, the restrictions of sections 
406(a)(1)(A) through (D) and 406(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 (D) of the Code shall not apply to the 
purchase or redemption of an institutional class of shares (the 
Institutional Shares) of State Farm mutual funds (the Fund(s)), open-
end management investment companies registered under the Investment 
Company Act of 1940 (the 1940 Act), by pension plans (the Plan(s)), as 
defined in Section III (h), below, which are established by:

[[Page 64473]]

    (a) Independent contractor agents (the Agent(s)) of State Farm 
Mutual Automobile Insurance Company (State Farm) or its affiliates, who 
are also registered representatives of State Farm VP Management Corp. 
(SFVPMC), for themselves and their employees, and
    (b) The family members of such Agents (the Family Member(s))(as 
defined in section 3(15) of the Act), provided that the conditions set 
forth in Section II, below are satisfied.

Section II: Conditions

    (a) Neither State Farm nor its affiliates has discretionary 
authority or control with respect to the investment of the plan assets 
involved in the transaction or renders investment advice (within the 
meaning of 29 CFR 2510.3-21(c)) with respect to those assets.
    (b) Plans do not pay any plan-level investment management, 
investment advisory, or similar fees to State Farm or its affiliates in 
connection with the investment of the assets of such Plans in any of 
the Funds.
    (c) Plans do not pay any redemption fees in connection with the 
sale of shares of any of the Funds by such Plans.
    (d) Plans do not pay any sales commissions in connection with the 
acquisition or sale of shares of any of the Funds, and the Agents do 
not receive any sales commissions or any other compensation or benefit, 
direct or indirect, in connection with the transactions that are the 
subject of this exemption. In this regard, neither State Farm nor any 
of its affiliates provides production credit, bonus, trip, or other 
sales incentive to such Agents based on such transactions.
    (e) All dealings between the Plans and the Funds and State Farm and 
its affiliates are on a basis no less favorable to such Plans than such 
dealings are with other shareholders of the Funds.
    (f) The price paid or received by a Plan for shares in a Fund is 
the net asset value per share, as defined, in Section III (d), below, 
at the time of the transaction and is the same price that would have 
been paid or received for such shares by any other investor in such 
Fund at that time.
    (g) For each Plan, the combined total of all fees received by State 
Farm and its affiliates for the provision of services to such Plan, and 
in connection with the provision of services to any of the Funds in 
which such Plan may invest, are not in excess of ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act.
    (h) Neither State Farm nor its affiliates receives any fees payable 
pursuant to Rule 12b-1 under the 1940 Act in connection with the 
proposed transactions.
    (i) The Plans are not employee benefit plans sponsored or 
maintained by State Farm or its affiliates.
    (j)(1) Each Agent, or a Family Member of such Agent (as defined in 
section 3(15) of the Act) in the case of a Plan sponsored by such 
Family Member, or each participant (the Participant(s)) in the case of 
a Plan which provides for participant investment direction, receives in 
advance of any initial investment in a Fund by such Plan (or 
Participant's account, in the case of a participant directed individual 
account plan) a full and detailed written disclosure of information 
concerning each Fund in which such Plan or Participant's account, as 
the case may be, is considering investing, including but not limited 
to:
    (A) A current prospectus for such Fund;
    (B) A statement describing the fees for investment advisory, 
investment management, or similar services, a statement describing any 
fees for secondary services (Secondary Services), as defined below in 
Section III (f), (including but not limited to fees for acting as 
custodian, transfer agent, or for providing administrative, brokerage, 
or other services) payable to State Farm or its affiliates, and all 
other fees to be charged to or paid by such Plan, Participant's 
account, or such Fund to State Farm or its affiliates;
    (C) A statement regarding appropriate investments for retirement 
plans and explaining why such Fund would be an appropriate investment 
for such Plan or Participant's account, as the case may be; and
    (D) Upon the request of an Agent, a Family Member, or a Participant 
in a participant directed individual account plan, as the case may be, 
a copy of this proposed exemption and/or a copy of the final exemption, 
if granted, as such documents appear when published in the Federal 
Register.
    (2) Each Participant, in the case of a Plan that does not provide 
for participant investment direction, receives from the fiduciary 
responsible for directing the investment of plan asset in advance of 
any initial investment in a Fund by such Plan:
    (A) A statement that the Plan is investing in the Funds;
    (B) The name of each Fund in which such Plan is investing; and
    (C) A current prospectus for each such Fund.
    (k) Any investment of the assets of a Plan (or a Participant's 
account in the case of a participant directed individual account plan) 
in each particular Fund is implemented only at the express direction of 
an Agent, Family Member, or Participant in a participant directed 
individual account plan, as appropriate, after such Agent, Family 
Member, or Participant receives the information described in paragraph 
(j) of Section II, above.\22\
---------------------------------------------------------------------------

    \22\ The Department notes that the general standards of 
fiduciary conduct under the Act would apply to the investment 
transactions permitted by this proposed exemption, and that 
satisfaction of the conditions of this proposed exemption should not 
be viewed as an endorsement of any particular investment by the 
Department. Section 404 of the Act requires, among other things, 
that a fiduciary discharge his duties with respect to a plan solely 
in the interest of the plan's participants and beneficiaries and in 
a prudent fashion. Accordingly, the Department notes that the 
selection and the retention of any of the Funds as an investment or 
an investment option under a Plan is a fiduciary act. In this 
regard, the Department expects the fiduciary of a Plan to determine, 
if such selection and retention of any of the Funds by a Plan is 
appropriate after taking into consideration the investment 
performance of such Funds and the fees paid by such Funds (including 
advisory fees and administrative fees paid to State Farm and other 
persons).
---------------------------------------------------------------------------

    (l) Pursuant to paragraph (k) of Section II, above, the investment 
of any assets of a Plan (or Participant's account, in the case of a 
participant directed individual account plan) in a Fund shall be 
terminable at will by an Agent, Family Member, or Participant, as 
appropriate, without penalty to such Plan (or Participant's account, in 
the case of an individually directed account plan), upon receipt by 
State Farm or its affiliates of a written notice of termination. A form 
(the Termination Form) expressly providing an election to terminate the 
investment in a Fund by a Plan (or Participant's account, in the case 
of an individually directed account plan) with instructions on the use 
of the form must be supplied to Agents, Family Members, or 
Participants, as the case may be, no less than annually; provided that 
the Termination Form need not be supplied to Agents, Family Members, or 
Participants, pursuant to this paragraph, sooner than six (6) months 
after such Termination Form is supplied pursuant to paragraph (m) of 
this Section II, below, except to the extent required by such paragraph 
in order to disclose an additional service or a fee increase. The 
instructions for the Termination Form must include a statement that the 
investment by a Plan in the Fund is terminable at will by a Plan (or 
Participant's account in the case of a participant directed individual 
account plan) without penalty to such Plan (or Participant's account), 
upon receipt by State Farm or its affiliates of written notice from the 
appropriate Agent, Family Member, or Participant.

[[Page 64474]]

    (m)(1) In the event of an increase in fees paid by a Fund for any 
service, or
    (2) In the event of an addition of any Secondary Service for which 
a fee is charged, or
    (3) In the event of an increase in the rate of any fee that results 
either from an increase in the rate of such fee or from the decrease in 
the number or kind of services performed for such fee, State Farm or 
its affiliates will, at least 30 days in advance of the implementation 
of such fee increase or a fee for an additional service or increase in 
the rate of a fee, provide a written notice (which may take the form of 
a proxy statement, letter, or similar communication that is separate 
from the prospectus of such Fund and that explains the nature and 
amount of the additional service for which a fee is charged or the 
increase in fees or the increase in the rate of any fee) to the 
appropriate Agent, Family Member, or Participant in a participant 
directed individual account plan. Such notice shall be accompanied by a 
Termination Form with instructions, as described above in paragraph (l) 
of this Section II, which will permit a Plan (or Participant's account, 
in the case of a participant directed individual account plan) to 
redeem shares of such Fund without penalty.
    (n)(1) On an annual basis, each Agent, Family Member, or 
Participant in a participant directed individual account plan receives 
from State Farm the following information for each Fund in which a Plan 
(or Participant's account, in the case of a participant directed 
individual account plan) invests:
    (a) A copy of the current prospectus,
    (b) Upon the request of the appropriate Agent, Family Member, or 
Participant in a participant directed individual account plan, a copy 
of the Statement of Additional Information that contains a description 
of all fees paid by such Fund to State Farm or its affiliates;
    (c) A copy of the annual report prepared by State Farm or its 
affiliates that includes information about the portfolios in such Fund, 
as well as audit findings of an independent auditor, within 60 days of 
the preparation of such report; and
    (d) Oral or written responses to inquiries of an Agent, Family 
Member, or Participant, as such responses arise.
    (2) On an annual basis, each Participant in the case of a Plan that 
does not provide for participant investment direction receives from the 
fiduciary responsible for directing the investment of plan assets 
copies of the annual report for each of the Funds in which the assets 
of such Plan are invested.
    (o) Any Plan subject to this proposed exemption that is a prototype 
retirement plan sponsored by State Farm or its affiliates may not 
require the investment of a minimum percentage of the total assets of 
such Plan in State Farm investment products.
    (p) State Farm or its affiliates maintain for a period of six (6) 
years the records necessary to enable the persons described in 
paragraph (q) of this Section II, below, 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 State Farm or 
its affiliates, the records are lost or destroyed prior to the end of 
the six-year period; and
    (2) No party in interest other than State Farm and its affiliates 
shall be subject to the civil penalty that may be assessed under 
section 502(i) of the Act, or to the taxes imposed by section 4975(a) 
and (b) of the Code, if the records are not maintained or are not 
available for examination as required by paragraph (q) of this Section 
II, below.
    (q)(1) Except as provided in paragraph (q)(2) of this Section II, 
below, and notwithstanding any provisions of section 504(a)(2) of the 
Act, the records referred to in paragraph (p) of this Section II, 
above, are unconditionally available at their customary location for 
examination during normal business hours by--
    (i) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service,
    (ii) Any Agent, Family Member, Participant in the case of a 
participant directed individual account plan, or any other fiduciary of 
a Plan who has authority to acquire or dispose of shares of any of the 
Funds owned by such Plan, or any duly authorized employee or 
representative of such fiduciary, and
    (iii) Any participant or beneficiary of a Plan or duly authorized 
employee or representative of such participant or beneficiary;
    (2) None of the persons described in paragraph (q)(1)(ii) and (iii) 
of this Section II, above, shall be authorized to examine trade secrets 
of State Farm or its affiliates, or commercial or financial information 
that is privileged or confidential.

Section III--Definitions

    For purposes of this proposed exemption:
    (a) The term, ``affiliate'' or ``affiliates,'' 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 (as defined in 
paragraph (e) of this Section III, below), 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, ``Fund or Funds,'' shall include any diversified 
open-end investment company or companies registered under the 1940 Act 
for which State Farm or its affiliates serve as an investment adviser 
and may also serve as a custodian, dividend disbursing agent, 
shareholder servicing agent, transfer agent, Fund accountant, or 
provide some other Secondary Service (as defined in paragraph (f) of 
this Section III, below), which has been approved by such Fund.
    (d) 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 a Fund's 
prospectus and Statement of Additional Information) and other assets 
belonging to such Fund or portfolio of such Fund, less the liabilities 
charged to each such portfolio or Fund, by the number of outstanding 
shares.
    (e) 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.
    (f) The term, ``Secondary Service,'' means a service other than an 
investment management, investment advisory, or similar service, which 
is provided by State Farm or its affiliates to a Fund, including 
custodial, accounting, brokerage, administrative, or any other service.
    (g) ``Termination Form,'' means the form supplied to an Agent, 
Family Member, or Participant in a participant directed individual 
account plan, as appropriate, that expressly provides an election to 
terminate on behalf of a Plan (or the Participant's account in the case 
of a participant directed individual account plan) the investment of 
plan assets in a Fund. Such Termination Form may be used at will by an 
Agent, Family Member, or Participant in a participant directed 
individual account plan to terminate the investment by a Plan in a Fund 
without penalty to the Plan (or the Participant's account, in the

[[Page 64475]]

case of a participant directed individual account plan) and to notify 
State Farm and its affiliates in writing to effect a termination by 
selling the shares of a Fund held by the Plan (or Participant's 
account) requesting such termination within one business day following 
receipt by State Farm or its affiliates of the form; provided that if, 
due to circumstances beyond the control of State Farm or its 
affiliates, the sale cannot be executed within one business day, State 
Farm or its affiliates shall have one additional business day to 
complete such sale.
    (h) The term, ``Plan'' or ``Plans,'' means any pension plan subject 
to the Act and/or the Code, including but not limited to plans that 
provide for participant investment direction, traditional individual 
retirement accounts (IRAs), SEP-IRAs, and Keogh plans.
    Effective Date: This proposed exemption, if granted, is effective, 
as of May 1, 2001.

Summary of Facts and Representations

    1. State Farm is a mutual insurance company organized under the 
laws of the State of Illinois. It is a property/casualty insurance 
company and is the parent company of a number of life and property/
casualty insurance companies and financial services companies.
    2. SFVPMC, organized as a Delaware corporation in 1996, is a 
wholly-owned subsidiary of State Farm. SFVPMC is registered as a 
broker-dealer with the Securities and Exchange Commission and is a 
member of the National Association of Securities Dealers, Inc. SFVPMC 
serves as the distributor of variable life insurance policies and 
variable annuity contracts issued by State Farm companies. State Farm 
Agents act as registered representatives of SFVPMC in connection with 
the sale of such insurance policies and variable annuity contracts.
    3. State Farm Investment Management Corp. (SFIMC), organized as a 
Delaware corporation in 1966, is a wholly-owned subsidiary of State 
Farm. SFIMC is registered as an investment adviser under the 1940 Act. 
SFIMC performs investment advisory, transfer agent, and underwriting 
services for State Farm.
    4. Although there are a modest number of State Farm Agents who are 
employees, State Farm and its subsidiaries sell their products through 
an exclusive agency force--a majority of which are independent 
contractors. State Farm selects and trains the Agents and provides them 
with exclusive agency contracts. State Farm works closely with the 
Agents in a number of areas, but it does not actively supervise them. 
This proposed exemption concerns only those State Farm Agents who are 
independent contractors, and all references to Agents should be read to 
apply to Agents of State Farm and its subsidiaries that are independent 
contractors.
    5. Many Agents hire employees to assist them in their sales and 
related activities. It is common for Agents to sponsor for themselves 
and for their employees retirement plans that are subject to the Act 
and/or the Code. In addition, Family Members of the Agents (as defined 
in section 4975(e)(6) of the Code) may also establish for themselves 
plans that are subject to the Act and/or the Code. These plans most 
frequently include 401(a) plans, IRAs, and SEP-IRAs. Many of these 
plans are funded with annuity and insurance contracts issued by life 
insurance subsidiaries of State Farm.
    6. During the fourth quarter of 2000, State Farm established the 
Funds, listed below, and placed $410,000,000 into such Funds as seed 
money. The seed money was allocated to the Funds as follows:

    (1) State Farm Equity Fund ($20 million); (2) State Farm Small 
Cap Equity Fund ($50 million); (3) State Farm International Equity 
Fund ($50 million); (4) State Farm S&P 500 Index Fund ($50 million); 
(5) State Farm Small Cap Index Fund ($50 million); (6) State Farm 
International Index Fund ($50 million); (7) State Farm Equity and 
Bond Fund ($50 million); (8) State Farm Bond Fund ($30 million); (9) 
State Farm Tax Advantaged Bond Fund ($50 million); and (10) State 
Farm Money Market Fund ($10 million).

    It is represented that the seed money was entirely derived from 
State Farm assets and not from the assets of any employee benefit plan. 
State Farm has informed the Department that it has no intention at this 
time of withdrawing such seed money from the Funds. It is further 
represented that the viability of the Funds is not dependent in any 
manner upon the investment of assets of any employee benefit plan.
    For each Fund, there are several classes of shares. As of September 
2, 2001, the percentage of State Farm's ownership in each portfolio of 
the Funds and each class of retail shares within each portfolio was as 
follows: (1) State Farm Equity Fund A (29.41%) and State Farm Equity 
Fund B (33.86%); (2) State Farm Small Cap Equity Fund A (93.45%) and 
State Farm Small Cap Equity Fund B (97.57%); (3) State Farm 
International Equity Fund A (95.40%) and State Farm International 
Equity Fund B (98.59%); (4) State Farm S&P 500 Index Fund A (76.06%) 
and State Farm S&P 500 Index Fund B (89.74%); (5) State Farm Small Cap 
Index Fund A (94.07%) and State Farm Small Cap Index Fund B (98.26%); 
(6) State Farm International Index Fund A (96.76%) and State Farm 
International Index Fund B (92.91%); (7) State Farm Equity and Bond 
Fund A (85.00%) and State Farm Equity and Bond Fund B (94.43%); (8) 
State Farm Bond Fund A (55.72%) and State Farm Bond Fund B (60.45%); 
(9) State Farm Tax Advantaged Bond Fund A (94.41%) and State Farm Tax 
Advantaged Bond Fund B (99.53%); and (10) State Farm Money Market Fund 
A (61.67%) and State Farm Money Market Fund B (99.98%).
    7. In early 2001, State Farm began offering shares of the ten (10) 
separate Funds, listed in paragraph 6 above, for sale through the State 
Farm Mutual Fund Trust (the Trust). The Trust is an open-end management 
investment company organized as a business trust under the laws of the 
State of Delaware. Each of the Funds has its own investment objective, 
investment policies, restrictions, and risks that are generally 
reflected in the name of each Fund.
    8. SFIMC is the investment adviser to each of these Funds. It is 
represented that the State Farm S&P 500 Index Fund, the State Farm 
Small Cap Index Fund, and the State Farm International Index Fund (the 
Equity Index Funds) seek to achieve their respective investment 
objectives by investing all of their assets in the S&P 500 Index Master 
Portfolio, the International Index Master Portfolio, and the Russell 
2000 Index Master Portfolio (the Master Portfolios) for which Barclays 
Global Fund Advisors (Barclays), a party unrelated to State Farm, 
serves as the investment adviser.
    9. State Farm, through the Trust, issues a separate series of 
shares of beneficial interest for each Fund, representing fractional 
undivided interests in such Fund. In this regard, for each Fund there 
are three (3) classes of shares, Class A shares, Class B shares, and 
Institutional Shares. These classes of shares are distinguished by 
varying sales charges and shareholder servicing fees. Class A shares 
have a front-end sales load of up to 3.00 percent (3%) and charge a 
12b-1 distribution fee of up to .25 percent (.25%). Class B shares have 
no front-end load, but provide for a contingent deferred sales charge 
on the back end of up to 3.00 percent (3%). In addition, Class B shares 
charge a 12b-1 distribution fee of up to .65 percent (.65%). Finally, 
Institutional Shares have no sales loads or 12b-1 distribution fees.
    SFVPMC is the broker-dealer, principal underwriter, and distributor 
for the Funds. Class A and Class B

[[Page 64476]]

shares of the Funds are sold through State Farm Agents who become 
licensed as registered representatives of SFVPMC. As of October 2000, 
there were approximately 9,200 State Farm Agents who were registered 
representatives of SFVPMC. The Institutional Shares are designed 
primarily for investment by employee benefit plans sponsored by State 
Farm and its affiliates and are not generally made available for sale 
to the public.
    10. State Farm and its subsidiary, SFVPMC, (collectively, the 
Applicants) have requested a prohibited transaction exemption which 
would permit: (a) The independent contractor Agents of State Farm who 
are also registered representatives of SFVPMC; and (b) the Family 
Members of such Agents to direct that assets of any Plan sponsored by 
such Agents or Family Members be invested in the Institutional Shares 
of one or more of the recently established Funds.
    Absent the requested relief, the Applicants are concerned that a 
violation of section 406(b)(2) of the Act would be deemed to occur, if 
assets of any of the Plans are invested in any of the Funds, because an 
Agent would be representing both SFVPMC and a Plan in any purchase or 
redemption of shares of such Funds. The Applicants are also seeking 
relief from any potential violations of section 406(a) of the Act and 
section 4975(c)(1)(A)-(D) of the Code that could be deemed to occur in 
the proposed transactions.
    11. There are two class exemptions covering transactions similar to 
those at issue in this proposed exemption. The first class exemption, 
Prohibited Transaction Class Exemption 77-3 (PTCE 77-3) (42 FR 18734, 
April 8, 1977), permits the acquisition or sale of shares of an open-
end investment company registered under the 1940 Act by an employee 
benefit plan covering only employees of such investment company, its 
investment adviser, principal underwriter, or ``affiliated persons'' of 
such entities (as defined in section 2(a)(3) of the 1940 Act). In this 
regard, the Applicants have determined that the proposed transactions 
are not within the scope of PTCE 77-3, because the Agents (and their 
Family Members) are not affiliated persons of any of the Funds, 
investment advisers to any of the Funds, or principle underwriters of 
such Funds within the meaning of section 2(a)(3) of the 1940 Act.
    The other class exemption, Prohibited Transaction Class Exemption 
77-4 (PTCE 77-4) (42 FR 18732, Apr. 8, 1977), permits the purchase or 
sale of shares of an open-end investment company where the investment 
adviser to the company is also a fiduciary of the plan. In this regard, 
the Applicants have determined that the proposed transactions are not 
within the scope of PTCE 77-4, because the investment adviser of the 
Funds is not a fiduciary of the Plans. However, because the proposed 
transactions appear to parallel the transactions contemplated by PTCE 
77-3 and PTCE 77-4, the Applicants have requested administrative relief 
comparable to that afforded by PTCE 77-3 and PTCE 77-4.
    12. As an investment adviser, SFIMC continuously furnishes an 
investment program for the Funds (other than the Equity Index Funds), 
is responsible for managing the investments of the Funds, and has 
responsibility for making decisions governing whether to buy, sell, or 
hold any particular security. In carrying out its obligations to manage 
the investment and reinvestment of the assets of the Funds, SFIMC 
performs research and obtains and evaluates pertinent economic, 
statistical, and financial data relevant to the investment policies of 
such Funds. As investment adviser to the Equity Index Funds, SFIMC 
monitors the performance of the Master Portfolio in which each of the 
Equity Index Funds invests.
    Pursuant to an investment advisory agreement, adopted in accordance 
with section 15 of the 1940 Act, the Trust pays SFIMC compensation in 
the form of an investment advisory and management services fee. The 
amount of the fee for each Fund is described in the prospectus for such 
Fund. In this regard, such fee accrues daily; is paid quarterly to 
SFIMC; and is based on average daily net assets. It is represented that 
SFIMC reimburses each Fund, if and to the extent, that the total annual 
operating expenses of each Fund exceed a specified percentage of the 
average net assets of such Fund.
    With respect to one of the Funds, the State Farm Equity and Bond 
Fund, SFIMC has agreed not to receive an investment advisory and 
management services fee for services rendered to such Fund. However, 
SFIMC will receive fees from managing the underlying Funds in which the 
State Farm Equity and Bond Fund invests. In this regard, SFIMC attempts 
to maintain approximately 60 percent (60%) of the net assets of the 
State Farm Equity and Bond Fund in shares of the State Farm Equity Fund 
and approximately 40 percent (40%) of the net assets of the State Farm 
Equity and Bond Fund in shares of the State Farm Bond Fund.
    13. The Trust is responsible for payment of all expenses it may 
incur in its operation and for all of its general administrative 
expenses, except those expressly assumed by SFIMC. These include (by 
way of description and not of limitation), any share redemption 
expenses, expenses of portfolio transactions, shareholder servicing 
costs, pricing costs (including the daily calculation of net asset 
value), interest on amounts borrowed by the Trust, charges of the 
custodian and transfer agent, cost of auditing services, non-interested 
Trustees' fees, legal expenses, all taxes and fees, investment advisory 
and management service fees, certain insurance premiums, cost of 
maintenance of corporate existence, investor services (including 
allocable personnel and telephone expenses), costs of printing and 
mailing updated Trust prospectuses to shareholders, costs of preparing, 
printing, and mailing proxy statements and shareholder reports to 
shareholders, the cost of paying dividends, capital gains distribution, 
costs of Trustee and shareholder meetings, dues to the Investment 
Company Institute to which the Funds are members, and any extraordinary 
expenses, including litigation costs in legal actions involving the 
Trust, or costs related to indemnification of Trustees, officers and 
employees of the Trust. The Board of Trustees of the Trust determines 
the manner in which expenses are allocated among the Funds of the 
Trust.
    14. Pursuant to a sub-advisory agreement, adopted in accordance 
with section 15 of the 1940 Act, SFIMC has engaged Capital Guardian 
Trust Company (CGTC) as the investment sub-adviser to provide day-to-
day portfolio management for the State Farm Small Cap Equity Fund and 
the State Farm International Equity Fund. CGTC manages the investments 
of the State Farm Small Cap Equity Fund and the State Farm 
International Equity Fund, determining which securities or other 
investments to buy and sell for each, selecting the brokers and dealers 
to effect the transactions, and negotiating commissions.
    For its services, SFIMC pays CGTC an investment sub-advisory fee 
equal to a percentage of the average daily net assets of each of the 
State Farm Small Cap Equity Fund and the State Farm International 
Equity Fund at the rates, as described in the prospectus of each Fund.
    15. As stated above, Barclays is the investment adviser to the 
Master Portfolios. Pursuant to an investment advisory contract with the 
Master Portfolios, adopted in accordance with section 15 of the 1940 
Act, Barclays provides investment guidance and policy direction in 
connection with the management of the assets of the Master

[[Page 64477]]

Portfolios. Barclays is entitled to receive monthly fees as 
compensation for its advisory and administrative services to each 
Master Portfolio, as described in the prospectus. This advisory fee is 
an expense of the Master Portfolios borne proportionately by its 
interest holders, such as the Equity Index Funds.
    16. The Applicants represent that the requested exemption is 
administratively feasible in that it will not require monitoring by the 
Department. In this regard, State Farm or its affiliates will maintain 
for a period of six (6) years the records necessary to determine 
whether the conditions of this exemption have been met.
    17. The Applicants represent that the investment in the Funds is in 
the best interest of the Plans and their participants and 
beneficiaries. In this regard, the Funds represent a wide range of 
investment alternatives for plan assets. The price to be paid or 
received by a Plan for Institutional Shares in a Fund will be the net 
asset value per share at the time of the transaction and will be the 
same price that would have been paid or received for such shares by any 
other investor in such Fund at that time.
    The exemption will permit the Plans to acquire Institutional Shares 
that would not ordinarily be available to Plans of this size with 
minimal fees and expenses. With respect to fees, the Plans will pay no 
plan-level investment advisory, investment management, or similar fee 
to State Farm or its affiliates in connection with the investment of 
the assets of such Plans in the Funds, nor will the Plans pay sales 
commissions or redemption fees in connection with the purchase or sale 
of Institutional Shares of the Funds. Furthermore, neither State Farm 
nor its affiliates will receive any fees payable pursuant to Rule 12b-1 
under the 1940 Act in connection with the proposed transactions. The 
costs to each such Plan of any investment in the Funds should therefore 
be at least comparable to the costs of investing in shares of other 
similar mutual funds.
    18. The proposed transactions parallel the transactions 
contemplated by PTCE 77-3 and PTCE 77-4. In this regard, as a result of 
the exclusive agency relationship and other factors, the Agents and 
their employees identify with State Farm in a way that is similar to 
the identification that employees of an insurance company, an 
investment company, or other financial institution would have with the 
company that employs them. Furthermore, the proposed exemption contains 
conditions similar to those imposed in PTCE 77-3 and PTCE 77-4 that are 
designed to prevent abuse.
    19. The proposed exemption contains additional safeguards to 
protect the interests of the Plans. In this regard, the investment of 
assets of a Plan (or a Participant's account in the case of a 
participant directed individual account plan) in each particular Fund 
will be implemented only at the express direction of an Agent, Family 
Member, or Participant in a plan that provides participant investment 
direction. In no event, will State Farm nor its affiliates have 
discretionary authority or control with respect to the investment of 
the plan assets involved in the proposed transactions, nor will State 
Farm or its affiliates render investment advice (within the meaning of 
29 CFR 2510.3-21(c)) with respect to those assets.
    Prior to the initial investment by any of the Plans in a Fund, 
annually after the initial investment, and in advance of any increase 
in fees, any increase in the rate of fees, or the addition of any 
Secondary Service for which a fee is charged, Agents, Family Members, 
or Participants, as appropriate, will receive from State Farm or its 
affiliates certain written disclosure of information concerning such 
Fund. Investment in the Funds will be terminable at will by a Plan 
without penalty, upon receipt of written notification by State Farm or 
its affiliates.
    The proposed exemption contains a condition that ensures that 
fiduciaries of the Plans are not improperly induced to purchase 
Institutional Shares of the Fund for Plans. In this regard, Agents will 
not receive sales commission or any other compensation or benefit, 
directly or indirectly, in connection with the purchase or sale of 
Institutional Shares of the Funds. Furthermore, it is represented that 
the Agents will not be pressured in any manner to cause Plans to 
purchase any shares in the Funds.
    The exemption, if granted, would operate to permit the Plans to 
purchase Institutional Shares in the Funds but would not require that 
the Plans be funded with the Funds. Furthermore, State Farm has 
confirmed to the Department that formal action will be taken through an 
amendment to the prototype documents, effective May 31, 2001, to delete 
any provision permitting the insurer to limit investment options under 
the prototypes. Accordingly, the proposed exemption contains a 
condition that any Plan that adopts a prototype retirement plan 
sponsored by State Farm or its affiliates must not be required under 
the provisions of such prototype to invest a minimum percentage of the 
total investments under such Plan in State Farm products.
    20. In summary, the Applicants represent that the proposed 
transactions will satisfy the statutory criteria of section 408(a) of 
the Act and section 4975(c)(2) of the Code because: (a) the acquisition 
and sale of Institutional Shares of the Funds to the Plans parallel the 
transactions contemplated by PTCE 77-3 and PTCE 77-4, and the proposed 
exemption contains safeguards similar to the conditions in such class 
exemptions; (b) the Plans pay no sales commissions or redemption fees 
with respect to investments by such Plans in any of the Funds; (c) 
Agents do not receive sales commission or any other compensation or 
benefit, directly or indirectly, in connection with the proposed 
transactions; (d) the Plans do not pay any plan-level investment 
advisory or similar fee in connection with the investment of the assets 
of such Plans in any of the Funds; (e) all dealings between the Plans, 
any of the Funds, and State Farm and its affiliates are on a basis no 
less favorable to such Plans than such dealings are with other 
shareholders of such Funds; (f) the price paid or received by a Plan 
for Institutional Shares in a Fund is the net asset value per share at 
the time of the transaction and is the same price that would have been 
paid or received for such shares by any other investor in such Fund at 
that time; (g) for each Plan, the combined total of all fees received 
by State Farm and its affiliates for the provision of services to such 
Plan, and in connection with the provision of services to any of the 
Funds in which such Plan may invest, are not in excess of ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act; (h) 
neither State Farm nor its affiliates receives any fees payable 
pursuant to Rule 12b-1 under the 1940 Act in connection with the 
proposed transactions; (i) prior to the initial investment by any of 
the Plans in a Fund, annually after the initial investment, and in 
advance of any increase in fees, any increase in the rate of fees, or 
the addition of any Secondary Service for which a fee is charged, 
Agents, Family Members, or Participants, as appropriate, receive 
certain written disclosure of information concerning such Fund; (j) any 
investment of assets of a Plan (or a Participant's account, in the case 
of a participant directed individual account plan) in a Fund is 
implemented only at the express direction of an Agent, Family Member, 
or Participant in a participant directed individual account plan; (k) 
investment by a Plan (or by a Participant's account, in the case of a 
individually directed account plan) in a

[[Page 64478]]

Fund is terminable at will by such Plan (or Participant's account), 
without penalty, upon receipt by State Farm or its affiliates of 
written notice of termination; (l) the Plans are not employee benefit 
plans sponsored or maintained by State Farm or its affiliates; and (m) 
any Plan subject to this proposed exemption which adopts a prototype 
retirement plan sponsored by State Farm or its affiliates must not be 
required under the provisions of such prototype to invest a minimum 
percentage of the total investments under such Plan in State Farm 
products.
    For Further Information Contact: Ms. Angelena C. Le Blanc of the 
Department, telephone (202) 219-8883. (This is not a toll-free number.)

Rollover Individual Retirement Account for Brenda A. Moran (the 
IRA) Located in Hobbs, New Mexico

[Application No. D-11015]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570, subpart B (55 FR 32836, 
August 10, 1990). If the exemption is granted, the sanctions resulting 
from the application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code, shall not apply to the proposed 
cash sale (the Sale) of common stock (the Stock) of Bravo Energy Inc. 
(Bravo) by the IRA \23\ to Bravo, a disqualified person with respect to 
the IRA, provided that the following conditions are met:
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    \23\ Because Brenda A. Moran (the Applicant) is the only 
participant in the IRA, there is no jurisdiction under Title I of 
the Act pursuant to 29 CFR 2510.3-3(b). However, there is 
jurisdiction under Title II of the Act under section 4975 of the 
Code.
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    (a) The Sale is a one-time transaction for cash;
    (b) The terms and conditions of the Sale are at least as favorable 
to the IRA as those obtainable in an arm's length transaction with an 
unrelated party;
    (c) The IRA receives the greater of $14.24 per share of Stock or 
the fair market value of the Stock at the time of the Sale; and
    (d) The IRA is not required to pay any commissions, costs or other 
expenses in connection with the Sale.

Summary of Facts and Representations

    1. The IRA is an individual retirement account under section 408(a) 
of the Code. The Applicant is the sole participant of the IRA. As of 
April 30, 2001, the IRA held assets valued at approximately 
$2,242,747.41. Moran is the only person who has investment discretion 
over the assets in the IRA.
    2. The IRA acquired 10,199 shares of Stock as a result of a 
rollover from the employee stock ownership plan of Moran Co., a New 
Mexico corporation. Moran Co. merged into Bravo effective as of July 
31, 1991.
    3. The Applicant requests an exemption for the Sale. The Applicant 
represent that the proposed transaction would be feasible because it 
would be a one-time transaction for cash. Furthermore, the Applicant 
states that the transaction would be in the best interest of the IRA 
because the Sale would enable the IRA to invest the proceeds from the 
Sale in assets with a higher rate of return. Finally, the Applicant 
represents that the transaction will be protective of the rights of the 
IRA's participant and beneficiaries because the IRA will receive the 
greater of $14.24 per share of Stock or the fair market value of the 
Stock, as determined by a qualified, independent appraiser on the date 
of the Sale, and will incur no commissions, costs, or other expenses as 
a result of the Sale.
    4. James W. Francis, a CPA accredited in business valuation with 
Johnson, Miller Co., located in Hobbs, New Mexico, appraised the Stock 
on October 11, 2001, based on Internal Revenue Service pronouncements. 
The value was obtained by determining the price that a hypothetical 
willing buyer would pay a willing seller for the shares of the Stock 
owned by the IRA. Based upon the factors related to the valuation and 
approaches, methods and procedures of valuation considered and other 
information accumulated during the investigation and analysis, 
including a December 31, 1999 valuation prepared by a qualified, 
independent, appraiser previously hired by the Applicant, the December 
31, 2000 balance sheet prepared by Bravo, and inspecting the Stock and 
analyzing all relevant data, Mr. Francis determined that a fee simple 
interest in the Stock had a fair market value of approximately $14.24 
per a share as of October 11, 2001.
    5. In summary, the Applicant represents that the proposed 
transaction satisfies the statutory criteria of section 4975(c)(2) of 
the Code because:
    (a) The terms and conditions of the Sale would be at least as 
favorable to the IRA as those obtainable in an arm's length transaction 
with an unrelated third party;
    (b) The Sale would be a one-time cash transaction allowing the IRA 
to divest itself of the Stock and reinvest the proceeds of the Sale in 
assets that will yield a higher rate of return;
    (c) The IRA would receive an amount equal to the greater of $14.24 
per share of the Stock, which represents the appraised fair market 
value of the Stock, as appraised by Mr. Francis in October 11, 2001, or 
the fair market value of the Stock at the time of the Sale; and
    (d) The IRA would not be required to pay any commissions, costs or 
other expenses in connection with the Sale.
    Notice to Interested Parties: Because Moran is the only participant 
in the IRA, it has been determined that there is no need to distribute 
the notice of proposed exemption (the Notice) to interested persons. 
Comments and requests for a hearing are due thirty (30) days after 
publication of the Notice in the Federal Register.
    For Further Information Contact: Khalif Ford of the Department, 
telephone (202) 219-8883 (this is not a toll-free number).

Individual Retirement Account of Howard E. Adkins (the IRA) Located 
in Boise, Idaho

[Application No. D-11025]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570 Subpart B (55 FR 32836, 32847, 
August 10, 1990). If the exemption is granted, the sanctions resulting 
from the application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code, shall not apply to the proposed 
sale by the IRA of an interest (the Interest) in certain real property 
(the Property) to Moccasin, LLC (the LLC), a disqualified person with 
respect to the IRA,\24\ provided that the following conditions are 
satisfied: (1) The sale is a one-time transaction for cash; (2) the IRA 
pays no commissions nor other expenses relating to the sale; and (3) 
the sales price received by the IRA equals the Interest's fair market 
value, as of the date of the sale, as established by a qualified, 
independent appraiser.
---------------------------------------------------------------------------

    \24\ Pursuant to 29 CFR 2510.3-2(d), the IRA is not an employee 
benefit plan within the jurisdiction of Title I of the Act. However, 
there is jurisdiction under Title II of the Act, pursuant to section 
4975 of the code.
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Summary of Facts and Representations

    1. The IRA is an individual retirement account, as described under 
section 408(a) of the Code. The IRA was established by Howard E. 
Adkins, M.D., who is the sole participant. Dr. Adkins' wife, Ione M. 
Adkins, is the beneficiary of the IRA. As of September 18, 2001,

[[Page 64479]]

the IRA had total assets of approximately $651,021.00, which consisted 
primarily of the Interest (as valued by an independent appraisal, 
discussed below). The trustee of the IRA is First Security Bank of 
Idaho, N.A., located in Boise, Idaho.
    2. Dr. Adkins and his wife are the sole managing members of the 
LLC, an Idaho limited liability company in which each owns 7,500 units. 
The LLC has no other members. The LLC, the proposed purchaser of the 
Interest, was formed to hold title to two real estate investment 
properties, which are ranches located near Salmon, Idaho. The LLC is 
contemplating a sale of one of the two ranches, with the proceeds to be 
used by the LLC to purchase the Interest from the IRA 7 in a tax-free 
exchange (pursuant to section 1031 of the Code).
    3. The Property consists of four units of farmland in Adams County, 
Washington--the West Tract (Units 45 & 46) and the East Tract (Units 56 
& 57). The Property was originally acquired as an investment by Dr. 
Adkins' individual account in the Adkins Fulwyler Pension Trust (the 
Trust). The Trust purchased two units of the Property in 1983 from 
Charles H. and Tonia L. Howarth, who are unrelated parties, for 
approximately $222,250. The Trust purchased two additional units in 
1985 from the Prudential Insurance Company, also unrelated, for 
approximately $225,000. The Property and other assets were distributed 
from the Trust and rolled over into the IRA in December, 1995.
    On July 20, 2000, Dr. Adkins turned 70\1/2\, the maximum age for a 
minimum required distribution (MRD) from his IRA. The applicant 
represents that there was insufficient cash available to make the MRD 
to Dr. Adkins from his IRA for the year 2000.\25\ Consequently, Dr. 
Adkins was forced to receive some cash and a small undivided interest 
(nine percent) in Units 45 & 46 of the Property.\26\ The applicant 
represents that the Property is not adjacent to any other real property 
owned by the Adkinses.
---------------------------------------------------------------------------

    \25\ The Department notes that the Internal Revenue Service has 
taken the position that a lack of diversification of investments in 
a qualified plan may raise questions in regard to the exclusive 
benefit rule under section 401(a) of the Code. See, e.g., Rev. Rul. 
73-532, 1973-2 C.B. 128. The Department further notes that section 
408(a) of the Code, which describes tax qualification provisions for 
IRAs, mandates that an IRA trust be created for the exclusive 
benefit of an individual and his or her beneficiaries. However, the 
Department expresses no opinion herein as to whether the acquisition 
and holding of the Property by the IRA violated any provisions of 
the Code.
    \26\ The applicant represents that the MRD for the 2000 tax year 
was calculated as follows. The fair market value of the total assets 
of the IRA on December 31, 1999 was $637,300. As of that date, the 
fair market value of Units 45 & 46 of the Property was equal to 
$346,200, while the fair market value of Units 57& 58 of the 
Property was equal to $291,100. The MRD for 2000 was $30,936. Thus, 
nine percent of Units 45 & 46 were deeded to Dr. Adkins (i.e., 
$346,200  x  .09 = $31,158). However, the Department expresses no 
opinion herein as to whether the amount distributed to Dr. Adkins as 
the MRD satisfied the applicable provisions of the Code.
---------------------------------------------------------------------------

    The Property is being rented annually to an unrelated third party 
for approximately $35,000.00 per year. Rental expenses include (i) a 
custodian charge by Wells Fargo Bank of 1% per month of the value of 
the Property, (ii) an onsite Property manager that receives 12% of the 
net rental income, (iii) taxes and water charges of approximately 
$18,000 per year, and (iv) miscellaneous repair and equipment 
purchases. The applicant further represents that the Property has not 
been leased to, nor used by, a disqualified person with respect to the 
IRA, at any time since being acquired by the IRA.\27\
---------------------------------------------------------------------------

    \27\ The Department notes that any lease or use of the Property 
by a ``disqualified person,'' as defined in section 4975(e)(2) of 
the Code, would be a separate prohibited transaction under section 
4975(c)(1)(A) or (D) of the Code.
---------------------------------------------------------------------------

    4. The Property has been appraised by Columbia Appraisal and Real 
Estate Company, a qualified, independent appraiser located in Pasco, 
Washington. Robert L. Greeno, a general appraiser certified in the 
State of Washington, and Wendy C. Greeno, Appraisal Assistant, 
estimated that the fair market value of the Property was $685,700, as 
of September 18, 2001. Utilizing the Sales Comparison Approach, the 
Greenos chose three recent sales of comparable irrigated farms in Adams 
County, which were within a 15-mile radius of the Property, as the best 
indicators of the current market value of the Property. Mr. Greeno 
concluded that the West Tract (Units 45 & 46) consists of 148.2 
irrigable acres worth $2,600 per acre for a value of $385,320, while 
the East Tract (Units 56 & 57) consists of 130.6 irrigable acres worth 
$2,300 per acre for a value of $300,380--thus, a total value for the 
Property of $685,700.
    Subtracting the nine percent (9%) minority interest in the West 
Tract of the Property (i.e., valued at $34,679), which is owned 
individually by Dr. Adkins as a result of the MRD from the IRA, Mr. 
Greeno concluded that the fair market value of the IRA's Interest was 
$651,021, as of September 18, 2001.
    5. The applicant proposes that the LLC purchase the Interest from 
the IRA for an amount in cash equal to the fair market value of the 
Interest ($651,021, as of September 18, 2001), based on an updated, 
independent appraisal at the time of the transaction. The IRA will pay 
no commissions nor other expenses relating to the sale.
    The applicant represents that the proposed exemption is in the best 
interests of the IRA because the IRA will be able to obtain a much 
better price for the Interest from the LLC, compared with offers it has 
received in past attempts to sell the Interest on the open market, and 
without incurring any brokerage commissions or other transaction costs. 
In addition, the sale will allow the IRA an opportunity to divest 
itself of an illiquid asset. The IRA will then be able to reinvest the 
sale proceeds in other investments that will increase the 
diversification of the IRA's assets and facilitate the payment of 
retirement benefits.
    6. In summary, the applicant represents that the proposed 
transaction satisfies the statutory criteria for an exemption under 
section 4975(c)(2) of the Code for the following reasons:
    (a) the sale will be a one-time transaction for cash; (b) the IRA 
will pay no commissions nor other expenses relating to the sale; (c) 
the sale price received by the IRA will equal the Interest's fair 
market value, as of the date of the sale, as established by a 
qualified, independent appraiser; and (d) the sale will allow the IRA 
an opportunity to divest itself of an illiquid asset, increase the 
diversification of the IRA's assets by reinvesting the proceeds of the 
sale in other investments, and facilitate the payment of retirement 
benefits.
    Notice to Interested Persons: Because Dr. Adkins is the sole 
participant in his IRA, it has been determined that there is no need to 
distribute the notice of proposed exemption to interested persons. 
Comments and requests for a hearing with respect to the proposed 
exemption are due within 30 days of the date of publication of this 
notice in the Federal Register.
    For Further Information Contact: Ms. Karin Weng of the Department, 
telephone (202) 693-8540. (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,

[[Page 64480]]

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 6th day of December, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits, 
Administration, Department of Labor.
[FR Doc. 01-30755 Filed 12-12-01; 8:45 am]
BILLING CODE 4510-29-P