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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Morgan Stanley & Co. Incorporated (MS&Co) [Notices] [01/03/2002]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Morgan Stanley & Co. Incorporated (MS&Co) [01/03/2002]

[PDF Version]

Volume 2, Number 67, Page 351-367

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10886, et al.]

 
Proposed Exemptions; Morgan Stanley & Co. Incorporated (MS&Co)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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

Written Comments and Hearing Requests

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

ADDRESSES: All written comments and requests for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration (PWBA), Office of Exemption Determinations, Room N-5649, 
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No. ___, stated in each Notice of 
Proposed Exemption. Interested persons are also invited to submit 
comments and/or hearing requests to PWBA via e-mail or FAX. Any such 
comments or requests should be sent either by e-mail to: 
``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,

[[Page 352]]

200 Constitution Avenue, N.W., Washington, DC 20210.

Notice to Interested Persons

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

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the 
Secretary of the Treasury to issue exemptions of the type requested to 
the Secretary of Labor. Therefore, these notices of proposed exemption 
are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

Morgan Stanley & Co. Incorporated (MS&Co) Located in New York, New 
York

[Exemption Application No. D-10886]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and 
406(b)(2) of the Act and the sanctions resulting from the application 
of section 4975(a) and (b) of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code, shall not apply to the September 
16, 1998 acquisition (the Acquisition), on behalf of the Central 
States, Southeast and Southwest Areas Pension Fund (the Fund), of 
certain Argentine bonds (the Bonds) from MS&Co, a party in interest 
with respect to the Fund, by the Capital Asset Trust (the Trust) at the 
direction of Alliance Capital Management L.P. (Alliance), an investment 
manager for the Fund, provided the following conditions are satisfied:
    (a) The Acquisition was a one-time transaction for cash;
    (b) The Fund paid no more than the current fair market value of the 
Bonds as of the date of the Acquisition;
    (c) The Fund paid no commissions or expenses with respect to the 
Acquisition;
    (d) The Acquisition and subsequent sale of the Bonds (the Sale) 
resulted in the Fund's receipt of a one-day profit totaling 
$147,250.01;
    (e) Upon identifying the Acquisition as a ``prohibited 
transaction'', MS&Co and Alliance acted promptly to comply with the 
relevant provisions of ERISA and the Code;
    (f) Alliance and MS&Co took whatever actions were necessary to 
ensure that the Fund was adequately protected with respect to the 
Acquisition;
    (g) Subsequent to the Acquisition, Alliance implemented an internal 
computer system designed to prevent transactions between client plans 
and named fiduciaries with respect to such plans; and
    (h) The transaction was not part of an agreement, arrangement or 
understanding designed to benefit a party in interest.
    EFFECTIVE DATE OF EXEMPTION: The effective date of this proposed 
exemption, if granted, is September 16, 1998.

Summary of Facts and Representations

    1. The Fund is a jointly managed Taft-Hartley Plan established in 
1955. As of September 30, 1998, the Fund had approximately 375,604 
participants and beneficiaries and an approximate fair market value of 
$17 billion.
    2. At the time of the Acquisition, the named fiduciary for the Fund 
was Morgan Stanley Dean Witter & Co. (MSDW). MSDW is a worldwide 
financial services firm that provides services, either directly or 
through its subsidiaries, to corporations, governments, and individual 
investors. MSDW became the Fund's named fiduciary as a result of a 
court order issued pursuant to a consent decree (the Consent Decree) 
that, among other things, prohibited the Fund's investment managers 
from engaging in transactions with ``parties in interest'' such as 
MS&Co.\1\
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    \1\ The Consent Decree was issued pursuant to Raymond J. 
Donovan, Secretary of Labor, v. Frank Fitzsimmons, et al., Civil 
Action No. 78 C 342.
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    MS&Co is a wholly-owned subsidiary of MSDW having business offices 
in New York and other cities worldwide. MS&Co is, among other things, a 
registered broker-dealer, a member of the National Association of 
Securities Dealers, and a member of most major United States and 
foreign commodity exchanges.
    3. Pursuant to an agreement dated May 2, 1994 (the Agreement), MSDW 
(through its predecessor-in-interest, the Morgan Stanley Group, Inc.) 
appointed Alliance as an investment manager with respect to a portion 
of the assets in the Fund. In this regard, at the time of the 
Acquisition, Alliance acted as a ``qualified professional asset 
manager'' \2\ with respect to certain Fund assets invested in the 
Trust, a Massachusetts trust in which the Fund was a participant.\3\ 
Specifically, Alliance was hired to manage a particular type of asset 
class, International Fixed Income-Emerging Markets Debt. The applicant 
represents that Alliance, an investment adviser registered with the 
Securities and Exchange Commission, is entirely independent of MSDW and 
its affiliates and does not have any management or ownership 
relationship with such entities.
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    \2\ As such term is defined in Section V(a) of the Department's 
Prohibited Transaction Class Exemption 84-14 (49 FR 9494 (1984)).
    \3\ The applicant represents that the beneficial interests of 
the Trust were held by two employee benefit plans subject to ERISA 
and thus the Trust itself was an entity the assets of which were 
subject to ERISA. At the time of the Acquisition, the Fund owned 
approximately 98.1% of the beneficial interests in the Trust, and 
the Marsh & McLennan US Retirement Plan owned approximately 1.9% of 
such interests.
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    Relevant sections of the Agreement provided that Alliance would: 
(a) invest Fund assets held in the Trust in accordance with investment 
objectives specified in writing by MSDW; (b) act in accordance with the 
Consent Decree and ERISA and not engage in any unexempted ``prohibited 
transaction''; and (c) comply with all federal or state law 
requirements that are imposed with respect to transactions involving 
the assets of the Fund.
    In addition, the applicant represents that MSDW delivered to 
Alliance, on a regular basis, a ``prohibited transaction'' notice. 
According to the applicant, such notice specifically advised that 
Alliance should not, among other things, execute trades through MS&Co. 
Furthermore, the applicant represents that Alliance's ``Current 
Investment Guidelines'' for the Trust, dated October 31, 1997, provided 
that Alliance: would not effect a prohibited transaction; and would not 
deal with any MSDW entity.
    4. The applicant represents that, on September 16, 1998, Alliance 
learned through news reports that the

[[Page 353]]

International Monetary Fund and certain banks were preparing a package 
of loans worth $4.5 billion for Argentina. The applicant states that 
Alliance believed the news would have a positive effect on Argentine 
fixed income securities. As a result, Alliance contacted MS&Co and 
asked for an ``offering'' on the Bonds in contravention of the 
safeguards described above. The applicant represents that the Bonds are 
$9,500,000 Face Amount Argentina Floating Rate Bonds due March 31, 
2005.
    According to the applicant, as a result of inadvertent errors made 
by personnel involved in the Acquisition, MS&Co agreed to fill the 
order. Alliance's purchase of the Bonds was made for settlement on 
September 21, 1998 for $7,566,947.91 (the Acquisition Price). Of this 
amount, $7,262,750.00 consisted of principal and $304,197.91 consisted 
of accrued interest.
    5. At the time of the Acquisition, MS&Co was a market maker in the 
Bonds. The applicant represents, however, that the Bonds were not in 
MS&Co's inventory at the time of the Acquisition. In this regard, the 
applicant states that a market maker will, from time to time, go into 
the market to replenish a particular security which the market maker 
has sold out of its inventory. Similarly, in this instance, MS&Co made 
a business decision to sell the Bonds at the Acquisition Price to 
Alliance even though it did not contemporaneously hold the Bonds. The 
applicant states that MS&Co committed itself to the Acquisition Price 
based on the belief that it could go into the market and obtain the 
Bonds at a discount relative to such price.
    However, in meeting its obligations with respect to the 
Acquisition, MS&Co was ultimately required to purchase the Bonds at a 
price higher than the Acquisition Price. In this regard, despite its 
commitment to sell the Bonds to Alliance for $7,566,947.91, market 
conditions were such that MS&Co was forced to acquire the Bonds in two 
separate trades for a total cost of approximately $7,714,000. In so 
doing, the applicant represents, MS&Co lost approximately $147,000.
    6. The applicant represents that the Acquisition Price represented 
the Bonds' fair market value at the time of the Acquisition. In this 
regard, it is represented that in providing the Acquisition price to 
Alliance, the MS&Co trader responsible for the emerging markets fixed 
income desk used pricing mechanisms commonly employed in the over-the-
counter fixed income markets such that the purchase price was fair and 
reasonable. Specifically, the Acquisition Price was determined in 
consideration of: Bid and ask prices for the Bonds available on 
interdealer computer screens; \4\ news events relating to Argentina's 
receipt of potential economic relief; prior bid and ask data 
historically furnished by interdealer brokers; certain volume 
requirements; and other objective criteria.
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    \4\ The applicant states that interdealer brokers, who are 
independent of the approximately 30-40 securities dealers that 
comprise the major market makers, collect and post dealer quotes 
(and execute trades between dealers). Information concerning dealer 
quotes is updated via computer monitors available to each of the 
primary securities dealers.
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    The applicant states that at the time the Acquisition occurred, the 
Bonds traded in relatively high volumes and were well known and well 
followed. As a result, the market for the Bonds was extremely 
``transparent'' at the time of the Acquisition with only a nominal 
spread between relevant bid and ask prices. In consideration of these 
and other factors such as Alliance's status as a valued MS&Co client, 
the MS&Co trader offered to sell the Bonds to Alliance at the 
Acquisition Price.
    7. Shortly after the Acquisition, Alliance decided to sell the 
Bonds. In this regard, during the course of the September 16, 1998 
trading day, Alliance observed significant fluctuations in the price of 
the Bonds. The applicant states that when relevant bond prices rose to 
the extent that Alliance believed selling the Bonds would be in the 
best interest of the Fund, Alliance sold the Bonds. In this regard, 
Alliance sold the Bonds to Goldman, Sachs & Co. (Goldman, Sachs) for 
$7,714,197.92 (the Sale). The applicant notes that the Fund, through 
the Trust, made a profit of $147,250.01 on the Acquisition and Sale.\5\
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    \5\ The applicant states that although there was one other 
participant in the Trust, the Trust implemented separate accounting 
such that all of the profit attributable to the Acquisition and Sale 
went solely to the Fund. In this regard, the Department is not 
providing relief to any other participant in the Trust, nor is it 
expressing any opinion as to representations made by the applicant 
concerning the composition and operations of the Trust.
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    8. In certifying its compliance with the Agreement to MSDW, 
Alliance noted that the Acquisition may have constituted a ``prohibited 
transaction''. Upon being so alerted, the applicant represents that 
MS&Co filed a Form 5330 with the Internal Revenue Service on June 30, 
1999, and paid an excise tax of $1,135,042.19 (15% of $7,566,947.91). 
The applicant notes that the Acquisition was fully disclosed in the 
Fund's audited financial statements and was corrected within the 
meaning of section 4975(f)(5) of the Code.\6\
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    \6\ The Department is expressing no opinion as to whether the 
Acquisition was corrected in accordance with relevant provisions of 
the Code.
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    9. The applicant states that neither Alliance nor MS&Co intended to 
engage in a ``prohibited transaction'' when consummating the 
Acquisition. In this regard, various mechanisms were in place to 
prevent Alliance from inadvertently violating the ``prohibited 
transaction'' provisions of ERISA, all of which failed, the applicant 
represents, in an unforeseeable and improbable manner.\7\ Subsequent to 
the Acquisition, Alliance has devised an internal computer system in an 
effort to ensure that future ``prohibited transactions'' do not 
similarly occur. Such system identifies situations when a specific 
trade is placed between a client plan and a party in interest who is a 
named fiduciary. The system flags the trade and alerts Alliance's 
compliance department.
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    \7\ In addition to the safeguards discussed above, the applicant 
states that Morgan Stanley Dean Witter Investment Management Inc., a 
wholly owned subsidiary of MSDW, had provided materials to Alliance 
at the outset of its appointment as an investment manager for the 
Fund which noted the restrictions on trading with MS&Co. In 
addition, prior to the Transaction, Mellon Bank, N.A., the Fund's 
custodian, had created and implemented a prohibited transaction 
surveillance system designed to reject attempted trades on behalf of 
the Fund and the Trust with parties with whom the Fund or the Trust 
were prohibited from dealing, including MSDW and its affiliates.
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    10. The applicant represents that the proposed exemption is 
administratively feasible in that the Bonds were sold on the same day 
they were acquired. In addition, the applicant states that the 
transaction was in the interests of the Fund's participants and 
beneficiaries since the Acquisition and Sale resulted in the Fund's 
receipt of a one-day profit totaling $147,250.01. Finally, the 
applicant represents that the Acquisition was fair to the Fund since 
the Fund paid no more than the current fair market value for the Bonds 
at the time of the Acquisition.
    11. In summary, the applicant represents that the requested 
retroactive individual exemption will satisfy the criteria of section 
408(a) of the Act for the following reasons:
    (a) The Acquisition was a one-time transaction for cash;
    (b) The Fund paid no more than the current fair market value of the 
Bonds as of the date of the Acquisition;
    (c) The Fund paid no commissions or expenses with respect to the 
Acquisition;
    (d) The Acquisition and the Sale resulted in the Fund's receipt of 
a one-day profit totaling $147.250.01;

[[Page 354]]

    (e) Upon identifying the Acquisition as a ``prohibited 
transaction'', MS&Co and Alliance, an investment manager for the Fund, 
acted promptly to comply with the relevant provisions of ERISA and the 
Code;
    (f) Alliance and MS&Co took whatever actions were necessary to 
ensure that the Fund was adequately protected with respect to the 
Acquisition;
    (g) Subsequent to the Acquisition, Alliance implemented an internal 
computer system designed to prevent transactions between client plans 
and named fiduciaries with respect to such plans; and
    (h) The transaction was not part of an agreement, arrangement or 
understanding designed to benefit a party in interest.

FOR FURTHER INFORMATION CONTACT: Christopher J. Motta of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

Union Bank of California (UBOC), Located in San Francisco, 
California

[Application No. D-10976]

Proposed Exemption

Section I--Retroactive and Prospective Exemption for In-Kind Redemption 
of Assets
    If the proposed exemption is granted, the restrictions of section 
406(a) and 406(b) of ERISA and the sanctions resulting from the 
application of section 4975 of the Code by reason of section 4975(c)(1) 
(A) through (F) of the Code, shall not apply, as of June 15, 2001, to 
certain in-kind redemptions (the Redemptions) by the Union Bank of 
California Retirement Plan or any other employee benefit plan sponsored 
by UBOC or an affiliate of UBOC (an In-house Plan) of shares (the 
Shares) of proprietary mutual funds (the Portfolios) offered by the 
HighMark Funds or other investment companies (the Funds) for which 
HighMark Capital Management, Inc. or an affiliate thereof (the Adviser) 
provides investment advisory and other services, provided that the 
following conditions are met:
    (A) The In-house Plan pays no sales commissions, redemption fees, 
or other similar fees in connection with the Redemptions (other than 
customary transfer charges paid to parties other than UBOC and 
affiliates of UBOC (UBOC Affiliates));
    (B) The assets transferred to the In-house Plan pursuant to the 
Redemptions consist entirely of cash and Transferable Securities. 
Notwithstanding the foregoing, Transferable Securities which are odd 
lot securities, fractional shares and accruals on such securities may 
be distributed in cash;
    (C) With certain exceptions defined below, the In-house Plan 
receives a pro rata portion of the securities of the Portfolio upon a 
Redemption that is equal in value to the number of Shares redeemed for 
such securities, as determined in a single valuation performed in the 
same manner and as of the close of business on the same day in 
accordance with the procedures established by the Funds pursuant to 
Rule 2a-4 under the Investment Company Act of 1940, as amended from 
time to time (the 1940 Act), (using sources independent of UBOC and 
UBOC Affiliates);
    (D) UBOC, the Adviser, or any affiliate thereof, does not receive 
any fees, including any fees payable pursuant to Rule 12b-1 under the 
1940 Act in connection with any redemption of the Shares;
    (E) Prior to a Redemption, UBOC provides in writing to an 
independent fiduciary, as such term is defined in Section II (an 
Independent Fiduciary), a full and detailed written disclosure of 
information regarding the Redemption;
    (F) Prior to a Redemption, the Independent Fiduciary provides 
written approval for such Redemption to UBOC, such approval being 
terminable at any time prior to the date of the Redemption without 
penalty to the In-house Plan, and such termination being effectuated by 
the close of business following the date of receipt by UBOC of written 
or electronic notice regarding such termination (unless circumstances 
beyond the control of UBOC delay termination for no more than one 
additional business day);
    (G) Before approving a Redemption, based on the disclosures 
provided by the Portfolios to the Independent Fiduciary and discussions 
with appropriate operational personnel of the In-house Plan, UBOC, and 
the Adviser as necessary to form a basis for making the following 
determinations, the Independent Fiduciary determines that the terms of 
the Redemption are fair to the participants of the In-house Plan and 
comparable to and no less favorable than terms obtainable at arms-
length between unaffiliated parties;
    (H) Not later than thirty (30) business days after the completion 
of a Redemption, UBOC or the relevant Fund provides to the Independent 
Fiduciary a written confirmation regarding such Redemption containing:
    (i) The number of Shares held by the In-house Plan immediately 
before the Redemption (and the related per Share net asset value and 
the total dollar value of the Shares held),
    (ii) The identity (and related aggregate dollar value) of each 
security provided to the In-house Plan pursuant to the Redemption, 
including any security valued in accordance with the Funds' procedures 
for obtaining current prices from independent market-makers,
    (iii) The current market price of each security received by the In-
house Plan pursuant to the Redemption, and
    (iv) The identity of each pricing service or market-maker consulted 
in determining the value of such securities;
    (I) The value of the securities received by the In-house Plan for 
each redeemed Share equals the net asset value of such Share at the 
time of the transaction, and such value equals the value that would 
have been received by any other investor for shares of the same class 
of the Portfolio at that time;
    (J) Subsequent to a Redemption, the Independent Fiduciary performs 
a post-transaction review which will include, among other things, 
testing a sampling of material aspects of the Redemption deemed in its 
judgment to be representative, including pricing. For Redemptions 
occurring on June 15, 2001,the Independent Fiduciary's review included 
testing a limited sampling of certain material aspects of the 
Redemption deemed in its judgment to be representative; \8\
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    \8\ The reason for this difference is to conform to the language 
used in the initial independent fiduciary agreement that U.S. Trust 
and UBOC entered into with respect to the June 15, 2001 
transactions.
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    (K) Each of the In-house Plan's dealings with: the Funds, the 
Adviser, the principal underwriter for the Funds, or any affiliated 
person thereof, are on a basis no less favorable to the In-house Plan 
than dealings between the Funds and other shareholders holding shares 
of the same class as the Shares;
    (L) UBOC maintains, or causes to be maintained, for a period of six 
years from the date of any covered transaction such records as are 
necessary to enable the persons described in paragraph (M) below to 
determine whether the conditions of this exemption have been met, 
except that (i) a prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of UBOC, the 
records are lost or destroyed prior to the end of the six-year period, 
(ii) no party in interest with respect to the In-house Plan other than 
UBOC shall be subject to the civil penalty that may be assessed under 
section 502(i) of the Act or to the taxes imposed by section 4975(a) 
and (b) of the Code if such records are not maintained or are not 
available for examination as required by paragraph (M) below.

[[Page 355]]

    (M)(1) Except as provided in subparagraph (2) of this paragraph 
(M), and notwithstanding any provisions of section 504(a)(2) and (b) of 
the Act, the records referred to in paragraph (L) above are 
unconditionally available at their customary locations for examination 
during normal business hours by (i) any duly authorized employee or 
representative of the Department of Labor, the Internal Revenue 
Service, or the Securities and Exchange Commission, (ii) any fiduciary 
of the In-house Plan or any duly authorized representative of such 
fiduciary, (iii) any participant or beneficiary of the In-house Plan or 
duly authorized representative of such participant or beneficiary, (iv) 
any employer with respect to the In-house Plan, and (v) any employee 
organization whose members are covered by such In-house Plan.
    (2) None of the persons described in paragraphs (M)(1)(ii) through 
(v) shall be authorized to examine trade secrets of UBOC, the Funds, or 
the Adviser, or commercial or financial information which is privileged 
or confidential.
    (3) Should UBOC, the Funds, or the Adviser refuse to disclose 
information on the basis that such information is exempt from 
disclosure pursuant to paragraph (M)(2) above, UBOC, the Funds, or the 
Adviser shall, by the close of the 30th day following the request, 
provide a written notice advising that person of the reasons for the 
refusal and that the Department may request such information.
Section II--Definitions
    For purposes of this proposed exemption,
    (A) The term ``affiliate'' means:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (B) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (C) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and sales calculated by dividing the value of all 
securities, determined by a method as set forth in the Portfolio's 
prospectus and statement of additional information, and other assets 
belonging to the Portfolio, less the liabilities charged to each such 
Portfolio, by the number of outstanding shares.
    (D) The term ``Independent Fiduciary'' means a fiduciary who is: 
(i) Independent of and unrelated to UBOC and its affiliates, and (ii) 
appointed to act on behalf of the In-house Plan with respect to the in-
kind transfer of assets from one or more Portfolios to or for the 
benefit of the In-house Plan. For purposes of this exemption, a 
fiduciary will not be deemed to be independent of and unrelated to UBOC 
if: (i) such fiduciary directly or indirectly controls, is controlled 
by or is under common control with UBOC; (ii) such fiduciary directly 
or indirectly receives any compensation or other consideration in 
connection with any transaction described in this exemption; (except 
that an Independent Fiduciary may receive compensation from UBOC in 
connection with the transactions contemplated herein if the amount or 
payment of such compensation is not contingent upon or in any way 
affected by the Independent Fiduciary's ultimate decision); and (iii) 
more than 1 percent (1%) of such fiduciary's gross income, for federal 
income tax purposes, in its prior tax year, will be paid by UBOC and 
its affiliates in the fiduciary's current tax year.
    (E) The term ``Transferable Securities'' shall mean securities (1) 
for which market quotations are readily available as determined 
pursuant to procedures established by the Funds under Rule 2a-4 of the 
1940 Act; and (2) which are not: (i) securities which may not be 
publicly offered or sold without registration under the Securities Act 
of 1933; (ii) securities issued by entities in countries which (a) 
restrict or prohibit the holding of securities by non-nationals other 
than through qualified investment vehicles, such as the Funds, or (b) 
permit transfers of ownership of securities to be effected only by 
transactions conducted on a local stock exchange; (iii) certain 
portfolio positions (such as forward foreign currency contracts, 
futures and options contracts, swap transactions, certificates of 
deposit and repurchase agreements) that, although they may be liquid 
and marketable, involve the assumption of contractual obligations, 
require special trading facilities or can only be traded with the 
counter-party to the transaction to effect a change in beneficial 
ownership; (iv) cash equivalents (such as certificates of deposit, 
commercial paper and repurchase agreements; and (v) other assets which 
are not readily distributable (including receivables and prepaid 
expenses), net of all liabilities (including accounts payable).
    (F) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of ERISA (or a ``member of the family,'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
sister, or a spouse of a brother or a sister.

Summary of Facts and Representations

    1. UnionBanCal Corporation (UNBC) is a bank holding company 
headquartered in San Francisco, California, the majority of the shares 
of which are owned by The Bank of Tokyo--Mitsubishi, Ltd., which in 
turn is wholly owned by Mitsubishi Tokyo Financial Group, Inc. UBOC, a 
federally chartered bank also headquartered in San Francisco, is a 
wholly owned subsidiary of UNBC. As of December 31, 2000, UNBC had 
approximately $35.2 billion in total assets.
    2. UBOC is the trustee of the Union Bank of California Retirement 
Plan (the Retirement Plan). The Retirement Plan is an In-house defined 
benefit Plan maintained by UBOC for certain current and former 
employees of UBOC and UBOC Affilates. As of January, 2001, the 
Retirement Plan had approximately 13,895 participants. As of May 31, 
2001 the Retirement Plan had approximately $616 million in assets.
    3. According to the applicant, UBOC's Employee Deferred 
Compensation and Benefit Plans Administrative Committee (the Committee) 
determined previously that the Retirement Plan would benefit from the 
investment of its assets in certain Portfolios of the HighMark Funds 
\9\ (the HighMark Portfolios). The HighMark Portfolios are mutual fund 
portfolios organized within the HighMark Funds. The HighMark Funds and 
any other Funds to which the exemption may apply are open-end 
investment companies registered under the 1940 Act with respect to 
which HighMark Capital Management, Inc. or an affiliate (the Adviser) 
acts as an investment adviser.
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    \9\ The HighMark Funds formerly were known as The HighMark 
Group.
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    At the time, the Committee considered the HighMark Portfolios to be 
an appropriate vehicle for diversifying the Retirement Plan's assets. 
In addition, the Committee determined that investment in the HighMark 
Portfolios by the Retirement Plan would allow the Retirement Plan to 
continue to use in-house investment managers that had provided 
investment services to the Plan. As a result, the Committee decided to 
invest Retirement Plan assets in the HighMark Portfolios in accordance 
with Prohibited

[[Page 356]]

Transaction Exemption 77-3 (PTE 77-3, 42 FR 18734 (1977)).\10\
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    \10\ The applicant has not requested exemptive relief with 
respect to any investment in the HighMark Portfolios by the 
Retirement Plan. The applicant notes that the Retirement Plan may 
acquire or redeem shares in the HighMark Portfolios or any other 
Funds pursuant to Prohibited Transaction Exemption (PTE) 77-3. In 
this regard, PTE 77-3 permits the acquisition or sale of shares of a 
registered, open-end investment company be an employee benefit plan 
covering only employees of such investment company, employees of the 
investment adviser or principal underwriter for such investment 
company, or employees of any affiliated person (as defined therein) 
of such investment adviser or principal underwriter, provided 
certain conditions are met. The Department is expressing no opinion 
in this proposed exemption regarding whether any transactions with 
the Funds by the Retirement Plan or any other In-house Plan is 
covered by PTE 77-3.
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    4. The applicant states that the Committee decided recently to 
reallocate the management of Retirement Plan assets among the 
affiliated and unaffiliated investment managers who would manage such 
assets on a separate account basis.\11\ The allocation of assets among 
the managers was based on a revised, comprehensive asset allocation 
strategy and policy developed by the Committee with the assistance of 
an independent consulting firm. The applicant notes such management 
avoids mutual fund fees and regulatory costs associated with investment 
in SEC-registered mutual fund portfolios.
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    \11\ The affiliated managers would include HighMark Capital 
Management, Inc. The applicant states that HighMark Capital 
Management, Inc. manages any separate account holding In-house Plan 
assets outside the Funds without compensation from the In-house 
Plan, other than reimbursement of direct expenses as permitted by 
ERISA.
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    5. HighMark Capital Management, Inc., a wholly-owned subsidiary of 
UNBC (HCM), serves as investment adviser to each of the Portfolios of 
the HighMark Funds. HCM is registered under the Investment Advisers Act 
of 1940 (the Advisers Act). The applicant describes the HighMark Funds 
and Portfolios as follows:
    HighMark Funds, a Massachusetts business trust, is an open-end 
management investment company registered under the 1940 Act. HighMark 
Funds currently is comprised of thirteen portfolios, including the 
following three Portfolios:
    (i) HighMark Value Momentum Fund
    (ii) HighMark Growth Fund
    (iii) HighMark Small Cap Value Fund
    As previously noted, HCM serves as investment adviser to each of 
the HighMark Portfolios listed above. The applicant represents that, in 
addition, HCM, UBOC, and UBOC Affiliates may provide other services to 
the HighMark Funds and the HighMark Portfolios, including accounting, 
administration, and shareholder services.
    6. The applicant also represents that, as of June 15, 2001:
    (i) A total of approximately $63.2 million in Retirement Plan 
assets was invested in the HighMark Value Momentum Fund (representing a 
10.51% ownership in such Portfolio);
    (ii) A total of approximately $46.1 million in Retirement Plan 
assets was invested in the HighMark Growth Fund (representing a 12.40% 
ownership interest in such Portfolio); and
    (iii) A total of approximately $61.7 million in Retirement Plan 
assets was invested in the HighMark Small Cap Value Fund (representing 
a 43.94% ownership interest in such Portfolio).\12\
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    \12\ As previously noted, the Department is expressing no 
opinion regarding the applicability of PTE 77-3 to the acquisition 
of the Shares by the Retirement Plan. In addition, the Department is 
expressing no opinion as to the applicability of section 404 of 
ERISA to the acquisition of the Shares by the Retirement Plan. In 
this regard, the Department directs the applicant's attention to an 
advisory opinion issued to Federated Investors [Advisory Opinion 98-
06A (July 30, 1998)], in which the Department noted that if the 
decision by a plan fiduciary to enter into a transaction is not 
``solely in the interest'' of the plan's participants and 
beneficiaries, e.g., if the decision is motivated by the intent to 
generate seed money that facilitates the marketing of the mutual 
fund, then the plan fiduciary would be liable for any loss resulting 
from such breach of fiduciary responsibility, even if the 
acquisition of mutual fund shares was exempt by reason of PTE 77-3.
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    7. The applicant represents that, on June 15, 2001, the Retirement 
Plan redeemed all of its Shares in the HighMark Value Momentum Fund and 
the HighMark Growth Fund and approximately $40 million of its Shares of 
the HighMark Small Cap Value Fund (the June 15, 2001 Redemptions). The 
applicant further represents that the June 15, 2001 Redemptions were an 
appropriate means of effectuating this diversification of investment 
managers and the shift to separate account management for the 
Retirement Plan. In this regard, the applicant represents that the 
HighMark Funds, under the supervision of the HighMark Funds' board of 
trustees (none of whom are directors, officers or employees of UBOC, 
HCM, or their affiliates), had the option to determine whether to 
effect the June 15, 2001 Redemptions in cash or in kind, and determined 
to effect such Redemptions in kind.\13\
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    \13\ The applicant represents that the HighMark Funds' board of 
trustees in 2000 adopted a resolution establishing objective 
procedures for in-kind redemptions intended to conform with the 
requirements set forth in a no-action letter issued by the staff of 
the Securities and Exchange Commission re Signature Financial Group, 
Inc. (1999 SEC No-Act.LEXIS 981, avail. 12/28/99)) (``the Signature 
Financial letter'') governing in-kind redemptions of shares held by 
``affiliated shareholders'' of the HighMark Funds. The procedures 
require, among other things, that the redemption be effected on a 
pro rata basis, based on the relevant HighMark Portfolios' current 
net assets at the time of redemption, and that the board of trustees 
verify that an in-kind redemption is effected in accordance with the 
procedures.
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    8. The applicant represents that it is possible that the Committee 
or other fiduciaries of the Retirement Plan or other In-house Plans 
\14\ may at a later date determine that it is in the best interest of 
the Retirement Plan or other In-house Plan and its participants and 
beneficiaries to redeem such Plan's interest in HighMark Portfolios or 
other Funds, other than those described in Paragraphs 5 and 6 above, 
for which UBOC or a UBOC Affiliate provides investment advisory 
services. Consequently, in the event that this proposed exemption is 
granted, and to the extent that all of the terms and conditions of the 
exemption, as granted, are met, the relief requested herein shall apply 
to any such future redemption that is effected in-kind.
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    \14\ The applicant informed the Department that on November 26, 
2001, an in-kind distribution was made of the Retirement Plan's 
entire investment in the HighMark International Fund. U.S. Trust 
served as the independent fiduciary for this transaction. The 
applicant represents that UBOC also sponsors a 401(k) Plan which 
permits participants to direct the investment of their plan accounts 
among various investment options, including several HighMark Funds. 
According to the applicant, the 401(k) plan intends to redeem all of 
its shares in the Highmark Growth Fund and the HighMark Large Cap 
Value Fund (formally known as the Income Equity Fund) in connection 
with a change of investment options. The applicant has been informed 
by the Funds that it will effect the requested redemptions in-kind. 
According to the applicant, the securities will be distributed to 
mutual funds that replace the Highmark Growth Fund and the Highmark 
Large Cap Value Fund as investment options under the 401(k) Plan. 
UBOC anticipates that these redemptions would occur on or about 
December 14, 2001, subject to completion of the independent 
fiduciaries review and approval of the transactions.
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    9. The applicant states that the June 15, 2001 Redemptions involved 
ministerial transactions performed in accordance with pre-established, 
objective procedures. As a result, the applicant represents that the 
transactions did not permit UBOC or a UBOC Affiliate to use its 
influence or control to purchase particular securities from the 
HighMark Portfolios. In addition, the applicant states that all Shares 
are offered and sold exclusively through the use of prospectuses and 
materials provided pursuant to the requirements of the Securities Act 
of 1933 and the 1940 Act and the rules and regulations thereunder.
    10. The applicant states that, to the extent possible, the 
Retirement Plan transferred Shares in return for a proportionate share 
of the securities

[[Page 357]]

held by each HighMark Portfolio in the June 15, 2001 Redemptions. 
According to the applicant, the Retirement Plan received only cash and 
Transferable Securities pursuant to the June 15, 2001 Redemptions. In 
this regard, each Transferable Security subject to a Redemption was 
transferred in-kind to the Retirement Plan. However odd lot securities, 
fractional shares and accruals on such securities were transferred in 
cash.\15\ The applicant states that the June 15, 2001 Redemptions were 
carried out, to the extent possible, on a pro rata basis as to the 
number and kind of securities transferred to the Retirement Plan.\16\
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    \15\ According to the report submitted by the Independent 
Fiduciary, none of the HighMark Portfolios held securities which 
were not Transferable Securities at the time of the June 15, 2001 
Redemptions, and, therefore, there was no cash adjustment to reflect 
the value of such securities. The applicant states, however, that 
such cash adjustments may be made with respect to future Redemptions 
to the extent relevant Fund holds such excluded securities.
    \16\ According to the applicant, the securities transferred from 
each HighMark Portfolio in the June 15, 2001 Redemptions were 
selected under a ``first in, first out'' (FIFO) procedure. Under 
this procedure, ``tax lots'' of securities to be distributed in kind 
in satisfaction of the in-kind redemption were selected on the basis 
of when the securities were acquired for the Portfolio, with the 
securities held longest by the Portfolio being distributed first, 
until distribution of the Plan's pro rata share of such security was 
completed. The applicant represents that the FIFO procedure is the 
one normally used by the High Mark Funds equity and fixed income 
funds for selecting securities to be sold or distributed in kind. 
The applicant further represents that with respect future in-kind 
redemptions pursuant to this exemption, securities will also be 
selected on a ``first in, first out'' basis or similar objective, 
ministerial procedure.
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    11. The applicant represents that, for purposes of the June 15, 
2001 Redemptions, the values of the HighMark Portfolio securities were 
determined based on the current market price of such securities as of 
the close of business on June 15, 2001 (the Valuation Date). As 
required by the no action letter re Signature Financial Group, Inc. 
issued by the staff of the Securities and Exchange Commission, the 
value of the securities in each Portfolio were determined by using the 
valuation procedures established by the HighMark Funds in accordance 
with Rule 2a-4 under the 1940 Act.\17\ In this regard, responsibility 
for valuations rests with the HighMark Funds' administrator (the 
Administrator), which is unrelated to UBOC. The Administrator has 
contracted with independent, third-party pricing agents approved by the 
HighMark Funds' board of trustees to provide security quotations.\18\
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    \17\ In the no action letter to Signature Financial Group, Inc. 
discussed above, the Division of Investment Management of the SEC 
states that it will not recommend enforcement action pursuant to 
Section 17(a) of the Investment Company Act of 1940 for certain in-
kind distributions of portfolio securities to an affiliate of a 
mutual fund. Funds seeking to use this ``safe harbor'' must value 
the securities to be distributed to an affiliate in an in-kind 
distribution ``in the same manner as they are valued for purposes of 
computing the distributing fund's net asset value.'' The applicant 
represented that, having adopted the Signature Financial Letter 
procedures for use in its affiliate transactions, it must use those 
procedures for transactions with its in-house plans, as these in-
house plans are affiliates of the mutual fund. The Department agreed 
to the use of the Signature Financial Letter procedures for 
determining the value of the securities in this in-kind transaction, 
with certain limitations.
    The Signature Financial Letter requires pro rata distribution of 
the securities. The letter does not address the marketability of 
such securities. The range of securities distributed pursuant to 
this ``safe harbor'' may therefore be broader than range of 
securities covered by SEC Rule 17a-7, 17 CFR Sec. 270.17a-7. In 
granting past exemptive relief with respect to in-kind transactions 
involving mutual funds, the Department has required that the 
securities being distributed in-kind fall within Rule 17a-7. One of 
the requirements of Rule 17a-7 is that the securities are those for 
which ``market quotations are readily availabale.'' SEC Rule 17a-
7(a). The Department has determined, and the applicant agrees, that 
exemptive relief in this case will also be limited to in-kind 
distribution of securities for which market quotations are readily 
available. The value of any other securities will be paid to the 
plan in cash.
    \18\ Under the exemption requested by UBOC, the Plan will 
receive only securities for which market quotations are readily 
available (as determined pursuant to the Funds' procedures described 
above) or cash.
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    12. The applicant represents that, in connection with the June 15, 
2001 Redemptions, U.S. Trust Company, N.A. (U.S. Trust), a federally 
chartered bank, confirmed its independence from UBOC and is qualified 
to serve as an Independent Fiduciary, as that term is defined in 
Section II of the proposed exemption. U.S. Trust, in turn, represented 
that it understood and accepted the duties, responsibilities and 
liabilities in acting as a fiduciary under ERISA for the Retirement 
Plan.
    U.S. Trust represents that it was responsible for (i) determining 
whether the terms of each Redemption of Shares of the HighMark 
Portfolios was fair to the participants of the Retirement Plan and 
comparable to and no less favorable than terms that would be reached at 
arms' length between unaffiliated parties, and (ii) opining as to the 
fairness and reasonableness of each such Redemption, as compared to a 
redemption for cash and subsequent reinvestment of such cash. This 
determination and opinion was set forth in a written report (the 
Report) dated June 8, 2001. Specifically, in the Report, U.S. Trust 
stated that:
    (a) the Redemptions would not involve certain transaction costs 
otherwise incurred in a cash redemption;\19\
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    \19\ The Report states that, with respect to the Redemptions 
involving Shares of the HighMark Value Momentum Fund and the 
HighMark Growth Fund, if the Retirement Plan were to receive cash 
rather than securities pursuant to the transaction, substantially 
all (in the case of the HighMark Value Momentum Fund) or the 
majority (in the case of the HighMark Growth Fund) of that cash 
would be reinvested in securities which would result in brokerage 
commissions and a buy-sell spread, the costs of which would be 
incurred by the Retirement Plan. The Report states further that 
depending on the form and timing of the Redemptions, part of the 
Portfolios' selling costs might be absorbed by the Retirement Plan 
as a shareholder in the Portfolios. Therefore, according to U.S. 
Trust, to the extent that the Redemption of the Retirement Plan's 
Shares of the HighMark Value Momentum Fund and the HighMark Growth 
Fund were effected in-kind, those costs would be avoided.
    U.S. Trust notes, however, that the Retirement Plan would sell 
substantially all of the securities received in redemption of its 
Shares of the HighMark Small Cap Value Fund shortly after the 
Redemption. In this regard, the applicant represents that the 
unaffiliated investment manager appointed to manage the ``small 
capitalization stock'' portion of the Retirement Plan's assets on a 
separate account basis after the June 15, 2001 Redemptions pursues 
an investment strategy that is different from that pursued by the 
HighMark Small Cap Value Fund. Accordingly, the Retirement Plan, at 
the request of the new manager, sold substantially all of the 
securities it received from the HighMark Small Cap Value Fund in 
connection with the June 15, 2001 Redemptions. However, UBOC 
contributed a cash payment to the Retirement Plan in an amount 
estimated by U.S. Trust to be equal to the difference between the 
transaction costs associated with the Retirement Plan's in-kind 
redemption of Shares of the HighMark Small Cap Value Fund and the 
transaction costs associated with a hypothetical cash redemption of 
such Shares. In calculating the transaction costs of a hypothetical 
cash redemption, U.S. Trust assumed that, prior to the cash 
redemption, the Fund would raise cash by selling the securities that 
were, in fact, distributed in kind. Under this scenario, those 
selling costs would be allocated proportionately across all 
shareholders in the Fund (including the Retirement Plan) before the 
Retirement Plan received its cash distribution. U.S. Trust concluded 
that UBOC's cash payment to the Retirement Plan made the Retirement 
Plan whole for redeeming its HighMark Small Cap Value Fund Shares in 
kind rather than in cash and, consequently, the redemption of such 
shares was fair to Retirement Plan participants.
    In connection with the November 26, 2001 in-kind distribution 
from the HighMark International Fund, the same issue arose, i.e., 
the new investment manager choose not to retain most of the 
securities distributed in kind. As in the earlier Small Cap Value 
Fund transaction, UBOC has agreed to make a cash payment sufficient 
to make the Retirement Plan whole.
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    (b) the Shares and cash associated with the Redemptions would be 
valued in accordance with procedures established by the HighMark Funds 
and applicable law, and that the same procedures are used to determine 
the net asset value of the HighMark Portfolios; and
    (c) U.S. Trust reviewed a written document detailing the procedures 
for in-kind redemptions for affiliated parties, and concluded that it 
matched its understanding of procedures for in-kind redemptions.

[[Page 358]]

    In the Report, U.S. Trust stated that, based upon its review of the 
methodology of the Redemptions of Shares of each of the HighMark 
Portfolios and an analysis of the costs associated with the Redemptions 
versus a cash redemption for the Retirement Plan's assets held by the 
HighMark Portfolios (and, with respect to the HighMark Small Cap Value 
Fund, the cash payment to the Retirement Plan noted above), the 
Redemptions would be fair to the participants of the Retirement Plan. 
The Report also stated that the methodology used to conduct the 
Redemptions would be comparable to and no less favorable than a similar 
in kind redemption reached at arms' length between unaffiliated 
parties. Therefore, U.S. Trust approved the Redemptions from the 
HighMark Portfolios, provided the Redemptions were conducted in 
accordance with the information provided to it by UBOC and the HighMark 
Funds.
    The Report also states that, if the Redemptions were thereafter 
undertaken, U.S. Trust would confirm in writing whether each such 
Redemption was effectuated consistent with the required criteria and 
procedures set forth in the Report, based on representations requested 
from UBOC and testing a limited sampling of certain material aspects of 
the Redemptions, deemed in U.S. Trust's judgment to be representative. 
Accordingly, subsequent to the June 15, 2001 Redemptions, U.S. Trust 
conducted the post-transaction review described above and concluded, 
based on information provided to it, that the Retirement Plan received 
its pro rata portion of each Transferable Security (rounded to the 
nearest round lot) held by the HighMark Portfolios and its pro rata 
portion of cash that the HighMark Portfolios held based on the Plan's 
ownership percentage of each such Portfolio (or, in the case of the 
Small Cap Fund, the percentage of the Small Cap Fund that the 
Redemption amount represented), and that the June 15, 2001 Redemptions 
were effectuated in a manner consistent with the required criteria and 
procedures set forth in the Report.
    13. In summary, it is represented that the June 15, 2001 and 
November 26, 2001 Redemptions satisfied, and any Redemptions to occur 
in the future will satisfy, the statutory criteria for an exemption 
under section 408(a) of ERISA for the following reasons:
    (A) The In-house Plan pays no sales commissions, redemption fees, 
or other similar fees in connection with the Redemptions (other than 
customary transfer charges paid to parties other than UBOC and UBOC 
Affiliates);
    (B) The assets transferred to the In-house Plan pursuant to the 
Redemptions consist entirely of cash and Transferable Securities. 
Notwithstanding the foregoing, odd lot securities, fractional shares 
and accruals on such securities may be distributed in cash;
    (C) With certain exceptions defined below, the In-house Plan 
receives a pro rata portion of the securities of the Portfolio upon a 
Redemption that is equal in value to the number of Shares redeemed for 
such securities, as determined in a single valuation performed in the 
same manner and as of the close of business on the same day in 
accordance with the procedures established by the Funds pursuant to 
Rule 2a-4 under the 1940 Act (using sources independent of UBOC and 
UBOC Affiliates);
    (D) UBOC, or any UBOC affiliate, does not receive any fees, 
including any fees payable pursuant to Rule 12b-1 under the 1940 Act, 
in connection with any Redemption of the Shares;
    (E) Prior to a Redemption, UBOC provides in writing to the 
Independent Fiduciary a full and detailed written disclosure of 
information regarding the Redemption;
    (F) Prior to a Redemption, the Independent Fiduciary provides 
written approval of such Redemption to UBOC, such approval being 
terminable at any time prior to the date of the Redemption without 
penalty to the In-house Plan, and such termination being effectuated by 
the close of business following the date of receipt by UBOC of written 
or electronic notice regarding such termination (unless circumstances 
beyond the control of UBOC delay termination for no more than one 
additional business day);
    (G) Before approving a Redemption, based on the disclosures 
provided by the Portfolios to the Independent Fiduciary and discussions 
with appropriate operational personnel of the In-house Plan, UBOC, and 
the Adviser as necessary to form a basis for making the following 
determinations, the Independent Fiduciary determines that the terms of 
the Redemption are fair to the participants of the In-house Plan and 
comparable to and no less favorable than terms obtainable at arms-
length between unaffiliated parties;
    (H) Not later than thirty (30) business days after the completion 
of a Redemption, the relevant Fund provides to the Independent 
Fiduciary a written confirmation regarding such Redemption containing:
    (i) the number of Shares held by the In-house Plan immediately 
before the Redemption (and the related per Share net asset value and 
the total dollar value of the Shares held),
    (ii) the identity (and related aggregate dollar value) of each 
security provided to the In-house Plan pursuant to the Redemption, 
including any security valued in accordance with the Funds' procedures 
for obtaining current prices from independent market-makers,
    (iii) the current market price of each security received by the In-
house Plan pursuant to the Redemption, and
    (iv) the identity of each pricing service or market-maker consulted 
in determining the value of such securities;
    (I) The value of the securities received by the In-house Plan for 
each redeemed Share equals the net asset value of such Share at the 
time of the transaction, and such value equals the value that would 
have been received by any other investor for shares of the same class 
of the Portfolio at that time;
    (J) Subsequent to a Redemption, the Independent Fiduciary performs 
a post-transaction review which will include, among other things, 
testing a sampling of material aspects of the Redemption deemed in its 
judgment to be representative, including pricing; and
    (K) Each of the In-house Plan's dealings with the Funds, the 
Investment Adviser, the principal underwriter for the Funds, or any 
affiliated person thereof, are on a basis no less favorable to the In-
house Plan than dealings between the Funds and other shareholders 
holding shares of the same class as the Shares.

Notice to Interested Persons

    The applicant will provide notice of the proposed exemption within 
30 days after publication thereof in the Federal Register (i) to active 
participants in the Retirement Plan by electronic communication through 
applicant's on-line employee intranet service and by posting at major 
job sites, and (ii) to retiree participants in pay status in the 
Retirement Plan by first class mail. Notices posted at major job sites 
will include a copy of the proposed exemption as published in the 
Federal Register. The notices will inform interested persons of their 
right to comment and/or request a hearing. Comments and requests for a 
hearing must be received by the Department not later than 60 days from 
the date of publication of this notice of proposed exemption in the 
Federal Register.

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

[[Page 359]]

Cargill, Incorporated and Associated Companies Salaried Employees' 
Pension Plan, et al (the Original Plans) Located in Minneapolis, 
Minnesota

[Application Nos. D-11017 through D-11023]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the proposed 
exemption is granted, effective October 18, 1996, the restrictions of 
sections 406(a), 406(b)(1) and (b)(2), and 407(a) of the Act, and the 
sanctions resulting from section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code, shall not apply to: (1) the 
acquisition (the Stock Acquisition) and holding of certain shares of 
Cargill, Incorporated common stock (the Common Stock) by the Cargill, 
Incorporated and Associated Companies Master Pension Trust (the Master 
Trust); and (2) the acquisition, holding and, where relevant, exercise 
by the Master Trust of a certain irrevocable put option associated with 
the Common Stock (the Put Option); provided that the following 
conditions are satisfied:
    (A) Prior to the Stock Acquisition, a qualified, independent 
fiduciary acting on behalf of the Master Trust (the Independent 
Fiduciary) determined that the Stock Acquisition was appropriate for, 
and in the best interests of, the Original Plans and the Master Trust.
    (B) The $178.75 per share purchase price the Master Trust paid for 
each share of Common Stock pursuant to the Stock Acquisition equaled 
the August 31, 1996 fair market value of each such share as determined 
by a qualified, independent appraiser selected by the Independent 
Fiduciary.
    (C) Subsequent to the Stock Acquisition, the Independent Fiduciary 
represented the interests of the Master Trust with respect to the 
Master Trust's holding of the Common Stock and the Master Trust's 
holding of the Put Option, and will continue to represent such 
interests as long as the Master Trust holds such stock and Put Option.
    (D) Subsequent to the Stock Acquisition, the Independent Fiduciary 
took and will take whatever action is necessary to protect the rights 
of the Master Trust with respect to the Master Trust's holding of the 
Common Stock and the Master Trust's holding of the Put Option.
    (E) Upon request by the Independent Fiduciary, Cargill, 
Incorporated (Cargill) purchased, or will purchase, all or a portion of 
the Common Stock held by the Trust, in accordance with the terms of the 
Put Option, for the greater of: (1) the price of the Common Stock as of 
the date of the Stock Acquisition; or (2) the fair market value of the 
Common Stock as of the date the Put Option is exercised.
    (F) Subsequent to the Stock Acquisition, the Common Stock did not, 
at any time, represent more than ten percent (10%) of the total fair 
market value of the assets held by: (1) any Original Plan; or (2) after 
the Original Plans were merged into each other on January 1, 1997, any 
remaining Original Plan that continued to have an undivided interest in 
the assets of the Master Trust (a Remaining Plan).
    (G) For purposes of securing its obligations with respect to the 
Put Option, Cargill established, and will continue to maintain, an 
escrow account containing cash and/or U.S. government securities 
amounting to at least 25 percent (25%) of the total current fair market 
value of the Common Stock held by the Master Trust.
    (H) All transactions between Cargill and the Master Trust, or 
between Cargill and any Original Plan or Remaining Plan (collectively, 
the Plans), arising in connection with the Stock Acquisition, were no 
less favorable to the Master Trust or Plan than arm's-length 
transactions involving unrelated parties.
    (I) Cargill reimbursed the Master Trust, with interest (the 
Reimbursement), for the Master Trust's payment of certain legal 
expenses associated with the Master Trust's holding of the Common Stock 
(the Legal Fees).
    (J) Cargill paid, and will continue to pay, the fees of the 
Independent Fiduciary and its financial advisor to the extent such fees 
relate to either the Stock Acquisition or the continued holding of the 
Common Stock and the Put Option by the Master Trust.
    (K) At no time subsequent to the Stock Acquisition has the Master 
Trust held more than 25% of the aggregate amount of Common Stock issued 
and outstanding.
    (L) Cargill adopts written procedures which require that a 
Remaining Plan fiduciary: (1) review all expenses submitted for payment 
by the Master Trust; and (2) approve the payment of only those expenses 
that are reasonable and necessary for the administration of a Remaining 
Plan.
    (M) Cargill adopts written procedures which require that 
independent legal counsel provide Cargill with a written opinion 
regarding the payment by the Master Trust or a Remaining Plan of 
expenses associated with a transaction between Cargill and a Remaining 
Plan.
    (N) In the event this proposed exemption is granted, Cargill, 
within 60 days of the date of such grant, files Form 5330 with the 
Internal Revenue Service and pays the applicable excise taxes with 
respect to the Master Trust's payment of the Legal Fees.

EFFECTIVE DATE: The effective date of this proposed exemption, if 
granted, is October 18, 1996.

Summary of Facts and Representations

    1. Cargill is a Delaware corporation established in 1865 by William 
W. Cargill (Mr. Cargill). Cargill is engaged in, among other things, 
the wholesaling of agricultural and other bulk commodities. As of 
February 28, 2001, Cargill had approximately 85,000 employees and 
annual revenues in excess of $47 billion.
    2. By October of 1993, Cargill had established certain tax 
qualified defined benefit plans (the Original Plans). At that time, the 
Original Plans were comprised as follows:
    a. Cargill, Incorporated and Associated Companies Salaried 
Employees' Pension Plan (the Salaried Employees' Pension Plan);
    b. Cargill, Incorporated Pension Plan for Seaboard Grain Miller 
Represented Employees (the Seaboard Grain Miller Employees' Pension 
Plan);
    c. Cargill, Incorporated and Associated Companies Pension Plan for 
Grain Miller Represented Employees (the Grain Miller Employees' Pension 
Plan);
    d. Cargill, Incorporated and Associated Companies Pension Plan for 
Union Represented Hourly Wage Employees (the Hourly Wage Employees' 
Pension Plan);
    e. Cargill, Incorporated and Associated Companies Pension Plan for 
Production Employees (the Production Employees' Pension Plan);
    f. Cargill, Incorporated and Associated Companies Pension Plan for 
Poultry Products Employees (the Poultry Products Employees' Pension 
Plan); and
    g. Cargill, Incorporated and Associated Companies Pension Plan for 
Union Represented Poultry Products Employees (the Union Poultry 
Products Employees' Pension Plan);
    3. The Common Stock is one of five classes of stock authorized by 
Cargill. Each share of Common Stock, and, generally, each share of 
Cargill's other classes of stock, is entitled to one vote. In addition, 
holders of the Common Stock are entitled to receive dividends on their 
shares in an amount decided annually by Cargill's Board of Directors.

[[Page 360]]

    4. Prior to October 18, 1996, the Common Stock was held solely by 
the lineal descendants of Mr. Cargill and their spouses and ex-spouses 
(the Cargill Common Stock Holders), either directly or indirectly 
through corporations and trusts of which they are beneficiaries.\20\ On 
October 18, 1996, the Original Plans obtained a portion of the Common 
Stock through the Stock Acquisition.\21\ In this regard, on that date, 
the Master Trust acquired 167,832 shares of the Common Stock pursuant 
to the Stock Acquisition, for a purchase price of $178.75 per Share. 
The applicant represents that the Original Plans paid cash for the 
Common Stock, the aggregate value of which was $29,999,970 as of the 
date of the Stock Acquisition. According to the applicant, immediately 
after the Stock Acquisition, the Common Stock represented less than 10% 
of the assets in the Master Trust.\22\
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    \20\ As a result, the Common Stock did not satisfy the 
definition of ``qualifying employer security''. In this regard, with 
respect to defined benefit plans, 407(d)(5)(A) of the Act defines a 
``qualifying employer security'' as, among other things, ``stock'' 
which satisfies the requirements of section 407(f)(1) of the Act. 
Section 407(f)(1)(b) of the Act states that ``stock'' meets the 
requirements of that section to the extent that at least 50 percent 
of the aggregate amount of stock of the same class issued and 
outstanding at the time of acquisition is held by persons 
independent of the issuer.
    \21\ Since the Common Stock was not a ``qualifying employer 
security'', the Stock Acquisition violated section 407(a)(1)(A) of 
the Act which provides that a plan may not acquire or hold any 
employer security which is not a qualifying employer security. In 
violating section 407(a) of the Act, the Stock Acquisition also 
violated section 406(a)(1)(E) of the Act which provides that a 
fiduciary with respect to a plan shall not cause the plan to engage 
in a transaction involving the acquisition, on behalf of the plan, 
of any employer security in violation of section 407(a) of the Act.
    \22\ The applicant states that, as of November 30, 2000, the 
Common Stock represented approximately 4% of the total assets held 
by the Master Trust.
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    5. The applicant represents that State Street Bank and Trust 
Company (State Street) acted as Independent Fiduciary for purposes of 
the Stock Acquisition. State Street represents that it is independent 
of Cargill and receives less than 1% of its aggregate annual gross 
revenue from Cargill. In addition, State Street represents that it is 
qualified to act as Independent Fiduciary on behalf of the Master Trust 
due to its status as one of the country's largest trust companies and 
its extensive experience in managing retirement plan assets. The 
applicant represents that, subsequent to the Stock Acquisition, State 
Street has acted as Independent Fiduciary with respect to the Plans' 
continued holding of the Common Stock and the Put Option.
    6. The applicant represents that, for purposes of the Stock 
Acquisition, the Cargill Common Stock Holders proposed a price of 
$178.75 per share. The applicant states that the Independent Fiduciary 
retained a qualified, independent advisor for the purpose of 
determining whether: (1) the proposed $178.75 per share sale price 
exceeded the fair market value of such shares; and (2) the terms of the 
proposed Stock Acquisition were fair and reasonable to the Master Trust 
from a financial point of view. In this regard, the applicant states 
that the Independent Fiduciary selected Duff & Phelps Financial 
Consulting Co. (Duff & Phelps) to make such determinations.
    In a letter dated October 18, 1996, Duff and Phelps stated that, in 
its capacity as financial advisor to the Independent Fiduciary for 
purposes of the Stock Acquisition, it reviewed, among other things: 
audited financial statements of Cargill; unaudited interim financial 
statements of Cargill for the three months ended August, 31, 1996; and 
certain internal documents and analyses provided by Cargill management. 
In carrying out its duties, Duff and Phelps stated that it additionally 
reviewed relevant financial and operating information for specific 
publicly traded companies which it deemed comparable in whole or in 
part to Cargill.
    Upon this review, Duff and Phelps compared Cargill's historical 
results and future prospects against several sets of publicly traded 
companies. Duff and Phelps stated that the fair market value of the 
Common Stock was thereafter determined upon reviewing the relative 
performance and pricing multiples of such companies and discounting the 
derived common stock value to reflect the illiquidity of the Common 
Stock. In the October 18, 1996 letter, Duff and Phelps concluded that: 
(a) the price of $178.75 per share to be paid by the Master Trust was 
not in excess of fair market value within the meaning of ERISA; and (b) 
the terms of the proposed Stock Acquisition were fair and reasonable to 
the Master Trust from a financial point of view.
    The applicant represents that, upon the Independent Fiduciary's 
review of the information provided by Duff and Phelps, the Independent 
Fiduciary determined that, as of October 18, 1996, the Stock 
Acquisition was appropriate for, and in the best interests of, the 
Original Plans and the Master Trust. The applicant states that, in 
consideration of this, on that date, the Independent Fiduciary directed 
that the Master Trust acquire the Common Stock pursuant to the Stock 
Acquisition.
    7. The applicant represents that at no time subsequent to the Stock 
Acquisition did the Common Stock represent more than 10% of the fair 
market value of any Original Plan or, after the merging of the Original 
Plans (see paragraph 9), any Remaining Plan. The applicant additionally 
represents that the Master Trust has never held, and will never hold, 
more than 25% of the aggregate amount of Cargill's issued and 
outstanding Common Stock.
    8. In addition to receiving the Common Stock pursuant to the Stock 
Acquisition, the Trust received the Put Option. In this regard, the 
Trust received an option which requires that Cargill, at the direction 
of the Independent Fiduciary, purchase from the Master Trust any or all 
of the Common Stock held by the Master Trust. According to the terms of 
the Put Option, the price of any share sold pursuant to a Put Option 
shall be the greater of: (1) the price at which the Master Trust 
acquired the Common Stock; or (2) the fair market value of the Common 
Stock as of the date the Put Option is exercised. The applicant 
represents that the Put Option has remained in effect since the Stock 
Acquisition and will continue to remain in effect to the extent the 
Master Trust continues to hold any of the Common Stock.
    9. After the Stock Acquisition, Cargill decided to merge certain of 
the Original Plans. In this regard, on January 1, 1997, the Seaboard 
Grain Miller Employees' Pension Plan, the Grain Miller Employees' 
Pension Plan, and the Union Poultry Products Employees' Pension Plan 
were merged into the Salaried Employees' Pension Plan. In addition, at 
the same time, the Poultry Products Employees' Plan was merged into the 
Production Employees' Pension Plan. Thus, after the mergers, the 
following plans remained: the Salaried Employees' Pension Plan having 
22,726 participants and $652,213,466 in total assets as of December 31, 
1999; the Production Employees' Pension Plan having 6,564 participants 
and $48,773,333 in total assets as of December 31, 1999; and the Hourly 
Wage Employees' Pension Plan having 8,449 participants and $147,72,972 
in total assets as of December 31, 1999.
    10. Subsequent to the Stock Acquisition, State Street retained 
responsibility for monitoring the Master Trust's continued ownership of 
the Common Stock. Thus, for as long as the Master Trust held the Common 
Stock, State Street, as Independent Fiduciary, was required to 
determine whether it would be in the interests of the Master Trust for 
the Master Trust to exercise

[[Page 361]]

the Put Option. State Street was, therefore, responsible for monitoring 
the financial status of Cargill at regular intervals to determine 
whether the Common Stock continued to be a stable and prudent 
investment for the Plans and the Master Trust.
    State Street was also given full investment discretion with respect 
to the Common Stock. As a result, State Street had the authority to: 
(1) Direct the trustee of the Master Trust with respect to the exercise 
of voting rights, conversion rights or tender offers; (2) join in or 
oppose voting trusts, mergers, consolidations, foreclosures, 
reorganizations, recapitalizations and liquidations and (3) exercise 
any and all rights relating to the Common Stock. The applicant 
represents that State Street will continue to have each of these 
responsibilities for as long as the Master Trust and the Plans hold the 
Common Stock.
    11. Cargill established, and continues to maintain, an escrow 
account (the Escrow Account) to secure Cargill's obligations under the 
Put Option. The applicant represents that the Escrow Account will 
remain in effect for the duration of the Trust's ownership of any of 
the Common Stock and will be maintained at an independent banking 
institution approved by State Street. The purpose of the Escrow 
Account, the applicant states, is to ensure that the Master Trust will 
receive a price for the Common Stock that is in accordance with the 
terms of the Put Option. Specifically, pursuant to any exercise of the 
Put Option by the Master Trust, State Street is entitled, as 
Independent Fiduciary, to draw upon the Escrow Account to satisfy 
Cargill's obligations under the terms of the Put Option in the event 
Cargill fails to purchase the Common Stock at the price required by 
such option. According to the applicant, the Escrow Account contains 
only cash and/or United States government securities amounting to at 
least 25% of the total fair market value of the Common Stock held by 
the Master Trust. Subsequent to the Stock Acquisition, the Master Trust 
has at all times had, the applicant states, a lien against the assets 
in the Escrow Account that gives the Master Trust priority over all 
creditors of Cargill with respect to the assets in the Escrow Account. 
The applicant represents that this lien will remain in place to the 
extent the Master Trust continues to hold any of the Common Stock.
    12. Cargill previously received temporary exemptive relief, 
pursuant to Prohibited Transaction Exemption (PTE) 94-23 (59 FR 10830 
(March 8, 1994)), for the purchase and holding of Common Stock by the 
Master Trust.\23\ Subsequent to the publication of the proposed 
exemption in the Federal Register (58 FR 58194 (October 29, 1993), the 
Department received a written comment objecting to the Master Trust's 
payment of the fees of State Street and Duff and Phelps. In response, 
as noted in PTE 94-23, Cargill agreed to pay such fees in order to 
avoid the depletion of the assets of the Master Trust.
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    \23\ In this regard, the relief provided by PTE 94-23 expired on 
March 8, 1999 with respect to the acquisition of Common Stock by the 
Master Trust. As noted in the granted exemption, however, the Master 
Trust was allowed to hold the Common Stock subsequent to the end of 
the five year period.
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    Cargill failed to meet this requirement when it inadvertently 
caused the Master Trust to pay the Legal Fees. In this regard, 
subsequent to the Stock Acquisition, Cargill directed that the Master 
Trust pay certain of the Independent Fiduciary's legal fees, the amount 
of which totaled $80,791. The applicant represents that such payment 
was due, in part, to certain personnel changes occurring within 
Cargill. Since Cargill failed to act in accordance with the 
representations it made in response to a commentator under PTE 94-23, 
the relief provided by the exemption ceased to be available. As a 
result, the applicant is seeking retroactive relief for the Stock 
Acquisition, as well as the Plans' subsequent holding of the Common 
Stock, and the acquisition, holding and potential exercise of the Put 
Option, by means of this proposed exemption.
    13. The applicant states that Cargill has taken the appropriate 
steps to reimburse the Master Trust for its payment of the Legal Fees. 
In this regard, the applicant represents that the Master Trust was 
reimbursed $80,791 for the Legal Fees. The applicant states that, in 
addition, Cargill paid certain interest to the Master Trust. According 
to the applicant, the amount of such interest, $36,696, represented the 
Master Trust's overall rate of return on its entire portfolio of 
investments from the date the Legal Fees were paid by the Master Trust 
to the date the Legal Fees were refunded to the Master Trust.
    The applicant represents that Cargill will undertake certain steps 
to prevent future inappropriate payments of expenses by the Master 
Trust. In this regard, the applicant represents that, if this proposed 
exemption is granted, Cargill will designate a fiduciary, as such term 
is defined by the Act, to review all expenses submitted for payment by 
the Master Trust. The applicant represents that, only upon such 
fiduciary's determination that an expense is reasonable and necessary 
for the administration of a Remaining Plan will the fiduciary approve, 
in writing, the payment of the expense. In addition, the applicant 
represents that no expense associated with any transactions between 
Cartill and a Remaining Plan will be paid by such Remaining Plan unless 
Cargill obtains a written opinion from independent legal counsel.
    14. In summary, that applicant represents that the proposed 
exemption is protective of, and in the best interests of, the Remaining 
Plans and the Master Trust since:
    (A) Prior to the Stock Acquisition, the Independent Fiduciary 
determined that the Stock Acquisition was appropriate for, and in the 
best interests of, the Original Plans and the Master Trust.
    (B) The $178.75 per share purchase price the Master Trust paid for 
each share of Common Stock pursuant to the Stock Acquisition equaled 
the August 31, 1996 fair market value of each such share as determined 
by a qualified, independent appraiser selected by the Independent 
Fiduciary.
    (C) Subsequent to the Stock Acquisition, the Independent Fiduciary 
represented the interests of the Master Trust with respect to the 
Master Trust's holding of the Common Stock and the Master Trust's 
holding of the Put Option, and continues to represent such interests as 
long as the Master Trust holds such stock and Put Option.
    (D) Subsequent to the Stock Acquisition, the Independent Fiduciary 
protected the rights of the Master Trust with respect to the Master 
Trust's holding of the Common Stock and the Master Trust's holding of 
the Put Option, and will continue to protect such rights as long as the 
Master Trust holds such stock and Put Option.
    (E) Upon request by the Independent Fiduciary, Cargill purchased, 
or will purchase, all or a portion of the Common Stock held by the 
Trust, in accordance with the terms of the Put Option, for the greater 
of: (1) The price of the Common Stock as of the date of the Stock 
Acquisition; or (2) the fair market value of the Common Stock as of the 
date any Put Option is exercised.
    (F) Subsequent to the Stock Acquisition, the Common Stock did not, 
at any time, represent more than ten percent (10%) of the total fair 
market value of the assets held by any Original Plan or any Remaining 
Plan.
    (G) For purposes of securing its obligations with respect to the 
Put Option, Cargill established, and will continue to maintain, an 
escrow account containing cash and/or U.S. government securities 
amounting to at least 25% of the total current fair market value of the

[[Page 362]]

Common Stock held by the Master Trust.
    (H) All transactions between Cargill and the Master Trust; or 
between Cargill and a Plan, arising in connection with the Stock 
Acquisition, were no less favorable to the Master Trust or Plan than 
arm's-length transactions involving unrelated parties.
    (I) Cargill reimbursed the Master Trust, with interest (i.e., the 
Reimbursement), for the Legal Fees.
    (J) Cargill paid, and will continue to pay, the fees of the 
Independent Fiduciary and its financial advisor to the extent such fees 
relate to either the Stock Acquisition or the continued holding of the 
Common Stock and the Put Option by the Master Trust.
    (K) At no time subsequent to the Stock Acquisition has the Master 
Trust held more than 25% of the aggregate amount of Common Stock issued 
and outstanding.
    (L) Cargill adopts written procedures requiring that a plan 
fiduciary: (1) review all expenses submitted for payment by the Master 
Trust; and (2) approve the payment of only those expenses that are 
reasonable and necessary for the administration of a Remaining Plan.
    (M) Cargill adopts written procedures requiring that independent 
legal counsel provide Cargill with a written opinion regarding the 
payment by the Master Trust or a Remaining Plan of expenses associated 
with a transaction between Cargill and a Remaining Plan.
    (N) In the event this proposed exemption is granted, Cargill, 
within 60 days of the date of such grant, files Form 5330 with the 
Internal Revenue Service and pays the applicable excise taxes with 
respect to the Master Trust's payment of the Legal Fees.
    Notice to Interested Persons: The applicant represents that notice 
to interested persons will be made within twenty (20) business days 
following publication of this notice in the Federal Register. Comments 
and requests for a hearing must be received by the Department not later 
than sixty (60) 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) 693-8544. (This is not a toll-free number.)

Blue Cross and Blue Shield of Kansas, (the Company) and Anthem 
Insurance Companies, Inc. (Anthem), Located in Topeka, KS and 
Indianapolis, IN, Respectively

[Application No. D-11030]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act (or ERISA) and section 
4975(c)(2) of the Code and in accordance with the procedures set forth 
in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 
1990).\24\
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    \24\ For purposes of this proposed exemption, references to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to corresponding provisions of the Code.
---------------------------------------------------------------------------

Section I. Covered Transactions
    If the exemption is granted, the restrictions of section 406(a) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the 
Code, shall not apply to the receipt of cash (Cash), including without 
limitation, Cash held in an escrow fund (the Escrow Fund), by any 
eligible policyholder (the Eligible Policyholder) of the Company and 
Anthem, the Company's future parent,\25\ which is an employee benefit 
plan (the Plan), as well as the Blue Cross and Blue Shield of Kansas, 
Inc. Health Benefit Plan (the Company Health Plan), which is sponsored 
by the Company, in exchange for the termination of such Plan's 
membership interest in the Company, in accordance with the terms of a 
plan of conversion (the Plan of Conversion) adopted by the Company and 
implemented pursuant to Article 40, Chapter 40 of the Kansas Statutes 
Annotated (the K.S.A.)
    The proposed exemption is subject to the general conditions set 
forth below in Section II.
---------------------------------------------------------------------------

    \25\ For purposes of this proposed exemption, references to the 
Company will generally include references to Anthem, unless noted, 
or unless the context requires otherwise.
---------------------------------------------------------------------------

Section II. General Conditions
    (a) The Plan of Conversion is implemented in accordance with 
procedural and substantive safeguards that are imposed under Kansas 
Insurance Law for a ``sponsored demutualization'' and is subject to 
review and approval by the Kansas Insurance Commissioner (the 
Commissioner).
    (b) The Commissioner reviews the terms of the options that are 
provided to Eligible Policyholders of the Company as part of such 
Commissioner's review of the Plan of Conversion, and only approves the 
Plan following a determination that --
    (1) Such Plan is (i) fair and equitable to policyholders, (ii) 
complies with the requirements of Kansas law, and
    (iii) does not unjustly enrich any officer, director, agent or 
employee of the company; and
    (2) The new stock insurer meets the minimum requirements to obtain 
a certificate of authority to transact business in Kansas and its 
operation is not hazardous to existing or future policyholders or the 
public.
    (c) Each Eligible Policyholder has an opportunity to vote at a 
special meeting to approve the Plan of Conversion after receiving full 
written disclosure from the Company.
    (d) With the exception of the Company Health Plan, one or more 
independent fiduciaries of a Plan that is an Eligible Policyholder 
elects to receive Cash pursuant to the terms of the Plan of Conversion 
and neither the Company nor any of its affiliates exercises any 
discretion or provides ``investment advice,'' within the meaning of 29 
CFR 2510.3-21(c) with respect to such acquisition.
    (e) In the case of the Company Health Plan, a committee (the 
Company Health Plan Committee), comprised of management-level employees 
of the Company, determines whether to vote for or against the 
implementation of the Plan of Conversion, but does not otherwise 
exercise investment discretion over the Company Health Plan's assets.
    (f) All Eligible Policyholders that are Plans participate in the 
demutualization on the same terms and conditions as other Eligible 
Policyholders that are not Plans.
    (g) One-third of the total Cash consideration is distributed to an 
Eligible Policyholder on a pro rata basis as the ``fixed component'' 
and the remaining two-thirds Cash consideration is allocated among each 
Eligible Policyholder as the ``variable component'' in accordance with 
a fair and objective standard, based upon actuarial formulas which take 
into account a policy's past and future contributions to the Company's 
surplus.
    (h) No Eligible Policyholder pays any brokerage commissions or fees 
in connection with the receipt of the demutualization consideration.
    (i) All of the Company's policyholder obligations remain in force 
and are not affected by the Plan of Conversion.
    (j) The terms of the transactions are at least as favorable to the 
Plans as an

[[Page 363]]

arm's length transaction with an unrelated party.
Section III. Definitions
    For purposes of this proposed exemption,
    (a) The term ``Blue Cross and Blue Shield of Kansas, Inc.'' means 
the Company and its future parent, Anthem, unless otherwise noted, or 
unless the context requires otherwise.
    (b) An ``affiliate'' of the Company includes --
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the Company (For purposes of this paragraph, the term ``control'' 
means the power to exercise a controlling influence over the management 
or policies of a person other than an individual.); and
    (2) Any officer, director or partner in such person.
    (c) The term ``Eligible Policyholders'' means persons who, 
according to the Company's records, are the holders of certain in force 
group and non-group insurance policies of the Company on the date on 
which the Company's Board of Directors approves and adopts the Plan of 
Conversion.

Summary of Facts and Representations

Description of the Parties
    1. The Company, which is located in Topeka, Kansas, is a mutual 
insurance company organized in 1992 under Kansas law. Through its 
operating divisions and subsidiaries, the Company is engaged in a 
variety of activities including providing accident and health coverage 
to subscribers, substantially all of whom are residents of the State of 
Kansas. The Company also performs administrative services and claims 
processing for other Blue Cross and Blue Shield plans' subscribers and 
for programs such as Medicare, Medicaid and the Federal Employee Health 
Benefits Program. As of December 31, 2000, the Company had total assets 
of approximately $731 million. As of February 9, 2001, the Company's 
most recent financial strength rating from A.M. Best Company, Inc. was 
``A-'' or ``Excellent.''
    As a mutual insurance company, the Company does not have capital 
stock but instead has members (Members) who are owners of policies and 
contracts issued by the Company. A policyholder's membership interest 
in the Company includes the right to vote, and to participate in the 
distribution of the Company's surplus in the event of the Company's 
voluntary dissolution or liquidation. Each Member has one vote.
    Pursuant to Article 40, Chapter 40 of the Kansas Statutes Annotated 
(i.e., the K.S.A.), the Company may be converted to a stock company 
under a process called ``demutalization.'' In the event of such a 
demutualization, Eligible Policyholders of the Company may receive Cash 
consideration (some or all of which may be held in an escrow fund, as 
described below) in exchange for their mutual membership interests in 
the Company. The Company's demutualization will not affect the rights 
of policyholders under their insurance contracts. In addition, only the 
Company's policyholders, and not policyholders of an affiliate of the 
Company, may vote and receive Cash consideration in connection with the 
demutualization.
    2. The Company provides a variety of insurance products to both 
non-group and group policyholders. As of October 25, 2001, the Company 
had 171,403 Eligible Policyholders. The non-group policyholders include 
124,347 Medicare Supplement policyholders and 36,317 policyholders 
holding non-group major medical policies or specialty policies such as 
``cancer only'' indemnity policies. The remaining 10,739 are group 
policyholders. Of the group policyholders, approximately 6,000 are 
ERISA-covered welfare plans.
    3. Anthem, which will become the ultimate parent of the Company 
pursuant to the Plan of Conversion, maintains its principal place of 
business in Indianapolis, Indiana. Anthem is currently organized as a 
stock insurance company under the laws of the State of Indiana. 
Together with its subsidiaries, Anthem is one of the nation's largest 
health benefits companies. As an independent licensee of the Blue Cross 
Blue Shield Association (BCBSA), Anthem and its affiliates offer BCBSA-
branded products throughout Indiana, Ohio, Kentucky, Connecticut, 
Colorado, Nevada, New Hampshire and Maine. In addition, Anthem and its 
affiliates provide health care coverage or services to over 7 million 
people in these states. As of December 31, 2000, Anthem had 
approximately $5.7 billion in assets, $3.8 billion in liabilities and 
surplus of $1.9 billion.
    4. The Company sponsors the Company Health Plan, a welfare plan 
which is expected to be an Eligible Policyholder entitled to receive 
consideration in connection with the implementation of the Plan of 
Conversion discussed herein. The Company Health Plan provides health 
insurance benefits to approximately 2,200 employee and retiree 
participants (and their respective dependents) through three separate 
benefit programs based on the participants' location within Kansas: (a) 
a health maintenance organization program with a self-referral benefit; 
(b) a preferred provider program; and (c) a traditional major medical 
program. Each program includes coverage for medical care, 
hospitalization, prescription drugs, and dental care, subject to the 
terms and conditions of the program. Thus, the Company Health Plan's 
assets consist solely of insurance and premiums withheld from employees 
which are remitted to the insurers and there is no valuation of the 
assets of such Plan.
    Active employees do not have an option among these three programs. 
Instead, those living in the service area of the health maintenance 
organization are enrolled in that coverage, and those outside the 
service area are enrolled in the preferred provider program. Retirees 
in the health maintenance organization service area can choose between 
that coverage and the traditional major medical program. Retirees 
living outside that service area are enrolled in the preferred provider 
program. The Company pays 75 percent of the cost of coverage of 
employees, retirees and their respective dependents. Under the Plan of 
Conversion, the Company may receive approximately $1,178,000 in the 
distribution if the total distribution is $321 million. The Company 
intends to use the entire amount of the distribution in respect of the 
Company Health Plan to defray employee and retiree costs of coverage 
within a year of the distribution.
The Company Restructuring
    5. On May 24, 2001, the Company's Board of Directors (the Board) 
authorized management to develop a plan of demutualization (i.e., the 
Plan of Conversion) pursuant to which the Company would be converted 
from a mutual insurance company to a stock insurance company. The Plan 
of Conversion, which was adopted by the Board on October 25, 2001, 
provides for the conversion (the Conversion) of the Company into a 
stock insurance company and the sale by the Company, pursuant to an 
Alliance Agreement, dated as of May 30, 2001 (the Alliance Agreement), 
of certain newly-issued shares of common stock to Anthem, Anthem West, 
Inc., an Indiana company and a wholly-owned subsidiary of Anthem, or to 
Anthem, Inc., a newly-formed public holding company and the parent of 
Anthem, to hold all of the shares of its common stock.\26\ In the

[[Page 364]]

Conversion, all policyholders' membership interests in the Company will 
be extinguished in exchange for a special distribution (the Special 
Distribution), to the extent declared by the Board, plus an additional 
amount of Cash that will be deposited into the Escrow Fund (described 
in Representation 9 of the proposal) and distributed, after resolution 
of a potential contingent litigation matter (the Contingent Litigation 
Matter) of the Company, to the Eligible Policyholders as provided in 
the Plan of Conversion.
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    \26\ Anthem has separately applied to the Department for an 
administrative exemption in connection with its contemplated 
demutualization. On November 6, 2001, the Department issued a final 
exemption (Prohibited Transaction Exemption 2001-44) to Anthem at 66 
FR 56133.
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    The Board believes that the Company's Conversion into a stock 
corporation and the sale of the Company to Anthem, which makes possible 
the distribution of the value of the Company to Eligible Policyholders, 
is in the best interests of the Company's policyholders. If the Company 
is to continue to provide high quality insurance services at reasonable 
costs to its policyholders in a health insurance market that has become 
national in scope, it must spread its costs over a sufficiently large 
policyholder base. The Company, however, holds a certificate of 
authority to sell insurance only in Kansas.
    Even if it were to seek to sell coverage in other states, it could 
not use the Blue Cross and Blue Shield names and service marks to do 
so, for those names and service marks are controlled by the BCBSA, 
whose licensees are provided exclusive areas within which they may use 
those names and service marks.
    In addition to being unable to expand geographically, the Company 
finds that its potential customer base within the state shrinks every 
year, as national corporations purchase or supplant local businesses. 
The Company is also unable to diversify its risks geographically. An 
adverse local illness, or adverse local legislation, or a natural 
disaster could have substantial impact on its financial soundness. The 
Conversion, wherein the Company will become a part of a substantially 
larger, multi-state insurer, will benefit the Company and its 
policyholders in several ways:
     The Conversion will provide the Company with sufficient 
capital to compete with national commercial companies as well as access 
to a larger total capital pool with which to acquire other health plans 
or related businesses.
     The Conversion will enable the Company to take advantage 
of economies of scale by eliminating duplicative resources and 
streamlining its compliance efforts in an increasingly complex 
regulatory environment.
     By virtue of the Company's becoming part of the 
diversified geographical base of Anthem that results from the 
demutualization, the Company will have increased flexibility in 
responding to localized adverse risk events, avoiding the twin perils 
of decreased financial stability or excessive increases in rates to 
avoid financial instability. By having such a diversified base, the 
Company will have the ability to participate better in insurance 
offerings to multi-state accounts.
     The Conversion will result in the Company being able to 
offer a greater variety of career paths to its employees and the 
potential for greater and more varied challenges, which in turn should 
permit it to continue to attract and retain the kinds of employees 
needed to provide its policyholders with quality service.
     The Conversion will allow the Company to take advantage of 
best practices in health insurance from Anthem and its health insurance 
affiliates.
     The Conversion will allow the Company to maintain a 
significant level of local employment.
     The Conversion will provide for sustained local input into 
medical policy.
     The Conversion will provide Eligible Policyholders with an 
opportunity to receive Cash in exchange for their otherwise illiquid 
membership interests, which will be extinguished. Thus, Eligible 
Policyholders will realize economic value from their membership 
interests that is not currently available to them so long as the 
organization remains a mutual company.
    6. Accordingly, the Company requests an administrative exemption 
from the Department which, if granted, will permit the receipt of Cash 
(including, without limitation, the Cash consideration to be held in 
the Escrow Fund described herein) by an Eligible Policyholder that is a 
Plan, including the Company Health Plan, in exchange for such Eligible 
Policyholder's membership interest in the Company, in accordance with 
the Plan of Conversion adopted by the Company and implemented pursuant 
to Kansas Insurance Law.
    The Company represents that the receipt of Cash by a Plan, in 
exchange for such Eligible Policyholders' mutual membership interest in 
the Company, may be viewed as a prohibited sale or exchange of property 
between the Plan and the Company in violation of section 406(a)(1)(A) 
of the Act. Moreover, the Company states that the transaction may also 
be construed as a transfer of plan assets to, or a use of plan assets 
by or for the benefit of, a party in interest in violation of section 
406(a)(1)(D) of the Act.
    The proposed exemption is conditioned upon a number of substantive 
safeguards. Among the safeguards is the requirement that distributions 
to Plans pursuant to the exemption must be on terms that are no less 
favorable to the Plans than Eligible Policyholders that are not Plans. 
In this regard, Plans that are Eligible Policyholders must participate 
in the demutualization transaction on the same terms and conditions as 
Eligible Policyholders that are not Plans. Further, the demutualization 
will not, in any way, change premiums or reduce policy benefits, 
guarantees or other policy obligations of the Company to its 
policyholders and contractholders.
Procedural Requirements under Kansas Insurance Law for Restructuring
    7. Kansas Insurance Law provides a regulatory framework for the 
conversion of a mutual insurance company into a stock company, 
including a ``sponsored demutualization,'' whereby all of the stock of 
an insurer is acquired by another company in return for cash. It is 
represented that the Company's proposed Conversion will be in the 
nature of a ``sponsored demutualization.''
    K.S.A. 40-4002 requires the demutualizing insurer's board of 
directors to adopt, by a two-thirds majority, a resolution stating the 
reasons a conversion to a stock insurance company would be in the best 
interests of the policyholders of the mutual insurance company. 
Following adoption of the resolution, a detailed plan of conversion 
will be developed and approved by a two-thirds majority of the board. 
The plan of conversion must also be submitted to the Kansas Insurance 
Commissioner for approval, subject to certain hearing requirements.
    Additionally, such plan must be approved by two-thirds of the 
policyholders of the mutual insurer (or by a simple majority, if a 
majority of policyholders vote) at a meeting called for the purpose of 
considering the plan of conversion.\27\ Policyholders may vote in 
person or by proxy. A copy of the plan of conversion and any 
information the Commissioner deems necessary to

[[Page 365]]

policyholder understanding, including a summary of the plan of 
conversion, must be furnished to policyholders.
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    \27\ It is represented that neither the Company nor any of its 
affiliates will exercise investment discretion or provide 
``investment advice,'' within the meaning of 29 CFR 2510.3-21(c), 
with respect to any election made by an Eligible Policyholder that 
is a Plan.
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    K.S.A. 40-4003a sets forth alternative structures which may be used 
for a conversion, including a plan in which policyholders exchange 
their membership interests for cash or other consideration, and 
requires the insurer to file a plan of conversion complying with the 
terms and conditions set forth for such structure. Existing 
policyholders of a converting insurer have their rights protected under 
K.S.A. 40-4003c, which provides for policies in force on the effective 
date of conversion remaining in force, with only voting rights, 
assessment provisions, and rights to share in surplus being 
extinguished.
    The Commissioner is required to hold a hearing regarding the plan 
of conversion, giving not less than 20 days' notice to the insurer and 
the policyholders of the insurer of the hearing. The Commissioner must 
approve the plan if she finds it is fair and equitable to 
policyholders, complies with the requirements of the law, does not 
unjustly enrich any director, officer, agent or employee of the 
company, and the new stock insurer would meet the minimum requirements 
to obtain a certificate of authority to transact business in Kansas and 
its operation would not be hazardous to existing or future 
policyholders or the public. The amount of consideration provided to 
policyholders is deemed to be fair and equitable if it is at least 
equal to the amount of statutory surplus contributed by policyholders. 
If the Commissioner approves the plan of conversion, he or she will 
issue a new certificate of authority to the converted insurer and the 
date of such issuance is deemed to be the conversion date.
    In addition to the provisions governing conversion to a stock 
company, because this transaction involves Anthem's acquisition of the 
Company's stock, it will also be subject to review under K.S.A. 40-
3304. This provision of the statute regulates the acquisition of a 
domestic insurer and requires Commissioner review and public hearings.
    As far as timing is concerned, between November 19 and November 27, 
2001, the Company sent notices to policyholders regarding a January 11, 
2002 policyholder meeting to consider the Plan of Conversion. The 
Company anticipates that the Commissioner will hold a hearing on the 
Plan of Conversion between January 7 and January 9, 2002 and that the 
Commissioner will approve such Plan during the first quarter of 2002.
Distributions to Eligible Policyholders
    8. Under the proposed transaction, Eligible Policyholders of the 
Company will be entitled to receive total Cash consideration, currently 
estimated at $321 million, in exchange for their mutual membership 
interests in the Company.\28\ The Cash consideration will consist of 
two components. In this regard, one-third of the Cash consideration 
will be distributed to Eligible Policyholders, pro rata, as the ``fixed 
component'' while the remaining two-thirds will be allocated among 
Eligible Policyholders as the ``variable component.'' Such latter 
allocation will be made in accordance with a fair and objective 
standard, based upon actuarial formulas which will take into account a 
policy's past and estimated future contributions to the Company's 
surplus.
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    \28\ The proceeds of the demutualization will belong to the Plan 
if they would be deemed to be owned by the Plan under ordinary 
notions of property rights. See ERISA Advisory Opinion 92-02A, 
January 17, 1992 (assets of plan generally are to be identified on 
the basis of ordinary notions of property rights under non-ERISA 
law). It is the view of the Department that, in the case of an 
employee welfare benefit plan with respect to which participants pay 
a portion of the premiums, the appropriate plan fiduciary must treat 
as plan assets the portion of the demutualization proceeds 
attributable to participant contributions. In determining what 
portion of the proceeds are attributable to participant 
contributions, the plan fiduciary should give appropriate 
consideration to those facts and circumstances that the fiduciary 
knows or should know are relevant to the determination, including 
the documents and instruments governing the plan and the proportion 
of total participant contributions to the total premiums paid over 
an appropriate time period. In the case of an employee pension 
benefit plan, or where any type of plan or trust is the 
policyholder, or where the policy is paid for out of trust assets, 
it is the view of the Department that all of the proceeds received 
by the policyholder in connection with a demutualization would 
constitute plan assets.'' See ERISA Advisory Opinion 2001-02A, 
February 15, 2001.
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    On the effective date of the Conversion (the Conversion Date), 
Eligible Policyholders will be entitled to receive $190 million in 
exchange for their mutual membership interests in the Company. Of this 
amount, Anthem will pay $48 million in Cash to the Escrow Fund. In 
addition, at or prior to the closing, the Company will declare the 
Special Distribution, which will be payable after the closing to the 
Eligible Policyholders, in an amount equal to the excess of the 
Company's consolidated closing book value over $155 million, subject to 
certain rounding considerations.\29\
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    \29\ The Alliance Agreement formerly provided that in the event 
the Special Distribution equal to the entire excess of the closing 
book value over $155 million was not paid, the purchase price would 
be increased by 30 percent of the excess of the undistributed 
closing book value over $155 million. Under the Alliance Agreement, 
as amended, and pursuant to a resolution adopted by the Company on 
October 25, 2001, the Special Distribution is currently equal to the 
excess of the closing book value over $155 million.
    The parties expect that the full amount of the Special 
Distribution will be paid. It is represented that it is a condition 
to the company's obligation to close that the Commissioner must 
grant ``any required approval to the payment of the Special 
Distribution'' or the Company will be required to obtain an opinion 
from its financial advisor confirming the fairness, from a financial 
point of view, of the purchase price to the Eligible Policyholders 
in the absence of the Special Distribution.
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    The amount of this excess is currently estimated to be 
approximately $131 million. The Special Distribution, together with 7 
percent interest from the Conversion Date, will be paid directly to the 
Eligible Policyholders as soon as is reasonably practicable following 
the resolution of the closing balance sheet used to calculate the 
amount of the Special Distribution.
    As stated above, of the $190 million purchase price, $48 million 
will be held in the Escrow Fund pending the resolution of the 
Contingent Litigation Matter, involving a subpoena dated February 28, 
2001 received by the Company from the Office of the Inspector General, 
U.S. Department of Health and Human Services. The subpoena seeks 
documents related to an investigation of possible improper claims 
against Medicare. The amounts held in the Escrow Fund will be used to 
pay all costs, expenses and liabilities related to the Contingent 
Litigation Matter, to pay related taxes which might become payable, and 
to pay all costs and expenses of the escrow, with any remaining amounts 
to be distributed to Eligible Policyholders following the final 
resolution of such matter.\30\ At present, the Company has been 
responding to the subpoena which underlies the Contingent Litigation 
Matter through the production of documents, which production is nearly 
complete, except for certain issues with respect to which the Company 
is awaiting clarification from the U.S. Department of Justice.
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    \30\ Even if the entire Escrow Fund were applied to costs 
related to the Contingent Litigation Matter, it is represented that 
Eligible Policyholders would still receive $142 million plus the 
Special Distribution amount (currently estimated at $131 million) 
within 90 to 120 days after the Conversion Date. Thus, the Company 
asserts that there is no possibility that Eligible Policyholders 
will receive nothing in return for their mutual membership 
interests.
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    Both the Special Distribution and any amounts remaining in escrow 
will be distributed to Eligible Policyholders in accordance with the 
distribution principles set forth in the Plan of Conversion. The Board 
has received an opinion from Dresdner Kleinwort

[[Page 366]]

Wasserstein, independent financial advisors to the Company, that the 
purchase price payable to the Eligible Policyholders and into the 
Escrow Fund for the benefit of the Eligible Policyholders pursuant to 
the Alliance Agreement is ``fair'' to the Eligible Policyholders, from 
a financial point of view.
The Escrow Fund
    9. The Alliance Agreement provides that $48 million of the $190 
million purchase price to be received by the Company from Anthem will 
be deposited by the Company (or Anthem or its specified affiliate on 
the Company's behalf) into the Escrow Fund. The Escrow Fund will be a 
separately-designated, interest-bearing deposit account established on 
or prior to the Conversion Date, under the terms of an escrow agreement 
(the Escrow Agreement) which will be entered into by and among the 
Company, Anthem and an escrow agent (the Escrow Agent).\31\ The Escrow 
Agent will be an unrelated New York bank with trust powers that is 
selected by the Company, and accepted by Anthem, to act as Escrow Agent 
under the Escrow Agreement.
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    \31\ It is represented that the Escrow Fund was required due to 
the difficulty in estimating the potential costs related to the 
Contingent Litigation Matter and to assure Eligible Policyholders 
that the acquisition offers received by the Company did not reflect 
any discount to the value of the Company due to the Contingent 
Litigation Matter. Thus, the Escrow Fund is intended to facilitate 
the Anthem transaction without diminishing potential returns to 
policyholders.
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    The Company will deposit, into the Escrow Fund, amounts recovered 
from insurers with respect to the Contingent Litigation Matter, net of 
any reasonable out-of-pocket costs and expenses incurred in effecting 
such recovery. The Escrow Fund will also provide funding for the 
payment of (a) the net after-tax amount of costs and expenses 
attributable solely to the Contingent Litigation Matter and (b) such 
other amounts as may be specified in the Escrow Agreement or in the 
Alliance Agreement. Following the satisfaction of all such costs and 
expenses, the Escrow Agreement will provide for the payment of Cash 
consideration by the Company to Eligible Policyholders. Tax benefits 
related to the costs and expenses will be determined once they are 
finally realized by the Company. However, the Company may withdraw 
amounts, from time to time, to cover such costs and expenses.
    The Escrow Fund will continue until the Contingent Litigation 
Matter has been finally disposed of by binding settlement or court 
order, all tax amounts have been finally determined, all amounts that 
are reasonably recoverable from any insurer in respect of the 
Contingent Litigation Matter are recovered, and all amounts in the 
Escrow Fund have been paid or distributed by the Escrow Agent in 
accordance with the Escrow Agreement and the Alliance Agreement. Upon 
delivery by the Company and the Policyholder Committee of a certificate 
certifying that all such amounts have been paid, the Escrow Fund will 
terminate and all remaining amounts held in the Escrow Fund will be 
distributed to Eligible Policyholders in accordance with the Plan of 
Conversion. No amounts need be distributed if the Policyholder 
Committee determines that it would be impractical to do so, taking into 
account the costs of distribution in relation to the amounts to be 
distributed. Any amounts that are not so distributed will instead be 
distributed to a charitable foundation selected by the Policyholder 
Committee.
    Amounts held in the Escrow Fund will be invested by the Escrow 
Agent solely in obligations of, or obligations fully guaranteed as to 
timely payment of principal and interest by, the United States of 
America or an agency or instrumentality thereof with a maturity date of 
one year or less from the date of investment. All costs and expenses of 
maintaining the Escrow Fund, including the fees and expenses of the 
Escrow Agent, the costs and expenses of making distributions out of the 
Escrow Fund and the fees and expenses of the Policyholder Committee, 
will be borne by the Escrow Fund. The rights of Eligible Policyholders 
to amounts held in the Escrow Fund will not be represented by any form 
of certificate or instrument and will not be transferable or assignable 
except by will, the laws of intestacy or by other operation of law.
    A committee comprised of five individuals who were members of the 
Board of Directors of the Company prior to the Conversion Date and are 
acceptable to Anthem (the Policyholder Committee) will oversee the 
conduct of the Contingent Litigation Matter.\32\ The Policyholder 
Committee will also certify amounts payable to the Company out of the 
Escrow Fund for the indemnification of costs incurred by the Company 
related to the Contingent Litigation Matter. The Policyholder Committee 
may then dispute the amounts claimed by the Company. However, once the 
dispute is settled pursuant to provisions in the Alliance Agreement, 
the Policyholder Committee will certify the indemnification amounts 
payable to the Company.
---------------------------------------------------------------------------

    \32\ It is represented that no members of the Policyholder 
Committee will serve on the Company Health Plan Committee that is 
described in Representation 10.
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    In addition, the Commissioner will retain regulatory oversight over 
the investment and distribution of the assets held in the Escrow Fund 
to ensure that the interests of Eligible Policyholders are protected.
    The Company expects that less than 25 percent of the interests in 
the Escrow Fund will be held by ``benefit plan investors'' within the 
meaning of the Department's Plan Asset Regulations, 29 CFR 2510.3-
101(f), and, accordingly, the assets of the Escrow Fund should not 
constitute ``plan assets'' subject to the Act. If the Company 
determines that 25 percent threshold has been exceeded by Plan 
investors, it will inform the Department of this determination.
Company Health Plan Oversight
    10. The Company has arranged for the retention of a committee, 
comprised of three management-level employees, to act as a fiduciary 
for the Company Health Plan in connection with the implementation of 
the Plan of Conversion. The Company Health Plan Committee will 
determine whether to vote for or against the implementation of the Plan 
of Conversion. The Company Health Plan Committee's vote on behalf of 
the Company Health Plan will represent one vote out of the 
approximately 171,403 votes which may be cast by Eligible 
Policyholders. The Company does not believe that the Company Health 
Plan Committee will exercise any investment discretion with respect to 
the type of consideration to be distributed in the demutualization, 
since the compensation will consist solely of Cash.
    11. In summary, it is represented that the proposed transactions 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) The Plan of Conversion will be implemented in accordance with 
procedural and substantive safeguards that are imposed under Kansas law 
and will be subject to review and supervision of the Commissioner.
    (b) The Commissioner will review the terms and options that are 
provided to Eligible Policyholders, including Plans, as part of such 
Commissioner's review of the Plan of Conversion and the Commissioner 
will approve the Plan of Conversion following a determination that, 
among other things, the Plan of Conversion is fair and equitable to 
policyholders.
    (c) The Plan of Conversion will provide the Company with access to 
new sources of capital that should help

[[Page 367]]

sustain the Company's financial strength, increase its ability to 
conduct its business efficiently and improve the Company's competitive 
position in the insurance industry.
    (d) With the exception of the Company Health Plan, one or more 
independent Plan fiduciaries will determine whether to vote for or 
against the implementation of the Plan of Conversion, following the 
receipt of full written disclosure from the Company.
    (e) In the case of the Company Health Plan, the Company Health Plan 
Committee will determine whether to vote for or against the 
implementation of the Plan of Conversion, but it will not otherwise 
exercise investment discretion over the Company Health Plan's assets.
    (f) Each Eligible Policyholder will have an opportunity to comment 
on the Plan of Conversion and will be solely responsible for any 
decisions that may permitted under the Plan of Conversion regarding the 
Cash consideration to be received in the demutualization.
    (g) The proposed exemption will allow Eligible Policyholders that 
are Plans to receive Cash in exchange for their membership interests in 
the Company, which will be extinguished, and neither the Company nor 
any of its affiliates will exercise investment discretion or provide 
``investment advice,'' within the meaning of 29 CFR 2510.3-21(c), with 
respect to such decisions.
    (h) All Plans that are Eligible Policyholders will participate in 
the transactions and on the same basis as Eligible Policyholders that 
are not Plans.
    (i) The demutualization will not, in any way, change premiums or 
reduce policy benefits, guarantees or other policy obligations of the 
Company to its policyholders and contractholders.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 693-8556. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which, among other things, require a fiduciary 
to discharge his duties respecting the plan solely in the interest of 
the participants and beneficiaries of the plan and in a prudent fashion 
in accordance with section 404(a)(1)(b) of the Act; nor does it affect 
the requirement of section 401(a) of the Code that the plan must 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries, and protective of 
the rights of participants and beneficiaries of the plan;
    (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 27th day of December, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 02-24 Filed 1-2-02; 8:45 am]
BILLING CODE 4510-29-P