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Employee Benefits Security Administration

EBSA Federal Register Notice

Proposed Exemptions; Kinder Morgan, Inc. [06/24/2003]

[PDF Version]

Volume 68, Number 121, Page 37534-37548

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application No. D-11079, et al.]

 
Proposed Exemptions; Kinder Morgan, Inc.

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of proposed exemptions.

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[[Page 37535]]

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 Employee Benefits Security 
Administration (EBSA), 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 EBSA via e-mail or FAX. Any such 
comments or requests should be sent either by e-mail to: 
``moffitt.betty@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 Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue, NW., 
Washington, DC 20210.

Notice to Interested Persons

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

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

Kinder Morgan, Inc., Located in Houston, Texas

[Exemption Application Number D-11079]

Proposed Exemption

    The Department is considering the grant of the following exemption 
under the authority of section 408(a) of the Act and section 4975(c)(2) 
of the Code, and in accordance with the procedures set forth in 29 CFR 
part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Transactions Involving Contributions In-Kind
    If the proposed exemption is granted, the restrictions of sections 
406(a)(1)(E), 407(a)(2), 406(b)(1), and 406(b)(2) of the Act shall not 
apply to: (1) The acquisition of publicly traded Employer Stock by the 
Trusts through the voluntary in-kind contribution (the Contribution) of 
such Stock by the Employer for the purpose of pre-funding welfare 
benefits provided by the Plans; and (2) the holding by the Trusts of 
Employer Stock acquired pursuant to a Contribution, provided that:
    (a) Each Contribution is authorized pursuant to, and made in 
conformity with, all relevant provisions of each affected Plan;
    (b) The Plans and/or Trusts do not pay any amount or type of 
consideration whether in cash or other property (including the 
diminution of any Employer obligation to fund a Plan) for Employer 
Stock contributed in-kind by the Employer;
    (c) Each Contribution is voluntary and unrelated to any Employer 
obligation to fund a Plan;
    (d) The Plans do not cede any right to receive a cash contribution 
from the Employer as a result of any Contribution made to any Plan;
    (e) The Plans and/or Trusts do not pay any fees or commissions in 
connection with any Contribution; and
    (f) Each condition set forth below in Section II is satisfied.
Section II--Conditions
    The exemption is conditioned upon the adherence by the Employer to 
the material facts and representations described in this notice of 
proposed exemption and upon the satisfaction of the following 
requirements:
    (a) Only Employer Stock that constitutes ``qualifying employer 
securities'' (QES), as such term is set forth in section 407(d)(5) of 
the Act, will be transferred by the Employer to a Trust pursuant to a 
Contribution; \1\
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    \1\ Section 407(d)(5) of the Act provides that the term 
``qualifying employer security'' means an employer security that is 
stock or a marketable obligation (as defined in subsection (e)). 
After December 17, 1987, in the case of a plan other than an 
individual account plan, stock is considered a ``qualifying employer 
security'' only if such stock satisfies the requirements of 
subsection 407(f)(1) of the Act. Section 407(f)(1) of the Act 
provides that stock satisfies such requirement if, immediately 
following the acquisition of such stock--(A) no more than 25 percent 
of the aggregate amount of stock of the same class issued and 
outstanding at the time of acquisition is held by the plan, and (B) 
at least 50 percent of the aggregate amount referred to in 
subparagraph (A) is held by persons independent of the issuer.
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    (b) Employer Stock transferred by the Employer on behalf of a Plan 
will thereafter be held by the Trust (or Trusts) for the purpose of 
funding welfare benefits for the participants and beneficiaries of such 
Plan;
    (c) Employer Stock contributed to, or otherwise acquired by, a 
Trust will be held in a separate account (an Account) under such Trust;
    (d) The appropriate fair market value of any Employer Stock 
contributed by the Employer to a Trust will be established by an 
Independent Fiduciary, as such term is defined in section III(c) of 
this proposed exemption;
    (e) The Independent Fiduciary will represent the interests of the 
Plans for all purposes related to each Contribution for the duration of 
the Trust's holding of such Employer Stock, and will authorize the 
trustee of each Trust to accept Employer Stock pursuant to a 
Contribution only after such Independent Fiduciary determines, at the 
time of the transaction, that such transaction is feasible, in the 
interest of the affected Plans, and protective of the participants and 
beneficiaries of such Plans;

[[Page 37536]]

    (f) The Independent Fiduciary will: (1) Verify that the price of 
Employer Stock contributed by the Employer is appropriate and, 
thereafter, monitor the Employer Stock and have sole responsibility for 
the ongoing management of the Accounts; and (2) take whatever action is 
necessary to protect the rights of the Plans funded by the Trusts, 
including, but not limited to, the making of all decisions regarding 
the acceptance and acquisition of Employer Stock contributed by the 
Employer, the retention and any disposition of such Stock, and the 
exercise of any voting rights associated with such Stock;
    (g) With certain exceptions described in paragraphs (h) and (i) 
below, the total amount of: (1) Employer Stock; (2) qualifying employer 
real property (QERP), as defined by section 407(d)(4) of the Act; and 
(3) QES other than the Employer Stock (collectively, the Limited 
Assets) held by each Plan shall not comprise more than twenty-five 
percent (25%) of the fair market value of the assets held by such Plan 
as determined on the date of each such transaction;
    (h) For purposes of calculating the percentage limitation described 
in paragraph (g) of this section, and to the extent the conditions of 
Prohibited Transaction Exemption (PTE) 91-38 have been met,\2\ Employer 
Stock will not constitute a ``Limited Asset'' to the extent that such 
Employer Stock:
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    \2\ PTE 91-38 (56 FR 31966 (July 12, 1991)) requires, among 
other things, that the interests of a plan in an unrelated common or 
collective trust fund may not exceed ten percent (10%) of the total 
of all assets in such common or collective trust fund.
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    (1) Is held by an unrelated common or collective trust fund 
maintained by an independent bank in which any of the Plans through the 
Trusts may invest; and
    (2) Has a total fair market value that does not exceed five percent 
(5%) of the fair market value of each such common or collective trust 
fund;
    (i) Notwithstanding the requirement set forth in paragraph (g) 
above, the amount of Limited Assets held by a Plan may exceed 25% of 
the total assets held by such Plan solely by reason of:
    (1) The Limited Assets appreciate in value at a rate that is 
greater than the rate attributable to the Plan's non-Limited Assets, 
and such difference in rates causes the value of the Limited Assets to 
exceed 25% of the Plan's total asset value; or
    (2) The non-Limited Assets have declined in value at a rate that is 
greater than the rate attributable to the Plan's Limited Assets, and 
such difference in rates causes the value of the Limited Assets to 
exceed 25% of the Plan's total asset value; and
    (j) At no time will any of the assets of the Trusts revert to the 
use or benefit of the Employer.
Section III. Definitions
    (a) The term ``Employer'' means Kinder Morgan, Inc., any successor 
to Kinder Morgan, Inc., and/or any affiliates of Kinder Morgan, Inc.;
    (b) The term ``Employer Stock'' means shares of publicly traded 
common stock of the Employer and includes any replacement publicly 
traded shares of such stock;
    (c) The term ``Independent Fiduciary'' means a fiduciary with 
respect to a Plan who is: (1) Qualified as an investment manager; (2) 
independent of and unrelated to the Employer; and (3) appointed to act 
on behalf of the Plans with respect to each Contribution. For purposes 
of this exemption, if granted, a fiduciary will not be deemed to be 
independent of and unrelated to the Employer if (i) such fiduciary 
directly or indirectly controls, is controlled by or is under common 
control with the Employer; or (ii) the Employer pays such fiduciary an 
amount of income during the fiduciary's current tax year that exceeds 
one percent (1%) of such fiduciary's gross income (for federal income 
tax purposes) over its prior tax year;
    (d) The term ``Plan'' means an employee welfare benefit plan 
maintained by the Employer; and
    (e) The term ``Trust'' means a trust which is qualified under 
Section 501(c)(9) of the Code, and established for the purpose of 
funding life, sickness, accident, and other welfare benefits for the 
participants and beneficiaries of the Plans.
Summary of Facts and Representations
    1. Kinder Morgan, Inc. (hereinafter, either the Employer or the 
Applicant) is an energy company that operates more than 30,000 miles of 
natural gas and products pipelines in various states. The Employer is 
the sole owner of Natural Gas Pipeline Company of America (NGPL), KN 
Energy Retail Division, Kinder Morgan Power Company, and KM 
International Services, Inc. The Employer also owns Kinder Morgan G.P., 
Inc., the general partner of Kinder Morgan Energy Partners, L.P. (KMP). 
The Employer had annual operating revenues of $1,054,918,000 in 2001 
and the book value of the Employer's assets as of December 31, 2001 was 
$9,533,085,000.
    The Employer Stock is common stock issued by the Employer. The 
Applicant represents that the Employer Stock is widely held, publicly 
traded, and may be freely exchanged on the New York Stock Exchange 
(NYSE symbol: KMI). The applicant states further that the Employer 
Stock qualifies as a ``qualifying employer security'', as defined by 
section 407(d)(5) of the Act, and also satisfies the requirements of 
section 407(f)(1) of the Act.
    2. The Employer sponsors the Plans. The Plans provide various types 
of welfare benefits to current and/or former employees of the 
Employer.\3\ Included in the Plans is the Retiree Plan, a welfare 
benefit plan that provides health, life, and disability benefits to all 
full-time salaried, non-union hourly, and union hourly retirees of the 
Employer.\4\ In addition, the Retiree Plan provides disability benefits 
and life insurance benefits for a small, closed group of individuals 
currently employed by the Employer. The Applicant estimates that, as of 
March 1, 2002, the Retiree Plan had 4,891 participants and 
beneficiaries and $67,268,272 in net assets as of January 31, 2002. The 
Applicant represents that any of the assets held by the Trusts on 
behalf of the Retiree Plan may be used to support any of the payments 
made in connection with the benefits provided by the Retiree Plan.
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    \3\ Currently, the Plans are: (1) The Retiree Medical Plan 
covering the United Mine Workers of America; (2) Western Alfalfa 
Corporation Retiree Medical Plan; (3) Kinder Morgan, Inc. Medical 
Plan; (4) Kinder Morgan Bulk Terminals, Inc. Health Benefit Plan; 
(5) Kinder Morgan, Inc. for Elizabeth River Terminals Employees; (6) 
Kaiser Foundation Health Plans, Inc. (Northern-Southern California); 
(7) Mountain Medical Affiliates (Colorado) Plan; (8) Health Net of 
California; (9) Kinder Morgan, Inc. Master Employee Welfare Benefit 
Plan; (10) Kinder Morgan, Inc. Dental Plan; (11) Kinder Morgan, Inc. 
Life Insurance Plan; (12) Kinder Morgan, Inc. Group Business Travel 
Insurance Plan; (13) Kinder Morgan, Inc. Accidental Death & 
Dismemberment Insurance Plan; (14) Kinder Morgan, Inc. Long Term 
Disability Insurance Plan; (15) Kinder Morgan, Inc. Flexible 
Spending Account Plan; (16) Kinder Morgan, Inc. Weekly Accident and 
Sickness Plan for Liquid Terminals Employees; (17) Kinder Morgan, 
Inc. Life Insurance Plan for Elizabeth River Terminals Employees; 
(18) Kinder Morgan, Inc. Weekly Accident and Sickness and Accidental 
Death and Dismemberment Insurance Plan for Elizabeth River Terminals 
Employees; (19) Kinder Morgan, Inc. Long Term Disability Insurance 
Plan for Elizabeth River Terminals Employees; (20) Kinder Morgan, 
Inc. Dental Expense Insurance Benefit Plan for Elizabeth River 
Terminals Employees; (21) Kinder Morgan, Inc. Severance Plan; and 
(22) Kinder Morgan, Inc. Vision Plan.
    \4\ The Employer currently anticipates pre-funding only the 
Retiree Plan to the extent this proposed exemption is granted.
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    According to the Applicant, the assets of the Retiree Plan are not 
invested in loans to any party in interest involved in the transactions 
described herein. However, the Applicant notes that less than one-half 
of one percent of the Retiree Plan's assets held in the Trusts

[[Page 37537]]

may be invested indirectly (through certain funds maintained by an 
independent bank) in securities of the Employer that constitute QES. 
The Applicant represents that such investment is permitted by section 
407(a) and 408(e) of the Act.\5\
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    \5\ The Department is expressing no opinion herein as to whether 
the securities of the Employer held by the Trusts constitute 
``qualifying employer securities'', as defined in section 407(d)(5) 
of the Act. The Department is also expressing no opinion herein as 
to whether the acquisition or holding of such securities is 
permitted by section 407(a) of the Act or covered by the statutory 
exemption provided by section 408(e) of the Act. Further, the 
Department is offering no relief herein for transactions other than 
those described in section I of this proposed exemption.
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    3. The Trusts are voluntary employees' beneficiary association 
trusts (VEBAs). The following Trusts are used to fund the Retiree Plan 
(the Retiree Plan Trusts): (1) The KMI Post-Retirement VEBA Trust 
(Bargained VEBA); (2) the KMI Post-Retirement Non-Bargaining VEBA Trust 
(Nonbargained Medical VEBA); (3) the KMI Retiree Life Insurance VEBA 
Trust (Life Insurance VEBA); and (4) the KMI Retiree Contributions VEBA 
Trust (Retiree Contribution Funding VEBA). The Applicant states that 
each Trust is intended to meet the requirements of section 501(c)(9) of 
the Code. As such, the trust agreement with respect to each Retiree 
Plan Trust or any other Trust prohibits the reversion to the Employer 
of the assets held by such Trust.
    The Applicant states that the assets held by the Bargained VEBA are 
used to provide benefits to participants in the Retiree Plan that are 
covered under collective bargaining agreements. The assets held by the 
Nonbargained Medical VEBA, meanwhile, are used to provide benefits to 
participants in the Retiree Plan that are not covered under a 
collective bargaining agreement. The assets held by the Life Insurance 
VEBA are used to provide death benefits to both bargained and 
nonbargained Retiree Plan participants. The assets held by the Retiree 
Contribution Funding VEBA are used to provide certain benefits to 
former bargained and nonbargained employees of the Employer and their 
dependents.
    4. The transactions described in this proposed exemption involve 
the pre-funding of the Retiree Plan by the Employer.\6\ The Applicant 
states that the Employer is not required to make minimum contributions 
to the Retiree Plan other than the contributions required under certain 
rate agreements (discussed below). Nevertheless, the Employer now seeks 
to pre-fund the Retiree Plan Trusts to a combined level of 100% of the 
accumulated post-retirement benefit obligation of the Retiree Plan, 
which is an amount redetermined annually by the third-party 
administrator of the Retiree Plan, based on the Retiree Plan's future 
obligations (determined in accordance with Financial Accounting 
Statement 106).
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    \6\ However, the Applicant notes that other Plans may be 
affected since the manner in which welfare benefits are provided to 
the Employer's current and former employees is subject to periodic 
restructuring.
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    The Applicant believes that the Retiree Plan, and any other 
affected Plan, will benefit from the proposed Contributions. In this 
regard, the Applicant represents that certain opportunities for 
expansion, acquisition, and debt reduction in the energy industry has 
re-prioritized the use of cash available to the employer. At no time in 
the foreseeable future does the Employer anticipate the future funding 
of retiree welfare benefits through the making of substantial cash 
contributions to its Retiree Plan (other than those amounts as required 
under the Rate Agreements). Rather, the Applicant states that the 
Contributions offer a practical means of pre-funding the Retiree Plan 
and will make the benefits offered by such Plan more secure.
    Initially, the Contributions will involve the transfer of specific 
amounts of Employer Stock to the Retiree Plan Trusts. With respect to 
the Bargained VEBA, the Employer seeks to contribute approximately 
$3,882,358 in Employer Stock and $3,430,041 in cash. To the extent this 
proposed exemption is granted, approximately 50% of the total assets 
held by the Bargained VEBA will be in the form of Employer Stock. 
Additionally, with respect to the Nonbargained Medical VEBA, the 
Employer intends to contribute approximately $11,920,891 in Employer 
Stock and approximately $767,457 in cash. To the extent this proposed 
exemption is granted, approximately 15.8% of the total assets held by 
the Nonbargained Medical VEBA will be in the form of Employer Stock. 
Further, with respect to the Life Insurance VEBA, the Employer intends 
to contribute approximately $4,480,667 in Employer Stock and 
approximately $2,037,024 in cash. To the extent this proposed exemption 
is granted, approximately 50% of the total assets held by the Life 
Insurance VEBA will be in the form of Employer Stock.\7\
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    \7\ The Retiree Contribution Funding VEBA is funded through 
contributions derived from participants in the Retiree Plan. As 
such, this VEBA will not receive any Employer Stock pursuant to the 
Contribution.
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    Thereafter, if granted, the proposed exemption could affect other 
Plans that provide welfare benefits. In this regard, the Applicant 
states that Plans other than the Retiree Plan may prospectively hold 
Employer Stock contributed by the Employer. The Applicant notes that 
any Contribution to a Plan other than the Retiree Plan and/or any 
holding of Employer Stock by such Plan will be subject to the same 
conditions as those applicable to the Retiree Plan.
    5. The Applicant states that each Contribution will be voluntary. 
In this regard, the Applicant represents that the receipt by a Plan of 
Employer Stock pursuant to a Contribution will not affect the right of 
such Plan to receive cash contributions from the Employer. The 
Applicant notes that the Employer is currently subject to two rate 
agreements (the Rate Agreements) entered into between the Federal 
Energy Regulatory Commission and NGPL and Kinder Morgan Interstate Gas 
Transmission LLC. Both Rate Agreements require the Employer to 
contribute a specified amount annually to a Trust for an indefinite 
period of time. The Applicant states that all of the contributions made 
by the Employer to satisfy the funding requirements under the Rate 
Agreements will be accounted for separately, and only cash 
contributions by the Employer will be used to satisfy the funding 
requirements under the Rate Agreements.
    The Applicant notes that subsequent to the contribution of cash to 
the Retiree Plan pursuant to any Rate Agreement, such cash is not 
thereafter segregated from any of the assets held under the Retiree 
Plan. Therefore, the collective assets of the Retiree Plan are used to 
pay all Retiree Plan participant benefits as they become due. The 
Applicant represents that to the extent the Retiree Plan is not 
sufficiently funded at the time a participant's benefits are due, 
regardless of the reason for the insufficient funding, the Employer 
will pay from its general assets the benefits owed to such participant.
    6. Each Contribution will be subject to several conditions designed 
to protect the Retiree Plan and any other affected Plans (hereinafter, 
either, a Plan). In this regard, Employer Stock transferred to a Trust 
will be held in the Accounts, which are separate accounts under such 
Trust, for the sole purpose of funding benefits provided by the Plan. 
Accordingly, at no time will such Employer Stock revert to the use or 
benefit of the Employer. In addition, each Contribution must be 
authorized by the appropriate Plan and made in conformity with the 
terms of such Plan. Further, no Plan will pay any

[[Page 37538]]

consideration for the Employer Stock nor any fees or commissions that 
arise in connection with the Contributions.
    The Applicant notes that the transactions described herein require 
the oversight of an Independent Fiduciary. In this regard, a Plan 
fiduciary who is independent of the Employer and qualified as an 
investment manager must authorize each contribution of Employer Stock 
only after such Independent Fiduciary determines at the time of the 
transaction that such transaction is feasible, in the interest of the 
affected Plans, and protective of the participants and beneficiaries of 
such Plans. The Applicant represents that, to date, no Independent 
Fiduciary has been chosen. However, the Applicant states that the 
Employer may not pay any Independent Fiduciary that is chosen, or any 
successor thereto, an amount of income during the fiduciary's current 
tax year that exceeds one percent (1%) of such fiduciary's gross income 
(for federal income tax purposes) over its prior tax year. In addition, 
any Independent Fiduciary chosen by the Employer will acknowledge, in 
writing, that it: (1) Will act prudently and in the interest of the 
Plan's participants and beneficiaries with respect to the proposed 
transactions; and (2) fully understands that risks and benefits 
associated with the transactions discussed herein. The Applicant 
represents that any fees or costs associated with the Independent 
Fiduciary will be borne, either directly or indirectly, by the Trusts.
    The Applicant represents that the Independent Fiduciary will 
establish the appropriate fair market value for the Employer Stock. In 
this regard, the Independent Fiduciary will: (1) Determine the recorded 
New York Stock Exchange closing price (the Closing Price) for the 
Employer Stock for the day on which such Employer Stock is contributed 
to a Trust; and (2) determine whether to discount the Closing Price by 
analyzing the percentage of issued and outstanding Employer Stock 
represented by the Contribution.\8\
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    \8\ According to the Applicant, the Independent Fiduciary will 
discount the Closing Price of the Employer Stock contributed by the 
Employer to the Trusts if the Independent Fiduciary determines that 
such amount of Stock may not be sold at the Closing Price within a 
reasonable period of time from the date of the Contribution.
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    Prior to approving any Contribution, the Independent Fiduciary will 
evaluate the appropriateness of the Trust(s)' acceptance of such 
Contribution given the investment needs of the affected Plan, the 
nature of the Contribution, and the impact of the Contribution on the 
risk and return characteristics of such Plan's portfolio.\9\ With 
respect to the nature of the Contribution, the Applicant states that 
the Independent Fiduciary will perform an analysis of both the Employer 
Stock and the Employer for the purpose of: (1) Valuing such Employer 
Stock; and (2) analyzing the acquisition of such Employer Stock in 
light of the overall portfolio of the affected Plan. The Employer will 
provide the Independent Fiduciary with access to all information on the 
Employer that the Independent Fiduciary reasonably requires to make 
these analyses, including financial statements, annual reports, 
materials filed with the Securities and Exchange Commission, and 
independent research and reports.
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    \9\ This analysis will include: (1) A review the Investment 
Guidelines to determine whether investment in Employer Stock is 
appropriate; (2) a determination as to whether acceptance of the 
Employer Stock is within the Investment Guidelines with respect to 
the percentage of Plan assets that may be committed to Employer 
Stock; (3) a determination as to the value of the Plan's assets 
committed to equities at the time of the proposed Contribution; (4) 
a determination as to whether the Plan can accept the proposed 
Contribution without exceeding the Investment Guidelines relating to 
equity investments; (5) a determination as to whether the proposed 
Contribution would have a detrimental effect on the ability of the 
Retiree Plan to meet its liquidity needs; and (6) a confirmation 
that the proposed Contribution would not be in lieu of any required 
asset or cash contributions.
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    The Applicant represents that the Independent Fiduciary will also 
have full discretion to accept or reject any Contribution, and to 
otherwise manage the Accounts subject to the specific investment 
allocation policies and guidelines of the Plan (the Investment 
Guidelines) as mutually agreed between the Employer and the Independent 
Fiduciary. These Guidelines will be re-evaluated at least annually by 
the Independent Fiduciary and the Employer. The Investment Guidelines 
may prohibit investment of assets in certain types of investments. 
Notwithstanding the Investment Guidelines mutually agreed to by the 
parties, the Independent Fiduciary and any successor Independent 
Fiduciary will remain subject to the fiduciary responsibility 
provisions of Section 404 of ERISA.
    The Applicant represents that the Independent Fiduciary will 
analyze the impact of the Contribution on the risk and return 
characteristics of the affected Plan's portfolio. In analyzing such 
impact, the Independent Fiduciary will review: The expected return of 
the portfolio; the overall volatility of the portfolio; and the beta 
risk level or market risk of the portfolio. The Independent Fiduciary 
will compare the performance of modeled portfolios that include the 
Employer Stock with the performance of comparable portfolios that do 
not include the Employer Stock. Based on the results of the Independent 
Fiduciary's analysis, the Independent Fiduciary must determine, prior 
to its authorization of a Contribution, that the risk/return tradeoff 
of accepting the Contribution would be at least as favorable, if not 
more favorable, to the affected Plan(s) than without such Contribution.
    The Applicant notes that subsequent to a Contribution, the 
Independent Fiduciary will periodically monitor, and have the ability 
to so monitor, the Employer Stock. Accordingly, the ongoing management 
of the Employer Stock will be subject to the sole discretion of the 
Independent Fiduciary. Finally, the Independent Fiduciary will make all 
of the decisions regarding the retention and any disposition of the 
Employer Stock, and the exercise of any voting rights associated with 
such Stock.
    7. The amount of Employer Stock contributed to the Trusts will be 
limited. In this regard, with limited exceptions, the aggregate fair 
market value of the Employer Stock will not exceed 25% of the fair 
market value of the assets of an affected Plan.\10\ A Plan may hold and 
continue to hold Employer Stock in excess of 25% solely in situations 
where the Employer Stock: Appreciates at a greater rate than that of 
the other assets held under the Plan (i.e., other than the Employer 
Stock); or depreciates at a rate that is less than that of the other 
assets held under the Plan. However, in no case will a Contribution be 
made to a Plan that contemporaneously holds an amount of Employer Stock 
that exceeds 25% of its total assets at the time of the Contribution.
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    \10\ This percentage limitation will generally be applied 
without regard to amounts of Employer Stock held by unrelated common 
or collective trust funds maintained by independent managers, so 
long as the Employer Stock held in such unrelated fund does not 
exceed five percent (5%) of the value of each such common or 
collective trust fund, and the Plan's interest in such fund does not 
exceed ten percent (10%) of the total assets in such common or 
collective trust fund.
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    The Applicant states that the Contributions will benefit the 
Retiree Plan, and any other Plan so affected. In this regard, the 
Applicant states that, subsequent to a Contribution, the Employer Stock 
will not be subject to any restrictions with respect to its 
marketability. Accordingly, the Employer Stock will be fully 
transferable at the discretion of the Independent Fiduciary. Further, 
the

[[Page 37539]]

Applicant anticipates that Employer Stock contributed by the Employer 
will appreciate in value and, therefore, will provide security to 
current and former employees of the Employer with respect to their 
receipt of welfare benefits through an affected Plan.
    9. In summary, the Applicant represents that with respect to the 
transactions described herein, the requirements of section 408(a) of 
the Act have been met since, among other things:
    (a) Each Contribution will be authorized pursuant to, and made in 
conformity with, all relevant provisions of each affected Plan;
    (b) The Plans and/or Trusts will not pay any amount or type of 
consideration whether in cash or other property (including the 
diminution of any Plan funding obligation of the Employer) for Employer 
Stock contributed in-kind by the Employer;
    (c) Each Contribution will be voluntary and unrelated to any 
current or future Employer obligation to fund a Plan;
    (d) The Plans will not cede any right to receive a cash 
contribution from the Employer in connection with any Contribution made 
to any Plan;
    (e) The Plans and/or Trusts do not pay any fees or commissions in 
connection with any Contribution;
    (f) Only Employer Stock that constitutes QES will be transferred by 
the Employer to a Trust pursuant to a Contribution;
    (g) The appropriate fair market value of any Employer Stock 
contributed by the Employer to a Trust will be established by an 
Independent Fiduciary;
    (h) An Independent Fiduciary will represent the interests of the 
Plans for all purposes related to each Contribution for the duration of 
the Trust's holding of such Employer Stock and will authorize the 
trustee of each Trust to accept Employer Stock pursuant to a 
Contribution only after such Independent Fiduciary determines, at the 
time of the transaction, that such transaction is feasible, in the 
interest of the affected Plans, and protective of the participants and 
beneficiaries of such Plans;
    (i) The Independent Fiduciary will: (1) Monitor the Employer Stock 
and have sole responsibility for the ongoing management of the 
Accounts; and (2) take whatever action is necessary to protect the 
rights of the Plans funded by the Trusts, including, but not limited 
to, the making of all decisions regarding the acceptance and 
acquisition of Employer Stock contributed by the Employer, the 
retention and any disposition of such Stock, and the exercise of any 
voting rights associated with such Stock;
    (j) With certain exceptions, the total amount of the Limited Assets 
held by each Plan shall not comprise more than 25% of the fair market 
value of the assets held by such Plan; and
    (k) At no time will any of the assets of the Trusts revert to the 
use or benefit of the Employer.
    Notice to Interested Persons: The applicant represents that notice 
will be provided within sixty (60) calendar days from the date of 
publication of this Notice in the Federal Register to all active 
employees of the Employer by means of a posting at those locations 
within the principal places of employment of the Employer which are 
customarily used for notices regarding labor-management matters for 
review and by an electronic mailing (i.e., e-mail) to all active 
employees. Such posting will contain a copy of the Notice, as it 
appears in the Federal Register on the date of publication, and a copy 
of the supplemental statement (the Supplemental Statement), as 
required, pursuant to 29 CFR 2570.43(b)(2), which will advise such 
interest persons of their right to comment and to request a hearing. 
All retirees of the Employer (including both those retirees who 
participate in a Plan and those terminated participants in a Plan who 
are not yet receiving retirement benefits) will be notified in a 
separate first class mailing by Silverstone Group, Inc., within sixty 
(60) calendar days of the date of publication of the notice of the 
proposed exemption in the Federal Register. Such newsletter will 
contain a copy of the Notice, as it appears in the Federal Register on 
the date of publication, and a copy of the Supplemental Statement, as 
required, pursuant to 29 CFR 2570.43(b)(2), which will advise such 
interested persons of their right to comment and to request a hearing.

FOR FURTHER INFORMATION CONTACT: Christopher Motta of the Department, 
telephone (202) 693-8544. (This is not a toll-free number.)

Fifth Third Bank, Located in Grand Rapids, Michigan

[Application No. D-11101]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Employee Retirement Income Security 
Act of 1974 (ERISA or the Act) and section 4975(c)(2) of the Internal 
Revenue Code of 1986 (the Code) and in accordance with the procedures 
set forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 
10, 1990). Old Kent Bank and Trust Company and its affiliates 
previously received the approval of the Department to engage in similar 
transactions (October 15, 1999) (FAN 99-25E) pursuant to PTE 96-62 (61 
FR 39988, July 31, 1996) (EXPRO).
Section I--Proposed Exemption for Receipt of Fees
    If the proposed exemption is granted, the restrictions of sections 
406(a) and 406(b) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (F) of the Code, shall not apply effective on or 
after April 2, 2001, to: the receipt of fees by Fifth Third Bank, a 
Michigan banking corporation, and its affiliates (Fifth Third), from 
the Kent Funds prior to October 26, 2001 or from the Fifth Third Funds 
on or after October 26, 2001 (the Funds), open-end investment companies 
registered under the Investment Company Act of 1940 (the 1940 Act), for 
acting as an investment adviser for the Funds, as well as for acting as 
administrator, custodian, accountant, transfer agent, and provider of 
other services to the Funds (including brokerage services in the 
future) which are not advisory services (collectively referred to as 
``Secondary Services'' as defined in Section III(h) below), in 
connection with the purchase and sale of shares of the Funds by certain 
employee benefit plans and individual retirement accounts (the Plans) 
for which Fifth Third serves as fiduciary with investment discretion; 
provided that the conditions set forth in Section II are met.
Section II--Conditions
    (a) No sales commissions, redemption fees, or other fees are paid 
by the Plans in connection with the purchase or sale of shares of the 
Funds.
    (b) The price paid or received by a Plan for shares in the Funds is 
the net asset value per share, as defined in Section III(e), at the 
time of the transaction, and is the same price that would have been 
paid or received for the shares by any other investor at that time.
    (c) Fifth Third, including any officer or director of Fifth Third, 
does not purchase or sell shares of the Funds from or to any Plan.
    (d) Each Plan receives a credit, through a cash rebate that will be 
accrued daily and, if the Plan so elects, will be automatically 
invested in shares of the money market funds selected by the Plan, of 
such Plan's proportionate share of all fees charged to the Funds by

[[Page 37540]]

Fifth Third for investment advisory services, including any investment 
advisory fee paid to third-party subadvisors, not later than two 
business days (or, prior to the date this final exemption is published 
in the Federal Register, one business day) after receipt of such fees 
by Fifth Third. The crediting of all investment advisory fees to the 
Plans by Fifth Third is audited by an independent accounting firm on at 
least an annual basis to verify the proper crediting of the fees to 
each Plan.
    (e) The combined total of all fees received by Fifth Third for the 
provision of services to a Plan, and in connection with the provision 
of services to the Funds in which the Plan may invest, is not in excess 
of ``reasonable compensation'' within the meaning of section 408(b)(2) 
of ERISA.
    (f) Fifth Third does not receive any fees payable pursuant to Rule 
12b-1 under the 1940 Act in connection with the transactions.
    (g) The Plans are not employee benefit plans sponsored or 
maintained by Fifth Third.
    (h) A second fiduciary acting for the Plan, who is independent of 
and unrelated to Fifth Third (the Second Fiduciary), receives, in 
advance of any initial investment by the Plan in a Fund, full and 
detailed written disclosure of information concerning the Fund, 
including, but not limited to:
    (1) A current prospectus for each Fund in which a Plan is 
considering investing;
    (2) A statement describing the fees for investment advisory or 
similar services and any Secondary Services and all other fees to be 
charged to or paid by the Plan and by the Fund, including the nature 
and extent of any differential between the rates of such fees;
    (3) The reasons why Fifth Third may consider such investment to be 
appropriate for the Plan;
    (4) A statement describing whether there are any limitations 
applicable to Fifth Third with respect to which assets of the Plan may 
be invested in the Fund, and, if so, the nature of such limitations; 
and
    (5) Upon the request of the Second Fiduciary, a copy of the 
proposed exemption and/or a copy of the final exemption, if granted, 
once such documents are published in the Federal Register.
    (i) After consideration of the information described in paragraph 
(h) above, the Second Fiduciary authorizes in writing the investment of 
assets of the Plan in each particular Fund, the fees to be paid by such 
Fund to Fifth Third (including fees for investment advisory services), 
and the cash rebate to the Plan of fees received by Fifth Third from 
the Fund for investment advisory services.
    (j) All authorizations made by a Second Fiduciary regarding 
investments in a Fund and the fees paid to Fifth Third (including fees 
for investment advisory services) are subject to an annual 
reauthorization wherein any such prior authorization referred to in 
paragraph (i) above shall be terminable at will by the Plan, without 
penalty to the Plan, upon receipt by Fifth Third of written notice of 
termination. A form expressly providing an election to terminate the 
authorization described in paragraph (i) above (the ``Termination 
Form'') with instructions on the use of the form must be provided to 
the Second Fiduciary at least annually. However, if the Termination 
Form has been provided to the Second Fiduciary pursuant to paragraph 
(k) or paragraph (1) below, then the Termination Form need not be 
provided again for an annual reauthorization pursuant to this paragraph 
unless at least six months have elapsed since the form was provided in 
connection with the additional service or fee increase. The 
instructions for the Termination Form must include the following 
information:
    (1) The authorization is terminable at will by the Plan, without 
penalty to the Plan, upon receipt by Fifth Third's investment services 
group of written notice from the Second Fiduciary; and
    (2) Failure to return the Termination Form will result in continued 
authorization of Fifth Third to engage in the transactions described 
above on behalf of the Plan.
    (k) The Second Fiduciary of each Plan invested in a particular Fund 
receives full written disclosure, in a statement separate from the Fund 
prospectus, of any proposed increases in the rates of fees charged by 
Fifth Third to the Fund for Secondary Services at least 30 days prior 
to the implementation of such increase in fees. The disclosure will be 
accompanied by a copy of the Termination Form, with instructions as 
described in paragraph (j) above. The Second Fiduciary will also 
receive full written disclosure, prior to the effective date, in a Fund 
prospectus or otherwise, of any increases in the rates of fees charged 
by Fifth Third to the Fund for investment advisory services even though 
such fees will be rebated as required by paragraph (d) above.
    (l) In the event that Fifth Third provides an additional Secondary 
Service to a Fund for which a fee is charged or there is an increase in 
the amount of fees paid by the Fund to Fifth Third for any Secondary 
Services resulting from a decrease in the number of services performed 
by Fifth Third for such fees in connection with a previously authorized 
Secondary Service, Fifth Third will, at least 30 days in advance of the 
implementation of such additional service or effective fee increase, 
provide written notice to the Second Fiduciary explaining the nature 
and the amount of such services or of the effective increase in fees of 
the affected Fund. Such notice shall be accompanied by the Termination 
Form.
    (m) On an annual basis, Fifth Third provides the Second Fiduciary 
of a Plan investing in the Fund with:
    (1) A copy of the current prospectus for the Fund and, upon such 
Second Fiduciary's request, a copy of the Statement of Additional 
Information for such Fund which contains a description of all fees paid 
by the Fund to Fifth Third (including fees for investment advisory 
services);
    (2) A copy of the annual financial disclosure report of the Fund in 
which such Plan is invested, which includes information about the Fund 
portfolios as well as audit findings of an independent auditor, within 
60 days of the preparation of the report;
    (3) Oral or written responses to inquiries of the Second Fiduciary 
as they arise; and
    (4) With respect to each of the Funds in which a Plan invests, in 
the event such Fund places brokerage transactions with Fifth Third, a 
statement specifying:
    (i) The total (expressed in dollars) of brokerage commissions of 
each Fund's investment portfolio that are paid to Fifth Third by such 
Fund;
    (ii) The total (expressed in dollars) of brokerage commissions of 
each Fund's investment portfolio that are paid by such Fund to 
brokerage firms unrelated to Fifth Third;
    (iii) The average brokerage commissions per share (expressed as 
cents per share) paid to Fifth Third by each investment portfolio of a 
Fund; and
    (iv) The average brokerage commissions per share (expressed as 
cents per share) paid by each investment portfolio of a Fund to 
brokerage firms unrelated to Fifth Third.
    (o) All dealings between the Plans and the Fund are on a basis no 
less favorable to the Plans than dealings with other shareholders of 
the Fund.
    (p) Fifth Third maintains for a period of six years the records 
necessary to enable the persons described in paragraph (q) 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 Fifth 
Third, the records are lost or

[[Page 37541]]

destroyed prior to the end of the six-year period, and (ii) no party in 
interest other than Fifth Third shall be subject to the civil penalty 
that may be assessed under section 502(i) of ERISA or to the taxes 
imposed by section 4975(a) and (b) of the Code if the records are not 
maintained or not available for examination as required by paragraph 
(q) below.
    (q)(1) Except as provided in paragraph (p) above and 
notwithstanding any provisions of section 504(a)(2) and (b) of ERISA, 
the records referred to in paragraph (p) above are unconditionally 
available at their customary location for examination during normal 
business hours by:
    (i) Any duly authorized employee or representative of the 
Department of Labor or the Internal Revenue Service;
    (ii) Any fiduciary of a Plan who has authority to acquire or 
dispose of shares of the Funds owned by the Plans, or any duly 
authorized employee or representative of such fiduciary; and
    (iii) Any participant or beneficiary of a Plan or duly authorized 
employee or representative of such participant or beneficiary.
    (2) None of the persons described in subparagraph (1)(ii) and (iii) 
above shall be authorized to examine trade secrets of Fifth Third, 
commercial or financial information which is privileged or 
confidential, or records that are unrelated to the Plan(s) that the 
fiduciary serves or under which the participant or beneficiary is 
entitled to receive benefits.
    (r) Within sixty (60) days of June 24, 2003, Fifth Third will file 
Form 5330 with the Internal Revenue Service and pay the excise taxes 
applicable under section 4975(a) of the Code in connection with the 
error in processing rebates of investment advisory fees during the 
period beginning October 26, 2001 and ending on March 1, 2003.
Section III--Definitions
    For purposes of this exemption:
    (a) ``Fifth Third'' means Fifth Third Bank, a Michigan banking 
corporation, and any affiliate thereof (as affiliate is defined below 
in paragraph (b) of this section).
    (b) An affiliate of a person includes:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (c) ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    (d) ``Fund'' or ``Funds'' means the Kent Funds prior to October 26, 
2001, the Fifth Third Funds on and after October 26, 2001, and each 
separate investment portfolio thereof, or any other diversified open-
end investment company registered under the 1940 Act for which Fifth 
Third serves as investment advisor and may also serve (or may in the 
future serve) as administrator, custodian, accountant, or transfer 
agent, or provide some other Secondary Service (as defined in paragraph 
(h) below) which has been approved by the Funds.
    (e) ``Net asset value'' means the amount for purposes of pricing 
all purchases and sales, calculated by dividing the value of all 
securities, determined by a method as set forth in a Fund's prospectus 
and statement of additional information, and other assets belonging to 
the Fund or portfolio of the Fund, less the liabilities charged to each 
such portfolio or Fund, by the number of outstanding shares.
    (f) ``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, a sister, or 
a spouse of a brother or a sister.
    (g) ``Second Fiduciary'' means a fiduciary of a Plan who is 
independent of and unrelated to Fifth Third. For purposes of this 
exemption, the Second Fiduciary will not be deemed to be independent of 
and unrelated to Fifth Third if:
    (1) Such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with Fifth Third;
    (2) Such fiduciary, or any officer, director, partner, employee, or 
relative of the fiduciary is an officer, director, partner, or employee 
of Fifth Third (or is a relative of such persons); or
    (3) Such fiduciary directly or indirectly receives any compensation 
or other consideration for his or her own personal account in 
connection with any transaction described in this exemption.
    If an officer, director, partner, or employee of Fifth Third (or 
relative of such persons), is a director of such Second Fiduciary, and 
if he or she abstains from participation in (i) the choice of the 
Plan's investment advisor, (ii) the approval of such purchase or sale 
between the Plan and a Fund, and (iii) the approval of any change in 
fees charged to or paid by the Plan in connection with any of the 
transactions described in Section II above, then subparagraph (2) above 
shall not apply.
    (h) ``Secondary Service'' means a service other than an investment 
management, investment advisory, or similar service that is (or will in 
the future be) provided by Fifth Third to a Fund, including (but not 
limited to) brokerage services, custodian services, transfer and 
dividend disbursing agent services, administrator or sub-administrator 
services, accounting services, and shareholder servicing agent 
services.
    (i) ``Termination Form'' means the form supplied to the Second 
Fiduciary that expressly provides an election to the Second Fiduciary 
to terminate on behalf of a Plan the authorization described in 
paragraph (i) of Section II above. Such Termination Form may be used at 
will by the Second Fiduciary to terminate an authorization without 
penalty to the Plan and to notify Fifth Third in writing to effect a 
termination by selling the shares of the Fund held by the Plan 
requesting such termination within one business day following receipt 
by Fifth Third of the form; provided that if, due to circumstances 
beyond the control of Fifth Third, the sale cannot be executed within 
one business day, Fifth Third shall have one additional business day to 
complete such sale.
    Effective Date: The proposed exemption, if granted, will be 
effective as of April 2, 2001, the date that Old Kent Financial 
Corporation, the holding company of Fifth Third, merged with and into 
Fifth Third Financial Corporation, a newly formed, wholly-owned 
subsidiary of Fifth Third Bancorp.
Summary of Facts and Representations
    1. Fifth Third (formerly Old Kent Bank and Trust Company), a state-
chartered Michigan banking corporation (Fifth Third or the Applicant) 
with its principal offices in Grand Rapids, Michigan, is a subsidiary 
of Fifth Third Financial Corporation (FTFC) which is itself a wholly-
owned subsidiary of Fifth Third Bancorp (FT Bancorp), a regional bank 
holding company headquartered in Cincinnati, Ohio. As of December 31, 
2002, the total assets of Fifth Third were approximately $81 billion. 
Fifth Third serves as a fiduciary with investment discretion to various 
employee benefit plans.
    Fifth Third Bank, an Ohio banking corporation (FTB (Ohio)), a 
wholly-owned subsidiary of FT Bancorp, provides Secondary Services to 
the Funds, and provided investment advisory services to the Kent Funds 
from April 2, 2001, through April 30,

[[Page 37542]]

2001. Its principal offices are in Cincinnati, Ohio. Fifth Third Asset 
Management Inc. (FTAM), a registered investment advisor and wholly 
owned subsidiary of FTB (Ohio), serves as investment advisor to the 
Funds, with the exception of the Fifth Third Pinnacle Funds. FTAM's 
principal offices are in Cincinnati, Ohio. Heartland Capital 
Management, Inc. (Heartland), a registered investment advisor and 
wholly owned subsidiary of FTFC, serves as investment advisor to the 
Fifth Third Pinnacle Funds, an investment portfolio of the Funds. 
Heartland's principal offices are in Indianapolis, Indiana. BISYS Fund 
Services, Inc. (BISYS) is a Delaware corporation, which provides 
certain Secondary Services to the Funds on behalf of Fifth Third. Its 
principal offices are in Columbus, Ohio. The parties involved in the 
transactions described in this proposed exemption include Fifth Third 
(the Applicant), FTB (Ohio), FTAM, Heartland, BISYS, the Funds, and the 
Plans. The proposed exemption would also cover other Fifth Third 
affiliates which serve or may in the future serve as fiduciaries with 
investment discretion to employee benefit plans.
    2. The Funds include the Kent Funds and the Fifth Third Funds (the 
Funds).\11\ The Kent Funds, (established on May 9, 1986) merged into 
the Fifth Third Funds (established on September 15, 1988) effective 
October 26, 2001. The Funds are Massachusetts business trusts organized 
as open-end, diversified investment management companies registered 
under the Investment Company Act of 1940, as amended, consisting of a 
number of separate investment portfolios (Portfolios), each with a 
different investment objective.
---------------------------------------------------------------------------

    \11\ Where applicable, the term ``Funds'' as used herein also 
refers to any other diversified open-end investment company 
registered under the 1940 Act for which Fifth Third may in the 
future serve as investment advisor. Where required by the context, 
the term ``Fund'' when used herein in the singular refers both to 
the Kent Funds prior to October 26, 2001, and to the Fifth Third 
Funds on and after October 26, 2001.
---------------------------------------------------------------------------

    The Fifth Third Funds had combined assets as of December 31, 2002 
of $11,714,062,533.77. This proposed exemption relates to all of the 
Portfolios of the Funds in existence on or after April 2, 2001, 
including future Portfolios, and to any other investment company for 
which Fifth Third may provide investment advisory services and/or 
Secondary Services and which may be made available for investment to 
the Plans. The Plans involved in the proposed transactions are employee 
benefit plans (as defined in section 3(3) of ERISA) for which Fifth 
Third serves as fiduciary with discretionary authority over the 
investment of their assets, as well as individual retirement accounts 
with respect to which Fifth Third exercises investment discretion. The 
Plans include pension, profit sharing, and stock bonus plans of various 
sizes, as well as thrift and section 401(k) plans. However, Fifth 
Third's records are kept in terms of retirement accounts rather than 
plans. (There are typically multiple retirement accounts set up for a 
single plan.)
    As of December 31, 2002, Fifth Third served as fiduciary for 17,336 
retirement accounts, with assets ranging from approximately $30,000 to 
$1 billion. Of these, 1,271 were defined benefit and 16,065 were 
defined contribution retirement accounts. Of the defined contribution 
retirement accounts, 12,850 were related to cash or deferred 
arrangements (i.e., section 401(k) plans). Fifth Third had full 
investment discretion with respect to 10,054 retirement accounts and 
was the directed trustee of 7,282 retirement accounts.
    3. Fifth Third seeks retroactive and prospective relief to permit 
the Applicant and its affiliates, as fiduciaries exercising investment 
discretion over the assets of the Plans, to cause the Plans to purchase 
and sell shares of the Kent Funds (prior to October 26, 2001) or the 
Fifth Third Funds (on and after October 26, 2001), open-end, registered 
investment companies from which Fifth Third receives fees for the 
provision of investment advisory services and certain Secondary 
Services. Fifth Third, formerly known as Old Kent Bank and Trust Co. 
(Old Kent Bank), sought and received PTE 92-67, 57 FR 38859 (Aug. 27, 
1992) on behalf of itself, affiliates, and subsidiaries. PTE 92-67 
related to the cash rebate to the Plans of investment advisory fees 
paid to Old Kent Bank by the Funds. PTE 77-4 provides a class exemption 
from section 406 of the Act and section 4975 of the Code for a plan's 
purchases or sales of mutual fund shares, subject to certain 
conditions, where the fund's investment advisor is a plan fiduciary or 
affiliated with a plan fiduciary and not an employer of employees 
covered by the plan. Prior to April 2, 2001, Lyon Street Asset 
Management (``LSAM''), a subsidiary of the Applicant, served as 
investment advisor to the Kent Funds. Old Kent Bank subsequently 
obtained relief under EXPRO for transactions substantially similar to 
those which are the subject of this application, the receipt of fees by 
Old Kent Bank and its affiliates from the Funds for investment advisory 
services and for Secondary Services (provided to the Kent Funds by Old 
Kent Bank and its affiliates, as well as by BISYS, an unrelated party 
to such Funds). This relief under FAN 99-25E replaced the exemptive 
relief under PTE 92-67.
    4. The Applicant states that effective April 2, 2001, Old Kent 
Financial Corporation (OKFC), the holding company of the Applicant, 
merged with and into FTFC, a newly formed wholly-owned subsidiary of FT 
Bancorp, the holding company of FTB (Ohio), and other entities. OKFC 
was acquired by FT Bancorp in a stock transaction and as a result of 
the merger, Old Kent Bank became and remains a wholly owned subsidiary 
of FTFC.\12\ Old Kent Bank was renamed Fifth Third Bank and continues 
to be a Michigan banking corporation. Its Board of Directors remains 
substantially unchanged, and it is the legal entity that operates all 
of the ongoing former Old Kent Bank banking and trust business 
locations. There was no transfer of ownership of the banking and trust 
operations of Old Kent Bank to any unrelated entity, except that some 
duplicate branch locations were divested and certain nonbanking lines 
of business were sold.
---------------------------------------------------------------------------

    \12\ The Applicant states that FT Bancorp and OKFC had initially 
entered into an Agreement and Plan of Merger dated as of November 
20, 2000 (the Original Merger Agreement). The Original Merger 
Agreement was amended and restated as of January 16, 2001 (the 
Restated Merger Agreement). FTFC was also a party to the Restated 
Merger Agreement. Old Kent Bank was a wholly owned subsidiary of 
OKFC with business locations throughout Michigan and in Illinois. 
Upon consummation of the merger pursuant to the Restated Merger 
Agreement, OKFC merged with and into FTFC, so that FTFC was the 
surviving corporation. The merger was intended and consummated as a 
reorganization under the provisions of section 368 of the Code, as 
well as a plan of reorganization for purposes of sections 354, 361, 
and 368 of the Code. The merger was consummated in accordance with 
the Michigan Business Corporation Act and the Ohio General 
Corporation Law. The surviving corporation, FTFC, continues its 
corporate existence under the laws of the state of Ohio. Subject to 
normal exclusions and adjustments, at the effective time of the 
merger, each outstanding share of common stock of OKFC was exchanged 
for a fractional share of the common stock of FT Bancorp. The 
exchange ratio was 0.74, so that each share of common stock of OKFC 
became a 0.74 fractional share of common stock of FT Bancorp. The 
merger was effective at 12:01 a.m. on April 2, 2001.
---------------------------------------------------------------------------

    5. In FAN 99-25E, LSAM, a subsidiary of Old Kent Bank (now Fifth 
Third Bank), was described as the investment advisor to the Kent Funds, 
an open-end, registered investment company. Following the merger, the 
Applicant states that FTB(Ohio) created a new asset management 
subsidiary, FTAM. FTAM began advising the Kent Funds as of April 30, 
2001.\13\ FTAM

[[Page 37543]]

employed many of the same individuals who staffed LSAM, and those 
individuals continued to advise the Kent Funds after the merger. Thus, 
the Applicant represents that the change to FTAM did not involve a 
change in actual control or management of the Kent Funds. Further, the 
investment advisory fees paid by the Kent Funds to FTB(Ohio) for April 
2001 and to FTAM thereafter were identical to the fees that the Kent 
Funds previously paid to LSAM. Also in FAN 99-25E, Old Kent Bank, Old 
Kent Securities Corporation, and other affiliates of Old Kent Bank were 
described as performing secondary services for the Kent Funds. Old Kent 
Securities Corporation merged with and into Fifth Third Securities 
Corporation, a subsidiary of FTFC. Fifth Third Securities Corporation 
employed many of the same individuals who staffed Old Kent Securities 
Corporation. However, after the merger, secondary services were 
provided to the Kent Funds by FTB(Ohio) under substantially identical 
fee arrangements. Additionally, FAN 99-25E mentioned BISYS, an 
unrelated entity, as a provider of secondary services to the Kent 
Funds. After the merger, BISYS continued to provide secondary services 
to the Kent Funds as FTB(Ohio)'s agent.
---------------------------------------------------------------------------

    \13\ See below, during the period from April 2, 2001 (the date 
of the merger) through April 30, 2001, the Kent Funds were advised 
by FTB(Ohio) pursuant to an Interim Advisory Agreement. This Interim 
Advisory Agreement was assumed by FTAM as of April 30, 2001.
---------------------------------------------------------------------------

    LSAM ceased to serve as investment advisor to the Kent Funds 
effective April 2, 2001. From April 2, 2001, through April 30, 2001, 
the Kent Funds were advised directly by FTB (Ohio) pursuant to an 
Interim Advisory Agreement. Effective April 30, 2001, the Interim 
Advisory Agreement was assumed by FTAM, a subsidiary of FTB (Ohio), 
which provided investment advisory services to the Kent Funds from 
April 30, 2001, through October 26, 2001. Secondary Services were 
provided to the Kent Funds between April 2, 2001, and October 26, 2001, 
by affiliates of the Applicant, including FTB (Ohio), and by BISYS. 
Effective October 26, 2001, the Kent Funds were merged with and into 
the Fifth Third Funds. All of the assets in each of the portfolios of 
the Kent Funds were transferred to newly created shell portfolios under 
the Fifth Third Funds, and shareholders of the Kent Funds became 
shareholders of the Fifth Third Funds. FTAM serves as investment 
advisor to the Fifth Third Funds, with the exception of the Fifth Third 
Pinnacle Funds, which is advised by Heartland. Secondary Services are 
provided to the Fifth Third Funds by FTB (Ohio) and by BISYS. Other 
Fifth Third affiliates may in the future also provide investment 
advisory services and Secondary Services to the Fifth Third Funds.
    The Kent Funds themselves continued until October 26, 2001. On that 
date, all of the assets in each of the portfolios of the Kent Funds 
were transferred to newly created shell portfolios under the Fifth 
Third Funds, an open-end, registered investment company. The Applicant 
represents that (1) the roles of all service providers, including FTAM, 
FTB(Ohio), and BISYS, are the same with respect to the Fifth Third 
Funds as they had been with respect to the Kent Funds prior to October 
26, 2001; (2) the fees paid by the new portfolios of the Fifth Third 
Funds to FTAM and to FTB(Ohio), BISYS, and any other secondary service 
providers are identical to the fees previously paid by the Kent Funds; 
(3) FTB(Ohio) has formally committed itself to maintaining total fund 
operating expenses (as a percentage of total assets), until at least 
April 2, 2003, at a level less than or equal to the level of such 
expenses for each corresponding Kent Fund as of April 2, 2001 (the date 
of the merger, as described above); and (4) the operation of the cash 
rebates to plan accounts, as described in FAN 99-25E, remains 
unchanged.
    6. Fifth Third requests that FAN 99-25E be replaced by this 
proposed exemption effective as of April 2, 2001 and requests that the 
proposed exemption contain one prospective modification to the 
described transactions.
    Fifth Third requests relief for the following transactions:
    (a) The payment of investment advisory fees by the Plans to Fifth 
Third with respect to assets of the Plans invested in the Funds. Each 
Plan will receive a rebate of its proportionate share of investment 
advisory fees charged to the Funds by Fifth Third. The Plans will 
receive such rebate in the form of cash or, if an election has been 
made by a Plan, in the form of a cash rebate applied to the purchase of 
additional money market funds shares, in either case within two 
business days of the receipt of the fees by Fifth Third. If a Plan 
elects to have its cash rebate applied toward the purchase of 
additional shares, the fair market value of such shares on the date of 
purchase equals the amount of the cash rebate.
    (b) The receipt and the retention of fees paid by the Funds to 
Fifth Third for certain Secondary Services provided to the Funds. Fifth 
Third currently acts as administrator, transfer agent, and fund 
accountant for the Funds, and may in the future provide additional 
Secondary Services to the Funds. The fees for such services are based 
on a percentage of the Funds' average daily net assets. Such fees are 
accrued daily and paid monthly.
    In addition to the changes to the parties, there is one difference 
in the above transactions from those described in FAN 99-25E. The 
Applicant requests that, with respect to the transactions occurring on 
and after the date of publication in the Federal Register of the notice 
granting this exemption, Fifth Third be allowed to credit a Plan, 
through a cash rebate that will be accrued daily and, if the Plan so 
elects, will be automatically invested in shares of the money market 
funds selected by the Plan, of such Plan's proportionate share of all 
fees charged to the Funds by Fifth Third for investment advisory 
services, including any investment advisory fee paid to third-party 
subadvisors, not later than two business days after receipt of such 
fees by Fifth Third. The crediting of all investment advisory fees to 
the Plans by Fifth Third will continue to be audited by an independent 
accounting firm on at least an annual basis to verify the proper 
crediting of the fees to each Plan.
    Fifth Third asserts that the request for up to two business days to 
effect the rebate is primarily because of the potentially larger number 
of accounts that may require rebating due to the merger of the OKFC 
group of companies and the FT Bancorp group of companies. Specifically, 
the Applicant represents that the number of accounts that currently 
receive rebates is 662; the number that potentially could participate 
in the rebating program is 6,355. Although Fifth Third expects to be 
able to effect the rebate in one business day after receipt of the fees 
in most cases, the Applicant believes the two business days would give 
Fifth Third more time to deal with any unexpected glitch in the 
processing of a large number of rebates without having to be concerned 
about violating the terms of the exemption and thus possibly engaging 
in a prohibited transaction.
    7. The Applicant represents that the procedures set forth in FAN 
99-25E have been followed to date, even though the relevant parties 
have changed due to the merger of OKFC, the holding company of Old Kent 
Bank (the prior name of Fifth Third Michigan), with and into FTFC, a 
newly formed wholly-owned subsidiary of FT Bancorp, effective April 2, 
2001. The appropriate officers of Fifth Third Bank acknowledge that the 
procedures set forth in FAN 99-25E have been

[[Page 37544]]

followed despite the change in the relevant parties.
    8. The Applicant represents that, prior to investing a Plan's 
assets in a Fund, Fifth Third will obtain the advance approval of an 
independent second fiduciary of the Plan, who will generally be the 
Plan's named fiduciary, trustee, or sponsoring employer (the Second 
Fiduciary). Fifth Third will provide the Second Fiduciary with a 
current prospectus for the Funds, a statement describing the fees to be 
charged to or paid by the Plan and by the Funds (including fees for 
investment advisory or similar services and any Secondary Services), a 
statement of the reasons why Fifth Third considers the investment to be 
appropriate for the Plan, and a statement describing any applicable 
limitation with respect to which assets of the Plan may be invested in 
the Funds.
    9. Under section 408(a) of ERISA, the Department may not grant an 
exemption unless a determination is made that such exemption is (i) 
administratively feasible; (ii) in the interests of the plan and of its 
participants and beneficiaries, and (iii) protective of the rights of 
the plan's participants and beneficiaries.
    Fifth Third asserts that the exemption would be administratively 
feasible because it is substantially similar to FAN 99-25E, except for 
changes to the parties and limited additional relief provided on a 
prospective basis to allow the maximum permitted time for rebating 
Funds-level fees to Plans to increase to two business days. The 
Applicant does not believe that these changes will significantly affect 
the protective nature of the exemption. The exemption establishes 
objective criteria for its application, and compliance with such 
criteria can be readily determined and audited. Fifth Third states that 
the proposed exemption is in the interests of investing plans and their 
participants and beneficiaries since investing assets of a Plan in 
mutual funds such as the Funds provides the Plans, and their 
participants and beneficiaries, with certain advantages which are not 
available through investment in commingled investment trusts (CITs), 
the alternative collective investment vehicle in which Fifth Third 
invests assets of employee benefit plans. Fifth Third notes that, 
because mutual funds share prices are published in daily newspapers, 
individuals are able to track the performance of their accounts on a 
daily basis. The daily deposit and redemption features of mutual funds 
allow for investment of new monies without delay and allow assets of 
the Plan to realize investment returns up to the date of redemption. 
Additionally, the various Portfolios offered by the Funds allow the 
investment managers or participants to transfer their investments 
between Portfolios with different investment objectives more promptly 
than could be done using CITs. Distributions can also be made in Funds 
shares, which eliminates any cost that might be associated with 
reinvesting cash distributions into new forms of investments. In sum, 
the Funds are an efficient alternative for the collective investment of 
assets, and the Plans will benefit from these efficiencies.
    If the exemption is not granted, Plans for which Fifth Third serves 
as a fiduciary with investment discretion will be precluded from 
investing their assets in the Funds using the rebate mechanism. Fifth 
Third believes that the Funds represent appropriate investment vehicles 
that should be made available to the Plans.
    10. On February 25, 2003, Fifth Third informed the Department that 
the Applicant recently discovered that an inadvertent error was made in 
processing rebates of investment advisory fees to certain retirement 
accounts. The system Fifth Third has installed for processing rebates 
involves assigning a code to each asset (i.e., each Fifth Third Fund) 
held in an account. The assigned code establishes the factor based on 
which the rebate is accrued and paid. The account itself is then coded 
to identify if that account is or is not to receive rebates. Fifth 
Third discovered that although each account was correctly coded, the 
system identified certain asset codes as ineligible to pay rebates to 
the accounts. As a result, accounts holding assets with those asset 
codes did not receive the full rebate to which they were entitled.
    Fifth Third states that this error appears to have initially 
occurred at the time of the merger of the Kent Funds into the Fifth 
Third Funds effective October 26, 2001. Thus, the rebate of the fees 
paid for October 2001 was the first rebate affected by the error. Both 
the number of plans and IRAs affected and the dollar amounts involved 
are relatively small. Fifth Third has determined that 44 tax-qualified 
plans and 32 IRAs are involved. The amounts that should have been 
rebated and were not are $39,736.08 for tax-qualified plans and 
$8,120.09 for IRAs.
    Fifth Third provides that it is correcting this error by returning 
the principal amount of the rebates to the applicable plans and IRAs 
plus earnings to the date of correction. The earnings will be 
calculated using the method set forth in the Department of Labor's 
Voluntary Fiduciary Correction (``VFC'') Program. Thus, the earnings 
added to each rebated amount will be the greater of ``Lost Earnings'' 
or the ``Restoration of Profits,'' both as defined in the VFC Program. 
See Sections 5(b)(5) and 5(b)(6) of the VFC Program. Fifth Third 
represents that the rebates are now functioning properly for all of the 
Fifth Third Funds. Thus, the fee rebates shown on the account 
statements for the tax-qualified plans and the IRAs will be correct 
going forward, beginning with the posting in early March for the fees 
paid in February 2003.
    Fifth Third represents that within sixty (60) days of the date of 
publication in the Federal Register of the notice granting this 
exemption, Fifth Third will file Form 5330 with the Internal Revenue 
Service and pay the excise taxes applicable under section 4975(a) of 
the Code in connection with the error in processing rebates of 
investment advisory fees during the period beginning October 26, 2001 
and ending on March 1, 2003.
    11. In summary, First Third represents that the transactions 
described herein will satisfy the statutory criteria of section 408(a) 
of ERISA and section 4975(c)(2) of the Code for the following reasons: 
(a) The transactions will allow the Plans to continue to enjoy the 
advantages of investment in mutual Funds, including more ready access 
to information regarding performance, thus enabling Plan fiduciaries 
and participants to make more informed decisions regarding their 
investments; (b) prior to the initial investment of Plan assets in the 
Funds, a second, independent fiduciary of each Plan will receive full 
disclosure regarding the proposed investment and the fees to be 
received by Fifth Third, and has the opportunity to approve or 
disapprove the investment; (c) no sales commissions or redemption fees 
will be paid by the Plans in connection with the acquisition or sale of 
shares of the Funds; and (d) all dealings among the Plans, the Funds, 
and Fifth Third will be on a basis no less favorable to the Plans than 
such dealings with the other shareholders of the Funds.
    Notice to Interested Persons: Fifth Third will furnish a copy of 
the notice of the proposed exemption along with the supplemental 
statement described at 29 CFR 2570.43(b)(2) to the named fiduciary of 
any affected Plan that Fifth Third serves as a fiduciary with 
investment discretion over such Plan's assets. The notice will be 
delivered by first class mail within 15 days of the date of publication 
of the proposed exemption in the Federal Register.

[[Page 37545]]


FOR FURTHER INFORMATION CONTACT: Ms. Wendy McColough of the Department, 
telephone (202) 693-8561. This is not a toll-free number.

Raleigh Pathology Laboratory Associates, P.A. Profit Sharing Plan (the 
Profit Sharing Plan), Located in Raleigh, NC

[Application No. D-11171]

Proposed Exemption

    The Department of Labor is considering granting an exemption under 
the authority of section 408(a) of the Act (or ERISA) and section 
4975(c)(2) of the Code and in accordance with the procedures set forth 
in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). 
If the exemption is granted, the restrictions of sections 406(a), 
406(b)(1) and (b)(2) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code,\14\ shall not apply to the 
proposed exchange of an unimproved waterfront lot (the Pine Knoll 
Shores Lot) owned by the Plan and allocated to the individually-
directed account (the Account) in the Plan of James R. Edwards, M.D., 
for one unimproved tract of land (Parcel One) owned personally by Dr. 
Edwards and his spouse, Mrs. Delores Edwards.
---------------------------------------------------------------------------

    \14\ For purposes of this proposed exemption, references to 
specific provisions of Title I of the Act, unless otherwise 
specified, refer also to the corresponding provisions of the Code.
---------------------------------------------------------------------------

    This proposed exemption is subject to the following conditions:
    (a) The exchange of the Pine Knoll Shores Lot between the Account 
and Dr. and Mrs. Edwards for Parcel One is a one-time transaction.
    (b) The fair market value of the Pine Knoll Shores Lot and Parcel 
One is determined by qualified, independent appraisers, who will update 
their appraisal reports at the time the exchange is consummated.
    (c) For purposes of the exchange, Parcel One has a fair market 
value that is no less than the fair market value of the Pine Knoll 
Shores Lot at the time the transaction is consummated.
    (d) The terms and conditions of the exchange are at least as 
favorable to the Account as those obtainable in an arm's length 
transactions with an unrelated party.
    (e) The exchange does not involve more than 25 percent of the 
Account's assets.
    (f) The exchange allows the Account to divest itself of property 
that is susceptible to hurricane damage and high maintenance costs, and 
it permits the Account to acquire virtually maintenance-proof property 
having increased liquidity.
    (g) Dr. Edwards is the only participant in the Plan whose Account 
is affected by the transaction and he desires that such transaction be 
consummated.
Summary of Facts and Representations
    1. Raleigh Pathology Laboratory Associates, P.A. (the Employer) of 
Raleigh, North Carolina, is a professional corporation. Through duly 
licensed physicians and other employees, the Employer provides 
professional pathology services to patients of Wake Medical Center, 
patients of health maintenance organizations and others.
    2. The Plan is a defined contribution plan which was established by 
the Employer, effective January 1, 2002, as a result of the merger of 
the Raleigh Pathology Laboratory Associates, P.A. Money Purchase 
Pension Plan (the Pension Plan), also sponsored by the Employer, into 
the Plan. As of December 31, 2001, which is the most recent date that 
financial information is available, the Plan had 20 participants and 
assets with an approximate aggregate fair market value of 
$13,885,737.83.
    3. The Plan is administered by 8 trustees (the Trustees). The 
Plan's current Trustees are James R. Edwards, M.D., Gordon B. LeGrand, 
M.D., Dana D. Copeland, M.D., D. Emerson Scarborough, M.D., Dennis E. 
Ose, M.D., Cheryl A. Szpak, M.D., George H. Clarke, M.D., and Shrinivas 
Rajagopalan.
    Pursuant to provisions of the Plan, each participant has the right 
to direct investments under such Plan for his or her own account. In 
such instances, the investments are earmarked for the account of the 
participants directing such investments.
    4. Dr. Edwards, a stockholder, director and an employee of the 
Employer, as well as a Trustee, has an individually-directed account in 
the Plan. As of May 5, 2002, the assets in Dr. Edwards's Account were 
valued at $2,143,643.53.
    5. Among the assets in Dr. Edward's Account is the Pine Knoll 
Shores Lot. This unimproved parcel of waterfront property is located at 
122 Arborvitae Court, Pine Knoll Shores, Carteret County, North 
Carolina. The Pine Knoll Shores Lot is also legally described as ``Lot 
11, Block TT, Section 5, Pine Knoll Shores Extension'' and it consists 
of approximately 9/10 of an acre of land. The property is not located 
in close proximity to any other property that is owned by Dr. Edwards.
    The Account acquired the Pine Knoll Shores Lot as a real estate 
investment for $65,000 from Romaine and Kathryn Howard, who were 
unrelated parties, on September 30, 1981. Because the Account paid the 
Howards cash consideration for the Pine Knoll Shores Lot, the property 
was not encumbered by a mortgage. Currently, there is no mortgage or 
other encumbrances existing on the property and it represents 
approximately 19 percent of the assets of Dr. Edward's Account.
    The Pine Knoll Shores Lot is located at the point where the Hoffman 
Inlet meets Bogue Sound. The lot has open water frontage on two full 
sides (approximately 202 feet on one side and 135 feet on the other). 
Although sea walls have been constructed on both sides of the property, 
they have required frequent maintenance since the North Carolina 
coastline is prone to hurricane damage.
    Since the Pine Knoll Shores Lot has been allocated to the Account, 
it has not been used by or leased to anyone, including parties in 
interest. However, the Account has incurred $36,307 in maintaining the 
sea wall, $14,853 in real estate taxes,\15\ and $7,571 for general 
maintenance for total expenses of approximately $58,731. Thus, together 
with the $65,000 acquisition price, the Account has expended $123,731 
in connection with its interest in the Pine Knoll Shores Lot.
---------------------------------------------------------------------------

    \15\ Although the Plan acquired the Pine Knoll Shores Lot in 
1981 and Dr. Edwards's Account began paying real estate taxes from 
that date, the applicant represents that Dr. Edwards has only been 
able to locate records relating to amounts paid for real estate 
taxes since 1992.
---------------------------------------------------------------------------

    6. The Pine Knoll Shores Lot has been most recently appraised by 
Edward Michael Lupton, a North Carolina Certified Real Estate 
Appraiser, who is affiliated with the appraisal firm of Putnam Real 
Estate of Morehead, North Carolina. In an appraisal report dated 
December 17, 2002, Mr. Lupton, a qualified, independent real estate 
appraiser, placed the fair market value of a fee simple interest in the 
Pine Knoll Shores Lot at $408,000 as of the same date as his report. In 
valuing the Pine Knoll Shores Lot, Mr. Lupton utilized the sales 
comparison approach because he believed this method would provide the 
most reliable indication of market value since other valuation methods 
were not applicable to vacant lots in the subject neighborhood.
    7. Because of ongoing expenses and the risk of further significant 
hurricane damage has left the Pine Knoll Shores Lot exposed to possible 
significant future losses, it is proposed that the Account divest 
itself of this property. Therefore, an administrative exemption is 
requested from the Department to

[[Page 37546]]

allow the Account to exchange the Pine Knoll Shores Lot for Parcel One. 
Although Parcel One does not officially exist at this time, it will be 
excised from a 20.9718 acre tract of land which is owned by Dr. and 
Mrs. Edwards and constitutes their homeplace. The subject property will 
occupy the southwest corner formed by the intersection of Brassfield 
Road and Cahill Road in Barton's Creek Township, Wake County, North 
Carolina and consist of approximately 4.017 acres of land. Further, 
Mrs. Edwards will, by quitclaim deed to Dr. Edwards, release her 
undivided interest in Parcel One. Following the exchange, Parcel One 
will constitute approximately 19 percent of the assets of the Account.
    8. Currently, boundary lines have been established to form Parcel 
One by Mr. Ronald Thomas, an independent appraiser who is affiliated 
with the real estate appraisal firm of Worthy & Wachtel Inc. of 
Raleigh, North Carolina. In an appraisal report dated December 29, 
2002, Mr. Thomas, using the sales comparison approach to valuation, 
placed the fair market value of Parcel One at $408,000 as of December 
17, 2002. Mr. Thomas also determined that the ``highest and best use'' 
of Parcel One is for single family residential development as four 
building lots, each consisting of one acre.
    9. Once formed and duly recorded with the Wake County Register of 
Deeds, Parcel One will be transferred by Dr. Edwards to his Account. 
Simultaneously with the exchange, the Plan trustees will transfer the 
Pine Knoll Shores Lot to Dr. Edwards. The Account will not pay any real 
estate fees or commissions in connection with the transaction. In 
addition, the Account will receive real property having an 
independently appraised fair market value that is equal to the fair 
market value of the Pine Knoll Shores Lot on the day of the exchange. 
For this purpose, the appraisers will update their appraisals just 
prior to or on the date of the transaction.
    10. In summary, it is represented that the proposed transaction 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) The exchange of the Pine Knoll Shores Lot by the Account to Dr. 
and Mrs. Edwards for Parcel One will be a one-time transaction.
    (b) The fair market values of the Pine Knoll Shores Lot and Parcel 
One will be determined by qualified, independent appraisers.
    (c) For purposes of the exchange, Parcel One will have a fair 
market value that will be no less than the fair market value of the 
Pine Knoll Shores Lot at the time the transaction is consummated.
    (d) The terms and conditions of the exchange will be at least as 
favorable to the Account as those obtainable in an arm's length 
transaction with an unrelated party.
    (e) The exchange will not involve more than 25 percent of the 
Account's assets.
    (f) The exchange will allow the Account to divest itself of 
property that is susceptible to hurricane damage and high maintenance 
costs, and it will permit the Account to acquire virtually maintenance-
proof property having increased liquidity.
    (g) Dr. Edwards is the only participant in the Plan whose Account 
will be affected by the transaction and he desires that such 
transaction be consummated.
Notice to Interested Persons
    Because Dr. Edwards is the only participant in the Plan whose 
Account will be affected by the proposed transaction, it has been 
determined that there is no need to distribute the notice of proposed 
exemption to interested persons. Therefore, comments and requests for a 
hearing are due 30 days after publication of the notice of pendency in 
the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Blessed Chuksorji, telephone (202) 
693-8567. (This is not a toll-free number.)

Valley OB-GYN Clinic P.C. Employees Pension Plan (the Plan), Located in 
Saginaw, Michigan

[Application No. D-11172]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to the proposed loan of $550,000 by the Plan to 
Valley OB-GYN Realty Company (the Company), a party in interest with 
respect to the Plan; provided that the following conditions are 
satisfied:
    a. The Loan does not exceed 25% of the total assets of the Plan at 
any time;
    b. The terms of the Loan are at least as favorable to the Plan as 
those terms which would exist in an arm's-length transaction with an 
unrelated party;
    c. The Loan is secured by a building which has a fair market value, 
as determined by an independent, qualified appraiser, of at least 150% 
of the outstanding principal balance of the Loan (plus accrued but 
unpaid interest) throughout its duration (unless other property is 
pledged as collateral, as noted below in condition f.);
    d. An independent, qualified fiduciary (the Independent Fiduciary) 
reviews the proposed terms and conditions of the Loan, and determines 
that the Loan is in the best interest and protective of the Plan and 
its participants and beneficiaries;
    e. The Independent Fiduciary monitors the Loan throughout its 
duration and takes whatever actions are necessary to safeguard the 
interests of the Plan and its participants and beneficiaries; and
    f. The Plan has the right, under the terms of the Loan and mortgage 
note related thereto, to require the Company to pledge additional 
property as collateral for the Loan, in the event such property is 
needed to maintain full collateralization at the amount specified 
herein.
Summary of Facts and Representations
    1. The Plan is a qualified retirement plan sponsored by Valley OB-
GYN Clinic, P.C (the Employer). The trustees of the Plan are Ronald C. 
Hazen, M.D., James R. Hines, M.D., and Duane B. Heilbronn, Jr., M.D. 
(the Trustees). Duane B. Heilbronn acts as the Plan's administrator. As 
of December 31, 2001, the Plan had approximately 42 participants and 
$7,702,976 in total assets.
    2. The sponsor of the Plan is the Employer, a Michigan professional 
services corporation owned in equal shares by Ronald C. Hazen, M.D., 
James R. Hines, M.D., Duane B. Heilbronn, Jr., M.D., John Llewelyn, 
M.D. and Kenneth Su, M.D. The Employer is a medical practice.
    3. The Loan will have a principal amount of $550,000, and a ten 
(10) year duration. The Loan will bear an interest rate of 9% per 
annum. The promissory note evidencing the Loan (the Note) requires 
monthly payments of principal and interest in the amount of $6,967 (or 
more) to be made on or before the 1st of each month. The Note requires 
monthly payments of principal and interest amortized over the entire 
ten (10) year duration of the Loan. The Note further provides that if 
any default should be made in the payment of any installment of 
principal and interest due thereunder, and should the Company fail to 
cure such default within thirty (30) days after delivery of written 
notice

[[Page 37547]]

thereof, then the full unpaid balance of the Note and all interest 
accrued thereon shall become immediately due and payable. The Plan, as 
the payee under the Note, shall have and may exercise any one or more 
of the rights and remedies provided by law, pursuant to the mortgage 
and other documents relating thereto. Among other things, the Note 
reserves the Plan the right to require the Company to pledge additional 
property as collateral for the Loan in the event such property is 
needed to maintain full collateralization at amounts which exceed at 
least 150% of the outstanding principal balance of the Loan.
    The applicant represents that the Loan will represent no more than 
25% of the Plan's total assets at any time.
    4. The Loan will be secured at all times by a mortgage (the 
Mortgage) on a medical office building (the Building) owned by the 
Company that is currently leased to the Employer. The Building is 
located at 926 North Michigan Avenue, Saginaw, Michigan. The Mortgage 
will be duly recorded under the laws of the State of Michigan.
    The Building was appraised (the Appraisal) on October 11, 2002 by 
Roland M. Adams, SRA, a certified independent real estate appraiser 
(Mr. Adams) with Adams Appraisal Services, located in Freeland, 
Michigan. In the Appraisal, Mr. Adams relied primarily on the cost and 
income approaches to value the Building.
    Mr. Adams states that the cost approach is based on the idea that 
an informed purchaser would pay no more than the cost of producing a 
substitute property with the same utility as the subject property. 
Under the cost approach, the fair market value of the Building was 
determined to be approximately $926,000.
    Mr. Adams also considered the income approach, where such analysis 
converts anticipated benefits (dollar income or amenities) to be 
derived from the ownership of property into a value estimate. The 
income approach is widely applied in appraising income-producing 
properties. Anticipated future income and/or reversions are discounted 
to a present-worth figure through the capitalization process. Mr. Adams 
stated that under the income approach, the fair market value of the 
Building was approximately $922,000.
    Mr. Adams states that due to the Building's overall good condition, 
he gave equal consideration to the cost and income approaches. In 
conclusion, Mr. Adams determined that the fair market value of the 
Building was $925,000, as of October 11, 2002.
    5. Citizens Bank in Saginaw, Michigan (the Bank) has examined the 
terms of the Loan. By letter dated April 21, 2003, Kimberly E. Johnson, 
a vice president of the Bank, represents that the Bank would provide a 
similar loan under the same terms for the same amount, payable in equal 
monthly installments of principal and interest over a ten (10) year 
period at an interest rate of 9% per annum.
    6. The Loan will be monitored by Ronald Krawczyk, CPA (Mr. K), who 
will serve as the independent fiduciary (the I/F) on behalf of the Plan 
for purposes of the Loan. Mr. K has submitted a statement dated April 
17, 2003, in which he discusses his role as the I/F. Mr. K believes 
that the Loan would be in the best interest of the Plan's participants 
and beneficiaries. Mr. K has reviewed the terms and conditions of the 
Loan in consideration of the Plan's overall investment portfolio, and 
found the Loan to be consistent with the Plan's overall investment 
objectives and liquidity needs. In this regard, Mr. K represents that 
the terms and conditions of the Loan are comparable with, and as 
favorable to, the Plan as the terms and conditions of a similar loan 
between unrelated parties. Mr. K believes that the Loan will be a 
stable investment opportunity that will provide consistent returns for 
the Plan at a steady rate of interest commensurate with market rates. 
The Loan will be adequately collateralized by property (i.e., the 
Building or other property) that will be valued in excess of at least 
150% of the outstanding principal amount of the Loan. Mr. K further 
states that the proposed rate of return for the Loan will exceed 
similar rates of return that could be obtained through other fixed-
income investment vehicles. Mr. K believes that the Loan will insure a 
favorable rate of return to the Plan on a continuing basis, throughout 
its duration.
    As the I/F, Mr. K will have an affirmative duty to monitor the Loan 
to ensure that monthly payments are timely made by the Company. Mr. K 
will consult with counsel for the Plan on a regular basis to determine 
that no default occurred under the terms of the Loan. In the event of 
default, Mr. K will act for the Plan and promptly transmit notice of 
default to the Company and the Trustees. Mr. K will then monitor, on 
behalf of the Plan, the progress for any cure of such default. Mr. K 
will have the authority and ability to act unilaterally to protect the 
interests of the Plan with respect to all options for recovery on the 
Note, under applicable Michigan law, including foreclosure on the 
Building with the right to sell the Building, or other property that is 
securing the Loan to third parties. Such action may be taken by Mr. K 
without the prior approval of the Trustees, if necessary. Mr. K will 
also periodically review the condition of the Building.\16\ Mr. K 
represents that he will take such actions as are necessary to ensure, 
and verify, that the fair market value of the Building is equal to or 
greater than, an amount that is at least 150% of the outstanding 
principal balance of the Loan (plus accrued but unpaid interest). If 
necessary, Mr. K will require the Company to pledge additional property 
as security for the Loan.
---------------------------------------------------------------------------

    \16\ Among other things, Mr. K notes that the insurance 
provisions relating to the Building are adequate to protect the 
Plan's interests. Pursuant to the terms of the Note, the Company is 
required to maintain both fire and casualty and general liability 
insurance policies on the Building at all times in commercially 
reasonable amounts satisfactory to the Plan. The amount of such 
policies shall be no less than the unpaid principal balance and 
accrued interest under the Note.
---------------------------------------------------------------------------

    With respect to Mr. K's qualifications to act as the I/F for the 
Plan for purposes of the Loan, Mr. K represents that he is a licensed 
CPA and has been in practice for 33 years. Mr. K maintains that he has 
had extensive auditing experience, having served as a trained auditor 
and audit manager. Mr. K states that he has performed audits and other 
financial services for various industries, including banks, hospitals, 
manufacturing firms and other businesses. Mr. K states that he is a 
member of the American Institute of CPA's (i.e., the AICPA) and the 
Michigan Association of CPA's.
    Mr. K represents that he is, and will remain, independent of the 
Employer and the Company, for purposes of his proposed duties and 
responsibilities as the I/F for the Plan.
    7. With respect to the possibility of the need to appoint an 
individual or entity to succeed Mr. K as the I/F for the Plan, the 
applicant states that it will notify the Department at least sixty (60) 
days in advance of such appointment. The person or entity so appointed 
will have the same responsibilities as Mr. K, and will have experience 
that is similar or comparable to that of Mr. K. Finally, the individual 
or entity that may be selected as the new I/F will be independent of 
the Employer and the Company.
    8. In summary, the applicant represents that the proposed 
transaction satisfies the statutory criteria of section 408(a) of the 
Act and section 4975(c)(2) of the Code because:
    a. The Loan will not exceed 25% of the total assets of the Plan at 
any time;
    b. The terms of the Loan are at least as favorable to the Plan as 
those terms

[[Page 37548]]

that would exist in an arm's-length transaction with an unrelated 
party;
    c. The Loan will be secured by the Building, which has a fair 
market value, as determined by an independent, qualified appraiser, of 
at least 150% of the outstanding principal balance of the Loan (plus 
accrued but unpaid interest);
    d. Mr. K., as the I/F for the Plan, has reviewed the proposed terms 
and conditions of the Loan, and determined that the Loan would be in 
the best interest and protective of the Plan and its participants and 
beneficiaries;
    e. Mr. K, as the I/F for the Plan, will monitor the Loan throughout 
its duration and take whatever actions are necessary to safeguard the 
interests of the Plan and its participants and beneficiaries; and
    f. The Plan has the right to require the Company to pledge 
additional property as collateral for the Loan in the event such 
property is needed to maintain full collateralization at an amount 
which is at least 150% of the outstanding principal balance of the Loan 
(plus accrued but unpaid interest).

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department 
at (202) 693-8540. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which, among other things, 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 19th day of June, 2003.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, Department of Labor.
[FR Doc. 03-15928 Filed 6-23-03; 8:45 am]

BILLING CODE 4510-29-P