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Employee Benefits Security Administration

EBSA Federal Register Notice

Proposed Exemptions; PAMCAH-UA Local 675 Pension Plan (Pension Plan) (Collectively the Plans) [03/23/2005]

[PDF Version]

Volume 70, Number 55, Page 14716-14732

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application No. D-10993, et al.]

 
Proposed Exemptions; PAMCAH-UA Local 675 Pension Plan (Pension 
Plan) (Collectively the Plans)

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of proposed exemptions.

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

Written Comments and Hearing Requests

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

ADDRESSES: All written comments and requests for a hearing (at least 
three copies) should be sent to the 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. PAMCAH-UA Local 675 Pension 
Plan (Pension Plan); PAMCAH-UA Local 675 Training Fund (Training Fund) 
(Collectively the Plans) Located in Honolulu, Hawaii [Exemption 
Application Nos. D-10993 & L-10994].

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, 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: (1) The Training Fund's purchase (the 
Purchase) of an improved parcel of real property (the Property) located 
at 731 Kamehameha Highway, Pearl City, Hawaii from the Pension Plan; 
and (2) a loan (the Loan) from the Pension Plan to the Training Fund to 
finance the Purchase. This proposed exemption is subject to the 
following conditions:
    (a) The fair market value of the Property is established by an 
independent, qualified, real estate appraiser that is unrelated to the 
Plans or any party in interest;
    (b) The Training Fund pays no more, and the Pension Plan receives 
no less than the fair market value of the Property as determined at the 
time of the transaction;
    (c) The Pension Plan will, on irreversible default of the Training 
Fund, reassume the ownership of the Property automatically without

[[Page 14717]]

requirement of a foreclosure and cancel the promissory note;
    (d) Under the terms of the Loan, the Pension Plan in the event of 
default by the Training Fund has recourse only against the Property and 
not the against the general assets of the Training Fund;
    (e) The terms and conditions of the Loan are not less favorable to 
the Plans than those obtained in arm's-length transactions with 
unrelated parties;
    (f) The Plans will not pay any commissions or other expenses with 
respect to the transaction;
    (g) The Bank of Hawaii (BOH), acting as an independent, qualified 
fiduciary for the Training Fund, has determined that the transactions 
are in the best interest of the Training Fund and its participants and 
beneficiaries;
    (h) The First Hawaiian Bank (FHB), acting as an independent, 
qualified fiduciary for the Pension Plan, has determined that the 
transactions are in the best interest of the Pension Plan and its 
participants and beneficiaries; and
    (i) FHB will monitor the terms and conditions of the Loan 
throughout the duration of the Loan and take whatever actions are 
necessary to protect the rights of the Pension Plan.

Summary of Facts and Representations

    1. The Plans are jointly trusteed Taft-Hartley style plans formed 
and maintained pursuant to section 302(c)(5) of the Labor Management 
Relations Act, as amended. The Plans are operated pursuant to a 
collective bargaining agreement by and between Local Union 675 of the 
United Association of Journeymen and Apprentice Plumbers and 
Pipefitters of the United States and Canada AFL-CIO (the Union) and 
various employers.
    As of July 30, 2004, the Pension Plan had approximately 2,000 
participants and total assets of $346,501,758 and the Training Fund had 
approximately 1,030 participants and total assets of $1,858,697. The 
participants of the Plans are engaged as plumbers, pipefitters, steam 
fitters, welders, air condition, refrigeration and fire sprinklers 
mechanics. The Union is headquartered in Honolulu, Hawaii, and 
collectively bargains on behalf of the employees it represents in the 
state of Hawaii.
    2. The Plans are administered by an administrative office (Ad 
Office) located in Honolulu, Hawaii. The geographical jurisdiction of 
both Plans includes the state of Hawaii. The Ad Office is under the 
control of a committee comprised of an employer trustee and a union 
trustee (Ad Committee). The Ad Committee allocates the operating 
expenses of the Ad Office by a reasonable charge to the various funds 
and programs utilizing its services, subject to the approval of the 
respective Plan for which administrative services are performed.
    3. The Property consists of a 36,791 square foot land area with a 
metal frame warehouse building with four individual bay units that are 
adjacent to each other. Since September 1, 1991, the Training Fund has 
leased a 15,840 square foot unit of the warehouse owned by the Pension 
Plan. The Training Fund pays fair market value rent for the leased 
premises. However, because the trustees of the Plans are the same, the 
trustees were concerned about the leasing arrangement being a potential 
prohibited transaction under 406(b)(2) of the Act. The Training Fund 
applied for and received a prohibited transaction exemption from the 
Department (Prohibited Transaction Exemption (PTE)) 93-80 (58 FR 60216, 
November 15, 1993) for the leasing arrangement.
    4. The Training Fund now seeks to purchase a fee simple interest in 
the Property that includes the portion currently being leased from the 
Pension Plan at fair market value.\1\ The Pension Plan owns the 
Property in fee simple.
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    \1\ The Department notes that the Purchase of the Property 
involves a substantial percentage of Training Fund assets. The 
Department expresses no opinion herein concerning the application of 
section 404 of the Act to the amount of expenditure of Training Fund 
assets for the Purchase of the Property. In this regard, the 
Department notes that the fact that a transaction is the subject of 
an exemption under section 408(a) of the Act does not relieve 
fiduciaries or other parties in interest from the general fiduciary 
responsibility provisions of section 404 of the Act. Section 
404(a)(1)(A) and (B) of the Act requires, among other things, that a 
fiduciary discharge his duties with respect to a plan solely in the 
interest of the plan's participants and beneficiaries and in a 
prudent fashion. Accordingly, it is the responsibility of the 
fiduciaries to ensure that the purchase of the Property is prudent, 
taking into account the costs and benefits associated with the 
ownership of the Property.
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    5. The Property was appraised by the real estate appraisal firm of 
Yamaguchi & Yamaguchi, Inc. (the Appraiser). In an appraisal report 
dated April 18, 2002, the Appraiser utilized the income approach to 
place the fair market value of the Property at $2,500,000. On July 1, 
2004, the Appraiser updated the appraisal report to reflect the 
Property as valued at $2,590,000.
    6. The Training Fund seeks to purchase the Property to have a rent-
free training facility; while the Pension Plan wishes to sell the 
Property at fair market value and reinvest the proceeds in a 
potentially higher yielding investment. The Training Fund currently 
pays the Pension Plan $16,292.83 per month in rent and monthly common 
area maintenance (CAM) for space it occupies on the Property. The 
Pension Fund rents a 4,200 sq., ft. unit to an unrelated third party 
for $4,578 per month in rent (including CAM). Additional potential 
revenue may be realized from a 3,200 sq. ft. vacant unit located on the 
Property.
    7. BOH, acting as independent fiduciary for the Training Fund, 
represents that under the terms of the Purchase, the Training Fund will 
make a 10% down payment of the purchase price to the Pension Plan and 
the balance will be financed by the Pension Plan pursuant to a purchase 
money mortgage at 7% simple interest, for a term of 30 years, with 
monthly payments estimated at $14,969.31 or $179,631.72 per annum. The 
mortgage payment will be approximately $15,872.28 less per annum than 
the current rent paid by the Training Fund.
    As the landlord, the Training Fund will be responsible for CAM on 
the vacant space, currently projected at $384 per month or $4,608 per 
annum. Therefore, it is projected that the Training Fund will save 
$11,264.28 per annum from the current rent payments. In addition, the 
Training Fund will avoid increased rental rate increases. BOH, 
represents; (a) That an independent appraisal has determined a market 
value of the Property; (b) the Training Fund will secure a permanent 
home for training the plumbers and pipefitters; (c) the mortgage 
payments are estimated to be less than current rent payments resulting 
in lower out of pocket expense for the Training Fund and (d) there is a 
potential for increased income for the Training Fund when the vacant 
space is leased. Based upon the review of the information submitted to 
BOH, BOH represents that the Purchase of the Property and the Loan is 
in the best interest of the Training Fund.
    The applicant represents that if the Property had no other tenants, 
the Training Fund would still be able to pay the debt service on its 
own, since it is paying less for the debt service than it is paying in 
rent. In addition, the common area maintenance expenses for the 
building are paid by the tenant under the requirements of the tenant 
lease, so there is an insignificant risk of repair and maintenance 
costs reducing the cash flow to an extent which would prevent the 
Training Fund from meeting its debt service requirements.
    The Training Fund has been and is financially stable. The Labor 
Agreement (the Agreement) covers a 5 year period beginning January 5, 
2003 and ending January 5, 2008. The Agreement has been in existence 
for approximately 40 years. The rate paid to the Training Fund has been 
relatively stable for many years and is scheduled to increase

[[Page 14718]]

incrementally over the 5-year term of the Agreement from $1.20 to $1.60 
per hour, an average increase of 7% per year. The Agreement resulted in 
strengthening the Training Fund's ability to generate sufficient cash 
flow for debt service purposes. Net assets available for benefits have 
been increasing since the year 2000. As a practical matter, since the 
leaders of the plumbing and pipefitting industry are the trustees of 
the Plans in addition to being the employer's collective bargaining 
representatives, it is anticipated that the Training Fund has 
sufficient funding to meet its obligations by adjusting the 
contribution rate as needed.
    8. FHB will serve as the independent fiduciary for the Pension 
Plan. FHB has determined the proposed interest rate for the Loan is at 
market. Additionally, the current cash flow and liquidity of the 
Training Fund are adequate to service a 30-year loan at a 7% interest 
rate. The loan documents supporting the Loan adequately secure the 
Pension Plan's lien position. Assuming the purchase price will be fair 
market value at the time of the transaction, FHB is of the opinion that 
the sale is prudent and beneficial to the Pension Plan. FHB will 
monitor the terms and conditions of the Loan throughout the duration of 
the Loan and take whatever actions are necessary to protect the rights 
of the Pension Plan.
    9. If the Training Fund becomes unable to pay the debt service, the 
Pension Plan would either foreclose on the mortgage or negotiate a work 
out agreement with the Training Fund to pay the delinquency. FHB 
represents that the Pension Plan will, on irreversible delinquency of 
the Training Fund, reassume the ownership of the Property automatically 
without requirement of a foreclosure and cancel the promissory note. 
Notwithstanding the foregoing, the Pension Fund is entitled to all 
moneys owed up to the date of default.
    10. In summary, the applicant states that the transactions have 
satisfied the statutory criteria of section 408(a) of the Act because: 
(a) The fair market value of the Property is established by an 
independent, qualified, real estate appraiser that is unrelated to the 
Plans or any party in interest; (b) the Training Fund pays no more, and 
the Pension Plan receives no less than the fair market value of the 
Property as determined at the time of the transaction; (c) the Pension 
Plan will, on irreversible default of the Training Fund, reassume the 
ownership of the Property automatically without requirement of a 
foreclosure and cancel the promissory note; (d) under the terms of the 
Loan, the Pension Plan in the event of default by the Training Fund has 
recourse only against the Property and not against the general assets 
of the Training Fund; (e) the terms and conditions of the Loan are not 
less favorable to the Plans than those obtained in arm's-length 
transactions with unrelated parties; (f) the Plans will not pay any 
commissions or other expenses with respect to the transaction; (g) BOH, 
acting as an independent, qualified fiduciary for the Training Fund, 
has determined that the transactions are in the best interest of the 
Training Fund and its participants and beneficiaries; (h) FHB, acting 
as an independent, qualified fiduciary for the Pension Plan, has 
determined that the transactions are in the best interest of the 
Pension Plan and its participants and beneficiaries; and (i) FHB will 
monitor the terms and conditions of the Loan throughout the duration of 
the Loan and take whatever actions that are necessary to protect the 
rights of the Pension Plan.
    Notice to Interested Persons: Notice of the proposed exemption 
shall be given to all interested persons in the manner agreed upon by 
the applicant and Department within 15 days of the date of publication 
in the Federal Register. Comments and requests for a hearing are due 
forty-five (45) days after publication of the notice in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Mr. Khalif I. Ford of the Department, 
telephone (202) 693-8540. (This is not a toll-free number.) R.G. Dailey 
Company, Inc. Defined Benefit Plan (the Plan) Located in Ann Arbor, 
Michigan [Application No. D-11212].

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 
August 10, 1990). If the exemption is granted, the sanctions resulting 
from the application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code \2\, shall not apply to the in 
kind contributions made to the Plan on August 12, 1999, June 12, 2000, 
May 17, 2001, and March 21, 2002 by the Employer, a disqualified person 
with respect to the Plan, of certain publicly-traded securities (the 
Securities), provided: (a) Each contribution was a one-time 
transaction; (b) the Securities were valued at their fair market value 
as of the date of the contribution, as listed on a national securities 
exchange; (c) no commissions were paid in connection with the 
transactions; (d) the terms of the transactions between the Plan and 
the Employer were no less favorable to the Plan than terms negotiated 
at arm's length under similar circumstances between unrelated parties; 
and (e) Mr. Dailey, who was the only person affected by the 
transactions, believes that the transactions were in the best interest 
of the Plan.
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    \2\ Because Mr. Robert M. Dailey was the sole sponsor of R.G. 
Dailey Company, Inc. (the Employer) and the only participant in the 
Plan, there is no jurisdiction under Title I of the Employee 
Retirement Income Security Act of 1974 (the Act). However, there is 
jurisdiction under Title II of the Act pursuant to section 4975 of 
the Code.

Effective Date: If granted, this proposed exemption will be effective 
as of August 12, 1999, June 12, 2000, May 17, 2001, and March 21, 2002 
for in kind contributions of Securities to the Plan occurring on these 
dates.

Summary of Facts and Representations

    1. The Employer, which is no longer in existence, was a Michigan 
corporation located at 1523 Edinborough Road, Ann Arbor, Michigan. The 
Employer was a manufacturer's representative company. The firm 
represented companies which molded plastics and were engaged in metal 
stamping (primarily, but not exclusively) of automotive parts.
    2. The Plan, which is also no longer in existence, was a defined 
benefit plan established by the Employer effective April 1, 1995. The 
Plan was always a sole participant plan. Mr. Robert M. Dailey, the 
President and sole shareholder of the Employer, was the trustee of the 
Plan as well as its only participant. On May 31, 2002, the Plan was 
terminated, after Mr. Dailey decided to dissolve the Employer. Also as 
of that date, the Plan had $572,730 in aggregate assets.
    3. In order to satisfy the Employer's contribution requirements to 
the Plan, Mr. Dailey, on behalf of the Employer, transferred certain 
publicly-traded securities to the Plan's trust account between August 
12, 1999 and March 21, 2002. The Securities were issued by unrelated 
companies and held in the Employer's corporate account with Morgan 
Stanley. Specifically,
    a. On August 12, 1999, the Employer contributed to the Plan 2,300 
shares of stock issued by America Service Group, Inc. (ASGR) and 4,500 
shares of Matria Healthcare, Inc. (MATR) stock. The ASGR stock is 
listed on the National Association of Securities Dealers Automatic 
Quotation System (NASDAQ). The MATR stock is also listed on the NASDAQ.

[[Page 14719]]

    On the date of contribution, the ASGR stock had a fair market value 
of $14 per share (or an aggregate fair market value of $32,200) \3\ and 
the MATR stock had a fair market value of $5.94 per share (or a total 
fair market value of $26,730). (Thus, the total amount of the 
contribution was $58,930). At the time of the contribution, the Plan 
had total assets of $201,065.
    b. On June 12, 2000, the Employer contributed to the Plan 4,000 
shares of stock issued by Input/Output, Inc. (IO), an additional 2,000 
shares of ASGR stock, and 500 shares of Countrywide Credit Industries, 
Inc. (CFC) stock. The IO is listed on the New York Stock Exchange 
(NYSE). As noted above, the ASGR stock is listed on the NASDAQ. The CFC 
stock is listed on the NYSE.
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    \3\ On the date of contribution, ASGR stock had a trading volume 
of 10,800 shares.
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    On the date of contribution, the IO stock had a fair market value 
of $7.25 per share (or an aggregate fair market value of $29,000), the 
ASGR stock had a fair market value of $16.00 per share (or an aggregate 
fair market value of $32,000),\4\ and the CFC stock had a fair market 
value of $33.75 per share (or a total fair market value of $16,875). 
(Thus, the total amount of the contribution was $77,875). At the time 
of the contribution, the Plan had total assets of $260,495, excluding 
the aforementioned contributed Securities. c. On May 17, 2001, the 
Employer contributed to the Plan 2,000 shares of stock issued by 
Navigant Consulting, Inc. (NCI), an additional 1,000 shares of IO 
stock, and 8,000 shares of stock issued by Champion Enterprises, Inc. 
(CHB). The NCI is listed on the NYSE. As noted above, the IO stock is 
listed on the NYSE. The CHB stock is listed on the NYSE.
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    \4\ On the date of contribution, ASGR stock had a trading volume 
of 21,00 shares.
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    On the date of contribution, the NCI stock had a fair market value 
of $7.00 per share (or an aggregate fair market value of $14,000), the 
IO stock had a fair market value of $12.55 per share (or an aggregate 
fair market value of $12,550), and the CHB stock had a fair market 
value of $10.96 per share (or a total fair market value of $87,680). 
(Thus, the total amount of the contribution was $114,230). At the time 
of the contribution, the Plan had total assets of $316,432, excluding 
the aforementioned contributed Securities.
    d. On March 21, 2002, the Employer contributed to the Plan 3,000 
shares of stock issued by Fleetwood Enterprises, Inc. (FLE) and 800 
shares of stock issued by Patterson UTI Energy, Inc. (PTEN). The FLE 
stock is listed on the NYSE. The PTEN stock is listed on the NASDAQ.
    On the date of contribution, the FLE stock had a fair market value 
of $9.72 per share (or an aggregate fair market value of $29,160) and 
the PTEN stock had a fair market value of $27.30 per share (or a total 
fair market value of $21,840). (Thus, the total amount of the 
contribution was $51,000). At the time of the contribution, the Plan 
had total assets of $337,669, excluding the aforementioned contributed 
Securities. 4. The Plan paid no fees or commissions in connection with 
the in kind contribution transactions, each of which was a one-time 
transaction. The Securities were valued at their closing prices, as 
listed on the applicable exchanges, on the date of each transaction. 
Accordingly, an administrative exemption is requested from the 
Department. If granted, the exemption would be effective on August 12, 
1999, June 12, 2000, May 17, 2001 and March 21, 2002, which are the 
dates the Employer contributed the Securities to the Plan.
    5. Mr. Dailey represents that he made the in kind contributions of 
the Securities in error. However, he indicates that he first consulted 
with his accountant, Mr. Philip R. Heller of Heller & Wetzler of 
Ypsilanti, Michigan, regarding the form of the contribution. Mr. Dailey 
states that he was advised by Mr. Heller that care would need to be 
taken to ensure that the Securities were appropriately valued and the 
Employer could recognize the capital gains accrued as of the date of 
the transfer. In the years thereafter, Mr. Dailey says he again caused 
the Employer to make in kind contributions of Securities to the Plan 
after consulting with Mr. Heller. Mr. Dailey asserts that at no time 
was he ever informed by Mr. Heller that the transactions were 
prohibited. Upon learning from his attorney that the in kind 
contributions were prohibited transactions, Mr. Dailey explains that he 
instructed his legal counsel to request an administrative exemption 
from the Department.
    6. Mr. Heller explains that he first became aware of the in kind 
contribution transactions while performing year-end accounting services 
for the Employer. At that time, he states that he was not aware that 
such transactions were prohibited because his only concerns were that 
the transfers were properly treated as sales on the Employer's books, 
that gains or losses were properly recognized, and that the Employer's 
pension expense was properly valued. Mr. Heller indicates that he 
discussed these matters with Mr. Dailey.
    Mr. Heller also states that while he was generally aware of the 
prohibited transaction rules of the Act and the Code, he never 
conceived that the transfers were prohibited because Mr. Dailey was the 
only employee of the Employer, the sole participant in the Plan, and 
the Plan Administrator. As Plan Administrator, Mr. Heller states that 
Mr. Dailey was highly-qualified to evaluate and select investments for 
the Plan. Mr. Heller further states that the only benefit derived by 
either the Employer or the Plan from the in kind contributions was the 
avoidance of transaction costs.
    7. In summary, it is represented that the transactions have 
satisfied or will satisfy the statutory requirements for an exemption 
under section 4975(c)(2) of the Code because:
    (a) Each contribution was a one-time transaction.
    (b) The Securities were valued at their fair market value as of the 
date of the contribution as listed on a national securities exchange.
    (c) No commissions were paid in connection with the transactions.
    (d) The terms of the transactions between the Plan and the Employer 
were no less favorable to the Plan than terms negotiated at arm's 
length under similar circumstances between unrelated parties.
    (e) Mr. Dailey, who was the only person affected by the 
transactions, believes that the transactions were in the best interest 
of the Plan.

Notice to Interested Persons

    Because Mr. Dailey was the only participant in the Plan who was 
affected by the transactions, 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: Mr. Arjumand A. Ansari of the 
Department at (202) 693-8566. (This is not a toll-free number.)

Mutual Service Life Insurance Company (MSL), Located in Arden Hills, MN

[Application No. D-11267]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act (or ERISA) and section 
4975(c)(2) of the Code and in accordance with the procedures set

[[Page 14720]]

forth in 29 CFR part 2570, subpart B (55 FR 32836, August 10, 1990).\5\
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    \5\ For purposes of this proposed exemption, references to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to corresponding provisions of the Code.
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Section I. Covered Transaction
    If the exemption is granted, the restrictions of section 406(a) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the 
Code, shall not apply, effective January 1, 2005, to the receipt of 
cash (Cash) or policy credits (Policy Credits) by any eligible member 
(Eligible Member), including an Eligible Member which is an employee 
benefit plan (within the meaning of section 3(3) of Act), an individual 
retirement annuity (within meaning of section 408(b) or 408(A) of the 
Code), or a tax sheltered annuity (within the meaning of section 403(b) 
of the Code)(each a Plan), including Plans sponsored by MSL for its 
employees (the MSL Plans), in exchange for the termination of such 
Eligible Member's membership interest in MSL, in accordance with the 
terms of a plan of conversion (the Plan of Conversion) adopted by MSL 
and implemented pursuant to Minnesota Statues Section 60A.075 (2003).
Section II. General Conditions
    This proposed exemption is subject to the following conditions:
    (a) The Plan of Conversion was subject to approval, review and 
supervision by the Minnesota Commissioner of Commerce (the 
Commissioner) and was implemented in accordance with procedural and 
substantive safeguards that are imposed under the laws of the State of 
Minnesota.
    (b) The Commissioner reviewed the terms of the options that were 
provided to Eligible Members of MSL as part of such Commissioner's 
review of the Plan of Conversion, and approved the Plan of Conversion 
following a determination that such Plan of Conversion was fair and 
equitable to all Eligible Members.
    (c) Each Eligible Member had an opportunity to vote at a special 
meeting to approve the Plan of Conversion after full written disclosure 
was given to the Eligible Member by MSL.
    (d) Any determination to receive Cash or Policy Credits by an 
Eligible Member, which was a Plan, pursuant to the terms of the Plan of 
Conversion, was made by one or more Plan fiduciaries that were 
independent of MSL and its affiliates, and neither MSL nor any of its 
affiliates exercised any discretion or provided investment advice, 
within the meaning of 29 CFR 2510.3-21(c), with respect to such 
decisions.
    (e) After each Eligible Member was allocated a fixed amount of 
consideration (Fixed Consideration) equivalent to approximately $400, 
such Eligible Member also received a variable amount of consideration 
(Variable Consideration) for each policy owned by the Eligible Member 
on September 30, 2003 (the Record Date) (Variable Component Policy) to 
reflect the Eligible Member's estimated past and future contributions 
to surplus as determined by an actuarial formula (approved by the 
Commissioner) based on specific features of the policies owned by the 
Eligible Member on September 30, 2003 (the Actuarial Calculation Date).
    (f) In the case of a MSL Plan, the independent Plan fiduciary (the 
Independent Fiduciary):
    (1) Voted on whether to approve or not to approve the 
demutualization;
    (2) Elected between consideration in the form of Cash or Policy 
Credits on behalf of such MSL Plans;
    (3) Reviewed and approved MSL's allocation of Cash or Policy 
Credits received for the benefit of the participants and beneficiaries 
of the MSL Plans;
    (4) Would provide the Department with a complete and detailed final 
report as it related to the MSL Plans prior to the granting of the 
exemption; and
    (5) Would take all actions that were necessary and appropriate to 
safeguard the interests of the MSL Plans and their participants and 
beneficiaries.
    (g) All Eligible Members that were Plans participated in the 
transaction on the same basis as all Eligible Members that were not 
Plans.
    (h) No Eligible Member paid any brokerage commissions or fees in 
connection with the receipt of Policy Credits.
    (i) All of MSL's policyholder obligations remained in force and 
were not affected by the Plan of Conversion.
    (j) The terms of the transactions were at least as favorable to the 
Plans as an arm's length transaction with an unrelated party.
    Effective Date: If granted, this proposed exemption will be 
effective as of January 1, 2005.
Section III. Definitions
    For the purposes of this proposed exemption,
    (a) The term ``MSL'' means Mutual Service Life Insurance Company 
and any affiliate of MSL, as defined below in Section III(b).
    (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 MSL; and
    (2) Any officer, director, or partner in any such person.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The term ``Independent Fiduciary'' means a fiduciary who is: 
(1) Independent of and unrelated to MSL and its affiliates, and (2) 
appointed to act on behalf of the MSL Plans with respect to the 
demutualization of MSL. For purposes of this proposed exemption, a 
fiduciary will not deemed to be independent of and unrelated to MSL if: 
(1) Such fiduciary directly or indirectly controls, is controlled by or 
is under common control with MSL; (2) such fiduciary directly or 
indirectly receives any compensation or other consideration in 
connection with any transaction described in this proposed exemption, 
except that an Independent Fiduciary may receive compensation for 
acting as an Independent Fiduciary from MSL in connection with the 
transactions contemplated herein if the amount of payment of such 
compensation is not contingent upon or in any way affected by the 
Independent Fiduciary's ultimate decision; and (3) the annual gross 
revenue received by such fiduciary from MSL and its affiliates during 
any year of its engagement, does not exceed 5 percent (5%) of the 
Independent Fiduciary's annual gross revenue from all sources for its 
prior tax year.
    (e) An ``Eligible Member'' means a person (an individual, 
corporation, joint venture, limited liability company, association, 
trust, trustee, unincorporated entity, organization or government or 
any department or agency thereof) who is an owner of a policy that is 
in force on the Record Date, i.e., September 30, 2003.
    (f) ``Policy Credit'' means consideration to be paid in the form of 
an increase in cash value, account value, dividend accumulations, face 
amount, extended term period or benefit payment, as appropriate, 
depending on the policy.
    (g) ``Effective Date'' means the date of the demutualization, which 
occurred on January 1, 2005.
    (h) ``The Plan of Conversion'' means the process by which MSL will 
convert from a mutual life insurance company to a stock life insurance 
company, and following consummation of the Stock Purchase Agreement, 
will thereafter continue its corporate existence without interruption 
as a wholly owned subsidiary of Country Life Insurance

[[Page 14721]]

Company (CLIC). MSL's conversion to a stock insurance company occurred 
on the Effective Date (i.e., January 1, 2005) and was subject to the 
conditions contained in the Plan of Conversion.

Summary of Facts and Representations

MSL and Affiliated Entities

    1. MSL was formerly a mutual life insurance company organized under 
Chapter 300 and 60A of the Minnesota Statutes. It has been part of an 
affiliated group of companies (herein, the MSI Group) \7\ since 
inception. MSL was incorporated in Minnesota in 1934, and since its 
incorporation, MSL has been closely affiliated with Mutual Service 
Casualty Insurance Company (MSCIC), a mutual insurance company formed 
in Minnesota in 1919. Later, MSL became affiliated with Mutual Service 
Cooperative (MSC), a service cooperative formed in Minnesota in 1941. 
The MSI Group arose during the farmer cooperative movement of the early 
twentieth century and both MSL and MSCIC were originally created to 
provide insurance for agricultural associations, cooperatives and 
individual farmers. The MSI Group was operated independently until it 
entered into certain alliances with the companies that comprise COUNTRY 
Insurance & Financial Services (herein, the Country Group).
---------------------------------------------------------------------------

    \7\ The MSI Group, as of 1999, prior to entering into the 
alliances described herein, formerly consisted of two mutual 
insurance companies (Mutual Service Life Insurance Company and 
MSCIC), two stock insurance companies (MSI Insurance Company and 
Modern Service Insurance Company), MSC, Cornwall and Stevens (a 
specialty agribusiness insurance broker), Pension Solutions, Inc. 
(PSI) (an organization that administered pension plans); and the MSI 
Insurance Foundation.
---------------------------------------------------------------------------

    As a mutual insurance company, MSL did not have capital stock but 
instead had members (Members) who were the owners of policies and 
contracts issued by MSL. A policyholder's membership interest in MSL 
included the right to vote in membership meetings and the right to 
participate in the distribution of MSL's surplus in the event of MSL's 
voluntary dissolution or liquidation.
    2. MSL's core function in the MSI Group was to sell life insurance 
and annuity products, while the purpose of MSCIC was to sell property 
and casualty insurance. The two companies maintained a separate 
existence because life insurance companies may not lawfully sell 
property casualty insurance, and property and casualty insurance 
companies may not sell life insurance. MSC served as the link between 
the two companies. Through MSC, MSL and MSCIC shared common management, 
common board members, and distributed products through the same captive 
agency system. Certain policyholder members of each of the mutual 
insurance companies became members of the MSC cooperative. Together, 
MSL, MSCIC, and MSC \8\ (collectively, the MSI Group), developed 
strategic business plans and implemented such plans as an integrated 
organization. Many policyholders of MSL are also policyholders of 
MSCIC.
---------------------------------------------------------------------------

    \8\ MSC historically served as fiscal agent for both mutual 
companies, MSCIC and MSL, such that neither company had any 
employees of its own. All MSI Group employees were employees of MSC 
and MSC employees conducted the day-to-day operations of the 
insurance companies pursuant to a management contract. MSC also 
controlled governance of the companies through its appointment as 
attorney in fact for policyholders. Applicants for policies with MSL 
and MSCIC were asked, as part of their application, to name the 
board of directors of MSC as attorney in fact for the purpose of 
appointing proxies to vote at annual meetings of both companies. 
Each year the MSC board of directors would designate a 
representative to vote proxies at the annual meetings of MSL and 
MSCIC and would thereby create a unified board of directors for the 
two insurance companies. MSC has also served as general agency for 
both, MSL and MSCIC.
---------------------------------------------------------------------------

    3. Between 1999 and later in 2002, the MSI Group entered into a 
series of agreements and relationships with CLIC, a stock life 
insurance company organized under the laws of Illinois, and CLIC's 
affiliates. These became known as the First and Second Alliances. Under 
these agreements, CLIC agreed to provide MSL with various 
administrative services, reinsurance, and surplus contributions in 
exchange for notes. Among other things, the agreements required MSL to 
issue a Surplus Note and Guaranty Fund Certificate to CLIC in the 
aggregate amount of $5,000,000. Under the terms of the Guaranty Fund 
Certificate and as required by Minnesota Law, CLIC was given control of 
a majority of the Board of Directors of MSL.

Background Leading to the First Alliance

    4. During the late 1990s, property and casualty losses for MSCIC 
exceeded projections, leading to a decrease in available surplus at 
MSCIC. Given the decrease in available surplus at MSCIC, the MSI Group 
considered its options to strengthen MSCIC's financial position, and 
led ultimately to the negotiations of an alliance with the Country 
Group.
    5. The Country Group consists of a number of companies engaged in 
financial and insurance services. The ultimate controlling entity of 
the Country Group is the Illinois Agricultural Association, located in 
Bloomington, Illinois, a not-for-profit agricultural membership 
organization, more commonly known as the ``Illinois Farm Bureau.'' One 
of the companies within the Country Group is CLIC. More than 98% of 
CLIC's voting securities are indirectly owned (through a subsidiary) by 
the Illinois Agricultural Association. The MSI Group and the Country 
Group had similar histories, philosophies and agribusiness market focus 
and were well known to each other. On November 30, 1999, the MSI Group 
and the Country Group signed the First Alliance Agreements. The Country 
Group agreed to infuse cash of $5 million into MSL and $17 million into 
MSCIC in the form of surplus notes, and the MSI Group agreed to make 
its captive agency distribution system available to the Country Group. 
There were no changes in the governance structure or management team of 
the MSI Group. The First Alliance became effective in June 2000.
    Because CLIC was perceived by the MSI Group sales force as having 
life insurance and annuity products superior to those offered by MSL, 
and because it would have been extremely expensive for MSL to develop 
comparable products, the MSL Board of Directors concluded, as a part of 
the First Alliance, that it would no longer sell MSL insurance products 
in any state in which CLIC products could be offered. At the same time, 
CLIC agreed to reinsure to MSL 40% of the risks arising from the sale 
of CLIC products through the MSI Group distribution system. This 
reinsurance arrangement allowed MSL to share in 40% of the profits and 
losses for those products.
    Also as part of the First Alliance, a new entity, MSI Preferred 
Services, Inc. (MSI Preferred), was formed. MSI Preferred is owned 60% 
by the Country Group's primary property casualty insurer, Country 
Mutual Insurance Company, and 40% by MSCIC. MSI Preferred serves as 
general agent for the MSI Group to conduct captive agency sales, 
including sales on behalf of MSL. In accordance with the First 
Alliance, MSC assigned all agency contracts and appointments to MSI 
Preferred.

Background Leading to the Second Alliance

    6. The MSI Group continued to incur financial losses after the 
First Alliance became effective. In January 2001, the A.M. Best Company 
advised the MSI Group management that MSCIC's rating was in danger of 
being reduced from ``B++'' to ``B+'' based upon year-end surplus 
projections. The boards of directors of the MSI Group companies 
concluded that this rating downgrade might force the MSI Group to exit 
the property and casualty insurance

[[Page 14722]]

marketplace. The Country Group expressed willingness to infuse 
additional surplus into the MSI Group, but only on the condition that 
the Country Group obtain management and board control of all MSI Group 
companies, including MSL.
    After careful consideration of its strategic alternatives, 
including the possible sale of MSL, the boards of directors of each of 
the MSI Group companies agreed to the Country Group's control-related 
conditions. A restructuring of the First Alliance was signed on July 
26, 2001. The restructuring and change of control of MSL was approved 
by the policyholder members of MSL in a special meeting of the members 
held on October 23, 2001, and was approved by the Minnesota Department 
of Commerce on November 2, 2001. This series of inter-related 
agreements became known as the Second Alliance, which became effective 
November 15, 2001.
    7. Under the Second Alliance, the $5 million surplus note that CLIC 
received from MSL under the First Alliance Agreement was restructured 
into a $4.5 million surplus note and guaranty fund certificate of 
$500,000. As permitted by Minnesota law, the guaranty fund certificates 
permitted CLIC to elect a majority of the MSL Board of Directors. (CLIC 
currently appoints four of MSL's directors and MSC appoints the 
remaining three.) \9\
---------------------------------------------------------------------------

    \9\ MSC has assigned its power of attorney to elect board 
members on behalf of policyholders to the respective boards of the 
insurance companies.
---------------------------------------------------------------------------

    As part of the Second Alliance, the Country Group was also given 
the future right to acquire the employees and certain assets of MSC. 
The Country Group exercised these rights on September 1, 2002 pursuant 
to an Assignment and Assumption Agreement and Bill of Sale. Under this 
agreement, MSC transferred all rights and interests in its 
relationships with MSI Group employees, including sponsorship of all 
employee benefit plans, to MSI Preferred.\10\
---------------------------------------------------------------------------

    \10\ The assignment and assumption agreement was actually 
between MSC and ``MSI Subsidiary''; MSI Subsidiary, in turn, was 
merged into MSI Preferred in a simultaneous transaction dated 
September 1, 2002.
---------------------------------------------------------------------------

    Also as part of the Second Alliance, MSL entered into a series of 
new service and expense allocation agreements with CLIC and the Country 
Group affiliates. MSL entered into management and expense agreements 
with MSI Preferred under which MSL and MSCIC continued to share 
services of MSI Group employees. MSL also entered into agreements with 
CLIC and Country Trust Bank through which those entities provide 
various financial, investment advisory, marketing, information, 
trustee, and operational services.\11\
---------------------------------------------------------------------------

    \11\ MSL experienced three significant developments related to 
its business operations after the Second Alliance became effective. 
First, the pension business conducted by a subsidiary of MSL, PSI, 
was discontinued due to a lack of profitability and its assets were 
sold to an unrelated party on June 2, 2003. Second, the number of 
states in which the MSI Group agency force sold MSL products 
dwindled as CLIC received approval to sell insurance in an 
increasing number of states. Third, effective January 1, 2003, MSL 
and CLIC entered into a reinsurance agreement whereby the MSL 
transferred 90% of its risk on both in force and new business to 
CLIC on a modified coinsurance basis.
---------------------------------------------------------------------------

Background to the Sponsored Demutualization

    8. After reviewing MSL's strategic alternatives \12\ throughout 
2003, the MSL Board of Directors (the MSL Board) ultimately concluded 
that a sponsored demutualization \13\ represented the best course of 
action for MSL's Members. There were two primary considerations in the 
MSL Board's analysis. First, because MSL was not writing any 
significant number of new policies, no new Members were being added. 
Since the number new MSL Members would only decrease over time as 
policies were paid or lapsed, the MSL Board concluded that a 
demutualization would potentially benefit a larger number of Members 
than would be the case in the future. Second, CLIC expressed an 
interest in purchasing, which action was thought to be a logical 
extension of the prior affiliation, with the benefit to CLIC being a 
simplified structure and governance.
---------------------------------------------------------------------------

    \12\ MSL represents that the strategic alternatives considered 
by the MSL Board included: (a) The sale of MSL to an unrelated 
entity, (b) the merger or consolidation of MSL with other mutual 
insurance companies, (c) a possible liquidation under the provisions 
of Minnesota law, (d) a sponsored demutualization (with Country 
purchasing the stock of MSL at fair value), or (e) maintaining the 
status quo.
    \13\ A sponsored demutualization occurs when a mutual insurance 
company is converted to a stock company and then the stock is 
immediately sold to a third party. The conversion of MSL is 
considered a sponsored demutualization with the sponsor being CLIC. 
Under the Plan of Conversion, which was approved by the Commissioner 
on December 21, 2004, CLIC purchased all of the voting stock MSL and 
became its sole shareholder as of January 1, 2005.
---------------------------------------------------------------------------

    Therefore, the MSL Board believed a sponsored demutualization would 
be an extension of the First Alliance and the Second Alliance between 
the MSI Group and the Country Group. Given that the MSI Group entities 
were already controlled by the Country Group, and given the increased 
integration between the two groups, the MSL Board believed it would be 
a logical progression for CLIC to consider the purchase and ownership 
of MSL.
    9. On August 28, 2003, the MSL Board decided to pursue the 
possibility of a sponsored demutualization with CLIC. Because the MSL 
Board was controlled by CLIC pursuant to the Second Alliance, the MSL 
Board appointed a Special Committee of Independent Members of the Board 
of Directors (the Special Committee) to represent the interests of MSL 
policyholders. The Special Committee was comprised of the three MSL 
directors who previously had been appointed by policyholder action and 
who had not been appointed by CLIC. Prior to CLIC obtaining control of 
the MSL Board, none of these three individuals had any prior 
relationship with the Country Group.
    10. The Special Committee was asked to review, consider, and 
negotiate a possible transaction with CLIC. Because the Minnesota 
Conversion Act (the Conversion Act) requires the full board of 
directors of a converting mutual insurance company to adopt a plan of 
conversion, the Special Committee was required to recommend (either 
favorably or unfavorably) such a transaction to the MSL Board following 
completion of the Special Committee's work. Once established, the 
Special Committee retained its own expert actuarial, financial and 
legal advisors to assist it in its review of the proposed sponsored 
demutualization.
    The Special Committee concluded that it was appropriate for MSL to 
undertake a sponsored demutualization whereby MSL would convert from a 
mutual life insurance company into a stock life insurance company (the 
Conversion), and immediately following the Conversion, would issue its 
entire capital stock to the sponsor of the demutualization, CLIC, in 
accordance with the provisions of a Plan of Conversion and Section 
60A.075 \14\ of the Minnesota Statutes.
---------------------------------------------------------------------------

    \14\ Section 60A.075 of the Conversion Act sets forth procedural 
and substantive requirements to ensure that the Conversion will be 
fair and equitable to MSL Members.
---------------------------------------------------------------------------

    11. As an insurance company, MSL provides a variety of insurance 
products to ERISA-covered employee benefit plans and to other plans 
described under the Code. MSL has marketed its products to employee 
benefit plans, and had, as of December 31, 2003, 430 in force policies 
and contracts held on behalf of employee pension and profit sharing 
plans (including Code Section 401(k) plans) and 10 contracts providing 
welfare benefit plan coverage such as group life, short and long term 
disability, accidental death and dismemberment, and group health 
coverage.

[[Page 14723]]

    Although a wholly owned subsidiary of MSL, PSI, formerly provided 
certain administrative services and record-keeping services to many of 
these pension and profit sharing plans. On April 15, 2003 the assets of 
PSI, including all customer contracts, were sold to Alerus Financial, 
National Association, an unrelated party. Thus, neither MSL nor any 
affiliated company currently remains in the business of ERISA plan 
administration.
    12. In its capacity as a business, MSL does not have any employees. 
Instead, all employees of the MSI Group are employees of MSI Preferred. 
As of September 30, 2003, MSI Preferred sponsored the following MSL 
Plans that will qualify as Eligible Members under the Plan of 
Conversion:

----------------------------------------------------------------------------------------------------------------
                                                             Participant                            Expected
             Plan name                    Plan type             totals          Asset totals      consideration
----------------------------------------------------------------------------------------------------------------
MSI Employees Capital Accumulation  Defined Contribution               542        $33,368,551               $400
 Plan and Trust.                     with CODA.                    (7/4/04)           (7/4/04)
MSI Employees Defined Contribution  Defined Contribution               526         29,004,089                400
 Retirement Plan.                                                  (7/4/04)           (7/4/04)
MSI Employees' Life Insurance Plan  Life Insurance                     364                  0         326,979.53
                                     Welfare Benefit               (7/4/04)
                                     Plan.
Mutual Service Agent's Group        Life Insurance                      73                  0         275,880.67
 Insurance Plan (Terminated 12/31/   Welfare Benefit             (12/31/03)
 03).                                Plan.
----------------------------------------------------------------------------------------------------------------

    13. MSL believes that it has never directly provided plan 
administration services to Plan policyholders and that none of its 
affiliates currently provides such services to Plan policyholders. 
However, MSL cannot rule out the possibility that it has provided some 
services to one or more Plan policyholders. Accordingly, while MSL 
believes that it is not a party in interest with respect to any such 
Plans under section 3(14)(A) and (B) of the Act or the related 
``derivative'' provisions of section 3(14) of the Act, it cannot rule 
out the possibility that such a party in interest relationship may be 
found to exist. MSL notes that on the Record Date, PSI sponsored four 
employee benefit plans that utilized, at least in part, MSL policies. 
Therefore, MSL is seeking an exemption in order to avoid the occurrence 
of inadvertent prohibited transactions in connection with the 
implementation of the Plan of Conversion. If granted, the proposed 
exemption would cover the receipt of Cash or Policy Credits by all 
Eligible Members that are Plans, in exchange for such Plan's existing 
membership interests and rights in MSL's surplus.
    The proposed exemption has been made retroactive to January 1, 
2005, the Effective Date of the demutualization. It includes a 
requirement that distributions to Plans pursuant to the exemption were 
on terms no less favorable to the Plans than an arm's length 
transaction between unrelated parties. In this regard, Eligible Members 
that are Plans to which MSL is a party in interest were not treated 
differently from any other Eligible Member, except that some Eligible 
Members which were Plans, were entitled to receive Policy Credits 
rather than Cash.

The MSL Demutualization

    14. Pursuant to Chapters 300 and 60A of the Minnesota Statutes, MSL 
converted to a stock company. In the event of such a demutualization, 
Eligible Members were entitled to receive consideration in the form of 
stock, cash, or such other consideration permitted under Minnesota 
Statutes and approved by the Commissioner.
    Also, in accordance with the Plan of Conversion, MSL converted from 
a mutual life insurance company to a stock life insurance company and 
thereafter is continuing its corporate existence without interruption 
as a wholly owned subsidiary of CLIC. The corporate existence of MSL is 
a continuation of MSL's corporate existence without interruption from 
its original date of incorporation, and all of MSL's rights, 
privileges, powers, permits and licenses and all of its duties, 
liabilities and obligations will remain as they were immediately prior 
to the Conversion and continue unaffected by the Conversion, except 
that all membership interests have been extinguished.
    15. In addition, all MSL policies in force on the Effective Date of 
the Conversion will remain in force under the terms of those policies, 
except that any voting rights of the members provided for under the 
terms of those policies were extinguished on such Effective Date. All 
other instruments in force at Conversion and not considered policies 
such as certificates of coverage will likewise continue in full force 
and effect and all contract rights under those instruments will remain 
as they existed prior to Conversion.
    Because all membership interests by Eligible Members of MSL have 
been extinguished, as soon as reasonably practicable following 
Conversion (but in any event no more than 75 days following the 
Effective Date unless an extension of time is approved by the 
Commissioner), MSL is required to (a) issue Policy Credits to Eligible 
Members that are entitled to receive Policy Credits and deliver a 
policy statement to each of those Eligible Members confirming the 
effect of the Policy Credits on the policy's value or benefits; and (b) 
distribute Cash, by check, net of any applicable withholding tax, to 
Eligible Members that are to receive Cash consideration pursuant to the 
proposed Plan of Conversion.\15\
---------------------------------------------------------------------------

    \15\ ``The proceeds of the demutualization will belong to the 
Plan if they would be deemed to be owned by the Plan under ordinary 
notions of property rights. See ERISA Advisory Opinion 92-02A, 
January 17, 1992 (assets of plan generally are to be identified on 
the basis of ordinary notions of property rights under non-ERISA 
law). It is the view of the Department that, in the case of an 
employee welfare benefit plan with respect to which participants pay 
a portion of the premiums, the appropriate plan fiduciary must treat 
as plan assets the portion of the demutualization proceeds 
attributable to participant contributions. In determining what 
portion of the proceeds are attributable to participant 
contributions, the plan fiduciary should give appropriate 
consideration to those facts and circumstances that the fiduciary 
knows or should know are relevant to the determination, including 
the documents and instruments governing the plan and the proportion 
of total participant contributions to the total premiums paid over 
an appropriate time period. In the case of an employee pension 
benefit plan, or where any type of plan or trust is the 
policyholder, or where the policy is paid for out of trust assets, 
it is the view of the Department that all of the proceeds received 
by the policyholder in connection with a demutualization would 
constitute plan assets.'' See ERISA Advisory Opinion 2001-02A, 
February 15, 2001.
---------------------------------------------------------------------------

    16. Immediately following the Conversion, in consideration of 
CLIC's payment of the purchase price, MSL issued and delivered two 
million shares of its Class A Common Stock to CLIC, representing all of 
MSL's voting stock then issued and outstanding, all in accordance with 
the terms and subject to the conditions contained in the Stock Purchase 
Agreement between MSL and

[[Page 14724]]

CLIC. The closing date, as described in the Stock Purchase Agreement, 
was the Effective Date of the Conversion as agreed upon by MSL and CLIC 
subject to the Commissioner's approval.
    17. The MSL Board believed the Conversion would serve the best 
interests of MSL and its policyholders by (a) making MSL a member of 
the Country Group; (b) enabling MSL to benefit from efficiencies 
derived from direct ownership by CLIC and being a member of the Country 
Group; (c) allowing for distribution of the embedded value of MSL to 
policyholders in the form of Cash or Policy Credits, as described in 
the proposed Plan of Conversion; and (d) distributing MSL's value to 
policyholders in an equitable manner and at an appropriate time prior 
to significant runoff of policies following discontinuation of the sale 
of new business.

Procedural Requirements Under Minnesota Law for Demutualization

    18. Section 60A.075 of the Conversion Act sets forth procedural and 
substantive requirements to ensure that the Conversion would be fair 
and equitable to MSL policyholders. The Conversion Act generally 
provides that a mutual life insurance company may become a stock life 
insurance company under a Plan of Conversion established and approved 
in the manner provided by the Conversion Act. The Commissioner is 
required to approve the fairness and equity of a Plan of Conversion 
with respect to policy-owners of a company undergoing demutualization. 
More specifically, Section 4(e) of the Conversion Act requires that the 
Commissioner review the Plan of Conversion to determine whether it 
complies with all provisions of law and is fair and equitable to the 
mutual company and its policy owners. Additionally, the Commissioner 
may order a hearing on the fairness and equity of the terms of the Plan 
of Conversion. Eligible Members and other interested persons would have 
a right to appear at the hearing.
    Section 5(d)(1) of the Conversion Act requires that the Plan of 
Conversion be approved by majority of the Eligible Members of the 
mutual company who vote on it. The statute requires that notice be 
given to the Eligible Members and permits voting by ballot, in person, 
or by proxy. The notice of meeting and election must contain a copy of 
the Plan of Conversion or a summary of such Plan.\16\
---------------------------------------------------------------------------

    \16\ The Conversion Act defines the class of policyholders 
entitled to receive notice and to vote on the Plan of Conversion, 
Eligible Members, as generally including policyholders whose 
policies or contracts are in force on the Record Date, which is the 
date of adoption of the Plan of Conversion or another date as 
approved by the Commissioner. (MSL had requested and received 
approval from the Commissioner for a Record Date of September 30, 
2003.)
---------------------------------------------------------------------------

    Section 13 of the Conversion Act provides that, after the Plan of 
Conversion has been approved by the Commissioner and the policyholders, 
the reorganized company will be a continuation of the mutual company 
and that the conversion will not annul or modify any of the mutual 
company's existing suits, contracts, or liabilities except as provided 
in the Plan of Conversion. Furthermore, all rights, franchises, and 
interests of the mutual company in and to property, assets, and other 
interests will be transferred to and vest in the reorganized company, 
and the reorganized company will assume all obligations and liabilities 
of the mutual company. However, the policyholder membership rights will 
be extinguished.
    Consistent with these requirements, the Plan of Conversion 
generally provided for MSL to file an application with the Commissioner 
to reorganize as a stock company. MSL also requested that the 
Commissioner hold a public hearing on the fairness and equity of the 
terms of the Plan of Conversion.
    The Plan of Conversion provided for Eligible Members to be able to 
comment on such Plan at the hearing, for the Eligible Members to vote 
on the Plan of Conversion at a Members' meeting and for MSL to provide 
notice to its Eligible Members of both the public hearing and the 
Members' meeting. A final order by the Commissioner to approve an 
application pursuant to the Conversion Act was subject to the 
administrative appeal procedures, as described in Minnesota Statute 
sections 14.63 to 14.68.
    As far as the timing of MSL's Conversion was concerned, on 
September 13, 2004, the MSL Board adopted the Plan of Conversion and 
submitted it to the Commissioner. On November 23, 2004, the 
Commissioner scheduled a public hearing. On November 24, 2004, a 
special meeting of Eligible Members entitled to vote on the Plan of 
Conversion occurred. On December 21, 2004, the Commissioner approved 
the Plan of Conversion, and the effective date of the demutualization 
was January 1, 2005.\17\
---------------------------------------------------------------------------

    \17\ Presently, the proceeds from the demutualization are being 
held in an interest-bearing escrow account with Wells Fargo, an 
unrelated party with respect to MSL, for the benefit of Plans that 
are Eligible Members. The proceeds will be distributed to such Plans 
once the Department grants MSL's pending exemption request.
---------------------------------------------------------------------------

Distributions to Eligible Members

    19. As noted above, the consideration given to Eligible Members in 
exchange for extinguishing their Membership Interests was MSL's 
Distributable Net Worth, such consideration was paid in the form of 
Cash or Policy Credits. For this purpose, an Eligible Member generally 
was the owner of one or more policies in force on the Record Date. The 
amount of consideration received by each Eligible Member, whether in 
the form of Cash or Policy Credits, was comprised of a fixed component 
and, under some circumstances, a variable component.
    Each Eligible Member received Fixed Consideration. In addition, an 
Eligible Member could also receive Variable Consideration for each 
policy owned by such Eligible Member on the Record Date (i.e., the 
Variable Component Policy) to reflect the Eligible Member's estimated 
past and future contributions to surplus, as determined by an actuarial 
formula based on specific features of the policies owned by the 
Eligible Member on the Actuarial Calculation Date (which under the Plan 
of Conversion was set at September 30, 2003). The total amount of Cash 
or Policy Credits distributed as Variable Consideration (the Aggregate 
Variable Component) was allocated to Eligible Members with respect to 
their Variable Component Policies as follows: (a) The Aggregate 
Variable Component allocation was made by multiplying each Eligible 
Member's Actuarial Contribution by the ratio of the Aggregate Variable 
Component to the sum of all Actuarial Contributions of all policies; 
(b) then, MSL made reasonable determinations of the dollar amount of 
Actuarial Contribution, which was zero or a positive number, for each 
Variable Component Policy, according to the principles and 
methodologies set forth in detail in the Actuarial Contribution 
Memorandum attachment to the proposed Plan of Conversion; and (c) each 
Actuarial Contribution was determined on the basis of MSL's records as 
of the Actuarial Calculation Date without regard to any changes in the 
status of, or premiums in excess of those required on the policies that 
occur subsequent to the Actuarial Calculation Date.
    20. Eligible Members received consideration in the form of Cash, 
except that certain Eligible Members received consideration in the form 
of Policy Credits, and not Cash, to the extent consideration was 
allocable to the Eligible Member based on

[[Page 14725]]

ownership of a policy of the following types: (a) A policy that was an 
individual retirement annuity contract within the meaning of section 
408(b) or 408A of the Code or a tax sheltered annuity contract within 
the meaning of section 403(b) of the Code; (b) a policy that was an 
individual annuity contract issued directly to the Plan participant 
pursuant to a Plan qualified under section 401(a) or 403(a) of the 
Code; or (c) a policy that was an individual life insurance policy 
issued directly to the Plan participant pursuant to a plan qualified 
under section 401(a) or 403(a) of the Code.
    All Eligible Members that owned the types of policies described in 
(a), (b), or (c) above, and all Eligible Members that were Plans that 
held group policies issued by MSL participated in the demutualization 
transaction on the same basis and within their class groupings as other 
Eligible Members that were not Plans.
    21. If any policy had matured by death or otherwise been 
surrendered or terminated prior to the date on which the Policy Credits 
would have been credited, Cash in the amount of the Policy Credits was 
paid in lieu of the Policy Credits to the person to whom the surrender 
value or other payment at termination was made under the policy or to 
the estate of the person if the policy matured by death.
    In the event that more than one person constituted a single owner 
of a policy, consideration was distributed jointly to such persons. If 
an Eligible Member who was an owner of more than one policy was 
entitled to receive consideration both in the form of Policy Credits 
and in the form of Cash, the Fixed Consideration was payable only with 
respect to one of the policies for which such Eligible Member was 
entitled to receive cash. In the event an Eligible Member was the owner 
of two or more policies, all of which would be credited Policy Credits, 
then the Fixed Consideration was payable only with respect to the 
policy with the earliest issue date.
    Payment of Cash was made by check, net of any applicable 
withholding tax. If the Policy Credit was applicable to a policy in the 
course of annuity payments, the Policy Credit was added to the next 
practicable benefit payment. If the Policy Credit was in the form of 
additional insurance or dividends with interest, as appropriate, under 
a policy that was a life insurance policy, the amount of the Policy 
Credit was determined by applying the amount of consideration in a 
manner that was consistent with the application of dividends towards 
additional insurance or dividends with interest, as appropriate.
    22. Decisions on voting whether to approve the Plan of Conversion 
and on making an election as to the form of consideration received or 
as to any matter in connection with such Plan was made by one or more 
Plan fiduciaries which were independent of MSL. In this regard, the 
Chairman of the Board of Directors of MSI Preferred appointed a 
fiduciary committee for the MSI Employees, Life Insurance Plan and the 
Mutual Service Agent's Group Insurance Plan (together, the MSL Welfare 
Plans) to exercise such Plans' rights in connection with the 
Conversion.\18\ The committees for the MSL Welfare Plans and the 
Administrative Committees for the MSL Pension Plans have each retained 
Consulting Fiduciaries, Inc. (CFI) to act as Independent Fiduciary for 
all four of the MSL Plans in connection with the implementation of the 
Plan of Conversion. CFI exercised full and exclusive discretionary 
authority on behalf of each of the MSL Plans to vote for or against the 
implementation of the Plan of Conversion. Neither MSL nor its 
affiliates exercised discretion or provided ``investment advice,'' 
within the meaning of 29 CFR 2510.3-21(c), with respect to any 
determination by the Independent Fiduciary to vote for or against the 
Plan of Conversion.
---------------------------------------------------------------------------

    \18\ The members of the committee for the MSI Welfare Plans were 
the same three individuals who comprised the membership of the 
Administrative Committees for the MSI Employees Capital Accumulation 
Plan and the MSI Employees Defined Contribution Retirement Plan 
(together, the MSL Pension Plans).
---------------------------------------------------------------------------

    CFI represents that it was qualified to act as an independent 
fiduciary in connection with the transaction. CFI states that it is an 
Illinois corporation which has been providing independent fiduciary 
services exclusively for over ten years. CFI explains that it has 
previously served as an independent fiduciary to plans with respect to 
an earlier demutualization process for an unrelated insurance company. 
CFI explains that it is independent of MSL and MSI and has no business, 
ownership or control relationship, nor is it otherwise affiliated with 
either MSI or MSL. CFI also states that it derives less than 3% of its 
annual income from MSI and that it receives no income from MSL.
    CFI explains that it was retained to consider, on behalf of the MSL 
Plans, whether to approve the transaction and how the Plans should vote 
their interest at the Special Meeting of Members of MSL which occurred 
on November 24, 2004. Additionally, CFI states that it reviewed with 
MSI the various issues related to the allocation among eligible 
participants of any Cash proceeds received by the MSL Plans. In a 
letter to the Department dated October 29, 2004, CFI describes the 
process it had undertaken to determine whether the demutualization was 
fair and in the interests of the MSL Plans and their participants and 
beneficiaries.
    CFI represents that the transaction would provide that the 
consideration to be paid to Eligible Members would be in the form of 
Cash, except for certain Eligible Members whose policies had a tax-
favored status that could be jeopardized by the receipt of Cash, in 
which case, they would receive Policy Credits. CFI notes that Eligible 
Members would not be given a choice of whether to receive Cash or 
Policy Credits, and in no event, would Eligible Members receive shares 
of MSL stock. CFI further notes that the consideration that would be 
paid to Eligible Members would consist of a fixed component and a 
variable component. According to CFI, the fixed component would be 
determined by the Board of Directors of MSL and would be paid to 
Eligible Members for giving up their membership interest and their 
voting rights. The variable component would be paid to certain Eligible 
Members based on a formula taking into account the estimated past and 
future contributions by such Eligible Members, to MSL's surplus.
    23. CFI states that Willamette Management Associates of Arlington, 
VA (Willamette) was retained on behalf of the MSL Plans to review the 
financial consideration being offered to Eligible Members by MSL and to 
render a financial fairness opinion with respect to the effect of the 
transaction on the Plans. CFI explains that Willamette reviewed and 
issued an opinion prior to CFI's submitting the vote on behalf of the 
Plans. Pending Willamette's review and opinion, CFI states that it 
preliminarily reviewed various documents related to the transaction 
including, but not limited to, the following: (a) The Plan of 
Conversion; (b) the Notice of Special Meeting of Members; (c) the 
Notice of Public Hearing Before the Commissioner; (d) a Summary of the 
MSL Conversion; (e) financial information of MSL; (f) the exemption 
request; and (g) legal, actuarial and financial opinions regarding 
MSL's Conversion.
    24. In addition to the documents reviewed, CFI states that it had 
discussions with various officers of MSI and with certain of the 
advisers to MSI and MSL regarding the history of the companies, the 
current situation, the

[[Page 14726]]

prospects for the future and the events leading to the consideration 
and structuring of the transaction. CFI represents that it 
preliminarily concluded that the transaction was structured in a manner 
similar to other prior demutualizations. In this regard, CFI explains 
that the transaction was also subject to the approval of the 
Commissioner.
    Furthermore, CFI states that it preliminarily determined that the 
concept of the transaction was fair and in the interest of the Plans 
and their participants and beneficiaries. Based on Willamette's 
favorable financial fairness opinion, CFI stated that it voted in favor 
of the transaction on November 24, 2004. Following the completion of 
the vote, CFI engaged in discussions with MSI regarding the issues 
related to the allocation of consideration among the eligible 
participants in the MSL Plans.
    CFI states that as an Independent Fiduciary it (a) voted on whether 
to approve or not to approve the demutualization; (b) elected between 
consideration in the form of Cash or Policy Credits on behalf of such 
Plans; (c) reviewed and approved MSL's allocation of Cash or Policy 
Credits received for the benefit of the participants and beneficiaries 
of the MSL Plans; (d) would provide the Department with a complete and 
detailed final report as it relates to the MSL Plans prior to the 
granting of the exemption; and (e) would take all actions that were 
necessary and appropriate to safeguard the interests of the MSL Plans 
and their participants and beneficiaries.
    25. In summary, it is represented that the transaction satisfied or 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) The Plan of Conversion was subject to approval, review and 
supervision by the Commissioner and was implemented in accordance with 
procedural and substantive safeguards that are imposed under the laws 
of the State of Minnesota.
    (b) The Commissioner reviewed the terms of the options that were 
provided to Eligible Members of MSL as part of such Commissioner's 
review of the Plan of Conversion, and approved the Plan of Conversion 
following a determination that such Plan of Conversion was fair and 
equitable to all Eligible Members (including Eligible Members that were 
Plans).
    (c) Each Eligible Member had an opportunity to vote at a special 
meeting to approve the Plan of Conversion after full written disclosure 
was given to the Eligible Member by MSL.
    (d) Any determination to receive Cash or Policy Credits by an 
Eligible Member which was a Plan, pursuant to the terms of the Plan of 
Conversion, was made by one or more Plan fiduciaries that were 
independent of MSL; and neither MSL nor its affiliates exercises any 
discretion or provides investment advice, with the meaning of 29 CFR 
2510.3-21(c), with respect to such decisions.
    (e) After each Eligible Member was allocated an amount of Fixed 
Consideration equivalent to approximately $400, such Eligible Member 
was considered to receive an amount of Variable Consideration for each 
policy owned by the Eligible Member on the Record Date to reflect the 
Eligible Member's estimated past and future contributions to surplus, 
as determined by an actuarial formula (approved by the Commissioner) 
based on specific features of the policies owned by the Eligible Member 
on the Actuarial Calculation Date.
    (f) In the case of a MSL Plan, the Independent Fiduciary:
    (1) Voted on whether to approve or not to approve the 
demutualization;
    (2) Elected between consideration in the form of Cash or Policy 
Credits on behalf of such MSL Plans;
    (3) Reviewed and approved MSL's allocation of Cash or Policy 
Credits received for the benefit of the participants and beneficiaries 
of the MSL Plans;
    (4) Will provide the Department with a complete and detailed final 
report as it related to the MSL Plans prior to the granting of the 
exemption; and
    (5) Took or will take all actions that were necessary and 
appropriate to safeguard the interests of the MSL Plans and their 
participants and beneficiaries.
    (g) All Eligible Members that were Plans participated in the 
transaction on the same basis as all Eligible Members that were not 
Plans.
    (h) No Eligible Member paid any brokerage commissions or fees in 
connection with the receipt of Policy Credits.
    (i) All of MSL's policyholder obligations remained in force and 
were not affected by the Plan of Conversion.
    (j) The terms of the transactions were at least as favorable to the 
Plans as an arm's length transaction with an unrelated party.

Notice to Interested Persons

    Notice of the proposed exemption will be given to interested 
persons within 14 days of the publication of the notice of pendency in 
the Federal Register. The notice will include a copy of the notice of 
proposed exemption, as published in the Federal Register, as well as a 
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2), 
which shall inform interested persons of their right to comment. 
Comments with respect to the proposed exemption are due 44 days after 
the date of publication of the proposed exemption in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Mr. Arjumand A. Ansari of the 
Department at (202) 693-8566. (This is not a toll-free number.) Liberty 
Media International, Inc. (LMI) Located in Englewood, CO, [Application 
No. D-11277].

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act and in accordance with the 
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 
August 10, 1990). If the exemption is granted, the restrictions of 
sections 406(a), 406(b)(1) and (b)(2), and 407(a) of the Act shall not 
apply,\19\ effective July 26, 2004, to (1) the acquisition by the 
Liberty Cablevision of Puerto Rico 401(k) Savings Plan (the Plan) of 
certain stock rights (the Rights) pursuant to a stock rights offering 
(the Offering) by LMI, the Plan sponsor and a party in interest with 
respect to the Plan; (2) the holding of the Rights by the Plan during 
the subscription period of the Offering; and (3) the disposition or 
exercise of the Rights by the Plan.
---------------------------------------------------------------------------

    \19\ It is represented that because the fiduciaries for the Plan 
have not made an election under section 1022(i)(2) of the Act, 
whereby the Plan would be treated as a trust created and organized 
in the United States for purposes of tax qualification under section 
401(a) of the Code, jurisdiction under Title II of the Act does not 
apply. Therefore, LMI is not requesting, nor is the Department 
providing, exemptive relief under the provisions of Title II of the 
Act. The Department is, however, providing exemptive relief under 
Title I of the Act.
---------------------------------------------------------------------------

    This proposed exemption is conditioned upon the following 
requirements:
    (a) The Rights were acquired by the Plan pursuant to Plan 
provisions for individually-directed investment of participant 
accounts;
    (b) The Plan's receipt of the Rights occurred in connection with 
the Rights Offering made available to all shareholders of LMI common 
stock;
    (c) All decisions regarding the holding and disposition of the 
Rights by the Plan were made in accordance with Plan provisions for 
individually-directed investment of participant accounts by the 
individual participants whose accounts in the Plan received Rights in 
the Offering, and if no instructions were received, the Rights were 
sold;

[[Page 14727]]

    (d) The Plan's acquisition of the Rights resulted from an 
independent act of LMI as a corporate entity, and all holders of the 
Rights, including the Plan, were treated in the same manner with 
respect to the acquisition; and
    (e) The Plan received the same proportionate number of the Rights 
as other owners of LMI Series A common stock (the Series A Stock).

Effective Date: If granted, this proposed exemption will be effective 
as of July 26, 2004.

Summary of Facts and Representations

    1. LMI, located in Englewood, Colorado, is a publicly-traded 
company with majority and minority interests in international 
distribution and programming companies. LMI's stock is traded on the 
Nasdaq National Market under the symbol ``LBTYA.'' Among LMI's 
principal assets is Liberty Media International Holdings, LLC (LMIH), a 
wholly owned subsidiary, which, in turn, wholly owns Liberty 
Cablevision of Puerto Rico, Ltd. (LCPR). LCPR is located in Luquillo, 
Puerto Rico. LCPR provides cable television, long distance telephone, 
and Internet access services to customers.
    2. LMI maintains the Plan for the benefit of LCPR employees. The 
Plan is a defined contribution plan that complies with the requirements 
of sections 1165(a) and (e) of the Puerto Rico Internal Revenue Code of 
1994, as amended.\20\ As of July 26, 2004, the Plan had approximately 
241 participants and total assets of $2,315,009. Also as of July 26, 
2004, the Plan held approximately 9,428 shares of LMI-issued Series A 
Stock valued at $298,671 on such date. The Series A Stock comprised 
approximately thirteen percent (13%) of the total Plan assets and it 
represented less than 1/10th of 1% of the total outstanding issue of 
Series A Stock, which consisted of 139,915,585 shares.
---------------------------------------------------------------------------

    \20\ It is represented that the Puerto Rico Tax Code provides 
``qualification'' rules for retirement plans that cover employees 
who reside in Puerto Rico. The qualification rules are similar, but 
not identical to, the requirements of section 401(a) of the Code. In 
order to permit permit pre-tax contributions by employees, and to 
allow deductions of contributions by the employer, Puerto Rico law 
also requires that the Plan qualify under the applicable sections of 
the Puerto Rico Tax Code.
---------------------------------------------------------------------------

    Eurobank, a banking corporation organized under the laws of the 
Commonwealth of Puerto Rico, is the Plan's trustee (Trustee). The 
Trustee holds legal title to the Plan's assets. Fidelity Investments 
Institutional Operations Company, Inc. (Fidelity) of Boston, 
Massachusetts, is the Plan's administrator. The Plan administrative 
committee (the Plan Administrative Committee) is the fiduciary 
responsible for Plan matters. The Plan Administrative Committee is 
comprised of Messrs. David Leonard, Bernard Dvorak, and Jose Alegria. 
Messrs. Leonard and Dvorak are LMI officers. Mr. Alegria is LCPR's 
general manager. At the time of the Offering, none of these individuals 
were on LMI's Board of Directors.
    3. The Plan permits participants to contribute a portion of their 
respective annual compensation to the Plan as pre-tax salary reduction 
contributions and as after-tax contributions. LMI then makes a matching 
contribution to the Plan. Participant salary reduction contributions 
are immediately 100% vested, while LMI's matching contributions vest 
according to a three-year vesting schedule, which is based on the years 
of service each participant has completed.\21\
---------------------------------------------------------------------------

    \21\ Series A Stock acquired by a Plan participant through the 
exercise of the Rights was vested based on the vested status of the 
Series A Stock on which the Right was granted. For example, Series A 
Stock acquired through the exercise of the Rights and held in a 
participant's employee contributions account became 100% vested. 
Series A Stock acquired through the exercise of the Rights and held 
in a participant's employer matching contributions account (which 
could be 33%, 66%, or 100% vested, depending on the participant's 
years of service) was vested in the same percentage as the employer 
matching contribution account.
---------------------------------------------------------------------------

    The Plan provides for participants to direct investments of their 
own contributions into one of 18 investment categories, including the 
Liberty Media International Stock Fund (the LMI Stock Fund). LMI 
matching contributions are always invested in the LMI Stock Fund if the 
account is not 100% vested. If the participant's LMI matching 
contributions account is 100% vested, the participant may direct the 
investment of the entire account into any of the investment options 
available under the Plan.
    4. On July 26, 2004, LMI announced a special rights offering (i.e., 
the Offering) which expired on August 23, 2004 (the Expiration Date). 
The Rights Offering period was determined solely by LMI. Holders of 
record of Series A Stock as of July 26, 2004 (the Record Date), each 
received 0.20 of a transferable subscription Right for each share of 
Series A Stock held. Such Rights were traded on NASDAQ. Each whole 
Right entitled the holder to purchase one share of Series A Stock at a 
subscription price of $25 per share (the Subscription Price). LMI's 
Board of Directors determined the Subscription Price. The Offering also 
gave LMI shareholders the right to purchase additional shares of Series 
A Stock up to the number of shares that were not purchased by the other 
shareholders (the Over Subscription Privilege).
    5. Because the Plan was the holder of record of Series A Stock, LMI 
represents that the granting of a Right to the Plan by LMI was the 
grant of an ``employer security'' under section 407(d)(1) of the 
Act.\22\ However, LMI explains that the Rights were not ``qualifying 
employer securities'' under section 407(d)(5) of the Act.\23\ 
Therefore, LMI indicates that its granting of the Rights to the Plan 
and the subsequent exercise of the Rights by the Plan participants, 
would violate sections 406(a), 406(b)(1), and 406(b)(2) of the Act. 
Therefore, LMI requests an administrative exemption from the Department 
for such transactions. If granted, the exemption would be effective as 
of July 26, 2004.\24\
---------------------------------------------------------------------------

    \22\ An ``employer security'' is defined under section 407(d)(1) 
of the Act as a security issued by an employer of employees covered 
by the Plan, or by an affiliate of such employer.
    \23\ Section 407(d)(5) of the Act defines the term ``qualifying 
employer security'' as an employer security which is (a) stock, (b) 
a marketable obligation, or (c) an interest in a publicly traded 
partnership, but only if such partnership is an existing partnership 
as defined in the Code.
    \24\ To avoid engaging in a prohibited transaction, the Plan 
Administrative Committee considered refusing to accept the Rights. 
However, since participation in the Offering was structured to allow 
participants to purchase shares of Series A Stock at a discount from 
market price, the Plan Administrative Committee concluded that a 
refusal to accept the Rights could constitute a breach of fiduciary 
duty under the Act.
---------------------------------------------------------------------------

    6. As part of the Rights Offering process, the Plan established two 
temporary funds to administer the Rights, the ``Rights Holding Fund'' 
and the ``Liberty Media Receivable Fund.'' The Rights Holding Fund was 
established to hold the Rights when they were issued. Rights were then 
credited to participants' accounts based on their respective balances 
in the LMI Stock Fund on July 26, 2004. The Liberty Media Receivable 
Fund, following the exercise of Rights as directed by the Plan 
participants, reflected the approximate value of the LMI Stock due from 
the subscription agent.
    7. Under the terms of the Plan, the Trustee had the option of 
either ``passing-through'' its right to vote to the Plan participants 
or taking action on the Series A Stock on behalf of such participants. 
However, the Plan Administrative Committee elected to have each 
participant determine whether to exercise or sell the Rights 
attributable to the shares of the Series A Stock allocated to the 
participant's Plan account. The elections applied to both the Series A 
Stock held in the participant's account that were attributable to the 
participant's own pre-

[[Page 14728]]

tax and after-tax contributions and to matching employer contributions 
(including vested and nonvested matching contributions).
    The passing-through of the election to exercise or sell the Rights 
was determined by the Plan Administrative Committee to be in the best 
interests of the Plan participants. This was because in order for a 
participant to exercise the Rights to acquire additional shares of 
Series A Stock, other assets in the Plan and in the participant's 
account, had to be liquidated. Therefore, by passing through this 
exercise election to each Plan participant, the participant could make 
an independent decision on whether to liquidate the assets in his or 
her Plan account to purchase additional shares of Series A Stock at a 
discount.
    8. To facilitate the pass through of the election, the Plan 
prepared and provided to participants detailed explanations of the 
participant's alternatives with respect to the Rights. In this regard, 
the Plan prepared and furnished Questions & Answers to Plan 
participants. Among other things, the Questions & Answers explained the 
Rights Offering and the participant's option to exercise or sell the 
Rights attributable to the Series A Stock allocated to such 
participant's Plan account. In addition, participants received the 
Rights Offering Instructions, which explained the steps a participant 
would take to exercise or sell the Rights. Further, participants were 
provided a prospectus describing the Rights issued by LMI.
    9. Fidelity required a considerable amount of administrative time 
to receive the Rights from LMI, to determine the Rights allocable to 
each participant based on the quantity of Series A Stock held in the 
participant's account, and then to allocate the Rights to the 
participant in the Rights Holding Fund. Fidelity was eventually able to 
commence taking exercise or sell directions from the participants on 
August 2, 2004.
    10. All LMI shareholders, including the Trustee, could exercise or 
sell the Rights through the close of business on the Expiration Date, 
which was implemented solely by LMI. To meet this deadline, Fidelity 
was required to collect all of the participants' elections, liquidate 
sufficient account assets of the participants who elected to exercise 
their Rights, and then provide the exercise instructions along with the 
exercise funds to the subscription agent, EquiServe Trust Company, N.A. 
(EquiServe), of Canton, Massachusetts, for LMI by the Expiration Date. 
Plan participants were also required to have their exercise or sell 
elections to Fidelity by the close of business on August 17, 2004 (the 
Election Close-Out Date) to give Fidelity sufficient time to liquidate 
other assets so that cash would be available for participants to 
exercise their Rights.
    11. Under the Oversubscription Privilege, LMI shareholders could 
subscribe to purchase additional shares of Series A Stock up to the 
number of shares that were not purchased by the other shareholders. 
However, the Plan Administrative Committee determined that the 
Oversubscription Privilege would result in a number of prohibited 
transactions and fiduciary breaches for which retroactive exemptive 
relief from the Department might not be obtainable. This was because in 
order to subscribe for the Oversubscription Privilege, the Trustee 
would have been required to liquidate Plan assets in order to remit 
cash to LMI in anticipation of the possibility of purchasing additional 
Series A Stock. Then, the liquidated Plan assets would have been held 
in an interest-bearing account and commingled with LMI's general 
assets. In addition, the interest would have been paid to LMI.
    Furthermore, it is represented that the liquidated assets might not 
have been used to purchase additional Series A Stock because the 
Oversubscription Privilege was conditioned on the Plan exercising all 
the issued subscription Rights. Thus, in the instance where the Plan 
did not exercise all its issued subscription Rights, the 
Oversubscription Privilege could not be exercised.\25\
---------------------------------------------------------------------------

    \25\ It is represented that LMI stated in the Prospectus for the 
Rights Offering that the Oversubscription Privilege could be 
exercised only if the shareholder exercised basic subscription 
Rights in full. Because the Trustee is the shareholder of the Plan's 
shares of Series A Shares, the Trustee would have had to exercise 
every Right issued on every share of Series A Stock held by the Plan 
in order to take advantage of the Oversubscription Privilege. 
Because this did not occur, the Oversubscription Privilege was not 
available to the Plan.
---------------------------------------------------------------------------

    12. Each Plan participant had the option to exercise any percentage 
of the Rights granted on such participant's Series A Stock allocated to 
the participant's Plan account. By speaking to a Fidelity 
representative at any time prior to 4 p.m. Eastern Daylight Time, a 
Plan participant could elect to exercise a Right on the Election Close-
Out Date. Participants had the opportunity prior to the Election Close-
Out Date to revoke or change instructions to exercise by (a) electing a 
new percentage; (b) placing an order to sell; or (c) a combination of 
both.
    The dollar amount required to exercise the Rights was exchanged 
from other investments in the participant's account into the Receivable 
Fund. The required dollar amount equaled the percentage of Rights 
exercised (as elected by the participant) multiplied by the number of 
Rights credited to the participant's account and multiplied by the 
exercise price for the Rights Offering. The dollar amount was exchanged 
from the other investment categories in which the account was invested 
on a proportional basis by source. The Liberty Media Stock Fund and the 
LMI Stock Fund were not included unless sufficient funds did not exist 
in the other investment categories under the participant's account. For 
those individuals with insufficient funds to permit exercise of the 
entire elected amount, Fidelity exercised as many rights as the account 
balance permitted.
    13. On or about August 20, 2004, the Rights to be exercised and the 
necessary funds were submitted to EquiServe for the purchase of Series 
A Stock. The participants' balances in the Rights Holding Fund were 
reduced by the number of Rights exercised on a participant's behalf. 
Fidelity then sold all remaining Rights on the open market between 
August 18, 2004 and August 23, 2004, at which time the Rights expired. 
Upon receipt of the new Series A Stock, the Liberty Media Receivable 
Fund was closed and the newly-received shares were transferred into the 
LMI Stock Fund and allocated to the participants' Plan accounts.
    For any Rights sold by the Plan, a commission of 2.9 cents per 
Right was charged to the Plan account from which the Right was sold. 
The commission was disclosed to participants, in the materials provided 
explaining the Rights Offering. The commission was not paid to LMI but 
to the broker-dealer, National Financial Services (NFS) of New York 
City, New York, for the sale transaction. NFS is an affiliate of 
Fidelity and is wholly owned by Fidelity Global Brokerage Group, Inc. 
The Plan Administrative Committee determined, after reasonable 
consideration of the alternatives, that the use of NFS was in the best 
interests of the Plan for the following reasons: \26\ (a) Brokerage 
services required to effect the sales transaction were considered 
necessary services for the operation of the Plan; (b) the reputation of 
NFS as a reputable broker; (c) the already established procedures 
between Fidelity and NFS for the prompt execution of the sale 
transactions; (d) the ability of NFS

[[Page 14729]]

to accept the engagement upon very short notice (the short notice 
provided by the issuer of the Rights); (e) the reasonable price charged 
for the brokerage services when compared with other unrelated brokers; 
and (f) the short-term nature of the arrangement. Although Fidelity is 
affiliated with NFS, it is represented that Fidelity did not use any 
discretion to select NFS as broker for the Rights. Moreover, it is 
represented that the participants paid commissions in the sale of their 
Rights in the same manner as any other shareholder paid commissions in 
the sale of their rights.
---------------------------------------------------------------------------

    \26\ The Department expresses no opinion herein on whether the 
selection of NFS meets the statutory conditions contained in section 
408(b)(2) of the Act.
---------------------------------------------------------------------------

    14. Those participants who elected to exercise only a portion of 
their Rights later could elect to exercise additional Rights if 
sufficient time existed prior to the Election Close-Out Date. The 
Election Close-Out Date was established to permit sufficient time to 
liquidate the other assets in an orderly manner so that the necessary 
cash would be available to exercise the Rights before the Rights 
offering Expiration Date (August 23, 2004). Unexercised Rights as of 4 
p.m. Eastern Time, August 17, 2004, were offered for sale on the open 
market by Fidelity from August 18, 2004, through August 23, 2004. 
Rights that remained unsold at the close of the market on August 23, 
2004, expired.
    A participant who elected to sell, rather than exercise the Rights 
allocated to his or her Plan account, was required to (a) contact a 
Fidelity representative; and (b) specify the percentage (in whole 
amounts) of the Rights he or she desired to sell.
    15. It is represented that the Rights Offering and the resulting 
transactions were protective, in the best interests of, and beneficial 
to the Plan and its participants and beneficiaries because participants 
in the Plan were treated in a similar manner as other LMI shareholders 
who received the Rights, with the sole exception that the Plan 
participants were not entitled to participate in the Oversubscription 
Privilege. Additionally, no expenses were incurred by the Plan from the 
Rights Offering, and full disclosure of the Rights Offering was made in 
the public documents filed with the Securities and Exchange Commission. 
With respect to the Plan participants, it is represented that all 
participants were notified in advance of the procedures for instructing 
Fidelity of the participant's desires for exercise or sale under the 
Rights offering, and all instructions given by the involved 
participants to Fidelity were properly executed. Further, all actions 
by Fidelity and the Trustee with respect to the Rights Offering were 
made pursuant to express instructions, except when the involved 
participant failed to act or acted in violation of the published 
procedures. Under such circumstances, the Rights were placed on the 
open market for sale and any unsold rights were allowed to expire 
unexercised. It is represented that the instructions for the 
disposition of the Rights upon the failure of the involved participant 
to act or to give valid instructions were fully disclosed in the 
procedural instructions given to the involved participants. 
Furthermore, it is represented that the instructions were consistent 
with the nature of participant-directed investments under a plan.
    16. In summary, it is represented that the transactions have 
satisfied the statutory criteria for an exemption under section 408(a) 
of the Act because:
    (a) The Rights were acquired by the Plan pursuant to Plan 
provisions for individually-directed investment of participant 
accounts;
    (b) The Plan's receipt of the Rights occurred in connection with 
the Rights Offering made available to all shareholders of Series A 
Stock;
    (c) All decisions regarding the holding and disposition of the 
Rights by the Plan were made in accordance with Plan provisions for 
individually-directed investment of participant accounts by the 
individual participant whose account in the Plan received Rights in the 
Offering, and if no instructions were received the Rights were sold;
    (d) The Plan's acquisition of the Rights resulted from an 
independent act of LMI as a corporate entity, and all holders of the 
Rights, including the Plan, were treated in the same manner with 
respect to the acquisition; and
    (e) The Plan received the same proportionate number of the Rights 
as other owners of Series A Stock.

Notice to Interested Persons

    Notice of proposed exemption will be provided to all interested 
persons by first class mail within 4 days of publication of the notice 
of pendency in the Federal Register. Such notice shall include a copy 
of the notice of pendency of the exemption, as published in the Federal 
Register, and a supplemental statement, as required pursuant to 29 CFR 
2570.43(b)(2), which will inform interested persons of their right to 
comment on the proposed exemption and/or to request a hearing. Comments 
and hearing requests are due within 34 days of the date of publication 
of the proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Silvia M. Quezada of the 
Department, telephone number (202) 693-8553. (This is not a toll-free 
number.) Riggs Bank N.A., Washington, DC; and the PNC Financial 
Services Group, Inc. (PNC), Pittsburgh, Pennsylvania (together, the 
Applicants), [Application No. D-11310].

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 2570, 
subpart B (55 FR 32836, 32847, August 10, 1990).

Section I. Riggs Bank N.A.

    If the exemption is granted, Riggs Bank N.A. (``Riggs Bank'') shall 
not be precluded from functioning as a ``qualified professional asset 
manager'' pursuant to Prohibited Transaction Exemption 84-14 (49 FR 
9494, March 13, 1984) (``PTE 84-14'') beginning on the date of the 
acquisition of Riggs National Corporation, the parent of Riggs Bank, by 
PNC, solely because of a failure to satisfy section I(g) of PTE 84-14 
as a result of the conviction of Riggs Bank for the felony described in 
the January 27, 2005 felony information (the ``Information'') entered 
in the U.S. District Court for the District of Columbia, provided that:
    (a) This exemption is not applicable if Riggs becomes affiliated 
with any person or entity convicted of any of the crimes described in 
section I(g) of PTE 84-14, unless such person or entity already has 
been granted an exemption to continue functioning as a QPAM pursuant to 
PTE 84-14;
    (b) This exemption is not applicable if Riggs is convicted of any 
of the crimes described in section I(g) of PTE 84-14, other than the 
specific felony charged in the Information;
    (c) An independent auditor, who has appropriate technical training 
or experience and proficiency with Title I of ERISA's fiduciary 
responsibility provisions, shall conduct an audit of Riggs Bank's ERISA 
custody and fiduciary asset management functions. This audit will be 
commenced not later than June, 2005. It will be completed and a report 
setting forth the procedures conducted and the results obtained will be 
sent to the Department as soon as possible, but in no event later than 
September 30, 2005;
    (d) The audit described above will cover the following areas for 
the period commencing in March, 1999 and ending with the date of the 
closing of the Riggs-PNC transaction (the Time Period): reconciliations 
(to determine that reconciliations and settlements are performed 
accurately and timely, and outstanding items are monitored and

[[Page 14730]]

cleared in a timely manner); unitizations (to determine that daily 
processes, including trade requests, valuation and reconciliation of 
unitized assets are authorized and properly performed, are consistent 
with liquidity requirements and to ensure that unitized assets 
evaluations are valid); conversions (to determine that adequate 
controls are in place and working effectively to ensure that 
conversions are completed accurately, in a timely manner, and in 
accordance with the client's contract); fees (to determine that 
controls over the fee assessment and collection process are adequately 
designed and operating accurately and effectively); annual and monthly 
statements (to determine that statements are prepared accurately and 
distributed to clients independently and within the required frequency 
and time frame); training (to determine that account administrators and 
administrative assistants are adequately trained, including with 
respect to the requirements of ERISA); system authorization (to 
determine whether there are controls in place to ensure access to 
systems is authorized, approved and limited based on employees' 
particular duties and responsibilities); new accounts (to determine 
controls in place to ensure new accounts receive appropriate approvals 
and are accurately set up for future required reviews and other account 
activities); the adequacy of the written policies and procedures 
adopted by Riggs to ensure compliance with the terms of the QPAM 
exemption (other than paragraph 1(g) of PTE 84-14), and the 
requirements of Title I of ERISA (including ERISA's prohibited 
transaction provisions and applicable statutory and administrative 
exemptions); and compliance (through a test of a representative sample 
of transactions of client plans during the Time Period) with: (i) The 
written policies and procedures that it has adopted and (ii) the 
objective requirements of Title I of ERISA and PTE 84-14 (other than 
paragraph 1(g) of PTE 84-14);
    (e) Any irregularities identified as a result of the audit will be 
promptly corrected; and
    (f) On the closing of the acquisition transaction, PNC will apply 
the same internal control and audit policies and procedures applied and 
enforced with respect to its pre-existing ERISA fiduciary asset 
management functions to the ERISA custody and fiduciary asset 
management functions formerly associated with Riggs Bank.

Section II. PNC

    If the exemption is granted, PNC and its affiliates shall not be 
precluded from functioning as a ``qualified professional asset 
manager'' pursuant to PTE 84-14 beginning on the date of the 
acquisition of Riggs National Corporation, the parent of Riggs Bank, by 
PNC, solely because of a failure to satisfy section I(g) of PTE 84-14 
as a result of the conviction of Riggs Bank for the felony described in 
the Information entered in the U.S. District Court for the District of 
Columbia, provided that:
    (a) This exemption is not applicable if PNC or any affiliate 
becomes affiliated with any person or entity convicted of any of the 
crimes described in section I(g) of PTE 84-14, unless such person or 
entity already has been granted an exemption under PTE 84-14; and
    (b) This exemption is not applicable if PNC or any affiliate is 
convicted of any of the crimes described in section I(g) of PTE 84-14, 
other than the conviction of Riggs Bank for the specific felony charged 
in the Information.

Section III. Definitions

    (a) For purposes of this exemption, the term ``Riggs'' means and 
includes Riggs Bank and any entity that was affiliated with Riggs Bank, 
including but not limited to its corporate parent Riggs National 
Corporation, prior to the date of acquisition of Riggs National 
Corporation by PNC.
    (b) For purposes of this exemption, the term ``PNC'' includes PNC 
Financial Services Group, Inc. and any entity that was affiliated with 
PNC Financial Services Group, Inc. prior to the date of acquisition of 
Riggs National Corporation by PNC, and any future affiliates, other 
than Riggs Bank, as defined in subsection (a).
    (c) The term ``affiliate'' of a person means--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person,
    (2) Any director of, relative of, or partner in, any such person,
    (3) Any corporation, partnership, trust or unincorporated 
enterprise of which such person is an officer, director, or a 5 percent 
or more partner or owner, and,
    (4) Any employee or officer of the person who--
    (A) is a highly compensated employee (as defined in section 
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of 
the wages of such person) or,
    (B) has direct or indirect authority, responsibility or control 
regarding the custody, management or disposition of plan assets.
    (d) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (e) The term ``Corporate Probation Period'' means the five-year 
period of corporate probation provided for in the plea agreement 
entered into between Riggs Bank, the United States Attorney for the 
District of Columbia and the United States Department of Justice and 
filed with the United States District Court for the District of 
Columbia on January 27, 2005; provided that if Riggs Bank or its 
corporate parent Riggs National Corporation is sold to a party 
unaffiliated with it as of the date of the plea agreement, whether by 
sale of stock, merger, consolidation, sale of a significant portion of 
its assets, or other form of business combination, or otherwise 
undergoes a direct or indirect change of control within the five-year 
corporate probation period, the corporate probation period shall 
terminate upon the closing of any such transaction or the occurrence of 
any such change of control.

Summary of Facts and Representations

    1. Riggs Bank is a national bank located in Washington, DC. The 
Applicants represent that the clientele served by Riggs Bank includes 
employee benefit plans subject to the Act. Riggs Bank maintains that, 
given the size and number of the plans which Riggs Bank represents, the 
number of financial service providers engaged by such plans, the 
breadth of the definition of ``party in interest'' under the Act, and 
the array of services offered by Riggs Bank, it would not be uncommon 
for Riggs Bank to propose a transaction involving a party in interest 
with respect to a plan for which Riggs Bank is acting in a fiduciary 
capacity. Riggs Bank represents that such transactions are necessary to 
offer plan clients adequate investment diversification opportunities, 
and that such opportunities will be missed if Riggs is not permitted to 
function as a QPAM pursuant to PTE 84-14.
    2. The Applicants represent that Riggs National Corporation, the 
corporate parent of Riggs Bank, currently has an agreement with 
Pittsburgh-based PNC that provides for Riggs National Corporation and 
Riggs Bank to be acquired by PNC. PNC is more than ten times larger 
than Riggs Bank, and is one of the largest financial services holding 
companies in the United States. As of June 30, 2004, PNC had total 
assets of approximately $73.1 billion and had 775 branches in six 
states, with a total deposit base of more than $50 billion.

[[Page 14731]]

As further discussed below, Riggs Bank represents that, absent an 
individual exemption, any acquiring entity would be barred from 
functioning as a QPAM pursuant to PTE 84-14, and that, accordingly, the 
provision of a QPAM exemption would facilitate the consummation of a 
change of control transaction.
    3. On January 27, 2005, the United States Attorney for the District 
of Columbia filed the felony information (the Information) in the 
United States District Court for the District of Columbia describing 
violations of 31 U.S.C. 5322(b) & 5318(g) (``the Title 31 Felony''). 
The Information charges Riggs Bank with failing to report suspicious 
banking transactions. That same day, Riggs Bank entered a plea of 
guilty to the charge in the Information pursuant to a written plea 
agreement with the United States Attorney for the District of Columbia 
and the Department of Justice (the ``Plea Agreement''). In the Plea 
Agreement, Riggs Bank agreed to pay a fine of $16 million and agreed to 
the Corporate Probation Period.
    4. The conduct that is the subject of the Information and the Plea 
Agreement involved compliance with Title 31 Bank Secrecy Act reporting 
requirements. Specifically, the Plea Agreement sets forth that Riggs 
Bank failed to file required reports with government authorities when 
certain of its customers, including foreign government officials such 
as Augusto Pinochet of Chile and senior officials in the government of 
the Republic of Equatorial Guinea, engaged in suspicious banking 
transactions involving the movement of funds between and among various 
accounts and banks.
    5. Riggs Bank represents that the Title 31 Felony did not relate in 
any way to the conduct of any investment adviser or fiduciary of an 
employee benefit plan. Riggs Bank maintains, however, that although 
none of the unlawful conduct involved investment management activities 
of Riggs Bank or its subsidiaries, or any plans covered by the Act, the 
Title 31 Felony could preclude Riggs from serving as a ``qualified 
professional asset manager'' (``QPAM''), due to the provisions of 
sections I(g) and V(d) of PTE 84-14. Section I(g) of PTE 84-14 
precludes a person who otherwise qualifies as a QPAM from serving as a 
QPAM if such person or an affiliate thereof has within the ten years 
immediately preceding the transaction been either convicted or released 
from imprisonment, whichever is later, as a result of certain specified 
criminal activity. Because the Title 31 Felony involved a crime 
described in PTE 84-14, the Applicants represent that Riggs may be 
barred from qualifying as a QPAM.
    6. Accordingly, the Applicants request an exemption to enable Riggs 
and its affiliates to function as QPAMs despite Riggs Bank's failure to 
satisfy section I(g) of PTE 84-14 as a result of the judgment of 
conviction to be entered against Riggs Bank on the charges set forth in 
the Information. The proposed exemption is also requested on behalf of 
such entities that may become affiliated with Riggs Bank, including, 
but not limited to, PNC and its affiliates. The transactions covered by 
the proposed exemption would include the full range of transactions 
that can be executed by investment managers who qualify as QPAMs 
pursuant to PTE 84-14 and satisfy the conditions contained therein. If 
granted, the exemption will enable Riggs to qualify as a QPAM by 
satisfying all of the conditions of PTE 84-14, except the condition 
stated in section I(g) of PTE 84-14.
    7. Riggs Bank represents that the Title 31 Felony does not create 
any concern that it will endanger employee benefit plans for which 
Riggs Bank or its subsidiaries propose to serve as a QPAM. Riggs Bank 
represents that none of the conduct that is set forth in the Plea 
Agreement involved any aspect of the investment management or 
investment advisory functions of Riggs Bank or its subsidiaries. 
Moreover, the individuals known to have been directly involved in the 
transactions set forth in the Plea Agreement, the managers of the 
divisions and subsidiaries where these individuals worked, and the 
managers of Riggs Bank's compliance staff during the relevant period, 
are no longer employed by Riggs Bank. Riggs Bank further represents 
that the Embassy Banking and International Private Banking divisions of 
Riggs Bank, the London Branch of Riggs Bank, and Riggs Bank's Edge Act 
subsidiary, Riggs International Banking Corporation, where the conduct 
that is set forth in the Plea Agreement transpired, have been closed or 
are in the process of being sold or closed, and that these operations 
were both operationally and physically separate from the investment 
management and advisory functions of Riggs Bank and its subsidiaries. 
Furthermore, Riggs Bank represents that it is committed to a strong 
legal compliance program. To address the Bank Secrecy Act compliance 
issues highlighted by the Information and prior regulatory enforcement 
actions, Riggs Bank has invested more than 50 million dollars in 
technological and system upgrades as well as the wholesale replacement 
and upgrade of its compliance personnel and systems. As the Plea 
Agreement reflects, these investments by Riggs Bank bore directly on 
the discovery of certain conduct set forth in the Plea Agreement, and 
certain conduct set forth in the Plea Agreement was first uncovered by 
internal investigations undertaken by Riggs Bank.
    8. Riggs Bank has agreed that an independent auditor, who has 
appropriate technical training or experience and proficiency with 
ERISA's fiduciary responsibility provisions, shall conduct an audit of 
Riggs Bank's ERISA fiduciary asset management functions. This audit 
will be commenced not later than June 2005. It will be completed and a 
report setting forth the procedures conducted and the results obtained 
will be sent to the Department as soon as possible, but in no event 
later than September 30, 2005.
    9. The audit described above will cover the following areas for the 
Time Period: reconciliations (to determine that reconciliations and 
settlements are performed accurate and timely, and outstanding items 
are monitored and cleared in a timely manner); unitizations (to 
determine that daily processes, including trade requests, valuation and 
reconciliation of unitized assets are authorized and properly 
performed, are consistent with liquidity requirements and to ensure 
that unitized assets evaluations are valid); conversions (to determine 
that adequate controls are in place and working effectively to ensure 
that conversions are completed accurately, in a timely manner, and in 
accordance with the client's contract); fees (to determine that 
controls over the fee assessment and collection process are adequately 
designed and operating accurately and effectively); annual & monthly 
Statements (to determine that statements are prepared accurately and 
distributed to clients independently and within the required frequency 
and time frame); training (to determine that account administrators and 
administrative assistants are adequately trained, including with 
respect to the requirements of ERISA); system authorization (to 
determine whether there are controls in place to ensure access to 
systems is authorized, approved and limited based on employees' 
particular duties and responsibilities); new accounts (to determine 
controls in place to ensure new accounts receive appropriate approvals 
and are accurately set up for future required reviews and other account 
activities); the adequacy of the written policies and procedures 
adopted by Riggs to ensure compliance with the

[[Page 14732]]

terms of the QPAM exemption (other than paragraph 1(g) of PTE 84-14), 
and the requirements of Title I of ERISA (including ERISA's prohibited 
transaction provisions and applicable statutory and administrative 
exemptions), and compliance (through a test of a representative sample 
of transactions of client plans during the Time Period) with: (i) the 
written policies and procedures that it has adopted and (ii) the 
objective requirements of Title I of ERISA and PTE 84-14 (other than 
paragraph 1(g) of PTE 84-14). Any irregularities will be promptly 
corrected.
    10. On the closing of the acquisition transaction PNC will apply 
the same internal control and audit policies and procedures applied and 
enforced with respect to its pre-existing ERISA fiduciary asset 
management functions to the ERISA fiduciary asset management functions 
formerly associated with Riggs Bank.
    11. In summary, the Applicants represent that the criteria of 
section 408(a) of the Act are satisfied for the following reasons: (a) 
The Title 31 Felony involved areas of business unrelated to employee 
benefit plans; (b) Riggs Bank has committed to a legal compliance 
program featuring written policies and procedures to prevent future 
illegal activity; (c) an independent audit requirement will further 
protect plans and their plan participants; (d) Riggs Bank's substantial 
investment in technological and system upgrades, as well as the 
wholesale replacement and upgrade of its compliance personnel and 
systems; and (e) the exemption will permit the bank(s) to engage in a 
broader variety of investments and services on behalf of client 
employee benefit plans which demand diverse investment opportunities.

Notice to Interested Persons

    With respect to notification of interested persons, Riggs Bank will 
distribute this notice of proposed exemption by first class mail to an 
independent plan fiduciary for all ERISA pension plans for which Riggs 
Bank and its subsidiaries provide fiduciary services, including trustee 
services and/or the provision of investment advice. All notifications 
will be mailed within three business days after publication of the 
proposed exemption in the Federal Register. Comments and requests for a 
hearing must be received by the Department within 28 days of the date 
of publication of this proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the 
Department, telephone (202) 693-8546. (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 18th day of March, 2005.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor.
[FR Doc. 05-5744 Filed 3-22-05; 8:45 am]

BILLING CODE 4510-29-P