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Employee Benefits Security Administration

EBSA Federal Register Notice

Proposed Exemptions; Notice of Proposed Individual Exemption Involving the Plumbers & Pipefitters National Pension Fund (the Fund) [08/21/2006]

[PDF Version]

Volume 71, Number 161, Page 48767-48788


[[Page 48767]]

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Part VII





Department of Labor





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 Employee Benefits Security Administration



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Employee Benefit Plans--Notice of Proposed Individual Exemption 
Involving the Plumbers & Pipefitters National Pension Fund (the Fund) 
and Grant of Individual Exemption for the Southwest Gas Corporation 
(Southwest Gas); Notices


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application No. D-11183, et al.]

 
Proposed Exemptions; Notice of Proposed Individual Exemption 
Involving the Plumbers & Pipefitters National Pension Fund (the Fund)

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 (ERISA or 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-5700, 
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.

DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application No. D-11183]

Notice of Proposed Individual Exemption Involving the Plumbers & 
Pipefitters National Pension Fund (The Fund) Located in Alexandria, VA

Proposed Exemption

    If the proposed exemption is granted, the restrictions of sections 
406(a)(1)(A) through (D) and 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, effective June 5, 2001, to the transactions described below 
involving the receipt by Diplomat Properties, Limited Partnership (DPLP 
or the Partnership) of certain services and products from the hotel 
management company, Westin Management Company East (after January 12, 
2006, Westin Hotel Management, L.P.) (referred to collectively with its 
parent company, Starwood Hotels & Resorts Worldwide, Inc., as Starwood) 
and certain related entities (Related Companies), retained to operate 
the Partnership's principal asset, the Westin Diplomat Resort & Spa and 
the Diplomat Country Club and Spa (collectively, the Resort), provided 
that there is adherence to the material facts and representations 
contained in the Application and satisfaction of the applicable 
requirements described in Parts II and III below.

I. Exemption Transactions

    (a) The provision of Centralized Services or Additional Services 
(collectively, the Proposed Services) to the Resort by Starwood or a 
Related Company;
    (b) The purchase of goods from Starwood or a Related Company in 
connection with the provision of Centralized Services or Additional 
Services (Purchase of Goods); and
    (c) The participation of the Resort in the Associate Room Discount 
Program (ARD Program).

II. General Conditions

    (a) LaSalle, CHM or a successor independent QPAM for the 
Partnership, will represent the interests of the Partnership for all 
purposes with respect to the Proposed Services and the Purchase of 
Goods for the duration of the arrangement. The QPAM, on behalf of the 
Partnership, through negotiation and execution of the Operating 
Agreements and periodic monitoring of the Proposed Services and the 
Purchase of Goods, determines that:
    (1) Starwood's provision of Centralized Services and Additional 
Services to the Resort is in the best interests and protective of the 
participants and beneficiaries of the Plumbers & Pipefitters National 
Pension Fund (the Fund).
    (2) The terms under which the provision of Centralized Services and 
Additional Services are provided by Starwood to the Resort are at least 
as favorable to the Resort as those which the Partnership could obtain 
in arm's length transactions with unrelated parties in the relevant 
market;
    (3) The overall cost of services and products charged by Starwood 
to the Resort on a centralized basis is consistent with the amounts 
charged by other potential branded operators; and
    (4) The Centralized Services and Additional Services made available 
by Starwood and its affiliates are provided at prices and on terms at 
least as favorable to the Partnership as are available in the relevant 
market from

[[Page 48769]]

unrelated parties and reflect the same prices and terms as are offered 
by Starwood and its affiliates to other properties managed by Starwood 
and its affiliates in the ordinary course of business.
    (b) Under the Operating Agreements, at all times that the 
Partnership is using Centralized Services and Additional Services, 
Starwood has acknowledged in writing:
    (1) Starwood's fiduciary status under section 3(21)(A) of the Act, 
with respect to the Resort; and
    (2) Starwood's indemnification of the Partnership with respect to 
any claims, demands, actions, penalties, suits and liabilities arising 
from Starwood's breach of fiduciary duty or violation of the Act.
    (c) On an annual basis, the QPAM, on behalf of the Partnership, 
approves the participation of the Resort in Centralized Services and 
Additional Services as part of its approval of the Resort's Annual 
Operating Plan.
    (d) During any year, subject to exceptions for certain Variable 
Expenses or Uncontrollable Expenses, Starwood does not, without the 
approval of the QPAM, incur any cost or expense or make any expenditure 
with respect to Centralized Services or Additional Services that would: 
(i) Cause the total expenditures for any line item in the Annual 
Operating Plan that includes payment of fees for Centralized Service or 
Additional Services to exceed the budgeted expense for that line item 
by more than 10%; (ii) cause total expenditures for any department of 
the Resort that pays fees for Centralized Service or Additional 
Services to exceed the budgeted expenses for that department by more 
than 5%; or (iii) cause the actual aggregate expenditures for operating 
expenses or capital expenditures to exceed the budget by more than 2%.
    (e) All purchases of products and services by Starwood from (i) 
itself, (ii) any person or entity directly or indirectly controlling, 
or controlled by, or under common control with Starwood, or (iii) any 
entity in which Starwood or its affiliates have any ownership, 
investment or management interest or responsibility are first approved 
by the QPAM (as part of the approval of the Annual Operating Plan or 
otherwise), except in cases of purchases of not more than $50,000 per 
annum where the price paid or charged for each such purchase and the 
terms thereof are lower than those that could be obtained from 
unrelated third parties in the applicable location.
    (f) The QPAM approves (as part of the approval of the Annual 
Operating Plan or otherwise) all contracts for Additional Services 
(and, to the extent applicable, Centralized Services) that provide for 
aggregate annual expenditure or revenue of more than $50,000 or have a 
term of more than one year.
    (g) The fees charged to the Resort for Centralized Services can be 
increased only on a system-wide basis (i.e., not just for the Resort).
    (h) The fees for Centralized Services are not greater than the 
lowest of: (i) the fees initially agreed upon by the parties in the 
Operating Agreement; (ii) Starwood's prevailing fee for the services or 
products as generally charged by Starwood or its affiliates to other 
properties managed by it; (iii) Starwood's cost, with no profit or 
mark-up (although it may include overhead); or (iv) 5% of gross 
revenues (exclusive of certain occupancy-related charges, such as 
third-party reservations fees and frequent guest program charges) of 
the hotel or country club, as applicable.
    (i) Starwood does not, with respect to any Centralized Service or 
Additional Service, solicit bids for the product or service in a manner 
that could result in a ``right of first refusal'' or other bidding 
advantage for the benefit of Starwood or its affiliates.
    (j) The QPAM, on behalf of the Partnership, has the right to opt 
out of any Centralized Services and to elect not to receive any 
Additional Services.
    (k) The QPAM, on behalf of the Partnership, retains the right to 
conduct audits of transactions entered into by Starwood with respect to 
Centralized Services and Additional Services, and, in the event that an 
audit uncovers a discrepancy related to any payment to Starwood or its 
affiliates, it must be corrected within ten days of notice being 
provided.
    (l) As part of its monitoring responsibilities, the QPAM, on behalf 
of the Partnership, has the right to meet with representatives of 
Starwood no less frequently than monthly (and otherwise at the request 
of the Partnership) for the purposes of reviewing each Annual Operating 
Plan, preparing, reviewing and updating rolling three-month forecasts 
for the Resort, and analyzing Starwood's actual performance against the 
Annual Operating Plan and the performance of the Resort relative to an 
applicable competitive set of resorts.
    (m) The QPAM, on behalf of the Partnership, retains the right to 
receive monthly interim and annual accounting reports that include a 
comparison of actual to budgeted expenses, and to have such reports 
audited by an independent accounting firm not more than once in any 
fiscal year.

III. ARD Program Conditions

    (a)(1) Rooms are not made available to employees or associates of 
Starwood or a Related Company pursuant to the Associate Room Discount 
Program if the rooms could otherwise be sold to the public at a higher 
rate; and
    (2) In each case, the discounted rates fully cover the variable 
cost to the Resort for the use of the room and the cost to the Resort 
of the food, beverage and amenities.
    (b) Participation in the Associate Room Discount Program is offered 
by Starwood at all of its owned properties and properties that it 
manages.
    (c) The QPAM, acting on behalf of the Partnership, monitors the 
Resort's participation in the Associate Room Discount Program and 
retains the right to opt out of the Associate Room Discount Program.

IV. Definitions

    (a) The term ``Partnership'' means Diplomat Properties, Limited 
Partnership whose principle asset is the Resort. The Plumbers & 
Pipefitters National Pension Fund (the Fund) is the sole member of 
Diplomat Properties, LLC, the General Partner of the Partnership. The 
QPAM is a non-member manager of the General Partner.
    (b) The term ``QPAM'' means LaSalle Investment Management, Inc. 
(LaSalle), Capital Hotel Management, LLC (CHM) or a successor qualified 
professional asset manager (as defined in section V(a) of Prohibited 
Transaction Class Exemption 84-14 at 49 FR 9494, March 13, 1984), as 
amended at 71 FR 5887 (February 3, 2006) or such other entity that is 
permitted by a U.S. Department of Labor individual exemption to 
function with powers similar to that of a qualified professional asset 
manager, that is exercising discretionary authority on behalf of the 
Fund with respect the activities of the Partnership and the Resort.
    (c) The term ``affiliate'' means:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner of any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (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 ``Related Company'' means wholly or partially owned

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affiliates of Starwood (including, without limitation, affiliates of 
Starwood that are parties in interest by virtue of section 3(14)(G), 
(H) or (I) of the Act or disqualified persons by virtue of sections 
4975(e)(2)(G), (H), or (I) of the Code) or affiliates or other entities 
in which Starwood has an ownership or other contractual interest.
    (f) The term ``Additional Services'' means any service or product 
other than Centralized Services: (1) Which is provided to the Resort by 
Starwood or a Related Company and is typically provided by Starwood or 
a Related Company on a property by property basis to properties 
operated by Starwood or an affiliate; and (2) for which Starwood or a 
Related Company receives a fee for providing such service or product 
that is based on the level of usage by the Resort.
    (g) The term ``Annual Operating Plan'' means the annual written 
operating plan submitted by Starwood to the Partnership no later than 
90 days before the commencement of each fiscal year, which plan shall 
include monthly estimates and cover the operating budget (including 
departmental revenue and expenses, taxes, insurance and reserves), the 
capital budget, the marketing plan, the advertising program, working 
capital requirements, litigation and any other matter reasonably deemed 
appropriate by the QPAM, on behalf of the Partnership.
    (h) The term ``Associate Room Discount Program'' means the program 
maintained by Starwood with the approval of the QPAM pursuant to which 
discounted room rates and discounted food, beverage and other amenities 
at participating hotels are provided for Starwood associates or 
associates of participating Starwood franchise hotels worldwide and 
their immediate family.
    (i) The term ``Centralized Services'' means any service or product, 
including (without limitation) certain advertising, marketing and 
promotional activities (including frequent guest programs), 
reservations and distribution systems and networks, training and 
similar items, provided that: (i) The service or product is provided to 
the Resort by Starwood or a Related Company and is typically provided 
by Starwood or a Related Company on a central, regional, chain or brand 
basis, rather than specifically at an individual property; and (ii) 
Starwood or a Related Company receives a fee for providing the service 
or product that is based on the level of usage by the Resort.
    (j) The term ``Operating Agreements'' means, collectively, the 
parallel operating agreements, executed on June 5, 2001, between 
LaSalle and Starwood, as amended, to brand and operate the Resort's 
convention hotel as the ``Westin Diplomat Resort and Spa,'' and to 
brand and operate the country club as ``The Diplomat Country Club and 
Spa,'' as part of Starwood's Luxury Collection, and any successor 
operating agreements that may be in effect between the parties or 
successor parties from time to time.
    (k) The term ``Variable Expense,'' as set forth in the Operating 
Agreements, means operating expenses covered by the then-current Annual 
Operating Plan that reasonably fluctuate as a direct result of business 
volumes, including food and beverage expenses, other merchandise 
expenses, operating supply expenses, and energy costs.
    (l) The term ``Uncontrollable Expenses,'' as set forth in the 
Operating Agreements, means certain expenses the amount of which cannot 
be controlled by Starwood, which expenses include, without limitation, 
real estate taxes, utilities, insurance premiums, license and permit 
fees and charges provided in contracts entered into pursuant to the 
Operating Agreement, provided, that Starwood agrees to use commercially 
reasonable efforts to mitigate the expenses under such contracts; and 
the QPAM, on behalf of the Partnership, agrees that Starwood shall have 
the right to pay all Uncontrollable Expenses without reference to the 
amounts provided for in respect thereof in the approved Annual 
Operating Plan.

Summary of Facts and Representations

    1. The Application for this proposed exemption is submitted by 
LaSalle Investment Management, Inc. (LaSalle), as qualified 
professional asset manager (QPAM) for, and on behalf of, the Plumbers & 
Pipefitters National Pension Fund (the Fund). By letter dated April 30, 
2006 (LaSalle Letter), LaSalle informed the Department that as of April 
30, 2006, LaSalle was replaced by Capital Hotel Management, LLC (CHM) 
as the QPAM for the Fund.\1\ The Fund is a Taft-Hartley, multi-
employer, defined benefit pension fund, as defined in section 3(37) of 
ERISA. The Fund is funded solely by employer contributions negotiated 
under collective bargaining agreements with the United Association of 
Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of 
the United States and Canada, AFL-CIO (the Union). The Fund is 
administered by the Board of Trustees of the Fund (the Board), which 
has six individual members, three of whom are appointed by employers 
who contribute to the Fund, and three of whom are appointed by the 
Union. By letter dated July 14, 2006 from CHM to the Department (CHM 
Letter), CHM stated that as of July 1, 2005, the Fund had 66,513 active 
participants, 17,697 terminated vested participants and 37,062 retirees 
and beneficiaries in pay status. As of July 1, 2006, the Fund had 
approximately $4.295 billion in total assets.
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    \1\ See below for information on the April 30, 2006 appointment 
of CHM as QPAM for the Fund.
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    2. The Application states that on August 19, 1997, the Union 
entered into a contract to acquire the Resort and related property from 
an unaffiliated third party (a wholly owned subsidiary of Union Labor 
Life Insurance Company). In late September 1997, the Union caused the 
Partnership and its general partner, Diplomat Properties, Inc. (the 
General Partner), to be organized, with the Union as the initial sole 
limited partner of the Partnership and the sole owner of Diplomat 
Properties, Inc. The Partnership was assigned the right to acquire the 
Resort and arranged to borrow $40 million from a third-party lender to 
fund the acquisition of the Resort and such related property. On 
October 7, 1997, the Union assigned its interests in both the 
Partnership and its General Partner to the Fund, in exchange for the 
Fund's agreement to make a capital contribution to the Partnership of 
$40 million plus certain costs incurred by the Union in connection with 
the acquisition of the Resort and related property. On October 9, 1997, 
the Partnership acquired the Resort from the third party seller for a 
purchase price of approximately $40 million (plus reimbursement of 
certain expenses to the Union); it thereupon repaid the loan from the 
third party lender. As a result, the Fund became the indirect owner of 
the Resort. The LaSalle Letter noted that ``the Fund paid off the $40 
million bank loan. That $40 million paid by the Fund was treated as a 
capital contribution by the Fund to the Partnership.''
    The Fund applied for an exemption from the prohibited transaction 
provisions of ERISA and the Code, on October 3, 1997 for the 
acquisition of the Resort. On November 15, 1999, the Department granted 
PTE 99-46, at 64 FR 61944, which provided conditional relief for the 
Fund's acquisition of the Resort from the Union. Additional 
undertakings agreed to by the Fund, pursuant to an October 13, 1999 
Term Sheet, were incorporated by reference into PTE 99-46. The Fund 
agreed to the appointment of Actuarial Sciences Associates (ASA) as the 
independent named fiduciary of the Fund's account that holds the 
interests in the Partnership, the General Partner and

[[Page 48771]]

other assets of the Fund invested in, or awaiting investment in, the 
Resort (the Diplomat Account). ASA's responsibilities were subsequently 
assumed, with the Department's approval, by its wholly owned 
subsidiary, ASA Fiduciary Counselors, Inc. (ASA Counselors). ASA 
Counselors resigned its appointment, effective as of November 3, 2000.
    On September 12, 2000, the Board and Independent Fiduciary 
Services, Inc. (IFS) entered into an Independent Named Fiduciary 
Agreement (the IFS Agreement), the terms of which were reviewed and 
approved by the Department prior to its execution, pursuant to which 
IFS was appointed, effective as of November 3, 2000, as the successor 
independent named fiduciary of the Fund with respect to the Diplomat 
Account. A more complete description of the general background and 
history of the development of the Resort is set forth in the 
Department's grant of PTE 2001-39 at 66 FR 53439, October 22, 2001 (PTE 
2001-39), providing relief to IFS which is similar to the relief 
provided under Prohibited Transaction Class Exemption 84-14 at 49 FR 
9494, March 13, 1984 (PTE 84-14).
    3. In September 2002, the Department filed a lawsuit entitled Chao 
v. Maddaloni, et al., Case No. 02-61289, in the United States District 
Court for the Southern District of Florida, in which the Partnership 
and the Fund trustees were named as defendants. The relevant facts are 
set forth in the Complaint filed in such action by the Department 
alleging that the trustees failed to prudently manage and invest the 
Fund's assets through their involvement in the Resort project. The suit 
arose from the Fund's acquisition and development of the Resort 
project, beginning in 1997. The Secretary alleged that the trustees 
acted imprudently and without regard to the Fund participants' 
interests in entering into, and continuing the project, specifically by 
failing to obtain, prior to the expenditure of Fund assets, necessary 
analyses for the evaluation of the economic feasibility of the project, 
failing to determine the Fund's rate of return, or risk, on the 
investment, failing to evaluate the qualifications and experience of 
various contractors with whom they entrusted discretionary authority 
with respect to the disposition of Fund assets, and paying excessive 
and unreasonable fees and expenses to the contractors. In August 2004, 
the parties signed a final Consent Order resolving the claims contained 
in this action.\2\ Prior to the Fund's retention of IFS, the Department 
notified the Partnership that it had begun an investigation of the use 
of the Fund's assets in the development of the Resort.\3\
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    \2\ The Application states that LaSalle has been informed that 
the Fund is the successor to the former Sabine Area Pipefitters 
Local No. 195 Pension Trust Fund, which was involved in the 
correction of a 1988 prohibited transaction that had occurred before 
the former Local 195 Pension Fund merged into the Fund in 1990. IFS 
has further been informed that the correction of the prohibited 
transaction did not involve any assets of the Fund except to the 
extent that the Local 195 Joint Apprenticeship Committee was 
assessed first tier excise taxes under section 4975 of the Code for 
its use of assets of the former Local 195 Pension Fund.
    \3\ Although the Department has requested documents relating to 
various aspects of the Resort's development and operation, LaSalle 
states that it is unaware of any investigation or enforcement action 
that is targeted at the retention of Starwood or its provision of 
services and/or products to the Resort.
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    4. The Applicant represents that, pursuant to IFS's authority as 
independent named fiduciary, and after an extensive due diligence 
process, which involved issuing a comprehensive request for proposal to 
numerous major real estate investment managers and personal interviews 
with several finalist candidates, IFS appointed LaSalle, effective 
December 14, 2000, pursuant to a comprehensive discretionary investment 
management agreement (the QPAM Agreement), to serve as the QPAM for the 
Diplomat Account, with broad discretionary powers to manage the 
Diplomat Account.
    The Application notes that LaSalle, a member of the Jones Lang 
LaSalle group (JLL), is a leading global real estate investment manager 
with approximately $21.5 billion of public and direct real estate 
assets under management. LaSalle represents many of the world's largest 
and most sophisticated institutional investors, has expertise in the 
management of all major real property types (including hotels) and 
frequently acts as an ERISA fiduciary and QPAM for its clients. Various 
divisions of JLL have assisted (and will continue to assist) LaSalle in 
connection with the Resort, subject to LaSalle's supervisory authority. 
Since its appointment, LaSalle has become integrally involved in all 
aspects of the Diplomat Account, and has made all of the business, 
operational and fiduciary decisions for the Diplomat Account, pursuant 
to the QPAM Agreement (subject to the oversight or approval of IFS, as 
appropriate). The fees of IFS are paid by the Fund; the fees of LaSalle 
are paid by the Partnership.
    In April 2003, Diplomat Properties, Inc. was converted to its 
present form, a limited liability company, and it is now known as 
Diplomat Properties, LLC (DPLLC). The Fund is the sole member of DPLLC, 
and both IFS and LaSalle are non-member managers of DPLLC. DPLLC 
remains the General Partner of the Partnership (DPLP).
    5. The Resort, located in the cities of Hollywood and Hallandale 
Beach, Florida, was initially constructed in the late 1950s and 
consisted of several parcels. The original Diplomat Hotel operated as a 
premier hotel and country club catering to the middle-income convention 
trade, but has been closed since 1992. Since their appointment, IFS and 
LaSalle have overseen the continuing development and initial operation 
of the Resort, including the construction, development and opening of a 
destination resort with multiple operating components, including a 998-
room ocean-front convention hotel with multiple food and beverage 
outlets and recreational facilities, a 217,000 square-foot convention 
center, two marinas, a country club (with 60 guest rooms, approximately 
8,000 square feet of meeting space, and a clubhouse), a 30,000 square-
foot spa, an 18-hole golf course and a tennis center.
    6. The Application states that the process of selecting a third-
party operator for the Resort formally commenced on or about April 1, 
2000, at which time Hotel Investment Partners (HIP), a hotel consulting 
firm selected by ASA, sent a request for proposal to potential 
operators. Upon its retention in December 2000, LaSalle reviewed the 
documentation collected in connection with HIP's initial search for an 
operator. LaSalle determined that it should conduct further analyses 
and reach its own conclusions regarding the appropriate operator for 
the Resort because, among other things, it found, as had IFS, that the 
initial process was not sufficiently organized or documented. During 
the first few months of 2001, IFS and LaSalle spent a significant 
amount of time and effort conducting due diligence and a competitive 
bidding process for the selection of a world-class branded hotel 
operator for the Resort.
    LaSalle performed a comprehensive review of the relevant issues, 
with the assistance of its affiliate, Jones Lang LaSalle Hotels (JLL 
Hotels) (a hotel advisory group staffed by lodging industry 
professionals experienced in hotel operations, hotel asset management 
and hotel transactions, including financing), and in coordination with 
IFS and its consultant, Strategic Hospitality Advisors (a hospitality 
consultant that regularly advises institutional clients on

[[Page 48772]]

the investment characteristics of hotel and resort properties, 
including feasibility, acquisition, planning, design, construction, 
operation and disposition of hotels and resorts) (SHA). Based on such 
review, LaSalle concluded that the retention of a third-party operator 
for the Resort was an important component to securing any necessary 
financing and ensuring that the Fund's investment in the Project will 
be managed in a profitable and professional manner. LaSalle further 
concluded that the Partnership should consider retaining a major 
operating company that has a significant internal infrastructure and 
global marketing resources.
    The Application notes that, in light of these conclusions, LaSalle 
then distributed a second, very detailed request for proposal to ten 
hotel operating companies, which companies then competed for the right 
to manage the Resort. The selected candidates included many of the 
larger international hotel operating companies, including several 
brands. After a detailed analysis of each candidate's written response 
to the request for proposal and a comprehensive analysis of the 
performance of the candidates' comparable properties, LaSalle concluded 
that, given the Resort's size, location and recent history, the 
selected operator should have a strong brand, including a marketing 
program, a group sales network and global distribution and reservations 
systems, in order to maximize revenues throughout the year in an area 
of the country (south Florida) primarily known as a seasonal 
destination.
    This conclusion was based in part on the fact that, while there are 
large-scale independent resort hotels in south Florida that operate 
successfully without the benefit of an operator's brand, those resorts 
are located in the more primary, upscale destinations of Boca Raton, 
Palm Beach and Miami and, in most instances, are established hotels 
that have been operating for many years. In addition, outside the key 
destination markets, such as Orlando, New York, Los Angeles and 
Chicago, there are, according to JLL Hotels, only eight independent 
hotels with over 800 rooms. In fact, LaSalle observed that all recently 
opened hotels over 1,000 rooms have been affiliated with a branded 
``chain.''
    Through a rigorous interview process, coupled with a detailed 
analysis of each candidate's written response to the request for 
proposal and a comprehensive analysis of the performance of the 
candidates' comparable properties, the original field of ten was then 
narrowed to three major operators--Starwood, Marriott International and 
Hyatt. Further interviews and negotiations with each of these three 
operator candidates, including an on-site review of the Resort by each 
company and a review of their comments to a proposed operating 
agreement, resulted in the selection of Starwood and Marriott 
International as finalists for negotiation. Following meetings with 
each of these companies and their counsel to review their comments on 
the proposed operating agreement, LaSalle selected Starwood, through 
its operating subsidiary, Westin Management Company East (effective as 
of January 12, 2006, Westin Management Company East assigned its 
interest in the Operating Agreements (described below) to Westin Hotel 
Management, L.P., a wholly-owned subsidiary of Starwood Hotels & 
Resorts Worldwide, Inc.) (Westin), as the candidate of first choice.
    Starwood is one of the world's preeminent international hotel 
owners and operators (with brands including St. Regis, W Hotels, Westin 
and Sheraton). Among other items considered by LaSalle in selecting 
Starwood was LaSalle's conclusion that the overall cost of services and 
products offered by Starwood on a centralized basis was consistent with 
the amounts charged by other potential operators.
    7. The Application represents that following extensive negotiations 
with Starwood, on June 5, 2001, LaSalle, on behalf of the Partnership 
(Owner), and Starwood (Operator) signed parallel operating agreements 
(collectively, the Operating Agreements) to brand and operate the 
Resort's convention hotel and spa as the ``Westin Diplomat Resort and 
Spa'' and to brand and operate the country club as ``The Diplomat 
Country Club and Spa,'' as part of Starwood's Luxury Collection. In the 
Operating Agreements, Starwood specifically acknowledged, represented 
and warranted that it is a ``fiduciary,'' as defined in section 
3(21)(A) of ERISA, with respect to the Resort and all assets of the 
Fund subject to the Operating Agreements, and that it is not subject to 
any of the disqualifications described in section 411 of ERISA.
    The Applicant asserts that the 15-year term of each of the 
Operating Agreements evidences Starwood's significant, long-term 
business and financial commitment to the Resort. The Operating 
Agreements required Starwood to provide up to $4 million to pay for 
various pre-opening expenses. The Application states that Starwood also 
agreed to provide loans to the Resort (without recourse to the general 
assets of the Fund, other than the Diplomat Account) to fund, among 
other things and subject to certain conditions, up to $11.75 million in 
operating cash flow shortfalls at any given time and up to $50 million 
for debt service shortfalls at any given time.
    8. The Application states that Starwood, like other national or 
international branded hotel operating companies, provides many of its 
services and products through itself or through wholly or partially 
owned affiliates (including, without limitation, the Starwood ERISA 
Affiliates \4\ or other entities in which Starwood has an ownership 
interest (all such affiliates or other entities referred to herein as 
the Related Companies).\5\ Many of these services and products, such as 
certain advertising, marketing and promotional activities (including 
frequent guest programs), reservations and distribution systems and 
networks, training and the like, are typically provided on a central, 
regional, ``chain'' or ``brand'' basis, rather than specifically at a 
property (such services and products referred to herein as Centralized 
Services). Other

[[Page 48773]]

services or products (the Additional Services) are provided by Starwood 
or Related Companies on a property by property basis to properties 
operated by Starwood.\6\ Starwood has informed LaSalle that, where that 
is the case, these Additional Services are offered to properties owned 
and operated by Starwood, as well as to properties operated, but not 
owned, by Starwood (such as the Resort); in each case on the same 
basis.
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    \4\ The parties in interest are Starwood Hotels & Resorts 
Worldwide, Inc., its wholly owned subsidiary, Westin Management 
Company East, and certain related entities that, because of their 
relationship with Starwood, are parties in interest by virtue of 
sections 3(14) (G), (H) or (I) of ERISA or disqualified persons by 
virtue of sections 4975(e) (2) (G), (H), or (I) of the Code 
(Starwood ERISA Affiliates).
    \5\ The Application notes that Starwood has disclosed to the 
Fund that its corporate and operating structure includes divisions 
or departments within Starwood or its operating subsidiary Westin 
Management Company East and a variety of affiliates that regularly 
deal with Starwood's network or ``chain'' of branded properties to 
provide both ``centralized'' services and products and regular, 
property-specific services and sources of supply. As operator of the 
components of the Resort, Starwood has presented an operating plan 
that will include obtaining certain products and/or services for the 
Resort (including the Centralized Services and Additional Services 
defined below) from Starwood, its affiliates and other Related 
Companies, subject to all the restrictions in the applicable 
Operating Agreement.
    In the LaSalle Letter, LaSalle further explained that the 
Applicant is requesting an exemption in order to permit Starwood to 
contract on behalf of the Applicant with any entity in which 
Starwood has an interest which arguably might affect its independent 
judgment. Because of the many and diverse entities in which Starwood 
from time to time has an economic interest and which are included in 
its operating programs, it is not feasible to break down the various 
types of relationships or to speculate how large an economic 
interest would have to be to create a prohibited transaction. 
Therefore, in order to cover all parties in which Starwood has an 
interest that might arguably affect its judgment, Starwood includes 
all entities in which it has an investment, even if the investment 
is very minor, as ``Related Companies.'' The references to ``ERISA 
Affiliates'' and ``subsidiaries'' are descriptive only and not 
meaningful to the Applicant because they are included in the larger 
group of ``Related Companies'' for which relief is requested.
    \6\ Starwood subsidiaries that may be involved in the provision 
of the Centralized Services and Additional Services to the Resort 
include the following: Galaxy Hotel Systems LLC; Westel Insurance 
Company; Westin Payroll Company; Westin Management Company East; 
Global Connextions, Inc.; and Starwood Reservations Corporation. 
LaSalle notes that, as used in the Application, the term 
``subsidiary'' refers to entities that are majority owned by 
Starwood; however, this distinction is not meaningful because the 
Application covers transactions with all Related Companies, which is 
a broader term that encompasses minority subsidiaries.
---------------------------------------------------------------------------

    The Application provides the following list of entities in which 
Starwood owns a minor equity interest and with which the Resort may 
enter into arrangements for products or services: LastMinute.com--On-
line provider of last-minute travel and entertainment packages.
    Plansoft Corporation--On-line meeting planning company that 
provides meeting planning and technology and services including the 
listing of basic meeting information on Starwood hotels.
    Brightware--Software licensor of e-mail automation and interactive 
one-to-one marketing solutions.
    Worldres--On-line Internet reservation network service provider for 
hotels and other lodging establishments that allows end-users to check 
availability and make real-time reservations.
    Big Vine--On-line business-to-business barter marketplace.
    Site 59.com Inc.--On-line provider of last-minute travel and 
entertainment packages.
    Classwave Wireless Inc.--Canadian company with a global strategy to 
transform the delivery of data to and from mobile devices.
    StarCite Inc.--On-line meeting planning company that provides 
meeting planning and technology and services including the listing of 
basic meeting information on Starwood hotels.
    Hotel Distribution Systems LLC--Joint venture to create a stable, 
low cost, high quality online distribution outlet for the services and 
products of its members currently consisting of Starwood, Hilton Hotels 
Corporation, Marriott International Hotels, Inc. Six Continents Hotels, 
Inc. and Pegasus Solutions, Inc.
    The Application notes that although the foregoing identifies the 
types of arrangements that Starwood currently expects to enter into 
with itself and Related Companies with respect to the Resort, it is 
possible that, due to changing business needs, other arrangements with 
these or other Related Companies will be consummated subject to the 
terms of the Operating Agreements.
    9. The Applicant states that the primary services and products 
provided by Starwood and its affiliates are classified as Centralized 
Services. In some cases, the products provided by Starwood and its 
affiliates (with respect to both Centralized Services and Additional 
Services) are incidental to the services it provides; in others they 
are not. Centralized Services, and the fee structure applicable 
thereto, were set forth in the Operating Agreements negotiated and 
executed by LaSalle for the Resort and were, therefore, approved by a 
QPAM. Changes to services and products or fees are presented to and 
approved, if applicable, by LaSalle in connection with the annual 
budget process (as described below). In addition, the amount of fees 
for Centralized Services is limited as described above to, among other 
limitations, the cost incurred by Starwood and its affiliates with no 
mark-up or profit. The Application provides a description of the 
Additional Services, Centralized Services and fees proposed in 
connection with the Operating Agreements.\7\ The Partnership (through 
LaSalle) has the right to opt out of any Centralized Service.
---------------------------------------------------------------------------

    \7\ The Fund notes that due to the ever changing nature of the 
hospitality business, it is anticipated that services and products 
(whether Centralized Services or Additional Services) may be added, 
discontinued or modified from time to time in the future, subject to 
the limitations and LaSalle's rights to approve any such changes as 
described in the Operating Agreements.
---------------------------------------------------------------------------

    The Applicant provides that Centralized Services for which fees are 
payable to Starwood and affiliates include the following major 
components:
    Reservations Services, for which there are fees based on gross room 
revenue and per room charges, plus additional fees for specialized 
services.
    Frequency Programs, which are the preferred guest programs and 
airline programs used to increase loyalty to the Starwood brands. Fees 
are a percentage of qualified charges \8\ plus usage fees for training, 
program materials, program audits, bonus points and customer service.
---------------------------------------------------------------------------

    \8\ In the LaSalle Letter, LaSalle explained that ``qualified 
charges'' are charges on the guest's room account based on the U.S. 
dollars or equivalent spent on eligible room rate, food and 
beverage, direct dialed telephone, laundry/valet, and in-room movies 
only. Qualified charges also include food and beverage charges of 
US$10 or more in participating Starwood dining outlets, even if the 
guest is not a registered guest. Other charges such as parking, 
business center, retail stores, greens fees, etc., as well as taxes, 
gratuities, service charges and other applicable charges, such as 
energy charges, resort fees, etc, are not qualified charges. Banquet 
or meeting room charges billed back to a member's room are not 
qualified charges. Amounts earned or accrued for charges master-
billed or paid by wholesale rates including WFNR, and all other 
rates from pre-paid channels, such as but not limited to, 
priceline.com, expedia.com, hotels.com, hrn.com, hotwire.com, 
lastminute.com, site59.com, etc. tour or tour operator or other 
vouchers or for certain other discounted rates including, without 
limit, airline vouchers or for certain other discounted rates are 
also not qualified charges. Charges from tour operator rates; 
wholesaler rates; stays longer than 30 days, Free Night Awards, TAED 
rates; room rates billed to master account, crew room rates, and 
employee rates are not qualified charges.
---------------------------------------------------------------------------

    Sales and Marketing Services, for which there is a fee based on 
gross revenues plus certain specified transaction based fees.
    Human Resources, which provides administration of employee benefits 
and payroll for the Resort for a per capita and per check fee 
respectively.
    Information Technology, which includes the Integrated Property 
System, which is the standard and mandated property management system 
for all Starwood hotels and resorts; the Starwood SAP Accounting 
System; Technology Management Services; Revenue Management Services, 
and Network Services. Oracle has been selected as Starwood's database 
for all future systems, including StarwoodONE, the Starwood company 
portal. In order to use StarwoodONE (and any of the following systems: 
Opera PMS, Starwood Customer Relationship Marketing System, Topline 
Prophet, and Rate Shopper), the Resort must participate in the Starwood 
Enterprise Oracle License Program, either through a purchase of the 
right to use the licenses or payment of an annual user fee.
    The Application notes that, in addition, it will become mandatory 
over the next few years for all Starwood hotels to offer high-speed 
Internet services in accordance with Starwood's Broadband Standards. 
Broadband refers to the technology infrastructure that delivers large 
amounts of data, voice and video over a network. There are two 
components to the Broadband Standards--the Guest Portal Standards and 
the Broadband Technology Standards. The Starwood Broadband

[[Page 48774]]

Guest Portal is the customer access point to the Internet and is a 
mandatory Westin standard requiring the payment of fees to Starwood 
based on estimates by Starwood of its costs and expenses. The costs and 
expenses are tracked by Starwood and the fees are adjusted up or down 
as appropriate. The Broadband Technology Standard can be met by the 
property by using the Starwood Broadband Solution or another solution 
that meets required standards.
    Internal Audit Services, with fees based on the size of the hotel.
    Six Sigma, which applies training and other tools to improve 
business processes in order to increase revenue and decrease costs.
    Reimbursable Expenses. The Application states that, on an as needed 
basis, properties pay directly or reimburse Starwood and its 
affiliates, for specified charges and fees, which may include, without 
limitation, rooms programs and services, food and beverage programs and 
services, travel expenses of supervisors, website design and 
consulting, training courses, brand audits, central accounting, 
treasury services, property directories and other brand collateral, and 
payments made to third parties for items such as surveys, employee 
handbooks and similar publications, property photography, internet 
booking services, printing and distribution of manuals and similar 
publications, and the costs incurred by Resort personnel in attending 
management seminars and conferences organized by the corporate 
divisions of Starwood and its affiliates.
    The Application represents that, in some cases, Centralized 
Services are provided in exchange for a fee that cannot be affected by 
Starwood's exercise of discretion. For example, the fee for certain 
Centralized Services is based on the number of rooms at the Resort. 
However, there are other Centralized Services with respect to which 
Starwood or a Related Company receives a fee for providing the service 
or product that is based on the level of usage by the Resort where 
Starwood can, through the exercise of its discretion as operator of the 
Resort, affect the level of usage by the Resort of the product or 
service. For example, one Centralized Service involves SPG Bonus 
Points, pursuant to which Starwood, through the General Manager of a 
particular hotel, can attempt to increase business during slow periods 
by running a promotion that increases the frequent guest award for 
stays at that hotel. The cost of the promotion, which is 1.25 cents for 
each bonus point awarded, is paid to a fund maintained by Starwood and 
used to pay the cost of the program, which includes the overhead cost.
    Another example of this situation involves training courses 
provided by Starwood on a centralized basis. For example, Starwood 
offers at the regional level an ``ABCs of Housekeeping'' training 
course. A fee, based on the cost of the program (including overhead), 
is paid to Starwood and is based on the number of persons who attend. 
Since this course is mandatory for all housekeeping staff, Starwood can 
theoretically affect the level of its fee for this program by hiring 
more housekeeping staff. There are other training courses, such as 
arrival training, that are not mandatory for all of the staff of a 
department. This gives Starwood, through the hotel's General Manager, 
the discretion as to which hotel employees receive arrival training 
and, therefore, the level of fees it receives.
    10. The Applicant represents that in addition to the Centralized 
Services involving Starwood and Related Companies, the Resort may also 
acquire Additional Services (i.e., arrangements for products or 
services) with entities in which Starwood has made an investment, but 
which are not controlled by Starwood. These Additional Services are 
being provided by entities connected to Starwood. One example of the 
Additional Services is insurance. LaSalle has decided to obtain general 
liability, automotive liability, employment practices liability 
insurance, automobile physical damage and umbrella/excess liability 
coverage through the Starwood Risk Management Program. Starwood 
provides this coverage to its owned hotels and makes it available to 
managed hotels on an optional basis for all or only selected coverage. 
(There is an exception for workers' compensation insurance, which must 
be provided through Starwood because Starwood is the employer of the 
employees who operate the Resort.) The Resort will receive first dollar 
protection (with no deductibles) with respect to this coverage with the 
exception of automobile physical damage coverage, which has a small 
deductible, and employment practices liability insurance, which has a 
$100,000 deductible for the Resort vs. a $250,000 deductible for the 
policy purchased by Starwood. To fund this coverage, Starwood purchases 
high deductible insurance and funds projected losses and related 
administrative costs through its subsidiary Westel Insurance Company, 
with premiums to Westel allocated to participating hotels on a cost 
recovery basis. The potential underwriting surplus is retained or the 
potential deficit is absorbed by Westel. LaSalle believes that the cost 
of insurance purchased in this manner is more attractive to the 
Partnership than if it purchased comparable insurance through an 
unrelated party.
    11. The Application notes that another program Starwood typically 
implements at hotels it manages is the Associate Room Discount Program 
(ARD Program) that provides discounted room rates and discounted food, 
beverage and other amenities (to be determined in advance with 
LaSalle's approval) at participating hotels, including the Resort, for 
Starwood associates (including employees of Starwood and their 
immediate families) or associates of participating Starwood franchise 
hotels worldwide and their immediate families. Starwood associates are 
all regular full time and part time employees who have been employed by 
Starwood entities or participating Starwood franchise hotel employers 
for more than 90 days. The ARD Program is offered to all of the 
properties that Starwood owns, manages or has an interest in. All 
hotels owned or managed by Starwood participate in the Associate Room 
Discount Program. Most hotels franchised by Starwood also participate 
in the Program.
    The Applicant states that under the ARD Program, the Resort's 
management would have control over the number of rooms rented at the 
discounted rate on any given night based on occupancy levels at the 
Resort (and where this would not cause higher rate business to be 
displaced). The discounted rates under this program fully cover the 
variable cost to the hotel for the use of the room and the cost to the 
hotel of the food, beverage and amenities. In return for its 
participation in this program and its offering discounted rates, the 
Resort enjoys a substantial benefit in that employees of the Resort are 
entitled to discount rates at other hotels participating in the 
program. The Application asserts that this allows the Resort to provide 
its employees with a valuable employee benefit that is low in cost 
relative to the value it provides (particularly because it is available 
only when rooms could not otherwise be sold at a higher rate). In 
addition, since this arrangement is typically offered by Starwood and 
all other international branded operators, refraining from offering 
this benefit to its employees would place the Resort in a distinct 
hiring disadvantage vis-[agrave]-vis other competing hotels. Further, 
to the extent that an individual taking advantage of the ARD Program 
spends money on food, beverage and incidentals, he or

[[Page 48775]]

she will bring additional revenues to the Resort.
    The LaSalle Letter noted that there is not a specific document 
executed by the Partnership describing the ARD Program that LaSalle, on 
behalf of the Partnership, has agreed to or signed. However, LaSalle 
provided to the Department a March 17, 2004 Starwood Corporate/
Divisional HR Policies and Procedures document on ``Hot Rates,'' 
Starwood's Associate Room Discount policy. LaSalle, on behalf of the 
Partnership, and Starwood entered into the Operating Agreements. In 
these agreements, Starwood has the authority to determine employment 
practices, (including wages, hiring, discipline, and discharge), and 
similarly has the authority to participate in ``Centralized Services,'' 
or those programs that Starwood performs as Operator at all other 
hotels managed by Operator. Although LaSalle did not specifically 
negotiate the terms of the ARD Program, it approved of the 
participation in the ARD Program as part of a more global approval of 
the terms on which Starwood was retained. LaSalle elected not to opt 
out of the ARD Program because it concluded that the program was 
standard industry practice and that the Resort would enjoy a 
substantial benefit from the program. In addition, from time to time, 
LaSalle conducts operational audits, the most recent of which was March 
31, 2005, to ensure that Starwood is complying with its procedures.\9\ 
Although the scope of these operational audits varies from audit to 
audit, a review of Starwood's compliance with the ARD Program has been 
the subject of some prior audits.
---------------------------------------------------------------------------

    \9\ See 13.(c) below for more information on the latest 
operational audit conducted by LaSalle.
---------------------------------------------------------------------------

    In the LaSalle Letter, LaSalle stated that it would be overly 
burdensome to cross-reference the very long list of Fund participants, 
Trustees and contributing employers against the very long list of 
participants in the ARD Program. However, LaSalle confirms that no 
participant, Trustee or contributing employer of the Fund could be a 
participant in the Associate Room Discount Program by virtue of that 
status. Rather, such an individual would only be a participant in the 
Program if he or she were an employee of a Starwood entity or a 
participating franchise hotel (in accordance with the eligibility 
criteria described above).
    12. Section 5.01 of the Operating Agreements requires that: With 
respect to its decisions concerning the operation of the [Resort], the 
Operator shall at all times act in good faith and in the best interests 
of the Owner, using all commercially reasonable efforts to maximize the 
profits from operation of the [Resort] for [the Partnership], subject 
to the terms and conditions of this Agreement.
    The Applicant represents that consistent with this requirement, 
Starwood has indicated that as a major owner of hotels, its primary 
objective in establishing Centralized Services and Additional Services 
is to deliver value to all hotel properties it represents. LaSalle 
believes that it is through the aggregation of these properties, the 
implementation of demonstrated practices and its hospitality industry 
expertise that Starwood is able to provide services and products that 
will result in improved operating performance beyond that which can be 
provided by an operator of a single hotel or smaller group of hotels. 
LaSalle believes that (a) by centralizing this sourcing function, 
Starwood is also able to capture economies of scale designed to reduce 
the cost of the procurement function in the Resort and (b) 
participation in these programs by the Resort should result in 
increased efficiencies and lower operating costs.
    In this regard, LaSalle states that there is objective industry 
data indicating that chain hotels are better performers than 
independent hotels in terms of both average daily rate and occupancy. 
While there is data comparing chain and independent hotels on an 
overall performance basis, there are no specific benchmarks that allow 
for a comparison of specific services. Accordingly, at the time it 
retained Starwood on behalf of the Partnership, LaSalle considered the 
generally accepted principle in the hospitality industry that such 
services can be aggregated and delivered more effectively and 
efficiently on behalf of a chain of hotels rather than individual 
hotels. In so doing, it relied on various sources of industry data 
bearing upon this issue. By way of example, LaSalle provided to the 
Department an example of one data compilation, prepared by Smith Travel 
Research, on which LaSalle relied when it decided to retain a chain 
hotel that provides Centralized Services, rather than an independent 
hotel that does not. In addition, LaSalle notes that there are several 
services provided by a chain such as Starwood that could not be easily 
replicated by an individual property, such as a frequent traveler 
program, reservation center, and similar services. No benchmark would 
exist that compares the services of chain and independent hotels in 
that regard because the independent hotels do not provide the service 
at all.
    LaSalle has concluded that the Centralized Services and Additional 
Services are likely to result in improved operating performance that is 
both monetary and non-monetary. Starwood has represented to LaSalle 
that utilizing these services and products will result in cost savings 
through aggregation of Starwood's purchasing and organizational power, 
and, as more fully described below, the Operating Agreements include 
specific provisions to assure that the Resort will benefit from such 
arrangements. LaSalle also shares Starwood's belief that value will be 
achieved through enhancements in quality and service resulting from the 
economies of scale and joint participation in such arrangements with 
Starwood's branded hotels. In attempting to select the right supplier 
for the hotels it operates, Starwood considers a variety of other 
factors, such as financial, operational (including availability of 
supplies), health and safety issues, and LaSalle ultimately expects 
that Starwood's services and purchasing program will maximize the value 
of the properties.
    13. The Application states that as of January 2003, Starwood's 
portfolio consisted of over 750 properties owned, managed or franchised 
by Starwood in 80 countries. By aggregating certain service and other 
activities described above, Starwood believes that it obtains a 
substantial net cost savings for owners (including itself) of 
properties it manages. Nevertheless, recognizing the Partnership's 
unique status as an ERISA plan asset, the Applicant asserts that 
Starwood has agreed to significant conditions and that the Operating 
Agreements include stringent limitations on Starwood's ability to enter 
into transactions and arrangements concerning the Resort. The 
Application provides the following examples.\10\
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    \10\ The Partnership and Starwood have entered into two 
Operating Agreements, one covering the country club and spa and one 
covering the hotel and convention center. The Application notes that 
although it references specific terms and conditions related to the 
Resort in general, these terms and conditions are included in each 
of the two Operating Agreements.
---------------------------------------------------------------------------

(a) Limitations on Transactions and Arrangements

    In order to ensure that Starwood treats the Resort at least as well 
as the other properties it manages (and to make it more likely that the 
Resort will be operated in accordance with customary industry 
standards), the Operating Agreements provide that the general operating 
policies applied to the Resort must (in all material respects) be at 
prices and on terms and conditions no less favorable to the Resort (in 
terms of

[[Page 48776]]

increasing gross revenues and decreasing gross operating expenses) than 
the general operating policies applied by Starwood and/or its 
affiliates to the other properties managed by Starwood and/or its 
affiliates. Additionally, Starwood is required by the Operating 
Agreements to act in the best interests of the Partnership and to use 
all commercially reasonable efforts to maximize its profits from the 
Resort.
    There are limitations on Starwood's ability to enter into 
contracts. Specifically, any contracts, leases, licenses and concession 
agreements (other than collective bargaining agreements or terminable 
group sales contracts) providing for an aggregate annual expenditure or 
revenue that exceeds $50,000 for the Resort, or with a term in excess 
of one year for contracts,
    (i) require the Partnership's prior approval (through LaSalle), 
whether as part of the Annual Operating Plan or otherwise; and
    (ii) must be subject to the competitive bidding procedures included 
in the Operating Agreement. Similarly, any single purchase providing 
for the purchase of products and services that requires an expenditure 
that exceeds $50,000 requires the Partnership's prior approval (through 
LaSalle), whether as part of the annual operating plan or otherwise. 
Capital expenditures in excess of $25,000 (as adjusted for increases of 
CPI), or in excess of $100,000 (as adjusted for increases of CPI) in 
the aggregate in any fiscal year, also require Partnership approval.
    There are specific limitations on the fees that may be charged for 
Centralized Services, which may not be greater than the lowest of: (i) 
Fees initially agreed upon by the parties in the Operating Agreements 
(which are the same as those currently offered to other, similar 
properties that Starwood manages), (ii) Starwood's prevailing fee for 
such services as offered from time to time, (iii) Starwood's cost, with 
no profit or mark-up, or (iv) 5% of gross revenues (exclusive of 
certain occupancy-related charges, such as third-party reservations 
fees and frequent guest program charges) of the hotel or country club, 
as applicable.
    Centralized Services and Additional Services provided by Starwood 
affiliates must be provided at prices and on terms and conditions no 
less favorable to the Resort than the fees and terms and conditions 
charged or included generally by Starwood (and its affiliates) to other 
properties Starwood manages. The fees charged to the Resort for 
Centralized Services can only be modified on a system-wide basis (i.e., 
not just for the Resort).
    The fee for reservations services, which includes participation in 
Starwood's proprietary reservations network system, is determined 
according to actual usage of the services and system on a basis no less 
favorable than that of any other property that is furnished such 
services and system. The Application notes that, to the extent that 
usage is determined by individuals unrelated to Starwood or Related 
Companies, it is likely that the use of this system will not constitute 
a prohibited transaction in the first instance.
    Under section 5.07 of the Operating Agreements, unless the 
Partnership's prior consent is obtained (as part of the approval of the 
Annual Operating Plan or otherwise), any transaction for the purchase 
of products or services from Starwood, its affiliates \11\ or any 
entity in which Starwood or any of its affiliates has any ownership, 
investment or management interest or responsibility must (i) be on 
prices and terms better than the prices and terms that could be 
obtained from third parties for delivery or performance in Hollywood, 
Florida (for the hotel and convention center) or Hallandale Beach, 
Florida (for the country club and spa) and (ii) not exceed $50,000. To 
ensure that this provision is not undermined by suspect bidding 
practices, the Operating Agreements also provide that Starwood may not 
solicit bids in a manner that could result in a right of first refusal, 
or any other bidding advantage, for Starwood or any of its affiliates, 
as defined in the Operating Agreement.
---------------------------------------------------------------------------

    \11\ Section 1.01 of the Operating Agreement defines an 
``Affiliate'' of Starwood as ``any [other] person or entity directly 
or indirectly controlling, or controlled by, or under common control 
with [Starwood].''
---------------------------------------------------------------------------

    The Partnership (through LaSalle) has the right to opt out of any 
Centralized Services and may choose not to participate in the Associate 
Room Discount Program. As the Additional Services are provided on a 
case-by-case basis and are subject to the limitations described above, 
the Partnership may elect not to receive any Additional Services.

(b) Partnership Involvement in the Budgeting Process

    The Operating Agreements include detailed and elaborate budgeting 
and reporting requirements that limit significantly Starwood's 
discretion with respect to all transactions and purchases, particularly 
those with or from Starwood and/or its affiliates. Starwood must submit 
to the Partnership (no later than 90 days before the commencement of 
each fiscal year) an Annual Operating Plan for the Resort. The 
Partnership (through LaSalle) has specific line-item approval of the 
Annual Operating Plan, which includes monthly estimates and covers the 
operating budget (including departmental revenue and expenses, taxes, 
insurance and reserves), the capital budget, the marketing plan, the 
advertising program, working capital requirements, litigation and any 
other matter reasonably deemed appropriate by the Partnership.
    Starwood is required to work within the approved Annual Operating 
Plan, with very strict parameters for permitted variation. During any 
year, Starwood may not, without the Partnership's prior approval 
(through LaSalle), and subject to certain variable or 
``uncontrollable'' expenses (which are defined in the Operating 
Agreements and include such items as real estate taxes and the like), 
(i) incur any cost or expense that would cause total expenditures for 
any line item to exceed the budgeted expense for that line item by more 
than 10%, (ii) incur any cost or expense that would cause total 
expenditures for any department to exceed the budgeted expenses for 
that department by more than 5%, or (iii) incur any cost or expense 
that would cause total operating or capital expenditures to exceed the 
budget by more than 2%. Other than for emergency reasons, Starwood may 
not exceed the budgeted amount for capital expenditures.

(c) Reporting and Disclosure Obligations

    The Applicant asserts that the Operating Agreements allow the 
Partnership and LaSalle to monitor Starwood's compliance with the 
budget and all major expenditures and transactions. The Partnership, 
through LaSalle, controls all bank accounts, and has signatories on the 
operating accounts that Starwood will use to manage the Resort. Upon 
the occurrence of an Event of Default (as described below), the 
Partnership may freeze these accounts and prevent Starwood from making 
any additional payments.
    The Operating Agreements also provide that representatives of 
Starwood and the Partnership (through LaSalle) must meet no less 
frequently than monthly, for the purposes of (i) reviewing each annual 
operating plan; (ii) analyzing Starwood's actual performance against 
the annual operating plan; (iii) reviewing and updating rolling revenue 
disbursements and three-month forecasts for the Resort; and (iv) 
analyzing Starwood's actual

[[Page 48777]]

performance against the performance of an applicable competitive set of 
resorts.
    Under Article 11 of the Operating Agreements, LaSalle, on behalf of 
the Partnership, has the right to conduct audits with respect to the 
Resort. The Partnership receives interim (delivered within 20 days 
after the end of each fiscal month) and annual (audited, and delivered 
within 90 days after the end of each fiscal year) accounting reports, 
which include a comparison of actual to budgeted expenses. The 
Partnership, through LaSalle, has the right to have these reports 
audited by an independent accounting firm. If any discrepancy is 
discovered with respect to payments to Starwood or any of its 
affiliates, including in the payment of fees for Centralized Services 
or reimbursement of expenses, the Operating Agreements provide for 
adjustment within 10 days following notice thereof. In addition, if the 
audit discloses weaknesses or the need for changes in internal control 
systems pertaining to safeguarding the Partnership's assets, Starwood 
is required to make the necessary changes.
    By letter dated July 13, 2006 from LaSalle to the Department, La 
Salle provided that the last operational audit was completed on March 
31, 2005 and was conducted by a third party, Gallogly, Fernandez & 
Riley, LLP, a prominent local accounting firm. A written report was 
provided to LaSalle and found no breaches of the Operating Agreements. 
The scope of the audit was to review areas such as the calculation and 
payment of management fees, allocation of salaries and wages, return of 
vendor rebates, use of complimentary rooms and other similar areas 
which are prone to miscalculations, inaccuracies or abuse. 
Additionally, LaSalle represented that they are not aware of any areas 
in which Starwood has exceeded its authority under the Operating 
Agreements and that LaSalle has not asked Starwood to discontinue 
providing any of the Centralized Services that Starwood provides under 
the Operating Agreements. LaSalle noted that it did instruct Starwood 
not to participate in the Starwood program for Worker's Compensation 
and elected to obtain coverage through a third-party.

(d) Recourse for Breach

    As described above, the Partnership, acting through LaSalle, 
exercises a significant level of oversight through the budgeting, 
reporting, monitoring and audit process, which will facilitate 
LaSalle's ability to detect and rectify any violation of the 
restrictions discussed above. If Starwood breaches its obligations 
under the Agreement, there are readily exercisable avenues of recourse 
for the Partnership.
    For example, upon the occurrence of an ``Event of Default,'' (which 
includes breaches of material covenants, undertakings, obligations or 
conditions (which are not cured within 30 days), the Partnership may 
terminate the Operating Agreements (or the relevant one) and pursue any 
other remedies available to it in law and in equity, other than those 
specifically excluded in the applicable Operating Agreement. 
Furthermore, as the funding of the operations of the Resort is 
primarily done through the Partnership's agency and reserve accounts, 
upon the occurrence of an Event of Default, the Partnership may freeze 
these accounts and prevent Starwood from making any additional 
payments.
    Additionally, the nature of the relationship between Starwood and 
the Partnership is one of fiduciary and agency. Accordingly, if, for 
any reason, the Partnership determines that Starwood is putting its 
assets at risk, the Partnership could protect itself by terminating the 
agency and demanding possession of the Resort.\12\
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    \12\ The Application provides that such an action could subject 
the Partnership to damages if, for example, the termination were a 
breach of contract. However, there is an extra layer of protection 
afforded the Partnership because it would have the right to remove 
Starwood from the Resort during the pendency of any dispute, 
assuring the Partnership that if such a dispute were to arise, it 
could conduct the litigation after Starwood left the property.
---------------------------------------------------------------------------

    The Partnership is also entitled to indemnification with respect to 
any claims, demands, actions, penalties, suits and liabilities arising 
from Starwood's breach of fiduciary duty, violation of ERISA or breach 
of or default on the Operating Agreements.
    14. LaSalle, after consulting with JLL Hotels (its hotel advisory 
firm) and following substantial review, determined that:
    (a) The provision of Centralized Services and the Additional 
Services is a critical component of management by a major third-party 
branded operator in order to allow the managed property to realize the 
benefits of retention of such an operator;
    (b) Given their existing infrastructure and agreements, neither 
Starwood nor any major competitive national or international third-
party operator could, as a practical contractual matter, provide these 
types of services and products on an effective basis without these 
sorts of arrangements;
    (c) The effect of aggregation in a multi-property system (e.g., 
enhanced by the buying power of over 750 hotels) and the affiliate 
relationships inherent in these arrangements are both reasonable and 
customary and, in light of the effect on costs and revenues, beneficial 
to the Partnership, as owner of the Resort;
    (d) The Partnership will be able to monitor these arrangements in 
an effective manner through the significant and ongoing controls 
available to it under the Operating Agreements (to be exercised by 
LaSalle); to the extent it determines that it is advisable to do so, it 
can opt out and/or discontinue some or all of these arrangements;
    (e) As noted above, in connection with the operator selection 
process, LaSalle reviewed in detail the Centralized Services offered by 
Starwood and concluded that the overall cost of services and products 
offered by Starwood on a centralized basis was consistent with the 
amounts charged by other potential international branded operators; and
    (f) Delivery of services and products such as the Centralized 
Services and Additional Services and participation in programs such as 
the Associate Room Discount Program is customary in the hotel industry, 
and comparable operators, such as Hilton, Marriott International and 
Hyatt, have similar policies and processes.
    Based on these determinations, LaSalle concluded that it would be 
appropriate to submit an application to the Department for the reasons 
set forth below.
    15. As noted above, the transactions undertaken by Starwood are 
subject to the authority and general direction of LaSalle. Pursuant to 
the IFS Agreement, IFS is the independent named fiduciary with respect 
to the Diplomat Account. IFS retained LaSalle to serve as investment 
manager and QPAM with respect to the Resort pursuant to the QPAM 
Agreement, which provides that IFS retains significant oversight 
responsibilities with respect to LaSalle's performance hereunder. 
Starwood, as property manager for the Resort, is acting under the 
authority and general direction of LaSalle pursuant to the Operating 
Agreements. As discussed above, the Operating Agreements contain both 
significant limitations on the ability of Starwood to exercise 
discretion and significant oversight of Starwood by LaSalle.

(a) Centralized Services and Additional Services

(1) Self-Dealing Transactions
    Because of the additional fees that could be earned by Starwood or 
a Related Company as a result of management decisions by Starwood,

[[Page 48778]]

Starwood could be viewed as having an interest that might affect its 
judgment in violation of section 406(b) of ERISA. Accordingly, Starwood 
seeks relief to the extent that either (i) the Related Company is a 
Starwood ERISA Affiliate or (ii) Starwood has an interest in the 
Related Company that could arguably affect its judgment in operating 
the assets of the Partnership.
(2) Party-In-Interest Transactions Involving Non-Incidental Goods
    Starwood's corporate and operating structure as well as its 
contractual obligations result in arrangements pursuant to which 
Starwood (or Starwood ERISA Affiliates) would be providing services 
and/or selling products to the Partnership. Any furnishing of services 
or products to the Fund by, or transfer of Fund assets to, Starwood or 
Starwood ERISA Affiliates could constitute a prohibited transaction in 
violation of ERISA and the Code, absent the applicability of a specific 
exemption.\13\
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    \13\ The Application notes that the provision of Additional 
Services is often by Related Companies in which Starwood owns less 
than 10% of the total outstanding equity. LaSalle believes that in 
cases in which Additional Services are provided by Related Companies 
that are not Starwood ERISA Affiliates, the provision of Additional 
Services would not constitute a prohibited transaction under section 
406(a) of ERISA because these entities in which Starwood has made an 
investment are not parties in interest or disqualified persons. 
Accordingly, relief is not sought in that circumstance. The 
Department expresses no views as to whether selection of these 
entities by Starwood would raise any issues under section 406(b) of 
ERISA.
---------------------------------------------------------------------------

    Notwithstanding the foregoing, the Application asserts that most 
such transactions will not constitute prohibited transactions (and 
relief is not sought with respect thereto) because specific exemptions 
will apply in most cases. To the extent that Centralized Services and 
Additional Services consist of services (as opposed to goods that are 
not incidental to such services), section 408(b)(2) of ERISA would 
exempt these services from the prohibited transaction rules because the 
services are ``reasonable arrangements'' under which Starwood (or an 
entity related to Starwood) provides ``services necessary for the 
establishment or operation of the plan, if no more than reasonable 
compensation is paid therefor[e].'' The Department notes, however, that 
section 408(b)(2) of the Act provides no relief from violations of 
section 406(b) of ERISA that may arise in connection with any provision 
of services.
    The Application states that section 408(b)(2) of ERISA does not 
provide an exemption with respect to goods that are not incidental to 
the furnishing of necessary services described in the preceding 
paragraph. PTE 84-14 would generally provide relief for transactions 
where a QPAM, e.g., LaSalle, or a property manager acting under its 
authority and general direction, approves a particular transaction. 
However, the Application notes that PTE 84-14 generally does not 
provide relief from violations of section 406(b) of ERISA. Accordingly, 
to the extent that the property manager has limited discretionary 
authority to affect the amount of non-incidental goods purchased by the 
Partnership, the Application states that this could constitute a 
prohibited transaction that is not exempted by either PTE 84-14 or 
section 408(b)(2) of ERISA. Relief is, therefore, being sought for such 
transactions.
(b) Associate Room Discount Program
    As a participant in the Associate Room Discount Program, the Resort 
provides Starwood associates, including its employees and employees of 
certain Starwood ERISA Affiliates, or associates of participating 
Starwood franchise hotels with discounted room rates and discounted 
food, beverage and other amenities, subject to various limitations.
    Under section 3(14) of ERISA, the term ``party in interest'' 
includes employees of Starwood, an entity providing services to the 
Fund, and certain Starwood ERISA Affiliates, as well as certain other 
individuals (such as family members of parties in interest). In 
addition, by offering these discounts to its associates, Starwood could 
be viewed as dealing with the assets of the Fund in its own interest or 
acting on behalf of the associates, who could be viewed as parties with 
interests adverse to those of the Fund. Accordingly, the provision of 
discounts to employees of Starwood or Starwood ERISA Affiliates and 
their families could constitute a prohibited transaction in violation 
of ERISA, absent the applicability of a specific exemption.\14\
---------------------------------------------------------------------------

    \14\ The Application notes that Part IV of PTE 84-14 (regarding 
Transactions Involving Places of Public Accommodation) would not 
provide an exemption for the Associate Room Discount Program because 
the rooms, food, beverage and other amenities are not furnished on a 
comparable basis to the general public. However, the rooms are not 
made available under the Associate Room Discount Program if they 
could otherwise be sold to the public at a higher rate. In addition, 
in each case, the discounted rates fully cover the variable cost to 
the hotel for the use of the room and the cost to the hotel of the 
food, beverage and amenities.
---------------------------------------------------------------------------

    16. LaSalle believes that Starwood's ability to provide (by itself 
or via Related Companies) the Centralized Services and Additional 
Services provides significant operational and economic benefits to the 
Partnership and, therefore, the Fund. LaSalle has concluded that the 
provision of these sorts of services is a critical component of 
management by a major third-party branded operator. After careful 
consideration and full analysis during the operator selection process 
(as described above), LaSalle concluded that the retention of a major 
international branded hotel operator was in the best interests of the 
Partnership because it would, among other things, increase the gross 
revenues and/or decrease certain expenses generated by the Resort, as 
well as permit the Partnership to obtain any necessary financing on 
more desirable terms than may otherwise be available to the 
Partnership. Services, such as the Starwood proprietary group sales and 
global reservations system, should provide the Resort with greater 
occupancy and revenues than could be obtained without engaging such a 
brand and operator.
    LaSalle asserts that the conflicts of interest that arise due to 
the fact that these services are provided by Starwood or a Related 
Company can be mitigated, if not eliminated, by (i) restrictions in the 
Operating Agreements relating to the amount and nature of charges for 
such services and products and the requirement that such arrangements 
be beneficial to the Partnership, such as those discussed above; (ii) 
the ability of the Partnership to review the effect of these 
transactions through its review of its financial information; and (iii) 
the Partnership's ability to opt out or discontinue some or all of 
these services or products.
    While the Partnership is entitled not to participate in certain 
Centralized Services or Additional Services and obtain the products and 
services on its own, overall these arrangements provide precisely the 
types of advantages that the Partnership (and LaSalle) intended to 
obtain by engaging a major international branded hotel operator to 
manage the Resort. For its part, Starwood has contractual arrangements 
in place with some Related Companies and other entities that require 
that Starwood utilize these entities in providing products and/or 
services, or that require a specific manner of obtaining services or 
products through these entities for its own properties.
    Based on information obtained during the process of selecting a 
brand and an operator for the Resort, as well as the experience of JLL 
Hotels, LaSalle believes these sorts of arrangements are customary in 
(and endemic to) the hotel

[[Page 48779]]

industry, and that each of the other candidates for operator--including 
the other finalist candidates (i.e., Hyatt and Marriott) have the same 
or similar arrangements. Therefore, it is extremely unlikely that the 
Partnership would be able to continue to retain a major hotel operator 
that would not have similar arrangements.\15\ LaSalle believes that, if 
the Partnership were forced to opt out of these arrangements, it would 
lose important benefits of being part of a major national branded 
operation (which, in LaSalle's considered view, would likely 
substantially reduce the profitability of the Resort and its value as 
an investment of the Fund).
---------------------------------------------------------------------------

    \15\ The Application notes that even if the Partnership were 
able to negotiate a different agreement with an alternative branded 
operator, it would incur the significant expense of negotiating 
another complicated operating agreement with the newly selected 
operator, whom both IFS and LaSalle believe would not be more 
qualified than Starwood to operate the Resort. Additionally, the 
Operating Agreements provide terms and conditions that are extremely 
favorable to the Partnership. There is a significant risk that an 
Operating Agreement with another entity would contain significantly 
less favorable terms and conditions.
---------------------------------------------------------------------------

    In addition, as discussed above, the Operating Agreements provide 
significant limitations on Starwood's use of affiliated entities. If 
products or services are provided to or performed by Starwood 
affiliates, as defined in the Operating Agreements, they must be 
(unless approved by the Partnership, through LaSalle), in the 
aggregate, on terms and prices lower (or at least as favorable) than 
those that could be obtained from unaffiliated parties in the relevant 
market. The fee for a significant number of these services or products 
(whether performed by affiliates or non-affiliates) may not exceed 
``the cost incurred by [Starwood or its affiliates] * * * with no 
profit or mark-up.'' Specific approval by LaSalle is required for 
agreements or purchases that are in excess of $50,000, or with a term 
in excess of one year for agreements, whether they are made with 
affiliates or with unrelated third parties.
    With respect to the Associate Room Discount Program, the Applicant 
notes that the Resort's participation enables the Resort to offer its 
employees discount rates at other hotels participating in the program. 
Although this provides employees with a valuable benefit that attracts 
high-level candidates, it is relatively low in cost to provide 
(particularly because it is available only when rooms would otherwise 
remain vacant and would not generate revenue). In addition, since this 
arrangement is typically offered by Starwood and all other 
international branded operators, refraining from offering this benefit 
to its employees would place the Resort in a distinct hiring 
disadvantage vis-a-vis other competing hotels.
    The Application states that the percentage of the Fund's assets 
involved in the provision of any service or the sale of any products by 
Starwood or a Related Company or with respect to the Associate Room 
Discount Program is not currently determinable. However, as discussed 
in greater detail above, the Operating Agreements include various 
protections against the use of significant assets in these transactions 
without the Partnership's approval. These include, by way of example, 
budgeting requirements, prohibitions on incurring costs significantly 
in excess of budget, specific limitations on the costs of Centralized 
Services, and requirements for Partnership approval of significant 
expenses and contractual undertakings.
    Accordingly, through written, enforceable assurances from Starwood 
in its agreements with the Partnership, LaSalle believes it has 
adequately provided for the Partnership's ability to profit from these 
arrangements and to control any abuse of authority or potential breach 
of duties by Starwood; but relief is sought in light of the concern 
that such transactions would otherwise be viewed as prohibited 
transactions.
    17. The Applicant asserts that the Partnership, the Fund and the 
Fund's participants and beneficiaries would suffer hardship and 
substantial economic loss if this Application were denied because the 
prohibited transaction rules of ERISA and the Code would not permit 
Starwood (or Related Companies) to provide certain Centralized Services 
and Additional Services and to participate in the Associate Discount 
Room Program. If this Application were to be denied, the Partnership 
may have to opt out of all of these arrangements and obtain the 
products and/or services on its own, likely on less favorable terms, or 
LaSalle will need to be intimately involved in managing, negotiating 
and approving each and every transaction involving the purchase of 
products and/or services, which would be very costly and highly 
impractical and negate much of the benefit to be derived from the 
Operating Agreements with Starwood and from engaging a major 
international branded hotel operating company. The Applicant states 
that the arrangements for Centralized Services and Additional Services, 
as described above, provide precisely the types of advantages that the 
Partnership (and LaSalle) intended to obtain by engaging a major 
international branded hotel operator to manage the Resort, such as 
increased operating revenues and economies of scale designed to reduce 
procurement costs. Additionally, LaSalle (and its and IFS's hotel 
advisors) has concluded that, given the size and location of the 
Resort, the utilization of the Centralized Services and Additional 
Services (such as a strong marketing program, groups sales network and 
reservation system) is absolutely essential to achieve acceptable 
occupancy rates, and to ensure that the Fund's investment is managed in 
a profitable and professional manner. Thus, the Fund would suffer 
significant economic loss and substantial hardship if, as a result of 
its inability to enter into transactions that are otherwise standard in 
the hotel industry, it was unable to retain (or optimally utilize the 
resources of) a major branded operating company with significant 
internal infrastructure and marketing resources. LaSalle is also of the 
opinion that maintaining an international branded operator enhances the 
ability of the Fund to obtain financing for the Resort, should this be 
needed in the future.
    18. The Application requests that the exemption be made applicable 
as of June 5, 2001, the execution date of the Operating Agreements. The 
circumstances surrounding the transactions are that the Fund and 
LaSalle believe that these products and/or services are essential for 
effective management of the Resort and in the interest of the Fund and 
its participants. If it had not engaged in these transactions, the Fund 
would not have been able to realize the critical benefits of retaining 
a third-party operator.
    19. The Applicant represents that an exemption would be 
administratively feasible for the Fund because it would allow Starwood 
to operate the Resort in accordance with its industry accepted, 
standard procedures. In contrast, if the exemption were not granted, at 
the present time, the Partnership would incur significant 
administrative and operating costs in purchasing and obtaining the 
services and/or products (that would otherwise be provided by Starwood 
or its affiliates) by itself, or, possibly, reviewing its rights with 
respect to terminating the Operating Agreements (and possibly searching 
for a smaller, less qualified operator). The Fund believes that an 
exemption would be administratively feasible for the Department because 
it does not add any additional material burden to the Department's 
already significant ongoing oversight of the Diplomat Account.

[[Page 48780]]

    The Applicant asserts that the proposed exemption would be 
protective of the rights of participants and beneficiaries of the Fund 
because the Operating Agreements contain (a) substantial limitations on 
Starwood's ability to provide services or sell products directly or 
through its affiliates and Related Companies;\16\ (b) provisions for 
significant involvement by the Partnership (generally, through LaSalle) 
in the budgetary process; (c) provisions for significant after the fact 
reporting and disclosure to the Partnership on these types of 
transactions; and (d) provisions for correction in the event that an 
audit uncovers a discrepancy related to any payments to Starwood or its 
affiliates or a weakness in internal control systems. The Application 
states that these protections, some of which are general, some of which 
are specific to affiliate transactions and some of which are triggered 
by expenditures in excess of a certain amount, significantly reduce the 
probability of an abuse of authority or conflict of interest that 
results in harm to participants and beneficiaries. The Application 
provides that, furthermore, each of these protections will be 
periodically monitored and scrutinized by LaSalle, who can cause the 
Partnership to cease to participate in most if not all of the 
transactions discussed herein.
---------------------------------------------------------------------------

    \16\ The Application notes that the Operating Agreements provide 
that, if services are performed by Starwood affiliates in lieu of 
Starwood, the affiliates are not entitled to be paid more than 
Starwood would have been paid. Additionally, if goods or services 
are provided or performed by affiliates, such goods or services will 
be provided on terms and at prices: (i) better than (or, with the 
Partnership's approval, at least as favorable to the Resort as) what 
is available in the relevant market; and (ii) consistent with terms 
made available to other similar properties operated by Starwood and 
its affiliates.
---------------------------------------------------------------------------

    20. By letter dated April 25, 2006, LaSalle advised the Department 
that, in connection with an internal restructuring of Starwood Hotels & 
Resorts Worldwide, Inc., effective as of January 12, 2006, Westin 
Management Company East assigned its interest in the Operating 
Agreements to Westin Hotel Management, L.P., a wholly-owned subsidiary 
of Starwood Hotels & Resorts Worldwide, Inc. References in the 
Application to Westin Management Company East should therefore be read 
to include Westin Hotel Management, L.P. Additionally, as of April 30, 
2006, LaSalle was replaced by Capital Hotel Management, LLC (CHM) as 
the qualified professional asset manager for the Fund.
    21. In the CHM Letter, CHM confirms that, pursuant to the 
Discretionary Investment Management Agreement by and among Diplomat 
Properties, L.P., Independent Fiduciary Services, Inc., on behalf of 
the Plumbers & Pipefitters National Pension Fund, and Capital Hotel 
Management, LLC dated February 27, 2006 (CHM Agreement), CHM has been 
appointed as the successor investment manager and QPAM with respect to 
the Resort. CHM has also replaced LaSalle as a non-member manager of 
DPLLC. CHM represents that it is an SEC registered investment advisor, 
which serves as a QPAM and one of the largest independent hotel asset 
and investment management companies operating in the U.S. today. CHM is 
a privately-held hotel investment management company, providing a full-
range of acquisition and disposition expertise for its investors, as 
well as customized strategies proven to maximize asset/portfolio value 
and increase overall hotel investment returns. CHM has under management 
a hotel portfolio representing more than 14,000 rooms, collectively 
valued at more than $5.2 billion. Hotel investments are comprised of 
urban landmark properties, high-profile destination resorts and 
convention center hotels operating in major markets across the U.S. and 
the Caribbean.
    CHM provides that, since its appointment as QPAM for the Fund, it 
has become integrally involved in all aspects of the Diplomat Account, 
and has made all of the business, operational and fiduciary decisions 
for the Diplomat Account, pursuant to the CHM Agreement (subject to the 
oversight or approval of IFS, as appropriate). CHM confirms that it is 
responsible for monitoring the performance of Westin Hotel Management, 
L.P. under the terms of the Operating Agreements, including the ongoing 
tasks described in the Application. CHM states that, for example, CHM 
is responsible for performing the actions ascribed to the QPAM as they 
relate to the general limitations on Starwood's activities described in 
this proposed exemption at 13. above, including with respect to (i) 
line-item approval of the Resort's Annual Operating Plan; (ii) approval 
of costs, expenses and expenditures; (iii) audits related to the 
Resort; and (iv) control of bank accounts. Similarly, CHM is 
responsible for performing the actions ascribed to the QPAM as they 
relate to the specific limitations on Starwood's activities including 
with respect to (i) the approval of certain purchases of products and 
services by Starwood from itself or its affiliates; (ii) the approval 
of certain contracts with an aggregate annual expenditure or revenue of 
more than $50,000 or having a term of more than one year, as well as 
certain capital expenditures; and (iii) the right to opt out of any 
Centralized Services and to elect not to receive any Additional 
Services. Further, as described in this proposed exemption at 9. above, 
changes to services and products or fees (as limited by the Operating 
Agreements) will be presented to and approved, if applicable, by CHM in 
connection with the annual budget process. Therefore, on and after 
April 30, 2006, references in the Application to LaSalle should, 
therefore, be deemed to refer to CHM.
    22. In determining to propose exemptive relief for the transactions 
involving the provision of services by Starwood and Related Companies, 
the Department placed a great deal of emphasis on the significant 
involvement of IFS, as named fiduciary, and LaSalle and CHM, as 
investment managers (the Independent Fiduciaries) and their considered 
and objective evaluation of the subject transactions. These Independent 
Fiduciaries have represented for the record that the retention of 
Starwood was in the interests of the Partnership and that the written 
agreement and the limitations contained therein permit the Independent 
Fiduciaries to effectively monitor and scrutinize the actions 
undertaken by Starwood. The initial and continued involvement of the 
Independent Fiduciaries on behalf of the Fund with respect to the 
transactions that are the subject of this proposed exemption is a 
critical factor in the Department's determination to propose exemptive 
relief. In addition, as the Department has previously stated in PTE 
2001-39, the fact that a transaction is the subject of an exemption 
under section 408(a) of the Act does not relieve a fiduciary from the 
general fiduciary responsibility provisions of section 404 of the Act. 
IFS' appointment of an investment manager and QPAM to manage the 
Diplomat Account and its ongoing determination to continue to retain 
LaSalle and CHM with respect to the management of the Diplomat Account 
are subject to section 404 of the Act. Both LaSalle and CHM, as 
investment managers for the Diplomat Account, retain fiduciary 
responsibility for the activities undertaken by Starwood on behalf of 
the Resort. In this regard, section 404(a)(1)(A) and (B) of ERISA 
requires that a fiduciary discharge his duties to a plan solely in the 
interests of the participants and beneficiaries, for the exclusive 
purpose of providing benefits to participants and beneficiaries and 
defraying reasonable administrative expenses, and in a

[[Page 48781]]

prudent manner. Accordingly, it is the responsibility of the Fund's 
fiduciaries to operate the Resort in a manner designed to maximize the 
Fund's rate of return, consistent with their fiduciary duties under 
section 404 of the Act. The fiduciary obligation to act prudently 
requires, at a minimum, that the Independent fiduciaries conduct an 
ongoing objective, thorough and analytical critique of the management 
of the Diplomat Account. If the transactions that are the subject of 
this proposed exemption result in activity that is not ``prudent,'' and 
not ``solely in the interest'' of the participants and beneficiaries of 
the Fund, the responsible fiduciaries of the Fund would be liable for 
any losses resulting from such a breach of fiduciary responsibility, 
even if the transactions involved do not constitute prohibited 
transactions under section 406 of ERISA.

Notice to Interested Persons

    The notice to interested persons, along with the supplemental 
statement required by Department Regulation 2570.43(b)(2), will be 
given to each member of the Board and to anyone who commented with 
respect to PTE 99-46, PTE Application D-10960 or D-10971.
    Notice will be provided by way of first class mail. The Application 
states that the Fund will notify interested persons within 15 days 
following publication by the Department of a notice of the Proposed 
Exemption in the Federal Register. It is intended, therefore, that 
there will be a 45-day period available for notice and comment (i.e., 
15 days for notice and 30 days for comment).

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

Mellon Financial Corporation (Mellon) Located in Pittsburgh, PA

[Application No. D-11342]

Proposed Exemption

Section I--Exemption for In-Kind Redemption of Assets

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and 4975(c)(2) of the Code, and 
in accordance with the procedures set forth in 29 CFR Part 2570 Subpart 
B (55 FR 32836, 32847, August 10, 1990). If the proposed exemption is 
granted, the restrictions in sections 406(a)(1)(A) through (D) and 
406(b)(2) of the Act, and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(D) of the Code, shall not apply, effective November 30, 2005, to 
certain in-kind redemptions (the Redemption(s)) by the Mellon 401(k) 
Retirement Savings Plan or by any other employee benefit plan sponsored 
by Mellon or an affiliate (the Plan(s)), of shares (the Shares) of 
certain proprietary mutual funds in which the Plans were invested as of 
November 30, 2005 (the Funds), for which Mellon or an affiliate 
(collectively, referred to also as Mellon) provides investment advisory 
and other services, provided that the following conditions are 
satisfied:
    (A) The Plan pays no sales commissions, redemption fees, or other 
similar fees in connection with the Redemption--other than customary 
transfer charges paid to parties other than Mellon;
    (B) The assets transferred to the Plan pursuant to the Redemption 
consist entirely of cash and Transferable Securities, as such term is 
defined in Section II, below. Notwithstanding the foregoing, 
Transferable Securities that are odd lot securities, fractional shares, 
and accruals on such securities may be distributed in cash;
    (C) With certain exceptions described below, the Plan receives in 
any Redemption its pro rata portion of the securities of the Funds 
equal in value to that of the number of Shares redeemed, as determined 
in a single valuation (using sources independent of Mellon) performed 
in the same manner and as of the close of business on the same day, in 
accordance with the procedures established by the Fund pursuant to Rule 
2a-4 under the Investment Company Act of 1940, as amended from time to 
time (the 1940 Act), and the then-existing procedures established by 
the board of the Funds that are in compliance with the rules 
administered by the Securities Exchange Commission (SEC);
    (D) Mellon does not receive any direct or indirect compensation or 
any fees, including any fees payable pursuant to Rule 12b-1 under the 
1940 Act, in connection with any Redemption of the Shares;
    (E) Prior to a Redemption, Mellon provides in writing to an 
independent fiduciary (Independent Fiduciary, as such term is defined 
in Section II, below), a full and detailed written disclosure of 
information regarding the Redemption;
    (F) The Independent Fiduciary provides written authorization in 
advance of the Redemption to Mellon, such authorization being 
terminable at any time prior to the date of the Redemption without 
penalty to the Plan, provided that the termination is effectuated by 
the close of business following the date of receipt by Mellon of 
written or electronic notice regarding such termination (unless 
circumstances beyond the control of Mellon delay termination for no 
more than one additional business day);
    (G) Before approving a Redemption, based on the disclosures 
provided by the Funds to the Independent Fiduciary and discussions with 
appropriate operational personnel of the Plan, the Independent 
Fiduciary determines that the terms of the Redemption are fair to the 
Plan and comparable to, and no less favorable than, terms obtainable at 
arm's length between unaffiliated parties, and that the Redemption is 
in the best interests of the Plan and its participants and 
beneficiaries;
    (H) Mellon makes a ``make-whole payment'' to ensure that the dollar 
value of the interests received by the Plan from the collective 
investment funds is not diminished by transaction costs nor by 
valuation differences as a result of the Redemption;
    (I) No later than thirty (30) business days after the completion of 
a Redemption, Mellon or the relevant Funds provides to the Independent 
Fiduciary a written confirmation regarding such Redemption containing:
    (i) The number of Shares held by the Plan immediately before the 
Redemption and the related per Share net asset value and the total 
dollar value of the Shares held;
    (ii) The identity and related aggregate dollar value of each 
security provided to the Plan pursuant to the Redemption, including 
each security valued (using sources independent of Mellon) in 
accordance with Rule 2a-4 under the 1940 Act and the then-existing 
procedures established by the board of the Fund for obtaining current 
prices from independent pricing services or market-makers;
    (iii) The current market price of each security received by the 
Plan pursuant to the Redemption; and
    (iv) The identity of each pricing service or market-maker consulted 
in determining the value of such securities;
    (J) The value of the securities and cash received by the Plan for 
each redeemed Share equals the net asset value of such Share at the 
time of the transaction, and such value equals the value that would 
have been received by any other investor for shares of the same class 
of the relevant Fund at that time;
    (K) Subsequent to a Redemption, the Independent Fiduciary performs 
a post-transaction review which will include, among other things, 
testing a sampling of material aspects of the Redemption

[[Page 48782]]

deemed in its judgment to be representative, including pricing;
    (L) Each of the Plan's dealings with the Funds, Mellon, the 
principal underwriter for the Funds, or any affiliate thereof, are on a 
basis no less favorable to the Plan than dealings between the Funds and 
other shareholders holding shares of the same class as the Shares;
    (M) Mellon maintains, or causes to be maintained, for a period of 
six years from the date of any covered transaction, such records as are 
necessary to enable the persons described in paragraph (N)(1)(i)-(v), 
below, to determine whether the conditions described in this Section I 
have been met, except that--
    (i) if the records necessary to enable the persons described in 
paragraph (N)(1)(i)-(v), below, to determine whether the conditions of 
this exemption, if granted, have been met are lost, or destroyed, due 
to circumstances beyond the control of Mellon, then no prohibited 
transaction will be considered to have occurred, solely on the basis of 
the unavailability of those records; and
    (ii) no party in interest with respect to the Plan other than 
Mellon shall be subject to the civil penalty that may be assessed under 
section 502(i) of the Act, or to the taxes imposed by section 4975(a) 
and (b) of the Code, if such records are not maintained or are not 
available for examination as required by paragraph (N) below.
    (N)(1) Except as provided in subparagraph (2) of this paragraph 
(N), and notwithstanding any provisions of section 504(a)(2) and (b) of 
the Act, the records referred to in paragraph (M), above, are 
unconditionally available at their customary locations for examination 
during normal business hours by:
    (i) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the SEC,
    (ii) any fiduciary of the Plan or any duly authorized 
representative of such fiduciary,
    (iii) any participant or beneficiary of the Plan or duly authorized 
representative of such participant or beneficiary,
    (iv) any employer whose employees are covered by the Plan, and
    (v) any employee organization whose members are covered by such 
Plan;
    (2) None of the persons described in paragraphs (N)(1)(ii) through 
(v) shall be authorized to examine trade secrets of Mellon or the 
Funds, or commercial or financial information which is privileged or 
confidential; and
    (3) Should Mellon or the Funds refuse to disclose information on 
the basis that such information is exempt from disclosure pursuant to 
paragraph (N)(2) above, Mellon or the Funds shall, by the close of the 
30th day following the request, provide a written notice advising that 
person of the reasons for the refusal and that the Department may 
request such information.

Section II--Definitions

    (A) The term ``affiliate'' means:
    (1) Any person (including a corporation or partnership) directly or 
indirectly through one or more intermediaries, controlling, controlled 
by, or under common control with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (B) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (C) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and sales calculated by dividing the value of all 
securities, determined by a method as set forth in the Fund's 
prospectus and statement of additional information, and other assets 
belonging to the Fund, less the liabilities charged to each such Fund, 
by the number of outstanding shares.
    (D) The term ``Independent Fiduciary'' means a fiduciary who is:
    (i) Independent of and unrelated to Mellon and its affiliates, and
    (ii) Appointed to act on behalf of the Plan with respect to the in-
kind transfer of assets from one or more Funds to, or for the benefit 
of, the Plan. A fiduciary will not be independent of, and unrelated to, 
Mellon if:
    (i) Such fiduciary directly or indirectly controls, is controlled 
by or is under common control with, Mellon;
    (ii) Such fiduciary, directly or indirectly, receives any 
compensation or other consideration in connection with any transaction 
described herein (except that an Independent Fiduciary may receive 
compensation from Mellon in connection with the transactions 
contemplated herein, if the amount or payment of such compensation is 
not contingent upon, or in any way affected by any decision made by the 
Independent Fiduciary); or
    (iii) More than 1 percent (1%) of such fiduciary's gross income, 
for federal income tax purposes, in its prior tax year, will be paid by 
Mellon and its affiliates in the fiduciary's current tax year.
    (E) The term ``Transferable Securities'' means securities--
    (1) for which market quotations are readily available, as 
determined pursuant to procedures established by the Funds under Rule 
2a-4 of the 1940 Act; and
    (2) That are not:
    (i) Securities that, if publicly offered or sold, would require 
registration under the Securities Act of 1933;
    (ii) Securities issued by entities in countries that (a) restrict 
or prohibit the holding of securities by non-nationals other than 
through qualified investment vehicles, such as the Funds, or (b) permit 
transfers of ownership of securities to be effected only by 
transactions conducted on a local stock exchange;
    (iii) Certain portfolio positions (such as forward foreign currency 
contracts, futures and options contracts, swap transactions, 
certificates of deposit and repurchase agreements) that, although 
liquid and marketable, involve the assumption of contractual 
obligations, require special trading facilities, or can be traded only 
with the counter-party to the transaction to effect a change in 
beneficial ownership;
    (iv) Cash equivalents (such as certificates of deposit, commercial 
paper, and repurchase agreements);
    (v) Other assets that are not readily distributable (including 
receivables and prepaid expenses), net of all liabilities (including 
accounts payable); and
    (vi) Securities subject to ``stop transfer'' instructions or 
similar contractual restrictions on transfer.
    (F) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or a ``member of the family,'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
sister, or a spouse of a brother or a sister.

Summary of Facts and Representations

    1. Mellon is a global financial services company headquartered in 
Pittsburgh, Pennsylvania, with approximately $4.5 trillion in assets 
under management, administration, or custody, including approximately 
$766 billion under management, as of September 30, 2005. Mellon is 
regulated as a bank holding company and a financial holding company 
under the Bank Holding Company Act of 1956, as amended by the Gramm-
Leach-Bliley Act, and subject to the supervision of the Board of 
Governors of the Federal Reserve System.
    The Mellon 401(k) Retirement Savings Plan (i.e., the Plan) is a 
defined

[[Page 48783]]

contribution plan maintained by Mellon to provide retirement benefits 
to eligible employees of Mellon and its subsidiaries and is intended to 
satisfy the qualification requirements of section 401(a) of the Code. 
The Plan accepts contributions attributable to ``cash or deferred 
arrangements'' described in Code section 401(k) (Pre-Tax 
Contributions), and Mellon makes matching contributions on those Pre-
Tax Contributions. Mellon Bank, N.A., a subsidiary of Mellon, serves as 
Trustee of the Plan. Investments under the Plan are directed by the 
Plan participants.
    2. The applicant represents that the selection and monitoring of 
the Plan's investment options are overseen by Mellon's Benefits 
Investment Committee (the BIC), the Plan's named fiduciary for 
investment purposes and whose members are Mellon corporate officers. 
Until November 30, 2005, the Plan made available three categories of 
investment options to Plan participants. The first category, the 
``Basic Funds,'' consisted of six Mellon Bank, N.A. collective 
investment funds and Mellon common stock. The second category, the 
``Actively Managed Funds,'' consisted of 14 proprietary mutual funds 
(i.e., the Funds)\17\ and the Mellon Stable Value Fund, a Mellon Bank, 
N.A. collective investment fund. The third category was a self-directed 
brokerage window that provided access to more than 7,000 mutual funds.
---------------------------------------------------------------------------

    \17\ The applicant represents that the Plan was invested in the 
Funds pursuant to the terms and conditions of Prohibited Transaction 
Exemption (PTE) 77-3. PTE 77-3 (42 Fed. Reg. 18734, April 8, 1977) 
is a class exemption that permits, under certain conditions, the 
acquisition or sale of shares of a registered, open-end investment 
company by an employee benefit plan covering only employees of such 
investment company, employees of the investment adviser or principal 
underwriter for such investment company, or employees of any 
affiliated person (as defined therein) of such investment adviser or 
principal underwriter. Thus, the applicant is not requesting 
exemptive relief with respect to the Plan's past investment in the 
Funds. The Department expresses no opinion herein as to whether the 
terms and conditions of PTE 77-3 were satisfied.
---------------------------------------------------------------------------

    Thirteen of the proprietary Funds are managed by the following 
subsidiaries of Mellon: (i) The Dreyfus Corporation (Dreyfus), which is 
headquartered in New York, New York and serves as the investment 
adviser to the Dreyfus family of mutual funds; and (ii) Founders Asset 
Management LLC (Founders), an indirect, wholly-owned subsidiary of 
Dreyfus that is headquartered in Denver, Colorado, and serves as the 
investment adviser to the Dreyfus Founders mutual funds (the Dreyfus 
family of mutual funds and the Dreyfus Founders mutual funds are 
hereinafter collectively referred to as the Dreyfus Funds). The 
distributor, transfer agent, and custodian of the Dreyfus Funds 
relevant to this application are also affiliates of Mellon. As of 
September 30, 2005, the Dreyfus Funds included more than 200 mutual 
fund portfolios holding approximately $172 billion. The Plan was 
invested in 13 of the Dreyfus Funds, as described above. The fourteenth 
proprietary Fund also has an adviser affiliated with Mellon.
    As of September 30, 2005, the assets held in trust under the Plan 
were valued at $1,380,761,939.46 and were allocated among the following 
investment options in the following amounts:

Basic Funds:
  Daily Liquidity Money Market.................           $89,949,424.10
  Daily Liquidity Asset Allocation.............            18,537,191.45
  Daily Liquidity Stock Index..................           234,057,799.50
  Daily Liquidity Small Cap Stock Index........             7,354,298.25
  Daily Liquidity International Stock Index....            22,742,989.30
  Daily Liquidity Aggregate Bond Index.........            50,485,047.00
  Mellon Stock.................................           409,606,522.50
Actively Managed Funds:
  Mellon Stable Value Dreyfus LifeTime                     92,584,517.21
   Portfolios..................................
  Income Portfolio.............................             6,954,841.82
    Growth and Income Portfolio................            61,604,892.28
    Growth Portfolio...........................            30,662,384.91
  Dreyfus Appreciation.........................             4,005,837.40
  Dreyfus Premier Core Value...................            39,396,197.50
  Dreyfus Disciplined Stock....................           113,489,817.05
  Dreyfus Premier Third Century................             4,255,733.72
  Dreyfus Premier Technology Growth............            12,967,651.48
  Dreyfus Founders Growth......................             9,086,042.62
  Dreyfus Premier New Leaders..................             5,982,309.07
  Dreyfus Founders Discovery...................            52,011,463.46
  Dreyfus Founders Worldwide Growth............            24,425,613.04
  Dreyfus Premier International Value..........            24,027,831.95
  The Boston Company International Small Cap...            25,566,295.14
Self Directed Account..........................            18,287,358.28
Participant Loan Fund..........................            22,719,880.43
                                                ------------------------
    Total......................................         1,380,761,939.46


    3. The applicant represents that the BIC made a decision to 
simplify the Plan's investment offerings for the benefit of Plan 
participants; it decided to make available only the Basic Funds as 
``core'' options, i.e., as funds in which Pre-Tax Contributions and 
Mellon matching contributions can be directly invested. The result was 
to eliminate the Actively Managed Funds from the ``core'' Plan 
investment line-up. The Mellon Stable Value Fund was moved to the Basic 
Funds category, and the other 14 Actively Managed Funds continue to be 
available only through the self-directed brokerage window. In addition 
to simplifying the investment offerings, the change also has had the 
advantage of reducing the investment management expenses borne by the 
Plan and Plan participants, as Mellon absorbs all of the investment 
management costs for the collective investment funds that comprise the 
Basic Funds but did not do so for the mutual funds in the Actively 
Managed Funds category. The BIC believes that being able to offer a 
streamlined menu of no-cost options to Plan participants represents a 
tremendous advantage over the long term and is in the best interests of 
Plan participants.

[[Page 48784]]

    The change was adopted by the BIC on May 20th, to be effective no 
later than December 31, 2005. After taking into account the 
administrative, recordkeeping, and communication issues related to a 
transaction of this size, as well as the availability of the internal 
and external resources necessary to effect the implementation, the BIC 
decided to implement the changes effective December 1, 2005. The Plan 
participants were notified of the upcoming changes and advised to 
review their investment elections. An announcement entitled ``Important 
Changes to the Investment Funds in the Mellon 401(k) Retirement Savings 
Plan,'' dated October 2005, was distributed on or about October 3, 
2005.
    On the effective date of the transfer, the Actively Managed Fund 
assets were transferred to the following Mellon collective investment 
funds included within the Basic Funds:

                   Fund Transfer or ``Mapping'' Chart
------------------------------------------------------------------------
         Actively managed fund             [rtrif] Recipient basic fund
------------------------------------------------------------------------
Dreyfus LifeTime Portfolios, Inc.......  [rtrif] Daily Liquidity Asset
                                          Allocation Fund.
  Income Portfolio.....................
  Growth and Income Portfolio..........
  Growth Portfolio.....................
Dreyfus Appreciation...................
Dreyfus Premier Core Value.............
Dreyfus Disciplined Stock..............  [rtrif] Daily Liquidity Stock
                                          Index.
Dreyfus Premier Third Century Fund, Inc
Dreyfus Premier Technology Growth......
Dreyfus Founders Growth................
Dreyfus Premier New Leaders............
Dreyfus Founders Discovery.............  [rtrif] Daily Liquidity Small
                                          Cap Stock Index.
Dreyfus Founders Worldwide Growth......  [rtrif] Daily Liquidity
                                          International Stock Index.
Dreyfus Premier International Value....
The Boston Company International Small
 Cap.
------------------------------------------------------------------------

    4. According to the applicant, the BIC requested that the Plan 
receive these redemptions in cash from all of the Funds. However, the 
Funds have reserved in their prospectuses the authority to ``redeem in 
kind,'' or make payments in securities rather than cash, if the amount 
to be redeemed is large enough to affect Fund operations--for example, 
if it exceeds 1% of fund assets.
    In October, the Dreyfus Disciplined Stock Fund (the Stock Fund) and 
the Dreyfus Founders Worldwide Growth Fund (the Growth Fund)--of which 
the Plan holds approximately 10% and 30% of Fund shares, respectively--
advised the BIC that they would be requiring that the redemptions from 
those Funds be taken in the form of securities rather than cash (i.e., 
the Redemptions). In response to this decision, the BIC: (i) Explored 
bifurcating the mapping of these two Funds from the overall Fund 
transfer, (ii) Considered pushing back the overall effective date, and 
(iii) Reconsidered the merits of the entire mapping transaction. As a 
result of these efforts, the BIC determined that: (a) It was 
inconsistent with the BIC's investment philosophy to exempt these Funds 
from the mapping entirely; (b) Due to the administrative, 
recordkeeping, and communication effort involved in a transaction of 
this size, it was unreasonable to defer the mapping of two Funds to a 
later date; and (c) Since offering a streamlined menu of no-cost 
options was advantageous to Plan participants, it was in their 
interests to implement the change in its entirety, effective December 
1, 2005.
    To carry out the Redemptions with minimal disruption and expense, 
the BIC employed a ``transition management service'' affiliated with 
Mellon, whereby: (i) The securities received from the two Funds were 
placed in separate transition management accounts under the Plan; (ii) 
The transition account investment adviser directed the sale of 
securities so as to retain only those securities that would be accepted 
in kind by the applicable target Basic Fund; and (iii) The restructured 
portfolio of securities and cash were then transferred to the 
applicable target Basic Fund. The Redemption, restructuring, and 
transfer occurred overnight on November 30, 2005, without any 
``blackout'' period on investment changes.
    The Plan did not pay any fees or transaction costs to Mellon 
affiliates or any other party in connection with the transition. Mellon 
covered all transaction costs related to the transition, as well as any 
differences arising from sales of securities by the transition account 
or the acceptance of the securities by the Basic Funds at values 
different from the Funds' valuation of the securities. The intended 
result was that the dollar value of the amounts redeemed from the Funds 
was no less than the dollar value of the interests acquired in the 
target Basic Funds on December 1, 2005.
    5. The applicant requests that the Department grant individual 
retroactive exemptive relief for the Redemptions of the Fund Shares. 
Investment option decisions for the Plan, which is sponsored by Mellon, 
are made by or under the authority of the BIC, the Plan's named 
fiduciary for investment purposes and whose members are Mellon 
corporate officers. Because subsidiaries of Mellon serve as the 
investment advisers and certain other service providers for the Dreyfus 
Funds, a transaction between the Plan and the Funds may be prohibited. 
The role of Mellon in deciding whether to redeem in kind the Plan's 
shares of the Stock Fund and Growth Fund, and under what conditions, 
raises the possibility of Mellon's acting in a transaction involving 
the Plan on behalf of a party whose interests are adverse to the 
interests of the Plan or its participants and beneficiaries, as well as 
raising the possibility of self-dealing.
    The applicant notes that PTE 77-3 provides exemptive relief for the 
sale of shares of a mutual fund by an employee benefit plan covering 
employees of the investment adviser for the mutual fund and its 
affiliates, subject to certain conditions. However, in three published 
exemptions, in which the Department has granted individual relief for 
the in-kind redemption of shares by plans of the investment advisers of 
mutual funds--see PTE 2003-01 (Northern Trust Company and Affiliates); 
PTE 2002-20 (Union Bank of California); PTE 2001-46 (Bank of America 
Corporation)--the exemption notices describe PTE 77-3 as being 
available for

[[Page 48785]]

a redemption of shares for cash, implying that PTE 77-3 would not be 
available for an in-kind redemption. See, e.g., PTE 2003-01, Proposed 
Exemption for Northern Trust Company and Affiliates, 67 FR 69561, 69563 
(2002).
    As the Plan did not have the option of redeeming its investment in 
the two Funds in cash, Mellon had discussions with the Department, 
through outside counsel, about obtaining individual relief for the 
contemplated in-kind Redemptions, modeled on the prior individual 
exemptions, above, as well as two authorizations granted under PTE 96-
62--see Final Authorization Number (F.A.N.) 2003-16E (AmSouth 
Bancorporation) and F.A.N. 2005-01E (U.S. Trust Company of New York). 
As further evidence of good faith, Mellon also made efforts to submit 
an exemption application to the Department in advance of the Redemption 
date, once it was determined that in-kind Redemptions would be 
necessary, although it was not possible to obtain a final exemption 
prior to that date.
    Mellon also requests prospective relief for future in-kind 
Redemptions involving the Funds, in the event that such opportunities 
should arise, to be carried out in accordance with the conditions of 
this exemption, if granted.
    6. It is represented that Mellon structured the Redemptions based 
on prior relief granted by the Department for in-kind redemptions from 
affiliated mutual funds, as described above. The securities transferred 
in kind from the Funds were a pro rata portion of the Funds' holdings 
to the extent possible,\18\ subject to adjustments for odd lots and 
securities that cannot be transferred, as determined in accordance with 
the Funds' valuation and in-kind redemption procedures that are 
designed to be objective and to comply with the requirements of the 
1940 Act. Mellon hired and paid for an Independent Fiduciary to oversee 
and approve the Redemptions, as described further in item 7, below. 
Mellon also committed to making a make-whole payment to ensure that the 
value of the participants' accounts was not diminished by transaction 
costs or valuation differences as a result of the Redemptions.
---------------------------------------------------------------------------

    \18\ As further explained by the applicant, the reason for the 
``to the extent possible'' language here and elsewhere in this 
paragraph is that it may not always be possible to divide a Fund's 
holdings of securities on a fully proportionate basis, due to the 
minimum increments in which the particular securities are traded. 
For example, the smallest unit of an equity security is typically a 
share. If the proportionate division of the portfolio would require 
dividing single shares into fractional shares, then the shares that 
would otherwise have to be divided would be sold and the cash 
proceeds divided instead. Even where the proportionate division 
could be done by dividing down to single shares, it may not be 
economical to do so because that would result in the creation of 
``odd lots''--lots of less than 100 shares--which are more expensive 
to sell. In such instances, it may be to the advantage of both 
parties for the round lot of 100 shares to be sold rather than 
divided, and the parties can then divide the cash proceeds. Bonds 
are held in larger units, generally of a minimum of $1,000 principal 
value, so some of those, too, may require conversion to cash to 
achieve a proportionate distribution.
---------------------------------------------------------------------------

    Because the in-kind Redemptions from the two Funds involved 
ministerial transactions performed in accordance with pre-established 
objective procedures, in accordance with applicable regulatory 
requirements, including the 1940 Act and the rules and regulations 
thereunder, Mellon was unable to use its influence or control to cause 
the Plan to receive particular securities from the Funds.\19\ To the 
extent possible, the Plan exchanged its Fund Shares for a proportionate 
share of the ``Transferable Securities''--securities for which market 
quotations are readily available and that are otherwise freely 
transferable\20\--held by each Fund portfolio. Securities that were not 
``Transferable Securities'' (including certain contractual obligations 
and cash equivalents) were either to be liquidated or retained by the 
Fund, and the sale proceeds or equivalent value transferred in cash. 
The value of odd lot securities, fractional shares, and accruals on 
such securities also were transferred in cash, as appropriate. 
Therefore, the Redemptions were carried out, to the extent possible, on 
a pro rata basis as to the number and kind of securities transferred to 
the Plan.
---------------------------------------------------------------------------

    \19\ According to the applicant, the Funds have adopted 
``Procedures Relating to Redemptions-In-Kind By Affiliated Persons'' 
(``Procedures''). As the Plan is considered to be an ``affiliated 
person'' under the 1940 Act, the Redemptions were made in accordance 
with the Procedures. The Procedures include the requirement that 
``[s]ecurities distributed in connection with any such redemption-
in-kind shall represent the affiliated shareholder's pro rata 
portion of all assets held by the Fund immediately prior to the 
redemption, with any adjustments as may be necessary in connection 
with, for example, restricted securities, odd lots or fractional 
shares.'' The applicant acknowledges that securities held in each 
Fund may have different purchase dates and tax bases attached to 
them. In redeeming the Plan's shares of the Funds, each Fund 
distributed the Plan's pro rata portion of the Fund's assets, 
including a pro rata portion of each tax lot for each Fund portfolio 
security, held immediately prior to the Redemption, with any 
adjustments necessary with respect to odd lots and fractional 
shares. Among other requirements of the Procedures, the distributed 
securities were valued in the same manner as they were valued for 
purposes of computing the Fund's net asset value per share, and the 
Redemption was consistent with the Fund's redemption policies and 
undertakings (as set forth in each Fund's then current prospectus 
and statement of additional information). The Procedures are 
reflected in the terms and conditions of the requested exemption.
    \20\ According to the applicant, for purposes of the proposed 
exemption, the Funds treat as ``securities for which market 
quotations are readily available'' any securities for which market 
quotations are normally available, but for which market quotations 
may not be available on the day of the in-kind distributions, due to 
events outside the control of Mellon. For example, if the Taiwan 
stock market were to close because of a typhoon, no market 
quotations would be available on that day for securities traded on 
that market, even though those securities are publicly traded. As 
described further below, such securities would be ``fair valued'' 
based on the most recent available trading information and any 
information that would indicate a change in value since the most 
recent trades or quotations.
---------------------------------------------------------------------------

    The boards of the respective Funds have adopted procedures for the 
fulfillment of in-kind redemption requests in conformity with the no-
action letter issued by the SEC staff to Signature Financial Group 
Inc.\21\ The pricing methodology to be applied with respect to a 
redemption in kind under these procedures complies with Rule 2a-4 under 
the 1940 Act, the general rule that governs the valuation process for 
purposes of determining the current price of mutual fund shares. 
Pursuant to these procedures, for purposes of the in-kind Redemptions, 
the values of the securities is determined based on, as applicable, 
current market prices or quotations, as of close of business, other 
approved valuation methodologies, and any ``fair value'' determinations 
(as described further below) on the date of the redemption request (the 
``Valuation Date''), in accordance with Rule 2a-4

[[Page 48786]]

under the 1940 Act and the procedures, using sources independent of 
Mellon. In general, values are determined as of close of trading on the 
New York Stock Exchange on the particular day, using market prices such 
as the last sale price or the most recent bid and asked quotations. In 
the event that a Fund holds securities for which market quotations are 
not readily available or illiquid securities, the Fund would determine 
the fair value of the security in accordance with its ``fair value'' 
procedures that have been adopted by its board (including a majority of 
disinterested directors). The fair value procedures require the Fund 
board, its pricing committee or the Fund's valuation committee to 
determine an appropriate price or pricing methodology for the 
particular security, as appropriate, considering such factors as 
fundamental analytical data, the nature and duration of restrictions on 
disposition, an evaluation of relevant market forces, and public 
trading in similar securities. The minutes of any meetings of the 
pricing and valuation committees describing the action they have taken 
and information they considered are presented to the Fund board and 
included in the board minutes. The Fund is required to preserve all 
relevant records for no less than six years.
---------------------------------------------------------------------------

    \21\ In the no action letter to Signature Financial Group, Inc. 
(Dec. 28, 1999), the Division of Investment Management of the SEC 
states that it will not recommend enforcement action pursuant to 
section 17(a) of the 1940 Act for certain in-kind distributions of 
portfolio securities to an affiliate of a mutual fund. Funds seeking 
to use this ``safe harbor'' must value the securities to be 
distributed to an affiliate in an in-kind distribution ``in the same 
manner as they are valued for purposes of computing the distributing 
fund's net asset value.'' As explained in footnote 3, above, the 
Dreyfus Funds have adopted Procedures in accordance with the 
Signature Financial Letter for use in affiliated transactions, and 
those Procedures must be followed for transactions with the Plan.
    The Signature Financial letter does not address the 
marketability of the securities distributed in kind. The range of 
securities distributed pursuant to this ``safe harbor'' may 
therefore be broader than the range of securities covered by SEC 
Rule 17a-7, 17 CFR 270.17a-7. In granting past exemptive relief with 
respect to in-kind transactions involving mutual funds, the 
Department has required that the securities being distributed in-
kind fall within Rule 17a-7. One of the requirements of Rule 17a-7 
is that the securities are those for which ``market quotations are 
readily available.'' SEC Rule 17a-7(a). Under this exemption 
request, exemptive relief also would be limited to in-kind 
distribution of securities for which market quotations are readily 
available, as defined in footnote 4, above. The value of any other 
security was paid to the Plan in cash. In addition, consistent with 
the Signature Financial letter, the Procedures adopted by the 
Dreyfus Funds require pro rata distributions for any in-kind 
redemptions.
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    The Growth Fund includes a substantial percentage of non-U.S. 
securities. Under its valuation procedures, this fund values foreign 
equity securities under certain circumstances using ``fair value'' 
prices provided by an approved independent pricing service. The service 
uses a model to adjust the foreign closing price of a security to 
reflect the historical correlation of that security with subsequent 
movements in the U.S. market, market indices, and other appropriate 
market measures, and the fund uses the adjusted price when the change 
in the U.S. stock market on that day exceeds a pre-determined ``trigger 
point'' and the security meets a ``minimum confidence interval.'' (The 
``confidence interval'' is the confidence level that the pricing 
service assigns to the fair value price it determines for a particular 
security based on its historical data on price movements in that 
security. Founders requires that the adjusted price meet a minimum 
confidence level to ensure reliability.) Although the Stock Fund 
invests principally in securities of U.S. issuers, it would use a 
similar pricing methodology in the event it holds foreign securities.
    Each Fund's fair value procedures was provided to, reviewed, and 
approved by the Independent Fiduciary in advance of the Redemption. The 
respective Funds retained documentation, in the form of the fair value 
reports prepared in accordance with the fair value procedures, showing 
how the procedures were applied and followed for each security valued 
in this manner.
    It was possible that the securities received by the transition 
accounts would be sold at prices different from the values used by the 
Funds in determining their distributions. Also, as the collective 
investment fund that is the target fund for the assets of the Growth 
Fund generally uses market value pricing for foreign securities, rather 
than the fair value procedure adopted by the Growth Fund, it was 
possible that the collective fund would assign a different value to the 
foreign securities it received than did the Growth Fund. As indicated 
above, Mellon made up any difference in value such that the dollar 
value of the interests received by the Plan from the collective funds 
was no less than the corresponding dollar value distributed by the two 
Funds.
    Not later than 30 business days after completion of a Redemption, 
the Funds confirmed in writing:
    (i) The number of Fund Shares held by the Plan immediately before 
the Redemption (and the related net asset value per Share and the 
aggregate dollar value of the Shares held);
    (ii) the identity (and related aggregate dollar value) of each 
security provided to the Plan pursuant to the Redemption, including 
each security valued in accordance with Rule 2a-4 under the 1940 Act 
and the then-existing procedures established by the board of the Funds 
(using sources independent of Mellon) for obtaining current prices from 
independent pricing services and market-makers;
    (iii) the price of each such security for purposes of the 
Redemption; and
    (iv) the identity of each pricing service or market-maker consulted 
in determining the value of such securities.
    7. U.S. Trust Company, N.A. (U.S. Trust), a national bank, was 
retained by the BIC as the ``Independent Fiduciary'' for purposes of 
this proposed exemption. U.S. Trust has confirmed its independence from 
Mellon and its eligibility to serve as Independent Fiduciary--that it 
is not controlled by, or under common control with, Mellon, does not 
control Mellon, and that no more than one percent of its gross income 
for federal income tax purposes will be paid by Mellon. U.S. Trust has 
acknowledged that it is a fiduciary to the Plan, as defined in section 
3(21) of the Act, and has represented that it understands and accepts 
the duties, responsibilities, and liabilities in acting as a fiduciary 
under the Act for the Plan.
    In its capacity as Independent Fiduciary to the Plan, U.S. Trust's 
responsibilities pursuant to the terms of an engagement letter, dated 
November 22, 2005, by and between Mellon and U.S. Trust, were to (i) 
make a determination as to whether the terms of the Redemptions were 
fair to the participants and beneficiaries of the Plan and are 
comparable to, and no less favorable than, terms that would be reached 
as a result of arms' length negotiations between unaffiliated parties, 
(ii) provide its opinion in a written report, dated November 29, 2005, 
(the Report) on behalf of the Plan as to the fairness and 
reasonableness of each Redemption, as compared to redemption of the 
Plan's shares for cash, which would involve the liquidation of Fund 
securities, the transfer of cash to the Plan, and the reinvestment of 
such cash by, or on behalf of the Plan, in a designated collective 
investment fund, and (iii) consider and conclude, on behalf of the 
Plan, whether to approve each Redemption.
    In the Report, U.S. Trust has stated that, based upon its review of 
the methodology of the Redemptions from the Funds and the difference in 
the costs associated with an in-kind redemption versus a hypothetical 
cash redemption for the Plan's assets held by each of the Funds, it 
believes that the proposed Redemptions would be fair to the 
participants of the Plan and no less favorable than the terms that 
would be reached at arms' length between unaffiliated parties. 
Furthermore, U.S. Trust believes that the method to be used in 
conducting the Redemptions is comparable to, and no less favorable 
than, a similar in-kind redemption reached at arms' length between 
unaffiliated parties.
    This was because, among other things, Mellon would be paying the 
transaction costs associated with the Redemptions and would make a cash 
payment to the Plan to eliminate any implementation shortfall, so that 
the Plan would be able to redeem its investment in the Funds without 
bearing the typical costs associated with a redemption, whether that 
redemption be in cash or in kind. Therefore, U.S. Trust approved the 
Redemptions from the Funds, provided that the Redemptions were 
conducted in accordance with the information provided to U.S. Trust by 
Mellon and the Funds.
    8. U.S. Trust conducted a post-transfer review, summarized in a 
letter

[[Page 48787]]

dated January 23, 2006,\22\ in which it confirmed that the transfer was 
carried out in accordance with the required criteria and procedures, by 
testing a sampling of certain material aspects of the redemption 
transactions.\23\
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    \22\ The applicant notes that the post-transaction review was 
completed within 60 days and represents that other post-transaction 
reviews in connection with future in-kind Redemptions, if any, would 
also be completed within that time frame.
    \23\ Condition (K) of the operative language refers to testing 
``a sampling'' of material aspects of the Redemptions by the 
Independent Fiduciary. The applicant represents, however, that the 
Independent Fiduciary was provided with data as of the Redemption 
date that listed each security transferred or sold for both the 
Stock Fund and the Growth Fund. With all of the data available to 
it, the Independent Fiduciary chose to review all of the individual 
security transactions, not merely a sampling.
---------------------------------------------------------------------------

    According to U.S. Trust, the Plan received (into two collective 
investment funds) its pro rata portion of each Transferable Security 
(rounded to the nearest round lot) held by the Funds and its pro rata 
portion of the cash that the Funds held based upon the ownership 
percentage that the Plan held in each Fund. The amount of cash 
transferred to the collective investment funds from each of the Funds 
was adjusted for the value of all the shares that did not transfer in 
kind due to rounding and was adjusted for the cash value of the Plan's 
pro rata share of the Funds' other balance sheet assets (receivables 
and prepaid expenses net of current liabilities). Neither of the Funds 
held non-transferable securities,\24\ so there was no cash adjustment 
to reflect the value of any non-transferable securities. Finally, the 
assets transferred to the Plan were valued in accordance with the 
Funds' procedures and applicable law.
---------------------------------------------------------------------------

    \24\ The applicant further represents that no Rule 144A 
securities were involved in the Redemptions.
---------------------------------------------------------------------------

    In the Pre-Trade analysis performed by Mellon Transition Management 
Services, the costs to sell securities distributed by the Stock Fund 
that would not be accepted in kind by the corresponding collective 
investment fund were estimated to be $4,286, combined for both 
commissions and spread. For the securities distributed by the Growth 
Fund, that would not be accepted in kind, the combined costs were 
estimated to be $12,724. The Plan was immediately reinvested after the 
Transfer; therefore potential opportunity costs associated with 
reinvestment risk was minimized. If the Plan had received cash instead 
of its pro rata portion of the assets of the Funds, it would have been 
forced to incur its pro rata portion of the sell side transactions 
costs, and it would have had to incur all of the buy side transactions 
costs when it reinvested the proceeds. Furthermore, there may have been 
a time lag from the date of the redemption request to the time the Plan 
had fully redeployed the proceeds. This time lag would have imposed an 
opportunity cost by not being invested in securities that would have 
had the potential to match the Plan's stated objective for this portion 
of the Plan's assets.
    After the completion of the transitions from the Funds, a post-
trade analysis was performed by Mellon Transition Management Services 
that listed the actual costs that were incurred. For the Stock Fund, 
94% of the portfolio transferred in kind, leaving only 6% that was 
traded in the open market. The total cost of these trades was $3,163 
compared to the pre-trade estimate of $4,286. For the Growth Fund, 42% 
of the portfolio transferred in kind, and 58% was traded on the open 
market. The total cost of these trades was $7,886 compared to the pre-
trade estimate of $12,724.
    Mellon represented that it would pay all of the expenses incurred, 
including the commissions and spread costs, to conduct the transfer. In 
addition, Mellon guaranteed that the Plan would not suffer an 
implementation shortfall if the portfolios of securities fell in value 
during the transfer. Mellon provided this protection with respect to an 
implementation shortfall while not seeking to require the Plan to give 
up its upside if the portfolios of securities increased in value during 
the transfer. Because the transaction was designed so that the Plan 
would receive no less than its entire investment in each of the Funds, 
while not sacrificing any potential upside during the transition 
period, the Plan held cash and securities equal to or greater in value 
at the market open on December 2, 2005 than it did at the market open 
on November 30, 2005.\25\
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    \25\ According to U.S. Trust, it determined that the Plan held 
cash and securities at the market open on December 1, 2005 equal in 
value to the shares it had redeemed, with the share values 
determined as of the close of business on November 30, 2005. 
However, a small number of the securities received were sold by the 
Plan on December 1st because the Plan did not want to retain them as 
investments. Mellon reimbursed the Plan for the costs related to 
these sales. U.S. Trust represents that it then looked at the value 
of the Plan's holdings as of the market open on December 2nd, by 
which time the in-kind redemption, sales, and reimbursements had 
been completed, to ensure that the plan suffered no loss.
---------------------------------------------------------------------------

    The applicant represents that, if there is an opportunity for 
additional Redemptions under this exemption, if granted, involving the 
Funds, such transactions will occur only if the Independent Fiduciary 
concludes that an in-kind transaction is in the best interests of the 
Plan, consistent with the above-described procedures.
    9. In summary, the applicant represents that the Redemptions 
satisfy the statutory criteria for an exemption under section 408(a) of 
the Act for the following reasons:
    (a) By accepting an in-kind redemption and using a transition 
management account strategy, the Plan lowered its transaction costs 
compared to the expenses that would have been incurred if it had 
withdrawn its investments in the two affected Funds in cash and then 
reinvested the cash because the Plan paid no brokerage commissions nor 
other fees, either directly or through its investment in either the 
transferring or receiving funds, in connection with the redeemed 
amounts (other than customary transfer charges paid to parties other 
than Mellon and its affiliates);
    (b) The Plan received a pro rata portion of the securities of the 
two affected Funds in the Redemption equal in value to the Fund Shares 
redeemed, as determined in a single valuation (using sources 
independent of Mellon) performed at the close of business on the 
Redemption date, in accordance with Rule 2a-4 under the 1940 Act;
    (c) The Redemption was overseen by U.S. Trust as Independent 
Fiduciary and was subject to prior written authorization by U.S. Trust 
based on U.S. Trust's determination, following full and detailed 
written disclosure of information regarding the Redemption, that the 
terms of the Redemption were fair and reasonable to the Plan, and 
comparable to and no less favorable than terms obtainable at arm's 
length between unaffiliated parties, and that the Redemption was in the 
best interests of the Plan and its participants and beneficiaries; and
    (d) Each of the Plan's dealings with the Funds, the investment 
advisers of those Funds, or any affiliated person thereof, would be on 
a basis no less favorable to the Plan than dealings between the Funds 
and other shareholders holding shares of the same class of the 
particular Fund.
    Notice to Interested Persons: The applicant will provide notice of 
the proposed exemption, after publication in the Federal Register, to 
(i) active participants in the Plan, and (ii) retiree and terminated 
vested participants, alternate payees, and beneficiaries in pay status. 
Notice to active participants in (i) above will either be by an 
individual direct interoffice mailing, or electronically in accordance 
with the conditions of 29 CFR 2520.104b-1. Notice to participants and 
beneficiaries in (ii) above will be provided by first

[[Page 48788]]

class mail, or electronically in accordance with the conditions of 29 
CFR 2520.104b-1.

FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department, 
telephone (202) 693-8557. (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 14th day of August, 2006.
Ivan Strasfeldm,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department Of Labor.
[FR Doc. E6-13623 Filed 8-18-06; 8:45 am]

BILLING CODE 4510-29-P