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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Jacor Communications Inc. Retirement Plan [Notices] [04/25/1996]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Jacor Communications Inc. Retirement Plan [04/25/1996]

[PDF Version]

Volume 61, Number 81, Page 18421-18445

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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09844, et al.]

 
Proposed Exemptions; Jacor Communications Inc. Retirement Plan 
(the Plan)

AGENCY: Pension and Welfare Benefits Administration, Labor

ACTION: Notice of proposed exemptions.

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

Written Comments and Hearing Requests

    Unless otherwise stated in the Notice of Proposed Exemption, all 
interested persons are invited to submit written comments, and with 
respect to exemptions involving the fiduciary prohibitions of section 
406(b) of the Act, requests for hearing within 45 days from the date of 
publication of this Federal Register notice. Comments and request 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. 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 request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 
20210. Attention: Application No. stated in each Notice of Proposed 
Exemption. The applications for exemption and the comments received 
will be available for public inspection in the Public Documents Room of 
Pension and Welfare Benefits Administration, U.S. Department of Labor, 
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 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 (43 FR 47713, October 17, 1978) 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.

Jacor Communications Inc. Retirement Plan (the Plan), Located in 
Cincinnati, Ohio

[Application No. D-09844]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
and 407(a) of the Act and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1) (A) 
through (E) of the Code shall not apply to (1) the past receipt by the 
Plan of certain stock- purchase warrants (the Warrants) pursuant to the 
restructuring of Jacor Communications, Inc. (Jacor), excluding that 
portion of Warrants which was acquired by the Plan's Qualified Matching 
Contribution Account (the QMCA, as described below); (2) the past and 
proposed future holding of the Warrants by the Plan; and (3) the

[[Page 18422]]

disposition or exercise of the Warrants by the Plan; provided that the 
following conditions are satisfied:
    (A) With respect to all participant accounts other than the QMCA, 
the Warrants were acquired pursuant to Plan provisions for 
individually-directed investment of such accounts;
    (B) The Plan's receipt and holding of the Warrants occurred in 
connection with the restructuring of Jacor and the Warrants were made 
available to all shareholders of common stock of Jacor;
    (C) The Plan's receipt and holding of the Warrants resulted from an 
independent act of Jacor as a corporate entity, and all holders of the 
common stock of Jacor, including the Plan, were treated in the same 
manner with respect to the restructuring of Jacor; and
    (D) With respect to Warrants allocated to the QMCA, the authority 
for all decisions regarding the holding, disposition or exercise of the 
Warrants by the Plan will be exercised by an independent fiduciary 
acting on behalf of the Plan, to the extent that such decisions have 
not been passed through to Plan participants; and
    (E) With respect to all other accounts (described below), the 
decisions regarding the holding, disposition or exercise of the 
Warrants have been, and will continue to be made in accordance with 
Plan provisions for individually-directed investment of participant 
accounts, by the individual Plan participants whose accounts in the 
Plan received Warrants in connection with the restructuring.

EFFECTIVE DATE: This exemption, if granted, will be effective as of 
January 11, 1993, except with respect to the Warrants held by the QMCA. 
With respect to those Warrants, the exemption, if granted, will be 
effective July 26, 1995.

Summary of Facts and Representations

    1. Jacor, the Plan sponsor, has its principal place of business in 
Cincinnati, Ohio. Jacor owns and operates radio stations across the 
United States and is the parent company of an affiliated group of 
corporations. The Plan is a defined contribution employee benefit plan 
intended to satisfy the requirements of sections 401(a) and 401(k) of 
the Code. The Plan provides for individual participant accounts (the 
Accounts) and participant-directed investment of the Accounts among 
five investment funds, one of which invests exclusively in common stock 
of Jacor (the Jacor Securities Fund). Participants can also choose to 
invest in the Money Market Fund (replaced by the Stable Asset Fund as 
of April 1, 1994), the Bond Fund (replaced by the International Fund as 
of April 1, 1994), the Balanced Fund and the Growth Fund. The various 
funds can be described as follows:
    (a) Money Market Fund, which invests exclusively in short-term U.S. 
Treasury obligations. The objective of this Fund is to provide 
stability of principal and current income consistent with that 
stability;
    (b) Bond Fund, which invests in U.S. government and federal agency 
securities along with high quality corporate obligations. The objective 
of this Fund is to provide more income than short-term obligations, but 
greater stability than long-term bonds;
    (c) Balanced Fund, which invests in equity securities issued by a 
broad range of companies along with corporate and government bonds. The 
objective of this Fund is to provide a balance between the growth 
potential of stock and the current income of bonds;
    (d) Growth Fund, which invests in equity securities issued by a 
broad range of companies. The objective of this Fund is long-term 
growth;
    (e) Jacor Securities Fund, which invests in equity securities 
issued by Jacor;
    (f) Stable Asset Fund, which invests in public and private debt 
securities and mortgage loans. This Fund provides a fixed rate of 
return that is adjusted annually; and
    (g) International Fund, which invests in equity securities of 
foreign corporations. The objective of this Fund is to provide long-
term growth with international diversification.
    2. Each participant may have as many as four Accounts under the 
Plan, known as the Elective Deferral Account, the Qualified Non-
Elective Contribution Account, the QMCA and the Rollover Account. As of 
December 31, 1993, there were 416 participants in the Plan, all of whom 
had at least one Account with an investment in the Jacor Securities 
Fund. As of that same date, the Plan held total assets of approximately 
$3,390,755. The trustees of the Plan as of January 8, 1993, were Terry 
S. Jacobs, R. Christopher Weber and Jon M. Berry, all of whom were 
officers and shareholders of Jacor. Terry S. Jacobs resigned as trustee 
and officer of Jacor effective June 7, 1993 and as of the same date was 
replaced by Randy Michaels.
    3. Investment Direction.
    In general, all contributions (and related earnings) allocated to 
any of the Accounts on or before December 31, 1991 are invested in the 
Jacor Securities Fund. Contributions (and related earnings) allocated 
on or after January 1, 1992 to any Account other than the QMCA are 
subject to participant-directed investment. In general, all 
contributions (and related earnings) allocated to the QMCA on or after 
January 1, 1992 continue to be invested in the Jacor Securities 
Fund.<SUP>1
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     1 The Plan has special provisions which provide increased 
investment options to Plan participants once they attain age 55.
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    In 1995, participants were given the authority to transfer all 
contributions (and related earnings) allocated to the QMCA and all 
other pre-1992 contributions and earnings to any of the other 
investment funds available under the Plan, in accordance with the 
following schedule:

(1) First Quarter of 1995--up to 25% of formerly restricted funds
(2) Second Quarter of 1995--up to 50% of formerly restricted funds
(3) Third Quarter of 1995--up to 75% of formerly restricted funds
(4) Fourth Quarter of 1995--up to 100% of formerly restricted funds

    4. Jacor represents that it entered into a restructuring agreement 
with Zell/Chilmark in September, 1992. Zell/Chilmark is a Delaware 
limited partnership controlled by Samuel Zell and David Schulte. Zell/
Chilmark was formed to invest in and provide capital and management 
support to companies that are engaged in significant recapitalizations 
or corporate restructuring. At the time of Jacor's restructuring, Zell/
Chilmark had capital commitments or investments in excess of $1 
billion. The Board of Directors of Jacor selected Zell/Chilmark to work 
with Jacor's creditors to formulate a restructuring plan. Zell/Chilmark 
was chosen because Jacor's Board believed that it would be able to 
raise the cash necessary to make a substantial equity investment and 
because of its experience in working with creditor groups.
    5. The restructuring consisted of an equity infusion of 
approximately $6 million by Zell/Chilmark and was accomplished by way 
of a merger of a corporation wholly owned by Zell/Chilmark into Jacor. 
As part of this process, Zell/Chilmark acquired approximately 91.44% of 
Jacor's outstanding Common Stock. Upon approval by the Federal 
Communications Commission of the transfer of control of Jacor to Zell/
Chilmark on April 23, 1994, Jacor's Class B Common Stock automatically 
converted to Class A Common Stock (the combination of the 2 classes of 
stock is now referred to as the New Common Stock). As a result of the 
restructuring, on January 11, 1993, all shareholders not electing to 
receive

[[Page 18423]]

cash, including the Plan, received for each share of Common Stock held 
.0423618 shares of New Common Stock and .1611234 Warrants to purchase 
New Common Stock. The New Common Stock and the Warrants trade on the 
National Association of Securities Dealers Automated Quotation (NASDAQ) 
National Exchange. The Warrants are exercisable at $8.30 per share and 
expire on January 14, 2000. Jacor represents that the decision as to 
whether to keep the New Common Stock and Warrants held in the Jacor 
Securities Fund or to sell those securities for cash was passed through 
to Plan participants for all Accounts under the Plan other than the 
funds in the QMCA.<SUP>2 Decisions regarding securities held in the 
QMCA were made by the Trustees.
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     <SUP>2 The applicant explains that, although Plan participants 
had no authority over the investment of pre-1992 contributions, they 
were given the authority to make decisions regarding the acquisition 
of employer securities for all funds in their Accounts other than 
the QMCA.
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    6. Along with the option of receiving New Common Stock and 
Warrants, shareholders who held shares as of November 27, 1992, were 
given the right to purchase additional New Common Stock (the Additional 
Rights Offering) at $5.74 per share.<SUP>3 Holders of New Common Stock 
could purchase 0.1237 additional shares of New Common Stock for each 
share of New Common Stock held immediately after the merger of the 
subsidiary of Zell/Chilmark with Jacor and after certain stock sales by 
creditors of Jacor (who had been issued stock in exchange for debt 
obligations) to Zell/Chilmark.<SUP>4 Pursuant to the Additional Rights 
Offering, Jacor sold a total of 1,000,000 shares of New Common Stock. 
The Plan Trustees made the decision, on behalf of the Plan, to purchase 
4,457 shares of New Common Stock in the Additional Rights Offering.
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     <SUP>3 The Department is not providing any exemptive relief for 
any prohibited transactions that may have arisen in connection with 
the Plan's ability to acquire such additional shares of New Common 
Stock.
     <SUP>4 Zell/Chilmark and creditors who retained New Common 
Stock in the debt restructuring were also given the opportunity to 
purchase stock in the Additional Rights Offering.
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    7. Since the Warrants acquired by the Plan fail to satisfy the 
definition of ``qualifying employer securities'' contained in section 
407(d)(5) of ERISA, the applicant is aware of the fact that prohibited 
transactions have occurred in violation of the Act. Accordingly, Jacor 
represents that within 90 days of the grant of this proposed exemption, 
Jacor will file Forms 5330 with the Internal Revenue Service and will 
pay all applicable excise taxes due with respect to past prohibited 
transactions not covered by this exemption.
    8. Under the restructuring described above, the Plan received 
36,038 shares of New Common Stock and 137,074 Warrants. Prior to the 
restructuring, there were 9,004,093 shares of Jacor common stock, of 
which 866,514 shares, <SUP>5 or approximately 9.6%, were in the Plan. 
After the restructuring, there were 9,004,093 shares of New Common 
Stock, so that the Plan held less than .5% of that amount. Jacor 
represents that, at the time the 137,074 Warrants were issued to the 
Plan, they represented 2.6% of the assets of the Plan. Since that time, 
11,290 of the Warrants have been distributed to terminated 
participants. As of December 31, 1993, the remaining 125,784 Warrants 
represented 22.6% of the assets of the Plan. This increase is due to 
the increase in the value of each Warrant from $.20 on January 11, 1993 
to $6.09 on December 31, 1993. Jacor represents that the decision of 
whether to hold, sell, or exercise the Warrants for all Accounts under 
the Plan other than the QMCA were passed through to the Plan 
participants.
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     <SUP>5 As part of the restructuring, 15,774 shares of Jacor 
common stock were tendered by Plan participants for cash. The 
remaining 850,740 shares were converted to New Common Stock in the 
restructuring.
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    9. To the extent that Plan participants do not have investment 
authority over the Warrants, decisions regarding Warrants held in the 
QMCA will be made by an independent fiduciary retained specifically for 
that purpose. The Fifth Third Bank (the Bank) has been retained as an 
independent fiduciary to represent the interests of the Plan with 
respect to all securities issued by Jacor including the Warrants, 
except to the extent that such investment authority is being exercised 
by participants in the Plan. At such time that the participants in the 
Plan are given full authority over all employer securities held in the 
Plan, the Bank states that it will no longer have any investment 
authority under the terms of its Trust Agreement. The Bank represents 
that, as of February 23, 1996, participants in the Plan have full 
investment authority over employer securities held by the Plan (see 
rep. 3, above).
    10. The Bank is a subsidiary of Fifth Third Bancorp, Inc., a bank 
holding company that is headquartered in Cincinnati, Ohio. The Bank has 
been in existence for over 100 years. The trust department of the Bank 
has $6.6 billion of assets under management, of which $2.5 billion of 
assets is held by the Bank as fiduciary of over 500 plans that are 
subject to the Act. The Bank is not related to Jacor.
    11. The Bank represents that it is fully aware of its duties and 
responsibilities as a fiduciary under the Act. In fulfilling its 
duties, the Bank reviewed the terms and conditions of the Common Stock 
and Warrants issued by Jacor and reviewed the most recent financial 
statements of Jacor and other material it considered appropriate to 
determine the financial condition of Jacor. Based on this review, and a 
review of the current market for the securities issued by Jacor, the 
Bank concluded, as of July 26, 1995, that it was currently in the best 
interest of the Plan's participants and beneficiaries for the Plan to 
retain all securities issued by Jacor that were currently held by the 
Plan and that were subject to the investment discretion of the Bank.
    12. The Bank represents that it will continue to monitor the Plan's 
holding of those securities issued by Jacor that are subject to the 
investment discretion of the Bank. In exercising that discretion as a 
fiduciary under the Act, the Bank will on an on-going basis review all 
relevant financial information related to Jacor to determine whether 
the Plan should continue to hold or should sell the Jacor Common Stock 
and to determine whether the Plan should hold, sell or exercise the 
Warrants, or let the Warrants expire without exercise.<SUP>6
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     6 The Bank represents that it would only let the Warrants 
expire without exercise if they had no value, which could occur if 
the value of the New Common Stock drops below the exercise price of 
the Warrants ($8.30 per share) prior to the expiration of the 
Warrants on January 14, 2000. As of February 20, 1996, the value of 
the New Common Stock was $21.25. As a result, it is not likely that 
the Warrants would be allowed to expire without exercise. In any 
case, it is not anticipated that the Bank would be responsible for 
that decision since all investment authority in connection with the 
Warrants is currently with Plan participants.
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    13. In summary, the applicant represents that the transactions 
satisfy the criteria of section 408(a) of the Act for the following 
reasons: (a) the Plan's acquisition of the Warrants resulted from an 
independent act of the Employer; (b) with respect to all aspects of the 
restructuring, all holders of the Common Stock were treated in the same 
manner, including the Plan; (c) all decisions with respect to the 
Plan's acquisition, holding and control of the Warrants were made by 
the individual participants whose Accounts held interests in the Jacor 
Securities Fund, except with respect to the QMCA; (d) with respect to 
the QMCA, the Bank, an independent fiduciary reviewed the investments 
as of July 26, 1995 and determined that the Plan's continued holding of 
the employer securities was

[[Page 18424]]

appropriate and in the Plan's best interest; and (e) the Bank continued 
to monitor the holding of the employer securities by the QMCA until 
such time as Plan participants were given full authority over the 
investment, and determined whether the Plan should hold, sell or 
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exercise the Warrants or let the Warrants expire without exercise.

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

EAI Partners, L.P. (EAI), Located in Norwalk, CT

[Application No. D-10147]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act and section 4975(c)(2) of 
the Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).<SUP>7
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     7 For purposes of this proposed exemption, reference to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
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Section I. Exemption for the In-Kind Transfer of Assets

    If the exemption is granted, the restrictions of sections 406(a) 
and 406(b) of the Act and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1) (A) 
through (F) of the Code, shall not apply, as of December 29, 1995, to 
the in-kind transfer of assets of employee benefit plans that are 
participant-directed account plans intended to satisfy section 404(c) 
of the Act and as to which EAI serves as a fiduciary (the Client 
Plans), including a plan established by EAI (the EAI Plan), as well as 
two plans that are sponsored by affiliates of EAI, namely, the Harding 
Service Corporation et al. Profit Sharing Plan and Trust (the Harding 
Plan) and the Stockwood VII, Inc. 401(k) Plan (the Stockwood 
Plan),<SUP>8 that are held in the Small Managers Equity Fund Trust 
(SMEF) maintained by EAI in exchange for shares of the EAI Select 
Managers Equity Fund (the Fund), an open-end investment company 
registered under the Investment Company Act of 1940 (the '40 Act) for 
which Evaluation Associates Capital Markets, Inc. (EACM), a wholly 
owned subsidiary of EAI, acts as investment adviser, in connection with 
the partial termination of SMEF.
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    \8\ The Client Plans, the EAI Plan, the Harding Plan and the 
Stockwood Plan are collectively referred to herein as the Plans. In 
addition, the EAI Plan, the Harding Plan and the Stockwood Plan are 
collectively referred to herein as the Related Plans.
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    This proposed exemption is subject to the following conditions:
    (a) No sales commissions or other fees, including any fees payable 
pursuant to Rule 12b-1 of the '40 Act (the 12b-1 Fees), are paid by a 
Plan in connection with the purchase of Fund shares through the in-kind 
transfer of SMEF assets.
    (b) All of the assets of a Plan that are held in SMEF are 
contributed by such Plan in-kind to the Fund in exchange for shares of 
such Fund. A Plan not electing to invest in the Fund receives a 
distribution of its allocable share of the assets of SMEF either in 
cash or in-kind.
    (c) Each Plan receives shares of the Fund which have a total net 
asset value that is equal in value to such Plan's allocable share of 
the assets of SMEF as determined in a single valuation performed in the 
same manner at the close of the same business day, using independent 
sources in accordance with the procedures set forth in Rule 17a-7(b) 
(Rule 17a-7) under the 1940 Act, as amended, and the procedures 
established by the Fund pursuant to Rule 17a-7 for the valuation of 
such assets. Such procedures must require that all securities for which 
a current market price cannot be obtained by reference to the last sale 
price for transactions reported on a recognized securities exchange or 
NASDAQ be valued based on an average of the highest current independent 
bid and lowest current independent offer, as of the close of business 
on the Friday preceding the weekend of the in-kind contribution of SMEF 
assets to the Fund, determined on the basis of reasonable inquiry from 
at least three sources that are broker-dealers or pricing services 
independent of EAI.
    (d) On behalf of each Plan, a second fiduciary who is independent 
of and unrelated to EAI (the Second Fiduciary) receives advance written 
notice of the in-kind transfer of assets of SMEF to the Fund and full 
written disclosure, which includes, but is not limited to, the 
following information concerning the Fund:
    (1) A current prospectus for the Fund in which a Plan is 
considering investing.
    (2) A statement describing the fees for investment advisory or 
similar services that are to be paid by the Fund to EACM; the fees 
retained by EACM for secondary services (the Secondary Services), as 
defined in paragraph g of Section II below; and all other fees to be 
charged to or paid by the Plan and by such Fund to EAI, EACM or to 
unrelated parties, including the nature and extent of any differential 
between the rates of the fees.
    (3) The reasons why EAI considers such investment to be appropriate 
for the Plan.
    (4) Upon request of the Second Fiduciary, a copy of the proposed 
exemption and/or a copy of the final exemption, if granted.
    (e) On the basis of the foregoing information, the Second Fiduciary 
authorizes in writing the in-kind transfer of a Plan's assets invested 
in SMEF to the Fund, in exchange for shares of the Fund, and the fees 
received by EACM in connection with its investment advisory services to 
the Fund. Such authorization by the Second Fiduciary will be consistent 
with the responsibilities, obligations and duties imposed on 
fiduciaries under Part 4 of Title I of the Act.
    (f) EAI sends by regular mail to the Second Fiduciary of each 
affected Plan, the following information:
    (1) Not later than 30 days after the completion of the in-kind 
transfer transaction, a written confirmation which contains--
    (A) The identity of each security that was valued for purposes of 
the transaction in accordance with Rule 17a-7(b)(4) of the '40 Act;
    (B) The price of each such security involved in the transaction; 
and
    (C) The identity of each pricing service or market maker consulted 
in determining the value of such securities.
    (2) Within 90 days after the completion of each transfer, a written 
confirmation which contains--
    (A) The number of SMEF units held by the Plan immediately before 
the transfer, the related per unit value and the total dollar amount of 
such SMEF units; and
    (B) The number of shares in the Fund that are held by the Plan 
following the transfer, the related per share net asset value and the 
total dollar amount of such shares.
    (g) On an ongoing basis, EAI provides a Plan investing in the Fund 
with--
    (1) A copy of an updated prospectus of such Fund, at least 
annually; and
    (2) Upon request, a report or statement (which may take the form of 
the most recent financial report, the current statement of additional 
information, or some other written statement) containing a description 
of all fees paid by the Fund to EAI and its affiliates.
    (h) As to each Plan, the combined total of all fees received by EAI 
and/or its affiliates for the provision of services to the Plan, and in 
connection with the provision of services to the Fund in

[[Page 18425]]

which the Plan invests, is not in excess of ``reasonable compensation'' 
within the meaning of section 408(b)(2) of the Act.
    (i) All dealings between a Plan and the Fund are on a basis no less 
favorable to the Plan than dealings between the Fund and other 
shareholders.
    (j) EAI maintains for a period of six years the records necessary 
to enable the persons described below in paragraph (k) to determine 
whether the conditions of this exemption have been met, except that (1) 
a prohibited transaction will not be considered to have occurred if, 
due to circumstances beyond the control of EAI, the records are lost or 
destroyed prior to the end of the six year period, and (2) no party in 
interest other than EAI, shall be subject to the civil penalty that may 
be assessed under section 502(i) of the Act or to the taxes imposed by 
section 4975 (a) and (b) of the Code if the records are not maintained 
or are not available for examination as required by paragraph (k) of 
this Section II; and
    (k)(1) Except as provided in paragraph (k)(2) and notwithstanding 
any provisions of section 504 (a)(2) and (b) of the Act, the records 
referred to in paragraph (j) are unconditionally available at their 
customary location for examination during normal business hours by--
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and Exchange 
Commission (the SEC);
    (B) Any fiduciary of a Plan who has authority to acquire or dispose 
of shares of the Fund owned by such Plan, or any duly authorized 
employee or representative of such fiduciary;
    (C) Any contributing employer to any participating Plan or any duly 
authorized employee representative of such employer; and
    (D) Any participant or beneficiary of any participating Plan, or 
any duly authorized representative of such participant or beneficiary.
    (2) None of the persons described in paragraph (k)(1)(B)-(D) shall 
be authorized to examine trade secrets of EAI, or commercial or 
financial information which is privileged or confidential.

Section II. Definitions
    For purposes of this proposed exemption:
    (a) The term ``EAI'' means EAI Partners, L.P. and the term ``EACM'' 
refers to Evaluation Associates Capital Markets, Inc.
    (b) An ``affiliate'' of EAI includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with EAI. (For purposes of this paragraph, the term ``control'' means 
the power to exercise a controlling influence over the management or 
policies of a person other than an individual.)
    (2) Any officer, director, employee, relative or partner in such 
person, and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (c) The term ``Fund'' refers to the EAI Select Managers Investment 
Fund, a diversified open-end investment company registered under the 
'40 Act for which EACM serves as an investment adviser and may also 
provide some other ``Secondary Service'' (as defined below in paragraph 
(g) of this Section II) which has been approved by the Fund.
    (d) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and redemptions of Fund shares, calculated by 
dividing the value of all securities, determined by a method as set 
forth in a Fund's prospectus and statement of additional information, 
and other assets belonging to the Fund, less the liabilities chargeable 
to the portfolio, by the number of outstanding shares.
    (e) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or member of the ``family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
a sister, or a spouse of a brother or a sister.
    (f) The term ``Second Fiduciary'' means a fiduciary of a plan who 
is independent of and unrelated to EAI. For purposes of this exemption, 
the Second Fiduciary will not be deemed to be independent of and 
unrelated to EAI if--
    (1) Such Second Fiduciary directly or indirectly controls, is 
controlled by, or is under common control with EAI;
    (2) Such Second Fiduciary, or any officer, director, partner, 
employee, or relative of such Second Fiduciary is an officer, director, 
partner or employee of EAI (or is a relative of such persons;
    (3) Such Second Fiduciary directly or indirectly receives any 
compensation or other consideration for his or her own personal account 
in connection with any transaction described in this proposed 
exemption. However, with respect to the Related Plans (i.e., the EAI 
Plan, the Harding Plan and the Stockwood Plan), the Second Fiduciary 
may receive compensation from EAI in connection with the transaction 
contemplated herein, but the amount or payment of such compensation may 
not be contingent upon or be in any way affected by the Second 
Fiduciary's ultimate decision regarding whether the Related Plans may 
participate in such transaction.
    With the exception of the Related Plans, if an officer, director, 
partner or employee of EAI (or relative of such persons), is a director 
of such Second Fiduciary, and if he or she abstains from participation 
in the choice of a Client Plan's investment adviser, the approval of 
any such purchase or sale between a Client Plan and the Fund, and the 
approval of any change of fees charged to or paid by the Client Plan, 
the transaction described in Section I above, then paragraph (f)(2) of 
this Section II, shall not apply.
    (g) The term ``Secondary Service'' means a service, other than 
investment advisory or similar service which is provided by EACM to the 
Fund. However, the term ``Secondary Service'' does not include any 
brokerage services provided by EAI Securities Inc. (EAISI) to the Fund.

EFFECTIVE DATE: If granted, this proposed exemption will be effective 
December 29, 1995.

Summary of Facts and Representations

Description of the Parties
    1. The parties involved in the subject transaction are described as 
follows:
    (a) EAI is a Delaware limited partnership maintaining its principal 
executive office in Norwalk, Connecticut. EAI provides investment 
consulting services to a number of employee benefit plan clients 
through SMEF, a collective investment fund. As of October 1, 1995, EAI 
had approximately $216 million of Plan assets under management in SMEF, 
of which $62 million was held for participant-directed plans.
    (b) SMEF, a collective investment fund established by EAI, has been 
organized to comply with Revenue Ruling 81-100. SMEF is trusteed by 
Boston Safe Deposit and Trust Company. Following the in-kind transfer 
transaction that is described herein, SMEF has continued to exist 
albeit with reduced assets.
    (c) The Fund was organized on September 27, 1995 as a Massachusetts 
business trust. It is registered as a no-load, open-end investment 
company with the SEC under the '40 Act. Shares of beneficial interest 
are being offered and sold pursuant to a registration statement under 
the Securities Exchange Act of 1933 Act, as amended.
    (d) EACM, a wholly owned subsidiary of EAI, manages the Fund and

[[Page 18426]]

negotiates investment advisory contracts and contracts for Secondary 
Services. EACM also serves as the investment adviser to the Fund and 
will receive investment advisory fees from the Fund.
    (e) EAISI, a wholly owned subsidiary of EAI, serves as the 
distributor of shares of the Fund but it does not receive any 
compensation from the Fund.
    (f) The Plans which are covered by the subject transaction include 
certain Client Plans that are participant-directed account plans within 
the meaning of section 404(c) of the Act for which EAI formerly served 
as a fiduciary through its management of Plan assets that had been 
invested in SMEF. Also covered by the subject transaction are the EAI 
Plan as well as Plans that are sponsored by the Harding Services 
Corporation (Harding) and Stockwood VII, Inc. (Stockwood), which are 
affiliates of EAI.<SUP>9 EAI formerly provided investment management 
services to the Related Plans by reason of their investment in SMEF 
through the end of 1995 but it did not charge the Related Plans any 
fees with respect to such services. The EAI Plan, the Harding Plan and 
the Stockwood Plan are participant-directed, defined contribution 
plans.
---------------------------------------------------------------------------

     <SUP>9 Specifically, EAI and EACM both have officers and 
directors and, in the case of EAI, equity holders who are officers, 
directors and affiliates of Harding and Stockwood.
---------------------------------------------------------------------------

    As of September 30, 1995, the participant, asset breakdown and the 
identities of the trustees of the Related Plans were as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      No.                                                                                               
                 Related plans                   participants    Total assets                                    Trustees                               
--------------------------------------------------------------------------------------------------------------------------------------------------------
EAI Plan.......................................           121       $11,877,063  Elke Bartel, Jeanne Gustafson and                                      
                                                                                 Malin Zergiebel.                                                       
Harding Plan...................................            99         9,800,000  Kurt Borowsky and Frank Richardson.                                    
Stockwood Plan.................................            10           371,000  Kurt Borowsky and Frank Richardson.                                    
--------------------------------------------------------------------------------------------------------------------------------------------------------

It is represented that none of the Related Plans is a party in interest 
with respect to the other within the meaning of section 3(14) of the 
Act.
    (g) Wilmington Trust Company (WTC) of Wilmington, Delaware, has 
been retained by EAI to serve as the Second Fiduciary for the Related 
Plans. In such capacity, WTC was hired to approve the in-kind transfer 
of the assets of the Related Plans that had been invested in SMEF to 
the Fund, in exchange for shares of the Fund. WTC, the primary 
subsidiary of Wilmington Trust Corporation, was established in 1903. 
WTC is wholly independent of EAI and its affiliates.
    As of December 31, 1994, WTC exercised discretionary authority over 
approximately $26.5 billion of fiduciary assets, including 
approximately $14.8 billion of the assets of plans covered by the Act 
as well as non-qualified plans. Also as of December 31, 1994, WTC 
served as directed trustee, agent or custodian with respect to more 
than $5 billion of assets of plans covered by the Act and nonqualified 
employee benefit plans.

Description of the Transaction

    2. Prior to December 29, 1995, EAI required the Plans involved 
herein to withdraw their assets from SMEF. It then provided these Plans 
with the opportunity to contribute their withdrawn SMEF assets to the 
Fund in exchange for shares of the Fund. The principal reason for the 
in-kind transfer of the Plans' assets that had been invested in SMEF to 
the Fund was an SEC ruling pertaining to section 3(c)(1) of the '40 
Act.<SUP>10 In that ruling, the SEC opined that each participant in a 
Plan providing for participant-directed investments would be counted 
for purposes of subjecting a collective investment fund, such as SMEF, 
to reporting and disclosure requirements applicable to open-end 
companies. In accordance with the SEC interpretation, EAI believed that 
the assets of the affected Plans had to be removed from SMEF prior to 
January 1, 1996.
---------------------------------------------------------------------------

    \10\ See Latham & Watkins, SEC No-Action Letter, 1994 SEC No 
Act. LEXIS 910 (December 28, 1994).
---------------------------------------------------------------------------

    In addition, EAI believed that the interests of these Plans would 
be appropriately served by use of a mutual fund, such as the Fund. 
According to EAI, mutual funds are under the supervision of the SEC, 
which places a greater emphasis on participant disclosure and which 
provides a mechanism for approval of disclosure documentation for the 
Fund. Moreover, EAI noted that mutual funds would afford Plan sponsors 
and participants with easier monitoring of investments since 
information concerning investment performance of the Fund would be 
available in daily newspapers of general circulation.
    Accordingly, EAI requests retroactive exemptive relief from the 
Department with respect to the in-kind transfer of the assets of 
certain Plans that had been invested in SMEF, in exchange for shares of 
the Fund. The in-kind transfer transaction occurred on December 29, 
1995 in connection with the partial termination of SMEF. If granted, 
the proposed exemption would be effective as of December 29, 
1995.<SUP>11
---------------------------------------------------------------------------

    \11\ EAI is not requesting an exemption with respect to the 
investment in the Fund by the EAI Plan, the Harding Plan or the 
Stockwood Plan. EAI represents that the Related Plans may acquire or 
sell share of the Fund pursuant to Prohibited Transaction Exemption 
(PTE) 77-3 (42 FR 18734, April 8, 1977). PTE 77-3 permits 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, provided certain conditions are met. The 
Department expresses no opinion on whether any transactions between 
the Fund and the Related Plans would be covered by PTE 77-3.
    Similarly, EAI is not requesting exemptive relief with respect 
to future acquisitions or sales of shares of the Fund by the Client 
Plans. EAI represents that such transactions would be covered under 
PTE 77-4 (42 FR 18732, April 8, 1977). In pertinent part, PTE 77-4 
permits the purchase and sale by an employee benefit plan of shares 
of a registered open-end investment company when a fiduciary with 
respect to the plan is also the investment adviser of the investment 
company. However, again, the Department expresses no opinion on 
whether any transactions between the Client Plans and the Fund would 
be covered by PTE 77-4.
---------------------------------------------------------------------------

    3. Plan assets formerly invested in SMEF that were exchanged for 
shares of the Fund occurred in two simultaneous phases. First, EAI 
obtained written approvals from all Second Fiduciaries with respect to 
the in-kind transfer. EAI then transferred to each Plan its allocable 
share of all assets of SMEF. It is represented that such assets 
consisted of marketable securities and cash balances. Second, the 
distributed assets were transferred by the Plan to the Fund, and, in 
exchange, the Fund issued to each Plan an appropriate number of shares 
of the Fund. These shares had an aggregate value equal to the aggregate 
value of each Plan's allocable share of SMEF assets that were 
transferred to the Fund.
    4. With respect to the initial disclosures provided to each Second 
Fiduciary, EAI represents that prior to

[[Page 18427]]

investing in the Fund, it obtained the affirmative written approval of 
a Second Fiduciary of a Plan who was generally the Plan's named 
fiduciary, trustee or sponsoring employer. In the case of the Related 
Plans, WTC was retained for this purpose. EAI provided each Second 
Fiduciary with a current prospectus for the Fund. The disclosure 
statement described the fees for investment advisory or similar 
services, the fees for Secondary Services and all other fees to be 
charged to, or paid by, a Plan (and by such Fund) to EACM or to 
unrelated parties, including the nature and extent of any differential 
between the rates of the fees. In addition, the disclosure statement 
specified the reasons why EAI considered an investment in the Fund was 
appropriate for a Plan.
    On the basis of such information, the Second Fiduciary authorized 
the investment of Plan assets in the Fund through an in-kind transfer 
of assets received from SMEF. Such authorization was given by the 
Second Fiduciary to EAI in writing.
    5. EAI represents that the in-kind transfer transaction was 
conducted over the weekend of December 29, 1995 in accordance with Rule 
17a-7 under the '40 Act and the procedures established by the Fund 
pursuant to Rule 17a-7 for the valuation of such assets. EAI notes that 
Rule 17a-7 provides an exemption from section 17(a) of the '40 Act, 
which prohibits, among other things, principal transactions between an 
investment company and its investment adviser or affiliates of the 
investment adviser.
    Among the conditions of Rule 17a-7 <SUP>12 is the requirement that 
the transaction be effected at the ``independent current market price'' 
for the security involved. In this regard, the ``current market price'' 
for specific types of SMEF assets involved in the in-kind transfer was 
determined as follows:
---------------------------------------------------------------------------

    \12\ Rule 17a-7 also includes the following requirements: (a) 
the transaction must be consistent with the investment objectives 
and policies of the Fund, as described in its registration 
statement; (b) the security that is the subject of the transaction 
must be one for which market quotations are readily available; (c) 
no brokerage commissions or other remuneration may be paid in 
connection with the transaction; and (d) the Fund's board of 
directors (i.e., those directors who are independent of the Fund's 
investment adviser) must adopt procedures to ensure that the 
requirements of Rule 17a-7 are followed, and determine no less 
frequently than quarterly that the transactions during the preceding 
quarter were in compliance with such procedures.
---------------------------------------------------------------------------

    (a) If the security was a ``reported security'' as the term is 
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934 (the 
'34 Act), the last sale price with respect to such security reported in 
the consolidated transaction reporting system (the Consolidated System) 
for December 29, 1995; or if there were no reported transactions in the 
Consolidated System that day, the average of the highest current 
independent bid and the lowest current independent offer for such 
security (reported pursuant to Rule 11Ac1-1 under the '34 Act), as of 
the close of business on December 29, 1995; or
    (b) If the security was not a reported security, and the principal 
market for such security was an exchange, then the last sale on such 
exchange on December 29, 1995; or if there were no reported 
transactions on such exchange that day, the average of the highest 
current independent bid and lowest current independent offer on such 
exchange as of the close of business on December 29, 1995; or
    (c) If the security was not a reported security and was quoted in 
the NASDAQ system, then the average of the highest current independent 
bid and lowest current independent offer reported on Level 1 of NASDAQ 
as of the close of business on December 29, 1995 or
    (d) For all other securities, the average of the highest current 
independent bid and lowest current independent offer as of the close of 
business on December 29, 1995, determined on the basis of reasonable 
inquiry.
    6. As stated above, the in-kind transfer transaction occurred over 
the weekend of December 29, 1995, using the market values as of the 
preceding Friday. The value of SMEF was determined by the custodian and 
portfolio accountant for the Fund in coordination with EAI. Securities 
listed on the exchange were valued at their closing prices on that 
Friday. Other securities were valued based on the average of current 
independent bid and ask quotations as of that Friday obtained from 
three independent brokers (or under a method otherwise in accordance 
with Rule 17a-7). Any fees charged by independent brokers were the 
responsibility of EAI. The contribution of securities was completed by 
the opening of business on January 2, 1996, such that Plans whose SMEF 
assets were contributed to the Fund held shares of the Fund which had 
the same aggregate value as their units in SMEF as of the preceding 
Friday. No sales commissions or other fees, including 12b-1 Fees, were 
paid by the Plans in connection with the purchase of Fund shares 
through the in-kind transfer of a Plan's assets that were invested in 
SMEF.
    7. Following the in-kind transfer transaction, EAI provided each 
affected Plan with a written confirmation statement on January 31, 
1996. This statement set forth (a) the number of SMEF units held by the 
Plan immediately before the conversion, the related per unit value and 
the total dollar amount of such SMEF units; and (b) the number of 
shares of the Fund that are held by the Plan following the conversion, 
the related per share net asset value and the total dollar amount of 
such shares.
    In addition, on January 31, 1996, EAI provided each affected Plan 
with written confirmation of (a) the identity of each security that was 
valued for purposes of the transaction in accordance with Rule 17a-
7(b)(4); (b) the price of each such security for purposes of the 
transaction; and (c) the identity of each pricing service or market 
maker consulted in determining the value of such securities.

Representations of the Second Fiduciary for the Related Plans Regarding 
the In-Kind Transfer

    8. As stated above, WTC was retained by EAI as the Second Fiduciary 
to oversee the in-kind transfer transaction on behalf of the EAI Plan, 
the Stockwood Plan and the Harding Plan. In such capacity, WTC 
represented that it understood and accepted the duties, 
responsibilities and liabilities in acting as a fiduciary with respect 
to the Related Plans including those duties, responsibilities and 
liabilities that are imposed on fiduciaries under the Act.
    WTC stated that it considered the effect and the implications of 
the transaction on the Related Plans as well as other Plan clients of 
EAI which had invested in SMEF. WTC noted that although SMEF would 
continue to exist after December 31, 1995, it would be maintained for 
Plans that were not participant-directed. Thus, WTC explained that the 
in-kind transfer transaction was being offered to certain Plans 
invested in SMEF on terms that were comparable to and no less favorable 
than the terms that would have been reached among unrelated parties.
    WTC represented that the in-kind transfer transaction was in the 
best interest of the Related Plans and their participants and 
beneficiaries for the following reasons: (a) In terms of the investment 
policies and objectives pursued, the Fund substantially replicates SMEF 
and thus the impact of the transaction on a Related Plan and its 
participants would be de minimis; (b) the Fund would probably continue 
to experience relative investment performance similar in nature to SMEF 
given the continuity of investment objectives and policies, management 
oversight and portfolio management personnel; (c) the in-kind transfer

[[Page 18428]]

transaction would not adversely affect the cash flows, liquidity or 
investment diversification of a Related Plan; (d) the benefits to be 
derived by the Related Plans and their participants investing in the 
Fund (e.g., broader distribution permitted of the Fund to different 
types of plans impacting positively on the asset size of the Fund and 
resulting in cost savings to shareholders) would more than offset the 
impact of minimum additional expenses that might be borne by the 
Related Plans.
    In opining on the appropriateness of the in-kind transfer 
transaction, WTC represented that it conducted an overall review of the 
Related and their respective Plan documents. WTC also stated that it 
examined the total investment portfolios for the Related Plans to 
determine whether or not the Related Plans were in compliance with 
their investment objectives and policies. Further, WTC stated that with 
respect to the Related Plans, it examined their overall liquidity 
requirements and reviewed the concentration of their assets that had 
been invested in SMEF as well as the portion of SMEF that comprised 
their assets. Finally, WTC represented that it reviewed the 
diversification provided by the investment portfolios of the Related 
Plans. Based upon its review and analysis of the foregoing, WTC 
represented that the in-kind transfer transaction would not adversely 
affect the total investment portfolios of the Related Plans or 
compliance by the Related Plans with their stated investment 
objectives, policies, cash flows, liquidity positions or 
diversification requirements.
    As the Second Fiduciary, WTC represented that it was provided by 
EAI with the confirmation statements described in Representation 7. In 
addition, WTC stated that it supplemented its findings following review 
of the post-transfer account information to confirm whether or not the 
in-kind transfer transaction had resulted in the receipt by the Related 
Plans of shares of the Fund equal in value to of each Related Plan's 
pro rata share of assets of SMEF on the conversion date.

Ongoing Disclosures and Other Exemptive Conditions

    9. On an annual basis, EAI will provide each affected Plan with a 
copy of an updated prospectus for the Fund. Upon request, the Plan will 
be provided with a report or statement (which may take the form of the 
most recent statement of additional information, or some other written 
statement) containing a description of all fees paid by the Fund to 
EACM.
    In addition, as to each individual Plan, the combined total of all 
fees received by EAI and/or its affiliates for the provision of 
services to the Plans, and in connection with the provision of services 
to the Fund will not be in excess of ``reasonable compensation'' within 
the meaning of section 408(b)(2) of the Act. Further, all dealings by 
or between the Plans and the Fund will remain on a basis which is at 
least as favorable to the Plans as such dealings are with other 
shareholders of the Fund.
    10. In summary, EAI represents that the in-kind transfer 
transaction described herein satisfies the statutory criteria for an 
exemption under section 408(a) of the Act because:
    (a) A Second Fiduciary authorized in writing, such in-kind transfer 
prior to the transaction and only after such Second Fiduciary received 
full written disclosure of information concerning the Fund.
    (b) Each Plan received shares of the Fund in connection with the 
in-kind transfer of assets from SMEF to the Fund which were equal in 
value to the Plan's allocable share of assets that had been invested in 
SMEF on the date of the transfer as determined in a single valuation 
performed in the same manner and at the close of the business day, 
using independent sources in accordance with procedures established by 
the Fund which complied with Rule 17a-7 of the '40 Act, as amended, and 
the procedures established by the Fund pursuant to Rule 17a-7 for the 
valuation of such assets.
    (c) Within 30 days following the completion of the in-kind transfer 
transaction, EAI provided the Second Fiduciary of each affected Plan 
with written confirmation containing (1) the identity of the security 
that was valued for purposes of the transaction in accordance with Rule 
17a-7(b)(4) of the '40 Act, (2) the price of the security involved in 
the transaction; and (3) the identity of the pricing service or market 
maker consulted in determining the value of such securities.
    (d) Within 90 days following the in-kind transfer, EAI mailed to 
the Second Fiduciary of each Plan, written confirmation containing (1) 
the number of SMEF units held by the Plan immediately before the 
transfer, the related per unit value and the total dollar amount of 
such SMEF units; and (2) the number of shares in the Fund that were 
held by the Plan following the transfer, the related per share net 
asset value and the total dollar amount of such shares.
    (e) As to each Plan, the combined total of all fees received by EAI 
and/or its affiliates for the provision of services to the Plans, and 
in connection with the provision of services to the Fund will not be in 
excess of ``reasonable compensation'' within the meaning of section 
408(b)(2) of the Act.
    (f) No sales commissions were paid by a Plan in connection with the 
acquisition of shares of the Fund.
    (g) With respect to investments in a Fund by the Plans, each Second 
Fiduciary received full and detailed written disclosure of information 
concerning the Fund, including a current prospectus and a statement 
describing the fee structure, and such Second Fiduciary authorized, in 
writing, the investment of the Plan's assets in the Fund and the fees 
paid by the Fund to the EACM.
    (h) EAI will provide ongoing disclosures to Second Fiduciaries of 
Plans to verify the fees charged by the EACM to the Fund.
    (i) All dealings by or between the Plans and the Fund have been and 
will remain on a basis which is at least as favorable to the Plans as 
such dealings are with other shareholders of the Fund.

Notice to Interested Persons

    Notice of the proposed exemption will be given to Second 
Fiduciaries of Plans that have investments in SMEF and from whom 
approval was sought for the in-kind transfer of Plan assets to the 
Fund. Such notice will be provided to interested persons by first class 
mail within 14 days following the publication of the notice of pendency 
in the Federal Register. Such notice will include a copy of the notice 
of proposed exemption as published in the Federal Register as well as a 
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2), 
which shall inform interested persons of their right to comment on and/
or to request a hearing. Comments and requests for a public hearing are 
due within 44 days of the publication of the notice of proposed 
exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Pension Plan of Roper Hospital, Inc. (the Plan) Located in Charleston, 
South Carolina

[Application No. D-10163]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and

[[Page 18429]]

in accordance with the procedures set forth in 29 CFR Part 2570, 
Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption is 
granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of 
the Code, shall not apply to the proposed cash sale (the Sale) by the 
Plan of Separate Investment Account Group Annuity Policy No. GA-4619 
(the Policy) maintained by New England Mutual Life Insurance Company 
(NEL) to Roper Health System, Inc. (the Hospital), the Plan sponsor and 
a party in interest with respect to the Plan, provided the following 
conditions are satisfied: (a) The Sale is a one-time transaction for 
cash; (b) the Plan receives no less than the greater of the fair market 
value of the Policy at the time of the Sale, or $494,130; and (c) the 
Plan does not pay any commissions or other expenses in connection with 
the transaction.

Summary of Facts and Representations

    1. The Hospital is a non-profit corporation with its principal 
office at Charleston, South Carolina. The Hospital sponsors the Plan, 
which is a defined benefit plan which had 2,431 participants and assets 
of approximately $22,936,604 as of December 31, 1994. Wachovia Bank of 
South Carolina, N.A. (the Bank) is the Plan's trustee. The Finance 
Committee of the Board of Trustees of the Hospital (the Finance 
Committee), however, has investment discretion with respect to the 
Policy. The Finance Committee consists of officers of the Hospital.
    2. In order to better serve the retirement goals of its employees, 
the Board of Trustees of the Hospital (the Board) has determined to 
restructure its retirement program. To that end, the Board has approved 
the termination of the Plan effective as of September 30, 1995. In 
place of the Plan, the Board has approved the adoption of a tax-
deferred savings plan under section 403(b) of the Code and an annuity 
plan under section 403(a) of the Code. Pursuant to the termination 
agreement (the Agreement), any assets remaining in the Plan after all 
benefit liabilities have been satisfied in accordance with the Act will 
be allocated and distributed to Plan participants in accordance with 
the allocation formulas specified in the Agreement. Accordingly, it is 
the Hospital's intent that the assets in the Plan be liquidated and 
distributed or applied for the benefit of participants and 
beneficiaries of the Plan. The applicant represents that pursuant to 
the terms of the Agreement participants' accrued benefits (although not 
surplus assets) were distributed on or about December 15, 1995. 
Distribution of the surplus assets, which will include the proceeds 
from the sale of the Policy to the Hospital (if the exemption proposed 
herein is granted), will not occur until later in 1996.
    3. Commencing in March of 1987 and continuing until March of 1988, 
the Plan's prior trustees (the Prior Trustees), who consisted of 
individuals who were officers of the Hospital, invested a total of 
$1,398,064 in the Policy maintained by NEL. NEL maintains a separate 
investment fund under the Policy known as the Developmental Properties 
Account (the DPA). The DPA is invested in income-producing properties 
throughout the United States. During the early 1990's, the DPA declined 
significantly in value due to the recession and general downturn in the 
real estate market, both of which adversely affected virtually all real 
estate investment funds. The DPA currently is ``frozen'', meaning that 
no withdrawal requests are being honored by NEL. In fact, withdrawal 
requests have not been honored by NEL since June 30, 1991. Since that 
date, the Policy has declined in value by approximately $909,316. The 
Hospital first became aware that the DPA had been frozen at the same 
time as other investors, on or about November 15, 1991, through the 
1991 Third Quarter Report provided by NEL, and without any opportunity 
to liquidate the Plan's investment. Accordingly, despite the DPA's 
decline in value, the Plan has been forced to continue to hold the 
Policy.<SUP>13 As of December 31, 1995, the fair market value of the 
Plan's interest in the DPA was $494,130. The fair market value was 
determined by NEL by multiplying the Plan's percentage ownership in the 
DPA by the aggregate fair market value of the assets of the DPA.
---------------------------------------------------------------------------

     <SUP>13 The Department notes that the decisions to acquire and 
hold the Policy are governed by the fiduciary responsibility 
requirements of Part 4, Subtitle B, Title I of the Act. In this 
regard, the Department is not herein proposing relief for any 
violations of Part 4 which may have arisen as a result of the 
acquisition and holding of the Policy issued by NEL.
---------------------------------------------------------------------------

    4. The applicant states that Mr. Fred Hyder of NEL has represented 
that at least one investor in the DPA sold its interest in the DPA to 
an unrelated buyer for one-third of its fair market value as determined 
by NEL. The investor was a retirement plan that had been terminated by 
the sponsoring employer. The trustee of the retirement plan was forced 
to sell its interest in the DPA to an unrelated buyer well below its 
stated fair market value in order to make distributions to participants 
upon termination. Mr. Hyder also indicated that in his opinion there is 
very little activity in the secondary market due to the inability of a 
DPA investor to sell its interest in the DPA to an unrelated buyer for 
its stated fair market value.
    5. The Hospital has offered to purchase the Plan's interest in the 
DPA for the greater of its current fair market value as determined by 
NEL (without any diminution in value as described in rep. 4, above), or 
$494,130. Under Section V of the Policy, the Plan cannot sell its 
interest in the DPA without the consent of NEL (which consent cannot be 
unreasonably withheld). However, NEL has agreed to the transfer of the 
Plan's interest in the DPA to the Hospital, provided the exemption 
proposed herein is granted. The applicant represents that the Finance 
Committee has determined that the sale of the Policy to the Hospital is 
in the best interests of the Plan and its participants and 
beneficiaries because the sale will allow the Bank to liquidate the 
Plan's investment in the DPA for the investment's current fair market 
value and to distribute or apply the proceeds from the sale to 
participants and beneficiaries in accordance with the Agreement. If the 
exemption proposed herein is denied, there is no viable purchaser for 
the DPA other than the Hospital. In addition, the Finance Committee 
represents that if the exemption were denied, then the Plan would be 
required to continue as a wasting trust solely for the purpose of 
holding the Policy until it can be liquidated, which is unlikely to 
occur in the near future.
    6. The fair market value of the Policy will be determined by the 
value reported by NEL as of the end of the quarter preceding the date 
of sale. There will be no reduction in this value as described in rep. 
4, above. Copley Real Estate Advisors (Copley), an indirect subsidiary 
of NEL, acts as an asset manager and advisor to NEL with respect to the 
DPA. Copley selects qualified appraisal firms to conduct annual outside 
appraisals on the properties which make up the DPA. At quarterly dates 
between annual appraisals, Copley's asset management group prepares 
internal valuations. Copley represents that the internal valuations are 
based on the work that is completed by the outside appraiser and the 
same basic valuation methods used by the outside appraisers are used 
for the internal valuation. The Hospital represents that the valuations 
reported by NEL provide a reliable indication of the fair market value 
of the Policy and

[[Page 18430]]

the DPA. NEL and Copley are independent of the Hospital and the Bank.
    7. In summary, the applicant represents that the proposed 
transaction satisfies the criteria contained in section 408(a) of the 
Act because: (a) The Sale is a one-time transaction for cash, and the 
Plan will pay no commissions or other expenses in connection with the 
Sale; (b) the Plan will receive cash for the Policy in an amount not 
less than the greater of the fair market value of the Policy as of the 
date of the Sale, or $494,130; (c) the fair market value of the Policy 
will be established by NEL, a party unrelated to the Plan and the 
Hospital; and d) the Sale will remove the Policy, which has been 
declining in value and is illiquid, from the Plan.

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

First Virginia Banks, Inc., Located in Falls Church, Virginia

[Application Nos. D-10175 thru D-10177]

Proposed Exemption

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

Section I--Transactions

    The restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of the 
Act and the sanctions resulting from the application of section 4975 of 
the Code, by reason of section 4975(c)(1) (A) through (E) of the Code, 
shall not apply to the following transactions provided that all of the 
conditions set forth in Section II below are met:
    (a) The cash sale on December 23, 1994 of certain variable rate 
certificates of deposit (CDs) issued by Merrill Lynch National Bank, 
Salt Lake City, Utah (the Merrill Lynch CDs) by forty (40) employee 
benefit plans, Keogh plans and individual retirement accounts (IRAs), 
for which First Knoxville Bank in Knoxville, Tennessee (the Bank) 
serves as a fiduciary, to First Virginia Banks, Inc. (First Virginia), 
a party in interest or disqualified person with respect to such plans 
and IRAs;
    (b) The cash sale on various dates during 1995 of certain fixed 
rate CDs issued by various unrelated financial institutions (the Fixed 
Rate CDs) by eighteen (18) employee benefit plans, Keogh plans and 
IRAs, for which the Bank serves as a fiduciary to First Virginia, a 
party in interest or disqualified person with respect to such plans and 
IRAs; and
    (c) The proposed cash sale of certain additional fixed rate CDs 
issued by various unrelated financial institutions (the Additional 
Fixed Rate CDs) by approximately twenty-one (21) employee benefit 
plans, Keogh plans and IRAs, for which the Bank serves as a fiduciary, 
to First Virginia, a party in interest or disqualified person with 
respect to such plans and IRAs.

Section II--Conditions

    (a) Each sale is a one-time transaction for cash;
    (b) Each plan or IRA (hereafter referred to as ``Plan'') receives 
an amount which is equal to the greater of (i) the face amount of the 
CDs owned by the Plan, plus accrued but unpaid interest, at the time of 
sale, or (ii) the fair market value of the CDs owned by the Plan as 
determined by an independent, qualified appraiser at the time of the 
sale;
    (c) The Plans do not pay any commissions or other expenses with 
respect to the sale of such CDs;
    (d) The Bank, as trustee of the Plans, determines that the sale of 
the CDs is in the best interests of each Plan and its participants and 
beneficiaries at the time of the transaction;
    (e) The Bank takes all appropriate actions necessary to safeguard 
the interests of the Plans and their participants and beneficiaries in 
connection with the transactions;
    (f) Each Plan receives a reasonable rate of interest on the CDs 
during the period of time such CDs are held by the Plan;
    (g) The Bank or an affiliate maintains for a period of six years 
the records necessary to enable the persons described below in 
paragraph (h) to determine whether the conditions of this exemption 
have been met, except that (1) a prohibited transaction will not be 
considered to have occurred if, due to circumstances beyond the control 
of the Bank or affiliate, the records are lost or destroyed prior to 
the end of the six-year period, and (2) no party in interest other than 
the Bank or affiliate shall be subject to the civil penalty that may be 
assessed under section 502(i) of the Act or to the taxes imposed by 
section 4975(a) and (b) of the Code if the records are not maintained 
or are not available for examination as required by paragraph (h) 
below; and
    (h) (1) Except as provided below in paragraph (h)(2) and 
notwithstanding any provisions of section 504(a)(2) of the Act, the 
records referred to in paragraph (g) are unconditionally available at 
their customary location for examination during normal business hours 
by--
    (i) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service,
    (ii) Any fiduciary of the Client Plans who has authority to acquire 
or dispose of shares of the Funds owned by the Client Plans, or any 
duly authorized employee or representative of such fiduciary, and
    (iii) Any participant or beneficiary of the Client Plans or duly 
authorized employee or representative of such participant or 
beneficiary;
    (2) None of the persons described in paragraph (h)(1)(ii) and (iii) 
shall be authorized to examine trade secrets of the Bank, or commercial 
or financial information which is privileged or confidential.

EFFECTIVE DATE: The proposed exemption, if granted, will be effective 
as of December 23, 1994, for the transactions described in Section I(a) 
above, and the various appropriate sale dates in 1995 for the 
transactions described above in Section I(b).

Summary of Facts and Representations

    1. The Bank is a wholly-owned subsidiary of First Virginia. The 
Bank, formerly called the First National Bank of Knoxville, was 
acquired by First Virginia in June 1994. The Bank serves as trustee, 
directed trustee, or custodian of various small employee benefit plans, 
Keogh plans and IRAs (collectively, the Plans). The Bank, as trustee, 
has investment discretion for the assets of the Plans.
    The Bank represents that following its acquisition by First 
Virginia, a number of problems surfaced upon review of the investment 
portfolios of the Plans regarding their acquisition and holding of 
certain CDs, as discussed below.<SUP>14
---------------------------------------------------------------------------

    \14\ The Department is expressing no opinion in this proposed 
exemption regarding whether the acquisition and holding of the CDs 
by the Plans violated any of the fiduciary responsibility provisions 
of Part 4 of Title I of the Act.
    The Department notes that section 404(a) of the Act requires, 
among other things, that a fiduciary of a plan act prudently, solely 
in the interest of the plan's participants and beneficiaries, and 
for the exclusive purpose of providing benefits to participants and 
beneficiaries when making investment decisions on behalf of a plan. 
Section 404(a) of the Act also states that a plan fiduciary should 
diversify the investments of a plan so as to minimize the risk of 
large losses, unless under the circumstances it is clearly prudent 
not to do so.
    In this regard, the Department is not providing any opinion as 
to whether a particular category of investments or investment 
strategy would be considered prudent or in the best interests of a 
plan as required by section 404 of the Act. The determination of the 
prudence of a particular investment or investment course of action 
must be made by a plan fiduciary after appropriate consideration to 
those facts and circumstances that, given the scope of such 
fiduciary's investment duties, the fiduciary knows or should know 
are relevant to the particular investment or investment course of 
action involved, including the plan's potential exposure to losses 
and the role the investment or investment course of action plays in 
that portion of the plan's investment portfolio with respect to 
which the fiduciary has investment duties (see 29 CFR 2550.404a-1). 
The Department also notes that in order to act prudently in making 
such investment decisions, a plan fiduciary must consider, among 
other factors, the availability, risks and potential return of 
alternative investments for the plan. Thus, a particular investment 
by a plan, which is selected in preference to other alternative 
investments, would generally not be prudent if such investment 
involves a greater risk to the security of a plan's assets than 
comparable investments offering a similar return or result.

---------------------------------------------------------------------------

[[Page 18431]]

The Merrill Lynch CDs

    2. On October 18, 1993, the Bank, in its capacity as a fiduciary of 
certain Plans, purchased the Merrill Lynch CDs through the brokerage 
firm of Dunham & Associates Investment Counsel, Inc. (Dunham) of San 
Diego, California. The Bank states that Dunham did not provide any 
investment advice as a fiduciary regarding the investments made by the 
Bank in the Merrill Lynch CDs for the Plans.
    There were 40 Plans involved in the purchase of the Merrill Lynch 
CDs by the Bank. Of these 40 Plans, approximately 32 Plans had only one 
participant covered by the Plan. The Plan with the largest number of 
participants was the Collier Development Company Profit Sharing Plan 
(the Collier P/S Plan), which had 83 participants and beneficiaries. 
The Collier P/S Plan had $101,149 in total assets, of which $26,000 or 
approximately 26 percent was invested in the Merrill Lynch CDs. The 
Plan with the largest amount of assets was the Theodore Haase, M.D., 
IRA (the Haase IRA) which had total assets of $1,172,511, at the time 
of the transactions. The Haase IRA had $21,000 invested in the Merrill 
Lynch CDs, which represented approximately two (2) percent of its total 
assets. The Plan with the largest investment in the Merrill Lynch CDs 
was the Gordon S. Hutchins IRA, which had such CDs with a face amount 
of $99,000. This amount represented approximately 64 percent of such 
Plan's total assets.
    The percentage of a Plan's total assets represented by investments 
in the Merrill Lynch CDs varied from as little as one (1) percent [e.g. 
the Mulford Enterprises Profit Sharing Plan] to as much as 92 percent 
[e.g. the Audrey Denton IRA]. However, most of the Plans had less than 
25 percent of their total assets invested in the Merrill Lynch CDs.
    3. The Merrill Lynch CDs were issued by Merrill Lynch National Bank 
in Salt Lake City, Utah, with a total face value of $1,995,000, and are 
scheduled to mature on October 18, 1998. The Merrill Lynch CDs owned by 
the Plans had a total face value of $894,500. The Bank states that the 
interest rate on the Merrill Lynch CDs was fixed at 5.00 percent per 
annum for the first year. However, the interest rate in the subsequent 
years until maturity on October 18, 1998, is a stated interest rate 
offset by the current six-month London Interbank Offered Rate (LIBOR) 
as follows: (i) years two and three--8.50 percent per annum minus six-
month LIBOR; and (ii) years four and five--10.50 percent minus six-
month LIBOR.
    4. The Bank represents that the information provided by Dunham to 
the Bank prior to the Bank's purchase of the Merrill Lynch CDs on 
behalf of the Plans indicated that there was no early withdrawal 
penalty. However, the Bank states that when it requested to redeem the 
Merrill Lynch CDs without a withdrawal penalty, the request was 
declined by Dunham, who indicated that such CDs could not be redeemed 
prior to maturity, with or without penalty.
    5. The Bank represents that the fair market value of the Merrill 
Lynch CDs was significantly below their face value as of December 1994. 
The Bank states that the significant decline in the fair market value 
of the Merrill Lynch CDs was attributable to two factors: (i) the fact 
that the interest rate on the CDs dropped to 2.54 percent (8.50 percent 
minus LIBOR), effective for the six-month period beginning October 18, 
1994; <SUP>15 and (ii) rising interest rates in the marketplace for 
comparable fixed income investments of the same duration, as measured 
by various interest rate indexes at the time.
---------------------------------------------------------------------------

    \15\ In this regard, the applicant states that the six-month 
LIBOR rate was 3.375 percent on October 18, 1993, the date on which 
the Merrill Lynch CDs were acquired, and 6.9375 percent on December 
13, 1994, prior to the sale of such CDs to the Holding Company 
discussed herein. The interest paid originally on the Merrill Lynch 
CDs was 5.00 percent as of October 18, 1993, and 2.54 percent as of 
December 13, 1994.
---------------------------------------------------------------------------

    Therefore, the Bank made a determination that it would be in the 
best interests of the Plans to sell the CDs to the Holding Company to 
avoid the investment losses which would result to the Plans from any 
sale on the open market.
    6. Davenport & Company of Virginia, Inc. (Davenport), an 
independent qualified appraiser located in Richmond, Virginia, 
appraised the Merrill Lynch CDs as having a fair market value of 
approximately $70.75 per $100 of face value, as of December 23, 1994. 
Davenport's analysis described the Merrill Lynch CDs as ``inverse 
floaters'' paying below market interest rates at the time of the 
transaction. Davenport states that the Merrill Lynch CDs are a 
``derivative type of security'' which involves a complicated pricing 
process to determine market value. Davenport represents that dealers 
trading such securities use data from the interest rate swap market and 
various interest rate forecasts to determine their bid prices. In 
addition, Davenport notes that since the Merrill Lynch CDs are traded 
over-the-counter and are not listed on an exchange, dealers have 
different options as to how to value such securities. Davenport 
concluded that as a result of the then current interest rates, as 
measured by LIBOR and other indexes at the time of the transaction, and 
market data concerning interest rate forecasts, there were few dealers 
or other buyers interested in purchasing the Merrill Lynch CDs without 
a significant discount on their face value.
    7. On December 23, 1994, the Holding Company purchased the Merrill 
Lynch CDs from the Plans for cash at their full face value, an amount 
which was significantly above the fair market value of the CDs at that 
time as determined by Davenport. In addition, the Holding Company paid 
the Plans interest at the originally stated rate of 5.00 percent per 
annum through the date of purchase, even though the Merrill Lynch CDs 
began earning interest at an annual rate of 2.54 percent on October 18, 
1994. The Plans did not pay any commissions or other expenses with 
respect to the transactions.
    The Bank states that it engaged in the transaction on behalf of the 
Plans for the following reasons: (i) the purchase of the Merrill Lynch 
CDs by the Holding Company provided the Plans with full access to the 
total face value of the CDs, without any withdrawal penalty, and 
avoided the investment loss which would have occurred from a sale of 
the CDs on the open market; (ii) as a result of the transaction, the 
Plans had the funds immediately available for either reinvestment at 
the current higher market interest rates or for distribution to the 
Plan participants and beneficiaries, as appropriate; (iii) the interest 
rate of 5.00 percent per annum paid on the CDs by the Holding Company 
was significantly higher than the effective interest rate of 2.54 
percent per annum being paid on the CDs at the time of the transaction; 
and (iv) since the Merrill Lynch CDs could not be redeemed prior to 
maturity, such CDs became effectively an illiquid

[[Page 18432]]

investment which was unsuitable for the Plans.

Certain Fixed Rate CDs

    8. On various dates prior to June 1994, the Bank, in its capacity 
as a fiduciary of certain Plans, purchased the Fixed Rate CDs through 
brokerage firms unrelated to the Bank and its affiliates. The Bank 
states that these brokerage firms did not provide any investment advice 
as a fiduciary regarding the investments made by the Bank in the Fixed 
Rate CDs for the Plans. There were approximately forty-three (43) 
different Fixed Rate CDs held by such Plans as of December 1994.
    There were 18 Plans involved in the purchase of the Fixed Rate CDs 
by the Bank. Of these 18 Plans, approximately 13 Plans had only one 
participant covered by the Plan. The Plan with the largest number of 
participants was the Farragut Ditching Profit Sharing Plan (the 
Farragut P/S Plan), which had approximately 50 participants and 
beneficiaries and total assets of $694,803 at the time of the 
transactions. The Farragut P/S Plan had $196,000 invested in the Fixed 
Rate CDs, which represented approximately 28 percent of its total 
assets. The Plan with the largest amount of total assets was the Jayne 
C. Tilley IRA (the Tilley IRA), which had approximately $989,733 at the 
time of the transactions. The Plan with the largest investment in the 
Fixed Rate CDs was also the Tilley IRA, which had such CDs with a face 
amount of $209,000. This amount represented approximately 21 percent of 
such Plan's total assets at the time of the transactions.
    The percentage of a Plan's total assets represented by investments 
in the Fixed Rate CDs varied from as little as one (1) percent [e.g. 
the Dean Cox IRA] to as much as 96 percent [e.g. the National Fuel 
SEP]. However, most of the Plans had less than 30 percent of their 
total assets invested in the Fixed Rate CDs.
    9. The Fixed Rate CDs were issued by various financial 
institutions, all of which were unrelated to the Bank and its 
affiliates. These financial institutions were: (a) First USA Bank, in 
Wilmington, Delaware; (b) Bluebonnet Savings Bank, FSB, in Dallas, 
Texas; (c) State Bank of India, in New York, New York; (d) Columbia 
First Bank, in Arlington, Virginia; (e) Amerifed Bank, FSB, in Joliet, 
Illinois; (f) Home Savings of America, in Los Angeles, California; (g) 
FNB Boston, in Boston, Massachusetts; (h) Provident Bank, in 
Cincinnati, Ohio; (i) Home Federal Bank of Tennessee, FSB, in 
Knoxville, Tennessee; (j) Investors Thrift and Loan, in Monterey, 
California; (k) Greenwood Trust Company, in New Castle, Delaware; and 
(l) Merrill Lynch National Bank, in Salt Lake City, Utah.
    The Fixed Rate CDs held by the Plans had a total face value of 
$1,199,150, with maturity dates ranging from May 1995 to January 1999. 
The Bank states that the interest rates on these CDs was fixed in each 
case for the entire length of the CDs. The interest rates paid on the 
Fixed Rate CDs ranged from 4.80 percent per annum for the CD issued by 
Amerifed Bank [with a par value of $10,000 and maturity on August 18, 
1995] to 6.25 percent per annum for the CD issued by FNB Boston [with a 
par value of $20,100 and maturity on January 1, 1999]. However, 
subsequent to the purchase of the Fixed Rate CDs by the Plans, the Bank 
learned that these CDs could not be redeemed prior to maturity, with or 
without penalty.
    10. The Bank represents that the fair market value of each of the 
Fixed Rate CDs was below its face value during 1995. The Bank states 
that the decline in the fair market value of the Fixed Rate CDs was 
attributable to rising interest rates in the marketplace for comparable 
fixed income investments of the same duration, as measured by various 
interest rate indexes at the time.
    Therefore, the Bank made a determination that it would be in the 
best interests of the Plans to sell the Fixed Rate CDs to the Holding 
Company prior to their maturity to avoid any investment losses which 
could result to the Plans from a sale of such CDs on the open market.
    11. Davenport also appraised each of the Fixed Rate CDs as having a 
fair market value which was below its face value at the time of the 
subject transactions in 1995. These valuations ranged from 
approximately $91.658 per $100 of face value, as of March 14, 1995, for 
the Fixed Rate CD issued by Greenwood Trust [which pays 5.00 percent 
per annum and is due to mature on September 28, 1998], to approximately 
$99.216 per $100 face value, as of April 19, 1995, for the Fixed Rate 
CD issued First USA Bank [which paid 6.15 percent per annum and matured 
on May 29, 1995].
    Davenport's analysis was based on information from brokerage firms 
and banks that trade such CDs. Davenport represents that the Fixed Rate 
CDs are not as liquid as other fixed income securities due to a number 
of factors including par amount, lack of issuer recognition, limited 
secondary market, lack of knowledge of the issuers financial strength 
and their non-rated status. Davenport states that dealers that trade 
such CDs usually demand yields between 50-70 basis points above the 
yield for comparable U.S. Treasury securities to account for these 
factors, despite the U.S. Government guarantee for CDs with face 
amounts under $100,000. Davenport's analysis estimated that bids for 
the Fixed Rate CDs would require an average yield of approximately 60 
basis points above the yield for comparable U.S. Treasury securities, 
before deducting approximately $7.50 per $1,000 face amount as an 
average commission for an open market transaction. Davenport's 
conclusions regarding the market value of the Fixed Rate CDs supported 
the Bank's determinations to sell these CDs to the Holding Company.
    12. On various dates during 1995, the Holding Company purchased the 
Fixed Rate CDs from the Plans for cash prior to maturity at their full 
face value, an amount which was above the fair market value of the CDs 
at that time as determined by Davenport. The Bank states that these 
transactions occurred on the following dates: (i) 10 Fixed Rate CDs 
were sold on March 14, 1995; (ii) one Fixed Rate CD was sold on March 
31, 1995; (iii) three Fixed Rate CDs were sold on April 7, 1995; (iv) 
two Fixed Rate CDs were sold on April 19, 1995; (v) one Fixed Rate CD 
was sold on April 27, 1995; (vi) three Fixed Rate CDs were sold on May 
26, 1995; (vii) four Fixed Rate CDs were sold on June 1, 1995; (viii) 
three Fixed Rate CDs were sold on June 2, 1995; (ix) one Fixed Rate CD 
was sold on August 2, 1995; (x) five Fixed Rate CDs were sold on August 
7, 1995; (xi) four Fixed Rate CDs were sold on August 8, 1995; and 
(xii) six Fixed Rate CDs were sold on August 11, 1995. In each case, 
the Holding Company paid the Plans any accrued but unpaid interest at 
the stated fixed rate for the CD through the date of purchase. The 
Plans did not pay any commissions or other expenses with respect to the 
transactions.
    The Bank states that it engaged in these transactions on behalf of 
the Plans for the following reasons: (i) The purchase of the Fixed Rate 
CDs by the Holding Company provided the Plans with full access to the 
total face value of the CDs, without any withdrawal penalty, and 
avoided the investment loss which would have occurred from a sale of 
the CDs on the open market; (ii) as a result of the transaction, the 
Plans had the funds immediately available for either reinvestment at 
the current higher market interest rates or for distribution to the 
Plan participants and beneficiaries, as appropriate; and (iii) since 
the Fixed Rate CDs could not be redeemed prior to maturity, such CDs 
became effectively illiquid investments which were unsuitable for the 
Plans.

[[Page 18433]]

Additional Fixed Rate CDs

    13. On various dates prior to June 1994, the Bank, in its capacity 
as a fiduciary of certain Plans, purchased the Additional Fixed Rate 
CDs through brokerage firms unrelated to the Bank and its affiliates. 
The Bank states that these brokerage firms did not provide the Bank 
with any investment advice as a fiduciary regarding the investments in 
the Additional Fixed Rate CDs made for the Plans. There are 
approximately sixteen (16) different Additional Fixed Rate CDs held by 
such Plans.
    There were 21 Plans involved in the purchase of the Additional 
Fixed Rate CDs by the Bank. Of these 21 Plans, approximately 16 Plans 
currently have only one participant covered by the Plan. The Plan with 
the largest number of participants is the Bandit Lites Profit Sharing 
Plan (the Bandit Lites P/S Plan), which has approximately 37 
participants and beneficiaries. The Bandit Lites P/S Plan has 
approximately $240,935 in total assets, of which $53,000 or 
approximately 21 percent of such assets are invested in the Additional 
Fixed Rate CDs. The Plan with the largest amount of assets is the 
Douglas G. Slater IRA (the Slater IRA), which has approximately 
$2,454,803. The Plan with the largest investment in the Additional 
Fixed Rate CDs is also the Slater IRA, which has such CDs with a face 
amount of $383,000. This amount represents approximately 15.5 percent 
of such Plan's total assets.
    The percentage of a Plan's total assets represented by investments 
in the Additional Fixed Rate CDs varies from as little as two (2) 
percent [e.g. the Donald Campbell SEP-IRA] to as much as 87 percent 
[e.g. the William Myers IRA]. However, most of the Plans have less than 
30 percent of their total assets invested in the Additional Fixed Rate 
CDs.
    14. The Additional Fixed Rate CDs were issued by various financial 
institutions unrelated to the Bank and its affiliates (see list in 
Paragraph 9 above). The Additional Fixed Rate CDs held by the Plans 
have a total face value of $875,150, with maturity dates ranging from 
June 1996 until January 1999. The Bank states that the interest rates 
on these CDs are fixed in each case for the entire length of the CDs. 
The interest rates on the Additional Fixed Rate CDs range from 5.00 
percent per annum for the CD issued by Bluebonnet Savings Bank [with a 
par value of $10,000 and maturity on June 14, 1996] to 5.50 percent per 
annum for the CD issued by Provident Bank [with a par value of $19,000 
and maturity on December 10, 1997].
    The Bank represents that at the time the Additional Fixed Rate CDs 
were purchased, the Bank believed that there was no early withdrawal 
penalty. However, the Bank states that it subsequently learned that 
these CDs cannot be redeemed prior to maturity, with or without 
penalty.
    15. The Bank proposes to sell the Additional Fixed Rate CDs to the 
Holding Company for cash prior to their maturity at an amount equal to 
the greater of either: (i) The face amount of such CDs, plus accrued 
interest; or (ii) the fair market value of such CDs, plus accrued 
interest, as determined by an independent, qualified appraiser at the 
time of the transaction.
    Davenport has provided an opinion as to the market value of the 
Additional Fixed Rate CDs, as of September 21, 1995. Davenport's 
valuations for these CDs as of such date ranged from approximately 
$95.112 per $100 of face value for the Additional Fixed Rate CD issued 
by Greenwood Trust [which pays 5.00 percent per annum and is due to 
mature on September 29, 1998], to approximately $98.28 per $100 of face 
value for the Additional Fixed Rate CD issued by Bluebonnet Savings 
Bank [which pays 5.00 percent per annum and is due to mature on June 
14, 1996].
    The Bank states that it wants to engage in the proposed 
transactions on behalf of the Plans for the following reasons: (i) The 
purchase of the Additional Fixed Rate CDs by the Holding Company would 
provide the Plans with full access to the total face value of the CDs, 
without any withdrawal penalty, and would avoid the possibility of 
investment losses that may occur in a sale of the CDs on the open 
market; (ii) as a result of the transaction, the Plans will have the 
funds immediately available for either reinvestment at any higher 
market interest rates currently available at the time of the proposed 
transaction or for distribution to the Plan participants and 
beneficiaries, as appropriate; and (iii) since the Additional Fixed 
Rate CDs cannot be redeemed prior to maturity, such CDs are effectively 
illiquid investments which are unsuitable for the Plans.
    Therefore, the Bank believes that it would be in the best interests 
of the Plans to sell certain of the Additional Fixed Rate CDs to the 
Holding Company prior to their maturity. The Bank states that the Plans 
will not pay any commissions or other expenses with respect to the 
sale.
    16. In summary, the Bank represents that the subject transactions 
satisfy the statutory criteria of section 408(a) of the Act because: 
(a) Each sale has been and will be a one-time transaction for cash; (b) 
each Plan has received or will receive an amount which is equal to the 
greater of (i) the face amount of the CDs owned by the Plan, plus 
accrued but unpaid interest, at the time of sale, or (ii) the fair 
market value of the CDs owned by the Plan as determined by an 
independent, qualified appraiser at the time of the sale; (c) the Plans 
have not paid and will not pay any commissions or other expenses with 
respect to the sales of the CDs; (d) the Bank, as trustee of the Plans, 
has determined and will determine that each sale of the CDs was or will 
be in the best interests of the Plan and its participants and 
beneficiaries at the time of the transaction; (e) the Bank has taken 
and will take all appropriate actions necessary to safeguard the 
interests of the Plans and their participants and beneficiaries in 
connection with the transactions; and (f) each Plan has received and 
will receive a reasonable rate of interest on the CDs during the period 
of time such CDs were or are held by the Plan.

Notice to Interested Persons

    The applicant states that notice of the proposed exemption shall be 
made by first class mail to the appropriate Plan fiduciaries within 
fifteen days following the publication of the proposed exemption in the 
Federal Register. This notice shall include a copy of the notice of 
proposed exemption as published in the Federal Register and a 
supplemental statement (see 29 CFR 2570.43(b)(2)) which informs 
interested persons of their right to comment on and/or request a 
hearing with respect to the proposed exemption. Comments and requests 
for a public hearing are due within forty-five days following the 
publication of the proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department, 
telephone (202) 219-8194. (This is not a toll-free number.)

First Security Group Life Insurance Plan (the Plan) Located in Salt 
Lake City, Utah

[Application No. L-10178]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the restrictions 
of sections 406 (a) and (b) of the Act shall not apply to the 
reinsurance of risks and the receipt of

[[Page 18434]]

premiums therefrom by First Security Life Insurance Company of Arizona 
(FSLIA) from the insurance contracts sold by Minnesota Mutual Life 
Insurance Company (MM) or any successor insurance company to MM which 
is unrelated to First Security Corporation (FSC), to provide life 
insurance benefits to participants in the Plan, provided the following 
conditions are met:
    (a) FSLIA--
    (1) Is a party in interest with respect to the Plan by reason of a 
stock or partnership affiliation with FSC that is described in section 
3(14) (E) or (G) of the Act,
    (2) Is licensed to sell insurance or conduct reinsurance operations 
in at least one of the United States or in the District of Columbia,
    (3) Has obtained a Certificate of Authority from the Insurance 
Commissioner of its domiciliary state which has neither been revoked 
nor suspended, and
    (4)(A) Has undergone an examination by an independent certified 
public accountant for its last completed taxable year immediately prior 
to the taxable year of the reinsurance transaction; or
    (B) Has undergone a financial examination (within the meaning of 
the law of its current domiciliary State, Arizona) by the Insurance 
Commissioner of the State of Arizona within 5 years prior to the end of 
the year preceding the year in which the reinsurance transaction 
occurred.
    (b) The Plan pays no more than adequate consideration for the 
insurance contracts;
    (c) No commissions are paid with respect to the direct sale of such 
contracts or the reinsurance thereof; and
    (d) For each taxable year of FSLIA, the gross premiums and annuity 
considerations received in that taxable year by FSLIA for life and 
health insurance or annuity contracts for all employee benefit plans 
(and their employers) with respect to which FSLIA is a party in 
interest by reason of a relationship to such employer described in 
section 3(14) (E) or (G) of the Act does not exceed 50% of the gross 
premiums and annuity considerations received for all lines of insurance 
(whether direct insurance or reinsurance) in that taxable year by 
FSLIA. For purposes of this condition (d):
    (1) the term ``gross premiums and annuity considerations received'' 
means as to the numerator the total of premiums and annuity 
considerations received, both for the subject reinsurance transactions 
as well as for any direct sale or other reinsurance of life insurance, 
health insurance or annuity contracts to such plans (and their 
employers) by FSLIA. This total is to be reduced (in both the numerator 
and the denominator of the fraction) by experience refunds paid or 
credited in that taxable year by FSLIA.
    (2) all premium and annuity considerations written by FSLIA for 
plans which it alone maintains are to be excluded from both the 
numerator and the denominator of the fraction.

EFFECTIVE DATE: If the proposed exemption is granted, the exemption 
will be effective August 1, 1993.

Preamble

    On August 7, 1979, the Department published a class exemption 
[Prohibited Transaction Exemption 79-41 (PTE 79-41), 44 FR 46365] which 
permits insurance companies that have substantial stock or partnership 
affiliations with employers establishing or maintaining employee 
benefit plans to make direct sales of life insurance, health insurance 
or annuity contracts which fund such plans if certain conditions are 
satisfied.
    In PTE 79-41, the Department stated its views that if a plan 
purchases an insurance contract from a company that is unrelated to the 
employer pursuant to an arrangement or understanding, written or oral, 
under which it is expected that the unrelated company will subsequently 
reinsure all or part of the risk related to such insurance with an 
insurance company which is a party in interest with respect to the 
plan, the purchase of the insurance contract would be a prohibited 
transaction.
    The Department further stated that as of the date of publication of 
PTE 79-41, it had received several applications for exemption under 
which a plan or its employer would contract with an unrelated company 
for insurance, and the unrelated company would, pursuant to an 
arrangement or understanding, reinsure part or all of the risk with 
(and cede part or all of the premiums to) an insurance company 
affiliated with the employer maintaining the plan. The Department felt 
that it would not be appropriate to cover the various types of 
reinsurance transactions for which it had received applications within 
the scope of the class exemption, but would instead consider such 
applications on the merits of each individual case.

Summary of Facts and Representations

    1. FSC is incorporated under the laws of the State of Delaware and 
is a regional bank holding company with banking subsidiaries in six 
western states. In addition, it has ten other subsidiaries, including a 
leasing company, a mortgage company, a life insurance company (FSLIA), 
an insurance agency company, a discount securities brokerage company, 
two financial services companies, and two companies providing technical 
and logistical services to other FSC subsidiaries.
    2. FSLIA is a corporation organized under the laws of Arizona with 
its principal administrative offices in Salt Lake City, Utah. FSLIA was 
originally organized in Texas in August, 1954 and operated as a life 
insurance company domiciled in that State until 1991. On December 20, 
1991, FSLIA moved its corporate domicile from Texas to Arizona. FSLIA 
has always been a wholly owned subsidiary of FSC and is currently 
licensed to underwrite life insurance business in Arizona. FSLIA is 
primarily engaged in the businesses of: (i) Fully underwriting credit 
life and disability insurance indirectly to the general public through 
an unrelated insurance underwriter; and (ii) reinsurance of credit life 
and disability policies sold by other insurance companies.
    3. The Plan is sponsored by FSC and most of its subsidiaries. The 
Plan is composed of two parts, the First Security Basic Group Term Life 
Insurance Plan, and the First Security Add-on Group Life Insurance Plan 
(which provides both optional add-on employee coverage and optional 
dependent coverage. It is a welfare benefit plan providing life 
insurance on the lives of all employees who are regularly scheduled to 
work 25 hours per week, as well as add-on life insurance on the lives 
of such employees and life insurance on the lives of the dependents of 
such employees who voluntarily elect to have and pay for the coverage. 
The Basic Term Life Insurance Plan had 7,044 participants as of 
September 30, 1995, and the Add-on Group Life Insurance Plan had 3,333 
participants with coverage on their own lives and 2,698 participants 
with dependent coverage as of that date. Premiums for basic coverage 
are paid for by the employers, while premiums for add-on and dependent 
insurance are wholly paid for by the employees through payroll 
deduction. The premiums are transferred twice monthly to a VEBA, from 
which they are remitted monthly to the direct insurer.
    4. The life insurance is currently underwritten by MM, an 
unaffiliated insurance carrier. The life insurance benefits under the 
Plan are provided by MM and reinsured on a 50% basis by FSLIA, i.e., 
FSLIA receives 50% of the premiums paid and pays 50% of the claims 
under the MM policy. The

[[Page 18435]]

reinsurance contract between FSLIA and MM was entered into effective 
August 1, 1993, and was actually implemented in stages between that 
date and December 31, 1993. The applicants have requested that this 
proposed exemption apply to any successor company to MM that is also 
unrelated to FSC should FSC decide to insure this life insurance 
coverage with another carrier under the same kind of arrangement.
    5. The applicants represent that the subject transaction has not 
and will not in any way affect the cost to the insureds of the group 
life insurance contracts, and the Plan has paid and will pay no more 
than adequate consideration for the insurance. Also, Plan participants 
are afforded insurance protection from MM, one of the largest and most 
experienced group insurers in the United States, at competitive rates 
arrived at through arm's-length negotiations. MM is rated A++ by the 
A.W. Best Company, whose insurance ratings are widely used in financial 
and regulatory circles. MM has assets in excess of $8.5 billion and 
reserves set aside for group life and accident and health policies of 
nearly $346 million. MM will continue to have the ultimate 
responsibility in the event of loss to pay insurance benefits to the 
employee's beneficiary.<SUP>16 The applicants represent that FSLIA is a 
sound, viable company which does a substantial amount of business 
outside its affiliated group of companies. FSLIA is substantially 
dependent upon insurance customers that are unrelated to itself and its 
affiliates for premium revenue.
---------------------------------------------------------------------------

    \16\ The applicants represent that any successor to MM would be 
a legal reserve life insurance company with assets of not less than 
$500,000,000, and thus be of such a size as to afford similar 
protection and responsibility.
---------------------------------------------------------------------------

    6. The applicants represent that the subject reinsurance 
transaction has met and will continue to meet all of the conditions of 
PTE 79-41 covering direct insurance transactions:
    (a) FSLIA is a party in interest with respect to the Plan (within 
the meaning of section 3(14)(G) of the Act) by reason of stock 
affiliation with FSC, which maintains the Plan.
    (b) FSLIA is licensed to do business in Arizona;
    (c) FSLIA has been audited by the independent certified public 
accounting firm of Deloitte & Touche for each of its fiscal years since 
1992 and has therefore undergone such an examination for each completed 
taxable year of the reinsurance transaction.
    (d) FSLIA has received Certificates of Authority from its 
respective domiciliary states (first Texas, then Arizona) which have 
been audited or reviewed annually since its organization and which have 
neither been revoked nor suspended.
    (e) The Plan has paid and will pay no more than adequate 
consideration for the insurance. The subject transaction has not and 
will not in any way affect the cost to the insureds of the group life 
insurance transaction.
    (f) No commissions have been or will be paid with respect to the 
direct insurance or the reinsurance agreements between MM (or any 
successor thereto) and FSC and FSLIA.
    (g) For each taxable year of FSLIA, the ``gross premiums and 
annuity considerations received'' in that taxable year for group life 
and health insurance (both direct insurance and reinsurance) for all 
employee benefit plans (and their employers) with respect to which 
FSLIA is a party in interest by reason of a relationship to such 
employer described in section 3(14)(E) or (G) of the Act have not 
exceeded and will not exceed 50% of the ``gross premiums and annuity 
considerations received'' by FSLIA from all lines of insurance in that 
taxable year. Most of the premium income of FSLIA comes from 
reinsurance, but some is credit life insurance written on a direct 
basis. FSLIA is principally in the business of reinsurance. The 
applicants represent that the premiums for the Plan insurance have 
never exceeded 18.8% of FSLIA's total premiums. In 1995, the premium 
income of FSLIA came from the following sources in the following 
amounts:
    (1) MM reinsurance on the subject Plan group policy: $559,209.
    (2) Reinsurance of credit life insurance sold to individual 
customers of FSC group--
    (A) American Bankers Credit reinsurance: $1,463,747
    (B) Central States of Omaha Visa Credit reinsurance: $807,049
    (C) Balboa Credit reinsurance on commercial loans: $154,000.
    Thus, more than 81% of FSLIA's premiums for 1995 were derived from 
insurance (or reinsurance thereon) sold to entities other than FSC and 
its affiliated group.
    7. In summary, the applicants represent that the subject 
transaction has met and will continue to meet the criteria of section 
408(a) of the Act because: a) Plan participants and beneficiaries are 
afforded insurance protection by MM, one of the largest and most 
experienced group insurers in the United States, at competitive market 
rates arrived at through arm's-length negotiations; b) FSLIA is a 
sound, viable insurance company which does a substantial amount of 
public business outside its affiliated group of companies; and c) each 
of the protections provided to the Plan and its participants and 
beneficiaries by PTE 79-41 has been and will continue to be met under 
the subject reinsurance transaction.

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

Chicago Trust Company (Chicago Trust) Located in Chicago, IL

[Application No. D-10222]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act and section 4975(c)(2) of 
the Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).<SUP>17
---------------------------------------------------------------------------

     17 For purposes of this proposed exemption, reference to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
---------------------------------------------------------------------------

Section I. Exemption for the In-Kind Transfer of Assets

    If the exemption is granted, the restrictions of section 406(a) and 
section 406(b) of the Act and the sanctions resulting from the 
application of section 4975 of the Code by reason of section 4975(c)(1) 
(A) through (F) shall not apply, effective September 21, 1995, to the 
in-kind transfer to any diversified open-end investment company (the 
Fund or Funds) registered under the Investment Company Act of 1940 (the 
'40 Act) to which Chicago Trust or any of its affiliates (collectively, 
Chicago Trust) serves as investment adviser and/or may provide other 
services, of the assets of various employee benefit plans (the Client 
Plans), including plans established or maintained by Chicago Trust (the 
In-House Plans; collectively, the Plans) that are either held in 
certain collective investment funds (the CIF or CIFs) maintained by 
Chicago Trust as trustee, investment manager, in exchange for shares of 
such Funds, provided that the following conditions are met:
    (a) A fiduciary (the Second Fiduciary) who is acting on behalf of 
each affected In-House Plan or Client Plan and who is independent of 
and unrelated to Chicago Trust, as defined in paragraph (h) of Section 
III below, receives advance written notice of the in-kind transfer of 
assets of the CIFs in exchange

[[Page 18436]]

for shares of the Funds and the disclosures described in paragraph (f) 
of Section II below.
    (b) On the basis of the information described in paragraph (f) of 
Section II below, the Second Fiduciary authorizes in writing the in-
kind transfer of assets of an In- House Plan or a Client Plan in 
exchange for shares of the Funds, the investment of such assets in 
corresponding portfolios of the Funds, and, in the case of a Client 
Plan, the fees received by Chicago Trust pursuant to its investment 
advisory agreement with the Funds. Such authorization by the Second 
Fiduciary is to be consistent with the responsibilities, obligations 
and duties imposed on fiduciaries by Part 4 of Title I of the Act.
    (c) No sales commissions or redemption fees are paid by an In-House 
Plan or a Client Plan in connection with the in-kind transfers of 
assets of the CIFs in exchange for shares of the Funds.
    (d) All or a pro rata portion of the assets of an In-House Plan or 
a Client Plan held in the CIFs are transferred in-kind to the Funds in 
exchange for shares of such Funds. A Plan not electing to participate 
in the Funds receives a cash payment representing a pro rata portion of 
the assets of the terminating CIF before the final liquidation takes 
place.
    (e) The CIFs receive shares of the Funds that have a total net 
asset value equal in value to the assets of the CIFs exchanged for such 
shares on the date of transfer.
    (f) The current value of the assets of the CIFs to be transferred 
in-kind in exchange for shares is determined in a single valuation 
performed in the same manner and at the close of business on the same 
day, using independent sources in accordance with the procedures set 
forth in Rule 17a-7(b) (Rule 17a-7) under the '40 Act, as amended from 
time to time or any successor rule, regulation, or similar 
pronouncement and the procedures established pursuant to Rule 17a-7 for 
the valuation of such assets. Such procedures must require that all 
securities for which a current market price cannot be obtained by 
reference to the last sale price for transactions reported on a 
recognized securities exchange or NASDAQ be valued based on an average 
of the highest current independent bid and lowest current independent 
offer, as of the close of business on the Friday preceding the weekend 
of the CIF transfers determined on the basis of reasonable inquiry from 
at least three sources that are broker-dealers or pricing services 
independent of Chicago Trust.
    (g) Not later than 30 days after completion of each in-kind 
transfer of assets of the CIFs in exchange for shares of the Funds, 
Chicago Trust sends by regular mail to the Second Fiduciary, who is 
acting on behalf of each affected Plan and who is independent of and 
unrelated to Chicago Trust, as defined in paragraph (h) of Section III 
below, a written confirmation that contains the following information:
    (1) The identity of each of the assets that was valued for purposes 
of the transaction in accordance with Rule 17a-7(b)(4) under the '40 
Act;
    (2) The price of each such assets for purposes of the transaction; 
and
    (3) The identity of each pricing service or market maker consulted 
in determining the value of such assets.
    (h) Not later than 90 days after completion of each in-kind 
transfer of assets of the CIFs in exchange for shares of the Funds, 
Chicago Trust sends by regular mail to the Second Fiduciary, who is 
acting on behalf of each affected In-House Plan or Client Plan and who 
is independent of and unrelated to Chicago Trust, as defined in 
paragraph (h) of Section III below, a written confirmation that 
contains the following information:
    (1) The number of CIF units held by each affected Plan immediately 
before the in-kind transfer (and the related per unit value and the 
aggregate dollar value of the units transferred); and
    (2) The number of shares in the Funds that are held by each 
affected Plan following the conversion (and the related per share net 
asset value and the aggregate dollar value of the shares received).
    (i) The conditions set forth in paragraphs (c), (d), (e), (p) and 
(q) of Section II below as they would relate to all Plans are 
satisfied.

Section II. Exemption for the Receipt of Fees From Funds

    If the exemption is granted, the restrictions of section 406(a) and 
section 406(b) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (F) of the Code shall not apply, effective 
September 21, 1995, to (1) the receipt of fees by Chicago Trust from 
the Funds for investment advisory services to the Funds; and (2) the 
receipt or retention of fees by Chicago Trust from the Funds for acting 
as custodian or shareholder servicing agent to the Funds, as well as 
any other services provided to the Funds which are not investment 
advisory services (i.e., the Secondary Services), in connection with 
the investment of shares in the Funds by the Client Plans for which 
Chicago Trust acts as a fiduciary, provided that--
    (a) No sales commissions are paid by the Client Plans in connection 
with purchases or sales of shares of the Funds and no redemption fees 
are paid in connection with the redemption of such shares by the Client 
Plans to the Funds.
    (b) The price paid or received by the Client Plans for shares in 
the Funds is the net asset value per share, as defined in paragraph (e) 
of Section III, at the time of the transaction and is the same price 
which would have been paid or received for the shares by any other 
investor at that time.
    (c) Chicago Trust, any of its affiliates or their officers or 
directors do not purchase from or sell to any of the Client Plans 
shares of any of the Funds.
    (d) For each Client Plan, the combined total of all fees received 
by Chicago Trust for the provision of services to such Plan, and in 
connection with the provision of services to any of the Funds in which 
the Client Plans may invest, is not in excess of ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act.
    (e) Chicago Trust does not receive any fees payable, pursuant to 
Rule 12b-1 (the 12b-1 Fees) under the '40 Act in connection with the 
transactions involving the Funds.
    (f) A Second Fiduciary who is acting on behalf of a Client Plan and 
who is independent of and unrelated to Chicago Trust, as defined in 
paragraph (h) of Section III below, receives in advance of the 
investment by a Client Plan in any of the Funds a full and detailed 
written disclosure of information concerning such Fund including, but 
not limited to--
    (1) A current prospectus for each portfolio of each of the Funds in 
which such Client Plan is considering investing;
    (2) A statement describing the fees for investment advisory or 
other similar services, any fees for Secondary Services, as defined in 
paragraph (i) of Section III below, and all other fees to be charged to 
or paid by the Client Plan and by such Funds to Chicago Trust, 
including the nature and extent of any differential between the rates 
of such fees;
    (3) The reasons why Chicago Trust may consider such investment to 
be appropriate for the Client Plan;
    (4) A statement describing whether there are any limitations 
applicable to Chicago Trust with respect to which assets of a Client 
Plan may be invested in the Funds, and, if so, the nature of such 
limitations;
    (5) A copy of the proposed exemption and/or a copy of the final 
exemption, if

[[Page 18437]]

granted, upon the request of the Second Fiduciary; and
    (6) The last date as of which consent to an in-kind transfer may be 
given by the Second Fiduciary, along with the disclosure that if 
consent is not given by that date, the Second Fiduciary will be deemed 
to have withheld consent to an in-kind transfer.
    (g) On the basis of the information described in paragraph (f) of 
this Section II, the Second Fiduciary authorizes in writing--
    (1) The investment of assets of the Client Plan in shares of the 
Fund, in connection with the transaction set forth in Section II;
    (2) The Funds in which the assets of the Client Plan may be 
invested; and
    (3) The fees received by Chicago Trust in connection with 
investment advisory services and Secondary Services provided to the 
Funds; such authorization by the Second Fiduciary to be consistent with 
the responsibilities obligations, and duties imposed on fiduciaries by 
Part 4 of Title I of the Act.
    (h) The authorization, described in paragraph (g) of this Section 
II, is terminable at will by the Second Fiduciary of a Client Plan, 
without penalty to such Client Plan. Such termination will be effected 
by Chicago Trust selling the shares of the Funds held by the affected 
Client Plan within one business day following receipt by Chicago Trust, 
either by mail, hand delivery, facsimile, or other available means at 
the option of the Second Fiduciary, of written notice of termination 
(the Termination Form), as defined in paragraph (i) of Section III 
below; provided that if, due to circumstances beyond the control of 
Chicago Trust, the sale cannot be executed within one business day, 
Chicago Trust shall have one additional business day to complete such 
sale.
    (i) The Client Plans do not pay any Plan-level investment advisory 
fees to Chicago Trust with respect to any of the assets of such Client 
Plans which are invested in shares of the Funds. This condition does 
not preclude the payment of investment advisory fees by the Funds to 
Chicago Trust under the terms of an investment advisory agreement 
adopted in accordance with section 15 of the '40 Act or other agreement 
between Chicago Trust and the Funds or the retention by Chicago Trust 
of fees for Secondary Services paid to Chicago Trust by the Funds.
    (j) In the event of an increase in the rate of any fees paid by the 
Funds to Chicago Trust regarding investment advisory services that 
Chicago Trust provides to the Funds over an existing rate for such 
services that had been authorized by a Second Fiduciary of a Client 
Plan, in accordance with paragraph (g) of this Section II, Chicago 
Trust will, at least 30 days in advance of the implementation of such 
increase, provide a written notice (which may take the form of a proxy 
statement, letter, or similar communication that is separate from the 
prospectus of the Fund and which explains the nature and amount of the 
increase in fees) to the Second Fiduciary of each Client Plan invested 
in a Fund which is increasing such fees. Such notice shall be 
accompanied by the Termination Form, as defined in paragraph (j) of 
Section III below;
    (k) In the event of an (1) addition of a Secondary Service, as 
defined in paragraph (h) of Section III below, provided by Chicago 
Trust to the Funds for which a fee is charged or (2) an increase in the 
rate of any fee paid by the Funds to Chicago Trust for any Secondary 
Service that results either from an increase in the rate of such fee or 
from the decrease in the number or kind of services performed by 
Chicago Trust for such fee over an existing rate for such Secondary 
Service which had been authorized by the Secondary Fiduciary in 
accordance with paragraph (g) of this Section II, Chicago Trust will, 
at least 30 days in advance of the implementation of such Secondary 
Service or fee increase, provide a written notice (which may take the 
form of a proxy statement, letter, or similar communication that is 
separate from the prospectus of the Funds and which explains the nature 
and amount of the additional Secondary Service for which a fee is 
charged or the nature and amount of the increase in fees) to the Second 
Fiduciary of each of the Client Plans invested in a Fund which is 
adding a service or increasing fees. Such notice shall be accompanied 
by the Termination Form, as defined in paragraph (j) of Section III 
below.
    (l) The Second Fiduciary is supplied with a Termination Form at the 
times specified in paragraphs (j) and (k) of this Section II, which 
expressly provides an election to terminate the authorization, 
described above in paragraph (g) of this Section II, with instructions 
regarding the use of such Termination Form including statements that--
    (1) The authorization is terminable at will by any of the Client 
Plans, without penalty to such Plans. The termination will be effected 
by Chicago Trust selling the shares of the Funds held by the Client 
Plans requesting termination within the period of time specified by the 
Client Plan, but not later than one business day following receipt by 
Chicago Trust from the Second Fiduciary of the Termination Form or any 
written notice of termination; provided that if, due to circumstances 
beyond the control of Chicago Trust, the sale of shares of such Client 
Plan cannot be executed within one business day, Chicago Trust shall 
have one additional business day to complete such sale; and
    (2) Failure by the Second Fiduciary to return the Termination Form 
on behalf of the Client Plan will be deemed to be an approval of the 
additional Secondary Service for which a fee is charged or increase in 
the rate of any fees and will result in the continuation of the 
authorization, as described in paragraph (g) of this Section II, of 
Chicago Trust to engage in the transactions on behalf of the Client 
Plan;
    (m) The Second Fiduciary is supplied with a Termination Form at 
least once in each calendar year, beginning with the calendar year that 
begins after the grant of this proposed exemption is published in the 
Federal Register and continuing for each calendar year thereafter; 
provided that the Termination Form need not be supplied to the Second 
Fiduciary, pursuant to this paragraph, sooner than six months after 
such Termination Form is supplied pursuant to paragraphs (j) and (k) of 
this Section II, except to the extent required by said paragraphs (j) 
and (k) of this Section II to disclose an additional Secondary Service 
for which a fee is charged or an increase in fees;
    (n)(1) With respect to each of the Funds in which a Client Plan 
invests, Chicago Trust will provide the Second Fiduciary of such Plan--
    (A) At least annually with a copy of an updated prospectus of such 
Fund;
    (B) A report or statement (which may take the form of the most 
recent financial report, the current statement of additional 
information, or some other written statement) which contains a 
description of all fees paid by the Fund to Chicago Trust within 15 
days of such document's availability; and
    (2) With respect to each of the Funds in which a Client Plan 
invests, in the event such Fund places brokerage transactions with 
Chicago Trust or any adviser or sub-adviser to a Fund or any of their 
affiliates (collectively, Related Party Brokerage), Chicago Trust will 
provide the Second Fiduciary of such Client Plan at least annually with 
a statement specifying--
    (A) The total, expressed in dollars, attributable to each Fund's 
investment portfolio which represent Related Party Brokerage;
    (B) The total, expressed in dollars, of brokerage commissions 
attributable to each Fund's investment portfolio other than Related 
Party Brokerage;

[[Page 18438]]

    (C) The average brokerage commissions per share, expressed as cents 
per share, paid for Related Party Brokerage by each Fund; and
    (D) The average brokerage commissions per share, expressed as cents 
per share, paid by each Fund for brokerage other than Related Party 
Brokerage.
    (o) All dealings between the Client Plans and any of the Funds are 
on a basis no less favorable to such Client Plans than dealings between 
the Funds and other shareholders holding the same class of shares as 
the Client Plans.
    (p) Chicago Trust maintains for a period of 6 years the records 
necessary to enable the persons, as described in paragraph (q) of 
Section II below, to determine whether the conditions of this proposed 
exemption have been met, except that--
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of Chicago Trust, 
the records are lost or destroyed prior to the end of the 6 year 
period; and
    (2) No party in interest, other than Chicago Trust, shall be 
subject to the civil penalty that may be assessed under section 502(i) 
of the Act, or to the taxes imposed by section 4975(a) and (b) of the 
Code, if the records are not maintained, or are not available for 
examination as required by paragraph (q) of Section II below.
    (q)(1) Except as provided in paragraph (q)(2) of this Section II 
and notwithstanding any provisions of subsection (a)(2) and (b) of 
section 504 of the Act, the records referred to in paragraph (p) of 
Section II above are unconditionally available at their customary 
location for examination during normal business hours by--
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service (the Service) or the 
Securities and Exchange Commission (the SEC);
    (B) Any fiduciary of each of the Client Plans who has authority to 
acquire or dispose of shares of any of the Funds owned by such Client 
Plan, or any duly authorized employee or representative of such 
fiduciary; and
    (C) Any participant or beneficiary of the Plans or duly authorized 
employee or representative of such participant or beneficiary.
    (2) None of the persons described in paragraph (q)(1)(B) and 
(q)(1)(C) of Section II shall be authorized to examine trade secrets of 
Chicago Trust, or commercial or financial information which is 
privileged or confidential.

Section III. Definitions

    For purposes of this proposed exemption,
    (a) The term ``Chicago Trust'' means Chicago Trust Company and any 
affiliate of Chicago Trust, as defined in paragraph (b) of this Section 
III.
    (b) An ``affiliate'' of a person includes:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual;
    (d) The terms ``Fund or Funds'' mean any diversified open-end 
investment company or companies registered under the '40 Act for which 
Chicago Trust serves as investment adviser and may also provide 
custodial or other services such as Secondary Services as approved by 
such Funds.
    (e) The term ``net asset value'' means the amount for purposes of 
pricing all purchases and sales calculated by dividing the value of all 
securities, determined by a method as set forth in a Fund's prospectus 
and statement of additional information, and other assets belonging to 
each of the portfolios in such Fund, less the liabilities charged to 
each portfolio, by the number of outstanding shares.
    (f) The term ``Plan'' means any ``employee benefit pension plan'' 
within the meaning of section 3(2) of the Act or any ``plan'' within 
the meaning of section 4975(e)(1) of the Code. The term ``Plan'' 
includes any plan maintained by an entity other than Chicago Trust 
(referred to collectively herein as the ``Client Plans'') and any of 
the following Plans sponsored or maintained by Chicago Trust (referred 
to collectively as the ``In-House Plans''): the Chicago Trust Pension 
Plan, the Chicago Trust Savings and Profit Sharing Plan, the Celite 
Employees' Thrift Plan, the Celite Hourly Retirement Savings 401(k) 
Plan, the Celite Employees' Retirement Plan and the Heads & Threads 
Savings and Profit Sharing Plan.
    (g) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or a ``member of the family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
a sister, or a spouse of a brother or a sister.
    (h) The term ``Second Fiduciary'' means a fiduciary of a plan who 
is independent of and unrelated to Chicago Trust. For purposes of this 
exemption, the Second Fiduciary will not be deemed to be independent of 
and unrelated to Chicago Trust if--
    (1) Such Second Fiduciary directly or indirectly controls is 
controlled by or is under common control with Chicago Trust;
    (2) Such Second Fiduciary, or any officer, director, partner, 
employee or relative of such Second Fiduciary is an officer, director, 
partner or employee of Chicago Trust (or is a relative of such 
persons); and
    (3) Such Second Fiduciary directly or indirectly receives any 
compensation or other consideration in connection with any transaction 
described in this exemption; provided, however, that nothing shall 
prevent a Second Fiduciary's receipt of its customary fees from a Plan 
or the Plan's sponsoring employer for serving as a fiduciary to such 
Plan.
    If an officer, director, partner, or employee of Chicago Trust (or 
a relative of such persons), is a director of such Second Fiduciary, 
and if he or she abstains from participation in the choice of the 
Plan's investment manager/adviser, the approval of any purchase or sale 
by the Plan of shares of the Funds, and the approval of any change of 
fees charged to or paid by the Plan, in connection with any of the 
transactions described in Sections I and II above, then paragraph 
(h)(2) of Section III above, shall not apply.
    (i) The term ``Secondary Service'' means a service, other than an 
investment advisory or similar service, which is provided by Chicago 
Trust to the Funds, including but not limited to custodial, accounting, 
brokerage, administrative, or any other service.
    (j) The term ``Termination Form'' means the form supplied to the 
Second Fiduciary of a Client Plan, at the times specified in paragraphs 
(j), (k), and (m) of Section II above, which expressly provides an 
election to the Second Fiduciary to terminate on behalf of the Plans 
the authorization, described in paragraph (g) of Section II. Such 
Termination Form is to be used at will by the Second Fiduciary to 
terminate such authorization without penalty to the Client Plan and to 
notify Chicago Trust in writing to effect such termination not later 
than one business day following receipt by Chicago Trust of written 
notice of such request for termination; provided that if, due to 
circumstances beyond the control of Chicago Trust, the sale cannot be 
executed within one business day,

[[Page 18439]]

Chicago Trust shall have one additional business day to complete such 
sale.

EFFECTIVE DATE: If granted, this proposed exemption will be effective 
as of September 21, 1995.

Summary of Facts and Representations

Description of the Parties

    1. The parties or entities involved in the subject transactions are 
described as follows:
    (a) Chicago Trust, a trust company chartered under the laws of the 
State of Illinois, maintains its principal office at 171 North Clark 
Street, Chicago, Illinois. Chicago Trust is a wholly owned subsidiary 
of the Allegheny Corporation (Allegheny) whose principal place of 
business is at Park Avenue Plaza, New York, NY. As of December 31, 
1995, Chicago Trust had approximately $6 billion in consolidated assets 
and it engages in two principal lines of business, directly or through 
subsidiaries. In this regard, Chicago Trust is the largest real estate 
title insurer in the world. In addition, Chicago Trust provides 
trustee, investment management and related services, primarily to high 
net worth individuals, families, tax-qualified pension and profit 
sharing plans (including plans subject to provisions of the Act), 
individual retirement accounts and insurance companies. As of December 
31, 1995, Chicago Trust managed approximately $1.3 billion of client 
assets.
    (b) The Client Plans consist of 351 separate employee benefit plan 
clients of Chicago Trust.<SUP>18 Of those Client Plans, 239 are 
employee pension benefit plans as defined in section 3(2) of the Act or 
Plans covering only partners or proprietors and their spouses, as 
described in 29 CFR 2510.3-3 (b) and (c). The Client Plans also consist 
of 112 individual retirement accounts With respect to the Client Plans, 
Chicago Trust may serve as trustee, either with or without investment 
discretion, or as an ``investment manager'' within the meaning of 
section 3(38) of the Act. Chicago Trust may also provide ``Plan-level'' 
administrative services to the Client Plans that include maintaining 
custody of Plan assets, maintaining Plan records, preparing periodic 
reports of Plan assets and participant accounts, effecting participant 
investment directions, processing participant loans and accounting for 
contributions, payment of benefits and other receipts and 
distributions. Chicago Trust does not have any ownership in or common 
ownership with any broker-dealer.
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    \18\ Although the Client Plans may also include participant-
directed plans subject to the provisions of section 404(c) of the 
Act, the Department is not providing, nor is the applicant 
requesting, exemptive relief for such Client Plans to the extent 
such transactions are covered under section 404(c) of the Act.
---------------------------------------------------------------------------

    Chicago Trust is compensated for its Plan-level investment 
management services according to a percentage of assets under 
management formula. Its fees for Plan-level administrative services are 
separately negotiated with each Client Plan for which such services are 
performed.
    (c) The In-House Plans consist of various plans that are sponsored 
by Chicago Trust and its affiliates. In this regard, Chicago Trust is 
the sponsoring employer of the Chicago Trust Company Pension Plan and 
the Chicago Trust Company Savings and Profit Sharing Plan 
(collectively, the Chicago Trust Plans). Celite Corporation, a third-
tier subsidiary of Allegheny, is the sponsoring employer of the Celite 
Employees Thrift Plan, the Celite Hourly Retirement Savings 401(k) 
Plan, the Celite Hourly Retirement Plan and the Celite Employees 
Retirement Plan (collectively, the Celite Plans). Heads and Threads, a 
division of Allegheny, is the sponsoring employer of the Heads and 
Threads Profit Sharing and Savings Plan (the Heads and Threads Plan). 
Each of these plans is an ``employee pension benefit plan within the 
meaning of section 3(2) of the Act. Collectively, the Chicago Trust 
Plans, the Celite Plans and the Heads and Threads Plan are referred to 
herein as the ``In-House Plans.'' The following table shows the 
participant breakdowns and asset totals for the In-House Plans as of 
December 31, 1995.

------------------------------------------------------------------------
                                                   No.                  
                    Plans                     participants  Total assets
------------------------------------------------------------------------
Chicago Trust:                                                          
  Pension...................................      10,880     $86,639,464
  Savings and Profit Sharing................       6,938     222,865,196
 Celite:                                                                
  Employees Thrift..........................         204      10,702,672
  Hourly Ret. Savings.......................         257       2,385,675
  Hourly Retirement.........................         326       7,747,333
  Employees Retirement......................         275      10,308,572
Heads & Threads:                                                        
  Profit Sharing and Savings................         196      11,800,983
------------------------------------------------------------------------

    Chicago Trust is trustee for each In-House Plan and also performs, 
at the Plan-level, related services for each In-House Plan. These 
services include maintaining custody of plan assets, maintaining plan 
records, preparing periodic reports of plan assets and participant 
accounts, effecting participant investment directions, processing 
participant loans and accounting for contributions, payments of 
benefits and other receipts and distributions. Chicago Trust's 
compensation from the In-House Plans for the performance of these Plan-
level services is limited to the reimbursement of direct expenses.
    (d) The CIFs, which are maintained pursuant to several declarations 
of trust, are the primary investment vehicles used by Chicago Trust in 
its investment management of plan assets of the In-House Plans and the 
Client Plans. The Chicago Trust Company Investment Trust for Employee 
Benefit Plans (the Investment Trust), which was created by a 
Declaration of Trust dated January 17, 1968 and restated several times, 
most recently as of January 31, 1994, is organized as a group trust 
within the meaning of Revenue Ruling 81-100, 1981-1 CB 326. The 
Investment Trust formerly included the assets of the Balanced Fund, the 
Core Equity Fund and the Fixed Income Fund, three CIFs which were 
terminated on September 21, 1995. The Investment Trust presently holds 
the assets of the Capital Appreciation Fund, the Growth Fund, the Index 
Fund, the International Equity Fund and the US Government Fund.
    Chicago Trust also utilizes its Safety of Principal Fund in the 
management of employee benefit plan assets. The Safety of Principal 
Fund is a vehicle which is permitted to invest in stated return 
contracts, certificates of deposit, institutional money market funds 
and certain other obligations. It is maintained pursuant to a 
declaration of trust dated April 24, 1985, titled the ``Chicago Trust 
Stated Principal Value Investment Trust for Employee Benefit Plans,'' 
and is organized as a ``group trust'' within the meaning of Revenue 
Ruling 81-100, 1981-1 CB 326.
    Until it was terminated on September 21, 1995, Chicago Trust 
utilized its Short Term Investment Fund in the management of employee 
benefit plan assets. The Short Term Investment Fund was a money-market 
vehicle which was maintained pursuant to a declaration of trust dated 
July 22, 1981, titled the ``Chicago Trust Company Short Term Investment 
Fund for Employee Benefit Plans'' which established the Short Term 
Investment Fund as a ``group trust'' within the meaning of Revenue 
Ruling 81-100, 1981-1 CB 326.
    Under section 3.02 of the respective Declarations of Trust which 
established the Investment Trust, the Safety of Principal Fund and the 
Short Term Investment Fund, Chicago Trust has had exclusive management 
and control of the assets of the CIFs. Chicago Trust has

[[Page 18440]]

charged no fee for its investment advisory services to these CIFs, but 
it has received reimbursement for its expenses. No CIF has imposed a 
minimum investment or maximum limit on investments in it by an In-House 
Plan or a Client Plan.
    (e) The Funds constitute a Delaware business trust organized on 
September 10, 1993 and registered as an open-end, management investment 
company under the provisions of the '40 Act. The Funds are managed by a 
Board of Trustees, a majority of whose members are persons independent 
of Chicago Trust. At present, the Funds offer seven separate, 
diversified series of shares of mutual fund portfolios. They are the 
Chicago Trust Growth & Income Fund, the Chicago Trust Intermediate 
Fixed Income Fund, the Chicago Trust Intermediate Municipal Bond Fund, 
the Chicago Trust Money Market Fund, the Montag & Caldwell Growth Fund, 
the Montag & Caldwell Balanced Fund and the Chicago Trust Talon Fund.
    Each Fund comprising the Funds is subject to a separate advisory 
agreement and pays an investment advisory fee to its respective 
investment adviser. Chicago Trust is the investment adviser to the 
Chicago Trust Growth & Income Fund, the Chicago Trust Intermediate 
Fixed Income Fund, the Chicago Trust Intermediate Municipal Bond Fund 
and the Chicago Trust Money Market Fund and it receives investment 
advisory fees, respectively, of 0.70 percent, 0.55 percent, 0.60 
percent and 0.40 percent of average daily net assets. Montag & 
Caldwell, a registered investment adviser which is a wholly-owned 
subsidiary of Chicago Trust, is the investment adviser to the Montag & 
Caldwell Growth Fund and the Montag & Caldwell Balanced Fund. For 
services rendered, Montag & Caldwell receives investment advisory fees 
of 0.80 percent and 0.75 percent of average daily net assets from the 
Growth Fund and Balanced Fund.
    In addition, Chicago Trust is the investment adviser to the Chicago 
Trust Talon Fund and it receives an investment advisory fee of 0.80 
percent of average daily net assets from this Fund. Pursuant to a sub-
advisory agreement, Chicago Trust pays, out of its investment advisory 
fee, a subadvisory fee to Talon Asset Management, Inc. (Talon), an 
unrelated investment adviser, to manage this Fund, subject to Chicago 
Trust's supervision. Talon's subadvisory fee ranges from 0.40 percent 
to 0.75 percent of daily net assets.
    The Funds maintain a written ``distribution and services plan'' 
pursuant to Rule 12b-1 of the '40 Act. Under the plan of distribution, 
each Fund (other than the Chicago Trust Money Market Fund) can charge a 
fee of 0.25 percent of average daily net assets. This fee is paid by 
the Chicago Trust Funds to parties other than Chicago Trust or its 
affiliates to finance activities that will result in the marketing or 
distribution of shares of the Funds.
    The minimum investment for an In-House Plan or a Client Plan in a 
Fund is $1,000 for the Chicago Trust Money Market Fund and $500 for 
each other Fund. No Fund imposes a maximum limit on investments in it 
by a Client Plan or an In-House Plan.
    (f) Cole Taylor Bank of Chicago, Illinois (Cole Taylor) has been 
retained by Chicago Trust to serve as the Second Fiduciary for the In-
House Plans currently investing in the Funds. Cole Taylor, which was 
established in 1929, is independent of and unrelated to Chicago Trust 
and each of its affiliates.
    As of December 31, 1995, Cole Taylor exercised discretionary 
investment authority over approximately $362,601,000 of fiduciary 
assets, including approximately $171,511,000 of assets of employee 
benefit plans covered by the Act and non-qualified employee benefit 
plans. As of December 31, 1995, Cole Taylor also served as directed 
trustee, agent or custodian with respect to approximately $238,131,900 
of assets of employee benefit plans covered by the Act and non-
qualified employee benefit plans.

Description of the Transactions

    2. Chicago Trust requests retroactive exemptive relief with respect 
to the in-kind transfer of all or a pro rata portion of an In-House 
Plan's or a Client Plan's assets from the terminating CIFs identified 
above to the Funds, in exchange for shares of the Funds. In addition, 
Chicago Trust requests retroactive exemptive relief for the receipt of 
fees from the Funds in connection with the investment of assets of 
Client Plans for which the Bank acts as a trustee, investment manager, 
or custodian, in shares of the Funds in instances where Chicago Trust 
is an investment adviser, custodian, and shareholder servicing agent 
for the Funds.<SUP>19 The exemptive relief provided for the receipt of 
fees would cover the Client Plans only, specifically those Plans for 
which Chicago Trust exercises investment discretion as well as Client 
Plans where investment decisions are made a Second Fiduciary.<SUP>20 If 
granted, the exemption would be effective as of September 21, 1995.
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    \19\ Chicago Trust is not requesting an exemption for 
investments in the Funds by the In-House Plans. Chicago Trust 
represents that the In-House Plans may acquire or sell shares of the 
Funds pursuant to Prohibited Transaction Exemption (PTE) 77-3 (42 FR 
18734, April 8, 1977). PTE 77-3 permits 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, provided certain conditions are met. The Department 
expresses no opinion on whether any transactions with the Funds by 
the In-House Plans would be covered by PTE 77-3.
     <SUP>20 Chicago Trust is not requesting exemptive relief for 
the provision of sweep services to Client Plans. Chicago Trust 
represents that since both the CIFs and the Funds employ daily 
valuations, there is no need for sweep services.
---------------------------------------------------------------------------

In-Kind Transfers to the Funds by In-House Plans and Client Plans

    3. Although Chicago Trust has maintained CIFs in which In-House 
Plans and Client Plans have invested as investment options in 
accordance with requirements under Federal or state banking laws that 
apply to collective investment trusts, it decided to terminate certain 
of its CIFs and offer to the Plans participating in such CIFs 
appropriate interests in certain Funds as alternative investments. 
Chicago Trust believes that the interests of the Plans invested in the 
CIFs would be better served by investment in shares of the Funds. 
According to Chicago Trust, by investing in the Funds, a Plan would be 
afforded daily valuations reported in newspapers of general circulation 
and increased liquidity.
    To avoid the potentially large brokerage expenses that would 
otherwise be incurred, Chicago Trust proposes that from time-to-time, 
the assets of its remaining CIFs (or similar future CIFs <SUP>21) be 
transferred in-kind to corresponding portfolios of the Funds in 
exchange for shares of such Funds. No brokerage commissions or other 
fees or expenses (other than customary transfer charges paid to parties 
other than Chicago Trust or its affiliates) would be charged to the 
CIFs in connection with the in-kind transfers of assets into the Funds 
and the acquisition of shares of the Funds by the CIFs. In addition, no 
12b-1 Fees would be paid to Chicago Trust or its affiliates in 
connection with such transactions.
---------------------------------------------------------------------------

    \21\ For example, CIFs acquired through mergers with or 
acquisitions of other Banks.
---------------------------------------------------------------------------

    4. On September 21, 1995, Chicago Trust made in-kind transfers of 
assets of the In-House Plans and the Client Plans that had been held in 
the Balanced Fund, the Core Equity Fund, the Fixed Income Fund and the 
Short-Term Investment Fund, in exchange for shares of the Funds. The 
affected CIFs had the same investment characteristics as their

[[Page 18441]]

corresponding Fund portfolios. The shares of such Funds were equal in 
value to the CIF assets exchanged. All in-kind transfers were effected 
as of a single valuation date. Following the in-kind transfers, each 
CIF was terminated in accordance with the provisions of the applicable 
Declarations of Trust and law. Any remaining assets in the CIFs from 
which the in-kind transfers were made were converted into cash. No in-
kind transfers were made from the Capital Appreciation Fund, the Growth 
Fund, the International Equity Fund, the Safety of Principal Fund or 
the U.S. Government Fund. As stated above, these CIFs were to be 
continued.
    Fund shares received by the terminated CIF were distributed to the 
accounts of the In-House Plans and the Client Plans, in proportion to 
such Plans' investment in the CIFs, so that each In-House Plan or 
Client Plan would be credited with Fund shares that were equal in value 
to its pro rata share of the CIFs assets which were transferred. A Plan 
not electing to participate in the Funds received a cash payment 
representing a pro rata portion of the assets of the terminating CIF 
before the final liquidation took place.
    A single lot of each in-kind security on the records of the CIF was 
established. The cost-basis of each in-kind security was the market 
value on the conversion date. The trade date of each in-kind 
transaction was the actual date the security was received by the 
custodian bank. The same custodian bank would hold the assets of the 
Funds and the CIFs. The in-kind securities were valued using the same 
pricing vendor and methodologies as the Fund and in accordance with the 
valuation procedures described in Rule 17a-7(b) under the '40 Act, as 
amended from time to time or any successor rule, regulation, or similar 
pronouncement. In this regard, Chicago Trust represents that the 
``current market price'' for specific types of CIF securities involved 
in the transaction was determined as follows:
    (a) If the security was a ``reported security'' as the term is 
defined in Rule 11Aa3-1 under the '34 Act, the last sale price with 
respect to such security reported in the consolidated transaction 
reporting system (the Consolidated System); or if there were no 
reported transactions in the Consolidated System that day, the average 
of the highest current independent bid and the lowest current 
independent offer for such security (reported pursuant to Rule 11Ac1-1 
under the '34 Act), as of the close of business on the CIF valuation 
date.
    (b) If the security was not a reported security, and the principal 
market for such security was an exchange, then the last sale on such 
exchange; or if there were no reported transactions on such exchange 
that day, the average of the highest current independent bid and lowest 
current independent offer on such exchange as of the close of business 
on the CIF valuation date.
    (c) If the security was not a reported security and was quoted in 
the NASDAQ system, then the average of the highest current independent 
bid and lowest current independent offer reported on Level 1 of NASDAQ 
as of the close of business on the CIF valuation date.
    (d) For all other securities, the average of the highest current 
independent bid and lowest current independent offer as of the close of 
business, determined on the basis of reasonable inquiry. (For 
securities in this category, Chicago Trust represents that it obtained 
quotations from at least three sources that were either broker-dealers 
or pricing services independent of and unrelated to Chicago Trust and, 
where more than one valid quotation was available, used the average of 
the quotations to value the securities, in conformance with 
interpretations by the SEC and practice under Rule 17a-7.)
    The same vendor performing fund accounting for the CIFs performed 
fund accounting for the Funds. The number of Fund shares to be issued 
was computed by dividing the total transferred fund market value by the 
net asset value of the Fund at the close of business on the conversion 
date. The number of shares of the Funds issued was allocated to the 
holders of the predecessor CIFs in the same proportion as the holdings 
in the CIFs.<SUP>22
---------------------------------------------------------------------------

    \22\ At the Plan account level, the conversion was reported in 
this manner--Assume a Client Plan held 1,000 units of the Core 
Equity Fund. On April 1, the Client Plan account showed a 
disposition of the 1,000 units valued at $6.50 with proceeds of 
$6,500. On the same date, the account showed a purchase of 684.211 
shares at $9.50 per share of the Chicago Trust Growth & Income 
Mutual Fund for a total cost of $6,500 the same amount as the 
disposition of the Core Equity Fund.
---------------------------------------------------------------------------

    No in-kind transfer was made except in accordance with pre-
established objective procedures which were approved by the Board of 
Directors of the Funds which provided that such in-kind transfers 
would: (a) Consist solely of assets which were consistent with the 
investment objectives, policies and restrictions of the transferee 
Fund; (b) satisfy the applicable requirements of the '40 Act and the 
Code; and (c) consist of assets which had a readily ascertainable 
market value (determined as of the close of business on the effective 
date of such in-kind transfer by reference to independent sources in 
accordance with the valuation procedures described in Rule 17a-7, are 
liquid and are not subject to restrictions on resale). Non-conforming 
assets were sold on the open market through an unaffiliated brokerage 
firm and the proceeds of such sale were transferred in cash.
    In addition, no in-kind transfer was made unless an In-House Plan 
or a Client Plan was represented by a Second Fiduciary who was 
independent of and unrelated to Chicago Trust. Such Second Fiduciary 
was required to give written approval of the in-kind transfer in 
advance following such fiduciary's receipt of written notice of the in-
kind transfer transaction and disclosure of the following information: 
(a) A current prospectus of the Funds; (b) a description of the fees, 
including investment advisory fees and all other fees to be charged to 
or paid by the Plan and by the Funds to Chicago Trust, including the 
nature and extent of any differential between the rates of such fees; 
(c) the reasons why Chicago Trust considered the in-kind transfer to be 
appropriate for the In-House Plan or the Client Plan; (d) a description 
of any limitations applicable to the in-kind transfer of assets from 
the CIFs to the Funds; and (e) the last date as of which consent to an 
in-kind transfer could be given by the Second Fiduciary, along with the 
disclosure that if consent was not given by that date, the Second 
Fiduciary would be deemed to have withheld consent to an in-kind 
transfer with respect to an In-House Plan or a Client Plan. Any 
approval by a Second Fiduciary was terminable at will by the Second 
Fiduciary, without penalty to an In-House Plan or a Client Plan 
invested in shares of any of the Funds.
    Following the in-kind transfers, Chicago Trust sent the Second 
Fiduciary of the In-House Plans as well as Second Fiduciaries of the 
Client Plans, written confirmations of the transactions. In this 
regard, not later than 30 days after each in-kind transfer, Chicago 
Trust sent a Second Fiduciary written confirmation of the identity of 
assets that were valued for purposes of the in-kind transfer in 
accordance with Rule 17a-7(b)(4), the price determined for such assets 
and the identity of each pricing services or market maker consulted in 
determining their value.<SUP>23 In addition, no later than

[[Page 18442]]

90 days after an in-kind transfer, Chicago Trust sent each Second 
Fiduciary written confirmation of (a) the number of CIF units held by 
an In-House Plan or a Client Plan before the in-kind transfer (and the 
related per unit value and the aggregate dollar value of the units 
transferred); and (b) the number of Fund shares received by the Plan as 
a result of the in-kind transfer (and the related per share net asset 
value and the aggregate dollar value of the shares received).
---------------------------------------------------------------------------

    \23\ The securities subject to valuation under Rule 17(a)-
7(b)(4) include all securities other than ``reported securities,'' 
as the term is defined in Rule 11Aa3-1 under the Securities Exchange 
Act of 1934, or those quoted on the NASDAQ system or for which the 
principal market is an exchange.
---------------------------------------------------------------------------

    In accordance with the conditions under Section I of this proposed 
exemption, similar procedures will occur upon any future in-kind 
exchanges between CIFs maintained by Chicago Trust and the Funds.\24\
---------------------------------------------------------------------------

    \24\ It should be noted that with respect to future in-kind 
transfers, Chicago Trust will provide the Second Fiduciary with 
copies of the subject proposed exemption and grant notice upon such 
fiduciary's request.
---------------------------------------------------------------------------

Representations of the Second Fiduciary for the In-House Plans 
Regarding the In-Kind Transfers

    5. As stated above, Chicago Trust retained Cole Taylor as the 
Second Fiduciary to oversee the initial in-kind transfers of CIF assets 
to the Funds as such transactions would affect the In-House Plans. In 
such capacity, Cole Taylor represented that it had considerable 
experience serving in a fiduciary capacity under the provisions of the 
Act and otherwise.
    Cole Taylor stated that it received the following documents and 
information from Chicago Trust: (a) A copy of the exemption 
application; (b) written disclosure of information concerning the 
Funds; (c) a current prospectus for each portfolio of the Funds; (d) a 
statement describing the fees to be charged to or paid by the In-House 
Plans and by the Funds to Chicago Trust or to unrelated parties; (e) a 
disclosure statement explaining why Chicago Trust believed the 
investment in the Funds by the In-House Plans would be appropriate; (f) 
a description of any limitations regarding which In-House Plan assets 
could be invested in shares of the Funds and, if so, the nature of such 
limitations; and (g) copies of plan and trust documents for the In-
House Plans, written investment guidelines applicable thereto and 
written descriptions of total investment portfolios for the In-House 
Plans.
    Based on the foregoing documents and information, Cole Taylor 
represented that it understood and accepted the duties, 
responsibilities and liabilities in acting as a fiduciary for the In-
House Plans, including those duties, responsibilities and liabilities 
that would be imposed on fiduciaries under the Act. In addition, Cole 
Taylor represented that the terms of the in- kind transfer transactions 
would be fair to the participants of the In-House Plans and would be 
comparable to and no less favorable than the terms that would have been 
reached among unrelated parties.
    Cole Taylor represented that the in-kind transfer transactions were 
in the best interest of the In-House Plans and their participants and 
beneficiaries for the following reasons: (a) The impact of the in-kind 
transfers on the In-House Plans should be de minimus because the Funds 
substantially replicate the CIFs in terms of the investment policies 
and objectives; (b) the Funds would probably continue to experience 
relative performance similar in nature to the CIFs given the continuity 
of investment objectives and policies, management oversight and 
portfolio management personnel; (c) the in-kind transfers would not 
adversely affect the cash flows, liquidity or investment 
diversification of the In-House Plans; and (d) the benefits to be 
derived by the In-House Plans and their participants by investing in 
the Funds (e.g., broader distribution permitted of the Funds to 
different types of plans impacting positively on asset size of the 
Funds and resulting in cost savings to shareholders) would more than 
offset the impact of minimum additional expenses (e.g., transfer agency 
fees and fees for shareholder services) that might be borne at the 
Fund-level by the In-House Plans.
    In forming an opinion on the appropriateness of the in-kind 
transfers, Cole Taylor represented that it conducted an overall review 
of the In-House Plans, including the In-House Plan documents. Cole 
Taylor stated that it also examined the total investment portfolios of 
the In-House Plans to ascertain whether or not the In-House Plans were 
in compliance with their investment objectives and policies. Further, 
Cole Taylor asserted that it examined the liquidity requirements of the 
In-House Plans and reviewed the concentration of the assets of the In-
House Plans that were invested in the CIFs as well the portion of the 
CIFs comprising the assets of the In-House Plans. Finally, Cole Taylor 
explained that it reviewed the diversification provided by the 
investment portfolios of the In-House Plans. Based on its review and 
analysis of the foregoing, Cole Taylor represented that the in-kind 
transfer transactions would not adversely affect the total investment 
portfolios of the In-House Plans, compliance by such Plans with their 
stated investment objectives and policies, or such Plans' cash flows, 
liquidity or diversification requirements.
    As Second Fiduciary, Cole Taylor represented that Chicago Trust 
would provide it with any documents it considered necessary to perform 
its duties as Second Fiduciary. In this regard, Chicago Trust provided 
Cole Taylor with advance written notice of the in-kind transfers and 
written confirmation statements as described in Representation 4. Upon 
receipt of such statements, Cole Taylor confirmed whether or not the 
in-kind transfer transactions had resulted in the receipt by the In-
House Plans of shares in the Funds that were equal in value to such 
Plans' pro rata share of assets of the CIFs on the conversion date.

Receipt of Fees by Chicago Trust

    6. Prior to the initial in-kind transfer transactions, any 
investment in the Funds by Chicago Trust for an In-House Plan or a 
Client Plan was made in accordance with PTE 77-3 or PTE 77-4, 
respectively. In pertinent part, PTE 77-3 would permit 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 
provided certain conditions were met. Under certain conditions, PTE 77-
4 would permit Chicago Trust to receive fees from the Funds under 
either of two circumstances: (a) Where a Client Plan did not pay any 
investment management, investment advisory, or similar fees with 
respect to the assets of such Plan invested in shares of a Fund for the 
entire period of such investment; or (b) where a Client Plan paid 
investment management, investment advisory, or similar fees to Chicago 
Trust based on the total assets of such Client Plan from which a credit 
had been subtracted representing such Plan's pro rata share of such 
investment advisory fees paid to Chicago Trust by the Fund. As such, 
there were two levels of fees involved under PTE 77-4--those fees which 
Chicago Trust charged to the Client Plans for serving as trustee with 
investment discretion or as investment manager (i.e., the Plan-level 
fees); and those fees Chicago Trust charged to the Funds (i.e., the 
Fund-level fees) for serving as investment advisor, custodian, or 
service provider. Plan-level fees for similar services

[[Page 18443]]

provided by Chicago Trust ranged from 0.40 percent to 0.95 percent.
    With respect to PTE 77-4, Chicago Trust subtracted a credit from 
the Plan-level investment management fee representing the Client Plan's 
pro rata share of the investment advisory fee paid by the Funds to 
Chicago Trust and, if applicable, Montag and Caldwell (including that 
portion of the investment advisory fee that Chicago Trust paid to 
Talon.) <SUP>25
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    \25\ The rates paid by each of the portfolios of the Funds for 
services rendered differed depending on the fee schedule for each 
portfolio and on the daily net assets in each portfolio. For 
example, for investment advisory services provided to the Chicago 
Trust Money Market Fund, Chicago Trust would be entitled to receive 
an annual fee of 0.40 percent based on that Fund's average daily net 
assets. For investment advisory services provided to the Chicago 
Trust Intermediate Municipal Bond Fund, Chicago Trust would be 
entitled to receive an annual fee of 0.60 percent based upon such 
Fund's average daily net assets.
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    Since September 21, 1995, Chicago Trust has no longer charged a 
Plan-level investment management fee with respect to the assets of a 
Client Plan that have been invested in shares of the Funds. Rather, 
Chicago Trust or Montag & Caldwell, as applicable, are receiving the 
investment advisory fee payable under the respective investment 
advisory agreements with the Funds, instead of the Plan-level 
investment management fee. Talon is receiving an investment advisory 
fee from Chicago Trust pursuant to the terms of its sub-advisory 
agreement. For In-House Plans, Chicago Trust represents that it intends 
to continue relying upon PTE 77-3 with respect to the receipt of Fund-
level investment advisory fees by it for assets of In-House Plans that 
are invested in shares of the Funds.<SUP>26
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    \26\ The Department expresses no opinion herein on the 
applicability of PTE 77-3 with respect to ongoing investments by the 
In-House Plans in shares of the Funds or to the receipt of fees from 
the Funds by Chicago Trust.
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    Chicago Trust is charging In-House Plans and Client Plans for Plan-
level recordkeeping, administrative, accounting and custodial services 
which do not involve investment management, such as custody of plan 
assets, maintaining plan records, preparing periodic reports of plan 
assets and participant accounts, effecting participant investment 
directions, processing participant loans and accounting for 
contributions, payments of benefits and other receipts and 
distributions. Chicago Trust's fees for such Plan-level services will 
continue to be negotiated with each Client Plan and its fees for such 
services for In-House Plans will continue to be limited to the 
reimbursement of direct expenses properly and actually incurred in the 
performance of the services.<SUP>27
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    \27\ Chicago Trust represents that it is relying upon section 
408(b)(2) with respect to its receipt of fees for such 
administrative services. The Department expresses no opinion herein 
on whether the provision of such services will satisfy section 
408(b)(2) of the Act.
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    At present, all services other than investment advisory services 
are provided to the Funds or their distributor by unrelated parties. 
However, Chicago Trust represents that the Funds may, in the future, 
wish to contract with it or an affiliate to provide administrative, 
custodial, transfer, accounting or similar services (i.e., Secondary 
Services) to the Funds or their distributor.<SUP>28
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    \28\ The fact that certain transactions and fee arrangements are 
the subject of an administrative exemption does not relieve the 
fiduciaries of the Client Plans from the general fiduciary 
responsibility provisions of section 404 of the Act. Thus, the 
Department cautions Second Fiduciaries of the Client Plans investing 
in the Funds that they have an ongoing duty under section 404 of the 
Act to monitor the services provided to such Plans to assure that 
the fees paid by the Client Plans for such services are reasonable 
in relation to the value of the services provided. These 
responsibilities would include determinations that the services 
provided are not duplicative and that the fees are reasonable in 
light of the level of services provided.
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    At the same time that it gives advance written notice and seeks 
approval of an in-kind transfer from a Second Fiduciary, Chicago Trust 
will also give the Second Fiduciary notice that it is seeking approval 
to provide Secondary Services to the Funds, either directly or by 
subcontracting with third parties. Such notice will describe the fees 
for Secondary Services (whether provided by Chicago Trust directly or 
through third parties) for which it is seeking approval from the Second 
Fiduciary and disclose that, while Chicago Trust is not presently 
providing Secondary Services to the Funds, it may do so in the future 
and intends to rely on the approval of the Second Fiduciary for its 
provision of Secondary Services.<SUP>29
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    \29\ With respect to In-House Plans, Chicago Trust represents 
that it intends to rely on PTE 77-3. However, the Department 
expresses no opinion herein as to the applicability of PTE 77-3 to 
Chicago Trust's receipt of fees for Secondary Services.
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    Chicago Trust will receive investment advisory fees or fees for 
Secondary Services from the Funds under the following conditions: (a) 
no sales commissions will be paid by the Client Plans in connection 
with purchases or sales of shares of the Funds and no redemption fees 
will be paid in connection with the sale of such shares by the Client 
Plans to the Funds; (b) the price paid or received by the Client Plans 
for shares in the Funds will be the net asset value per share at the 
time of the transaction and is the same price which would have been 
paid or received for the shares by any other investor at that time; (c) 
Chicago Trust and its officers or directors will not purchase from or 
sell to any of the Client Plans shares of any of the Funds; (d) for 
each Client Plan, the combined total of all fees received by Chicago 
Trust for the provision of Plan-level services to the Client Plans, and 
in connection with the provision of investment advisory services or 
Secondary Services to any of the Funds in which the Client Plans may 
invest, will not be in excess of ``reasonable compensation'' within the 
meaning of section 408(b)(2) of the Act; (e) Chicago Trust will not 
receive any fees or commissions in connection with the purchase, 
holding or sale of shares of the Funds by a Client Plan; and (f) the 
receipt of investment advisory fees and fees for Secondary Services, 
and any changes in such fees is, with respect to any Client Plan, 
approved by the Second Fiduciary of the Client Plan pursuant to the 
procedures described herein.

Authorization Requirements for Client Plans

    7. As described in Representation 6, Chicago Trust intends to seek 
the approval of the Second Fiduciary of each Client Plan to receive 
fees for providing Secondary Services, directly or by subcontracting 
with a third party. Chicago Trust will then rely on that approval for 
its receipt of fees for Secondary Services from the Funds.<SUP>30
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    \30\ The Department notes that an increase in the amount of a 
fee for an existing Secondary Service (other than through an 
increase in the value of the underlying assets in the Funds) or the 
imposition of a fee for a newly-established Secondary Service shall 
be considered an increase in the rate of such Secondary Fee. 
However, in the event a Secondary Fee has already been described in 
writing to the Second Fiduciary and the Second Fiduciary has 
provided authorization for the amount of such Secondary Fee, and 
such fee was waived, no further action by Chicago Trust would be 
required in order for Chicago Trust to receive such fee at a later 
time. Thus, for example, no further disclosure would be necessary if 
Chicago Trust had received authorization for a fee for custodial 
services from Client Plan investors and subsequently determined to 
waive the fee for a period of time in order to attract new investors 
but later charged the fee. However, reinstituting the fee at an 
amount greater than previously disclosed would necessitate Chicago 
Trust providing notice of the fee increase and a Termination Form.
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    To the extent that the fees for investment advisory services or 
Secondary Services exceed the rates approved by the Second Fiduciary of 
a Client Plan or an additional Secondary Service for which a fee is 
charged causes an increase in the fees paid to Chicago Trust over the 
rates approved by the Second Fiduciary of a Client

[[Page 18444]]

Plan, Chicago Trust will use the ``Termination Form'' approach. In this 
regard, in the event of an increase in the rate of any fees paid by the 
Funds to Chicago Trust for investment advisory services that Chicago 
Trust provides to the Funds over an existing rate for such services 
that had been authorized by a Second Fiduciary of a Client Plan, 
Chicago Trust will, at least 30 days in advance of the implementation 
of such increase, provide a written notice (which may take the form of 
a proxy statement, letter, or similar communication that is separate 
from the prospectus of the Funds and which explains the nature and 
amount of the increase in fees) to the Second Fiduciary of each Client 
Plan invested in a Fund which is increasing such fees. Such notice will 
be accompanied by the Termination Form.
    In addition, in the event of an (a) addition of a Secondary Service 
provided by Chicago Trust to the Funds for which a fee is charged or 
(b) an increase in the rate of any fee paid by the Funds to Chicago 
Trust for any Secondary Service that results either from an increase in 
the rate of such fee or from the decrease in the number or kind of 
services performed by Chicago Trust for such fee over an existing rate 
for such Secondary Service, which had been authorized by the Secondary 
Fiduciary, Chicago Trust will, at least 30 days in advance of the 
implementation of such Secondary Service or fee increase, provide a 
written notice (which may take the form of a proxy statement, letter, 
or similar communication that is separate from the prospectus of the 
Funds and which explains the nature and amount of the additional 
Secondary Service for which a fee is charged or the nature and amount 
of the increase in fees) to the Second Fiduciary of each of the Client 
Plans invested in a Fund which is adding a service or increasing fees. 
Such notice will also be accompanied by the Termination Form.
    The instructions to the Termination Form will expressly provide an 
election to the Second Fiduciary to terminate, at will, any prior 
authorizations without penalty to the Client Plan and stipulate that 
failure to return the form will result in the continuation of all 
authorizations previously given by the Second Fiduciary and be deemed 
to be an approval of the additional Secondary Service for which a fee 
is charged or increase in the rate of any fees for Secondary Services 
or investment advisory services. Termination of the authorization by a 
Client Plan to invest in the Funds will be effected by Chicago Trust 
selling the shares of the Funds held by the affected Client Plan within 
the period of time specified by the Client Plan, but not later than one 
business day following receipt by Chicago Trust of the Termination Form 
or any other written notice of termination. If, due to circumstances 
beyond the control of Chicago Trust the sale cannot be executed within 
one business day, Chicago Trust will have one additional day to 
complete such sale.
    The Second Fiduciary will be supplied with a Termination Form at 
least once each year, beginning with the calendar year that begins 
after the date of the notice granting this proposed exemption is 
published in the Federal Register and continuing for each calendar year 
thereafter, regardless of whether there have been any changes in the 
fees payable to Chicago Trust or changes in other matters in connection 
with the services rendered to the Funds. However, if the Termination 
Form has been provided to the Second Fiduciary in connection with an 
increase in fees for investment advisory services, the addition of a 
Secondary Service for which a fee is charged or an increase in any fees 
paid by the Funds to Chicago Trust, the Termination Form need not be 
provided again to the Second Fiduciary until at least six months have 
elapsed, unless such Termination Form is required to be sent sooner as 
a result of an addition of a Secondary Service for which a fee is 
charged or an increase in the fees for Secondary Services or investment 
advisory services that are paid to Chicago Trust, which would cause 
Chicago Trust's aggregate fees to exceed the rates approved by the 
Second Fiduciary.

Ongoing Disclosures to Client Plans

    8. In addition to the disclosures provided to the Second Fiduciary 
of a Client Plan prior to investment in the Funds, Chicago Trust 
represents that it will provide the Second Fiduciary, at least 
annually, with a copy of an updated prospectus for the Funds. In 
addition, Chicago Trust will provide the Second Fiduciary with a report 
or statement (which may take the form of the most recent financial 
report, the current statement of additional information or some other 
written statement) which contains a description of all fees paid by the 
Funds to Chicago Trust within 15 days of such document's availabillity.
    Although Chicago Trust does not presently execute securities 
brokerage transactions for the investment portfolios of the Funds, in 
the event that it or an adviser or a sub-adviser to the Funds 
(including their affiliates) does perform brokerage services, it will 
provide, at least annually, to the Second Fiduciary in which a Client 
Plan invests, a written disclosure indicating: (a) The total, expressed 
in dollars, brokerage commissions attributable to each Fund's 
investment portfolio which represent Related Party Brokerage; (b) the 
total, expressed in dollars, of brokerage commissions attributable to 
each Fund's investment portfolio other than Related Party Brokerage; 
(c) the average brokerage commissions per share, expressed as cents per 
share, paid by each Fund for Related Party Brokerage; and (d) the 
average brokerage commissions per share, expressed as cents per share, 
paid by each Fund for brokerage other than Related Party Brokerage.
    9. In summary, it is represented that the proposed transactions 
have satisfied or will satisfy the statutory criteria for an exemption 
under section 408(a) of the Act because:
    (a) With respect to the in-kind transfer of the assets of an In-
House Plan or a Client Plan invested in a CIF in exchange for shares of 
a Fund, a Second Fiduciary has authorized or will authorize in writing, 
such in-kind transfer prior to the transaction only after receiving 
full written disclosure of information concerning the Fund.
    (b) Each In-House Plan or Client Plan has received or will receive 
shares of the Funds in connection with the transfer of assets of a 
terminating CIF which have a total net asset value that is equal to the 
value of such Plan's pro rata share of the CIF assets on the date of 
the transfer as determined in a single valuation performed in the same 
manner and at the close of the business day, using independent sources 
in accordance with procedures established by the Funds which comply 
with Rule 17a-7 of the '40 Act, as amended, and the procedures 
established by the Funds pursuant to Rule 17a-7 for the valuation of 
such assets.
    (c) Chicago Trust has sent or will send by regular mail to each 
affected In-House Plan and Client Plan a written confirmation, not 
later than 30 days after the completion of the transaction, containing 
the following information: (1) The identity of each security that was 
valued for purposes of the transaction in accordance with Rule 17a-
7(b)(4) of the '40 Act; (2) the price of each such security involved in 
the transaction; and (3) the identity of each pricing service or market 
maker consulted in determining the value of such securities.
    (d) Chicago Trust has sent or will send by regular mail, no later 
than 90 days after completion of each transfer, a

[[Page 18445]]

written confirmation that contains the following information: (1) the 
number of CIF units held by an In-House Plan or a Client Plan 
immediately before the transfer, the related per unit value and the 
total dollar amount of such CIF units; and (2) the number of shares in 
the Funds that are held by the Plan following the conversion, the 
related per share net asset value and the total dollar amount of such 
shares.
    (e) The price that has been or will be paid or received by an In-
House Plan or a Client Plan for shares of the Funds is the net asset 
value per share at the time of the transaction and is the same price 
for the shares which will be paid or received by any other investor at 
that time.
    (f) No sales commissions or redemption fees have been or will be 
paid by an In-House Plan or a Client Plan in connection with the 
purchase of shares of the Funds.
    (g) For each Client Plan, the combined total of all fees received 
by Chicago Trust for the provision of Plan-level services, and in 
connection with the provision of investment advisory services or 
Secondary Services to any of the Funds in which Client Plans may 
invest, will not be in excess of ``reasonable compensation'' within the 
meaning of section 408(b)(2) of the Act.
    (h) Chicago Trust has not received and will not receive any 12b-1 
Fees in connection with the transactions.
    (i) Any authorizations made by a Client Plan regarding investments 
in the Funds and the fees paid to Chicago Trust (including increases in 
the contractual rates of fees for Secondary Services that are retained 
by the Chicago Trust) have been and will be terminable at will by the 
Client Plan, without penalty to the Client Plan and have been and will 
be effected within one business day following receipt by Chicago Trust, 
from the Second Fiduciary, of the Termination Form or any other written 
notice of termination, unless circumstances beyond the control of 
Chicago Trust delay execution for no more than one additional business 
day.
    (j) The Second Fiduciary has received and will receive written 
notice accompanied by the Termination Form with instructions on the use 
of the form at least 30 days in advance of the implementation of any 
increase in the rate of any fees paid by the Funds to Chicago Trust 
regarding investment advisory services, fees for Secondary Services or 
an additional Secondary Service for which a fee is charged which exceed 
the rates authorized for Chicago Trust by the Second Fiduciary.
    (k) All dealings by or between the Client Plans, the Funds and 
Chicago Trust have been and will be on a basis which is at least as 
favorable to the Client Plans as such dealings are with other 
shareholders holding the same class of shares of the Funds.

Notice to Interested Persons

    Notice of the proposed exemption will be given to interested 
persons who had investments in the terminated CIFs and from whom 
approval is being sought for the in-kind transfers of Plan assets from 
such CIFs in exchange for shares of the Funds. In this regard, 
interested persons will include Cole Taylor, the Second Fiduciary of 
the In-House Plans; active participants in the In-House Plans; and 
Second Fiduciaries of the Client Plans. Notice will be provided to each 
Second Fiduciary by first class mail and to active particpants in the 
In-House Plans by posting at major job sites. Such notice will be given 
to interested persons within 14 days following the publication of the 
notice of pendency in the Federal Register. The notice will include a 
copy of the notice of proposed exemption as published in the Federal 
Register as well as a supplemental statement, as required, pursuant to 
29 CFR 2570.43(b)(2), which shall inform interested persons of their 
right to comment on and/or to request a hearing. Comments and requests 
for a public hearing are due within 44 days of the publication of the 
notice of proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (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 of 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 accurately describe all 
material terms of the transaction which is the subject of the 
exemption. In the case of continuing exemption transactions, if any of 
the material facts or representations described in the application 
change after the exemption is granted, the exemption will cease to 
apply as of the date of such change. In the event of any such change, 
application for a new exemption may be made to the Department.

    Signed at Washington, DC, this 19th day of April, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 96-10071 Filed 4-24-96; 8:45 am]
BILLING CODE 4510-29-P