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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Zerhusen and Ghazi, M.D. Inc. Profit Sharing Plan, et al. [Notices] [08/27/1996]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Zerhusen and Ghazi, M.D. Inc. Profit Sharing Plan, et al. [08/27/1996]

[PDF Version]

Volume 61, Number 167, Page 44085-44091

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DEPARTMENT OF LABOR
[Application No. D-10224, et al.]

 
Proposed Exemptions; Zerhusen and Ghazi, M.D. Inc. Profit Sharing 
Plan, et al.

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 restriction of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
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

[[Page 44086]]

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.

Zerhusen and Ghazi, M.D. Inc. Profit Sharing Plan (the Plan) 
Located in Cincinnati, Ohio

[Application No. D-10224]

Proposed Exemption

    The Department of Labor (the Department) is considering granting an 
exemption under the authority of section 408(a) of the Act and section 
4975(c)(2) of the Code and in accordance with the procedures set forth 
in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). 
If the exemption is granted, the restrictions of sections 406(a), 
406(b)(1) and (b)(2) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)((A) through (E) of the Code, shall not apply to the proposed 
sale (the Sale) by Dr. J. Robert Zerhusen's individual, self-directed 
account within the Plan (the Account) of a parcel of real property (the 
Property) to his spouse, Marilyn E. Zerhusen (Mrs. Zerhusen), a 
participant in the Plan and a party in interest with respect to the 
Plan, provided that the following conditions are satisfied: (a) the 
Sale is a one time transaction for a lump sum cash payment; (b) the 
purchase price is the fair market value of the Property as of the date 
of the Sale; (c) the Property has been appraised by a qualified, 
independent real estate appraiser; and (d) the Account will pay no 
commissions or other expenses relating to the Sale.

Summary of Facts and Representations

    1. The Plan is a defined contribution plan and has four 
participants as of the date of the application. The Plan participants 
have individual, self-directed investment accounts within the Plan. Dr. 
J. Robert Zerhusen (Dr. Zerhusen) has a non-self-directed account in 
addition to a self-directed account within the Plan. The real property 
involved in the Sale is in Dr. Zerhusen's self-directed account and Dr. 
Zerhusen has investment discretion over this real property. As of 
December 31, 1995, the fair market value of the total assets of the 
Plan was $911,015.68. As of that date, the Account had assets of 
$106,546.00 and Dr. Zerhusen's non-self-directed account had assets of 
$713,740.45. The $49,100.00 appraised value of the Property represents 
forty-six (46) percent of the total Account balance as of December 31, 
1995.
    2. The Plan was sponsored by Zerhusen & Ghazi, M.D. Inc. (Z & G) 
which was an Ohio corporation maintained by physicians for the practice 
of medicine. Dr. Zerhusen is the trustee of the Plan. Currently, there 
is no active trade or business being conducted in the name of Z & G. 
The operations of the corporation have been transferred to a newly 
formed corporation named Westside Cardiology, Inc. Dr. Zerhusen 
maintains the position of president and director of Westside 
Cardiology, Inc.
    3. The Property consists of 5.112 acres of unimproved land located 
on Rear Owl Creek Road in Cincinnati, Ohio. The specific zoning 
classification is residential. The Property was originally purchased by 
the Account on December 23, 1986 for $40,000.00. The 20 acres of 
property adjacent to the Property is owned by Mrs. Zerhusen. Mrs. 
Zerhusen purchased the adjacent property from the same seller and on 
the same date that the Account purchased the Property.<SUP>1 The 
adjacent Property was purchased by Mrs. Zerhusen for $8,000 per acre or 
$160,000.00.
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     <SUP>1 The Department expresses no opinion herein on whether 
the acquisition and holding of the Property by the Account in the 
Plan violated any of the provisions of Part 4 of Title I of the Act.
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    4. The Property has been held in the Account since the purchase 
date and has not been used by or leased to any person since its 
acquisition by the Account. On February 9, 1996, the Property was 
appraised by Joseph L. Schaffer, a Certified Real Estate Appraiser 
located in Cincinnati, Ohio. Relying on the market data approach, Mr. 
Schaffer estimated that the fair market value of the Property was 
$49,100.00. In his appraisal of the Property, Mr. Schaffer found that 
there will be no special benefit to be derived by Mrs. Zerhusen by 
virtue of purchasing the Property due to the fact that she owns the 
adjacent parcel.
    5. Mrs. Zerhusen proposes to purchase the Property from the Account 
for a lump sum payment of cash representing the fair market value of 
the Property on the date of sale. There will be no other type of 
financing involved. The applicant represents that the Sale will result 
in a conversion of Plan assets from real property to a liquid 
investment. The Plan will be terminating due to dissolution of the Plan 
sponsor, Z & G, and liquid assets will be easier to transfer from the 
Plan.
    6. In summary, the applicant represents that the requested 
exemption will satisfy the criteria of section 408(a) of the Act for 
the following reasons: (a) The Sale is a one time transaction for a 
lump sum cash payment; (b) the Plan will receive the fair market value 
of the Property at the time of the transaction; (c) the fair market 
value of the Property has been determined by an independent, qualified 
real estate appraiser; (d) the Plan will pay no fees or commissions 
associated with the Sale; and (e) no other participant in the Plan will 
be affected by the transaction.

Notice to Interested Persons

    Because the only Plan assets involved in the proposed transaction 
are those in the Account of Dr. Zerhusen and he is the only participant 
affected by the proposed transaction, it has been determined that there 
is no need to distribute the notice of proposed exemption to interested 
persons. Comments and requests for a hearing are due 30 days from the 
date of publication of this proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Wendy McColough of the Department,

[[Page 44087]]

telephone (202) 219-8971. (This is not a toll-free number.)

Lehman Brothers, Inc. (Lehman) Located in New York, New York

[Application No. D-10255]

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 section 406(a) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (D) of the Code, shall not 
apply to the sales of collateralized guaranteed investment contracts 
(CGICs) by Lehman to employee benefit plans (the Plans), provided the 
following conditions are satisfied: (a) The decision to purchase a CGIC 
will be made by a fiduciary of a Plan who is independent of Lehman; (b) 
Lehman will provide the independent fiduciary with audited and 
unaudited statements of its financial condition at the time of the 
purchase of the CGIC and subsequently as issued; (c) Lehman will 
transfer to a tri-party custodial account, under the exclusive 
direction of a Plan's trustees, securities selected by the Plan with a 
market value equal to at least 102% of the CGIC's purchase price; (d) 
such securities will be marked to market on a daily basis, and Lehman 
will be required to maintain the market value of the securities at the 
agreed-upon level of at least 102% of the CGIC's purchase price; (e) a 
Plan will receive daily reports describing the securities on deposit 
and their market value, and monthly reports describing all activity 
with respect to the CGIC, including accrued interest; (f) a Plan will 
have full recourse against Lehman for all obligations and expenses owed 
to it by Lehman,; (g) Lehman will be responsible for all legal fees and 
expenses associated with any failure to fulfill its obligations under a 
CGIC; (h) a Plan will have an unqualified right to the return of its 
principal and accrued interest no later than the conclusion of the 
stated term of the CGIC; (i) if a Plan requires a termination of a CGIC 
prior to maturity to pay benefit responsive payments, no market value 
adjustment will be imposed; and (j) Lehman will market CGICs only to 
Plans with assets having an aggregate market value of at least $50 
million.

Summary of Facts and Representations

    1. Lehman, a Delaware corporation, is a wholly-owned subsidiary of 
Lehman Brothers Holdings Inc. (Holdings), also a Delaware corporation. 
Lehman, one of the largest full-line investment services firms in the 
United States, is a broker/dealer registered with and regulated by the 
Securities and Exchange Commission. Lehman is a member of the New York 
Stock Exchange and other principal securities exchanges in the U.S., is 
a primary government securities dealer, and is also a member of the 
National Association of Securities Dealers, Inc. As of November 30, 
1995, Lehman had $82.6 billion in assets, $2 billion in shareholders' 
equity, and $3 billion in subordinated debt.
    2. On August 31, 1995, Lehman Government Securities, Inc. (LGSI), 
another wholly-owned subsidiary of Holdings, merged into Lehman. LGSI 
had been an issuer of a variety of different types of guaranteed 
investment contracts (GICs) since 1986. Lehman has issued over $19.5 
billion of GICs (including the activities of LGSI) and maintains an 
active portfolio of between $6.5 and $8.5 billion.
    3. Lehman requests an exemption for the sale of CGICs to Plans. The 
applicant represents that a CGIC is a secured, stable GIC. A CGIC 
offers all of the return characteristics and ease of use found in a 
traditional insurance company general account GIC, such as a fixed, 
floating or indexed rate of return, benefit responsiveness and book 
value accounting. However, unlike a general or separate account GIC, a 
CGIC offers additional protection by allowing a Plan sponsor to 
maintain legal title to the assets which Lehman deposits to secure the 
CGIC's principal for the term of the CGIC. In addition, the Plan's 
sponsor will stipulate the quality and type of assets (the Purchased 
Securities) selected to secure its CGIC contract, and such assets will 
be held by a third party custodian.<SUP>2
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     2 If and when Lehman substitutes securities for the Purchased 
Securities that were selected by a Plan, the substituted securities 
will have a statistical credit rating from an independent rating 
agency that is, at a minimum, equal to the credit rating of the 
lowest rated Purchased Securities that had been selected by the Plan 
as acceptable collateral at the time of the purchase of the CGIC.
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    4. The purchase of a CGIC by a Plan will be effected through the 
execution by an independent Plan fiduciary of a Master Repurchase 
Agreement With Respect to CGIC Investments (the Master Agreement), a 
confirmation (the Confirmation), and a custody agreement (the Custody 
Agreement). Lehman represents that it will market CGICs only to Plans 
with assets having an aggregate market value of at least $50 million. 
This restriction is intended to assure that the decision to purchase a 
CGIC will be made by an independent fiduciary of above average 
experience and sophistication in matters of this kind.
    5. Lehman will provide an independent fiduciary of the Plan with 
its most recent audited statement of financial condition and its most 
recent unaudited statement of financial condition at the time Lehman 
issues a Confirmation to the Plan. In addition, Lehman will represent 
to the Plan that, since the date of the latest such financial 
statement, there has been no material adverse change in its financial 
condition that has not been disclosed to the Plan. Finally, during the 
term of the CGIC, Lehman will provide the Plan with future audited and 
unaudited statements of its financial condition as these are issued.
    6. By the close of business on the initial day of a Plan's purchase 
of a CGIC, assets will be transferred to a custodial account in the 
name of the Plan's trustee, pursuant to the terms of the Custody 
Agreement. The assets will be in the form of Purchased Securities 
selected by the Plan, and the margin value of the securities (the 
Margin Value) will be equivalent to the market value of the Purchased 
Securities divided by an applicable margin percentage (the Margin 
Percentage). The Margin Percentage for Purchased Securities (other than 
for cash) <SUP>3 will be no less than 102 percent, depending on the 
type of Purchased Securities. The Margin Value of the Purchased 
Securities based upon such Margin Percentage shall equal or exceed the 
purchase price of the CGIC (the Purchase Price).
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    \3\ Cash may be substituted for Purchased Securities during the 
course of a business day or be delivered to the Plan's account to 
cure a margin deficit in accordance with the terms of the Custody 
Agreement. The Margin Percentage with respect to such cash shall be 
100%.
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    7. Under the terms of the Custody Agreement, a tri-party custodial 
arrangement, an independent bank will act as the non-exclusive 
custodian (Custodian) with respect to the CGIC an all transactions 
thereunder.<SUP>4 Lehman will pay all costs associated with the 
establishment and operation of the custodial account, and such account 
by its terms will not be subject to any security interest, lien or 
right of setoff by the Custodian, or any third party claiming through 
the Custodian.
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     <SUP>4 Although it is anticipated that most Plans will choose 
the tri-party custodial arrangement, a Plan may, at its discretion, 
hold the assets related to a CGIC.

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[[Page 44088]]

    8. The Custodian will be responsible for daily mark-to-market 
valuations of the Purchased Securities to ensure that the Margin Value 
of the Purchased Securities will be maintained at the agreed-upon level 
throughout the life of the CGIC. The Custodian will provide daily 
reports to the Plan and to Lehman describing the Purchased Securities 
on deposit in the Custodial Account and the market value of such 
securities. If a decline in the market value of the Purchased 
Securities causes the Margin Value to fall below the Purchase Price, 
the Custodian will require Lehman to transfer sufficient securities (or 
cash) to the Plan's account to restore the value of the Purchased 
Securities to the appropriate Margin Value. Conversely, if an increase 
in the market value of the Purchased Securities causes the Margin Value 
to exceed the Purchase Price, Lehman may request the Custodian to 
transfer to it sufficient cash or securities such that the Margin Value 
in the Plan's account does not exceed the Purchase Price.
    9. The general terms of a CGIC, including the terms and conditions 
under which Lehman will repurchase Purchased Securities from a Plan, 
will be set forth in the Master Agreement, while the specific and 
negotiable terms of a CGIC, such as the principal amount, the interest 
rate, the maturity date, and the Margin Percentage will be set forth in 
a Confirmation.
    10. The type of Purchased Securities will be a component in 
determining the interest rate of a CGIC. For example, direct 
obligations of the U.S. Government, such as Treasury bills, notes, 
bonds and GNMAs, will provide a lower rate of return to Lehman than 
less liquid U.S. Government agency securities. Accordingly, a CGIC's 
interest rate with the former as Purchased Securities will be lower 
than with the latter as Purchased Securities. Alternatively, a higher 
interest rate may be obtained from a CGIC if a Plan selects Purchased 
Securities that offer lower credit quality and/or increased pricing 
volatility, such as AAA private label mortgage-backed securities, AA 
corporate bonds or asset-backed securities (e.g., automobile 
receivables), because such securities would generate a higher return to 
Lehman. In any case, however, a Plan will not be at risk for either 
credit or market value exposure of the Purchased Securities, and the 
interest on a CGIC will not vary with the investment performance of the 
Purchased Securities.
    11. Accrued interest will be paid or compounded monthly, quarterly, 
semi-annually, annually or compounded until maturity, in accordance 
with the needs of the Plan. A Plan will receive from Lehman monthly 
reports detailing all activity with respect to the Plan's CGIC, 
including accrued interest, as well as the previously discussed daily 
reports from the Custodian regarding the market value of the Purchased 
Securities.
    12. In order to provide a Plan with the ability to withdraw all or 
part of its investment prior to the maturity date of a CGIC, the Master 
Agreement provides that the Plan, in its sole discretion may require 
Lehman to repurchase Purchased Securities held in the custodial account 
prior to the maturity date of the CGIC (a Transaction Reduction) under 
the following circumstances and conditions.
    The Master Agreement will provide that, prior to requesting a 
Transaction Reduction, a Plan must satisfy its benefit responsive 
payments, to the extent possible, from its normal sources of liquidity 
which shall be set forth in the Master Agreement or the Confirmation. 
Such sources, which are Plan assets separate and apart from the CGIC, 
may include, but are not limited to, the following:
    (a) cash reserves;
    (b) funds received from new deposits;
    (c) liquidation of short-term securities;
    (d) proceeds from interest payments received;
    (e) proceeds from the maturity of contracts.
    However, to the extent that these normal sources of a Plan's 
liquidity have been exhausted and additional funds are required by the 
Plan to satisfy its benefit responsive payments, the Plan may request a 
Transaction Reduction under the CGIC, as well as withdrawals from other 
investment providers, using a methodology agreed upon in the Master 
Agreement or the Confirmation. Such a benefit responsive Transaction 
Reduction would be effected without penalty upon two days' written 
notice to Lehman (or such other period that is otherwise agreed to by a 
Plan and Lehman). At any time, however, Lehman may demand reasonable 
proof, including written documentation to verify or establish the need 
for such a benefit responsive Transaction Reduction.
    A Plan may effect a whole or partial Transaction Reduction at any 
time and for any purpose, other than a benefit responsive payment, upon 
ten days' written notice to Lehman (or such other period that is agreed 
to by a Plan and Lehman). On the date of such notice, Lehman, as 
calculation agent, would determine the market value adjustment 
(Termination Cost), if any, applicable to such a Transaction Reduction. 
Such Termination Cost would be determined in accordance with one of two 
methodologies mutually agreed upon in the Confirmation and described in 
the Master Agreement. One such methodology would employ an objective 
mathematical computation that would result in a Termination Cost if the 
prevailing interest rate on the date of notice for a comparable GIC 
with terms similar to the unexpired term of the CGIC were greater than 
that of the CGIC. Under an alternative methodology, the Termination 
Cost would be based upon quotations obtained by Lehman from not less 
than three leading independent dealers of the amount, if any, that 
Lehman would be required to pay such a dealer to enter into an 
agreement with Lehman that would have the effect of preserving for 
Lehman the economic equivalent of its rights under the CGIC. The lowest 
of such dealer quotations (i.e., the quotation most favorable to the 
Plan) would be the Termination Cost of the CGIC. Such quotes would 
result in a Termination Cost to a Plan only if the quote most favorable 
to the Plan represented an amount that Lehman would be required to pay 
to the independent dealer for such a replacement transaction. In either 
case, the Termination Cost would not be based on the investment 
performance of the Purchased Securities or investments purchased by 
Lehman with the CGIC principal. Lehman represents that it will not have 
the discretion to increase the market value adjustment to a CGIC 
regardless of which methodology is utilized.
    13. If Lehman fails to repurchase the Purchased Securities upon the 
maturity date of the CGIC or fails to maintain the Margin Value in 
accordance with the Custody Agreement, a Plan will have the right under 
the Master Agreement (i) to sell any or all of the Purchased Securities 
and to apply the proceeds to the aggregate unpaid purchase price and 
any other amounts owing by Lehman or (ii) to take possession of the 
Purchased Securities and credit the market value of the Purchased 
Securities (as determined by a generally recognized source or by the 
most recent closing bid quotation from such a source) against the 
aggregate unpaid CGIC purchase price and any other amounts owing by 
Lehman. After an event of default, any income on the Purchased 
Securities will be retained by the Plan and applied to the aggregate 
unpaid CGIC purchase price. In addition, in the case of such a default 
by Lehman, Lehman will be obligated to pay the amount of any

[[Page 44089]]

obligations to, and the expenses of, a Plan that are not otherwise 
covered by the Purchased Securities, including all reasonable legal or 
other expenses incurred by the Plan in connection with, or as a 
consequence of, such default, together with interest thereon at a rate 
equal to the CGIC interest rate.
    14. A CGIC will terminate (Final Repurchase Date) upon the earlier 
of (i) the maturity date of the CGIC, (ii) the date on which a 
Transaction Reduction causes a return to a Plan of the CGIC's remaining 
principal and interest, or (iii) the date on which Lehman terminates a 
CGIC as a result of its determination that a modification to the Plan's 
operative documents or the Plan's administration (a Plan Amendment) 
would materially reduce Lehman's expected benefits or increase its 
exposure or obligations under the CGIC.<SUP>5 On the Final Repurchase 
Date, Lehman will pay the applicable repurchase price of the CGIC (and 
any accrued but unpaid interest) to the Plan, and the Purchased 
Securities remaining in the custodial account will be returned to 
Lehman.
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     <SUP>5 Lehman represents that in the unlikely event of a Plan 
Amendment, the Master Agreement provides that such a termination 
would be subject to a market value adjustment, if any.
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    15. The applicant represents that the terms and conditions of the 
CGIC are essentially the same as the conditions imposed by the 
Department in Prohibited Transaction Exemption 81-8 (PTE 81- 8, 46 FR 
7511, January 23, 1981, as amended at 50 FR 14043, April 9, 1985), 
other than the condition that the term of a repurchase agreement be 
limited to one year or less:
    (a) PTE 81-8 does not provide relief for fiduciaries of a plan. The 
exemption proposed herein does not provide relief when Lehman is a 
fiduciary to a Plan with respect to the investment of Plan assets in a 
CGIC.
    (b) PTE 81-8 requires that the seller transfer to a Plan securities 
(or banker's acceptances, commercial paper or certificates of deposit) 
with a market value of at least 100% of the purchase price paid by the 
Plan. The exemption proposed herein requires that Lehman transfer to a 
custodial account, under the exclusive direction of a Plan's trustees, 
Purchased Securities with a market value of at least 102% of the CGIC's 
purchase price.
    (c) PTE 81-8 requires that a Plan must receive certain audited and 
unaudited statements of the seller's financial condition, as well as a 
representation regarding changed financial condition. The exemption 
proposed herein requires Lehman to provide the same information and 
representation to a Plan at the time Lehman issues a confirmation to 
the Plan. In addition, Lehman is under a continuing obligation to 
provide audited and unaudited statements of its financial condition as 
issued.
    (d) PTE 81-8 requires a written repurchase agreement the terms of 
which would satisfy an ``arm's-length'' standard. The use of master 
agreements covering a series of transactions is expressly approved. 
Under the exemption proposed herein, the Master Agreement, the 
Confirmation, and the Custody Agreement will be in written form. The 
terms of the CGIC, as reflected in Confirmation, are subject to 
negotiation, based on the needs of a Plan as determined by its 
independent fiduciary in arm's-length negotiations with Lehman.
    (e) PTE 81-8 requires that the interest paid to a Plan must be no 
less than it would receive in a comparable transaction with an 
unrelated party. Under the exemption proposed herein, the Plan will 
receive interest at a rate agreed upon by the Plan and Lehman based 
upon the economic characteristics of the transaction.
    (f) PTE 81-8 requires that the collateral be marked to market on a 
daily basis to maintain a 100% market value level. The exemption 
proposed herein similarly requires that the Purchased Securities be 
marked to market on a daily basis to maintain at least a 102% Margin 
Value.
    (g) PTE 81-8 requires that the seller must transfer an amount equal 
to the purchase price of the securities plus interest to a Plan upon 
the expiration of a repurchase agreement. Under the exemption proposed 
herein, a Plan will have an unqualified right to the return of its 
principal and accrued interest no later than the conclusion of the 
stated term of the CGIC.
    (h) PTE 81-8 requires that a Plan must have certain rights in event 
of a seller's default. The exemption proposed herein provides that a 
Plan has full recourse against Lehman and the Purchased Securities for 
all obligations and expenses owed to it by Lehman. In addition, Lehman 
would be responsible for all legal fees and expenses associated with 
any such failure to fulfill its obligations under a CGIC.
    16. In summary, the applicant represents that the proposed 
transaction will satisfy the criteria contained in section 408(a) of 
the Act for the following reasons: (a) the decision to purchase a CGIC 
will be made by a fiduciary of a Plan who is independent of Lehman; (b) 
Lehman will provide the independent Plan fiduciary with audited and 
unaudited statements of its financial condition at the time Lehman 
issues a Confirmation to the Plan, and Lehman will be under a 
continuing obligation to provide audited and unaudited statements of 
financial condition as issued; (c) upon the purchase of a CGIC by a 
Plan, Lehman will transfer to a tri-party custodial account, under the 
exclusive direction of a plan's trustees, securities selected by the 
Plan with a market value equal to at least 102% of the CGIC's purchase 
price; (d) the Purchased Securities will be marked to market on a daily 
basis, and Lehman will be required to maintain the market value of the 
Purchased Securities at the agreed-upon level of at least 102% of the 
CGIC's purchase price; (e) a Plan will receive daily reports describing 
the securities on deposit in the custodial account and their market 
value, as well as monthly reports describing all activity with respect 
to the CGIC, including accrued interest; (f) interest will be paid on a 
CGIC at intervals determined by the Plan; (g) a Plan will have full 
recourse against Lehman and the purchased Securities for all 
obligations and expenses owed to it by Lehman; (h) Lehman will be 
responsible for all legal fees and expenses associated with any failure 
to fulfill its obligations under a CGIC; (i) a Plan will have an 
unqualified right to the return of its principal and accrued interest 
no later than the conclusion of the stated term of the CGIC; (j) if a 
Plan requires a termination of a CGIC prior to maturity to pay benefit 
responsive payments, no market value adjustment will be imposed on such 
an early termination; and (k) the CGICs will be marketed only to Plans 
with assets having an aggregate market value of least $50 million.

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

Rexam Retirement Savings Plan (the Plan) Located in Charlotte, North 
Carolina

[Application No. D-10294]

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) and 406 (b)(1) and 
(b)(2) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(E) of

[[Page 44090]]

the Code shall not apply to the loan of $1,620,246.56 (the Loan) to the 
Plan from Rexam, Inc. (the Employer) with respect to the Guaranteed 
Investment Contract No. 62317 (the GIC) issued by Confederation Life 
Insurance Company (Confederation) and the Plan's potential repayment of 
the Loan upon the receipt by the Plan of payments under the GIC; 
provided the following conditions are satisfied:
    (A) All terms and conditions of the transactions are no less 
favorable to the Plan than those that the Plan could obtain in arm's-
length transactions with unrelated parties;
    (B) No interest payments or other expenses are paid by the Plan in 
connection with the Loan and its repayment;
    (C) The Loan will be repaid only from proceeds paid to the Plan by 
Confederation, its successors, or by any other third-party;
    (D) Repayment of the Loan will be waived to the extent that the 
Loan exceeds the proceeds from the GIC;
    (E) If total proceeds received by the Plan with respect to the GIC 
exceed the amount of the Loan, the excess will be credited to the 
respective accounts of the participants in proportion to the relative 
investment of each account in the GIC on June 25, 1996; and
    (F) A qualified, independent fiduciary represented the Plan at the 
execution of the Loan and will continue to represent the interests of 
the Plan throughout the duration and repayment of the Loan.

EFFECTIVE DATE: If the proposed exemption is granted, the exemption 
will be effective as of June 25, 1996.

Summary of Facts and Representations

    1. The Employer, a Delaware corporation with its principal office 
located in Charlotte, North Carolina, is a wholly-owned subsidiary of 
Rexam plc, a publicly traded holding company based in London, England. 
The Employer is primarily in the business of manufacturing and 
marketing specialty packaging and coated products. The specialty 
packaging includes (A) healthcare packaging such as pharmaceutical 
blister foil packaging and sterilizable packaging for medical 
instruments and surgical gloves, (B) cosmetic packaging that includes 
perfume atomizers and lipstick tubes and cases, and (C) plastic bottles 
and containers and child-resistant screw tops. The coated products by 
the Employer include graphic printed cartons and containers and 
metallized films and papers that are used for labels and food and 
cigarette package liners.
    2. The Plan is a defined contribution plan that maintains 
individual accounts for its participants and is intended to satisfy the 
qualification requirements of sections 401(a) and 401(k) of the Code. 
The total assets of the Plan had a fair market value of $74,767,875.86, 
as of March 31, 1996. There are currently approximately 5,800 
participants in the Plan.
    The applicant represents that the Plan is administered by an 
investment committee (the Committee) which is appointed by the 
Employer. The Committee consists of the Employer's Chief Executive 
Officer, Chief Financial Officer, Corporate Treasurer, and Vice 
President--Human Resources. The applicant represents that the Committee 
selects for the Plan the different types of investment funds or 
vehicles that are maintained by the Plan trustee and offered to 
participants for self-directing investments of assets in their 
respective individual accounts in the Plan. The Committee also reviews 
the performance of the Plan trustee which has discretion for selecting 
the various specific securities of the different investment funds or 
vehicles offered to the Plan. The Charlotte, North Carolina office of 
Towers Perrin is represented by the applicant to have been the previous 
recordkeeper for the Plan.
    After reviewing various investment funds available for tax-
qualified plans, the applicant represents that it amended the Plan, 
effective July 1, 1996, in order to enhance the investment options 
available to Plan participants. The new investment options or funds 
consist of six mutual funds managed by the Vanguard Group of Investment 
Companies. After the execution of the Loan on June 25, 1996, a transfer 
of assets of the Plan, other than the GIC issued by Confederation, was 
made from Wachovia Bank of North Carolina, N.A., located in Winston-
Salem, North Carolina (Wachovia) to the new trustee of the Plan, 
Vanguard Fiduciary Trust Company, located in Valley Forge, Pennsylvania 
(Vanguard), an affiliate of The Vanguard Group of Investment Companies. 
At the time of the transfer, Vanguard also assumed from Towers Perrin 
the function of recordkeeper for the new assets of the Plan.
    Wachovia continues as trustee for the Plan with respect to the GIC 
issued by Confederation until the final settlement of the GIC and the 
repayment of the Loan and will represent and enforce the interests of 
the Plan and its participants.
    3. The GIC was acquired by the Plan effective September 27, 1990, 
from Confederation pursuant to the Plan tendering $1 million to 
Confederation on October 25, 1990.<SUP>6 Under the terms of the GIC the 
maturity date is September 28, 1995, and the interest yield is 
guaranteed at 9.25 percent compounded annually with both interest and 
principal to be paid on September 29, 1995. The applicant represents 
that no additional deposits or withdrawals of the principal have been 
made.
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    \6\ The Department notes that decisions to acquire and hold the 
GIC are governed by the fiduciary responsibility provisions of Part 
4 Title I of the Act. In this regard the Department is not proposing 
relief for any violations of Part 4 which may have arisen as a 
result of the acquisition and holding of the GIC.
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    On August 12, 1994, the Ingham County Circuit Court in Lansing, 
Michigan placed Confederation in conservatorship and rehabilitation, 
causing Confederation to suspend all payments on its contracts, 
including the GIC. The Employer represents that it does not know 
whether, when, or under what circumstances Confederation will be able 
to pay the principal and interest that is due under the GIC.
    4. In order to eliminate the expenses and risks associated with the 
continued investment of participant's respective accounts in the GIC, 
and to permit participant's accounts so invested to direct equivalent 
amounts invested in the GIC into the investment options offered by 
Vanguard, the Employer made the Loan on June 25, 1996, as a one-time, 
unsecured, and interest free loan. No expenses or commissions were 
incurred, or are to be incurred, by the Plan from the transactions.
    The Loan was computed to equal the $1 million principal amount of 
the GIC and the 9.25 contract rate compounded annually through the 
maturity date of September 28, 1995, plus an additional yield of 5.5 
percent compounded for the period after September 28, 1995, through 
June 25, 1996.<SUP>7
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     7 The 5.5 percent rate of return was selected because of the 
short period of time involved and because the rate was comparable to 
the short-term investment fund yield offered by the Plan to the 
participants through Wachovia.
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    The terms of the Loan also provide that repayment to the Employer 
is to be made by the Plan solely from the proceeds received from the 
GIC.
    As provided by the Loan, if the proceeds received by Wachovia, as 
trustee for the Plan, from the GIC are less than the amount of the 
Loan, Wachovia will ensure the remaining outstanding balance owed by 
the Plan on the Loan will be waived by the Employer. In addition, 
Wachovia will enforce the terms of the Loan which provide, inter alia, 
that if the proceeds from the GIC exceed the amount of the Loan, the 
excess will be shared by the respective accounts of the participants

[[Page 44091]]

in proportion to the amounts the respective accounts were invested in 
the GIC on June 25, 1996. The applicant further represents that the 
transactions are administratively feasible because of the documentation 
of the Loan and its repayment terms can be monitored. Also, the 
applicant represents that the transactions are in the best interests of 
the Plan and its participants and beneficiaries because they enable the 
Plan to avoid having a portion of the participants accounts invested in 
an illiquid asset that has significant investment risk. Further, the 
transactions are represented by the applicant to serve the interests of 
the participants and beneficiaries by permitting the participants to 
direct the entire value of their respective accounts into the 
investment options offered by Vanguard.
    5. In summary, the applicant represents that the transactions will 
satisfy the criteria for an exemption under section 408(a) of the Act 
because (a) the transactions will preserve the ability of the Plan to 
timely fund and preserve benefits for the participants and their 
beneficiaries; (b) the Plan will not incur any expenses or commissions 
with respect to the transactions; (c) repayment of the Loan will be 
made only from the proceeds realized from the GIC; (d) if the proceeds 
realized from the GIC as paid by Confederation, its successors, or any 
other third party are not sufficient to repay the Loan the Employer 
will waive the unpaid balance of the Loan; and (e) if the proceeds from 
the GIC exceed the Loan, the excess will be paid to the accounts of the 
participants in proportion to their respective accounts investment in 
the GIC.

FOR FURTHER INFORMATION CONTACT: Mr. C. E. Beaver 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 that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 22nd day of August, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 96-21839 Filed 8-26-96; 8:45 am]
BILLING CODE 4510-29-P