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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Chase Manhattan Bank [Notices] [09/06/1996]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Chase Manhattan Bank [09/06/1996]

[PDF Version]

Volume 61, Number 174, Page 47195-47205

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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10200, et al.]

 
Proposed Exemptions; Chase Manhattan Bank

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

[[Page 47196]]

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 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.

The Chase Manhattan Bank (National Association) Located in New York, 
New York

Exemption Application No. D-10200

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

    If the exemption is granted, the restrictions of sections 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 following transactions, provided that the 
conditions set forth in Section II below are met:
    (a) Any acquisition or sale of ``emerging market'' securities (the 
Securities), and any repurchase agreement involving such Securities, 
which occurs between The Chase Manhattan Bank, N.A. (Chase) or its 
Affiliates and the IBM Retirement Plan (the IBM Plan), to which Chase 
or an Affiliate is a party in interest under the Act at the time of the 
transaction; and
    (b) Certain repurchase agreements involving the Securities which 
occurred between the IBM Plan and Chemical Bank, N.A. (Chemical) that 
were outstanding as of March 31, 1996, the date of the merger between 
Chemical and Chase (the Merger). (All references herein to Chase which 
refer to the period of time after March 31, 1996 shall include 
Chemical.)

Section II--Conditions

    (a) The assets of the IBM Plan involved in the transactions 
described in Section I(a) and I(b) above are managed by Wasserstein 
Perella Emerging Markets Asset Management L.P. (W-P), as the 
independent qualified fiduciary for the IBM Plan;
    (b) W-P, as the IBM Plan's independent fiduciary and investment 
manager for the assets invested in the Securities, negotiates the terms 
of such transactions on behalf of the IBM Plan and makes the decision 
to have the IBM Plan enter into any such transactions with Chase;
    (c) W-P, as the IBM Plan's independent fiduciary and investment 
manager for the assets invested in the Securities, monitors the 
investments made by the IBM Plan in such Securities and takes whatever 
actions are necessary to protect the interests of the IBM Plan;
    (d) Neither Chase nor an Affiliate has discretionary authority or 
control with respect to the investment of the IBM Plan's assets 
involved in the transactions or renders investment advice (within the 
meaning of 29 CFR 2510.3-21(c)) with respect to those assets;
    (e) In any transaction where the IBM Plan acquires a Security from 
Chase, the IBM Plan pays a price which is no greater than the fair 
market value of such Security, as determined by W-P in accordance with 
either W-P's internal valuation process or independent third party 
sources (such as independent broker-dealers and market-makers dealing 
in such Securities);
    (f) In any transaction where the IBM Plan sells a Security to 
Chase, the IBM Plan receives a price which is no less than the fair 
market value of such Security, as determined by W-P in accordance with 
either W-P's internal valuation process or independent third party 
sources (such as independent broker-dealers and market-makers dealing 
in such Securities);
    (g) The repurchase agreements between the IBM Plan and Chase are 
entered into pursuant to a written agreement between the parties which 
describes all of the material terms and conditions for such 
transactions, including the rights and obligations of each party, and 
is consistent with the specific guidelines established by the IBM 
Plan's named fiduciary for transactions involving the Securities;
    (h) All repurchase agreements between the IBM Plan and Chase, 
including those agreements which were in place at the time of the 
Merger with Chemical, have terms and conditions which are at least as 
favorable to the IBM Plan as terms and conditions which would exist in 
a similar transaction with an unrelated party;
    (i) All other terms of each transaction described above in Section 
I(a) are not less favorable to the IBM Plan than the terms available in 
an arm's-length transaction between unrelated parties;

[[Page 47197]]

    (j) W-P does not engage in, or commit to sell, any uncovered put or 
call options (including, but not exclusive to, ``straddles'' and 
``strangles'') in transactions with Chase on behalf of the IBM Plan;
    (k) Any transactions involving the use of leverage by W-P, on 
behalf of the IBM Plan, do not exceed the specific guidelines 
established by the IBM Plan's named fiduciary under its investment 
management agreement with W-P;
    (l) No brokerage commission, sales commission, or similar 
compensation other than the particular dealer mark-up for the Security, 
is paid to Chase by the IBM Plan with regard to such transactions; and
    (m) The amount of the IBM Plan's assets involved in the 
transactions described in Section I(a) and I(b) represents no more than 
two (2) percent of the total assets of the IBM Plan.

Section III--Definitions

    (a) The term ``Chase'' refers to The Chase Manhattan Bank (National 
Association) and its Affiliates, as defined below, including Chemical 
Bank, N.A., effective as of March 31, 1996, pursuant to the terms of 
the Merger which occurred on such date.
    (b) The term ``Chemical'' refers to Chemical Bank, N.A., as it 
existed as an independent entity prior to March 31, 1996;
    (c) The term ``Affiliate'' refers to affiliates of Chase, including 
entities controlling, controlled by, or under common control with Chase 
as well as successors to such entities.
    (d) The term ``control'' for purposes of the above definition of 
``Affiliate'' means the power to exercise a controlling influence over 
the management or policies of an entity.
    (e) The term ``emerging market'' or ``emerging markets'' refers to 
capital markets in developing or less developed countries that are, 
with the exception of Mexico, not member countries of the Organization 
for Economic Cooperation and Development.
    (f) The term ``Security'' refers to certain ``emerging market'' 
securities and instruments issued in, or on behalf of, an ``emerging 
market'' (including both corporate and sovereign issuers of debt 
securities as well as corporate issuers of equity securities). For 
purposes of the proposed exemption, such ``Securities'' would include 
publicly traded or privately placed debt, equity, or convertible 
securities, certain put and call options (as described herein), 
collateralized bonds, Brady Bonds and Eurobonds.
    (g) The term ``IBM Plan'' refers to the IBM Retirement Plan, a 
defined benefit pension plan covering employees of the International 
Business Machines Corporation and its affiliates (IBM), which is an 
employee benefit plan covered by the Act.
    (h) The term ``W-P'' refers to Wasserstein Perella Emerging Markets 
Asset Management L.P. and its affiliates, including the Emerging 
Capital Markets Division of Wasserstein Perella Securities, Inc.

EFFECTIVE DATE: The exemption, if granted, will be effective as of the 
date that this notice of proposed exemption is published in the Federal 
Register for all transactions described in Section I(a), and as of 
March 31, 1996, for the transactions described in Section I(b).

Summary of Facts and Representations

    1. The subject exemption request is made on behalf of Chase and its 
Affiliates (referred to hereafter as ``the Applicant'') for certain 
transactions with the IBM Plan involving securities and instruments 
issued in, or on behalf of, various emerging capital markets in 
developing or less developed countries throughout the world.
    2. Chase is a national banking association and acts as a non-
discretionary trustee of the IBM Retirement Plan Trust (the IBM Trust), 
a trust that holds the assets of the IBM Plan.<SUP>1 Chase's 
subsidiary, Chase Investment Bank Limited (CIBL) is an underwriter of, 
and a dealer and market-maker in, various securities and instruments, 
including securities of emerging market issuers (i.e. Securities). CIBL 
is hereafter not referred to separately but is one of Chase's 
Affiliates included within the definition of the term ``Affiliate'' in 
Section III(c) above.
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    \1\ With respect to all Securities acquired by the IBM Plan 
pursuant to this proposed exemption, the applicant represents that 
the requirements of section 404(b) of the Act and the regulations 
thereunder will be met (see 29 CFR 2550.404b-1). In this regard, 
section 404(b) of the Act states that no fiduciary may maintain the 
indicia of ownership of any assets of a plan outside the 
jurisdiction of the district courts of the United States, except as 
authorized by regulation by the Secretary of Labor. The Department 
is providing no opinion herein as to whether such requirements will 
be met.
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    3. The Applicant states that ``emerging markets'' are defined to 
include, for purposes of the proposed exemption, capital markets in 
developing or less developed countries that are, with the exception of 
Mexico, not member countries of the Organization for Economic 
Cooperation and Development (OECD). The Securities are securities and 
instruments issued in, or on behalf of, an ``emerging market'' 
(including both corporate and sovereign issuers of debt securities as 
well as corporate issuers of equity securities). These ``Securities'' 
would include publicly traded or privately placed debt, equity, or 
convertible securities, certain put and call options, collateralized 
bonds, Brady Bonds and Eurobonds (as described in greater detail 
below).
    4. The Applicant states that as a major bank with branches in 58 
countries, Chase has a physical presence in most of the principal 
emerging market countries and has access to local market information 
through such means as review of local press and access to local 
business and government officials. The Applicant represents that it 
engages in extensive corporate and sovereign research relevant to 
emerging markets. As a result the Applicant states that it is a major 
market-maker in the Securities and is a source of premier research and 
market reports to its customers that are interested in such markets.
    The Applicant represents that it is also a major underwriter of new 
issues in emerging market securities and a prominent secondary market-
maker for all issuers of emerging market securities and instruments. 
The Applicant states that because trading in these Securities is not 
done primarily on an exchange and there are few definitive industry 
reports, it is difficult to quantify the exact amount of the 
Applicant's share of various markets. However, the Applicant estimates 
that prior to the Merger between Chase and Chemical, it accounted for 
as much as 30 percent of the trading volume in the Eurobond market and 
as much as 15 to 20 percent of the trading volume in the sovereign debt 
market. The Applicant notes that according to figures made public by 
major sovereign bond dealers for 1994, Chase's trading volume of $268.4 
billion ranked it second in that market. After the Merger, Chase became 
even more of a presence in emerging markets and an even larger dealer/
underwriter of the Securities because Chemical had also been a major 
dealer/underwriter for such Securities.
    5. Wasserstein Perella Emerging Markets Asset Management L.P. (i.e. 
W-P) is an investment advisor registered with the Securities and 
Exchange Commission (SEC) under the Investment Advisors Act of 1940 and 
provides discretionary asset management services for various 
institutional clients, including employee benefit plans. W-P is managed 
by the Emerging Capital Markets Division of Wasserstein Perella 
Securities, Inc. (WPS). WPS is a broker-dealer registered with the SEC. 
The Grantchester Securities Division of WPS

[[Page 47198]]

is one of the leading dealers in the high yield debt securities market. 
In addition, WPS, through its equities division, has been increasing 
its underwriting and market-making in emerging market equity securities 
as well as adding to its equity research and trading presence in this 
market. For example, W-P states that WPS's equities division has been a 
manager on a number of significant syndicate transactions involving 
emerging market securities. The WPS Emerging Capital Markets Division 
also has a presence in the sales and trading of pre-Brady loans, Brady 
Bonds, other debt instruments of less developed countries, local 
currency products and equities issued by businesses in such markets. W-
P states that the principal officials of W-P have extensive experience 
in structuring transactions involving emerging market securities and in 
managing investments in, and trading, such securities.
    6. W-P currently serves as an investment manager for certain assets 
of the IBM Plan. Pursuant to its reserved powers as named fiduciary 
under a trust indenture between IBM Plan and Chase, as trustee, the 
International Business Machines Corporation (IBM) has appointed W-P as 
an investment manager with respect to a portion of the IBM Trust (the 
W-P Account). The terms of the investment management agreement (the 
Agreement) governing the W-P Account provide W-P with full discretion 
to manage the IBM Plan's assets held in the Account, including the 
power to give investment directions to Chase as the trustee of such 
assets. The Agreement also requires W-P to manage the W-P Account in 
accordance with investment guidelines established by IBM, as the named 
fiduciary for the IBM Plan. These investment guidelines (the 
Guidelines) call for W-P to invest all of the assets in the W-P Account 
in emerging market securities of the type described herein (i.e. the 
Securities).<SUP>2 The Guidelines also prescribe that no more than 10 
percent of the W-P Account's assets may be invested in such Securities 
which are equity securities. Thus, W-P must invest at least 90 percent 
of the IBM Plan's assets managed in the W-P Account in Securities which 
are either corporate or sovereign debt securities.
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     <SUP>2  The Department is expressing no opinion in this 
proposed exemption regarding whether the acquisition and holding of 
any of the Securities by the IBM Plan would violate 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.
    Nor is the Department providing any views herein 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. 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.
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    The Guidelines state that the Securities that are debt securities 
may be either dollar-denominated or non dollar denominated, and equity 
securities may be either listed or unlisted. The Guidelines also 
contain geographic restrictions and restrictions requiring 
diversification of issuers with respect to such Securities held in the 
W-P Account's portfolio. The Guidelines have specific provisions 
regarding the use by the portfolio of, and exposure of the portfolio 
to, certain instruments known as ``derivatives'' (as discussed in 
greater detail below).<SUP>3
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    \3\ The term ``derivatives'', as used in the Guidelines, 
includes: (i) Futures contracts; (ii) options on futures contracts; 
(iii) over-the-counter options on eligible Securities; (iv) interest 
rate caps, floors, and swaps; and (v) currency forwards, futures and 
options. However, as discussed herein, W-P's use of derivatives for 
assets of the IBM Plan is generally limited to the purchase of put 
and call options, and the sale of covered put and call options, and 
does not involve futures contracts, options on futures contracts, or 
swap transactions. Accordingly, the Department is providing no 
relief under this proposed exemption for transactions involving 
``derivatives'' other than the purchase of put and call options and 
the sale of covered put and call options described herein.
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    In addition, the Guidelines expressly permit the use of leverage. 
Thus, when managing the IBM Plan's assets in the W-P Account, W-P may 
use portfolio Securities as collateral for a ``loan'' (i.e. repurchase 
agreement) the proceeds of which will be used to acquire more 
Securities. In this regard, the Guidelines require that borrowings 
against the portfolio may not exceed 150 percent of the portfolio's net 
asset value, but are usually only 75-80 percent of such value. Such 
transactions are entered into by the IBM Plan with large banks, such as 
Chase and Chemical. These ``loans'' are structured as repurchase 
agreements (REPOs). As discussed further below, W-P entered into 
certain REPOs relating to the Securities with Chemical, on behalf of 
the IBM Plan, which were outstanding as of March 31, 1996, the date of 
the Merger.
    Finally, the Guidelines require that the investment performance of 
the W-P Account be measured by investment objectives which call for 
returns of the Account to exceed certain specified benchmarks, such as 
the Lehman Brothers Aggregate Bond Index and the Salomon Brothers Brady 
Bond Index, with lower than normal volatility of returns.<SUP>4
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    \4\ As a general rule, W-P states that its investment objectives 
are to target a 15 percent to 20 percent annualized rate of return 
for investors and to strive to produce steady returns with a focus 
on reduction of volatility.
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    7. The Applicant states that, as of December 1993, the IBM Plan had 
approximately 289,829 participants and beneficiaries. The total assets 
of the IBM Plan at that time were approximately $28.2 billion. The 
assets of the IBM Plan currently managed in the W-P Account are 
approximately $400 million, an amount which represents less than 1.5 
percent of the IBM Plan's total assets. Thus, the amount of the IBM 
Plan's assets involved in the transactions described herein with Chase 
will not represent more than two (2) percent of the total assets of the 
IBM Plan.
    The Applicant represents that the IBM Plan's assets under 
management by W-P exceed 20 percent of W-P's total assets under 
management. Therefore, W-P is unable to rely on Prohibited Transaction 
Exemption (PTE) 84-14 (49 FR 9494, March 13, 1984), a class exemption 
for certain ``plan asset'' transactions which are determined by an 
independent qualified professional asset manager (``QPAM'').<SUP>5 W-P 
represents that it is a QPAM, as defined under Section V(a) of PTE 84-
14, and would otherwise be able to use that

[[Page 47199]]

class exemption for the transactions described herein involving Chase.
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     <SUP>5  The Department is expressing no opinion in this 
proposed exemption as to whether the subject transactions between 
these parties would meet all of the conditions required for an 
exemption under either PTE 84-14 or any other class exemption, such 
as PTE 75-1 (40 FR 50845, October 31, 1975). The Department notes 
that the exemptive relief provided in PTE 84-14 for transactions 
engaged in on behalf of a plan by a QPAM, acting as the plan's 
fiduciary, is not available if the plan's assets (combined with any 
other assets of plans maintained by the same employer or employee 
organization which are managed by the QPAM) represent more than 20 
percent of the total client assets managed by the QPAM at the time 
of the transaction (see Part I(e) of PTE 84-14).
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    The Applicant maintains that W-P is entirely independent of Chase 
and its Affiliates. Specifically, the Applicant states that there is no 
ownership or management relationship between W-P and Chase or its 
Affiliates. The Applicant and W-P engage in arm's-length trading of 
emerging market securities involving accounts other than the W-P 
Account for the IBM Plan. However, the Applicant represents that they 
have no contractual or other arrangements that would cause them to be 
viewed other than as acting entirely independent of one another. In 
particular, the Applicant states that Chase, as a non-discretionary 
trustee of the IBM Trust, lacks any discretionary authority over 
investment or management of the IBM Plan's assets, including the assets 
in the W-P Account. Neither Chase nor an Affiliate has, or has 
exercised, any authority to appoint or terminate W-P as an investment 
manager for the IBM Plan.
    8. The Applicant seeks an exemption to permit W-P, as an investment 
manager and independent fiduciary for the IBM Plan, to engage in 
transactions involving emerging market securities and instruments (i.e. 
the Securities) with Chase, a party in interest with respect to the IBM 
Plan as a result of being a non-discretionary trustee of the Plan's 
assets. Such transactions could include purchases, sales and exchanges 
of the Securities between Chase and the IBM Plan, as well as REPOs that 
may be entered into between the parties in connection with the IBM 
Plan's acquisition and holding of the Securities. In addition, the 
Applicant seeks a retroactive exemption for certain REPOs involving the 
Securities which occurred between the IBM Plan and Chemical that were 
not prohibited transactions at the time such transactions were entered 
into, but which became prohibited transactions as of March 31, 1996, 
the date of the Merger with Chase. As noted above, Chase was and 
continues to be a party in interest (i.e. a non-discretionary trustee) 
with respect to the IBM Plan and Chemical, as a result of the Merger, 
became a party in interest to the IBM Plan on March 31, 1996.

Retroactive Relief for Certain REPOs

    9. With respect to the retroactive relief necessary as a result of 
the Merger, the Applicant states that the IBM Plan had engaged in 
several REPOs with Chemical whereby the Plan's acquisition of new 
Securities was being financed in part by a REPO with Chemical. The 
Applicant represents that a number of the REPOs were terminated prior 
to the Merger to avoid additional prohibited transactions with respect 
to the IBM Plan. However, as of March 31, 1996, there were five (5) 
open positions with Chemical involving the IBM Plan's acquisition of 
Securities.
    These open positions involved the following Securities: (i) A $3.5 
million issue of Bulgarian IABs (Interest Arrears Bonds), paying a 
floating interest rate based on LIBOR <SUP>6 with maturity scheduled 
for July 28, 2011, issued under the terms of Bulgaria's Brady Bond Plan 
(as discussed further below) completed in July 1994; (ii) a $4 million 
issue of Certificates of Deposit (CDs) issued by Argentina Banco de la 
Nacion, which matured on May 15, 1996; (iii) a $2.8 million issue of 
Brazil Bamerindus Eurobonds issued by a private Brazilian bank, which 
matured on July 15, 1996; (iv) a $605,000 issue of Brazil Bamerindus 
Euro Medium Term Notes, which matured on June 5, 1996; and (v) a $1.5 
million issue of Morocco Tranche A Loans, which are bank loans made to 
the Kingdom of Morocco as part of a debt restructuring and are due to 
mature in January 2009. In this regard, the Securities described above 
in (ii)-(iv) have matured and were paid in full.
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    \6\ ``LIBOR'' is a widely used interest rate index and refers to 
the London Interbank Offered Rate. LIBOR is derived from current 
market quotations offered by major European banks for short-term 
(i.e. one-month, six-month, etc.) Eurodollar deposits.
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    10. With respect to the terms of the REPOs with Chemical, the 
Applicant states that the REPO value <SUP>7 vis a vis the Face Amount 
of the Securities was determined based on the market value of the 
underlying Securities and the advance rate extended by the REPO 
counterparty (i.e. Chemical). For example, at the time that the terms 
of the REPO on the Bulgaria IAB Bonds were set (i.e. the Latest REPO 
Date),<SUP>8 the market value of the Bonds (including any accrued 
interest) was equal to approximately 48.3 percent of the Face Amount 
(i.e. $1,690,238 of the $3,500,000 Face Amount), and the advance rate 
given by Chemical was 80 percent (i.e. Chemical was willing to lend the 
IBM Trust 80 percent of the market value of the Bonds that were given 
to Chemical as collateral). Therefore, the REPO value of the Securities 
on this transaction was calculated as follows:

    \7\ The term ``REPO value'' refers to that amount of money, 
expressed as a percentage of the market value of the Securities 
involved, which a bank, as a REPO counterparty, would be willing to 
``loan'' or ``advance'' to the owner of the Securities (i.e. a plan 
investor) under a particular REPO.
    \8\ The initial REPO date was the date that the repurchase 
contract was initially settled--i.e. the date on which Chemical 
received the Securities and, in exchange for the Securities, 
extended cash to the IBM Trust. The Applicant explains that REPOs 
are often set for a specified term, such as one month, three months, 
etc. At the end of that term, the REPO counterparty (Chemical) will 
often give the other party (IBM Plan) the option of renewing the 
REPO for another term (i.e. ``rolling it over''). Thus, the ``latest 
rollover date'' refers to the last time a REPO transaction was 
rolled over.
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Advance Rate (80%)  x  Market Value ($1,690,238.17) = $1,352,190.97.

    Thus, the IBM Trust was able to receive $1,352,190.97 in cash under 
this REPO in exchange for the Bonds for a stated period. The IBM Trust 
was committed to ``repurchase'' the Bonds at the end of the REPO's term 
(i.e. by paying Chemical back the money advanced plus interest at a 
certain agreed upon rate), unless the REPO was ``rolled over''. W-P 
states that the other REPOs with Chemical involving the Securities 
mentioned above operated under similar terms.
    W-P represents that it attempts to obtain the cheapest REPO 
financing available consistent with the creditworthiness of the 
counterparty, since the cheaper the cost of borrowing through REPOs, 
the higher the returns will be to the IBM Trust. W-P states that it 
contacts potential counterparties to bid on REPOs and negotiates the 
best available terms with each counterparty. Because the credit-
standing of the IBM Trust is excellent, W-P is able to negotiate very 
favorable terms for these REPOs, including low interest rates. W-P 
represents that all REPO interest rates negotiated with Chemical, as 
with other counterparties, were rates that were at least as favorable 
to the IBM Trust as rates available from other counterparties of 
similar credit standing.

The Mechanics and Concept Behind REPOs

    11. With respect to W-P's philosophy and purpose for using 
leverage, W-P explains that assets purchased for the IBM Trust are 
often pledged to a creditworthy counterparty (typically a single A 
rated institution or better), who in turn provides financing against 
the asset they hold as collateral. W-P uses the standard Public 
Securities Association (PSA) REPO agreement, which is used not only for 
emerging market securities but for other securities. W-P generally 
utilizes leverage for the IBM Trust in order to increase the 
portfolio's exposure to low duration/low volatility assets (with 
maturities typically less than one (1) year and high credit quality--
most often from sovereign issuers). W-P states that its long-term 
performance demonstrates that exposure to such low duration assets 
provides a cushion of stable returns. Thus, W-P states that while 
leverage is traditionally used as a means

[[Page 47200]]

of gaining access to a greater overall exposure (i.e. risk) for a 
portfolio via borrowed funds, W-P utilizes the leverage vehicle to 
mitigate, rather than magnify, the portfolio's volatility.<SUP>9
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     9  The Department is providing no opinion or views herein on 
the use of such leveraging as a means to mitigate portfolio risk or 
volatility.
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    With respect to the selection of assets for a REPO, W-P represents 
that it seeks leverage on assets on which it receives the most 
attractive terms--the lowest interest rates, highest advance rates and 
most flexible terms. W-P states that generally it is able to receive 
the best REPO terms on Brady Bonds (see discussion below), because they 
are the most liquid assets in the market for emerging market 
securities. However, W-P states that because it has a general strategy 
for building a portfolio with a foundation in low duration/low 
volatility assets, capital preservation is the main goal. In this 
regard, W-P targets a specific degree of leverage based on the cash 
needs of the portfolio at particular times.
    With respect to choosing the counterparties, W-P states that REPO 
transactions are entered into only with high-quality institutions that 
actively trade in emerging market instruments. Selection of these REPO 
counterparties depends on a variety of factors, including the rates 
charged on financing, the percentage of leverage advanced, the 
flexibility of terms, and operational ease. After credit is determined 
to be suitable, pricing (i.e. the rate charged on the leverage) is 
generally the most important variable in selecting a REPO counterparty.
    With respect to the mechanics of the REPO agreement, W-P states 
that the agreement: (i) Basically outlines the procedures for 
transferring Securities to and from the REPO counterparty; (ii) defines 
terms contained in the REPO confirmations, such as the interest rate 
charged; (iii) sets the maturity date for the REPO; (iv) covers the 
terms and conditions for margin calls and substitution of assets; and 
(v) covers each party's remedies under any events of default. W-P 
states that the only real risk to the IBM Trust that stems specifically 
from the REPO agreement is that the REPO counterparty, who holds the 
Securities as collateral, could renege on its obligations under the 
agreement (i.e. the counterparty could fail to return the collateral to 
the IBM Trust when the REPO matures). W-P notes that it is for this 
reason that it is careful in selecting the REPO counterparty and 
chooses only reliable, creditworthy counterparties for these 
transactions.

Types of Securities Involved in Transactions Between the IBM Plan and 
Chase

    12. The Applicant has provided the following general descriptions 
of each type of Security or instrument involved in the emerging market 
transactions that would be covered by the proposed exemption.
    (i) Brady Bonds. The most liquid asset class in fixed income 
emerging market securities, these Bonds were issued in exchange for 
outstanding sovereign bank loans in a number of developing countries as 
part of the debt reduction/restructuring plans named after former 
Treasury Secretary Nicholas Brady. Brady Bond plans have been 
implemented since 1989 in over a dozen countries in Latin America, 
Eastern Europe, Asia and Africa. The current outstanding market for 
Brady Bonds equals approximately $140 billion, and annual turnover 
exceeds $2 trillion, according to the Emerging Markets Trader's 
Association. Brady Bonds have maturities ranging from 6 years to 30 
years, and many (including all par and discount bonds) carry principal 
and interest collateral guarantees in the form of U.S. Treasury 
securities. W-P states that a large secondary market exists for these 
Bonds, and financing can be obtained on virtually all Brady Bond 
assets.
    (ii) Eurobonds/144A. Bonds denominated in U.S. dollars or other 
currencies issued by sovereign or corporate entities in many countries. 
These bonds usually mature within 2 to 5 years and are issued in sizes 
ranging from $50 million to $1 billion. The Eurobond market is an 
important source of capital for multinational corporations and foreign 
governments, particularly in emerging market countries. These bonds are 
Euroclearable--i.e. transferable to U.S. investors via the Depository 
Trust Company. Eurobonds are not registered with the SEC, but are 
available for purchase by U.S. persons that meet certain SEC 
requirements under SEC Rule 144A.<SUP>10 W-P states that leverage is 
available on larger issues and there is a growing REPO market.
---------------------------------------------------------------------------

    \10\ SEC Rule 144A requires that investors have available to 
them offering memoranda. Transactions covered under a Rule 144A 
offering are limited to ``qualified institutional buyers'' (i.e. 
large institutional investors, such as pension plans) that are 
considered to be sophisticated investors capable of insisting that 
they be furnished with adequate disclosure.
    In this regard, the Department notes that a plan fiduciary in 
meeting its obligations to act prudently, as required under section 
404(a) of the Act, should seek to obtain any relevant information 
that it believes necessary in order to determine whether a 
particular investment in emerging market securities, such as 
Eurobonds, would be appropriate for and in the best interests of the 
plan.
---------------------------------------------------------------------------

    (iii) Commercial Bank Loans. These assets are direct or syndicated 
bank loans, usually to governments or quasi- governmental entities, 
that are transferred between buyer and seller via assignment or 
participation agreements. Some loans (e.g. Jamaica, Morocco) are 
current, though most are in default on interest and principal payments 
(e.g. Russian Vnesh loans, Yugoslavia, Vietnam). Defaulted loans are 
purchased in the secondary market at a deep discount to the face value 
of the loan and are purchased with the expectation of a ``Brady plan'' 
type restructuring that will convert the loans into new, current 
securities. The loans are accounted for in the same way as other 
Securities in the portfolio and they are marked-to-market daily. 
Liquidity varies from loan to loan, but prices are quoted daily. W-P 
states that leverage is available on the more liquid loans (Morocco), 
so that they can be used in REPO transactions as described above.
    (iv) Commercial Paper/Certificates of Deposit. Short-term (30-160 
day) debt obligations of banks or corporations in emerging market 
countries with interest and principal typically paid in U.S. dollars. 
The interest rates on these debt obligations are usually pegged to 
LIBOR. W-P states that leverage is available at times from 
counterparties that sell the assets.
    (v) Short-term Sovereign Debt.
    (A) Local Currency: Local treasury debt issued on an ongoing basis 
by foreign governments with interest rates often based on LIBOR. 
Maturities generally range from 30 days to 2 years.
    (B) Dollar-denominated or dollar-hedged: Some countries (e.g. 
Argentina) have outstanding debt denominated in U.S. dollars (issued in 
exchange for frozen US dollar bank deposits), with remaining maturities 
ranging from 2 months to 12 years. Other countries (e.g. Ecuador, 
Brazil) offer dollar-hedged structures that guarantee specific foreign 
exchange exit levels. These latter instruments are new issues, and have 
maturities ranging from 3 months to 1 year.
    (vi) Equities. Exchange-traded stocks of companies in emerging 
market countries, denominated (for the most part) in that country's 
local currency.
    (vii) Convertibles. Debt instruments issued by companies (usually 
with maturities of 3 to 10 years) that contain provisions whereby the 
bondholder can exchange their bonds for a set number of shares of the 
issuer's stock.

[[Page 47201]]

Processes Used in Determining Which Securities To Acquire for the IBM 
Trust

    13. W-P represents that in addition to following the Guidelines set 
forth for the IBM Trust, its overall goal as an investment manager for 
emerging market securities is to obtain superior absolute and risk-
adjusted returns for the IBM Plan relative to certain key fixed income 
indices. As noted earlier, in addition to investing in directional 
assets, such as those included in the Salomon Brothers Brady Bond 
Index,<SUP>11 W-P builds a low duration portfolio (i.e. by investing in 
securities with short maturities issued by high-quality borrowers) upon 
which it adds moderate leverage.<SUP>12 This low duration portfolio 
insulates the overall portfolio from a portion of the volatility often 
experienced in emerging market securities. W-P's approach to managing 
risk is to focus primarily on the duration of the Securities in the 
portfolio. W-P states that in times of high volatility, it does not 
exit the market for the Securities but instead lowers the portfolio's 
average maturity profile because lower duration assets will generally 
exhibit lower volatility. Thus, W-P's strategies place particular 
emphasis on the liquidity needs of each portfolio.
---------------------------------------------------------------------------

    \11\ Such Securities are generally Brady Bonds, Pre-Brady loans 
and some equities relating to companies in these emerging markets.
    \12\ The low duration Securities are generally short-term 
sovereign debt, Eurobonds, Bank CDs and Commercial Paper.
---------------------------------------------------------------------------

    14. With respect to the use of derivatives, W-P represents that it 
engages in the trading of certain instruments that would be considered 
derivatives when it determines that it is prudent to do so to achieve 
its goals. These derivatives include: (i) The sale of covered call 
options to enhance the return on portfolio Securities; (ii) the 
purchase of call options to obtain exposure to particular assets 
without the necessity of using large sums of money; and (iii) the 
purchase of put options to mitigate market value deterioration for 
portfolio Securities. W-P also engages in two strategies that provide 
incremental income while exposing the IBM Trust, as the option writer, 
to additional market exposure. These strategies involve: (i) The 
purchase and sale of ``straddles''--the simultaneous purchase or sale 
of a put and call option with identical strike prices on the same 
Security); and (ii) the purchase and sale of ``strangles''--the 
simultaneous purchase or sale of a put and call option with strike 
prices set at a specific amount which is ``out-of-the-money''.<SUP>13
---------------------------------------------------------------------------

    \13\ For example, W-P states that if the market price of the 
underlying Security is 85 percent of a certain designated price, 
then a ``2-point out-of-the-money strangle'' on that asset would 
include a put option with a strike price of 83 percent and a call 
option with a strike price of 87 percent.
---------------------------------------------------------------------------

    However, W-P represents that it rarely enters into trades of 
uncovered options (puts or calls) for any client accounts.<SUP>14 
Therefore, as a condition of the proposed exemption, W-P has committed 
not to sell any uncovered put or call options, including (but not 
exclusive to) ``straddles'' and ``strangles'', in transactions with 
Chase for assets of the IBM Plan.
---------------------------------------------------------------------------

     <SUP>14  To the extent that W-P chooses to enter into any 
uncovered options or other ``derivatives'' with the assets of the 
IBM Plan managed in the W-P Account with counterparties other than 
Chase, the Department is providing no opinion in this proposed 
exemption as to whether such transactions would be consistent with 
the prudence requirements of section 404(a) of the Act and the 
regulations thereunder. For a current statement of the Department's 
views on the use of ``derivatives'' by pension plans, see DOL Letter 
from Olena Berg, Assistant Secretary for Pension and Welfare 
Benefits, to The Honorable Eugene A. Ludwig, Comptroller of the 
Currency, dated March 21, 1996.
---------------------------------------------------------------------------

    W-P represents that the use of derivatives in the W-P Account for 
the IBM Trust is generally limited to the purchase and sale of put and 
call options on Brady Bonds and Commercial Bank Loans. These are over-
the-counter (OTC) options. W-P states that the counterparties involved 
are always large, creditworthy emerging markets' broker-dealers, 
similar to those used for REPO transactions. W-P typically uses such 
options for one of three purposes:
    (i) To hedge long positions, through the sale of covered call 
options, or the purchase of put options;
    (ii) To earn incremental income through the sale of covered calls 
and covered puts when W-P judges that the market will move little, or 
at least less than the premium available from the sale of such options; 
and
    (iii) To obtain a leveraged exposure to an asset through the 
purchase of call options, without downside risk beyond the cost of the 
option.
    15. With respect to the process for buying and selling Securities, 
W-P states that it has real time access through electronic media to 
data which provides pricing for assets traded in the emerging markets. 
W-P also deals routinely with other market-makers that provide bid/
offer quotations on demand. When buying or selling a Security, W-P 
typically obtains prices from three different counterparties and 
chooses the best price. In instances where a less actively traded 
Security is purchased, W-P looks at assets of the same credit quality, 
size and duration to verify its relative value. W-P represents that its 
central mandate as an IBM Plan fiduciary is to secure the ``best'' 
price available on any trade. In this regard, W-P states that it is not 
compelled to deal with any particular party, including Chase, should 
that party not provide competitive pricing for the Securities involved. 
Under the conditions of the proposed exemption, when the IBM Plan 
acquires a Security from Chase, the IBM Plan must not pay a price which 
is greater than the fair market value of such Security, as determined 
by W-P in accordance with either W-P's internal valuation process or 
independent third party sources (such as independent broker-dealers and 
market- makers dealing in such Securities). In addition, in any 
transaction where the IBM Plan sells a Security to Chase, the IBM Plan 
must receive a price which is no less than the fair market value of 
such Security, as determined by W-P in accordance with such valuation 
processes or sources. W-P notes that no brokerage commission, sales 
commission, or similar compensation other than the particular dealer 
mark-up for the Security, will be paid to Chase by the IBM Plan with 
regard to such transactions. W-P will endeavor to achieve the best 
possible prices for the Securities involved in transactions with Chase 
and will use its expertise in emerging markets to ensure that the 
particular mark-ups paid to Chase are reasonable based on W-P's 
valuations of the Securities.
    16. W-P acknowledges its duties, responsibilities and liabilities 
in acting as a fiduciary under the Act for the IBM Trust in connection 
with its investments and represents that it will ensure that the 
conditions of this exemption, if granted, are met.
    W-P represents that it will ensure that the terms of each 
transaction with Chase are at least as favorable to the IBM Plan as the 
terms which would exist in a similar transaction with an unrelated 
party. W-P states that it will determine, prior to each transaction, 
that the acquisition and holding of the particular Securities is in the 
best interests of the IBM Plan, and will ensure that each transaction 
is consistent with the IBM Plan's investment guidelines, objectives, 
and liquidity needs. W-P states further that there will be proper 
diversification of the investments in the IBM Plan portfolio to prevent 
unnecessary exposure to the risks involved in a particular market 
sector. W-P notes that its use of leverage (i.e. REPOs) for the IBM 
Plan assets will be moderate and is usually about half of the maximum 
allowable under the Guidelines. As a condition of the proposed 
exemption, W-P represents that it will not exceed the maximum amount of 
leverage

[[Page 47202]]

allowable under the Guidelines (i.e. 150 percent of the net asset value 
of the Securities involved in the particular REPO). Finally, W-P states 
that while it may utilize certain derivatives for the IBM Plan's 
account under the Guidelines, such use does not normally involve 
selling uncovered put or call options and will not involve any such 
transactions with Chase. W-P states that it does not use futures 
contracts or other derivatives, other than those previously discussed, 
to hedge risks as part of its investment management strategies.
    W-P represents that it will monitor all of the investments made by 
the IBM Plan in the Securities or other instruments and will take 
whatever actions are necessary to protect the interests of the IBM 
Plan.
    17. In summary, the Applicant represents that the transactions 
described herein have met and will continue to meet the statutory 
criteria under section 408(a) of the Act because, among other things: 
(a) The assets of the IBM Plan involved in the transactions are managed 
by W-P, an independent qualified fiduciary for the IBM Plan; (b) W-P, 
as the IBM Plan's independent fiduciary and investment manager for the 
assets invested in the Securities, negotiates the terms of such 
transactions on behalf of the IBM Plan and makes the decision to have 
the IBM Plan enter into any such transactions with Chase; (c)W-P 
monitors the investments made by the IBM Plan in such Securities and 
takes whatever actions are necessary to protect the interests of the 
IBM Plan; (d) neither Chase nor an Affiliate has discretionary 
authority or control with respect to the investment of the IBM Plan's 
assets involved in the transactions or renders investment advice 
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those 
assets; (e) all terms and conditions of the transactions between the 
parties on behalf of the IBM Plan, including the prices paid or 
received by the IBM Plan for any Securities and the interest rates paid 
by the IBM Plan for any REPOs, are at least as favorable to the IBM 
Plan as the terms and conditions that would exist in an arm's-length 
transaction between unrelated parties; (f) the REPOs between the IBM 
Plan and Chase are entered into pursuant to a written agreement between 
the parties which describes all of the material terms and conditions 
for such transactions, including the rights and obligations of each 
party, and is consistent with the specific guidelines established by 
the IBM Plan's named fiduciary for transactions involving the 
Securities; (g) W-P does not engage in, or commit to sell, any 
uncovered put or call options in transactions with Chase on behalf of 
the IBM Plan and adheres to all of the investment guidelines 
established for the IBM Plan by the Plan's named fiduciary; (h) no 
brokerage commission, sales commission, or similar compensation other 
than the particular dealer mark-up for the Security, is paid to Chase 
by the IBM Plan with regard to such transactions; and (i) the amount of 
the IBM Plan's assets involved in the transactions represents no more 
than two (2) percent of the total assets of the IBM Plan.

FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng or Mr. E. F. Williams 
of the Department, telephone (202) 219-8881 or 219-8194, respectively. 
(These are not toll-free numbers.)

International Brotherhood of Electrical Workers Local Union 613 (IBEW), 
Local 613 Defined Contribution Pension Fund (the Fund), Located in 
Atlanta, Georgia

[Application No. D-10225]

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 32847, August 10, 1990). If the exemption is 
granted, the restrictions of sections 406(a), 406(b) (1) and (2) 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) of a certain parcel of 
improved real property (the Property) from the Fund to Mr. Charles W. 
Eason, Sr., a party in interest with respect to the Fund provided that 
the following conditions are met: (1) The fair market value of the 
Property is established by an independent and qualified real estate 
appraiser; (2) Mr. Eason will pay the greater of: the fair market value 
of the Property at the time of the transaction or $123,000; (3) The 
Sale will be a one-time transaction for cash; and (4) The Fund will pay 
no fees or commissions associated with the Sale.

Summary of Facts and Representations

    1. The Fund is a multi-employer defined contribution plan. As of 
December 31, 1994, the Fund had approximately 2,592 participants and 
assets of $72,773,801. The Fund is maintained pursuant to collective 
bargaining agreements between the IBEW and employers of members of the 
IBEW. The Fund trustees are comprised of a Board of Trustees consisting 
of three representatives of the IBEW and three representatives of the 
employers. Mr. Eason is a member of the Board of Trustees of the Fund.
    2. The Property is located at 1249 Jennie Lane, Lilburn, Georgia 
and consists of a single-family dwelling that has been converted to 
office use and a detached garage. The Fund acquired the Property from 
Bowman Electric, Inc. (Bowman). Bowman originally purchased the 
Property in 1986 from James and Alice Yancey subject to a promissory 
note issued to the Yanceys secured by a deed to secure debt dated 
February 4, 1986.
    Bowman was required to pay benefit contributions to the Fund and 
other multi-employer funds (the Other Funds) and dues to the IBEW 
pursuant to a collective bargaining agreement. Bowman became delinquent 
with respect to the contributions and dues owed to the Fund, the Other 
Funds, and the IBEW. The Fund, the Other Funds and the IBEW took steps 
to collect the money owed by Bowman. Specifically, Bowman owed the Fund 
contributions in the amount of $5,529.07. As a result, Bowman executed 
a promissory note dated August 10, 1993 payable to the Fund, the Other 
Funds and the IBEW.<SUP>15 This promissory note was secured by a 
second-in-priority deed to secure debt and security agreement dated 
August 10, 1993 on the Property. Bowman defaulted on the promissory 
note increasing the money owed to the Fund by $3,987 (This amount 
reflects the contributions Bowman failed to pay from August 10, 1993, 
the date Bowman executed a promissory note and gave the Fund, the Other 
Funds and the IBEW a second mortgage as security for the debt through 
the date of foreclosure.) The Fund, the Other Funds and the IBEW began 
non-judicial foreclosure proceedings.
---------------------------------------------------------------------------

    \15\ The applicant has not requested and the Department has not 
provided exemptive relief for the promissory note issued by Bowman 
to the Fund, the Other Funds and the IBEW. In this regard, the 
applicant represents that the actions taken to collect outstanding 
fringe benefit contributions, including the execution of the 
promissory note, are covered by Part A of Prohibited Transaction 
Exemption (PTE) 76-1 (41 FR 12740, March 26, 1976) which pertains to 
Delinquent Employer Contributions. However, the Department expresses 
no opinion herein on whether such transactions are covered by Part A 
of PTE 76-1.
---------------------------------------------------------------------------

    During these proceedings, the Fund, the Other Funds and the Union 
discovered that Bowman had also defaulted on the Yancey's promissory 
note, and that the Yancey's began foreclosure proceedings. The 
applicants represent that if the Yanceys were to foreclose on the first 
mortgage on the Property, the second mortgage held by the Fund, the 
Other Funds and the

[[Page 47203]]

Union would have been extinguished and they would have lost their 
interest in the Property. In order to protect their interest in the 
Property, the Fund, the Other Funds and the Union could have attempted 
to purchase the Property at the Yancey's foreclosure proceedings. 
However, to avoid the uncertainties of such a purchase, the Fund 
negotiated an agreement in which the Fund paid the Yanceys 
approximately $74,035 to acquire the Yancey's first-in-priority 
interest in the Property. The Fund, the Other Funds and the IBEW 
completed foreclosure proceedings on the second mortgage and acquired 
title to the Property subject to the first mortgage, owned by the Fund. 
Percentage ownership interests in the Property were assigned in 
accordance with the amounts Bowman owed to the respective entities. 
Upon the sale of the Property, once the Fund's first mortgage is paid 
off, the remaining sale proceeds will be divided among the Fund, the 
Other Funds and the IBEW in accordance with their respective percentage 
ownership interests in the Property. The Fund's ownership interest in 
the Property equals 31.8%.
    3. The Property was appraised by Mr. Glenn Keaton, Jr., MIA of 
Keaton and Company, an independent real estate appraisal firm located 
in Atlanta, Georgia. Mr. Keaton determined that the market value of the 
Property as of December 1995 is $110,000. In his appraisal report, Mr. 
Keaton defined market value as the most probable price which a property 
should bring in a competitive and open market under all conditions 
requisite to a fair sale, the buyer and seller each acting prudently 
and knowledgeably, and assuming the price is not affected by undue 
stimulus.
    4. The Fund has proposed to sell the Property to Mr. Eason for 
$123,000 in a one-time cash transactions. Assuming the Property is sold 
for that amount, the Fund will receive $74,035.38 (the amount paid by 
the Fund to acquire the first mortgage from the Yanceys) plus 
approximately $15,585.44 (this amount represents 31.8% of the remaining 
$48,964.62 sales proceeds and will provide the Fund with enough money 
to recover the delinquent contributions owed by Bowman which currently 
total $9,516.48 and the Fund's share of property taxes and assessments 
on the Property totaling $1,399.04.) The applicant represents that the 
Fund no longer wishes to be in the business of owning and/or managing 
rental income properties. Further, the applicant believes that the Sale 
will provide the Fund with the opportunity to divest itself of a non-
liquid asset and to replace it with a liquid asset.
    5. In summary, the applicant represents that the proposed 
transaction will satisfy the criteria for an exemption under section 
408(a) of the Act because: (a) The fair market value of the Property is 
established by an independent and qualified real estate appraiser; (b) 
Mr. Eason will pay the greater of the fair market value of the Property 
at the time of the transaction or $123,000; (c) The Sale will be a one-
time transaction for cash; and (d) The Fund will pay no fees or 
commissions associated with the Sale.

FOR FURTHER INFORMATION CONTACT: Allison Padams of the Department, 
telephone (202) 219-8971. (This is not a toll-free number.)

Huggler & Silverang Profit Sharing Plan (the Plan) Located in 
Philadelphia, Pennsylvania

[Application No. D-10238]

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 the 
Code shall not apply to the proposed cash sale (the Sale) by the Plan 
of two 5 percent limited partnership interest interests (collectively, 
the Interests) in Rosemont Square Associates, L.P. (the Partnership), 
one to Mr. David H. Huggler and the second to Mr. Kevin J. Silverang, 
respectively, parties in interest with respect to the Plan; provided 
(1) the Sale is a one-time transaction for cash, (2) the Plan pays no 
commissions nor incurs any expenses in connection with the proposed 
transaction, and (3) the Plan receives as consideration for the Sale no 
less than the fair market value of the Interests as of the date of the 
Sale.

Summary of Facts and Representations

    1. The Plan is a defined contribution plan with individual accounts 
which are self-directed by the respective participants as to the 
investment of the assets. The sponsoring employer of the Plan is 
Huggler & Silverang, P.C., a Pennsylvania professional corporation, a 
law firm that discontinued operations effective April 30, 1995. After 
the sponsoring employer discontinued operations it disbanded, and the 
Plan distributed all assets of the Plan to terminated participants 
except for the Interests held in the individual accounts of Messrs. 
Huggler and Silverang, respectively. Each account of the two remaining 
participants in the Plan holds a 5 percent limited partnership interest 
in the Partnership that the applicants represent has a fair market 
value of $186,010, respectively.
    2. The applicants, Messrs. Huggler and Silverang, represent that on 
October 17, 1991, each of their respective individual accounts in the 
Plan acquired a 5 percent Interest in the Partnership by each tendering 
to the Partnership as consideration a 40 percent limited partnership 
interest, each valued at $125,000, in another limited partnership, 
Saber Associates, a Pennsylvania limited partnership.
    The applicants request an administrative exemption from the 
prohibited transaction provisions of the Act to enable each of them to 
purchase for $186,010 in cash the Interests from their respective 
individual accounts in the Plan. The applicants intend to terminate the 
Plan and roll over the cash assets remaining in their individual 
accounts in the Plan to Individual Retirement Accounts (IRAs). The 
applicants represent that they have not been able to find and engage a 
trustee-custodian willing to accept and hold their respective Interests 
for a reasonable annual fee.
    The applicants represent that the proposed transaction is in the 
best interests of the Plan and its participants and beneficiaries 
because the Plan will be able to terminate and roll-over its remaining 
cash assets into IRAs for the last two participants. Also, they 
represent that their rights as participants will be protected by the 
objective determination of the fair market value of the Interests by 
the president of the general partner of the Partnership.
    3. The Interests have been appraised, as of August 1, 1996, and 
determined to have a fair market value of $186,010, respectively. The 
appraisal was done by Mr. Stephen W. Bajus, who is the president of 
Rosemont Associates, Ltd., a Pennsylvania corporation and general 
partner of the Partnership.
    Mr. Bajus represents that he is independent of the Plan and its 
sponsoring employer, and although he has been a client of the sponsor 
of the Plan and the current law firm of Messrs. Huggler and Silverang, 
his relationships never generated revenues that exceeded 2 percent of 
the total yearly revenues of either law firm. He further represents 
that his relationships never enabled the parties to control or 
influence his actions as an independent appraiser of the Interests. Mr. 
Bajus further

[[Page 47204]]

represents that there is no market for trading activity in the 
Interests and never has been since the initial establishment of the 
Partnership. Mr. Bajus represents that the actual value of the 
Interests should be determined by reference to the only asset possessed 
by the Partnership, which is the Rosemont Square Mall located in Lower 
Merion Township, Montgomery County, Pennsylvania.
    The Rose Square Mall was appraised on September 28, 1994, by H. 
Bruce Thompson, Jr. and Associates, Inc. of Bryn Mawr, Pennsylvania and 
determined to have a fair market value of $10,300,000.
    Mr. Bajus represents that the methodology that he employed in his 
appraisal of the fair market value of the Interests involved 
subtracting the mortgaged indebtedness of $6,579,798, as of July 31, 
1996, from the fair market value of $10,300,000 of the Rosemont Square 
Mall to determine the total equity interests of $3,720,202 that the 
Partnership possessed on August 1, 1996. Mr. Bajus then represents that 
he determined that each 5 percent ownership in the Partnership has a 
fair market value equal to $186,010, respectively.
    4. In summary, the applicant represents that the proposed 
transaction will satisfy the criteria of section 408(a) of the Act 
because (a) the Sale of the Interests involves a one-time transaction 
for cash; (b) the Plan will not incur the payment of any commissions 
nor incur any expenses from the Sale; (c) the Plan will be able to 
terminate and roll-over its remaining cash assets into two IRAs for the 
benefit of the two remaining participants; (d) the Interests in the 
Partnership have been appraised by the president of the general partner 
of the Partnership; and (e) the Plan will receive as consideration for 
the Sale no less than the fair market value of the Interests as of the 
date of the Sale.
    Notice to Interested Persons: Because Messrs. Huggler and 
Silverang, the applicants, are the sole participants of the Plan, 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 thirty (30) days after publication of this notice in 
the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. C. E. Beaver of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Acme 401(k) Retirement Savings Plan (the Plan) Located in Scottsdale, 
Arizona

[Application No. D-10270]

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 sections 4975(c)(1) (A) through 
(E) of the Code shall not apply to the proposed cash sale (the Sale) by 
the Plan of a 2.86% interest (the Interest) in the Arizona Equities V 
Real Estate Investment Trust (the REIT) to RSC Holdings, Inc. (RSC), 
sponsor of the Plan and a party in interest with respect to the Plan; 
provided the following conditions are satisfied: (1) The Sale is a one-
time transaction for cash; (2) the Plan does not incur any expenses in 
connection with the Sale; and (3) the Plan receives as consideration 
from the Sale the greater of: (a) the fair market value of the REIT 
Interest as determined by a qualified independent appraiser at the time 
of the Sale or, (b) the Plan's total investment in the Interest in the 
amount of $50,572.

Summary of Facts and Representations

    1. The Plan is a defined contribution 401(k) plan, and has 
approximately 850 participants; 335 participant accounts contain a 
share of the REIT Interest. As of December 31, 1995 the fair market 
value of total assets in the Plan was $3,163,741. RSC is a Delaware 
corporation engaged in the business of rental services. U.S. Bank of 
Idaho currently serves as the Plan's trustee and has investment 
discretion over all the assets held in the Plan.
    2. The Plan acquired the Interest in the REIT in October 1989, 
subsequent to a merger with the C & W Action Rentals, Inc. Profit 
Sharing Plan. The merger of the two plans occurred after RSC's 
predecessor, Acme Holdings, Inc. acquired the sponsor of the C & W 
Plan. The C & W Plan had originally purchased the Interest in the REIT 
in 1984, in the principal amount of $50,572; the Plan owns a 2.86% 
Interest in the REIT.
    On November 6, 1984, the REIT made a $1,770,020 loan to an 
independent third party. The loan was secured by a deed of trust on 
real estate located in Tucson, Arizona (the Tucson Property). The Plan 
participated in the loan through the REIT. In March of 1989, the Plan 
was notified that the borrower was in default; subsequently the 
borrower never repaid the loan <SUP>16. After the default, Citibank 
(Arizona), formerly known as United Bank of Arizona, as Trustee of the 
REIT, foreclosed on the Tucson Property securing the loan and took 
possession of it.
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    \16\ The Department notes that the decision to acquire and hold 
the Interest are governed by the fiduciary responsibility 
requirements of Part 4, Subtitle B, Title I of the Act. In this 
regard, the Department herein is not proposing relief for any 
violations of Part 4 which may have arisen as a result of the 
acquisition and holding of the interest by the Plan.
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    3. RSC, the applicant, represents that the Tucson Property is 
currently the REIT's sole asset and that because the Interest is a 
minority interest and it is not publicly traded, there is not an 
established market for the Interest.
    4. The trustee of the Plan has attempted to sell the Plan's 
Interest in the REIT, but has not been successful. West One Bank, 
former Plan trustee, made arrangements with Pepper Viner Co., the 
REIT's successor trustee to Citibank (Arizona), in 1993, for Pepper 
Viner to circulate a letter from West One Bank, to the REIT's other 
unit holders to determine if any of them might have an interest in 
purchasing the Plan's Interest. However, no one responded. Subsequently 
West One Bank contacted several brokers and as a result, received one 
offer to purchase the REIT Interest, for a total price of $4,000. West 
One Bank declined the offer because they felt that the Plan's interest 
in the underlying property had a value much higher than the $4,000.
    RSC, the sponsor, requests an exemption to permit the cash Sale by 
the Plan of the Interest to RSC. The Plan will receive the greater of: 
(1) The fair market value of the Interest as determined by an 
independent appraiser at the time of the Sale, or (2) the Plan's total 
investment in the Interest of $50,572. The applicant represents that 
this Sale is in the best interest of Plan participants and 
beneficiaries because the asset provides no income to the Plan, and is 
illiquid. The Sale will facilitate full implementation of participant-
directed investing of accounts, which was adopted by the Plan in 
January, 1994. The Sale will allow the Plan to convert the Interest 
into cash, so that participants whose account balances are partially 
invested in the Interest may direct the investment of that portion of 
their accounts into assets generating greater returns.

[[Page 47205]]

    5. The Interest, the sole value of which is the Plan's undivided 
2.86% interest in the Tucson Property, was appraised as of July 19, 
1996 by Mr. Thomas A. Baker, MAI, SRA, a State of Arizona Certified 
General Real Estate Appraiser who is independent of the Plan and RSC. 
Mr. Baker applied the direct sales comparison approach to determine 
both the market value and fee simple interest of the total property and 
of the Plan's 2.86% interest in the subject property.
    In addition, the appraiser used comparable sale information of 
partial interest sales in order to determine the fair market value of 
the Plan's 2.86% Interest in the REIT. Mr. Baker concluded that the 
fair market value of the Plan's 2.86% interest in the REIT, as of July 
19, 1996 was $10,900.
    6. RSC represents that the plan would incur no expenses nor 
commissions with respect to the Sale. The applicant also represents 
that the proposed transaction is administratively feasible and 
protective of the Plan's participants and beneficiaries. Furthermore, 
the applicant represents that any amounts received by the Plan as a 
result of the Sale, which are in excess of the fair market value of the 
Interest, will be treated as contributions to the Plan, but that these 
contributions will not exceed limitations of section 415 of the 
Internal Revenue Code.
    7. In summary, the applicant represents that the transaction 
satisfies the statutory criteria of section 408(a) of the Act and 
section 4975(c)(2) of the Code because: (1) The Sale will be a one-time 
transaction for cash; (2) no commissions or fees will be paid by the 
Plan as a result of the Sale; (3) the Sale will facilitate full 
implementation of participant-directed investing of accounts, which was 
adopted by the Plan in January, 1994; and (4) the Sale price will be 
the higher of: (a) The fair market value of the Interest on the date of 
the Sale, or (b) the Plan's total investment in the Interest, in the 
amount of $50,572.

FOR FURTHER INFORMATION CONTACT: Ms. Marianne H. Cole 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 30th day of August, 1996.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 96-22717 Filed 9-5-96; 8:45 am]
BILLING CODE 4510-29-P