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Secretary of Labor Thomas E. Perez
Proposed Exemptions; RREEF USA Fund-I (The Trust) [Notices] [03/22/1996]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; RREEF USA Fund-I (The Trust) [03/22/1996]

[PDF Version]

Volume 61, Number 57, Page 11878-11896

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DEPARTMENT OF LABOR
[Application No. D-09410, et al.]

 
Proposed Exemptions; RREEF USA Fund-I (The Trust)

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

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

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 
20210. Attention: Application No. stated in each Notice of Proposed 
Exemption. The applications for exemption and the comments received 
will be available for public inspection in the Public Documents Room of 
Pension and Welfare Benefits Administration, U.S. Department of Labor, 
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of 
the Secretary of the Treasury to issue exemptions of the type requested 
to the Secretary of Labor. Therefore, these notices of proposed 
exemption are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

RREEF USA Fund-I (The Trust) Located in San Francisco, California

[Application No. D-09410]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption 
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2) 
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 receipt by RREEF America 
L.L.C., the investment manager of the Trust (the Manager), of a certain 
performance compensation fee (the Performance Fee) in connection with 
the liquidation of the Trust, provided that the following conditions 
are satisfied:

[[Page 11879]]

    (a) The terms and the payment of the Performance Fee shall be 
approved in writing, through approval of an amendment to the Group 
Trust Agreement (the Group Trust Agreement), by independent fiduciaries 
of the plans that participate in the Trust (the Participating Plans);
    (b) The terms of the Performance Fee shall be at least as favorable 
to the Participating Plans as those obtainable in an arm's-length 
transaction between unrelated parties;
    (c) The total fees paid to the Manager by the Participating Plans 
that have invested in the Trust, shall constitute no more than 
reasonable compensation;
    (d) The Performance Fee will be payable only when all of the assets 
of the Trust have been completely liquidated;
    (e) The Performance Fee received by the Manager will be based on 
distributions, adjusted for inflation and present value, and will be 
calculated using two real hurdle rates of return (the Hurdle Rates). 
The Performance Fee will equal 10% after the Participating Plans have 
earned a 5% real return on the initial value of their investment and 
20% after the Participating Plans have earned an 8% real return on the 
initial value of their investment;
    (f) In the event of the Manager's resignation or termination as the 
investment manager to the Trust, the Investment Management Agreement 
would also terminate <SUP>1 and the Manager will not receive a 
Performance Fee.

    \1\ Unless termination was in bad faith wherein the Manager may 
seek legal recourse.
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    (g) The Manager or its affiliates shall maintain, for a period of 
six years, the records necessary to enable the persons described in 
paragraph (2) of this Section (g) to determine whether the conditions 
of this exemption have been met, except that:
    (1)(a) a prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of the Manager or 
its affiliates, the records are lost or destroyed prior to the end of 
the six year period; and (b) no party in interest, other than the 
Manager, shall be subject to the civil penalty that may be assessed 
under section 502(i) of the Act or the taxes imposed by section 4975 
(a) and (b) of the Code if the records are not maintained or are not 
available for the examinations required from (2) below.
    (2)(a) Except as provided in paragraph (3) and notwithstanding any 
provisions of section 504(a)(2) and (b) of the Act, the records 
referred to in paragraph (1) of this Part (g) shall be unconditionally 
available at their customary location for examination during normal 
business hours by:
    (i) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (ii) Any fiduciary of a Participating Plan or any duly authorized 
employee or representative of such fiduciary;
    (iii) Any contributing employer to a Participating Plan or any duly 
authorized employee or representative of such employer; and
    (iv) Any participant or beneficiary of a Participating Plan or any 
duly authorized employee or representative of such participant or 
beneficiary.
    (3) None of the persons described above in paragraph (2)(a)(ii)-
(iv) shall be authorized to examine the trade secrets of the Manager 
and its affiliates or any commercial or financial information which is 
privileged or confidential.
    Effective Date: If granted this exemption will be effective as of 
January 1, 1993.

Summary of Facts and Representations

    1. The assets of the Trust consist of direct or indirect <SUP>2 
ownership interests in commercial or industrial real property (the 
Properties). Currently, there are six Properties held by the Trust 
which are located in California, Pennsylvania, New Jersey, New York and 
Illinois. The Trust is a closed-end real estate tax-exempt group trust 
organized in 1979 in the State of California pursuant to the IRS 
Revenue Ruling 81-100. The Trust was organized to allow the 
Participating Plans to pool their assets to purchase income-producing 
real property for investment. The Trust was created and is operated in 
accordance with the terms of the Group Trust Agreement dated September 
7, 1979, with certain amendments thereto (the Amendments). Initially, 
the Trust provided for a ten year holding period of the Properties with 
additional extensions of two years if consented to by more than sixty 
percent of outstanding beneficiaries. The end of the initial holding 
period of the Trust was 12/31/92. As of December 31, 1992, the net 
asset value of the Trust was $325,040 million. It is represented that 
this figure was based on the most recent independent annual appraisals 
obtained prior to December 31, 1992, and it is also the ``base'' amount 
against which the Manager's asset management fee (the Base Fee) is 
determined, as discussed further in paragraph 5 below.

    \2\ Several of the real properties of the Trust are held 
indirectly through wholly owned Code section 501(c)(2) or 501(c)(25) 
corporations.
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    2. The Participating Plans are seven large ERISA plans (including 
one or more master or group trusts holding assets of multiple ERISA 
plans) and one governmental plan (as defined in section 3(32) of 
ERISA), each with assets in excess of $1 billion.
    3. RREEF America L.L.C. is the investment manager to the Trust (the 
Manager) and the trustees of the Trust are principals and officers of 
the Manager (the Trustees), (the Manager and the Trustees, 
collectively; the Fiduciaries). The Trustees and the Manager have 
entered into an Investment Management Agreement, also dated September 
7, 1979. Pursuant to that Investment Management Agreement, the Manager 
has the authority to acquire and dispose of any and all properties on 
behalf of the Trust; perform day-to-day investment and administrative 
operations of the Trust; and prepare the financial and other reports as 
provided in the Group Trust Agreement. The Investment Management 
Agreement is terminable by the Trustees or by a vote or written consent 
of the Participating Plans holding sixty percent of the outstanding 
units in the Trust at any time upon not less than sixty days written 
notice.
    4. Pursuant to the Group Trust Agreement, the Trust was scheduled 
to terminate on December 31, 1992, whereupon an orderly liquidation of 
the Trust was to begin as soon as practicable. On September 11, 1991, 
the Participating Plans' representatives and the Fiduciaries held a 
conference to discuss the pending expiration of the Trust and 
liquidation of its assets. Due to a downturn in the real estate market, 
the Participating Plans' representatives proposed to the Fiduciaries 
that the Trust's liquidation period (the Liquidation Period) be 
extended for a period of up to six years to avoid ``fire sale'' prices. 
This extension of the Liquidation Period also involved restructuring of 
the fees payable to the Manager so as to provide further incentives to 
maximize sales prices while liquidating the Trust's real estate assets 
as soon as practicable. Accordingly, as of December 31, 1992, subject 
to the unanimous consent of the Participating Plans, the Trustees 
adopted Amendment #7 to the Group Trust Agreement in order to: (1) 
Extend the period for liquidating the Trust's real property assets up 
to six years from its scheduled expiration date; (2) reduce the annual 
Base Fee payable to the Manager during the Liquidation Period as 
discussed more fully below; (3) add a performance component (the 
Performance Fee) to the Base Fee.
    5. Until December 31, 1992, the annual investment management fee 
(the Base Fee) under the Group Trust

[[Page 11880]]
Agreement remained at 1% of the net asset value of the Trust as of the 
preceding December 31 (based on annual independent appraisals), and was 
payable 1/12th monthly in advance.
    However, effective January 1, 1993, pursuant to the unanimous 
consent of the Participating Plans, and conditioned upon the grant of 
this proposed exemption, the Base Fee was reduced from 1% to .45% of 
``the adjusted December 31, 1992, net asset value of the Trust'', also 
payable 1/12th monthly in advance. The ``adjusted December 31, 1992 net 
asset value of the Trust'' is the net asset value determined pursuant 
to the most recent independent appraisals of the Trust's properties at 
or before December 31, 1992. The net asset value is the base amount on 
which the Base Fee is determined, and it can be reduced (not increased) 
at the time the Base Fee is calculated to reflect any subsequent 
material changes in the value of the Trust's properties as evidenced by 
the Manager's subsequent quarterly internal appraisals. The net asset 
value and any subsequent reductions to it, if required by the Manager's 
internal appraisals, will be used by the Manager solely for the 
determination of the Base Fee. With respect to the Liquidation Period, 
the Participating Plans determined that continuing to obtain annual 
appraisals by independent qualified appraisers was too costly and 
inconsistent with their goal of maximizing their returns. It is 
represented, however, that the Manager will obtain independent 
appraisals every three years, and will compare them to the Manager's 
quarterly internal appraisals.
    6. The Performance Fee was proposed by the Participating Plans as 
an incentive for the Manager to liquidate the assets of the Trust as 
quickly as possible while achieving the best possible sales prices for 
the Trust's assets. However, in the event this proposed exemption is 
not granted, the Base Fee will be calculated on the basis of .60% of 
the adjusted December 31, 1992 net asset value of the Trust; this 
resulting increase in the Base Fee will be payable retroactive from 
January 1, 1993 (without interest); and no Performance Fee will be 
paid.
    7. For the purpose of the Performance Fee, the initial value of the 
Trust's assets is based on the greater of the Trust's value on December 
31, 1991 or December 31, 1992. The Performance Fee will reflect all 
gains and losses of the Trust with respect to the Properties <SUP>3 and 
will be calculated as a cash flow fee with two real (inflation-
adjusted) hurdle rates of 5% and 8% (the Hurdle Rates) of the initial 
value of the Trust's assets. It is represented that the payment of the 
Performance Fee to the Manager is dependent upon distribution to the 
Participating Plans' of such initial value plus interest at the real 
Hurdle Rates.
    The Performance Fee is calculated with respect to the cash flow. 
The applicant represents that prior to the Trust's liquidation, cash 
flow is all cash actually distributed by the Trust to the Participating 
Plans, either from operations or capital events. The major sources of 
cash are rents, interest or dividends on invested reserves, and 
proceeds of sale, net of all expenses. Upon the liquidation of the 
Trust, cash flow means all cash available for distribution to the 
Participating Plans after payment of (or reservation for) all remaining 
liabilities of the Trust, but before the payment of the Performance 
Fee.
    8. The Performance Fee is payable to the Manager in cash as of the 
date the last real property asset in the Trust is liquidated and the 
Trust is fully terminated. The calculation of the Performance Fee is 
accomplished by converting the annual distributions to the 
Participating Plans into 1993 dollars (January 1, 1993 is the effective 
date of the addition of the Performance Fee component to the fees paid 
by the Trust to the Manager). The annual distributions include, among 
other things, proceeds from capital events and rents. First, the annual 
distributions are discounted for inflation using the CPI index. Second, 
the inflation adjusted annual distributions are discounted to the 
present value using appropriate discount rates of 5% or 8%, which are 
identical to the Hurdle Rates to arrive at the discounted distributions 
(the Discounted Distributions). The amounts by which the Discounted 
Distributions exceed the initial value of the Trust as of January 1, 
1993 are then calculated (the Excess Distributions).
    For purposes of the Performance Fee calculation, these Excess 
Distributions are converted into the current value (i.e., value during 
the year when the Manager is paid the Performance Fee). This conversion 
is calculated as follows. The Excess Distributions are divided first by 
the inflation CPI index for the year when the Performance Fee is paid, 
and second, they are divided by the appropriate 5% or 8% discount 
rates. The result is current excess distributions (Current Excess 
Distributions).
    The Performance Fee paid to the Manager is ten percent (10%) of the 
Current Excess Distributions when the Participating Plans earn a 5% 
real Hurdle Rate on the initial value of their investment in the Trust 
and until the Participating Plans earn an 8% real Hurdle Rate return on 
the initial value of their investment in the Trust. When the 
Participating Plans earn an 8% real Hurdle Rate return on the initial 
value of their investment in the Trust, the Performance Fee paid to the 
Manager is twenty percent (20%) of the Current Excess Distributions in 
the 8% real Hurdle Rate context after they have been reduced by 10% 
Performance Fee amount.
    9. In this regard, the applicant submitted a numerical example of 
how the Performance Fee will work under certain assumptions if the 
inflation rate is 4% annually. Under these assumptions the Trust holds 
a single real property with an initial value of $100,000 as of December 
31, 1992, and this property generates distributable (before fees) cash 
flow of $10,000 a year for three years. At the end of the third year 
the property is sold for $110,000.
    At a 5% real Hurdle Rate, the Discounted Distributions are as 
follows:

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                                          Year 1                Year 2                Year 3            Total   
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Nominal $........................  $10,000+              $10,000+              $120,000=                $140,000
CPI..............................  *.9615=               *.9246=               *.8890=               ...........
Discount.........................  $9,615                $9,246                $106,680              ...........
5% Discount......................  *.9524                *.9070                *.8638                ...........
Adjusted $.......................  $9,157+               $8,386+               $92,150=                 $109,693
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[[Page 11881]]


      

    \3\ By definition, all gains and losses with respect to the 
Properties will be realized prior to calculation of the Performance 
Fee, i.e., there will be no unrealized gains or losses.
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    The present value of the Excess Distributions, at a 5% real Hurdle 
Rate, is $109,693-$100,000=$9,693. Converting the Excess Distributions 
to current value, the excess is $12,622. This is calculated as follows: 
9,693/.8890=10,903 then 10,903/.8638=$12,622 (the Current Excess 
Distributions).
    At an 8% real Hurdle Rate, the Discounted Distributions are as 
follows:

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                                          Year 1                Year 2                Year 3            Total   
----------------------------------------------------------------------------------------------------------------
Nominal $........................  $10,000+              $10,000+              $120,000=                $140,000
CPI..............................  *.9615=               *.9246=               *.8890=               ...........
Discount.........................  $9,615                $9,246                $106,680              ...........
8% Discount......................  *.9259                *.8573                *.7938                ...........
Adjusted $.......................  $8,903+               $7,927+               $84,683=                 $101,513
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    The present value of the Excess Distributions at an 8% real Hurdle 
Rate, is $101,513-$100,00=$1,513. Converting the Excess Distributions 
to current value, the excess is $2,144. This is calculated as follows: 
1,513/.8890=1701.9 then 1701.9/.7938=$2,144 (Current Excess 
Distributions).
    For Current Excess Distributions above the 5% real Hurdle Rate and 
until the 8% Hurdle Rate, the Performance Fee is 10%:

$12,622-$2,144=$10,478 * 10%=$1,048

    This fee payment reduces the remaining amount available for 
distribution. Accordingly, after subtracting the 10% fee, the remaining 
Current Excess Distributions are subject to a 20% Performance Fee:

$2,144-$1,048=$1,096 * 20%=$219

    As such, in this example the total Performance Fee paid is $1,048 
+$219=$1,267.
    The applicant represents that the cash flow will not be reinvested 
and the Performance Fee would not be determined and paid until all of 
the Trust's assets have been liquidated and the Trust is terminated.
    10. In the event that the Manager is terminated <SUP>4 or resigns 
with respect to the Trust, the Manager will not receive a Performance 
Fee, and the Investment Management Agreement, including all obligations 
of the Trustees to continue to compensate the Manager thereunder, would 
also terminate. If, however, the Manager is terminated in bad faith, 
the Manager may seek legal recourse. Also, whether a replacement 
investment manager would receive a performance fee is dependent solely 
upon whether a performance fee was negotiated as part of the investment 
management agreement of the replacement manager.

    \4\ The Manager can be terminated by the Trustees, or by a vote 
or written consent of the Participating Plans holding sixty percent 
(60%) of the outstanding units in the Trust at any time upon not 
less than sixty days written notice.
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    11. The applicant represents that the interests of the 
Participating Plans are fully aligned by the Performance Fee because 
the Performance Fee is calculated as a ``share'' in all distributions 
after the Plans have received the initial value of their investment 
plus earnings at the designated real Hurdle Rates. Furthermore, the 
Performance Fee will reflect all gains and losses of the Trust with 
respect to the Properties and will be payable only at a pre-established 
point, i.e., the liquidation of all of the Trust's Properties. It is 
also represented that the Manager cannot use its discretion to 
accelerate sales to benefit itself without equally benefitting the 
Participating Plans, and the Manager cannot use its discretion over the 
timing of sales to the detriment of the Participating Plans without 
causing itself a similar detriment. If the Trust distributes a real 
return of at least 5%, the Manager would receive 10% of all 
distributions in excess of a 5% real return until the Participating 
Plans have received a real return of at least 8%. If the Trust 
distributes a real return of at least 8%, the Manager would receive 20% 
of all distributions in excess of an 8% real return. It is represented 
that the Performance Fee component will allow the Manager to 
potentially offset some or all of the reduction in the Base Fee and to 
provide other incentives to maximize the value and dispose of the 
Properties. If the Trust is completely liquidated earlier than the six 
year period, the Performance Fee will become payable at that time. The 
applicant also represents that making the payment of the Performance 
Fee contingent upon the complete liquidation of the Trust would prevent 
the Fiduciaries from causing the Trust to acquire assets with a view 
toward increasing the Performance Fee (e.g., by increasing risk).
    12. 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:
    (a) The terms and the payment of the Performance Fee shall be 
approved in writing, through an amendment to the Group Trust Agreement, 
by independent fiduciaries of the Participating Plans;
    (b) The terms of the Performance Fee shall be at least as favorable 
to the Participating Plans as those obtainable in an arm's-length 
transaction between unrelated parties;
    (c) The total fees paid to the Manager by the Participating Plans 
that have invested in the Trust, shall constitute no more than 
reasonable compensation;
    (d) The Performance Fee will be payable only when all of the assets 
of the Trust have been completely liquidated;
    (e) The Performance Fee received by the Manager will be based on 
distributions, adjusted for inflation and present value, and will be 
calculated using two real Hurdle Rates of return. The Performance Fee 
will equal 10% after the Participating Plans have earned a 5% real 
return on the initial value of their investment and 20% after the 
Participating Plans have earned an 8% real return on the initial value 
of their investment;
    (f) In the event of the Manager's resignation or termination as the 
investment manager to the Trust, the Investment Management Agreement 
would also terminate and the Manager will not receive a Performance 
Fee. However, if the Manager is terminated in bad faith, the Manager 
may seek legal recourse;
    (g) The Performance Fee is a one-time payment to the Manager upon 
complete liquidation of the Trust within six years and upon final 
distribution of its assets; and
    (h) The Participating Plans have proposed the Performance Fee as 
being in their interest because it would encourage the goal of the 
Participating

[[Page 11882]]
Plans to liquidate the Properties as quickly as practicable while 
maximizing their sales prices.

Notice to Interested Persons

    Those persons who may be interested in the pendency of this 
exemption include the fiduciaries who are responsible for directing the 
investment of the Participating Plans' assets in the Trust. The 
applicant represents that it proposes to notify the interested persons 
within ten (10) days of the publication of the notice of the proposed 
exemption in the Federal Register. Such notice will contain a copy of 
the notice of the proposed exemption published in the Federal Register 
and a statement advising interested persons of their right to comment 
and to request a hearing on the proposed exemption. Accordingly, 
comments and hearing requests on the proposed exemption are due forty 
(40) days after the date of publication of this proposed exemption in 
the Federal Register.
    For Further Information Contact: Ekaterina A. Uzlyan, U.S. 
Department of Labor, telephone (202) 219-8883. (This is not a toll-free 
number.)

PaineWebber Incorporated (PaineWebber) Located in New York, NY

[Application No. D-09818]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act and section 4975(c)(2) of 
the Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, August 10, 1990).<SUP>5

    \5\ For purposes of this proposed exemption, reference to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
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Section I. Covered Transactions
    If the exemption is granted, the restrictions of section 406(a) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (D) of 
the Code, shall not apply, effective August 18, 1995, to the purchase 
or redemption of shares by an employee benefit plan, an individual 
retirement account (the IRA) or a retirement plan for a self-employed 
individual (the Keogh Plan) (collectively referred to herein as the 
Plans) in the PaineWebber Managed Accounts Services Portfolio Trust 
(the Trust) established in connection with such Plans' participation in 
the PaineWebber PACE Program (the PACE Program).
    In addition, the restrictions of section 406(b) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1) (E) and (F) of the Code, shall not 
apply, effective August 18, 1995, to (a) the provision, by PaineWebber 
Managed Accounts Services (PMAS), a division of PaineWebber, of asset 
allocation and related services to an independent fiduciary of a Plan 
(the Independent Fiduciary) or to a directing participant (the 
Directing Participant) in a Plan that is covered under the provisions 
of section 404(c) of the Act (the Section 404(c) Plan), which may 
result in the selection by the Independent Fiduciary or the Directing 
Participant of portfolios of the Trust (the Portfolios) in the PACE 
Program for the investment of Plan assets; and (b) the provision of 
investment management services by Mitchell Hutchins Asset Management, 
Inc. (Mitchell Hutchins) to the PACE Money Market Investments Portfolio 
of the Trust.
    This proposed exemption is subject to the conditions set forth 
below in Section II.
Section II. General Conditions
    (a) The participation of each Plan in the PACE Program is approved 
by an Independent Fiduciary or, if applicable, Directing Participant.
    (b) As to each Plan, the total fees paid to PMAS and its affiliates 
constitute no more than reasonable compensation and do not include the 
receipt of fees pursuant to Rule 12b-1 under the Investment Company Act 
of 1940 (the '40 Act) by PMAS and its affiliates in connection with the 
transactions.
    (c) No Plan pays a fee or commission by reason of the acquisition 
or redemption of shares in the Trust.
    (d) The terms of each purchase or redemption of Trust shares remain 
at least as favorable to an investing Plan as those obtainable in an 
arm's length transaction with an unrelated party.
    (e) PMAS provides written documentation to an Independent Fiduciary 
or a Directing Participant of its recommendations or evaluations based 
upon objective criteria.
    (f) Any recommendation or evaluation made by PMAS to an Independent 
Fiduciary or Directing Participant is implemented only at the express 
direction of such fiduciary or participant.
    (g) PMAS provides investment advice in writing to an Independent 
Fiduciary or Directing Participant with respect to all available 
Portfolios.
    (h) With the exception of the PACE Money Market Investments 
Portfolio, any sub-adviser (the Sub-Adviser) appointed by Mitchell 
Hutchins to exercise investment discretion with respect to a Portfolio 
is independent of PaineWebber and its affiliates.
    (i) The quarterly fee that is paid by a Plan to PMAS for asset 
allocation and related services rendered to such Plan under the PACE 
Program (i.e., the outside fee) is offset by such amount as is 
necessary to assure that Mitchell Hutchins retains 20 basis points as a 
management fee from any Portfolio (with the exception of the PACE Money 
Market Investments Portfolio from which Mitchell Hutchins retains an 
investment management fee of 15 basis points) containing investments 
attributable to the Plan investor. However, the quarterly fee of 20 
basis points that is paid to Mitchell Hutchins for administrative 
services is retained by Mitchell Hutchins and is not offset against the 
outside fee.
    (j) With respect to its participation in the PACE Program prior to 
purchasing Trust shares,
    (1) Each Independent Fiduciary receives the following written or 
oral disclosures from PaineWebber:
    (A) A copy of the prospectus (the Prospectus) for the Trust 
discussing the investment objectives of the Portfolios comprising the 
Trust; the policies employed to achieve these objectives; the corporate 
affiliation existing between PaineWebber, PMAS, Mitchell Hutchins and 
their affiliates; the compensation paid to such entities; any 
additional information explaining the risks of investing in the Trust; 
and sufficient and understandable disclosures relating to rebalancing 
of investor accounts.
    (B) Upon written or oral request to PaineWebber, a Statement of 
Additional Information supplementing the Prospectus, which describes 
the types of securities and other instruments in which the Portfolios 
may invest, the investment policies and strategies that the Portfolios 
may utilize and certain risks attendant to those investments, policies 
and strategies.
    (C) An investor questionnaire.
    (D) A written analysis of PMAS's asset allocation decision and 
recommendation of specific Portfolios.
    (E) A copy of the agreement between PMAS and such Plan relating to 
participation in the PACE Program.
    (F) Upon written request to Mitchell Hutchins, a copy of the 
respective investment advisory agreement between Mitchell Hutchins and 
the Sub-Advisers.

[[Page 11883]]

    (G) Copies of the proposed exemption and grant notice describing 
the exemptive relief provided herein.
    (2) In the case of a Section 404(c) Plan, the Independent Fiduciary 
will--
    (A) Make copies of the foregoing documents available to Directing 
Participants.
    (B) Allow Directing Participants to interact with PaineWebber 
Investment Executives and receive information relative to the services 
offered under the PACE Program, including the rebalancing feature, and 
the operation and objectives of the Portfolios.
    (3) If accepted as an investor in the PACE Program, an Independent 
Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in 
writing to PMAS, prior to purchasing Trust shares that such fiduciary 
has received copies of the documents described in paragraph (j)(1) of 
this Section II.
    (4) With respect to a Section 404(c) Plan, written acknowledgement 
of the receipt of such documents is provided by the Independent 
Fiduciary (i.e., the Plan administrator, trustee, investment manager or 
named fiduciary, as the recordholder of Trust shares). Such Independent 
Fiduciary will be required to represent in writing to PMAS that such 
fiduciary is--
    (A) Independent of PaineWebber and its affiliates;
    (B) Knowledgeable with respect to the Plan in administrative 
matters and funding matters related thereto, and;
    (C) Able to make an informed decision concerning participation in 
the PACE Program.
    (5) With respect to a Plan that is covered under Title I of the 
Act, where investment decisions are made by a trustee, investment 
manager or a named fiduciary, such Independent Fiduciary is required to 
acknowledge, in writing, receipt of such documents and represent to 
PMAS that such fiduciary is--
    (A) Independent of PMAS and its affiliates;
    (B) Capable of making an independent decision regarding the 
investment of Plan assets;
    (C) Knowledgeable with respect to the Plan in administrative 
matters and funding matters related thereto; and
    (D) Able to make an informed decision concerning participation in 
the PACE Program.
    (k) As applicable, subsequent to its participation in the PACE 
Program, each Independent Fiduciary receives the following written or 
oral disclosures with respect to its ongoing participation in the PACE 
Program:
    (1) Written confirmations of each purchase or redemption 
transaction by the Plan with respect to a Portfolio.
    (2) Telephone quotations from PaineWebber of such Plan's account 
balance.
    (3) A monthly statement of account from PaineWebber specifying the 
net asset value of the Plan's investment in such account. Such 
statement is also anticipated to include cash flow and transaction 
activity during the month, unrealized gains or losses on Portfolio 
shares held; and a summary of total earnings and capital returns on the 
Plan's PACE Portfolio for the month and year-to-date.
    (4) The Trust's semi-annual and annual report which will include 
financial statements for the Trust and investment management fees paid 
by each Portfolio.
    (5) A written quarterly monitoring report that includes a record of 
the Plan's PACE Program portfolio for the quarter and since inception, 
showing the rates of return relative to comparative market indices 
(illustrated in a manner that reflects the effect of any fees for 
participation in the PACE Program actually incurred during the period); 
an investment outlook summary containing market commentary; and the 
Plan's actual PACE Program portfolio with a breakdown, in both dollars 
and percentages, of the holdings in each portfolio. The quarterly 
monitoring report will also contain an analysis and an evaluation of a 
Plan investor's account to ascertain whether the Plan's investment 
objectives have been met and recommending, if required, changes in 
Portfolio allocations.
    (6) A statement, furnished at least quarterly or annually, 
specifying--
    (A) The total, expressed in dollars, of each Portfolio's brokerage 
commissions that are paid to PaineWebber and its affiliates;
    (B) The total, expressed in dollars, of each Portfolio's brokerage 
commissions that are paid to unrelated brokerage firms;
    (C) The average brokerage commissions per share by the Trust to 
brokers affiliated with PaineWebber, expressed as cents per share; and
    (D) The average brokerage commissions per share by the Trust to 
brokers unrelated to PaineWebber and its affiliates, expressed as cents 
per share for any year in which brokerage commissions are paid to 
PaineWebber by the Trust Portfolios in which a Plan's assets are 
invested.
    (7) Periodic meetings with a PaineWebber Investment Executive by 
Independent Fiduciaries to discuss the quarterly monitoring report or 
any other questions that may arise.
    (l) In the case of a Section 404(c) Plan where the Independent 
Fiduciary has established an omnibus account in the name of the Plan 
(the Undisclosed Account) with PaineWebber, the information noted above 
in subparagraphs (k)(1) through (k)(7) of this Section II may be 
provided directly by PaineWebber to the Directing Participants or to 
the Independent Fiduciary for dissemination to the Directing 
Participants, depending upon the arrangement negotiated by the 
Independent Fiduciary with PMAS.
    (m) If previously authorized in writing by the Independent 
Fiduciary, the Plan investor's account is automatically rebalanced on a 
periodic basis to the asset allocation previously prescribed by the 
Plan or participant, as applicable, if the quarterly screening reveals 
that one or more Portfolio allocations deviates from the allocation 
prescribed by the investor by the agreed-upon formula threshold.
    (n) The books and records of the Trust are audited annually by 
independent, certified public accountants and all investors receive 
copies of an audited financial report no later than 60 days after the 
close of each Trust fiscal year.
    (o) PaineWebber maintains, for a period of six years, the records 
necessary to enable the persons described in paragraph (p) of this 
Section II to determine whether the conditions of this exemption have 
been met, except that--
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of PaineWebber 
and/or its affiliates, the records are lost or destroyed prior to the 
end of the six year period; and
    (2) No party in interest other than PaineWebber shall be subject to 
the civil penalty that may be assessed under section 502(i) of the Act, 
or to the taxes imposed by section 4975(a) and (b) of the Code, if the 
records are not maintained, or are not available for examination as 
required by paragraph (p)(1) of this Section II below.
    (p)(1) Except as provided in subparagraph (p)(2) of this paragraph 
and notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the records referred to in paragraph (o) of 
this Section II are unconditionally available at their customary 
location during normal business hours by:
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service (the Service) or the 
Securities and Exchange Commission (the SEC);

[[Page 11884]]

    (B) Any fiduciary of a participating Plan or any duly authorized 
representative of such fiduciary;
    (C) Any contributing employer to any participating Plan or any duly 
authorized employee representative of such employer; and
    (D) Any participant or beneficiary of any participating Plan, or 
any duly authorized representative of such participant or beneficiary.
    (p)(2) None of the persons described above in paragraphs (p)(1)(B)-
(p)(1)(D) of this paragraph (p) are authorized to examine the trade 
secrets of PaineWebber or Mitchell Hutchins or commercial or financial 
information which is privileged or confidential.
Section III. Definitions
    For purposes of this proposed exemption:
    (a) The term ``PaineWebber'' means PaineWebber Incorporated and any 
affiliate of PaineWebber, as defined in paragraph (b) of this Section 
III.
    (b) An ``affiliate'' of PaineWebber includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with PaineWebber.
    (2) Any officer, director or partner in such person, and
    (3) Any corporation or partnership of which such person is an 
officer, director or a 5 percent partner or owner.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The term ``Independent Fiduciary'' means a Plan fiduciary which 
is independent of PaineWebber and its affiliates and is either
    (1) A Plan administrator, trustee, investment manager or named 
fiduciary, as the recordholder of Trust shares of a Section 404(c) 
Plan;
    (2) A participant in a Keogh Plan;
    (3) An individual covered under a self-directed IRA which invests 
in Trust shares;
    (4) An employee, officer or director of PaineWebber and/or its 
affiliates covered by an IRA not subject to Title I of the Act;
    (5) A trustee, Plan administrator, investment manager or named 
fiduciary responsible for investment decisions in the case of a Title I 
Plan that does not permit individual direction as contemplated by 
Section 404(c) of the Act; or
    (e) The term ``Directing Participant'' means a participant in a 
Plan covered under the provisions of section 404(c) of the Act, who is 
permitted under the terms of the Plan to direct, and who elects to so 
direct, the investment of the assets of his or her account in such 
Plan.
    (f) The term ``Plan'' means a pension plan described in 29 CFR 
2510.3-2, a welfare benefit plan described in 29 CFR 2510.3-1, a plan 
described in section 4975(e)(1) of the Code, and in the case of a 
Section 404(c) Plan, the individual account of a Directing Participant.
    Effective Date: If granted, this proposed exemption will be 
effective as of August 18, 1995.

Summary of Facts and Representations

    1. The parties to the transactions are as follows:
    (a) Paine Webber Group (Paine Webber Group), located in New York, 
New York, is the parent of PaineWebber.
    Paine Webber Group is one of the leading full-line securities firms 
servicing institutions, governments and individual investors in the 
United States and throughout the world. Paine Webber Group conducts its 
businesses in part through PMAS, a division of PaineWebber and Mitchell 
Hutchins, a wholly owned subsidiary of PaineWebber. Paine Webber Group 
is a member of all principal securities and commodities exchanges in 
the United States and the National Association of Securities Dealers, 
Inc. In addition, it holds memberships or associate memberships on 
several principal foreign securities and commodities exchanges. 
Although Paine Webber Group is not an operating company and, as such, 
maintains no assets under management, as of September 30, 1994, Paine 
Webber Group and its subsidiaries rendered investment advisory services 
with respect to $36.1 billion in assets.
    (b) PaineWebber, whose principal executive offices are located in 
New York, New York, provides investment advisory services to 
individuals, banks, thrift institutions, investment companies, pension 
and profit sharing plans, trusts, estates, charitable organizations, 
corporations and other business and government entities. PaineWebber is 
also responsible for securities underwriting, investment and merchant 
banking services and securities and commodities trading as principal 
and agent. PaineWebber serves as the dealer of Trust shares described 
herein.
    (c) PMAS, located in Weehawken, New Jersey is responsible for 
individual investor account management and investor consulting 
services. PMAS provides such services to the investors involved in 
various PaineWebber investment programs by providing asset allocation 
recommendations and related services with respect to their investments. 
PMAS provides investment consulting and advisory services to more than 
40,000 accounts, with account sizes ranging from institutional accounts 
in excess of $650 million in assets to individual accounts with 
$100,000 minimum investments. PMAS provides investors in the Trust with 
asset allocation recommendations and related services with respect to 
investments in the Trust Portfolios.
    (d) Mitchell Hutchins, which is located in New York, New York, is a 
registered investment adviser under the Investment Adviser's Act of 
1940 (the Advisers Act) and a wholly owned subsidiary of PaineWebber. 
Mitchell Hutchins provides investment advisory and asset management 
services to investors and develops and distributes investment products, 
including mutual funds and limited partnerships. Mitchell Hutchins also 
provides financial services to over $24.8 billion in client assets 
representing twenty-eight investment companies with fifty-five separate 
portfolios. Mitchell Hutchins is providing investment management and 
administrative services with respect to the Trust and investment 
advisory services with respect to one of the Trust's Portfolios.
    (e) State Street Bank and Trust Company (State Street), located in 
North Quincy, Massachusetts, serves as the custodian of assets for the 
Trust. State Street is not affiliated with PaineWebber and its 
affiliates. It provides a full array of integrated banking products, 
focusing on servicing financial assets (i.e., asset custody, cash 
management, securities lending, multi-currency accounting and foreign 
exchange), managing assets and commercial lending. As of September 30, 
1994, State Street rendered custodian services with respect to 
approximately $1.6 trillion in assets and provided investment 
management services to approximately $155 billion in assets.
    (f) PFPC, Inc. (PFPC), a subsidiary of PNC Bank, National 
Association, and whose principal address is in Wilmington, Delaware, 
serves as the Trust's transfer and dividend disbursing agent. PFPC is 
not affiliated with PaineWebber and its affiliates. PFPC provides a 
complete range of mutual fund administration and accounting services to 
a diverse product base of domestic and international investment 
portfolios. PFPC is also one of the nation's leading providers of 
transfer and shareholder servicing services to mutual funds and asset 
management accounts. As of September 30, 1994, PFPC rendered accounting 
and administration services to over 400

[[Page 11885]]
mutual funds and provided transfer agency, dividend disbursing and/or 
shareholder servicing services with respect to more than 3.1 million 
shareholder accounts.
    2. The Trust is a no load, open-end, diversified management 
investment company registered under the '40 Act. The Trust was 
organized as a Delaware business trust on September 9, 1994 and it has 
an indefinite duration. As of November 6, 1995, the Trust had $184 
million in net assets. The Trust presently consists of twelve different 
portfolios which will pay dividends to investors. The composition of 
the Portfolios will cover a spectrum of investments ranging from 
foreign and U.S. Government-related securities to equity and debt 
securities issued by foreign and domestic corporations. Although a 
Portfolio of the Trust is permitted to invest its assets in securities 
issued by PaineWebber and/or its affiliates, the percentage of that 
Portfolio's net assets invested in such securities will never exceed 
one percent. With the exception of the PACE Money Market Investments 
Portfolio, shares in each of the Portfolios are being initially offered 
to the public at a net asset value of $10 per share. Shares in the PACE 
Money Market Investments Portfolio are being initially offered to the 
public at a net asset value of $1.00 per share.
    3. Mitchell Hutchins serves as the distributor of Trust shares and 
PaineWebber serves as the dealer with respect to shares of the 
Portfolios.<SUP>6 Such shares are being offered by PaineWebber at no 
load, to participants in the PACE Program. The PACE Program is an 
investment service pursuant to which PMAS provides participants in the 
PACE Program with asset allocation recommendations and related services 
with respect to the Portfolios based on an evaluation of an investor's 
investment objectives and risk tolerances. As stated above, State 
Street will serve as the custodian of each Portfolio's assets and PFPC 
serves as the Portfolio's transfer and dividend disbursing agent.

    \6\ As distributor or principal underwriter for the Trust, 
Mitchell Hutchins will use its best efforts, consistent with its 
other businesses, to sell shares of the Portfolios. Pursuant to a 
separate dealer agreement with Mitchell Hutchins, PaineWebber will 
sell Trust shares to investors. However, neither Mitchell Hutchins 
nor PaineWebber will receive any compensation for their services as 
distributor or dealer of Trust shares. According to the applicants, 
Mitchell Hutchins and PaineWebber may be regarded as having an 
indirect economic incentive by virtue of the fact that Mitchell 
Hutchins and PaineWebber will be paid for the services they provide 
to the Trust in their respective capacities as investment manager 
and administrator of the Trust (Mitchell Hutchins) and as the 
provider of asset allocation and related services (PaineWebber, 
through PMAS).
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    To participate in the PACE Program, each investor must open a 
brokerage account with PaineWebber.<SUP>7 The minimum initial 
investment in the PACE Program is $10,000.

    \7\ According to the Statement of Additional Information that 
accompanies the Prospectus for the PACE Program, shares in the Trust 
are not certificated for reasons of economy and convenience. 
However, PFPC maintains a record of each investor's ownership of 
shares. Although Trust shares are transferable and accord voting 
rights to their owners, they do not confer pre-emptive rights (i.e., 
the privilege of a shareholder to maintain a proportionate share of 
ownership of a company by purchasing a proportionate share of any 
new stock issues). PaineWebber represents that in the context of an 
open-end investment company that continuously issues and redeems 
shares, a pre-emptive right would make the normal operations of the 
Trust impossible.
    As for voting rights, PaineWebber states that they are accorded 
to recordholders of Trust shares. PaineWebber notes that a 
recordholder of Trust shares may determine to seek the submission of 
proxies by Plan participants and vote Trust shares accordingly. In 
the case of individual account plans such as Section 404(c) Plans, 
PaineWebber believes that most Plans will pass the vote through to 
Directing Participants on a pro-rata basis.
---------------------------------------------------------------------------

    Although PaineWebber anticipates that investors in the Trust will 
initially consist of institutions and individuals, it is proposed that 
prospective investors will include Plans for which PaineWebber may or 
may not currently maintain investment accounts. A majority of these 
Plans may be IRAs or Keogh Plans. In addition, it is proposed that 
Plans for which PaineWebber or an affiliate serves as a prototype 
sponsor and/or a nondiscretionary trustee or custodian be permitted to 
invest in the Trust.<SUP>8

    \8\ The Department notes that the general standards of fiduciary 
conduct promulgated under the Act would apply to the participation 
in the PACE Program by an Independent Fiduciary. Section 404 of the 
Act requires that a fiduciary discharge his duties respecting a plan 
solely in the interest of the plan's participants and beneficiaries 
and in a prudent fashion. Accordingly, an Independent Fiduciary must 
act prudently with respect to the decision to enter into the PACE 
Program with PMAS as well as with respect to the negotiation of 
services that will be performed thereunder and the compensation that 
will be paid to PaineWebber and its affiliates. The Department 
expects that an Independent Fiduciary, prior to entering into the 
PACE Program, to understand fully all aspects of such arrangement 
following disclosure by PMAS of all relevant information.
---------------------------------------------------------------------------

    The applicants represent that the initial purchase of shares in the 
Trust by a Plan participating in the PACE Program may give rise to a 
prohibited transaction where PaineWebber, or an affiliate thereof, is a 
party in interest with respect to the Plan. PaineWebber also 
acknowledges that a prohibited transaction could arise upon a 
subsequent purchase or redemption of shares in the Trust by a 
participating Plan inasmuch as the party in interest relationship 
between PaineWebber and the Plan may have been established at that 
point.
    Accordingly, the applicants have requested retroactive exemptive 
relief from the Department with respect to the purchase and redemption 
of shares in the Trust by a Plan participating in the PACE Program 
where PaineWebber does not (a) sponsor the Plan (other than as 
prototype sponsor) or (b) have discretionary authority over such Plan's 
assets.<SUP>9 No commissions or fees will be paid by a Plan with 
respect to the sale and redemption transactions or a Plan's exchange of 
shares in a Portfolio for shares of another Portfolio. If granted, the 
proposed exemption will be effective as of August 18, 1995.

    \9\ PaineWebber represents that to the extent employee benefit 
plans that are maintained by PaineWebber purchase or redeem shares 
in the Trust, such transactions will meet the provisions of 
Prohibited Transaction Exemption (PTE) 77-3 (42 FR 18734, April 8, 
1977). PaineWebber further represents that, although the exemptive 
relief proposed above would not permit PaineWebber or an affiliate 
(while serving as a Plan fiduciary with discretionary authority over 
the management of a Plan's assets) to invest those assets over which 
it exercises discretionary authority in Trust shares, a purchase or 
redemption of Trust shares under such circumstances would be 
permissible if made in compliance with the terms and conditions of 
PTE 77-4 (42 FR 18732, April 8, 1977). The Department expresses no 
opinion herein as to whether such transactions will comply with the 
terms and conditions of PTEs 77-3 and 77-4.
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    4. Overall responsibility for the management and supervision of the 
Trust and the Portfolios rests with the Trust's Board of Trustees (the 
Trustees). The Trustees will approve all significant agreements 
involving the Trust and the persons and companies that provide services 
to the Trust and the Portfolios.
    5. Mitchell Hutchins also serves as the investment manager to each 
Portfolio. Under its investment management and administration agreement 
with the Trust, Mitchell Hutchins will provide certain investment 
management and administrative services to the Trust and the Portfolios 
that, in part, involve calculating each Portfolio's net asset value 
<SUP>10 and, with the exception of the PACE Money Market Investments 
Portfolio (for which Mitchell Hutchins will exercise investment 
discretion), making recommendations to the Board of Trustees of the 
Trust regarding (a) the

[[Page 11886]]
investment policies of each Portfolio and (b) the selection and 
retention of the Sub-Advisers who will exercise investment discretion 
with respect to the assets of each Portfolio.\11\

    \10\ The net asset value of each Portfolio's shares, except for 
the PACE Money Market Investments Portfolio, fluctuates and is 
determined as of the close of regular trading on the New York Stock 
Exchange (the NYSE) (currently, 4:00 p.m. Eastern Time) each 
business day. The net asset value of shares in the PACE Money Market 
Investments Portfolio is determined as of 12:00 p.m. each business 
day. Each Portfolio's net asset value per share is determined by 
dividing the value of the securities held by the Portfolio plus any 
cash or other assets minus all liabilities by the total number of 
Portfolio shares outstanding.
    \11\ Subject to the supervision and direction of the Trustees, 
Mitchell Hutchins will provide to the Trust investment management 
evaluation services principally by performing initial review on 
prospective Sub-Advisers for each Portfolio and thereafter 
monitoring each Sub-Adviser's performance. In evaluating prospective 
Sub-Advisers, Mitchell Hutchins will consider, among other factors, 
each Sub-Adviser's level of expertise, consistency of performance 
and investment discipline or philosophy. Mitchell Hutchins will have 
the responsibility for communicating performance expectations and 
evaluations to the Sub-Advisers and ultimately recommending to the 
Trustees whether a Sub-Adviser's contract should be continued.
---------------------------------------------------------------------------

    The Sub-Advisers will provide discretionary advisory services with 
respect to the investment of the assets of the respective Portfolios 
(other than the PACE Money Market Investments Portfolio) on the basis 
of their performance in their respective areas of expertise in asset 
management. With the exception of the PACE Money Market Investments 
Portfolio which will be advised by Mitchell Hutchins, PaineWebber 
represents that all of the Sub-Advisers, will be independent of, and 
will remain independent of PaineWebber and/or its affiliates. The Sub- 
Advisers will be registered investment advisers under the Advisers Act 
and maintain their principal executive offices in various regions of 
the United States.
    The administrative services for which Mitchell Hutchins will be 
responsible include the following: (a) supervising all aspects of the 
operations of the Trust and each Portfolio (e.g., oversight of transfer 
agency, custodial, legal and accounting services; (b) providing the 
Trust and each Portfolio with corporate, administrative and clerical 
personnel as well as maintaining books and records for the Trust and 
each Portfolio; (c) arranging for the periodic preparation, updating, 
filing and dissemination of the Trust's Registration Statement, proxy 
materials, tax returns and required reports to each Portfolio's 
shareholders and the SEC, as well as other federal or state regulatory 
authorities; (d) providing the Trust and each Portfolio with, and 
obtaining for it, office space, equipment and services; (e) providing 
the Trustees with economic and investment analyses and reports, and 
making available to the Trustees, upon request, any economic, 
statistical and investment services. These administrative services do 
not include any management services that might be performed by Mitchell 
Hutchins. As noted in Representations 17 and 18, Mitchell Hutchins is 
separately compensated for management services rendered to the Trust.
    6. Through the PACE Program, PMAS is providing a Plan investor with 
non-binding, asset allocation recommendations with respect to such 
investor's investments in the Portfolios. In order to make these 
evaluations, PMAS will furnish copies of an investor questionnaire, 
designed to elicit information about the specific investment needs, 
objectives and expectations of the investor, to an Independent 
Fiduciary of a Title I Plan that does not permit individually-directed 
investments, to an Independent Fiduciary of an IRA or a Keogh Plan, or 
to a Directing Participant of a Section 404(c) Plan. Although the 
contents of the questionnaire may vary somewhat depending upon the type 
of Plan investing in the PACE Program, for a particular Plan, the same 
questionnaire will be given to each participant.
    In the case of a Section 404(c) Plan where an Independent Fiduciary 
has established an Undisclosed Account with PaineWebber in the name of 
the Plan, PMAS will provide investor questionnaires to each Directing 
Participant through PaineWebber Investment Executives (who are 
registered representatives of PaineWebber), via the Plan's benefits 
personnel or independent recordkeeper (the Recordkeeper), or by other 
means requested by the Independent Fiduciary. The applicants recognize 
that Section 404(c) Plans typically employ a Recordkeeper to assist the 
Independent Fiduciary with maintaining Plan-related data which is used 
to generate benefit status reports, regulatory compliance reports and 
participant- and Plan-level investment performance reports. Therefore, 
the Undisclosed Account arrangement is intended to coordinate with the 
functions traditionally provided to Section 404(c) Plans by their 
Recordkeepers.<SUP>12

    \12\ The applicants wish to emphasize that the PACE Program can 
currently be provided to participants in Section 404(c) Plans on 
either an Undisclosed Account or a disclosed account (the Disclosed 
Account) basis (i.e., where the Independent Fiduciary opens a 
separate PACE Program account with PaineWebber for each Directing 
Participant). In this regard, the applicants note that PaineWebber 
presently offers the PACE Program on a Disclosed Account arrangement 
to IRAs and Keogh Plans. However, for other Section 404(c) Plans 
such as those that are covered under the provisions of section 
401(k) of the Code, PaineWebber prefers not to establish Disclosed 
Accounts for individual participants because of servicing and other 
administrative matters typically undertaken by such Plans' 
Recordkeepers. The applicants note that from the participant's 
perspective, there is no difference in the nature of the services 
provided under the PACE Program regardless of whether the 
participant's investment is held through a ``Disclosed'' or 
``Undisclosed'' Account arrangement. The applicants state that these 
designations are primarily internal distinctions relating to whether 
the participant's name appears in the account set-up and reflects 
differences in the applicable sub-accounting functions.
    Notwithstanding the above, the Department wishes to point out 
that, regardless of the arrangement negotiated with PaineWebber, an 
Independent Fiduciary of a Section 404(c) Plan has the 
responsibility to disseminate all information it receives to each 
Directing Participant investing in the PACE Program.
---------------------------------------------------------------------------

    7. Based upon data obtained from the investor questionnaire, PMAS 
will evaluate the investor's risk tolerances and investment objectives. 
PMAS will then recommend, in writing, an appropriate allocation of 
assets among suitable Portfolios that conforms to these tolerances and 
objectives.
    PaineWebber represents that PMAS will not have any discretionary 
authority or control with respect to the allocation of an investor's 
assets among the Portfolios. In the case of an IRA or Keogh Plan, 
PaineWebber represents that all of PMAS's recommendations and 
evaluations will be presented to the Independent Fiduciary and will be 
implemented only if accepted and acted upon by such fiduciary.
    In the case of a Section 404(c) Plan, PaineWebber represents that 
Directing Participants in such Plan will be presented with 
recommendations and evaluations that are tailored to the responses 
provided by that Directing Participant in his or her questionnaire. 
PMAS's recommendations will be disseminated to Directing Particpants in 
accordance with procedures established for the Plan.
    After receipt of PMAS's initial recommendations, which may or may 
not be adopted, the Independent Fiduciary or Directing Participant, as 
applicable, will select the specific Portfolios. PMAS will continue to 
recommend to Independent Fiduciaries or Directing Participants asset 
allocations among the selected Portfolios.
    8. Aside from the investor questionnaire, in order for a Plan to 
participate in the PACE Program, PaineWebber or PMAS will provide an 
Independent Fiduciary with a copy of the Trust Prospectus discussing 
(a) the investment objectives of the Portfolios comprising the Trust, 
(b) the policies employed to achieve these objectives, (c) the 
corporate affiliation existing between PaineWebber, PMAS, Mitchell 
Hutchins and their subsidiaries, and (d) the compensation paid to such 
entities by the Trust and information explaining the risks attendant to 
investing in the Trust. In addition, upon written or oral

[[Page 11887]]
request to PaineWebber, the Independent Fiduciary will be given a 
Statement of Additional Information supplementing the Prospectus which 
describes, in further detail, the types of securities and other 
instruments in which the Portfolios may invest, the investment policies 
and strategies that the Portfolios may utilize and certain risks 
attendant to those investments, policies and strategies. Further, each 
Independent Fiduciary will be given a copy of the investment advisory 
agreement between PMAS and such Plan relating to participation in the 
PACE Program, including copies of the notice of proposed exemption and 
grant notice for the exemptive relief provided herein. Upon oral or 
written request to the Trust, PaineWebber will also provide an 
Independent Fiduciary with a copy of the respective investment advisory 
agreements between Mitchell Hutchins and the Sub-Advisers.
    In the case of a Section 404(c) Plan, depending on the arrangement 
negotiated with the Independent Fiduciary, PaineWebber represents that 
the Independent Fiduciary will make available copies of the foregoing 
documents to Directing Participants.
    In addition, Independent Fiduciaries and, if applicable, Directing 
Participants, will receive introductory documentation regarding the 
PACE Program in marketing materials and in other communications. 
Further, depending upon the arrangement negotiated between PMAS and the 
Independent Fiduciary, a PaineWebber Investment Executive will meet 
with a Directing Participant, upon oral or written request, to discuss 
the services offered under the PACE Program, including the rebalancing 
feature described in Representation 12, as well as the operation and 
objectives of the Portfolios.<SUP>13

    \13\ The Department is expressing no opinion as to whether the 
information provided under the PACE Program is sufficient to enable 
a Directing Participant to exercise independent control over assets 
in his or her account as contemplated by section 404(c) of the Act.
---------------------------------------------------------------------------

    9. If accepted as an investor in the PACE Program, an Independent 
Fiduciary will be required by PMAS to acknowledge, in writing, prior to 
purchasing Trust shares, that such fiduciary has received copies of the 
documents referred to in Representation 8. With respect to a Plan that 
is covered by Title I of the Act (e.g., a defined contribution plan), 
where investment decisions will be made by a trustee, investment 
manager or a named fiduciary, PMAS will require that such Independent 
Fiduciary acknowledge in writing receipt of such documents and 
represent to PaineWebber that such fiduciary is (a) independent of 
PaineWebber and its affiliates, (b) capable of making an independent 
decision regarding the investment of Plan assets, (c) knowledgeable 
with respect to the Plan in administrative matters and funding matters 
related thereto, and (d) able to make an informed decision concerning 
participation in the PACE Program.
    With respect to a Section 404(c) Plan, written acknowledgement of 
the receipt of such documents will be provided by the Independent 
Fiduciary (i.e., the Plan administrator, trustee, investment manager or 
named fiduciary, as the recordholder of Trust shares). Such Independent 
Fiduciary will be required to represent, in writing, to PMAS that such 
fiduciary is (a) independent of PaineWebber and its affiliates, (b) 
knowledgeable with respect to the Plan in administrative matters and 
funding matters related thereto, and (c) able to make an informed 
decision concerning participation in the PACE Program.
    10. After the selection of specific Portfolios by an Independent 
Fiduciary or a Directing Participant,<SUP>14 PMAS will continue to 
provide recommendations to such persons relating to asset allocations 
among the selected Portfolios. However, with respect to a Section 
404(c) Plan in which at least three Portfolios may be selected by the 
Independent Fiduciary, PMAS's initial asset allocation recommendation 
to Directing Participants will be limited to the suggested Portfolios 
offered under the Plan. PMAS anticipates that it may also work with the 
Independent Fiduciary of a Section 404(c) Plan to assist the fiduciary 
in (a) identifying and drafting investment objectives, (b) selecting 
suitable investment categories or actual Portfolios to be offered to 
Directing Participants or (c) recommending appropriate long-term 
investment allocations to a Directing Participant, if this individual 
receives such advice.

    \14\ In the case of a Section 404(c) Plan, PMAS will receive 
electronically from the Recordkeeper each participant's investment 
selections.
---------------------------------------------------------------------------

    An Independent Fiduciary or a Directing Participant will be 
permitted to change his or her investment allocation by specifying the 
new allocation in writing or by other means authorized by the Plan 
(e.g., by use of a kiosk). Although PaineWebber currently imposes no 
limitation on the frequency with which an Independent Fiduciary or a 
Directing Participant may change his or her prescribed asset 
allocation, PaineWebber reserves the right to impose reasonable 
limitations.
    11. Depending on the arrangement negotiated with PMAS, PaineWebber 
will provide each Independent Fiduciary with the following information: 
(a) Written confirmations of each purchase and redemption of shares of 
a Portfolio; (b) daily telephone quotations of such Plan's account 
balance; (c) a monthly statement of account specifying the net asset 
value of a Plan's assets that are invested in such account; and (d) a 
quarterly, written investment performance monitoring report.
    The monthly account statement will include, among other 
information: (a) cash flow and transaction activity during the month, 
including purchase, sale and exchange activity and dividends paid or 
reinvested; (b) unrealized gains or losses on Portfolio shares held; 
and (c) a summary of total earnings and capital returns on the Plan's 
PACE Program Portfolio for the month and year-to-date. The quarterly 
investment performance report will include, among other information, 
the following: (a) a record of the performance of the Plan's PACE 
Program portfolio for the quarter and since inception showing rates of 
return relative to comparative market indices (illustrated in a manner 
that reflects the effect of any fees for participation in the PACE 
Program actually incurred during the period) <SUP>15; (b) an investment 
outlook summary containing market commentary; and (c) the Plan's actual 
PACE Program portfolio with a breakdown, in both dollars and 
percentages, of the holdings in each Portfolio. In addition, to the 
extent required by the arrangement negotiated with the Independent 
Fiduciary, the quarterly performance monitoring report will (a) contain 
an analysis and an evaluation of a Plan investor's account to assist 
the investor to ascertain whether the investment objectives are being 
met, and (b) recommend, from time to time, changes in Portfolio 
allocations. The quarterly performance monitoring report is described 
in the summary of the PACE Program contained in the Trust Prospectus.

    \15\ The comparative index is a blended index of the individual 
Portfolio indices that are weighted by the allocation percentages 
corresponding to those holdings that make up the investor's total 
investment in the PACE Program.
---------------------------------------------------------------------------

    With respect to a Section 404(c) Plan, the quarterly investment 
performance report transmitted to the Independent Fiduciary will 
include the following aggregate information relative to the Undisclosed 
Account as well as market commentary: (a) a record of the performance 
of the Plan's assets and rates of return as compared to several

[[Page 11888]]
appropriate market indices (illustrated in a manner that reflects the 
effect of any fees for participation in the PACE Program actually 
incurred during the period); and (b) the Plan's actual investment 
portfolio with a breakdown of investments made in each Portfolio. As to 
each Directing Participant, PMAS will provide information to be 
contained in the quarterly performance monitoring report to such 
participants.
    In addition, on both a quarterly and annual basis, commencing with 
the first quarterly report due after this notice of proposed exemption 
is issued, PaineWebber will provide, as applicable, an Independent 
Fiduciary or a Directing Participant with written disclosures of (a) 
the total, expressed in dollars, of each Portfolio's brokerage 
commissions that are paid to PaineWebber and its affiliates; (b) the 
total, expressed in dollars, of each Portfolio's brokerage commissions 
that are paid to unrelated brokerage firms; (c) the average brokerage 
commissions per share by the Trust to brokers affiliated with the 
PaineWebber, expressed as cents per share; and (d) the average 
brokerage commissions per share by the Trust to brokers unrelated to 
the PaineWebber and its affiliates, expressed as cents per share for 
any year in which brokerage commissions are paid to PaineWebber by the 
Trust Portfolios in which a Plan's assets are invested.
    Further, the Independent Fiduciary or Directing Participant, as 
applicable, will have access to a PaineWebber Investment Executive for 
the discussion of the quarterly performance monitoring reports, the 
rebalancing feature described below in Representation 12 or any 
questions that may arise.
    12. Depending on the arrangement negotiated with PMAS, for any 
investor who so directs PMAS, the investor's Trust holdings will be 
automatically rebalanced on a periodic basis to maintain the investor's 
designated allocation among the Portfolios. PMAS will receive no 
additional compensation to provide this service. At both the 
Independent Fiduciary and Directing Participant levels, the rebalancing 
election will be made in writing or in any manner permitted by the Plan 
(e.g., in the case of a Section 404(c) Plan, electronic transmission by 
the Recordkeeper to PMAS of the Directing Participant's election). The 
election will be accompanied by a disclosure that is designed to 
provide the Independent Fiduciary and the Directing Participant, as 
applicable, with an understanding of the rebalancing feature. 
Disclosure of the rebalancing feature is included in the Prospectus for 
the PACE Program which will be provided to each Independent Fiduciary 
and Directing Participant.
    It is currently anticipated that screening will be performed 
quarterly with respect to the PACE Program accounts for which the 
investor has elected the rebalancing service and that rebalancing will 
be performed for each such account where any Portfolio allocation 
deviates from the allocation prescribed by the investor by the agreed-
upon uniform threshold.<SUP>16 The threshold for triggering rebalancing 
is a percentage (presently, 2\1/2\ percent) that has been established 
by PaineWebber and is applied uniformly to all accounts subject to 
rebalancing. If PaineWebber were, in the future, to determine that this 
uniform threshold should be changed, PMAS would notify all investors 
(including Independent Fiduciaries and Directing Participants) who had 
elected the rebalancing feature. Then, in order to continue to provide 
this service, PMAS would need to obtain the consent of each such 
investor.

    \16\ Currently, with regard to investors who have elected the 
rebalancing feature, rebalancing is effected by an automated, 
mechanical system that, as to each account: (a) Calculates the 
current allocation for each Portfolio based on the quarter-end net 
asset value; (b) compares the current allocation for each Portfolio 
with the allocation prescribed by the investor; (c) identifies for 
rebalancing all accounts with one or more Portfolios whose current 
allocation deviates by the agreed-upon threshold from the allocation 
prescribed by the investor; and (d) for each account which has been 
identified for rebalancing pursuant to (a)-(c), (1) calculates the 
dollar difference between the current allocation and the allocation 
prescribed by the investor, (2) reduces each Portfolio whose current 
allocation exceeds the allocation prescribed by the investor by an 
amount equal to the dollar difference between the two allocations, 
and (3) increases each Portfolio whose current allocation is less 
than the allocation prescribed by the investor by an amount equal to 
the dollar difference between the two allocations. This rebalancing 
is accomplished by automatically exchanging, in the order of the 
Portfolio's respective CUSIP numbers, a dollar-equivalent number of 
shares of each Portfolio to be reduced for the corresponding number 
of shares of a Portfolio to be increased until the current 
allocation is equal to the allocation prescribed by the investor. 
Valuation of the Portfolios is done as of the close of regular 
trading on the NYSE each business day.
---------------------------------------------------------------------------

    The applicants note that rebalancing is a feature that an investor 
chooses to apply indefinitely until the investor notifies PaineWebber 
that it wishes to have this service discontinued. After rebalancing has 
been discontinued, an investor may reactivate the rebalancing service 
by notifying PaineWebber in writing.
    13. PaineWebber notes that not all of the services described above 
will be provided to every Plan. The services that will be provided will 
depend on what is decided upon by the Independent Fiduciary. Assuming 
the Independent Fiduciary requests a reduction in the level of 
services, there will be no corresponding reduction in the fee that the 
fiduciary pays PMAS. This is due to the bundled nature of the services 
provided in the PACE Program. For example, if the Independent Fiduciary 
were to limit the number of Portfolios available as investment options 
for its Plan participants, this might be deemed a reduction in the 
services available under the PACE Program that would not result in any 
reduction in the applicable Program fee. Similarly, under the PACE 
Program, an Independent Fiduciary of a Section 404(c) Plan may decide 
for its own reasons not to make the automatic rebalancing service 
available to Directing Participants. Under such circumstances, PMAS 
will not reduce its fees to reflect the absence of the provision of 
rebalancing services to the Plan. Further, under the particular 
arrangement which it has negotiated with PMAS, the Independent 
Fiduciary may or may not request PaineWebber Investment Executives to 
make presentations or be available to meet with Directing Participants.
    Thus, an Independent Fiduciary may choose all, some or none of the 
PACE Program's optional services. If an Independent Fiduciary selects 
all of these services, the Plan will incur no greater an annual fee 
than had that Independent Fiduciary selected some or none of these 
services. The absence of a reduction in fees in the event not all 
services are requested is an issue that should be considered by the 
Independent Fiduciary.<SUP>17 Nonetheless, the Applicants represent 
that the reduction in the types of services provided will not cause the 
fees paid to PaineWebber by a Plan under the PACE Program to violate 
section 408(b)(2) of the Act.

    \17\ In this regard, the Department emphasizes that it expects 
the Independent Fiduciary to consider prudently the relationship of 
the fees to be paid by the Plan to the level of services to be 
provided by PaineWebber. In response to the Department's concern 
over this matter, PaineWebber represents that it will amend the 
Trust Prospectus to include the following statement: ``Investors who 
are fiduciaries or otherwise, in the process of making investment 
decisions with respect to Plans, should consider, in a prudent 
manner, the relationship of the fees to be paid by the Plan along 
with the level of services provided by PaineWebber.''
---------------------------------------------------------------------------

    14. Plans wishing to redeem their Trust shares may communicate 
their requests in writing or by telephone to PMAS. Redemption requests 
received in proper form prior to the close of trading on the NYSE will 
be effected at the net asset value per share determined on that day. 
Redemption requests received after

[[Page 11889]]
the close of regular trading on the NYSE will be effected at the net 
asset value at the close of business of the next day, except on 
weekends or holidays when the NYSE is closed. A Portfolio will be 
required to transmit redemption proceeds for credit to an investor's 
account with PaineWebber within 5 business days after receipt of the 
redemption request.<SUP>18 In the case of an IRA or Keogh Plan 
investor, PaineWebber will not hold redemption proceeds as free credit 
balances and will, in the absence of receiving investment instructions, 
place all such assets in a money market fund (other than the PACE Money 
Market Investments Portfolio) that may be affiliated with 
PaineWebber.<SUP>19 In the case of Plans that are covered by Title I of 
the Act, the redemption proceeds will be invested by PaineWebber in 
accordance with the investment directions of the Independent Fiduciary 
responsible for the management of the Plan's assets. With respect to a 
Section 404(c) Plan, the treatment of such investment will depend upon 
the arrangement for participant investment instructions selected by the 
Plan sponsor. In the event that the Independent Fiduciary does not give 
other investment directions, such assets will be swept into a no-load 
money market fund that may be affiliated with PaineWebber. No brokerage 
charge or commission is charged to the participant for this service.

    \18\ PaineWebber will provide clearance (on a fully disclosed 
basis), settlement and other back office services to other broker-
dealers.
    \19\ The applicants are not requesting, nor is the Department 
proposing, exemptive relief with respect to the investment, by 
PaineWebber, of redemption proceeds in an affiliated money market 
fund where the Plan investor has not given investment instructions. 
The applicants represent that to the extent PaineWebber is 
considered a fiduciary, such investments will comply with the terms 
and conditions of PTE 77-4. However, the Department expresses no 
opinion herein on whether such transactions are covered by this 
class exemption.
---------------------------------------------------------------------------

    Due to the high costs of maintaining small PACE Program (Plan) 
accounts, the Trust may redeem all Trust shares held in a PACE Program 
account in which the Trust shares have a current value of $7,500 or 
less after the investor has been given at least thirty days in which to 
purchase additional Trust shares to increase the value of the account 
to more than the $7,500 amount. Proceeds of an involuntary redemption 
will be deposited in the investor's brokerage account unless 
PaineWebber is otherwise instructed.<SUP>20

    \20\ The thirty day limit does not restrict a Plan's ability to 
redeem its interest in the Trust. The thirty day notice period is 
provided to give a Plan an opportunity to increase the value of the 
assets in its Plan account with PaineWebber to an amount in excess 
of $7,500. If desired, the Plan may still follow the redemption 
guidelines described above.
---------------------------------------------------------------------------

    15. Through the PACE Program, shares of a Portfolio may be 
exchanged by an investor for shares of another Portfolio at their 
respective net asset values and without the payment of an exchange fee. 
However, Portfolio shares are not exchangeable with shares of other 
PaineWebber group of funds or portfolio families.
    With respect to brokerage transactions that are entered into under 
the PACE Program for a Portfolio, such transactions may be executed 
through PaineWebber and other affiliated broker-dealers, if in the 
judgment of Mitchell Hutchins or the Sub-Adviser, as applicable, the 
use of such broker-dealer is likely to result in price and execution at 
least as favorable, and at a commission charge comparable to those of 
other qualified broker-dealers.
    16. Each Portfolio will bear its own expenses, which generally 
include all costs that are not specifically borne by PaineWebber, 
Mitchell Hutchins or the Sub-Advisers. Included among a Portfolio's 
expenses will be costs incurred in connection with the Portfolio's 
organization, investment management and administration fees, fees for 
necessary professional and brokerage services, fees for any pricing 
service, the costs of regulatory compliance and costs associated with 
maintaining the Trust's legal existence and shareholder relations. No 
Portfolio, however, will impose sales charges on purchases, reinvested 
dividends, deferred sales charges, redemption fees; nor will any 
Portfolio incur distribution expenses. Investment management fees 
payable to Mitchell Hutchins and the Sub-Advisers will be disclosed in 
the Trust Prospectus.
    17. As to each Plan, the total fees that are paid to PMAS and its 
affiliates will constitute no more than reasonable compensation.<SUP>21 
In this regard, for its services under the PACE Program, PMAS charges 
an investor a quarterly fee for asset allocation and related services. 
This ``outside fee,'' will not be more than 1.50 percent on an annual 
basis of the maximum annual value of the assets in the investor's PACE 
Program account. Such fee may be paid either from the assets in the 
account or by separate check. A smaller outside fee may be charged 
depending on such factors as the size of the PACE Program account 
(e.g., PACE Program accounts in excess of $100,000), the number of Plan 
participants or the number of PACE Program accounts. The outside fee is 
charged directly to an investor and is neither affected by the 
allocation of assets among the Portfolios nor by whether an investor 
follows or ignores PMAS's advice.<SUP>22 In the case of Plans, the 
outside fee may be paid by the Plan or the Plan sponsor or, in the case 
of IRAs only, the fee may be paid by the IRA owner directly.

    \21\ The applicants represent that PMAS and its affiliates will 
not receive 12b-1 Fees in connection with the transactions.
    \22\ PaineWebber represents that the outside fee will not be 
imposed on the accounts of the Paine Webber Group and its 
subsidiaries, including PaineWebber, PMAS, Mitchell Hutchins or 
their subsidiaries, accounts of their immediate families and IRAs 
and certain employee pension benefit plans for these persons. The 
applicants state that this fee will be waived to encourage employees 
to invest in PaineWebber, although PaineWebber reserves the right to 
impose such fees. However, with respect to IRAs or Plans maintained 
by PaineWebber or its affiliates for their employees, the applicants 
assert that such waiver would be required by PTE 77-3.
---------------------------------------------------------------------------

    For Plan investors, the outside fee will be payable in full within 
five business days (or such other period as may be required under 
applicable law or regulation) after the trade date for the initial 
investment in the Portfolios and will be based on the value of assets 
in the PACE Program on the trade date of the initial investment. The 
initial fee payment will cover the period from the initial investment 
trade date through the last calendar day of the subsequent calendar 
quarter, and the fee will be pro-rated accordingly. Thereafter, the 
quarterly fee will cover the period from the first calendar day through 
the last calendar day of the current calendar quarter. The quarterly 
fee will be based on the value of assets in the PACE Program measured 
as of the last calendar day of the previous quarter, and will be 
payable on the fifth business day of the current quarter.
    If additional funds are invested in the Portfolios during any 
quarter, the applicable fee, pro-rated for the number of calendar days 
then remaining in the quarter and covering the amount of such 
additional funds, shall be charged and be payable five business days 
later. In the case of redemptions during a quarter, the fee shall be 
reduced accordingly, pro-rated for the number of calendar days then 
remaining in the quarter. If the 'net fee increase or decrease to an 
investor for additional purchases and/or redemptions during any one 
quarter is less than $20, the fee increase or decrease will be waived.
    In addition, for investment management and administrative services 
provided to the Trust, Mitchell Hutchins will be paid, from each 
Portfolio, a fee which is computed daily and paid monthly at an annual 
rate ranging from .35 percent to 1.10 percent,

[[Page 11890]]
of which the management fee component ranges from .15 percent to .90 
percent on an annual basis, of each Portfolio's average daily net 
assets depending upon the Portfolio's objective.<SUP>23 From these 
management fees, Mitchell Hutchins will compensate the applicable Sub-
Adviser. This ``inside fee,'' which is the difference between the 
individual Portfolio's total management fee and the fee paid by 
Mitchell Hutchins to the Sub-Adviser, will vary from the annual rate of 
.15 percent to .40 percent depending on the Portfolio. With the 
exception of the PACE Money Market Investments Portfolio from which 
Mitchell Hutchins is paid a management fee of 15 basis points, Mitchell 
Hutchins is retaining 20 basis points as a management fee from each 
remaining single Portfolio on investment assets attributable to the 
Plans. Pursuant to Transfer Agency and Service Agreements with the 
Trust, PFPC and State Street will be paid annual fees of $350,000 and 
$650,000, respectively, for transfer agent and custodial services.

    \23\ The fees payable to Mitchell Hutchins under its investment 
management and administration agreement with the Trust are comprised 
of two components. One component is for administrative services 
provided to each Portfolio at the annual rate of .20 percent of each 
Portfolio's net assets. The second component is for investment 
management and related services provided to each Portfolio. The 
annualized fee range here is from .15 percent to .90 percent of the 
Portfolio's average daily net assets.
---------------------------------------------------------------------------

    18. The management fees that are paid at the Portfolio level to 
Mitchell Hutchins and the Sub-Advisers are set forth in the following 
table. For purposes of the table, Mitchell Hutchins and a Sub-Adviser 
are referred to as ``MH'' and ``SA,'' respectively. As noted in the 
table, the sum of the management fees retained by Mitchell Hutchins and 
the Sub-Adviser with respect to a Portfolio will equal the total 
management fee paid by that Portfolio.

------------------------------------------------------------------------
                                        MH                              
                                    management  SA retained  MH retained
            Portfolio                  fee          fee          fee    
                                    (percent)    (percent)    (percent) 
------------------------------------------------------------------------
PACE Money Market Investments....          .15          .00          .15
PACE Government Securities Fixed                                        
 Income Investments..............          .50          .25          .25
PACE Intermediate Fixed Income                                          
 Investments.....................          .40          .20          .20
PACE Strategic Fixed Income                                             
 Investments.....................          .50          .25          .25
PACE Municipal Fixed Income                                             
 Investments.....................          .40          .20          .20
PACE Global Fixed Income                                                
 Investments.....................          .60          .35          .25
PACE Large Company Value Equity                                         
 Investments.....................          .60          .30          .30
PACE Large Company Growth Equity                                        
 Investments.....................          .60          .30          .30
PACE Small/Medium Company Value                                         
 Equity Investments..............          .60          .30          .30
PACE Small/Medium Company Growth                                        
 Equity Investments..............          .60          .30          .30
PACE International Equity                                               
 Investments.....................          .70          .40          .30
PACE International Emerging                                             
 Markets Investments.............          .90          .50          .40
------------------------------------------------------------------------

    PMAS is offsetting, quarterly, against the outside fee such amounts 
as is necessary to ensure that Mitchell Hutchins retains no more than 
20 basis points as a management fee from any Portfolio on investment 
assets attributable to any Plan.<SUP>24

    \24\ PaineWebber asserts that it chose 20 basis points as the 
maximum net fee retained for management services rendered to the 
Portfolios because this amount represents the lowest percentage 
management fee charged by PaineWebber among the Portfolios 
(excluding the PACE Money Market Investments Portfolio for which a 
fee of 15 basis points will be charged).
---------------------------------------------------------------------------

    The administrative services fee payable to Mitchell Hutchins is not 
being offset against the outside fee. Instead, that fee is being 
retained by Mitchell Hutchins.
    19. The following example demonstrates the operation of the fee 
offset mechanism, the calculation of the net inside fee, and the 
calculation of the total of a Plan investor's net outside fee and share 
of the investment management fees paid by the Portfolios in a given 
calendar quarter or year:

    Assume that as of September 30, 1995, the net asset value of 
Trust Portfolio shares held by a Plan investor was $1,000. 
Investment assets attributable to the Plan were distributed among 
five Trust Portfolios: (1) PACE Money Market Investments in which 
the Plan made a $50 investment and from which Mitchell Hutchins 
would retain an inside fee of .15 percent; (2) PACE Intermediate 
Fixed Income Investments in which the Plan made a $200 investment 
and from which Mitchell Hutchins would retain an inside fee of .20 
percent; (3) PACE Large Company Value Equity Investments in which 
the Plan made a $250 investment and Mitchell Hutchins would retain 
an inside fee of .30 percent; (4) PACE Small/Medium Company Growth 
Equity Investments in which the Plan made a $250 investment and 
Mitchell Hutchins would be entitled to receive an inside fee of .30 
percent; and (5) PACE International Equity Investments in which the 
Plan made a $250 investment and Mitchell Hutchins would be entitled 
to receive an inside fee of .30 percent.
    Assume that the Plan investor pays an outside fee of 1.50 
percent so that the total outside fee for the calendar quarter 
October 1 through December 31, prior to the fee offset, would be as 
follows:

----------------------------------------------------------------------------------------------------------------
                                                                                      Maximum                   
                             Portfolio                                  Amount        outside         Outside   
                                                                       invested    quarterly fee   quarterly fee
----------------------------------------------------------------------------------------------------------------
PACE Money Market Investments......................................          $50     1.50% (.25)         $0.1875
PACE Intermediate Fixed Income Investments.........................          200     1.50% (.25)           .7500
PACE Large Company Value Equity Investments........................          250     1.50% (.25)           .9375
PACE Small/Medium Company Growth Equity Investments................          250     1.50% (.25)           .9375
PACE International Equity Investments..............................          250     1.50% (.25)           .9375
    Total Outside Fee Per Quarter..................................        1,000  ..............          3.7500
----------------------------------------------------------------------------------------------------------------

    Under the proposed fee offset, the outside fee charged to the 
Plan must be reduced by a Reduction Factor to ensure that Mitchell 
Hutchins retains an inside fee of no more than 20 basis points from 
each of the Portfolios on investment assets attributable to

[[Page 11891]]
the Plan. The following table shows the Reduction Factor as applied 
to each of the Portfolios comprising the Trust:

------------------------------------------------------------------------
                                   MH retained   Maximum MH   Reduction 
            Portfolio                  fee          fee         factor  
                                    (percent)    (percent)    (percent) 
------------------------------------------------------------------------
PACE Money Market Investments....          .15          .15          .00
PACE Government Securities Fixed                                        
 Income Investments..............          .25          .20          .05
PACE Intermediate Fixed Income                                          
 Investments.....................          .20          .20          .00
PACE Strategic Fixed Income                                             
 Investments.....................          .25          .20          .05
PACE Municipal Fixed Income                                             
 Investments.....................          .20          .20          .00
PACE Global Fixed Income                                                
 Investments.....................          .25          .20          .05
PACE Large Company Value Equity                                         
 Investments.....................          .30          .20          .10
PACE Large Company Growth Equity                                        
 Investments.....................          .30          .20          .10
PACE Small/Medium Company Value                                         
 Equity Investments..............          .30          .20          .10
PACE Small/Medium Company Growth                                        
 Equity Investments..............          .30          .20          .10
PACE International Equity                                               
 Investments.....................          .30          .20          .10
PACE International Emerging                                             
 Markets Investments.............          .40          .20          .20
------------------------------------------------------------------------

    Under the proposed fee offset, a Reduction Factor of .10 percent 
is applied against the quarterly outside fee with respect to the 
value of Plan assets that have been invested in PACE Large Company 
Value Equity Investments, PACE Small/Medium Company Growth Equity 
Investments and PACE International Equity Investments. As noted 
above, the PACE Money Market Investments Portfolio and the PACE 
Intermediate Fixed Income Investments Portfolio do not require the 
application of a Reduction Factor because the management fee 
retained by Mitchell Hutchins for managing these Portfolios does not 
exceed 20 basis points. Therefore, the quarterly offset for the plan 
investor is computed as follows:

(.25) [($250).10% + ($250).10% + ($250).10%] = $0.1875 or $.19.

    In the foregoing example, if the Plan investor elects to receive 
an invoice directly, the Plan investor would be mailed a statement 
for its PACE Program account on or about October 15, 1995. This 
statement would show the outside fee to be charged for the calendar 
quarter October 1 through December 31, as adjusted by subtracting 
the quarterly offset from the quarterly outside fee as determined 
above. The net quarterly outside fee that would be paid to PMAS 
would be determined as follows:

$3.75 - $.19 = $3.56.

    The Plan investor that elects to receive an invoice directly 
would be asked to pay the outside fee for that quarter within 30 
days of the date on which the statement was mailed (e.g., November 
15, 1995). If the outside fee were not paid by that date, PMAS would 
debit the account of the Plan investor (as with other investors) for 
the amount of the outside fee (pursuant to the authorization 
contained in the PACE Program Investment Advisory Agreement, and as 
described in the PACE Program Description appended to the 
Prospectus).<SUP>25 A Plan investor that elects to have the outside 
fee debited from its account would receive, in November, a statement 
as of October 31 reflecting the outside fee and the quarterly offset 
therefrom.

    \25\ PaineWebber explains that the foregoing example illustrates 
the fact that Plan investors will get the benefit of the fee offset 
contemporaneously upon the payment of the outside fee. Because the 
inside fee is paid monthly and the fee offset is computed quarterly, 
the applicants also explain that PMAS does not receive the benefit 
of a ``float'' as a result of such calculations because the fee 
offset will always be realized no later than the time that the 
outside fee is paid. Since the inside fee is paid at the end of each 
calendar month, the applicants further explain that Plan investors 
will realize the full benefit of the offset before the time that the 
inside fee is paid for the second and third months of the calendar 
quarter.
---------------------------------------------------------------------------

    Assuming the Plan investor's investment in and allocation among 
the Portfolios remains constant throughout the quarter, (a) the Plan 
investor's fees for the quarter for asset allocation and related 
services provided by PMAS (net outside fee) and (b) the fees paid by 
the Portfolios for investment management services provided by 
Mitchell Hutchins (inside fee) would be as follows:

$3.56 (net outside fee)+(.25) [($50+$200+$250+$250+$250).20%] 
(administrative services fee)+(.25) [($50).15% + ($200).20% + ($250 
+ $250 + $250).30%] (inside fee) = $4.74.

    Assuming the Plan investor's investment in and allocation among 
the Portfolios remains constant throughout the year, the total net 
outside fee and inside fee borne by the Plan investor for the year 
would be as follows:

4(($4.74) = $18.96 or 1.89% per $1,000 invested.

    20. PaineWebber notes that a potential conflict may exist by reason 
of the variance in retained inside fees between the different 
Portfolios. For example, Mitchell Hutchins will retain a lower inside 
fee with respect to assets invested in the PACE Money Market 
Investments Portfolio than all other Portfolios. PaineWebber recognizes 
that this factor could result in the recommendation of a higher fee-
generating Portfolio to an investing Plan. Nonetheless, PMAS will be 
subject to and intends to comply fully with the standards of fiduciary 
duty that require that it act solely in the best interest of the Plan 
when making investment recommendations.
    21. The books of the Trust will be audited annually by independent, 
certified public accountants selected by the Trustees and approved by 
the investors. All investors will receive copies of an audited 
financial report no later than sixty days after the close of each Trust 
fiscal year. All Trust financial statements will be prepared in 
accordance with generally accepted accounting principles and relevant 
provisions of the federal securities laws. The books and financial 
records of the Trust will be open for inspection by any investor, 
including the Department, the Service and SEC, at all times during 
regular business hours.
    22. In summary, it is represented that the transactions will 
satisfy the statutory criteria for an exemption under section 408(a) of 
the Act because:
    (a) The investment of a Plan's assets in the PACE Program will be 
made and approved by a Plan fiduciary or participant that is 
independent of PaineWebber and its affiliates such that the Independent 
Fiduciary or Directing Participant will maintain complete discretion 
with respect to participating in the PACE Program.
    (b) An Independent Fiduciary or Directing Participant will have 
full discretion to redeem his or her shares in the Trust.
    (c) No Plan will pay a fee or commission by reason of the 
acquisition or redemption of shares in the Trust and PMAS nor will its 
affiliates receive 12b-1 Fees in connection with the transactions.
    (d) Prior to making an investment in the PACE Program, each 
Independent Fiduciary or Directing Participant will receive offering 
materials and disclosures from PMAS which disclose all material facts 
concerning the purpose, fees, structure, operation, risks and 
participation in the PACE Program.
    (e) PMAS will provide written documentation to an Independent 
Fiduciary or Directing Participant of its

[[Page 11892]]
recommendations or evaluations based upon objective criteria.
    (f) With the exception of Mitchell Hutchins which will manage the 
PACE Money Market Investments Portfolio, any Sub- Adviser appointed to 
exercise investment discretion over a Portfolio will always be 
independent of PaineWebber and its and its affiliates.
    (g) The quarterly investment advisory fee that is paid by a Plan to 
PMAS for investment advisory services rendered to such Plan will be 
offset by such amount as is necessary to assure that Mitchell Hutchins 
retains 20 basis points from any Portfolio (with the exception of the 
PACE Money Market Investments Portfolio) on investment assets 
attributable to the Plan investor. However, the quarterly fee paid to 
Mitchell Hutchins for administrative services will be retained by 
Mitchell Hutchins and will not be offset against the outside fee.
    (h) Each participating Plan will receive copies of the Trust's 
semi-annual and annual report which will include financial statements 
for the Trust that have been prepared by independent, certified public 
accountants and investment management fees paid by each Portfolio.
    (i) On a quarterly and annual basis, PaineWebber will provide 
written disclosures to an Independent Fiduciary or, if applicable, 
Directing Participant, with respect to (1) the total, expressed in 
dollars, of each Portfolio's brokerage commissions that are paid to 
PaineWebber and its affiliates; (2) the total, expressed in dollars, of 
each Portfolio's brokerage commissions that are paid to unrelated 
brokerage firms; (3) the average brokerage commissions per share by the 
Trust to brokers affiliated with the PaineWebber, expressed as cents 
per share; and (4) the average brokerage commissions per share by the 
Trust to brokers unrelated to the PaineWebber and its affiliates, 
expressed as cents per share for any year in which brokerage 
commissions are paid to PaineWebber by the Trust Portfolios in which a 
Plan's assets are invested.
    For Further Information Contact: Ms. Jan D. Broady of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

Herzog, Heine, Geduld, Inc., Located in New York, New York

[Application No. D-10018]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the sanctions 
resulting from the application of section 4975 of the Code by reason of 
section 4975(c)(1)(A) through (D) of the Code, shall not apply to the 
extension of credit between Herzog, Heine, Geduld, Inc. (HHG) and 
various individual retirement accounts for which HHG serves as passive 
trustee or custodian (the HHG IRA or HHG IRAs) resulting from the 
proposed in-kind transfer to HHG IRAs at the direction of the owners of 
such HHG IRAs of certain senior subordinated notes (the Notes) issued 
by HHG, and thereafter the holding of such Notes by the HHG IRAs; 
provided that: (1) officers, directors, and employees in HHG who are 
also owners of HHG IRAs do not participate in the proposed 
transactions; (2) the owners of the HHG IRAs have exclusive 
responsibility and control over the investment of the assets of such 
accounts; (3) HHG has no discretionary authority or control with 
respect to the investment of the assets of the HHG IRAs involved in the 
proposed transactions, nor does HHG render investment advice (within 
the meaning of 29 CFR 2510.3-21(c)) with respect to those assets; (4) a 
separate accounting of the assets in the HHG IRAs, including the Notes 
which have been acquired by such accounts, will be maintained by HHG; 
(5) the value of the Notes in each HHG IRA will at no time exceed 25 
percent (25%) of the value of the assets of each HHG IRA; (6) the HHG 
IRAs will pay no fees or commissions in connection with the 
transactions; and (7) the combined total of all fees received by HHG 
for the provision of services to the HHG IRAs is not in excess of 
``reasonable compensation'' within the meaning of section 4975(d)(2) of 
the Code.\26\

    \26\ Pursuant to 29 CFR 2510.3-2(d), the HHG IRAs are not within 
the jurisdiction of Title I of the Act. However, there is 
jurisdiction under Title II of the Act, pursuant to section 4975 of 
the Code.
---------------------------------------------------------------------------

Summary of Facts and Representations

    1. HHG is a full service broker/dealer, registered with the 
Securities and Exchange Commission under the Securities Exchange Act of 
1934. HHG also provides fully disclosed clearing services to other 
broker/dealers. HHG is a member of the New York Stock Exchange (NYSE) 
and is a leading market maker in NASDAQ and over-the-counter 
securities. As of September 29, 1995, HHG had total liabilities of 
$746.1 million, shareholders' equity of $107.5 million and $31.9 
million in liabilities subordinated to the claims of general creditors.
    2. It is represented that HHG has for many years offered individual 
retirement accounts to its customers. In this regard, HHG has been 
approved, since February 11, 1982, by the Internal Revenue Service to 
serve as a passive trustee or custodian for individual retirement 
accounts, Keoghs, and custodial accounts established under section 
403(b)(7) of the Code. In its capacity as a custodian, HHG is a 
disqualified person with respect to the HHG IRAs, pursuant to section 
4975(e)(2) of the Code.
    It is represented that HHG has considerable experience in dealing 
with individual retirement accounts that contain investments of all 
types, including debt instruments. As of January 25, 1995, HHG 
maintained approximately 8,000 individual retirement accounts for its 
customers representing approximately $365 million dollars in assets.
    3. In 1992 and 1993, HHG issued the Notes which are the subject of 
this proposed exemption in minimum face amounts on each of the Notes of 
$250,000. The Notes issued in 1992 pay interest quarterly at the annual 
rate of 11 percent (11%) on an aggregate principal amount of 
$7,500,000. The Notes issued in 1993 pay interest quarterly at the 
annual rate of 10 percent (10%) on an aggregate principal amount of 
$7,500,000. It is represented, as of February 19, 1996, that HHG had 
made all interest payments to the holders of the Notes. The Notes were 
issued for a term of five (5) years each. In this regard, the maturity 
date for the Notes issued in 1992 is January 1, 1997, and the maturity 
date for the Notes issued in 1993, is April 1, 1998. The Notes will pay 
principal in a balloon payment at maturity. The Notes are described as 
Senior Subordinated Notes of HHG. In this regard, the Notes are 
unsecured, rank equally with all other outstanding subordinated debt of 
HHG, and are subordinate to any senior claim of present or future 
creditors of HHG. A senior claim is defined as any present or future 
obligation of HHG, except those obligations which are the subject of 
subordination agreements.
    The Notes were only offered for sale to investors who met the 
``accredited investor'' net worth and income standards described in 
Regulation D, promulgated under the Securities Act of 1933.\27\ It is 
represented that the Notes

[[Page 11893]]
were acquired by all investors at face value, and were purchased in the 
same manner and on the same terms by all investors. It is represented 
that potential investors in the Notes received certain disclosures 
prior to making the investment. Such disclosures included, among other 
things, an outline of the nature of the Notes, a description of the 
risk factors involved in investing in the Notes, and detailed financial 
disclosures about HHG. It is represented that each investor 
acknowledged receipt of these disclosures in writing. In addition, it 
is represented that prior to acquiring the Notes, each purchaser 
certified in writing that the ``accredited investor'' net worth and 
income standards had been satisfied.

    \27\ In general, the ``accredited investor'' net worth and 
income standards described in Regulation D promulgated under the 
Securities Act of 1933 provide that an ``accredited investor'' is 
one of the following: (a) an individual with a net worth (or joint 
net worth with a spouse) in excess of $1,000,000; (b) an individual 
who had an individual income in excess of $200,000 in each of the 
two most recent years or joint income with that person's spouse in 
excess of $300,000 in each of those years, and has a reasonable 
expectation of reaching the same income level in the current year; 
or (c) a trust with total assets in excess of $5,000,000.
---------------------------------------------------------------------------

    It is represented that the entirety of the Notes has been issued 
and are being held by individual investors and by individual retirement 
accounts unrelated to HHG. In this regard, approximately 90 percent 
(90%) of the Notes were sold to customers other than owners of 
individual retirement accounts, and at least 50 percent (50%) of the 
Notes are held by persons independent of HHG and/or the HHG IRAs.
    There is no public trading market for the Notes. The Notes are not 
registered under the Securities Act of 1933, because the Notes are 
issued to ``accredited investors;'' and therefore, are exempt from 
registration, pursuant to an exemption described in section 4(2) and/or 
section 3(b) of the Securities Act of 1933 and by Regulation D. The 
Notes may not be sold or transferred, except in a transaction exempt 
from the registration requirements of federal and state securities 
laws. In addition, the Notes may not be sold or transferred, unless HHG 
is furnished with a satisfactory opinion of counsel to the effect that 
an exemption from the registration requirements of federal and state 
securities laws is available. Further, any proposed sale to another 
member of the NYSE is subject to a right of first refusal by HHG.
    4. In 1992 and 1993 when the Notes were issued, HHG offered them 
for purchase by certain of its customers. However, the owners of HHG 
IRAs who met the ``accredited investor'' standards were not permitted 
to acquire the Notes, because HHG believed that prohibited transactions 
would arise, if the owners of such accounts were to direct HHG, the 
custodian of such HHG IRAs, to purchase the Notes on behalf of the HHG 
IRAs with funds from such HHG IRAs. Instead, HHG suggested that the 
owners of HHG IRAs who were interested in purchasing the Notes for 
their accounts set up other individual retirement accounts with other 
custodians or trustees (the Non-HHG IRAs or the Non-HHG IRA) and then 
arrange for these Non-HHG IRAs to purchase the Notes. Accordingly, it 
is represented that some owners of HHG IRAs transferred funds from 
their HHG IRAs into Non-HHG IRAs at other brokerage firms or banks and 
directed the trustees or custodians of such Non-HHG IRAs to purchase 
the Notes.\28\

    \28\ The Department expresses no opinion herein, as to whether 
the prohibited transactions provisions, as set forth in section 4975 
of the Code, have been violated in connection with the purchase of 
the Notes by the Non-HHG IRAs at the direction of the owners of such 
accounts who are also officers, directors, or employees of HHG and 
the subsequent holding of the Notes in such Non-HHG IRAs by trustees 
or custodians other than HHG. The Department notes that the proposed 
relief is limited to the transactions described herein, and no 
relief has been provided in connection with the acquisition and 
holding of the Notes by the Non-HHG IRAs.
---------------------------------------------------------------------------

    HHG believes that the HHG IRAs which transferred funds from their 
HHG IRAs to Non-HHG IRAS in order to purchase the Notes contained 
assets with an aggregate fair market value of $4,400,000. It is 
estimated that for the average owner of a Non-HHG IRA the Notes 
constituted less than 30 percent (30%) of the total assets of such 
owner's account.
    5. HHG seeks to permit the acquisition and holding of the Notes by 
the HHG IRAs. In order to accomplish this goal, the owners of the Non-
HHG IRAs would transfer assets that include the Notes from the Non-HHG 
IRAs into the HHG IRAs. It is anticipated that the Notes would be 
transferred in kind at the direction of the owners of the Non-HHG IRAs 
from the current trustee of the Non-HHG IRAs to HHG. It is represented 
that such transfers will be direct custodian to custodian transfers. In 
this regard, each holder of a Non-HHG IRA who wishes to transfer the 
assets in such account to the custodianship of HHG will complete and 
sign a customer account transfer form, and direct that the assets be 
transferred in kind from the former custodian of the Non-HHG IRA to 
HHG.
    6. HHG believes the transactions described in the paragraph above 
may be prohibited, pursuant to section 4975(c) of the Code in that such 
transactions may result in a direct or indirect lending of money or 
other extension of credit between a plan and a disqualified person with 
respect to such plan. Accordingly, HHG seeks exemptive relief from the 
prohibited transaction provisions, as set forth in section 4975(c)(1) 
(A) through (D) of the Code.
    7. It is represented that the proposed transactions would be in the 
interest of the affected HHG IRAs, in that owners of the HHG IRAs would 
not need, solely for the purpose of acquiring and holding the Notes, to 
incur the additional custodial fees and other expenses related to 
maintaining the Non-HHG IRAs. In this regard, it is represented that 
HHG charges for an HHG IRA a custodial fee of $25 annually,\29\ which 
HHG maintains is considerable less than the amount charged by trustees 
or custodians of the Non-HHG IRAs which currently hold the Notes.

    \29\ The Department, herein, expresses no opinion as to whether 
the provision of services by HHG to the HHG IRAs and the 
compensation received therefor satisfies the terms and conditions of 
the statutory exemption, as set forth in section 4975(d)(2) of the 
Code. To the extent that such provision of services to the HHG IRAs 
by HHG does not satisfy the requirements of section 4975(d)(2) of 
the Code, the Department, herein, is offering no relief.
---------------------------------------------------------------------------

    8. It is represented that the proposed transactions would be 
protective of the rights of participants in the HHG IRAs and their 
beneficiaries, in that the percentage of the assets of the HHG IRAs 
involved in the Notes will at no time exceed 25 percent (25%) of the 
value of the assets of such accounts.
    Further, it is represented that HHG has no discretion to direct any 
investment of any HHG IRA which will be involved in the proposed 
transactions. Under the terms of the HHG IRAs, the owners of such 
accounts, as fiduciaries, have exclusive responsibility for and control 
over the investment of the assets of such accounts. In this regard, it 
is represented that the owners of the Non-HHG IRAs which purchased the 
Notes are sophisticated investors who, in most cases, are long standing 
customers of HHG and are familiar with the firm. It is represented that 
the owners of the Non-HHG IRAs made the original decision to purchase 
the Notes with the assets in the Non-HHG IRAs, and, if the proposed 
exemption is granted, the same individuals who are also the owners of 
the HHG IRAs will make the decision to transfer all or a portion of the 
assets in the Non-HHG IRA, including the Notes, into an HHG IRA. It is 
estimated, as of the date of the application, that eleven (11) 
participants and beneficiaries may be affected by the requested 
exemption, as they may be

[[Page 11894]]
given the opportunity to transfer Notes from Non-HHG IRAs to HHG IRAs, 
but will not be obligated to make such a transfer. Of these eleven 
(11), two individuals are officers of HHG who are employed in the 
securities trading department of HHG. Under the terms of this proposed 
exemption, officers, directors and employees of HHG who are also owners 
of HHG IRAs will not be permitted to participate in the proposed 
transactions.
    9. It is represented that the requested exemption is 
administratively feasible in that HHG already maintains an individual 
retirement program, is approved by the IRS to serve as a custodian for 
individual retirement accounts, and has experience dealing with such 
accounts. HHG believes that the owners of HHG IRAs would prefer to hold 
their investments in the Notes in HHG IRA custodial accounts, because 
it would be less expensive and would be administratively less awkward 
for both HHG and the owners of the HHG IRAs. In this regard, it is 
represented that HHG will maintain a separate accounting of all of the 
holdings in the HHG IRAs, including the Notes that may be acquired, for 
each owner of an HHG IRA. Further, it is represented that the HHG IRAs 
will not pay commissions as a result of the transfer of the Notes into 
the custodianship of HHG.
    10. In summary, HHG, the applicant, represents that the proposed 
transactions meet the statutory criteria of section 4975(c)(2) of the 
Code because:
    (a) officers, directors, or employees in HHG who are also owners of 
HHG IRAs will not be permitted to participate in the proposed 
transactions;
    (b) the owners of the HHG IRAs have exclusive responsibility and 
control over the investment of the assets of such accounts;
    (c) HHG has no discretionary authority or control with respect to 
the investment of the assets of the HHG IRAs to be involved in the 
proposed transaction, nor does HHG render investment advice (within the 
meaning of 29 CFR 2510.3-21(c)) with respect to those assets;
    (d) a separate accounting of the assets in the HHG IRAs, including 
the Notes which have been acquired by such accounts, will be maintained 
by HHG;
    (e) the percentage of the assets of the HHG IRAs involved in the 
Notes will at no time exceed 25 percent (25%) of the value of the 
assets of such accounts;
    (f) the HHG IRAs will pay no fees or commissions in connection with 
the transactions;
    (g) the combined total of all fees received by HHG for the 
provision of services to the HHG IRAs are not in excess of ``reasonable 
compensation'' within the meaning of section 4975(d)(2) of the Code; 
and
    (h) the owners of the HHG IRAs will avoid the administrative burden 
and expense of maintaining the Non-HHG IRAs.

For Further Information Contact: Angelena C. Le Blanc of the Department 
(202) 219-8883. (This is not a toll-free number.)

Pierre W. Mornell, M.D., A Sole Proprietorship, Defined Benefit Plan 
(the Plan) Located in Mill Valley, California

[Application No. D-10170]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 C.F.R. Part 2570, Subpart B (55 F.R. 32836, 
32847, August 10, 1990). If the exemption is granted the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1) (A) through (E) of the Code, shall not apply to 
the proposed sale of certain unimproved real property located in Mill 
Valley, California (the Property) by the Plan to Pierre W. Mornell and 
Linda C. Mornell, parties in interest with respect to the Plan; 
provided that the following conditions are satisfied:
    (A) All terms and conditions of the transaction are no less 
favorable to the Plan than those which the Plan could obtain in an 
arm's-length transaction with an unrelated party;
    (B) The Plan receives a cash purchase price for the Property in the 
amount of the fair market value of the Property; and
    (C) The Plan does not incur any expenses or suffer any loss with 
respect to the transaction.

Summary of Facts and Representations

    1. The Plan is a defined benefit pension plan with one participant 
and total assets of $287,585 as of November 1, 1995. The Plan is 
sponsored by the medical practice of Pierre W. Mornell, M.D. (Dr. 
Mornell), which is a sole proprietorship (the Employer) located in Mill 
Valley, California. The Plan's sole participant is Dr. Mornell, who 
also serves as the Plan's trustee and administrator.<SUP>30

    \30\ Since Dr. Mornell is the sole proprietor and the only 
participant in the Plan, there is no jurisdiction under Title I of 
the Act pursuant to 29 CFR 2510.3-3(b). However, there is 
jurisdiction under Title II of the Act pursuant to section 4975 of 
the Code.
---------------------------------------------------------------------------

    2. The Property is a vacant parcel of 3,420 square feet of land 
located in Mill Valley, California at 19 Park Avenue, zoned for multi-
family residential development. Dr. Mornell represents that the 
Property was purchased by the Plan in 1989 from parties unrelated to 
himself, his medical practice, and his spouse, and that the terms and 
conditions of that transaction were negotiated at arm's length with the 
sellers. The Plan paid a purchase price of $225,000, of which $90,000 
was represented by a five-year promissory note (the Note) payable to 
the seller, secured by a first deed of trust on the Property, due on or 
before August 1, 1994. Dr. Mornell represents that the Note was timely 
paid in full by the Plan.
    3. Dr. Mornell represents that as Plan trustee he caused the Plan 
to purchase the Property in 1989, and to invest a large percentage of 
the Plan's assets therein, for a variety of reasons, summarized as 
follows: During 1989, the value of real estate in the market in which 
the Property is situated was appreciating rapidly, and Dr. Mornell 
believed that the Property's value would continue to appreciate after 
purchase by the Plan. The Property is situated adjacent to a corner lot 
along a main thoroughfare in an affluent suburban community, and Dr. 
Mornell, as trustee, represents that he believed that the risk of a 
significant decline in the Property's value was small, due to these 
factors. Dr. Mornell notes that he was and is the sole participant in 
the Plan, and was aware that he would be the only person who would be 
adversely affected if the Property did not prove to be a favorable 
investment. Dr. Mornell represents that it had been his intention that 
the Property be developed by the construction of income-producing 
improvements thereon, but the value of the Property ceased to 
appreciate. Instead, Dr. Mornell represents that the Property's value 
commenced to decline before any improvements had been added to the 
Property, and the Property has never produced any income of any kind. 
Since the Property has proven to be an unfavorable investment, Dr. 
Mornell desires that the Plan divest of the Property and reinvest in 
other, more diversified assets with more potential for favorable 
return. Accordingly, Dr. Mornell and his spouse, Linda C. Mornell 
(together, the Mornells) propose to purchase the Property from the Plan 
and are requesting an exemption to permit this transaction under the 
terms and conditions described herein.
    4. It is proposed that the Mornells will make a single cash payment 
to the Plan for the Property in the amount of no less than the fair 
market value of the

[[Page 11895]]
Property, and in no event less than $215,000. The Property has been 
appraised by T.B. Combs (Combs), a professional real estate appraiser 
in Mill Valley, California. Combs represents that as of October 15, 
1996, the Property had a fair market value of $215,000. The Plan will 
not incur any expenses related to the transaction. Dr. Mornell 
represents that the proposed transaction is in the best interests and 
protective of the Plan because it will enable the Plan to dispose of an 
non-income-producing asset and will receive a cash purchase price 
representing the Property's fair market value, which can be reinvested 
in more diverse assets with better prospects for favorable returns.
    5. In summary, the applicant represents that the proposed 
transaction satisfies the criteria of section 4975(c)(2) of the Code 
for the following reasons: (a) The Plan, in which Dr. Mornell is the 
sole participant, will receive cash for the Property for reinvestment 
in more diverse assets; (b) The purchase price will be the fair market 
value of the Property as determined by Combs' appraisal; (c) the Plan 
will not incur any expenses related to the proposed transaction; and 
(d) Dr. Mornell is the only participant affected by the transaction, 
and he desires that the transaction be consummated.

Notice to Interested Persons

    Since Dr. Mornell is the only Plan participant to be affected by 
the proposed transaction, the Department has determined that there is 
no need to distribute the notice of proposed exemption to interested 
persons. Comments and requests for a hearing are due within 30 days 
from the date of publication of this notice of proposed exemption in 
the Federal Register.
    For Further Information Contact: Ronald Willett of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Gail L. Belt Self Employed Retirement Plan (the Plan) Located in 
Vienna, Virginia

[Application No. D-10219]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to 
the proposed sale of a parcel of real property (the Property) by the 
Plan to Ms. Gail L. Belt, a disqualified person with respect to the 
Plan for $115,000, provided the following conditions are satisfied: a) 
the sale is a one-time transaction for cash; b) the Plan pays no 
commissions or expenses in connection with the transaction; c) the Plan 
receives not less than the greater of the fair market value of the 
Property or its cost in acquiring the Property; d) the fair market 
value of the Property has been determined by a qualified, independent 
appraiser; and e) Ms. Belt is the only Plan participant to be affected 
by the transaction, and she desires that the transaction be 
consummated.<SUP>31

     31 Since Ms. Belt is the sole owner of the Plan sponsor and the 
only participant in the Plan, there is no jurisdiction under Title I 
of the Act pursuant to 29 CFR 2510.3-3(b). However, there is 
jurisdiction under Title II of the Act pursuant to section 4975 of 
the Code.
---------------------------------------------------------------------------

Summary of Facts and Representations

    1. Ms. Belt is a self-employed real estate agent in Northern 
Virginia. Her primary business is facilitating the buying and selling 
of residential real estate. She is a realtor for Coldwell Banker, 
Stevens Realtors, located in Vienna, Virginia. Ms. Belt is the sole 
trustee and sole participant in the Plan, which is a defined 
contribution Plan with current assets of approximately $1,080,597.
    2. In August, 1993, Ms. Belt, in her capacity as sole trustee for 
the Plan, acquired the Property as a Plan investment. The Property was 
purchased from Edward and Edith Schultz, parties unrelated to Ms. Belt 
and the Plan, for a purchase price of $110,000. The Property consists 
of an unimproved plot of land located at 1747 Lockerbie Lane, Vienna, 
Virginia.
    3. The Plan now wishes to sell the Property to Ms. Belt. The 
applicant represents that the Property is not increasing in value in 
the current real estate market, and the Plan has ongoing administrative 
expenses for the Property. In addition, the Plan has been unable to 
procure liability insurance to cover any possible injuries on the site. 
Finally, the Plan would be disposing of an illiquid asset.
    4. Mr. Douglas S. Waldron of Residential Appraisal Group, Inc., an 
independent licensed residential real estate appraiser in Annandale, 
Virginia, has appraised the Property as having a fair market value of 
$115,000 as of February 5, 1996. The applicant represents that Ms. Belt 
will pay this amount to the Plan since it exceeds the Plan's purchase 
price for the Property, plus expenses.
    5. In summary, the applicant represents that the proposed 
transaction satisfies the criteria of section 4975(c)(2) of the Code 
because: a) the sale is a one-time transaction for cash; b) the Plan 
will pay no commissions or other expenses in connection with the 
transaction; c) the Plan will receive the greater of its acquisition 
price for the Property plus expenses, or the current fair market value 
of the Property as determined by a qualified, independent appraiser; 
and d) Ms. Belt is the sole participant in the Plan to be affected by 
the transaction, and she desires that the transaction be consummated.

Notice to Interested Persons

    Since Ms. Belt is the only Plan participant to be affected by the 
proposed transaction, the Department has determined that there is no 
need to distribute the notice of proposed exemption to interested 
persons. Comments and requests for a hearing are due within 30 days 
from the date of publication of this notice of proposed exemption in 
the Federal Register.
    For Further Information Contact: Gary H. Lefkowitz 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;

[[Page 11896]]

    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete and accurately describe all 
material terms of the transaction which is the subject of the 
exemption. In the case of continuing exemption transactions, if any of 
the material facts or representations described in the application 
change after the exemption is granted, the exemption will cease to 
apply as of the date of such change. In the event of any such change, 
application for a new exemption may be made to the Department.

    Signed at Washington, DC, this 19th day of March, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 96-6991 Filed 3-21-96; 8:45 am]
BILLING CODE 4510-29-P