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Secretary of Labor Thomas E. Perez
Proposed Exemptions; State Street Bank and Trust [Notices] [10/02/1997]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; State Street Bank and Trust [10/02/1997]

[PDF Version]

Volume 62, Number 191, Page 51684-51697

[DOCID:fr02oc97-101]

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10159, et al.]

 
Proposed Exemptions; State Street Bank and 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 restrictions of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
requests for a hearing should state: (1) The name, address, and 
telephone

[[Page 51685]]

number of the person making the comment or request, and (2) the nature 
of the person's interest in the exemption and the manner in which the 
person would be adversely affected by the exemption. A request for a 
hearing must also state the issues to be addressed and include a 
general description of the evidence to be presented at the hearing.

ADDRESSES: All written comments and 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.

State Street Bank and Trust Company Located in Boston, 
Massachusetts

[Application No. D-10159]

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)(1) (A) through (D) and 
406 (b)(1) and (b)(2) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1) (A) through (E) of the Code,<SUP>1</SUP> shall not apply to 
the lending of securities to State Street Bank and Trust Company (State 
Street), acting through its Financial Markets Group (FMG) (formerly the 
Money Market Division of the Capital Markets Area) or acting through 
any other division or U.S. affiliate of State Street that is a 
successor to the activities of FMG; and shall not apply to the lending 
of securities to any U.S. registered broker-dealers affiliated with 
State Street (the Affiliated Broker Dealers) <SUP>2</SUP> by employee 
benefit plans (the Client Plans or the Client Plan), including 
commingled investment funds holding plan assets for which State Street, 
through its Master Trust Services Division (the Trust Division) acts as 
directed trustee or custodian, and for which State Street, through its 
Global Securities Lending Division or any other similar division of 
State Street or U.S. affiliate of State Street or of its parent 
(collectively, GSL) acts as securities lending agent (or sub-agent); 
and shall not apply to the receipt of compensation by GSL in connection 
with the proposed transactions, provided that the following conditions 
are met:
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    \1\ For purposes of this proposed exemption, references to 
specific provisions of Title I of the Act, unless otherwise 
specified, refer also to the corresponding provisions of the Code.
    \2\ FMG, any division or U.S. affiliate of State Street that 
becomes a successor to the activities of FMG, and the Affiliated 
Broker Dealers are collectively referred to, herein, as the SSB 
Group.
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    a. Neither State Street, the SSB Group, GSL, nor any other division 
or affiliate of State Street has or exercises discretionary authority 
or control with respect to the investment of the assets of Client Plans 
involved in the transaction (other than with respect to the investment 
of cash collateral after securities have been loaned and collateral 
received) or renders investment advice (within the meaning of 29 CFR 
2510.3-21(c)) with respect to such assets, including decisions 
concerning a Client Plan's acquisition or disposition of securities 
available for loan;
    b. Before a Client Plan participates in a securities lending 
program and before any loan of securities to the SSB Group is effected, 
the fiduciary of such plan who is independent of State Street, GSL, the 
SSB Group, and any other division or affiliate of State Street must 
have:
    (1) Authorized and approved the securities lending authorization 
agreement with GSL (the Agency Agreement), where GSL is acting as the 
direct securities lending agent; or
    (2) Authorized and approved the primary securities lending 
authorization agreement (the Primary Lending Agreement) with the 
primary lending agent, where GSL is lending securities under a sub-
agency arrangement with the primary lending agent <SUP>3</SUP>; and
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    \3\ The Department, herein, is not providing relief for 
securities lending transactions engaged in by primary lending 
agents, other the GSL, beyond that provided, pursuant to Prohibited 
Transaction Class Exemption 81-6 (PTCE 81-6) and Prohibited 
Transaction Class Exemption 82-63 (PTCE 82-63). PTCE 81-6 was 
granted 46 FR 7527, January 23, 1981, as amended at 52 FR 18754, May 
19, 1987. The Notice of Proposed Exemption for application numbers 
D-5598 and D-5776 was published at 46 FR 10570, February 3, 1981. 
PTCE 82-63 was granted 47 FR 14804, April 6, 1982. The Notice of 
Proposed Class Exemption was published at 46 FR 7518, January 23, 
1981, as amended at 46 FR 10570, February 3, 1981.
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    (3) Approved the general terms of the securities loan agreement 
(the Loan Agreement) between such Client Plan and the borrower, the SSB 
Group, the specific terms of which are negotiated and entered into by 
GSL;
    c. A Client Plan may terminate the Agency Agreement or the Primary 
Lending Agreement at any time, without penalty to such plan, on five 
(5) business days notice;
    d. The Client Plan will receive from the SSB Group (either by 
physical delivery or by book entry in a securities depository, wire 
transfer or similar means) by the close of business on or before the 
day the loaned securities are delivered to the SSB Group, collateral 
consisting of cash, securities issued or guaranteed by the U.S. 
Government or its agencies or instrumentalities, or irrevocable bank 
letters of credit issued by a person other than State Street or an 
affiliate thereof, or any combination thereof, or other collateral 
permitted under PTCE 81-6 (as amended from time to time or, 
alternatively, any additional or superseding class exemption that may 
be issued to cover securities lending by employee benefit plans);
    e. The market value of the collateral must, as of the close of 
business on the

[[Page 51686]]

preceding business day, initially equal at least 102 percent (102%) of 
the market value of the loaned securities. If the market value of the 
collateral falls below 100 percent (100%) (or such greater percentage 
agreed to by the parties) of the loaned securities, GSL will require 
the SSB Group to deliver additional collateral by the close of business 
on the following day such that the market value of the collateral will 
again equal at least 102 percent (102%). The Loan Agreement will give 
the Client Plans a continuing security interest in, title to, or the 
rights of a secured creditor with respect to the collateral and a lien 
on the collateral. GSL will monitor the level of the collateral daily;
    f. All GSL's procedures regarding the securities lending activities 
will at a minimum conform to the applicable provisions of PTCE 81-6 and 
PTCE 82-63;
    g. State Street will agree to indemnify and hold harmless each 
lending Client Plan (including the sponsor and fiduciaries of such 
Client Plan) against any and all damages, losses, liabilities, costs, 
and expenses (including attorneys' fees) which the Client Plan may 
incur or suffer directly arising out of the lending of the securities 
of such Client Plan to the SSB Group;
    h. The Client Plan will receive the equivalent of all distributions 
made to holders of the borrowed securities during the term of any loan, 
including, but not limited to, cash dividends, interest payments, 
shares of stock as a result of stock splits and rights to purchase 
additional securities, or other distributions;
    i. Prior to any Client Plan's approval of the lending of its 
securities to the SSB Group, a copy of this Notice of Proposed 
Exemption and a copy of the final exemption, if granted, will be 
provided to the Client Plan;
    j. Only Client Plans with total assets having an aggregate market 
value of at least $50 million will be permitted to lend securities to 
the SSB Group;
    k. The terms of each loan of securities by the Client Plans to the 
SSB Group will be at least as favorable to such plans as those of a 
comparable arm's-length transaction between unrelated parties;
    l. Each Client Plan will receive monthly reports on the 
transactions, including but not limited to the information described in 
paragraph 26 below, so that an independent fiduciary of such plan may 
monitor the securities lending transactions with the SSB Group;
    m. Before entering into the Loan Agreement and before a Client Plan 
lends any securities to the SSB Group, an independent fiduciary of such 
Client Plan will receive sufficient information, concerning the 
financial condition of State Street, including but not limited to 
audited and unaudited financial statements of State Street's parent 
corporation; and
    n. The SSB Group will provide to a Client Plan prompt notice at the 
time of each loan by such plan of any material adverse changes in State 
Street's financial condition, since the date of the most recently 
furnished financial statements.

Summary of Facts and Representations

    1. State Street is a wholly-owned subsidiary of State Street Boston 
Corporation, a bank holding company organized in 1970 under the laws of 
the Commonwealth of Massachusetts. As a Massachusetts trust company and 
a member bank of the Federal Reserve System, State Street is a 
``bank,'' as defined in both section 202(a)(2) of the Investment 
Advisers Act of 1940 and section 581 of the Code. As of December 31, 
1994, State Street's total assets were $21.7 billion, of which $16 
billion (or 74%) were investment securities and money market assets and 
$3.2 billion (or 15%) were loans.
    2. State Street, through its Trust Division, provides custodial 
services, trustee, and related fiduciary services to its customers. In 
this regard, the Trust Division has more than $1.6 trillion of assets 
under custody and, as custodian, services $664 billion of pension and 
other assets for U.S. pension plans, government plans, and other tax 
exempt investors in North American. In addition, with $675 billion of 
mutual fund assets under custody, it is represented that the Trust 
Division services 36 percent (36%) of registered funds. It is 
represented that at year-end 1994, the Trust Division also had $210 
billion of bonds under trusteeship and $160 billion of assets under 
management.
    3. State Street, acting through GSL, also provides securities 
lending services to many of State Street's institutional clients. GSL, 
on behalf of State Street's securities lending clients, negotiates the 
terms of loans with borrowers, pursuant to a client-approved form of 
loan agreement the terms of which may be modified from time to time 
with the approval of the client, and otherwise acts as a liaison 
between the lender and the borrower to facilitate the lending 
transaction. As securities lending agent, GSL also has responsibility 
for monitoring receipt of all required collateral and for marking such 
collateral to market daily, so that adequate levels of collateral are 
maintained. To the extent agreed upon with the client, GSL is also 
responsible for investing the cash collateral after securities have 
been loaned and collateral received. GSL also monitors and evaluates on 
a continuing basis the performance and creditworthiness of the 
borrowers of securities.
    GSL also may be retained from time to time by primary securities 
lending agents to provide securities lending services in a sub-agency 
capacity with respect to portfolio securities of the clients of such 
primary lending agents. As securities lending sub-agent, GSL's role in 
the lending transaction (i.e., negotiating the terms of loans with 
borrowers, pursuant to a client-approved form of loan agreement the 
terms of which may be modified from time to time with the approval of 
the client, monitoring receipt of collateral, marking to market 
required collateral, and investing cash collateral) parallels the role 
under lending transactions in which GSL acts as primary lending agent 
on behalf of its clients.
    The borrowers with whom GSL usually transacts as agent for the 
lender are typically broker-dealers who use borrowed securities to 
satisfy their trading requirements or to ``re-lend'' securities to 
other broker-dealers, and others who need a particular security for 
various periods of time. All such borrowing by broker-dealers is 
required to conform to the Federal Reserve Board's Regulation T. 
Borrowing purposes which are permitted, pursuant to Regulation T, 
include the delivery of securities in the case of short sales, the 
failure of a broker to receive securities it is required to deliver, or 
other similar situations.
    4. State Street itself, however, acting through the SSB Group, is 
also a borrower of securities, and indeed acts in this capacity, after 
full disclosure and consent, with respect to many of GSL's 
institutional clients, such as public pension plans which are not 
covered by the Act. The SSB Group, as borrower, uses borrowed 
securities to meet its obligations to deliver securities in connection 
with its short sales, trade fails, or other similar situations, and to 
engage in repurchase transactions with third parties.<SUP>4</SUP> 
Acting as principal, the SSB
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    \4\ It is represented that Regulation T of the Federal Reserve 
Board does not apply to the borrowing of securities by the SSB 
Group, because the SSB Group is part of a bank.
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    Group actively engages in the borrowing and lending of securities, 
with a daily outstanding loan volume averaging $2 billion.
    5. It is represented that GSL currently does not lend to the SSB 
Group the

[[Page 51687]]

securities of any of State Street's trust or custody clients covered by 
the Act, although as noted above, after full disclosure and consent, 
GSL does lend U.S. government securities to the SSB Group for certain 
of its clients who are not covered by the Act. It is represented that 
the SSB Group and GSL have each developed an accounting system and 
safeguards to service the needs of its respective client base. It is 
represented that whenever trades are effected between GSL, acting as 
securities lending agent, and the SSB Group, as borrower, such trades 
are accomplished in the same manner as between completely independent 
third parties. In this regard, such trades take place pursuant to an 
established protocol, primarily over the telephone and through computer 
trading screens used by all participants in the industry.
    6. State Street proposes to offer to Client Plans, for which the 
Trust Division of State Street serves as directed trustee or custodian, 
and GSL serves as securities lending agent (or sub-agent), the 
opportunity to lend securities to the SSB Group.<SUP>5</SUP> In 
addition, State Street proposes that GSL and the SSB Group receive 
compensation in connection with such securities lending transactions. 
It is represented that State Street is a party in interest and a 
fiduciary with respect to the Client Plans, pursuant to section 
3(14)(A) of the Act, and a service provider to such plans, pursuant to 
section 3(14)(B) of the Act. Because the Trust Division, GSL, and the 
SSB Group are all part of the same legal entity, State Street, the 
lending of securities to the SSB Group by Client Plans for which the 
Trust Division serves as directed trustee or custodian and for which 
GSL serves as securities lending agent (or sub-agent) could be deemed 
to be a prohibited transaction under section 406(a)(1) (A) through (D) 
of the Act for which exemptive relief would be necessary. In addition, 
because State Street, through GSL, would be acting as securities 
lending agent (or sub-agent) and, through the SSB Group, would be the 
borrower of securities from the Client Plans, the proposed transactions 
could be deemed to be prohibited under section 406 (b)(1) and (b)(2) of 
the Act, as well.
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    \5\ For the sake of simplicity, future references to GSL's 
performance of services as securities lending agent should be deemed 
to include its parallel performance as securities lending sub-agent 
and references to Client Plans should be deemed to refer to plans 
for which GSL is acting as sub-agent with respect to securities 
lending activities, unless otherwise indicated specifically or by 
the context of the reference.
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    7. With respect to various prohibited transactions which arise in 
certain situations involving securities lending, there are two relevant 
class exemptions, PTCE 81-6 and PTCE 82-63. PTCE 81-6 provides an 
exemption under certain conditions from section 406(a)(1) (A) through 
(D) of the Act and the corresponding provisions of section 4975(c) of 
the Code for the lending of securities that are assets of an employee 
benefit plan to certain broker-dealers or banks which are parties in 
interest. In this regard, condition number one of PTCE 81-6 requires, 
in part, that neither the borrower nor an affiliate of the borrower has 
discretionary authority or control with respect to the investment of 
the plan assets involved in the transaction. PTCE 82-63 provides an 
exemption under specified conditions from section 406(b)(1) of the Act 
and section 4975(c)(1)(E) of the Code for the payment of compensation 
to a plan fiduciary for services rendered in connection with loans of 
plan assets that are securities. In this regard, PTCE 82-63 permits the 
payment of compensation to a plan fiduciary for the provision of 
securities lending services, only if the loan of securities itself is 
not prohibited under section 406(a) of the Act (i.e. a loan of 
securities to a non-party in interest).
    Under the proposed arrangement, because GSL would have discretion 
to lend securities of the Client Plans to the SSB Group, and because 
both GSL and the SSB Group are divisions of State Street, the lending 
of securities to the SSB Group by the Client Plans for which GSL serves 
as securities lending agent (or sub-agent) may be outside the scope of 
relief provided by PTCE 81-6 and by PTCE 82-63. Accordingly, State 
Street has requested the Department to grant relief from section 
406(a)(1) (A) through (D), (b)(1), and (b)(2) of the Act and the 
corresponding provisions of the Code which would permit the SSB Group 
to borrow securities from those Client Plans for which State Street, 
through its Trust Division will be acting as directed trustee or 
custodian, and through GSL will be acting as securities lending agent 
(or sub-agent).
    In addition, State Street has requested relief from section 
406(a)(1) (A) through (D), (b)(1), and (b)(2) and the corresponding 
provisions of the Code which would permit GSL and the SSB Group to 
receive compensation from a Client Plan in connection with the proposed 
securities lending transactions. In this regard, it is represented that 
the SSB Group will be compensated as any other independent borrower of 
Client Plan securities would be (e.g., by receiving an agreed rebate 
payment). In no event, will rates paid to the SSB Group be less 
favorable to the Client Plan than a loan of such securities made at the 
same time and under the same circumstances to an unaffiliated borrower.
    8. If the requested exemption is granted, GSL represents that it 
intends to employ the same procedures currently used in the case of 
securities loans to unrelated third party borrowers and which GSL has 
already incorporated into similar arrangements with institutional 
clients not covered by the Act. Specifically, it is represented that 
State Street will adopt and implement procedural safeguards that all 
trades affected will take place at the same ``arms'' length'' prices 
that would have been negotiated with similarly-situated third party 
borrowers. In this regard, it is represented that the SSB Group, as 
borrower, will receive a rebate fee comparable to the fee received by 
independent borrowers, and GSL, as lender's agent for Client Plans, 
will receive a fee specified in the agreement with such plans for 
securities lending services. In this regard, it is represented that 
such securities lending services will include monitoring the collateral 
and acting appropriately to protect the interest of the lender in the 
event of default by the borrower. It is further represented that with 
respect to each Client Plan to which the proposed exemption would 
apply, neither State Street, the SSB Group, GSL, nor any other division 
or affiliate of State Street has or exercises discretionary authority 
or control with respect to the investment of the assets of the plan 
involved in the transaction (other than with respect to the investment 
of cash collateral after securities have been loaned and collateral 
received), or renders investment advice (within the meaning of 29 CFR 
2510.3-21(c) with respect to those assets, including decisions 
concerning a Client Plan's acquisition or disposition of securities 
available for loan. Accordingly, it is represented that GSL will not be 
in a position to influence the portfolio holdings of its Client Plans 
in a manner that might increase or decrease the securities available 
for lending to the SSB Group (or any other borrower). In addition, 
State Street represents that the proposed lending program incorporates 
the relevant conditions contained in class exemptions PTCE 81-6 and 
PTCE 82-63.
    9. Several safeguards, described more fully below, are incorporated 
into this exemption in order to ensure the protection of the assets of 
the Client Plans involved in the proposed transactions. In this regard, 
where GSL

[[Page 51688]]

is the direct securities lending agent, a fiduciary of a Client Plan 
who is independent of State Street, GSL, the SSB Group, and any other 
division or affiliate of State Street will sign the Agency Agreement 
before such Client Plan participates in a securities lending program. 
The Agency Agreement will, among other things, describe the operation 
of the lending program, prescribe the form of the Loan Agreement to be 
entered into on behalf of the Client Plan with borrowers, specify the 
securities which are available to be loaned, and prescribe that a 
borrower (including the SSB Group) is required to deliver collateral 
having a value in excess of the value of the loaned securities (i.e. 
not less than 102% or, in some cases, a higher agreed-upon percentage). 
In addition, the Agency Agreement will provide that the securities will 
be marked-to-market daily and provide a list of permissible borrowers, 
including the SSB Group.
    The Agency Agreement will also set forth the basis and the method 
for GSL's compensation from a Client Plan for the performance of 
securities lending services. As set forth more fully below, the basis 
for GSL's compensation will be its fixed percentage share of the 
return, if any, on cash collateral or the applicable interest due on a 
non-cash collateral loan. The actual rate of return that will be 
divided between the Client Plan and GSL in such pre-agreed percentage 
will vary each day (and indeed during the day from time to time) 
according to the investment performance from each loan of securities. 
It is represented that GSL's share with respect to each Client Plan 
will be negotiated with such Client Plan and thereafter set forth in 
the Agency Agreement on the date such agreement is executed.
    10. The Agency Agreement will contain provisions to the effect that 
if the SSB Group is designated by a Client Plan as an approved 
borrower, (i) such Client Plan will acknowledge that the SSB Group, 
GSL, and the Trust Division are, or may be deemed to be, the same legal 
entity, and (ii) GSL will represent to such Client Plan that each and 
every loan made to the SSB Group on behalf of such plan will be at 
market rates and will in no event be less favorable to such Client Plan 
than a loan of such securities, made at the same time and under the 
same circumstances, to an unaffiliated borrower.
    11. When GSL is lending securities under a sub-agency arrangement, 
the primary lending agent will enter into a Primary Lending Agreement 
with a fiduciary of a Client Plan, before such plan participates in the 
securities lending program. It is represented that it is the 
responsibility of the primary lending agent to obtain the approval of 
the fiduciary of the Client Plan to such Primary Lending Agreement. It 
is represented that the primary lending agent will be independent of 
GSL and the SSB Group. As State Street will not be a party to the 
Primary Lending Agreement, it is represented that the sub-agency 
arrangement between GSL and the primary lending agent will obligate the 
primary lending agent to provide assurance that the primary lending 
agent was independent of the fiduciary of the Client Plan.
    The Primary Lending Agreement will contain substantive provisions 
akin to those in the Agency Agreement relating to the description of 
the operation of the lending program, use of an approved form of Loan 
Agreement, specification of securities which are available to be 
loaned, prescription that a borrower is required to deliver collateral 
having a specified value in excess of the value of the loaned 
securities, and a list of approved borrowers (including the SSB Group). 
The Primary Lending Agreement will specifically authorize the primary 
lending agent to appoint sub-agents, including GSL, to facilitate its 
performance of securities lending agency functions. Where GSL is 
appointed to act as such a sub-agent, GSL would require that the 
primary lending agent represent to GSL that the primary lending agent 
has received prior approval of or has the authority to make the 
decision to hire GSL.
    The Primary Lending Agreement will also set forth the basis and the 
method for the primary lending agent's compensation from the Client 
Plan for the performance of securities lending services and will 
authorize the primary lending agent to pay a portion of its fee, as the 
primary lending agent determines in its sole discretion, to any sub-
agent(s) it retains pursuant to the authority granted under such 
agreement.
    Pursuant to its authority to appoint sub-agents, the primary 
lending agent will enter into a securities lending sub-agency agreement 
(the Sub-Agency Agreement) with GSL under which the primary lending 
agent will retain and authorize GSL, as sub-agent, to lend the 
securities of the primary lending agent's Client Plans, in a manner 
consistent with the terms and conditions as specified in the Primary 
Lending Agreement. It is represented that the Primary Lending Agreement 
and the Sub-Agency Agreement will not necessarily have identical terms, 
because the procedures that State Street uses in operating its lending 
program will be spelled out in its form agreement, and these may not be 
identical to how the primary lending agent operates its own program. 
For example, State Street may require that its Sub-Agency Agreement 
contain certain specific provisions which the primary lending agent may 
not have requested from the Client Plan. One such requirement is that 
collateral initially equal 102 percent (102%) of the value of the 
loaned securities, whereas the primary lending agent may have been 
authorized to make loans of securities at less than 102 percent (102%) 
collateral. State Street may also require recordkeeping in addition to 
that specified in the Primary Lending Agreement and may require 
different notice provisions.
    GSL represents that the Sub-Agency Agreement will contain 
provisions which are in substance comparable to those described in 
paragraphs 9 and 10 above, which would appear in an Agency Agreement in 
situations where GSL is the primary lending agent. In this regard, GSL 
will make representations in the Sub-Agency Agreement, as described in 
paragraph 10 above, with respect to arm's-length dealing with the SSB 
Group. The Sub-Agency Agreement will also set forth the basis and 
method for GSL's compensation to be paid by the primary lending agent.
    12. In all cases, GSL will maintain records sufficient to assure 
compliance with its representation that all loans to the SSB Group are 
effectively at arm's-length terms. Such records will be provided to the 
appropriate independent fiduciary of a Client Plan in the manner and 
format agreed to with such fiduciary and without charge to such Client 
Plan. A Client Plan may terminate the Agency Agreement at any time, 
without penalty to such plan, on five (5) business days notice. It is 
further represented that the Primary Lending Agreement may be subject 
to a similar termination provision, if the primary lending agent is 
relying on PTCE 81-6.
    13. GSL, on behalf of the Client Plans, will enter into a Loan 
Agreement with the SSB Group that is in substantially similar form to 
the one used from time to time, with all other borrowers. It is 
represented that the Loan Agreement cannot be identical to that used 
with an unrelated party, in part because, special disclosures must be 
made to Client Plans, regarding the relationship between GSL, the SSB 
Group, and the Trust Division, as operations divisions of State Street. 
However, it is represented that the economic terms and procedures 
required by the Loan Agreement will be identical to those negotiated 
with unrelated borrowers.

[[Page 51689]]

    Although GSL will negotiate with the SSB Group the terms of any 
specific loan, the general terms of the Loan Agreement, pursuant to 
which any loan is effected will be approved by a fiduciary of the 
Client Plan who is independent of State Street. The Loan Agreement will 
specify, among other things, the right of the Client Plan, acting 
through GSL, to terminate a loan at any time and such plan's rights in 
the event of any default by the SSB Group. The Loan Agreement will 
explain the basis for compensation to the Client Plan for lending 
securities to the SSB Group under each category of collateral. The Loan 
Agreement also will contain a requirement that the SSB Group must pay 
all transfer fees and transfer taxes related to the loans of 
securities.
    14. Before entering into the Loan Agreement, State Street will 
furnish its most recent available audited and unaudited financial 
statements of its parent, State Street Boston Corporation, to GSL, and 
in turn such statements will be made available to each Client Plan 
before such plan is asked to approve the terms of the Loan Agreement. 
The Loan Agreement will contain a requirement that the SSB Group must 
provide to the Client Plan prompt notice at the time of a loan by such 
plan of any material adverse changes in State Street's financial 
condition, since the date of the most recently furnished financial 
statements. If any such changes have taken place, GSL will not make any 
further loans to the SSB Group, unless an independent fiduciary of such 
Client Plan has approved the loan in view of the changed financial 
condition.
    15. As noted in paragraph 9 and 10, the agreement by GSL to provide 
securities lending services, as agent, to a Client Plan will be 
embodied in the Agency Agreement. The Client Plan and GSL will, prior 
to the commencement of any lending activity, agree to the fee 
arrangement, as described in paragraph 9 above, under which GSL will be 
compensated for its services as lending agent. Such agreed upon fee 
arrangement will be set forth in the Agency Agreement and thereby will 
be subject to the prior written approval of a fiduciary of such Client 
Plan who is independent of the SSB Group and GSL.
    Similarly, with respect to such arrangements under which GSL is 
acting as securities lending sub-agent, the agreed upon fee arrangement 
of the primary lending agent will be set forth in the Primary Lending 
Agreement, and such agreement will specifically authorize the primary 
lending agent to pay a portion of the fee, as the primary lending agent 
determines in its sole discretion, to any sub-agent, including GSL, 
which is to provide securities lending services to the Client 
Plans.<SUP>6</SUP> A Client Plan will be provided with any reasonably 
available information which is necessary for the independent fiduciary 
of such plan to make a determination whether to enter into or continue 
to participate under the Agency Agreement (or the Primary Lending 
Agreement) and any other reasonably available information which such 
fiduciary may reasonably request.
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    \6\ The foregoing provisions describe arrangements comparable to 
conditions (c) and (d) of PTCE 82-63 which require that the payment 
of compensation to a ``lending fiduciary'' is made under a written 
instrument and is subject to prior written authorization of an 
independent ``authorizing fiduciary.'' In the event that a 
commingled investment fund participates in the securities lending 
program, the special rule applicable to such funds concerning the 
authorization of the compensation arrangement, as set forth in 
paragraph (f) of PTCE 82-63, must be satisfied.
---------------------------------------------------------------------------

    16. Each time a Client Plan loans securities to the SSB Group, 
pursuant to the Loan Agreement, GSL will reflect in its records the 
material terms of the loan, including the securities to be loaned, the 
required level of collateral, and the fee or rebate payable. When a 
loan is collateralized with cash, the cash will be invested for the 
benefit of and at the risk of the Client Plan, and resulting earnings 
(net of a rebate rate to the borrower and the fee to the lending agent) 
comprise the compensation to such plan with respect to the loan. Where 
the collateral consists of obligations other than cash, the borrower 
will pay a fee (loan premium) directly to the Client Plan. The terms of 
each loan will be at least as favorable to the Client Plan as those of 
a comparable arm's-length transaction between unrelated parties.
    17. The Client Plan will receive the equivalent of all 
distributions made to holders of the borrowed securities during the 
term of any loan, including, but not limited to, cash dividends, 
interest payments, shares of stock as a result of stock splits and 
rights to purchase additional securities, or other distributions. The 
Loan Agreement will provide that the Client Plan may terminate any loan 
at any time. Upon a termination, the SSB Group will be contractually 
obligated to return the loaned securities to the Client Plan within 
five (5) business days of notification (or such longer period of time 
permitted pursuant to PTCE 81-6, as amended or superseded). If the SSB 
Group fails to return the securities within the designated time, the 
Client Plan will have the right under the Loan Agreement to purchase 
securities identical to the borrowed securities and apply the 
collateral to payment of the purchase price and any other expenses of 
such plan associated with the sale and/or purchase.
    18. GSL will establish each day separate written schedules of 
lending fees and rebate rates to assure uniformity of treatment among 
borrowing brokers and to limit the discretion that GSL would have in 
negotiating securities loans to the SSB Group. Loans to all borrowers 
of a given security on that day will be made at rates or lending fees 
on the relevant daily schedules or at rates or lending fees which may 
be more advantageous to the Client Plans. It is represented that in no 
case will loans be made to the SSB Group at rates or lending fees less 
advantageous to the Client Plans than those on the schedule. The daily 
schedule of rebate rates will be based on the current value of the 
clients' reinvestment vehicles and on market conditions, as reflected 
by demand for securities by borrowers other than the SSB Group. As with 
rebate rates, the daily schedule of lending fees will also be based on 
market conditions, as reflected by demand for securities by borrowers 
other than the SSB Group, and will generally track the rebate rates 
with respect to the same security or class of security.
    19. GSL will adopt maximum daily rebate rates for cash collateral 
payable to the SSB Group on behalf of a lending Client Plan. Separate 
maximum daily rebate rates will be established with respect to loans of 
designated classes of securities such as U.S. government securities, 
U.S. equities and corporate bonds, international fixed income 
securities, and international equities. With respect to each designated 
class of securities, the maximum rebate rate will be the lower of: (i) 
The one month LIBOR rate, minus a stated percentage of such LIBOR rate 
and, (ii) the client's actual reinvestment rate for the relevant cash 
collateral, minus a stated percentage of such reinvestment rate, as 
pre-approved by the independent fiduciary of the Client Plan. Thus, 
when cash is used as collateral, the daily rebate rate will always be 
lower than the rate of return to the Client Plans from authorized 
investments for cash collateral by such stated percentage as shall be 
pre-approved by the independent fiduciary. GSL will submit the formula 
for determining the maximum daily rebate rates to an independent 
fiduciary of the Client Plan for approval before lending any securities 
to the SSB Group on behalf of such plan.
    20. GSL will also adopt minimum daily lending fees for non-cash 
collateral payable by the SSB Group to

[[Page 51690]]

GSL on behalf of the Plan. Separate minimum daily lending fees will be 
established with respect to loans of designated classes of securities, 
such as U.S. government securities, U.S. equities and corporate bonds, 
international fixed income securities, and international equities. With 
respect to each designated class of securities, the minimum lending fee 
will be stated as a percentage of the principal value of the loaned 
securities. GSL will submit such minimum daily lending fees to an 
independent fiduciary of the Client Plan for approval before initially 
lending any securities to the SSB Group on behalf of such plan.
    21. For collateral other than cash, the lending fees charged the 
previous day will be reviewed by GSL for competitiveness. Based on the 
demand of the marketplace, this daily fee tends to remain constant and, 
with respect to domestic securities and international debt securities, 
is currently at least one twentieth of one percent of the principal 
value of the loaned securities. With respect to international equity 
securities, the daily fee is currently one fifth of one percent of the 
principal value of the loaned securities. Because 50 percent (50%) or 
more of securities loans by Client Plans will be to unrelated brokers 
or dealers,<SUP>7</SUP> the competitiveness of GSL's fee schedule will 
be continuously tested in the marketplace. Accordingly, loans to the 
SSB Group should result in a competitive rate of income to the lending 
Client Plan.
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    \7\ It is represented that this 50 percent (50%) requirement 
applies regardless of the type of collateral used to secure the 
loan.
---------------------------------------------------------------------------

    The method of determining the daily securities lending rates (fees 
and rebates), the minimum lending fees payable by the SSB Group and the 
maximum rebate payable to the SSB Group will be specified in an exhibit 
attached to the Agency Agreement to be executed between the independent 
fiduciary of the Client Plan and GSL in cases where GSL is the direct 
securities lending agent.
    22. Should GSL recognize prior to the end of a business day that, 
with respect to new and/or existing loans, it must change the rebate 
rate or lending fee formula in the best interest of Client Plans, it 
may do so (i) with respect to borrowers other than the SSB Group, at 
the end of such business day, and (ii) with respect to the SSB Group, 
upon GSL's receipt of a written approval of the Client Plan's 
independent fiduciary.<SUP>8</SUP>
---------------------------------------------------------------------------

    \8\ GSL represents that it will not initiate any modification in 
such rates or fees which would be detrimental to the Client Plans.
---------------------------------------------------------------------------

    GSL may propose a change in the lending fee or rebate rate 
determination, as applicable, with respect to an outstanding loan by 
delivering written notice of the effective date and the new 
determination pursuant to which a lending fee or rebate rate, as the 
case may be, may be determined at least five (5) business days before 
the date of the proposed change. In the event that the Client Plans 
does not consent to such change by not providing GSL with 
acknowledgment of its consent in writing by such means that will ensure 
receipt by GSL prior to 10:00 A.M. New York time, on the effective date 
of the change, then GSL will not make such change. The applicant 
represents that allowing GSL to request a modification to the lending 
fee or the rebate rate formula with respect to an existing loan to the 
SSB Group when market conditions change will be beneficial to the 
Client Plans. According to the applicants, in the absence of the 
ability to make such modification, the SSB Group may be forced by 
market conditions to terminate the loan and seek better terms 
elsewhere. Such termination may then force the Client Plan to seek new 
borrowers for its securities who, in light of the changed market 
conditions, are likely to negotiate for the lending fee or rebate rate 
which the SSB Group would have received or paid had GSL had the written 
authority from the independent fiduciary of the Client Plan to decrease 
the lending fee or increase the rebate rate.
    23. While GSL will normally lend securities to requesting 
borrowers, including, for these purposes, the SSB Group, on a ``first 
come, first served'' basis, as a means of assuring uniformity of 
treatment among borrowers, it should be recognized that in some cases 
it may not be possible to adhere to a ``first come, first served'' 
allocation. This can occur, for instance, where (a) the credit limit 
established for such borrower by GSL and/or the Client Plan has already 
been satisfied; (b) the ``first in line'' borrower is not approved as a 
borrower by the particular Client Plan whose securities are sought to 
be borrowed; or (c) the ``first in line'' borrower cannot be 
ascertained, as an operational matter, because several borrowers spoke 
to different GSL representatives at or about the same time with respect 
to the same security. In situations (a) and (b), loans would normally 
be effected with the ``second in line.'' In situation (c), securities 
would be allocated equitably among all eligible borrowers.
    24. Under the Loan Agreement, State Street will agree to indemnify 
and hold harmless each lending Client Plan (including the sponsor and 
fiduciaries of such Client Plan) against any and all damages, losses, 
liabilities, costs, and expenses (including attorneys' fees) which the 
Client Plan may incur or suffer directly arising out of the lending of 
the securities of such Client Plan to the SSB Group. Accordingly, State 
Street will assure the Client Plan that the rate of return on each loan 
will at a minimum equal the transactional cost to the plan of lending 
securities to the SSB Group. The applicants contend that, as a result 
of this indemnity, the rate of return earned by Client Plans from 
lending to the SSB Group will, in total, exceed the return from lending 
securities to other brokers.
    25. The Client Plan will receive collateral from the SSB Group by 
physical delivery, book entry in a securities depository, wire 
transfer, or similar means by the close of business on or before the 
day the loaned securities are delivered to the SSB Group. The 
collateral will consist of cash, securities issued or guaranteed by the 
U.S. Government or its agencies or instrumentalities or irrevocable 
bank letters of credit (issued by a person other than State Street or 
its affiliates) or any combination thereof, or such other types of 
collateral which might be permitted by the Department under PTCE 81-6, 
as amended or superseded, relating to securities lending activities. 
The market value of the collateral on the close of business on the day 
preceding the day of the loan will be at least 102 percent (102%) of 
the market value of the loaned securities. The Loan Agreement will give 
the Client Plan a continuing security interest in, title to, or the 
rights of a secured creditor with respect to the collateral and a lien 
on the collateral. GSL will monitor the level of the collateral daily. 
If the market value of the collateral falls below 100 percent (100%) 
(or such greater percentage agreed to by the parties) of that of the 
loaned securities, GSL will require the SSB Group to deliver by the 
close of business the next day sufficient additional collateral to 
bring the level back to at least 102 percent (102%).
    26. Each Client Plan participating in the lending program will be 
sent a monthly transaction report which will provide a list of all 
security loans outstanding and closed for a specified period. The 
report will identify for each open loan position, the securities 
involved, the value of the security for collateralization purposes, the 
current value of the collateral, the rebate or loan premium (as the 
case may be) at which the security is loaned, and the number of days 
the security has been on loan.

[[Page 51691]]

    In order to provide the means for monitoring lending activity, 
rates on loans to the SSB Group compared with loans to other brokers, 
and the level of collateral on the loans, it is represented that the 
monthly report will show, on a daily basis, the market value of all 
outstanding security loans to the SSB Group and to other borrowers as 
compared to the total collateral held for both categories of loans. 
Further, the monthly report will state the daily fees where collateral 
other than cash is utilized and will specify the details used to 
establish the daily rebate payable to all brokers where cash is used as 
collateral. The monthly report also will state, on a daily basis, the 
rates at which securities are loaned to the SSB Group compared with 
those at which securities are loaned to other brokers. This statement 
will give an independent fiduciary information which can be compared to 
that contained in the daily rate schedule.
    27. With respect to the proposed transactions, GSL will make and 
retain for six (6) months tape recordings evidencing all securities 
loan transactions with the SSB Group. Also, if requested by the lending 
customer, GSL shall provide daily confirmations of securities lending 
transactions; and GSL shall provide to lending customers monthly 
account reports, or if requested by the customer, weekly, or daily 
reports, setting forth for each transaction made or outstanding during 
the relevant reporting period the loaned securities, the related 
collateral, rebates and loan premiums, and such other information in 
such format as shall be agreed to by the parties.
    28. Only Client Plans with total assets having an aggregate market 
value of at least $50 million will be permitted to lend securities to 
the SSB Group. This restriction is intended to assure that any lending 
to the SSB Group will be monitored by an independent fiduciary of above 
average experience and sophistication in matters of this kind.
    29. State Street represents that the proposed transactions are in 
the interest of the Client Plans in that the lending of securities is 
an attractive investment opportunity. In this regard, a Client Plan 
which participates in securities lending is able to earn a fee for 
lending the securities to the borrower while continuing to receive the 
economic benefits of receiving dividends, interest payments, and other 
distributions made with respect to the loaned securities.
    It is represented that failure to grant the requested exemption 
will limit the number of companies to whom the Client Plans can lend 
securities by excluding the SSB Group, an active securities borrower 
that currently borrows securities in lending transactions or in 
connection with reverse repurchase agreements worth in excess of $5 
billion daily.
    30. It is represented that the proposed exemption is 
administratively feasible, in that it will not require any ongoing 
involvement by the Department. In this regard, it is represented that 
compliance with the requirements of the exemption can be readily 
monitored by the independent fiduciaries of the Client Plans, as well 
as by State Street's own internal audit and compliance personnel. 
Further, it is represented that State Street will bear the cost of 
filing the application for exemption and the costs associated with the 
transfers of the loaned securities.
    31. In summary, the applicants represent that the described 
transactions will satisfy the statutory criteria of section 408(a) of 
the Act because:
    (a) Neither State Street, the SSB Group, GSL, nor any other 
division or affiliate of State Street will have or exercise 
discretionary authority or control with respect to the investment of 
plan assets involved in the transaction (other than with respect to the 
investment of cash collateral after securities have been loaned and 
collateral received), or render investment advice (within the meaning 
of 29 CFR 2510.3-21(c)) with respect to those assets, including 
decisions concerning a Client Plan's acquisition or disposition of 
securities available for loan;
    (b) Before a Client Plan participates in a securities lending 
program and before any loan of securities is effected, the fiduciary of 
such plan who is independent of State Street, GSL, the SSB Group, and 
any other division or affiliate of State Street will authorize and 
approve the Agency Agreement or the Primary Lending Agreement, as 
appropriate, and will approve the general terms of the Loan Agreement 
between the Client Plan and the SSB Group;
    (c) a Client Plan may terminate the Agency Agreement at any time, 
without penalty to such plan, on five (5) business days notice;
    (d) the Client Plans will receive from the SSB Group a continuing 
security interest in, title to, or the rights of a secured creditor 
with respect to the collateral and a lien on various forms of 
collateral on each loan to the SSB Group which initially will be worth 
at least 102 percent (102%) of the market value of the loaned 
securities, and which will be monitored daily by GSL to insure that the 
market value of the collateral never falls below 100 percent (100%) of 
the market value of the loaned securities (or such greater percentage 
agreed to by the parties);
    (e) all the procedures under the proposed transactions will, at a 
minimum, conform to the applicable provisions of PTCE 81-6 and PTCE 82-
63;
    (f) State Street will indemnify and hold harmless each lending 
Client Plan (including the sponsor and fiduciaries of such Client Plan) 
against any and all damages, losses, liabilities, costs, and expenses 
(including attorneys' fees) which the Client Plan may incur or suffer 
directly arising out of the lending of the securities of such Client 
Plan to the SSB Group;
    (g) the lending arrangements will permit the Client Plans to lend 
to the SSB Group, a major borrower of securities, and will enable such 
plans to diversify the list of eligible borrowers and earn additional 
income from the loaned securities on a secured basis, while continuing 
to receive any dividends, interest payments and other distributions due 
on those securities;
    (h) prior to any Client Plan's approval of the lending of its 
securities to the SSB Group, a copy of this Notice of Proposed 
Exemption and a copy of the final exemption, if granted, will be 
provided to the Client Plan;
    (i) only Client Plans with total assets having an aggregate market 
value of at least $50 million will be permitted to lend securities to 
the SSB Group;
    (j) the terms of each loan of securities between the Client Plans 
and the SSB Group will be at least as favorable to such plans as those 
of a comparable arm's-length transaction between unrelated parties;
    (k) the Client Plans will receive monthly reports, so that an 
independent fiduciary of such plans may monitor the securities lending 
transactions with the SSB Group;
    (l) Before entering into the Loan Agreement and before a Client 
Plan lends any securities to the SSB Group, an independent fiduciary of 
such Client Plan will receive sufficient information, concerning the 
financial condition of State Street, including but not limited to 
audited and unaudited financial statements of State Street's parent 
corporation; and
    (m) The SSB Group will provide to a Client Plan prompt notice at 
the time of each loan by such plan of any material adverse changes in 
State Street's financial condition, since the date of the most recently 
furnished financial statements.

[[Page 51692]]

Notice to Interested Persons

    Included among those persons who may be interested in the pendency 
of the proposed exemption are the investment committee(s) or trustee(s) 
of any Client Plan(s) which are interested in lending securities to the 
SSB Group. It is represented that the applicant will furnish at its 
cost these various classes of interested persons with a copy of the 
Notice of Proposed Exemption (the Notice), plus a copy of the 
supplemental statement (Supplemental Statement), as required, pursuant 
to 29 CFR 2570.43(b)(2) within fifteen (15) calendar days of 
publication of the Notice in the Federal Register. Notification will be 
provided to all the investment committee(s) or trustee(s) of any Client 
Plan(s) which are interested in lending securities to the SSB Group 
either by hand delivery or by mailing first class of a copy of the 
Notice, plus a copy of the Supplemental Statement. It is represented 
that the applicant will at its cost provide a copy of such Notice and a 
copy of the final exemption, if granted, to Client Plans after the 
final exemption has been issued and prior to any Client Plan's approval 
of the lending of securities to the SSB Group.

FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the 
Department, telephone (202) 219-8883. (This is not a toll-free number.)

Franklin & Davis, P.C. Profit Sharing Plan (the Plan) Located in Troy, 
Michigan

[Application No. D-10450]

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 
two proposed loans (the Loans) totaling $229,000 to Franklin & Davis, 
P.C. (F&D), the Plan's sponsor and a disqualified person with respect 
to the Plan, by the individual account (the Account) of Bruce W. 
Franklin (Mr. Franklin), provided the following conditions are 
satisfied: (a) The terms of the Loans are at least as favorable to the 
Plan as those obtainable in arm's-length transactions with an unrelated 
party; (b) the Loans do not exceed 25% of the assets of the Account; 
(c) the first Loan (Loan 1) is secured by a second mortgage on certain 
real property (the Property) which has been appraised by a qualified 
independent appraiser to have a fair market value not less than 150% of 
the amount of Loan 1 plus the balance of the first mortgage which it 
secures; (d) the second Loan (Loan 2) is secured by certain securities 
(the Securities) which have a fair market value not less than 200% of 
Loan 2; and (e) the fair market value of the collateral remains at 
least equal to the percentages described in conditions (c) and (d), 
above, throughout the duration of the Loans.<SUP>9</SUP>
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    \9\ Since Mr. Franklin is the sole owner of F&D 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.
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Summary of Facts and Representations

    1. F&D is a corporation located in Troy, Michigan, which is engaged 
in the practice of law. The Plan is a defined contribution plan with 
one participant, Mr. Franklin, who is also the Plan's trustee. As of 
March 31, 1997, Mr. Franklin's Account balance was approximately 
$916,000.
    2. F&D wishes to borrow $229,000 from the Account, which represents 
25% of the current fair market value of the Account. The money will be 
loaned to F&D in two separate Loans. The Loans will each be amortized 
over a 10 year period, with equal monthly payments of principal and 
interest over the 10 year term. The interest rate for each Loan will be 
9.5% per annum. The total monthly payments for the Loans will be 
$2,963.20 per month. Ms. Linda Walden, Vice President of First Citizens 
Bank (the Bank) of Newnan, Georgia, has represented in a letter dated 
June 26, 1997 that the Bank would lend money to F&D at the same terms 
as those of the Loans.
    3. Loan 1 will be secured by the Property, which consists of Mr. 
and Mrs. Franklin's residence, which is located at 3631 Brookside, 
Bloomfield Township, Michigan. The Property has been appraised by Mr. 
James Valiquett, an independent appraiser in Farmington, Michigan, to 
have a fair market value of $720,000 as of October 8, 1996. The 
Property has a first mortgage in the amount of $335,136. Loan 1 would 
be secured by a second mortgage on the Property in the amount of 
$144,864. Thus, the appraised fair market value of the Property would 
represent 150% of the total outstanding principal amount of debt 
secured by the Property. The applicant represents that the mortgage to 
the Plan will be duly recorded.
    4. Loan 2, which will be in the principal amount of $84,136, will 
be secured by the Securities. The Securities are publicly traded stock 
owned by Mr. and Mrs. Franklin, and consist of 257,084 shares of Royal 
Silver Mines, Inc. which is traded on the NASDAQ stock exchange. The 
Securities are currently valued at $192,813, which represents 
approximately 230% of the principal amount of Loan 2. The applicant 
represents that the Plan's security interest in the Securities will be 
duly recorded.
    5. In summary, the applicant represents that the proposed 
transactions satisfy the criteria contained in section 4975(c)(2) of 
the Code for the following reasons: (a) The Loans represent not more 
than 25% of the assets of the Account; (b) the terms of the Loans will 
be at least as favorable to the Plan as those obtainable in arm's-
length transactions with an unrelated party, as demonstrated by the 
letter from the Bank; (c) Loan 1 will be secured by a second mortgage 
on the Property, which has been determined by a qualified, independent 
appraiser to have a fair market value of not less than 150% of the 
total principal amount of the loans that it will secure; (d) Loan 2 
will be secured by the Securities, which are publicly traded securities 
with a current fair market value of approximately 230% of Loan 2; and 
(e) Mr. Franklin is the only participant in the Plan to be affected by 
the transactions, and he desires that the transactions be consummated.

NOTICE TO INTERESTED PERSONS: Since Mr. Franklin is the only Plan 
participant to be affected by the proposed transactions, 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.)

The Sperry Rail, Inc. Retirement Plan (the Plan) Located in Danbury, 
Connecticut

[Application No. D-10452]

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

[[Page 51693]]

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 loan (the Loan) by the Plan of $965,000 to 
Sperry Rail, Inc. (Sperry), the Plan sponsor and a party in interest 
with respect to the Plan, provided the following conditions are 
satisfied: (a) The Loan does not exceed 25% of the assets of the Plan; 
(b) the Loan is at terms not less favorable to the Plan than those 
obtainable in an arm's-length transaction with an unrelated party; (c) 
the Loan is secured by personal property (the Property) that has been 
appraised by an independent appraiser as having a fair market value not 
less than 200% of the principal amount of the Loan; (d) an independent 
fiduciary has reviewed the proposed Loan on behalf of the Plan and has 
determined that the Loan is in the best interest of the Plan and its 
participants and beneficiaries; and (e) the Plan's independent 
fiduciary will monitor the Loan throughout its duration to ensure that 
it remains in the best interest of the Plan and continues to meet the 
conditions of the exemption proposed herein.

Summary of Facts and Representations

    1. Sperry, the Plan sponsor, is in the railroad track inspection 
business and maintains its executive offices in Danbury, Connecticut. 
Sperry is a member of a controlled group of corporations. The other 
members of the controlled group are Sperry's parent corporation, 
Longview Holdings, Inc. (LHI), and Longview Inspection, Inc., another 
subsidiary of LHI. The Plan is a defined benefit plan that has 
approximately 192 participants and assets of $4,062,320 as of July 1, 
1997.
    2. Sperry has requested the exemption proposed herein to permit it 
to borrow $965,000 from the Plan. The Loan is to be repaid over a 
period of 15 years. The interest rate for the Loan is to be 1.5% plus 
the yield on 30 year Treasury Bonds on the outstanding balance, which 
is currently approximately 6.90% (which, when added to the 1.5% yields 
approximately 8.40%). For the first three years of the Loan, Sperry 
will make equal monthly payments of principal and interest in the 
amount of $5,361.11. The interest rate (and monthly payment amount) 
will be adjusted every 3 years to an amount equal to 1.5% above the 
then-current yield on 30 year U.S. Treasury Bonds. The applicant 
represents that when the interest rate is reset, it shall never be less 
than the interest rate applicable at the start of the Loan. Mr. J. 
Scott Bognar, Vice President of Putnam Trust (the Bank), a subsidiary 
of Bank of New York, has reviewed the proposed terms of the Loan and 
has determined that they constitute fair market value terms and are 
commercially reasonable.
    3. The Loan will be secured by the Property, which consists of a 
Sperry Induction Detector Car bearing registration number: SRS 148, and 
Sperry spare parts inventory, together with all accessions, 
accessories, attachments, parts, equipment and repairs which may be 
affixed to or used in connection with the Property. The applicant 
represents that the Plan will have a first priority interest in the 
Property, and Sperry will execute such financing statements as are 
necessary to perfect the Plan's interest in the Property. The Property 
has been appraised by R.L. Banks & Associates, Inc. (Banks), 
Transportation Economists and Engineers, an independent expert with 
offices in Washington, D.C. Banks has determined that as of December 
27, 1996, the fair market value of Car Number 148 was $803,720, and the 
value of the Sperry spare parts inventory was $1,500,000. Thus, Banks 
has appraised the Property to have a total fair market value of 
$2,303,720 as of December 27, 1996. This would represent approximately 
2.4 times the principal amount of the Loan.
    4. Mr. Paul Mishkin, a certified public accountant has been 
retained by the Plan to be its independent fiduciary with respect to 
the proposed Loan. Mr. Mishkin represents that he has more than 25 
years' experience in both private industry and public accounting 
working with large publicly-held corporations as well as significant 
private companies. He has spent a substantial portion of that time 
analyzing corporate structures and evaluating financial alternatives. 
Mr. Mishkin represents that he has no financial interest in Sperry or 
its related entities, nor does he provide any services to Sperry or its 
affiliates. Mr. Mishkin has reviewed the terms of the proposed Loan and 
has determined that they are equal or more favorable to the Plan than 
those obtainable from an unrelated borrower. Mr. Mishkin represents 
that the Loan is appropriate for the Plan and in the best interest of 
the Plan's participants and beneficiaries and protective of their 
rights.
    5. Mr. Mishkin represents that he will monitor and enforce 
compliance with the terms of the Loan. He will monitor monthly payments 
made by Sperry. In the event payments are not made on a timely basis, 
he will explore all avenues of recovery, including the right to sell 
the Property. Additionally, Mr. Mishkin will periodically inspect the 
condition of the Property, including obtaining current appraisals at 
Sperry's expense, to insure that the collateral maintains a value of 
200% of the outstanding Loan amount at all times. If the collateral 
value falls below 200%, Mr. Mishkin has the authority to require Sperry 
to add additional collateral to restore the Plan's secured interest to 
200%. Alternatively, Mr. Mishkin has the authority to accelerate 
repayments of principal consistent with any collateral shortfall.
    6. In summary, the applicant represents that the proposed 
transaction satisfies the criteria of section 408(a) of the Act 
because: (a) The Loan represents not more than 25% of the assets of the 
Plan; (b) the Loan is at terms not less favorable to the Plan than 
those obtainable in an arm's-length transaction with an unrelated 
party, as demonstrated by the representation from the Bank; (c) the 
Loan is secured by the Property, which has been appraised by an 
independent appraiser as having a fair market value approximately 240% 
of the principal amount of the Loan; (d) Mr. Mishkin, the Plan's 
independent fiduciary, has reviewed the proposed Loan on behalf of the 
Plan and has determined that the Loan is in the best interest of the 
Plan and its participants and beneficiaries; and (e) the Plan's 
independent fiduciary will monitor the Loan throughout its duration to 
ensure that it remains in the best interest of the Plan and continues 
to meet the conditions of the exemption proposed herein.

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

Crown American Properties L.P. Retirement Savings Plan (the Plan) 
Located in Johnstown, Pa.

[Application No. D-10454]

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, August 10, 1990). If the exemption is 
granted, the restrictions of section 406(a), 406 (b)(1) and (b)(2), and 
section 407(a) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1) (A) through (E) of the Code, shall not apply to the 
purchase, holding or sale by participant-

[[Page 51694]]

 directed accounts in the Plan of shares of Crown American Realty Trust 
(the Crown REIT), an affiliate of Crown American Properties L.P. (Crown 
American), the Plan's sponsor and, as such, a party in interest with 
respect to the Plan, provided that the following conditions are met:
    (A) Any purchase or sale of the Crown REIT shares by a participant 
account (an Account) is made solely in accordance with the directions 
of the participant whose account is making the purchase or sale;
    (B) Immediately following any purchase of the Crown REIT shares by 
an Account, the percentage of the total value of the Account invested 
in the Crown REIT shares does not exceed 25 percent, as measured based 
on the value of the assets held by such Account as of the close of the 
prior business day;
    (C) Compliance with the terms and conditions of this proposed 
exemption, including the 25 percent limit described in Paragraph (B) 
above, is monitored by PNC Bank, National Association, as the Plan's 
trustee, which is independent of the Crown REIT and Crown American or 
any affiliate thereof;
    (D) With respect to any decisions made by a Plan participant for a 
purchase or sale of Crown REIT shares by an Account, neither Crown 
American, PNC, nor any of their affiliates has discretionary authority 
or control with respect to the investment of the Plan assets involved 
in the transaction, other than as required for PNC to monitor and 
enforce compliance with the 25 percent limit described in Paragraph (C) 
above, or renders any investment advice [within the meaning of 29 CFR 
2510.3-21(c)] with respect to those assets;
    (E) All purchases and sales of the Crown REIT shares by the Plan 
are executed:
    (1) for cash;
    (2) on the national exchange on which the Crown REIT shares are 
primarily traded (the Primary Exchange); and
    (3) at the prevailing market price for the Crown REIT shares on the 
Primary Exchange at the time of the transaction;
    (F) Notwithstanding the provisions contained in (E) above, 
purchases and sales of the Crown REIT shares may occur between the 
Accounts within the Plan in order to avoid brokerage commissions and 
other transaction costs, provided that the price received by each 
Account is equal to the closing price for the Crown REIT shares on the 
NYSE on the date of the transaction;
    (G) Crown American maintains for a period of six years the records 
necessary to enable the persons described below in paragraph (H) to 
determine whether the conditions of this exemption have been met, 
except that (1) a prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of Crown American, 
the records are lost or destroyed prior to the end of the six-year 
period, and (2) no party in interest other than Crown American or an 
affiliate shall be subject to the civil penalty that may be assessed 
under section 502(i) of the Act or to the taxes imposed by section 4975 
(a) and (b) of the Code if the records are not maintained or are not 
available for examination as required by paragraph (H) below; and
    (H)(1) Except as provided below in paragraph (H)(2) and 
notwithstanding any provisions of section 504(a)(2) of the Act, the 
records referred to in paragraph (G) are unconditionally available at 
their customary location for examination during normal business hours 
by--
    (i) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service,
    (ii) Any fiduciary of the Plan or any duly authorized employee or 
representative of such fiduciary, and
    (iii) Any participant or beneficiary of the Plan or duly authorized 
employee or representative of such participant or beneficiary;
    (2) None of the persons described in paragraph (H)(1) (ii) and 
(iii) shall be authorized to examine trade secrets of Crown American, 
or commercial or financial information which is privileged or 
confidential.

Summary of Facts and Representations

    1. The Plan is a defined contribution plan sponsored by Crown 
American. The Plan is a profit sharing plan that allows for elective 
deferral contributions by Plan participants in accordance with section 
401(k) of the Code. Elective deferrals may not exceed 15 percent of a 
participant's compensation. In addition, Crown American may make 
matching contributions and employer contributions.
    As of June 30, 1997, the Plan had approximately $5.6 million in 
assets and covered 449 participants and beneficiaries.
    The trustee of the Plan is PNC, a banking corporation with its 
principal place of business in Pittsburgh, Pennsylvania. PNC is 
independent of Crown American and its affiliates.
    Plan participants are responsible for determining how their 
contributions and account balances are to be allocated among the 
investment options available under the Plan. The eleven current 
investment options are an investment contract fund, two fixed income 
funds, two balanced funds, an S&P 500 Index Fund, two growth funds, a 
small-capitalization equity fund, and two international funds.
    2. Crown American is a Delaware limited partnership through which 
the Crown REIT conducts its business operations. Crown American 
currently has about 400 employees who are engaged in executive, asset 
and property management, leasing, development, construction, financial, 
legal and administrative operations relating to the shopping center 
businesses owned by the Crown REIT.
    The sole general partner of Crown American is the Crown REIT, which 
also owned a 74.47 percent interest in Crown American as of August 31, 
1996. The other 25.53 percent interests are limited partnership 
interests owned by Crown Investment Trust, a Delaware business trust, 
and Crown American Investment Company, a Delaware corporation, each 
owned by the persons who developed the Crown REIT. The Crown REIT, as 
sole general partner, controls the management of Crown American, 
although Crown Investment Trust and Crown American Investment Company 
have approval rights over certain decisions.
    3. The Crown REIT is a Maryland real estate investment trust that 
owns interests in a number of enclosed shopping mall properties. The 
Crown REIT conducts its business activities through two partnerships, 
one of which is Crown American.
    The Crown REIT was created in 1993. The Crown REIT has one class of 
equity interests, entitled ``Common Shares of Beneficial Interest'' 
(i.e. the Shares). There were 27,667,636 Shares outstanding as of April 
15, 1997. The Shares are traded on the New York Stock Exchange (NYSE), 
which is currently considered the Primary Exchange for purposes of the 
proposed exemption (see Condition (E)(2) and (E)(3) above).
    The average trading volume for the Shares is currently 
approximately 300,000 Shares per week. The applicant states that the 
average daily trading volume during 1996 was 96,100 Shares, and the 
annual trading volume during that year was 18,696,300 Shares, or 
approximately $148.6 million at the current stock price of $8 per 
share, as of July 1997. The applicant states further that during the 
period from July 1996 until June 1997, the price per share of the 
Shares fluctuated from a low of $7.25 to a high of $8.75.<SUP>10</SUP>
---------------------------------------------------------------------------

    \10\ The applicant states that based on current Plan assets of 
$5.6 million, the maximum amount that could be transferred into the 
Shares as an investment option for the Plan would be $1.4 million 
(25 percent of $5.6 million). This amount would represent 
approximately .8 percent of the annual trading volume. The maximum 
annual projected new funds that could be invested in the Shares, 
based on 25 percent of annual Plan contributions, could not exceed 
$260,000 at current contribution rates, which would be just under .2 
percent of the annual trading volume. Thus, the applicant does not 
anticipate that trading by the Plan in the Shares will exceed one 
(1) percent of annual trading volume during the first year, or .2 
percent of annual trading volume during subsequent years. Since not 
all participants will be investing up to 25 percent of their 
Accounts in the Shares, and because trading will be spread out over 
time with transactions being netted between Accounts when possible, 
the applicant states that the actual percentages are likely to be 
much lower. Therefore, the projected impact of the Plan's trading on 
overall trading activity and the market value of the Shares is 
expected to be negligible.

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

[[Page 51695]]

    4. Crown American, as the named fiduciary of the Plan, has 
determined that it would be prudent and in the interests of the Plan's 
participants and beneficiaries to make the Shares available as an 
investment option under the Plan, to supplement the eleven current 
investment options. Crown American states that the Shares are the 
equivalent of ``employer securities' \11\ with respect to the Plan (see 
discussion in Paragraph 5 below). Therefore, Crown American believes 
that having the Shares available as an investment option would allow 
the Plan participants to share in the growth of their employer's 
business. Crown American represents that since the Shares are currently 
traded daily on the NYSE, they should be considered a liquid investment 
that can be easily valued on a daily basis.
---------------------------------------------------------------------------

    \11\ Section 407(d)(1) of the Act states that an ``employer 
security'' is a security issued by an employer of employees covered 
by the plan, or by an affiliate of such employer.
---------------------------------------------------------------------------

    If the proposed exemption is granted, Plan participants will 
decide, as an additional investment option under the Plan, whether to 
invest any of their account balances (i.e. Accounts) in the Shares. 
Participants will be allowed to: (a) allocate a specified percentage of 
their elective deferral contributions to an investment in the Shares, 
and/or (b) transfer amounts from their investments in other Plan 
investment options to the Shares. The Plan will require that a Plan 
participant could not invest more than 25 percent of the assets in the 
Account in the Shares, measured at the time of any proposed investment 
in Shares using the Account values as of the previous business day.
    Compliance with the 25 percent limitation will be monitored by PNC, 
the Plan's trustee, as an independent plan fiduciary. If more than 25 
percent of an Account is already invested in Shares, or if a directed 
investment would cause the Account to exceed the 25 percent limit, PNC 
will not permit any additional investment by that Account in the 
Shares.
    Purchases and sales of Shares by the Plan, which would result 
solely from participant contributions or investment transfer decisions, 
will be executed on the NYSE at the prevailing market price (subject to 
applicable brokerage commissions) at the time of such transactions. 
However, to avoid brokerage commissions and other transaction costs, 
purchases and sales will be made between the Accounts to the extent 
possible (i.e. ``netted'' transactions). Any such ``netted'' 
transactions will be valued at the closing market price for the Shares 
on the NYSE on the date of the transaction and would be executed in a 
non-discretionary, mechanical manner. \12\ All purchases and sales of 
the Shares by the Plan will be for cash.
---------------------------------------------------------------------------

    \12\ The applicant states that purchases and sales between the 
Accounts would be considered intra-Plan transactions that would not 
create separate prohibited transactions under section 406 of the 
Act. In this regard, the Department is providing no opinion in this 
proposed exemption as to whether cross-trades of employer securities 
between participant accounts within a plan would violate any 
provisions of Part 4 of Title I of the Act. However, the Department 
notes that section 406(b)(2) of the Act prohibits a plan fiduciary 
from acting, in his individual or in any other capacity, in any 
transaction on behalf of a party (or represent a party) whose 
interests are adverse to the interests of the plan or the interests 
of its participants and beneficiaries. [emphasis added]
---------------------------------------------------------------------------

    PNC will not be providing brokerage services to the Plan. PNC will 
place all trades of the Shares for execution through an independent 
broker-dealer.
    Crown American states that it would not render any investment 
advice, within the meaning of section 3(21)(A)(ii) of the Act, to any 
participant regarding the investment of that participant's Account in 
the Shares.
    5. Crown American is the employer of the employees covered by the 
Plan. Crown American represents that because the Crown REIT owns a 75.6 
percent interest in Crown American, the Crown REIT would be considered 
an ``affiliate'' of Crown American within the meaning of the Act.\13\
---------------------------------------------------------------------------

    \13\ Section 407(d)(7) of the Act states that a person other 
than a corporation is treated as an ``affiliate'' of another person 
to the extent provided by regulation. The applicant states that the 
Department has taken the position that in the absence of 
regulations, a 50 percent ownership test, which is the threshold for 
determining affiliation of corporations, should be used for 
determining whether a corporation would be an ``affiliate'' of a 
partnership or joint venture under section 407(d)(7). See DOL Info. 
Ltr. To Gary Quintiere, WSB File No. DL0398 at 2 (Feb. 25, 1994); 
see also ERISA Adv. Op. 80-55A (where a joint venture owning 65 
percent of the interests in a corporation was considered an 
affiliate of the corporation). Therefore, the applicant states that 
the same 50 percent threshold should apply for purposes of 
determining affiliation among non-corporate entities. In this 
regard, the Department is providing no opinion herein as to whether 
such non-corporate entities would be considered ``affiliates'' of 
one another.
---------------------------------------------------------------------------

    Crown American states that the Shares are ``securities'' within the 
meaning of section 2(1) of the Securities Act of 1933, and as such are 
``securities'' for purposes of Title I of the Act (see section 3(20) of 
the Act defining the term ``security''). Crown American states further 
that the Shares, as securities issued by the Crown REIT, would be 
securities issued by an affiliate of an employer of employees covered 
by the Plan, and thus ``employer securities'' with respect to the Plan 
under section 407(d)(1) of the Act (as noted previously in Footnote 1). 
However, under section 407(a)(1)(A), a Plan may acquire and hold only 
those employer securities that are ``qualifying employer securities''. 
In order to be a ``qualifying employer security'' (QES), section 
407(d)(5) requires that an employer security must be either stock, a 
marketable obligation, or an interest in certain types of publicly-
traded partnerships (as defined in section 7704(b) of the Code).
    The applicant states that the Shares are not marketable obligations 
(as defined under section 407(e) of the Act) or interests in a 
``publicly-traded partnership,'' as defined under the Code,\14\ which 
would allow such Shares to meet the definition of QES under section 
407(d)(5)(C) of the Act.\15\ In addition, the applicant represents that 
it is not clear whether the Shares would be considered ``stock'' within 
the meaning of section 407(d)(5) of the Act because, under Maryland 
law, a ``share'' of a real estate investment trust is defined as a 
transferable unit of beneficial interest in a real estate investment 
trust, without any reference to the term ``stock''.\16\ The applicant 
notes that the term ``stock'' is used under Maryland law solely in

[[Page 51696]]

connection with describing interests in a corporation, whereas a real 
estate investment trust takes the form of an unincorporated trust.
---------------------------------------------------------------------------

    \14\ The applicant notes that a real estate investment trust 
such as the Crown REIT, takes the form of a corporation, trust or 
association, each of which is distinguished in the Code from a 
partnership (see section 856(a) of the Code).
    \15\ The applicant also notes that to meet the requirements of 
section 407(d)(5)(C) of the Act, a partnership must be an ``existing 
partnership'' as defined in section 10211(c)(2)(A) of the Revenue 
Act of 1987. This provision requires that the partnership have 
existed or have applied for existence as a publicly-traded 
partnership as of December 17, 1987. Because the Crown REIT was not 
established until 1993, it cannot meet this definition.
    \16\ See Md. Corp. & Assoc. Sec. 8-101(c).
---------------------------------------------------------------------------

    The applicant states that if the Shares are not considered to be 
QES, the Plan cannot rely on the statutory exemption under section 
408(e) of the Act to obtain relief for the prohibitions of section 406 
and 407 relating to transactions involving employer securities that are 
QES.\17\ Therefore, the applicant requests an exemption under section 
408(a) of the Act to enable the Accounts in the Plan to acquire, hold, 
or dispose of the Shares, subject to the conditions discussed herein.
---------------------------------------------------------------------------

    \17\ The Department is providing no opinion herein as to whether 
the proposed transactions could meet the conditions necessary for 
relief under section 408(e) of the Act and the regulations 
thereunder.
---------------------------------------------------------------------------

    6. PNC will be retained as an independent fiduciary for the Plan 
for purposes of the proposed exemption. PNC represents that it is 
independent of Crown American and its affiliates, including the Crown 
REIT. PNC does have business relationships with Crown American and the 
Crown REIT, including certain banking services and commercial loans. 
However, PNC states that to the extent it has provided services to 
Crown American or an affiliate in the past, its annual gross income for 
such services was less than one-tenth of one (1) percent of its total 
annual gross income. In addition, PNC has made, and may continue to 
make, certain construction or permanent loans to the Crown REIT along 
with other banks in connection with properties owned by the Crown REIT. 
PNC states that such loans represent a de minimis percentage of PNC's 
outstanding loan portfolio. PNC does not expect that any such loans 
will affect its independence for purposes of its duties and 
responsibilities as an independent fiduciary for the Plan in connection 
with the proposed transactions involving the Shares.\18\ Moreover, as 
discussed further in Paragraph 9, PNC is not providing any 
recommendations or other investment advice as a fiduciary to the Plan 
participants regarding whether to invest in the Shares.
---------------------------------------------------------------------------

    \18\ The Department notes that section 404(a) of the Act 
requires, among other things, that a plan fiduciary act prudently 
and solely in the interests of the plan and its participants and 
beneficiaries.
---------------------------------------------------------------------------

    7. PNC represents that it is an experienced fiduciary which 
currently serves as trustee of a number of participant-directed 
employee pension plans subject to the Act, including plans that invest 
in employer securities. In addition, PNC represents that it has had 
experience with transactions involving publicly-traded shares of a real 
estate investment trust.
    PNC has submitted a statement, dated April 15, 1997, whereby it 
acknowledges that it will be acting as a fiduciary to the Plan under 
the Act for purposes of the proposed transactions involving the Shares, 
and that it understands its duties, liabilities and responsibilities 
under the Act.
    8. The applicant has submitted a letter agreement between Crown 
American and PNC (the I/F Agreement), which describes the duties of PNC 
as the Plan's independent fiduciary in connection with the proposed 
transactions. The I/F Agreement states that it shall be PNC's 
responsibility to monitor compliance by the Accounts with all of the 
conditions of this proposed exemption.
    PNC will purchase and sell the Shares, as the Plan's trustee, in 
accordance with participant instructions. PNC will execute all 
transactions on the NYSE at the prevailing market price for the Shares, 
except to the extent such transactions can be accomplished through 
transfers between Accounts using the NYSE closing price to value the 
Shares. PNC will value the Shares for the Accounts on a daily basis 
using the NYSE prices.
    PNC will ensure that following any purchase of Shares by an 
Account, the percentage of the total value of the Account invested in 
Shares does not exceed 25 percent, as measured based on the value of 
the assets held by the Account as of the close of the prior business 
day. In this regard, PNC's recordkeeping system will monitor whether an 
initial investment allocation or contribution allocation would cause 
the Account to exceed the 25 percent limit, and will not permit the 
allocation if that would be the result. Any other participant-initiated 
transaction involving the Shares, such as a reallocation among Plan 
investments or reallocation of future contributions, will be requested 
using a paper form. The completed form will be reviewed initially by 
Crown and then by the responsible Client Service Officer at PNC to 
ensure that the 25 percent limit will not be exceeded as a result of 
the particular transaction. The Client Service Officer at PNC will 
approve the transaction as complying with this requirement before it is 
processed by PNC, as the Plan's trustee. However, the 25 percent 
limitation under the proposed exemption will not be violated if an 
Account's investment in Shares exceeds 25 percent of the value of the 
Account solely by reason of an increase in value of the Shares or a 
decrease in value of the other assets in the Account after such Shares 
are acquired by the Account.
    9. PNC represents that it would be appropriate for Crown to add the 
Shares as an investment option for participants of the Plan for the 
following reasons:
    (a) Participants will be able to decide whether or not to invest 
their Account balances in the Shares, and how much of their Account 
balances to invest in or transfer from such Shares. They are familiar 
with the issuer because they work for Crown, and they will receive 
quarterly financial statements and annual reports of the issuer just as 
any other shareholder;
    (b) The Shares will be one of a series of diverse and varied 
investment options available to Plan participants, and as a real estate 
equity investment will help complement the other options as part of an 
overall, well-diversified portfolio;
    (c) The Shares are traded on the NYSE, so that (i) participants 
will be able to follow any changes in the price of the Shares each 
business day in newspapers of general circulation, and (ii) the Plan 
will have a readily available avenue for purchasing or selling the 
Shares as determined by participant investment decisions; and
    (d) A participant's investment in the Shares could not exceed 25 
percent of his or her total Account balance at time of purchase, 
preventing the Account from becoming unduly concentrated in the Shares.
    However, PNC states further that its statements regarding the 
Shares do not constitute a recommendation or investment advice as to 
whether any Plan participant should invest in the Shares as an 
investment option under the Plan. Thus, PNC's role as the Plan's 
independent fiduciary under the proposed exemption is limited to 
enforcing the terms and conditions stated herein and does not extend to 
the underlying investment decisions made by Plan participants as to 
whether the Shares are an appropriate investment for particular 
Accounts.
    The applicant states that a communication statement will be sent by 
Crown and PNC to each Plan participant regarding the addition of the 
Shares as an investment option for the Plan and describing how this 
investment option will operate. The communication statement will 
describe, among other things, the information that Plan participants 
will receive about their Share investments on an ongoing basis and the 
relationships that exist between PNC and Crown or its affiliates.
    10. In summary, the applicant represents that the proposed 
transactions will meet the statutory

[[Page 51697]]

criteria of section 408(a) of the Act because: (a) Plan participants 
will be able to invest in ``equity'' interests of the Crown REIT (i.e. 
the Shares), which will allow them to share in the growth of their 
employer's business; (b) no Plan participant will be able to invest 
more than 25 percent of his or her Account in the Shares, so that an 
Account's assets will not be unduly concentrated in Shares; (c) 
compliance with the terms and conditions of the proposed exemption, 
including the 25 percent limitation, will be monitored by an 
independent Plan fiduciary (i.e. PNC); (d) the Shares will be acquired 
and sold for cash by the Accounts; (e) the acquisition and disposition 
of the Shares will occur on the NYSE, except to the extent that such 
transactions can be ``netted'' between the Accounts to avoid brokerage 
commissions and other transaction costs; (f) all transactions involving 
the Shares will be either (i) executed on the open market at the then-
current NYSE prices, or (ii) ``netted'' between the Accounts using the 
NYSE closing price for the Shares on the date of the transaction, as 
determined by PNC, as the Plan's independent fiduciary; (g) Plan 
participants will decide whether or not to invest their Account 
balances in the Shares, and how much of their Account balances to 
invest in or transfer from such Shares (subject to the 25 percent limit 
required herein), and will receive quarterly financial statements and 
annual reports of the issuer just as any other shareholder; and (h) 
PNC, as the Plan's independent fiduciary, has determined that it would 
be appropriate for Crown to add the Shares as an investment option for 
the Plan's participants to complement other investment options as part 
of an overall, well-diversified portfolio, but is not providing any 
recommendations or investment advice to Plan participants in connection 
with their proposed investments in the Shares.

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

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest of disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(b) of the act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete, and that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 26th day of September, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 97-26072 Filed 10-1-97; 8:45 am]
BILLING CODE 4510-29-U