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Secretary of Labor Thomas E. Perez
Proposed Exemptions; The Retirement Plan for Salaried and Certain Hourly Employees of Keebler Company (the Plan) [Notices] [12/30/1996]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; The Retirement Plan for Salaried and Certain Hourly Employees of Keebler Company (the Plan) [12/30/1996]

[PDF Version]

Volume 61, Number 251, Page 68791-68801

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DEPARTMENT OF LABOR
[Application No. D-10253, et al.]

 
Proposed Exemptions; The Retirement Plan for Salaried and Certain 
Hourly Employees of Keebler Company (the Plan)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of Proposed Exemptions.

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

Written Comments and Hearing Requests

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

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

Notice to Interested Persons

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

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

[[Page 68792]]

The Retirement Plan for Salaried and Certain Hourly Employees of 
Keebler Company (the Plan), Located in Elmhurst, Illinois

[Application No. D-10253]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of 
the Code, shall not apply to (1) the leasing by the Plan of certain 
improved real property (the Property) to Keebler Company (the 
Employer), a party in interest with respect to the Plan, (2) the 
potential future purchase of the Property by the Employer pursuant to 
the Employer's right of first refusal, as stipulated in the lease, and 
(3) the ``make whole agreement,'' and any payments thereunder, whereby 
the Employer will make the Plan whole, in the event that the Plan sells 
the Property to an unrelated party at a net loss.
    This proposed exemption is subject to the following conditions:
    (1) The Plan is represented for all purposes with respect to the 
lease by a qualified, independent fiduciary;
    (2) The terms and conditions of the lease are and continue to be at 
least as favorable to the Plan as those the Plan could obtain in a 
comparable arm's length transaction with an unrelated party;
    (3) The rent paid to the Plan under the lease is and continues to 
be no less than the fair market rental value of the Property, as 
established by a qualified, independent appraiser;
    (4) The rent is adjusted, at a minimum, every three years (upwards 
only), based upon an updated independent appraisal;
    (5) The lease is a net lease, under which the Employer as the 
tenant is obligated for all operating expenses, including maintenance, 
taxes, insurance, and utilities;
    (6) The independent fiduciary for the Plan represents that it has 
reviewed the terms and conditions of the lease on behalf of the Plan 
and believes the lease is in the best interests of and appropriate for 
the Plan;
    (7) The independent fiduciary monitors and enforces compliance with 
the terms and conditions of the lease and of the exemption for the 
duration of the lease;
    (8) The independent fiduciary expressly approves any improvements 
by the Employer over $100,000 to the Property and any renewal of the 
lease beyond the initial term;
    (9) In the event that the Employer exercises its right of first 
refusal under the lease, the Employer purchases the Property from the 
Plan for an amount which is the greater of: (a) the original 
acquisition cost of the Property, plus the cost of any improvements, 
paid by the Plan, or (b) the fair market value of the Property as of 
the date of the sale, as established by a qualified, independent 
appraiser selected by the independent fiduciary;
    (10) In the event that the Plan sells the Property to an unrelated 
party at a net loss (taking into account the cost of any improvements 
and all selling expenses paid by the Plan), the Employer makes the Plan 
whole, within 15 days after the date of such sale, by paying the Plan 
cash in an amount equal to the difference between: (a) the original 
acquisition cost of the Property, plus the cost of any improvements and 
all selling expenses, paid by the Plan, and (b) the amount of the sale 
proceeds received by the Plan; and
    (11) At all times, the fair market value of the Property represents 
no more than 25 percent of the total assets of the Plan.

EFFECTIVE DATE: This exemption, if granted, will be effective as of 
April 15, 1996.

Summary of Facts and Representations

    1. The Plan is a defined benefit plan sponsored by the Employer. 
The Employer, a Delaware corporation, is engaged in the business of 
making cookies, crackers, ice cream cones, and snacks and is located in 
Elmhurst, Illinois. The Plan had total assets of $200,697,537, as of 
December 31, 1994. The Plan had 7,496 participants and beneficiaries, 
as of April 1, 1996. The trustee of the Plan is the Northern Trust 
Company (Northern Trust). The Chicago Trust Company (Chicago Trust), 
the successor to the Chicago Title & Trust company, is the Subtrustee 
with respect to the Plan's investment in employer real property by 
virtue of a Subtrust Agreement with Northern Trust, entered into as of 
January 5, 1981 and amended as of April 10, 1985.
    2. Among the assets of the Plan is the Property, which is currently 
being leased to the Employer. The Property consists of a land area of 
7.36 acres and a one-story multi-purpose warehouse and manufacturing 
facility of 100,676 sq. ft. The Property is located at 2201 Cabot 
Boulevard West, Langhorne, Pennsylvania. It is represented that the 
Property is not near any other real property owned or used by the 
Employer. It is further represented that the Property is not subject to 
any debt.
    3. The Property was appraised by Messrs. Christopher J. Hall and L. 
Edward Klein, M.A.I., of Binswanger Real Estate Appraisal, both 
independent general real estate appraisers certified in the State of 
Pennsylvania. Messrs. Hall and Klein employed all three basic valuation 
methodologies (cost, sales comparison, and income) utilized in the 
appraisal field and concluded that the fair market value of the fee 
simple interest of the Property was $2,550,000, as of December 1, 1995. 
Messrs. Hall and Klein also examined four other comparable leases and 
concluded, as of that same date, that the Property had a fair market 
rental value of $3.25 per sq. ft. ($327,200 per annum, rounded), if 
leased on a net basis. Finally, Messrs. Hall and Klein concluded that 
the fair market value of the leased fee interest of the Property, which 
is being leased to the Employer pursuant to a 15-year lease at above 
market rent, was $4,100,000, as of December 1, 1995.
    The appraisal states that the zoning of the Property is M-1, Light 
Manufacturing, which restricts its use to various industrial and office 
uses. The highest and best use of the Property, if vacant, is as an 
industrial building. The highest and best use of the Property, as 
improved, is its continued use as a warehouse/distribution facility.
    4. As previously noted, the Property is being leased to the 
Employer pursuant to a 15-year lease, whose term commenced on September 
13, 1991. Until recently, the Plan was also leasing to the Employer a 
second parcel of real property located in Valencia, California (the 
California Property) for an 11-year term expiring on March 31, 1996. It 
is represented that together such leases, because they involved 
``qualifying employer real property,'' were statutorily exempt under 
section 408(e) of the Act.<SUP>1 However, on April 15, 1996, the 
California Property was sold by the Plan to the Employer for 
$2,350,000, again, pursuant to a statutory exemption under section 
408(e) of the Act.<SUP>2 Prior

[[Page 68793]]

to that date, the applicant submitted a request for an administrative 
exemption from the Department for the continued leasing to the Employer 
of the sole remaining parcel of real property in the Plan, retroactive 
to the date of the sale of the California Property.
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     <SUP>1 Section 408(e) of the Act provides an exemption from 
sections 406 and 407 of the Act for certain transactions involving 
``qualifying employer real property,'' as that term is defined in 
section 407(d)(4) of the Act. However, the Department expresses no 
opinion herein as to whether the leasing of either the Property or 
the California Property to the Employer complied with the 
requirements of section 408(e) of the Act.
     <SUP>2 The Department expresses no opinion herein as to whether 
the sale of the California Property complied with the requirements 
of section 408(e) of the Act. Further, the Department expresses no 
opinion herein as to whether the acquisition and holding of either 
the Property or the California Property by the Plan violated any of 
the provisions of Part 4 of Title I in the Act.
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    5. The interests of the Plan with respect to the lease are 
represented by the Subtrustee Chicago Trust, acting as an independent 
fiduciary for the Plan. Chicago Trust, whose fees are paid by the Plan, 
represents that it is unrelated to and independent of the Employer. 
Chicago Trust represents that it has extensive experience as a 
fiduciary under the Act, that it is knowledgeable as to the subject 
transactions, and that it acknowledges and accepts its duties, 
responsibilities, and liabilities in acting as a fiduciary with respect 
to the Plan.
    6. The lease provides for a primary term of 15 years, which may be 
extended at the option of the lessee for three successive terms of five 
years each, upon the express approval of the independent fiduciary. It 
is represented that the Employer currently pays to the Plan rent in the 
amount of $5.12 per sq. ft. ($515,497 per annum), which significantly 
exceeds the fair market rental value of $327,200 per annum established 
for the Property. The lease provides for annual rent increases based 
upon a return of income as a percentage of the Plan's original 
disbursement of $4.3 million for the Property (with such percentage 
ranging from 10.0% in 1992 to 14.01% in 2006, the final lease year). 
The fair market rental value of the Property is to be redetermined 
every three years, based upon an updated independent appraisal. If the 
appraised fair market rental value exceeds the rent being paid by the 
Employer, the rent will be increased to a level that is not less than 
the appraised fair market rental value. If the appraised value is less 
than the rent being paid by the Employer, the then current rent will 
remain in effect.
    The lease is a net lease, under which the rent is an absolutely net 
return to the Plan as landlord and is not subject to deductions for any 
expenses relating to the Property. The Employer as tenant is obligated 
for all operating expenses, including maintenance, taxes, insurance, 
and utilities. The lease permits the Employer to remodel and make 
structural changes and additions to the Property at the Employer's 
expense, so long as such improvements comply with all applicable 
governmental regulations. Any expense over $100,000 must be expressly 
approved by the independent fiduciary. Any improvements or renovations 
of the property will belong to the Plan upon termination of the lease. 
The Employer will indemnify and hold the Plan harmless for all claims 
and demands arising from or in any way relating to the Property.
    7. In the event that the independent fiduciary determines it is in 
the best interests of the Plan to sell the Property, the lease grants 
the Employer the right of first refusal. If the Employer exercises its 
right of first refusal, the Employer will purchase the Property from 
the Plan for an amount which is the greater of: (a) the original 
acquisition cost of the Property, plus the cost of any improvements, 
paid by the Plan, or (b) the fair market value of the Property as of 
the date of the sale, as established by a qualified, independent 
appraiser selected by the independent fiduciary. Any such sale would be 
a one-time transaction for cash, and the Plan would incur no expenses 
relating to the sale.
    If the Plan sells the Property to an unrelated party during the 
term of the lease, the Employer will continue to be bound as tenant 
under the lease for the duration of the lease. Further, if the Plan 
sells the Property to an unrelated party at a net loss (taking into 
account the cost of any improvements and all selling expenses paid by 
the Plan), the Employer will make the Plan whole, within 15 days after 
the date of such sale, by paying the Plan cash in an amount equal to 
the difference between: (a) the original acquisition cost of the 
Property, plus the cost of any improvements and all selling expenses, 
paid by the Plan, and (b) the amount of the sale proceeds received by 
the Plan.
    8. Chicago Trust, acting as an independent fiduciary for the Plan, 
represents that it has reviewed the terms and conditions of the lease 
on behalf of the Plan and determined that such terms and conditions are 
at least as favorable to the Plan as those the Plan could obtain in a 
comparable arm's length transaction with an unrelated party. Chicago 
Trust further represents it believes that the lease is in the best 
interests of and appropriate for the Plan and that it will monitor and 
enforce compliance with the terms and conditions of the lease and of 
the exemption for the duration of the lease.
    The initial decision to invest a portion of the Plan's assets in 
real estate was made by the Employer. In its role as Subtrustee, 
Chicago Trust has the exclusive authority to hold and manage the Plan's 
employer real property. Accordingly, Chicago Trust made the decisions 
to sell the California Property and to retain the Property for the 
Plan. With respect to the latter, Chicago Trust took into account the 
fact that a forced sale of the Property to an unrelated party would 
have caused the Plan to incur a substantial loss, as well as depriving 
the Plan of rental income at an above market rate (yielding a net 
investment return not less than 10.0% in the first year and not less 
than 14.01% in the final lease year). Chicago Trust has also examined 
the financial viability of the Employer, determined that the Employer's 
past performance under the lease has been in accordance with its 
contractual obligations, and concluded that the Employer will continue 
to be a good tenant.
    9. In summary, the applicant represents that the proposed 
transactions satisfy the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons: (1) the Plan is 
represented for all purposes with respect to the lease by a qualified, 
independent fiduciary; (2) the terms and conditions of the lease are 
and will continue to be at least as favorable to the Plan as those the 
Plan could obtain in a comparable arm's length transaction with an 
unrelated party; (3) the rent charged by the Plan under the lease is 
and will continue to be no less than the fair market rental value of 
the Property, as established by a qualified, independent appraiser; (4) 
the rent will be adjusted, at a minimum, every three years (upwards 
only), based upon an updated independent appraisal; (5) the lease is a 
net lease, under which the Employer as the tenant is obligated for all 
operating expenses, including maintenance, taxes, insurance, and 
utilities; (6) the independent fiduciary for the Plan represents that 
it has reviewed the terms and conditions of the lease on behalf of the 
Plan and believes the lease is in the best interests of and appropriate 
for the Plan; (7) the independent fiduciary will monitor and enforce 
compliance with the terms and conditions of the lease and of the 
exemption for the duration of the lease; (8) the independent fiduciary 
will expressly approve any improvements by the Employer over $100,000 
to the Property and any renewal of the lease beyond the initial term; 
(9) in the event that the Employer exercises its right of first refusal 
under the lease, the Employer will purchase the Property from the Plan 
for an amount which is the greater of: (a) the original acquisition 
cost of the Property, plus the cost of any improvements, paid by the 
Plan, or (b) the fair market value of the Property as of the date of 
the sale, as established by

[[Page 68794]]

a qualified, independent appraiser selected by the independent 
fiduciary; (10) in the event that the Plan sells the Property to an 
unrelated party at a net loss (taking into account the cost of any 
improvements and all selling expenses paid by the Plan), the Employer 
will make the Plan whole, within 15 days after the date of such sale, 
by paying the Plan cash in an amount equal to the difference between: 
(a) the original acquisition cost of the Property, plus the cost of any 
improvements and all selling expenses, paid by the Plan, and (b) the 
amount of the sale proceeds received by the Plan; and (11) at all 
times, the fair market value of the Property will represent no more 
than 25 percent of the total assets of the Plan.

Notice to Interested Persons

    Notice of the proposed exemption shall be given to all interested 
persons by first-class mail or by posting the required information at 
the Employer's offices within 30 days of the date of publication of the 
notice of pendency 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/or request a hearing with respect to the proposed exemption. 
Comments and requests for a hearing are due within 60 days of the date 
of publication of this notice in the Federal Register.

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

Travelers Group Inc. 401(k) Savings Plan (the Plan), Located in New 
York, New York

[Exemption Application No. D-10269]

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 (E), 
406(a)(2), 406(b)(1), 406(b)(2), and 407(a)(1) 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>3 
shall not apply, as of the effective date of this exemption: (1) to the 
in-kind contribution by Travelers Group Inc. (TGI) of certain options 
(the Stock Option or Stock Options) into the accounts in the Plan of 
eligible employees of TGI and its subsidiaries and affiliates (the 
Employees or Employee); (2) to the holding of the Stock Options by such 
accounts; and (3) to the exercise of such Stock Options by Employees in 
order to purchase shares of common stock of TGI (the Stock), provided 
that: (a) all Employees will be treated in the same manner for the 
purpose of the allocation of Stock Options to the accounts of such 
Employees, except that certain highly-paid officers of TGI who are 
subject to the reporting requirements of section 16(a) of the 
Securities and Exchange Act of 1934 will not be eligible to receive 
such contributions of Stock Options; (b) the allocation of the Stock 
Options to the Plan and the acquisition of such options by the accounts 
of Employees will occur automatically each year on a uniform basis 
without any action required by such Employees, and the determination of 
the number of Stock Options granted to the accounts of each such 
Employee will be based solely on the compensation earned by such 
Employee; (c) contributions of Stock Options by TGI to Employees' 
accounts in the Plan will not be contingent upon contributions by 
Employees to such Plan; (d) Employees acquire TGI Stock without using 
cash balances from the Plan or selling assets of the Plan, other than 
selling a portion of the TGI Stock acquired from the exercise of such 
Stock Options; (e) no party, other than the individual Employee with 
respect to his or her own account, or upon the death of such Employee, 
his or her beneficiary(ies), or in the event of an assignment under a 
qualified domestic relations order the alternative payee, will have any 
discretion over the decision to exercise the Stock Options held in such 
account; (f) the price at which the Stock Options can be exercised will 
be established by the market value of the TGI Stock as listed on the 
New York Stock Exchange (NYSE) at the close of the business day prior 
to the date each Stock Option is granted; (g) the terms and conditions 
of each of the Stock Options contributed by TGI into Employees' 
accounts in the Plan will be no less favorable to the Plan than terms 
obtainable by the Plan under similar circumstances when negotiated at 
arm's length with unrelated third parties; (h) an independent trustee 
(the Trustee) will facilitate the sale of the Stock in connection with 
the exercise of the Stock Options under ``sell to cover'' transactions, 
as described herein; (i) the Plan incurs no fees, commissions, or other 
charges or expenses as a result of its acquisition, holding, or 
exercise of the Stock Options, other than brokerage fees payable to an 
unrelated third party broker; and (j) the terms and conditions 
described herein are at all times satisfied.

    \3\ For purposes of this exemption, references to specific 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
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EFFECTIVE DATE: This proposed exemption will be effective, as of the 
beginning of the 1997 plan year.<SUP>4
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    \4\ It is represented that the plan year is the calendar year.
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Summary of Facts and Representations

    1. The applicant is TGI, a Delaware corporation. TGI is a 
diversified financial services holding company engaged, through its 
subsidiaries, principally in four business segments: (a) investment 
services; (b) consumer finance services; (c) life insurance services; 
(d) property and casualty insurance services. TGI is a party in 
interest with respect to the Plan, pursuant to section 3(14)(C) of the 
Act. The principal subsidiaries of TGI may also be parties in interest 
with respect to the Plan. These subsidiaries include but are not 
limited to, Smith Barney Inc. (Smith Barney), Commercial Credit 
Company, Primerica Financial Services, Travelers Insurance Company, and 
Travelers/Aetna Property Casualty Corporation (TAP).
    2. The Plan is sponsored and maintained by TGI for its Employees 
and those of its participating affiliates and subsidiaries. The Plan is 
an employee benefit plan qualified under section 401(a) of the Code and 
401(k) of the Code and is a trust exempt from taxation under section 
501(a) of the Code. The administrator of the Plan is a committee (the 
Plan Administration Committee) appointed by the Board of Directors of 
TGI.
    It is represented that the proposed transactions will only affect 
those individuals who are actively employed by TGI and its subsidiaries 
and affiliates. As of April 30, 1996, it is represented that there were 
60,000 active Employees of which approximately 70 percent (70%) 
contributed to the Plan. Further, it is represented that there are 
13,265 beneficiaries and participants in the Plan who are not actively 
employed by TGI and its subsidiaries and affiliates.
    It is represented that the Plan is invested in common stock and 
preferred shares issued by TGI or its subsidiaries and affiliates, 
fixed income contracts and certain mutual funds and collective trust 
funds. Several of the fixed income contracts and mutual funds are 
issued

[[Page 68795]]

and distributed by certain subsidiaries of TGI. As of January 31, 1996, 
the date of the most recent Plan valuation, the approximate aggregate 
fair market value of the assets of the Plan was $2,256,356,498. Of this 
$2.3 billion in assets of the Plan, approximately $600 million is 
invested in TGI Stock, $45 million is invested in common stock of TAP, 
and $168 million is invested in preferred shares of TGI.
    3. TGI requests an exemption from the prohibitions of the Act in 
order to permit the contribution to the Plan of the Stock Options, the 
holding by the Plan of such contributed Stock Options, and the 
subsequent exercise of such Stock Options by eligible Employees under 
certain conditions which are discussed below. The Stock Options 
contributed to the Plan may not be sold, exchanged, assigned, or 
otherwise transferred. In this regard, all or a portion of the Stock 
Options contributed to the Plan either: (a) will be exercised by the 
Employees; or (b) if unexercised, will expire at the end of the option 
term, as discussed more fully below.
    4. It is represented that Stock Options will be contributed 
annually into the Plan beginning in the 1997 plan year. It is 
represented that, in order to facilitate the proposed in-kind 
contribution of the Stock Options to the Plan, the Plan Administration 
Committee will create an account in the Plan for each Employee who is 
eligible to participate in the Plan and is active on the date of each 
grant of such Stock Options. An eligible Employee is one who had at 
least one (1) year of service on December 31, of the plan year prior to 
the year in which the Stock Options are granted, regardless of whether 
such Employee is otherwise participating in the Plan. However, it is 
represented that certain highly-paid officers who are subject to the 
reporting requirements of section 16(a) of the Securities and Exchange 
Act of 1934 will not be eligible to receive in-kind contributions of 
Stock Options.
    5. The Stock Options will permit each Employee to purchase TGI 
Stock at the closing price of such Stock (the Exercise Price) on the 
NYSE on the business day immediately preceding the date of the grant of 
such Stock Option. The term of each Stock Option will be ten (10) 
years. In this regard, each Stock Option will expire, if it has not 
previously been exercised, on the tenth (10th) anniversary of the date 
upon which such Stock Option was granted.
    6. It is anticipated that the number of shares of TGI Stock 
permitted to be purchased with each Stock Option contributed to an 
Employee's account will be based on the compensation earned by such 
Employee in the plan year prior to the year in which the Stock Option 
is granted, regardless of whether such Employee is otherwise actively 
participating in the Plan. In this regard, it is anticipated that the 
number of shares of TGI Stock in a Stock Option contributed to an 
Employee's account will equal ten percent (10%) of such Employee's 
eligible pay, divided by the option price. For purposes of this 
exemption, ``eligible pay'' is defined as an Employee's base pay and/or 
commissions for the prior year, plus any bonus accrued by such Employee 
for the prior year, which is paid in the plan year in which the Stock 
Option is granted, not to include compensation in excess of $40,000.
    For example, assume an Employee is employed on December 31, 1996, 
and is otherwise eligible to participate in the Plan. Further, assume 
the price of TGI Stock on the NYSE on March 28, 1997, at the close of 
business is $60. If such Employee's compensation was $30,000, then 10 
percent (10%) of such compensation would equal $3,000. Accordingly, TGI 
would contribute to the Employee's account a Stock Option which would 
entitle that Employee upon exercise of such Stock Option to purchase 
fifty (50) shares of TGI Stock ($3,000 <divide> $60 per share).
    7. It is represented that Stock Options will vest immediately upon 
issuance to the Plan, but will not be immediately exercisable. In this 
regard, it is represented that an Employee may exercise the Stock 
Options only in accordance with certain conditions. Generally, once a 
Stock Option has been contributed to the account of an Employee in the 
Plan, such Stock Option may only be exercised while such Employee is 
actively employed by TGI or by any of its subsidiaries or affiliates. 
While actively employed, an Employee can exercise a Stock Option at a 
rate of 20 percent (20%) a year, beginning as of the first anniversary 
of the grant date of such Stock Option. It is represented that an 
Employee can exercise eligible Stock Options at any time thereafter 
until the end of the ten (10) year option term, as long as he or she is 
employed by TGI or employed by any of TGI's subsidiaries or affiliates. 
In the event of an Employee's separation from service for reasons other 
than by disability, death, or retirement, all Stock Options which are 
unexercised and unexpired shall remain in the Employee's account until 
the later of: (a) the normal retirement age of 65 of the Employee; (b) 
the tenth (10th) anniversary of such Employee's participation in the 
Plan; or (c) the separation from service of the Employee with an 
employer participating in the Plan; at which time the Stock Option 
shall be distributed upon the request of such Employee, in accordance 
with section 401(a)(14) of the Code.
    After terminating employment with TGI or its subsidiaries or 
affiliates, Employees may not exercise Stock Options, except in the 
circumstances, as described below. In the event an Employee terminates 
service by reason of his or her disability, any Stock Options that have 
not expired and are exercisable immediately before disability shall 
continue to be exercisable during the period of disability, until such 
Stock Option expire. In the event of an involuntary termination of 
employment of an employee, for a period of thirty days following their 
involuntary termination, participants may exercise options that were 
exercisable immediately before they were involuntarily terminated. Upon 
the death of an Employee, prior to his or her termination of 
employment, all Stock Options that have not expired and were 
exercisable before such Employee's death continue to be exercisable by 
the beneficiary(ies) of such Employee until such Stock Options expire. 
However, the Stock Options will not continue to accrue exercisability 
after death. In the event an Employee retires at the age of 55 with 5 
years of service, all Stock Options that have not expired shall remain 
exercisable in accordance with the exercisability percentage achieved 
at the termination of service for a period of three (3) years, or until 
such Stock Options expire, whichever is shorter. In the event an 
Employee terminates service on or after attaining normal retirement age 
of 65 or terminates service after attaining age 59\1/2\ with ten (10) 
of service, all Stock Options that have not expired will continue to 
accrue exercisability and can be exercised by such Employee for a 
period of four (4) years or until such Stock Options expire, whichever 
is shorter.
    8. TGI believes that Employees will have the opportunity to 
exercise eligible Stock Options on a daily basis, where all exercise 
elections are received before a set time each day. However, should the 
requirements imposed by the recordkeeper of the Plan prevent the daily 
exercise of the Stock Options, then it is represented that the 
frequency of the Employee's ability to exercise Stock Options will be 
limited to a period of not more often than weekly and not less often 
than monthly.
    9. It is represented that the Employee's decision to exercise a 
Stock Option will be carried out in the following manner. TGI will 
designate an

[[Page 68796]]

agent to receive the exercise instructions from Employees. In this 
regard, TGI anticipates that the recordkeeper for the Stock Options 
will serve as its agent for this purpose. In order to exercise a Stock 
Option, the Employee will contact the recordkeeper for the Stock 
Options. Upon receipt of election requests from Employees, it is 
represented that the recordkeeper intends to aggregate all exercise 
requests.
    It is represented that if an Employee contacts the recordkeeper by 
the recordkeeper's deadline for aggregation, the entire transaction 
from exercise request to settlement and receipt of the Stock by the 
Plan, will require three (3) business days from such deadline. However, 
if an Employee with an election request contacts the recordkeeper after 
the recordkeeper's deadline for aggregation, it is represented that the 
entire process will require, respectively, one (1), five (5), or twenty 
(20) additional business day(s) for completion, depending on whether 
the recordkeeper for the Plan establishes a daily, weekly, or monthly 
deadline for aggregation.
    10. After aggregating the Employees' requests to exercise Stock 
Options, the recordkeeper will contact the Trustee to arrange for the 
exercise of such Stock Options. Typically, when an option holder 
exercises his or her right under an option to purchase shares of stock, 
he or she must pay in cash the exercise price, as set forth in such 
option. However, if this exemption is granted, Employees will only be 
allowed to exercise contributed Stock Options through a cashless form 
of exercise known as a ``sell to cover'' transaction and may not use 
any other funds to exercise the Stock Options. Therefore, no other 
assets that are in the accounts of Employees prior to the ``sell to 
cover'' transactions will be used to exercise the Stock Options. In 
this regard, a ``sell to cover'' transaction would permit any Employee 
who decides to exercise one of the Stock Options contributed by TGI to 
his or her account to authorize the Trustee of the Plan to sell the 
appropriate number of shares received upon the exercise of such Stock 
Option in order to obtain cash to pay the Exercise Price to TGI. In 
this regard, the shares of Stock necessary to be sold to pay for the 
exercise of Stock Options would be sold on the open market. TGI would 
receive payment equal to the Exercise Price for the shares of such 
Stock, and the Plan would receive from TGI the incremental shares of 
Stock representing the gain realized from the exercise of the Stock 
Option. In this regard, it is represented that TGI is the source of the 
Stock transferred to the Plan as a result of the exercise of a Stock 
Option, and that such Stock will be either treasury stock or previously 
unissued stock of TGI.
    For example, suppose an Employee has a Stock Option to purchase 100 
shares of Stock from TGI at $60 per share, and the current market price 
for such Stock is $75 per share. A ``sell to cover'' transaction would 
involve the Employee's exercise of such Stock Option for an Exercise 
Price of $6,000 (100 shares times $60 per share). To cover this 
Exercise Price, the Employee would authorize the Trustee to sell on the 
market eighty (80) of the 100 shares of Stock which were acquired by 
the Employee from TGI through the exercise of the Stock Option at the 
current market price of $75 per share ($6,000 <divide> $75). TGI would 
receive cash in the amount of $6,000 (80 shares times $75 per share), 
and the Employee's account in the Plan would retain twenty (20) of the 
100 shares of Stock acquired from TGI through the exercise of such 
Stock Option (100 shares minus 80 shares).
    11. It is represented that all sales of Stock in connection with 
``sell to cover'' transactions will be executed through a broker either 
on the NYSE or other nationally recognized exchange on which shares of 
TGI Stock are traded. In this regard, it is represented that the 
exclusive purpose of the broker in the ``sell to cover'' transactions 
will be to effect sales of the appropriate number of shares of the 
Stock in order to obtain the Exercise Price in connection with the 
exercise of Stock Options by the Plan.
    It is represented that Smith Barney, a related broker, may be 
selected by TGI to provide brokerage services to the Plan in connection 
with the exercise of Stock Options and the sale of Stock to cover the 
Exercise Price. If brokerage services are provided to the Plan by Smith 
Barney or other related brokers, it is represented that such brokerage 
services will be provided without the receipt of commissions, fees, or 
other compensation by Smith Barney or such related brokers.<SUP>5
---------------------------------------------------------------------------

    \5\ TGI maintains that the statutory exemption, pursuant to 
section 408(b)(2) of the Act, is available to provide exemptive 
relief for the provision of brokerage services to the Plan by Smith 
Barney or other related brokers, where Smith Barney or such related 
brokers do not receive commissions, fees, or other compensation for 
such services. The Department is offering no view, herein, as to 
whether the provision of brokerage services to the Plan by Smith 
Barney or other related brokers, as described, is covered by the 
statutory exemption provided in section 408(b)(2), nor is the 
Department providing any relief herein with respect to such 
brokerage services.
---------------------------------------------------------------------------

    In the event that Smith Barney is not chosen by TGI to effect sales 
of TGI Stock in connection with the exercise of Stock Options by the 
Plan and the sale of Stock to cover the Exercise Price, it is 
represented that TGI will authorize the Trustee of the Plan to select a 
broker, either related or unrelated, to execute such sales of Stock. 
Once such authorization is given to the Trustee by TGI with respect to 
a particular ``sell to cover'' transaction, such authorization will be 
irrevocable. In this regard, it is represented that under no 
circumstances will TGI or its subsidiaries and affiliates have the 
ability to direct the Trustee's selection of which broker will receive 
the brokerage business of the Plan.
    If brokerage services are provided to the Plan by an independent, 
unrelated broker, it is represented that the Plan will incur expenses 
for the commission due to such broker. It is further represented that 
brokerage commissions associated with such execution will be deducted 
from the gross proceeds of the trade. In this regard, the amount of 
commission expense incurred will depend on the number of shares of 
Stock involved in a ``sell to cover'' transaction, as negotiated 
between such independent, unrelated broker and the Trustee.
    12. It is represented that the shares of TGI Stock realized by an 
Employee through the exercise of the Stock Options in his or her 
individual account in the Plan will be tradable at the direction of 
such Employee and will not be subject to any restriction on the length 
of time such shares of TGI Stock must be held before such shares are 
sold and the proceeds invested in an alternative investment choice 
within the Plan. In this regard, it is represented that at least 
monthly Employees will have an opportunity to sell Stock acquired 
through the exercise of the Stock Options in accordance with the terms 
of the Plan.
    13. TGI believes that the transactions which are the subject of 
this proposed exemption may be prohibited, pursuant to sections 
406(a)(1) (A) through (E), 406(a)(2), 406(b)(1), 406(b)(2), and 
407(a)(1) of the Act and section 4975(c)(1) (A) through (E) of the 
Code, and, accordingly, requests exemptive relief. In this regard, TGI 
believes that its contribution of Stock Options to the Plan and the 
holding of the Stock Options by the Plan may constitute violations of 
section 407(a)(1), section 406(a)(1)(E), and section 406(a)(2) of the 
Act, because the definition of a ``qualifying employer security,'' as 
set forth in section 407(a) of the Act, includes stock, but does not 
include stock options or other stock rights. In addition, because TGI 
may be a fiduciary with respect to the Plan, TGI

[[Page 68797]]

believes that the exercise of the Stock Options contributed to the Plan 
and the concurrent transfer of cash to TGI to pay for the exercise of 
such Stock Options may violate section 406(b)(1) of the Act and section 
4975(c)(1)(E) of the Code, for which relief is requested. With respect 
to section 406(b)(2) of the Act, TGI does not believe that there is a 
potential for conflicts of interest to occur with respect to the 
proposed transactions, as the exercise of the Stock Options will be 
transacted only at the direction of Employees and the necessary sales 
of TGI Stock to cover the Exercise Price will occur on the open market. 
Nevertheless, TGI requests relief from the prohibitions imposed by 
section 406(b)(2) of the Act, in the event it is determined that a 
transaction may occur with a party whose interests are adverse to the 
interests of the Plan and of its participants and beneficiaries.
    14. TGI maintains that the proposed transactions are in the 
interest of the Plan and its participants and beneficiaries in that the 
contribution of the Stock Options will enhance the value of the assets 
of the Plan. Further, it is represented that the exercise of the Stock 
Options by the accounts of Employees in the Plan offers an opportunity 
for economic gain in that the Employees could exercise the Stock 
Options and purchase Stock from TGI at favorable prices. In this 
regard, it is represented that during the past nine (9) years TGI Stock 
has appreciated at a compounded annual rate of nearly 23 percent (23%), 
excluding dividends.
    TGI believes that ownership of TGI Stock by Employees is desirable. 
In this regard, it is represented that the proposed transactions 
facilitate the acquisition of TGI Stock into the accounts of lower paid 
Employees who otherwise would not have the resources to buy such Stock. 
In addition, Employees acquire TGI Stock without using cash balances in 
the Plan or the sale of assets of the Plan, other than the sale of the 
Stock acquired from the exercise of the Stock Options. Further, in the 
opinion of TGI the ``leveraging'' effect of the Stock Options, is such 
that increases in the price of the Stock would create larger increases 
in the values of the accounts of Employees' than the current match 
formulas used by TGI in other programs that provide opportunities for 
Employees to own shares of TGI Stock. In addition, the proposed 
transactions would encourage long term retirement savings and would 
permit an Employee to defer paying taxes on the appreciation of the 
value of the Stock, thus, increasing his or her retirement savings.
    15. It is represented that the exemption is protective of the 
rights of participants and beneficiaries. In this regard, the timing of 
the decision to exercise the Stock Options is at the discretion of the 
Employee into whose account such Stock Options have been contributed or 
is at the discretion of such Employee's beneficiary(ies) or alternative 
payee, and is only subject to the restrictions on exercisability 
imposed by TGI, the issuer.
    It is further represented that the price at which the Stock Options 
are exercised will be based on an objective third party source. In this 
regard, the Exercise Price for the Stock Options will be established by 
using the closing price for TGI Stock from the NYSE on the business day 
prior to the grant of such Stock Option. All transactions with respect 
to the exercise of the Stock Options and the subsequent sale of the TGI 
Stock realized from such exercise will be executed through the NYSE or 
other nationally recognized stock exchange.
    TGI maintains that additional protection for the Plan and its 
participants is provided by the appointment of an independent qualified 
party to be responsible for certain aspects of the proposed 
transactions. In this regard, as of December 31, 1994, TGI retained 
Citibank, N.A., an independent party, to serve as the Trustee for the 
Plan. It is represented that the Trustee's role with respect to the 
proposed transactions will be to facilitate the sale of shares of Stock 
in ``sell to cover'' transactions in connection with the exercise of 
the Stock Options. In this regard, it is represented that the Trustee 
will be responsible for selecting and retaining a broker to execute 
such transactions, unless Smith Barney, a related broker, is selected 
by TGI to provide brokerage services for the ``sell to cover'' 
transactions.
    16. TGI maintains that the proposed transactions are 
administratively feasible in that the level of monitoring required of 
the Department with respect to this exemption will be minimal. In 
addition, TGI will bear all of the costs of the exemption application, 
and TGI will be responsible for the costs associated with notifying 
interested persons.
    17. In summary, TGI represents that the proposed transactions 
satisfy the criteria of section 408(a) of the Act because: (a) All 
Employees will be treated in the same manner for the purpose of the 
allocation of Stock Options to the accounts of such Employees, except 
that certain highly-paid officers will not be eligible to receive such 
contribution of Stock Options; (b) lower paid Employees of TGI and its 
subsidiaries and affiliates will be able to take advantage of the 
opportunity to acquire TGI Stock; (c) contribution of Stock Options by 
TGI to the accounts of Employees in the Plan will not be contingent on 
contributions by Employees to such Plan; (d) the allocation of the 
Stock Options to the Plan and the acquisition of such options by the 
accounts of Employees will occur automatically each year on a uniform 
basis without any action required by such Employees, and the 
determination of the number of Stock Options granted to the accounts of 
each Employee will be based solely on the compensation earned by such 
Employee; (e) Employees will acquire TGI Stock without using cash 
balances from the Plan or the proceeds from the sale of assets of the 
Plan, other than the TGI Stock acquired from the exercise of the Stock 
Options; (f) the contribution of the Stock Options will enhance the 
value of the assets in the accounts of Employees in the Plan; (g) no 
party, other than the individual Employee with respect to his or her 
own account, or upon the death of such Employee his or her beneficiary 
or in the event of an assignment under a qualified domestic relations 
order the alternative payee, will have any discretion over the decision 
to exercise the Stock Options held in such account; (h) the price at 
which the Stock Options can be exercised will be established by the 
market value of the TGI Stock as listed on NYSE at the close of 
business on the day prior to the date each Stock Option is granted; (i) 
the terms and conditions of each of the Stock Options contributed by 
TGI into Employees' accounts in the Plan will be no less favorable to 
the Plan than terms obtainable by the Plan under similar circumstances 
when negotiated at arm's length with unrelated third parties; (j) the 
Trustee will facilitate the purchase and sale of the Stock in 
connection with the exercise of the Stock Options under ``sell to 
cover'' transaction, as described herein; (k) the Plan will incur no 
fees, commissions, or other charges or expenses as a result of its 
acquisition, holding, or exercise of the Stock Options, other than 
brokerage fees payable to the unrelated third party broker; (l) shares 
of TGI Stock realized by an Employee through the exercise of the Stock 
Options in his or her individual account in the Plan will be tradable 
at the direction of such Employee at least monthly and will not be 
subject to any restriction on the length of time such shares can be 
held before being sold and the proceeds

[[Page 68798]]

invested in alternative investment choices in the Plan; and (m) the 
terms and conditions described herein will at all times be satisfied.

Notice to Interested Persons

    It is represented that the proposed transactions would affect only 
participants in the Plan who are actively employed by TGI and its 
subsidiaries and affiliates. Accordingly, all employees of TGI and its 
subsidiaries and affiliates may be considered interested persons. TGI 
represents that all interested persons will be provided 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 interested persons by posting at all worksites a copy 
of the Notice, plus a copy of the Supplemental Statement at those 
locations within the principal places of employment of employees of TGI 
which are customarily used for notices regarding labor-management 
matters for review.
    It is further represented that if the exemption is granted, TGI, 
will, upon request, make available to all interested persons a copy of 
the final exemption.

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

Consolidated Lumber Corp., Pension Plan (the Plan), Located in Clifton, 
New Jersey

[Application No. D-10344]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406 (a) and 406(b) (1) and 
(b)(2) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1) (A) through 
(E) of the Code, shall not apply to the proposed sale for cash (the 
Sale) by the Plan to Consolidated Lumber Corp. (the Employer), the 
sponsor of the Plan, of certain whole life insurance policies (the 
Policies) issued by Confederation Life Insurance Company of Canada 
(Confederation); provided the following conditions are satisfied: (A) 
All terms and conditions of the Sale are at least as favorable to the 
Plan as those which the Plan could obtain in arm's-length transactions 
with unrelated parties; (B) The Plan receives cash consideration from 
each Sale that is no less than the greater of (1) the fair market value 
of each of the Policies as of the date of the Sale, or (2) each of the 
Policies' net cash surrender value as of the date of the Sale; and (C) 
the Plan does not incur any expenses or suffer any losses with respect 
to the proposed transactions.

Summary of Facts and Representations

    1. The Employer, a New Jersey corporation, is in the business of 
wholesale distribution of lumber and millwork products in the greater 
metropolitan area of New York, New York. Messrs. Jess Shirvan, Mark 
Shirvan, and Neil Shirvan each own 22.61 percent of the Employer and 
the remaining 32.17 percent of the Employer is owned by Mr. Stanley 
Shirvan.
    The Plan was established by the Employer as of January 1, 1968. As 
of December 31, 1990, Consolidated Pine, Inc., an Oregon corporation, 
also became a sponsor of the Plan; and as of April 16, 1993, 
Consolidated Distribution, Inc., a New Jersey corporation became a 
sponsor of the Plan.\6\
---------------------------------------------------------------------------

    \6\ Consolidated Pine, Inc. is wholly owned by Mr. Stanley 
Shirvan. Five percent of Consolidated Distribution, Inc. is owned by 
Mr. Stanley Shirvan and Messrs. Neil Shirvan, Jess Shirvan, and Mark 
Shirvan, each own 31.667 percent.
---------------------------------------------------------------------------

    The Plan is a defined benefit pension plan with 32 participants and 
total assets of approximately $218,551.44, as of December 16, 1996. The 
trustee of the Plan is the First Fidelity Bank, N.A., New Jersey 
located at Newark, New Jersey. The Boards of Directors of the three 
sponsoring employers of the Plan have investment discretion over the 
assets of the Plan and the trustee of the Plan expedites the 
instructions of the Directors of the sponsoring employers.<SUP>7
---------------------------------------------------------------------------

    \7\ Mr. Stanley Shirvan is the sole director of the sponsoring 
employers of the Plan. He is also a shareholder and president of the 
sponsoring employers.
---------------------------------------------------------------------------

    2. The Plan, which provided for the investment of Plan assets in 
whole life insurance policies (the Policies), holds 32 Policies issued 
by Confederation. The purchasing of Policies by the Plan was 
discontinued as of December 31, 1990, and all existing Policies remain 
in the Plan. Each Policy provides for death benefits and an investment 
feature in the form of its cash surrender value.
    On August 11, 1994, the Canadian insurance regulatory authorities 
placed Confederation in receivership. On August 12, 1994, the assets of 
Confederation in the United States were placed under the regulatory 
supervision of the insurance authorities of the State of Michigan. 
Rehabilitation proceedings (Proceedings) were instituted by Michigan in 
order to protect the interest of all policy owners in the United 
States, resulting in all Confederation Policies being subject to 
restrictions which prohibit access to the cash surrender value of the 
Policies. As a result of the restrictions imposed on Confederation, the 
Plan is unable to surrender the Policies to Confederation for their 
cash surrender value and make final distributions to Plan participants.
    On August 10, 1995, the Plan notified its participants that the 
Plan was to terminate as of October 15, 1995. Filings were made on 
February 8, 1996, for approval of termination of the Plan with the 
Pension Benefit Guaranty Corporation (PBGC) and the Internal Revenue 
Service (IRS). The PBGC has a mandatory 60 day review period which 
expired April 9, 1996, and thereafter the Plan is required to make 
final distribution of its assets within 180 days unless an extension is 
obtained from the PBGC. The applicant represents that an extension of 
an additional six months until April 7, 1997, for final distribution of 
assets was obtained by the Plan from PBGC. The IRS issued an approval 
of termination of the Plan as of April 9, 1996.
    3. Premium payments on Policies were discontinued by the Plan, 
causing the decline in cash surrender values of the Policies as charges 
are debited against the cash surrender values. As of November 7, 1996, 
the 32 Policies involved in the proposed Sale had a cash surrender 
value of $103,485.10 less the debits of $23,017.66 leaving a net cash 
value of $80,467.44.
    The Employer proposes to purchase the 32 Policies for not less than 
the greater of their fair market value on the date of the Sale, or for 
their net cash surrender value on the date of the Sale.
    The Employer proposes this Sale because the Plan is unable to 
determine when or to what extent it will be able to have access to the 
net cash surrender values of the Policies under the Michigan 
Proceedings. As stated above, the Employer and the affiliated 
corporations that sponsor the Plan are in the process of terminating 
the Plan and distributing the participants accrued benefits. In order 
to accomplish this termination and distribution the Plan needs to 
liquidate the Policies. Therefore the Employer is requesting the 
proposed exemption in order to liquidate the Policies as soon as 
possible. The Employer represents that the proposed transactions are 
necessary

[[Page 68799]]

in order for the participants to avoid any risk associated with the 
Plan continuing to hold the Policies. The applicant represents that the 
Employer will bear all expenses which may be incurred with respect to 
the Sale or the proposed exemption.
    4. In summary, the applicant represents that the proposed 
transaction will satisfy the criteria of section 408(a) of the Act 
because (a) the Plan will not incur any expenses with respect to the 
proposed transaction; (b) the Plan will receive on the date of Sale the 
greater of either the net cash surrender value or the fair market value 
of the Policies, and (c) the proposed transaction will enable the Plan 
to avoid the possible losses associated with the continued holding of 
the Policies.

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

The Chase Manhattan Bank, N.A. (Chase), Located in New York, New York

[Application No. D-10348]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of section 406(a) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1) (A) through (D) of the Code, shall not 
apply to (1) the proposed granting to Chase, as the representative of 
lenders (the Lenders) participating in a credit facility, of security 
interests in limited partnership interests in LF Strategic Real Estate 
Investors, L.P. (the Partnership) owned by certain employee benefit 
plans (the Plans) with respect to which some of the Lenders are parties 
in interest; and (2) the proposed agreements by the Plans to honor 
capital calls made by Chase in lieu of the Partnership's general 
partner; provided that (a) the proposed grants and agreements are on 
terms no less favorable to the Plans than those which the Plans could 
obtain in arm's-length transactions with unrelated parties; and (b) the 
decisions on behalf of each Plan to invest in the Partnership and to 
execute such grants and agreements in favor of Chase are made by a 
fiduciary which is not included among, and is independent of, the 
Lenders and Chase.

Summary of Facts and Representations

    1. The Partnership is a limited partnership the general partner of 
which is LF Strategic Realty Investors L.L.C. (the General Partner). 
The General Partner is a New York limited liability company, and all 
outstanding membership interests in the General Partner are owned by 
Lazard Freres and Company, L.L.C. (Lazard) or its affiliates; the 
managers of the General Partner are individuals employed by the General 
Partner. The General Partner (or an affiliate) will contribute not less 
than $20,000,000 to the Partnership. The Partnership has been created 
specifically to invest in a select portfolio of leading real estate 
companies (the Selected Companies) which are diversified as to property 
type and geographic location, and which have established track records, 
experienced management, and large portfolios of high quality real 
estate assets. The Partnership will have a maximum term of 10 years, 
but it is intended that each real estate investment (an Investment) 
will be liquidated within five to seven years.
    2. The General Partner intends to raise a maximum of $650,000,000 
of subscriptions for limited partnership interests. The minimum capital 
commitment (or subscription amount) for each investor in the 
Partnership (an Investor) is $25,000,000. Capital committed by an 
Investor pursuant to a subscription agreement (the Subscription 
Agreement) will be called (a Called Contribution) by the General 
Partner from time to time as needed to be invested in Investments. 
Investors will be obligated to fund their subscription amounts pursuant 
to calls during a three- year period; the General Partner may extend 
this period for an additional year, but at the end of the period, the 
subscription agreements will be terminated and no further capital calls 
may be made thereunder. There are currently 10 Investors having 
irrevocable, unconditional capital commitments of at least 
$645,000,000.
    3. It is contemplated that the General Partner will incur 
indebtedness to pay the Partnership's general costs and expenses 
incurred in connection with many of its investments. In addition, the 
Partnership may utilize borrowings from third parties (a) for the 
acquisition of particular investments and for working capital purposes 
(with the expectation that such acquisition indebtedness will be repaid 
from the Investors' capital commitments and/or from mortgage debt), and 
(b) financing and/or credit enhancement in connection with proposed 
Investments, including providing financing to or on behalf of Selected 
Companies. This indebtedness will take the form of a credit facility 
(the Credit Facility) secured by a pledge and assignment of each 
Investor's capital commitments and by a security in the Investors' 
Partnership interests. This type of facility will allow the General 
Partner to consummate Investments quickly without having to finalize 
the debt/equity structure for an Investment or having to arrange for 
interim or permanent financing prior to making an Investment. In 
connection with this Credit Facility, each of the Investors is required 
to execute documents customarily required in secured financings, 
including an agreement to unconditionally honor capital calls.
    4. Chase will become agent for a group of Lenders providing the 
Credit Facility to the Partnership. Chase will also be a participating 
Lender. Repayments will be made generally by the Partnership from 
Called Contributions, the Investors' capital commitments, proceeds from 
mortgage financings and proceeds from liquidation of the Partnership's 
Investments. The Credit Facility is intended to be a 32-month revolving 
credit with restricted availability levels. The Partnership can use its 
credit under the Credit Facility either by direct or indirect 
borrowings or by requesting that letters of credit be issued. All 
Lenders will participate on a pro rata basis with respect to all cash 
loans and letters of credit. All such loans and letters of credit will 
be issued to the Partnership or an entity in which the Partnership owns 
an interest (a Qualified Borrower), and not to any individual Investor. 
All payments of principal and interest made by the Partnership or a 
Qualified Borrower will be allocated pro rata among all Lenders. The 
applicant represents that the aggregate capital commitments to be 
pledged will be at least three times the maximum amount of the credit 
available under the Credit Facility.
    5. The stated maturity date for the Credit Facility will be 
September 30, 1998. Until that time, interest only is payable on the 
Facility. At the maturity date, the entire unpaid principal balance of 
the Credit Facility will be due and payable, unless the Credit Facility 
is extended. The Credit Facility will be a limited recourse obligation 
of the Partnership, the repayment of which is secured primarily by the 
assignment by the Partnership of a security interest in both the 
Investors' capital commitments and the General Partner's right to make 
capital calls. The capital commitments are fully recourse to all the 
Investors and the General Partner.

[[Page 68800]]

The General Partner's right to make capital calls will be assigned by 
the Partnership and General Partner to Chase, as agent under the Credit 
Facility for the benefit of the Lenders. In the event of default under 
the Credit Facility, the agent has the right to unilaterally make 
capital calls on the Investors to pay their unfunded capital 
commitments, and will apply cash received from such capital calls to 
any outstanding debt.
    6. Under the Credit Facility, it is contemplated that each Investor 
will execute a security agreement (the Security Agreement) pursuant to 
which it grants to Chase, for the benefit of each Lender, a security 
interest and a lien in its Partnership interest. In addition, each 
Investor will covenant with Chase for the benefit of the Lenders that 
such Investor will unconditionally honor any capital call made by Chase 
in accordance with the Subscription Agreement up to the unfunded 
capital commitment of such Investor.
    7. The trusts which hold assets of the Plans (the Trusts) own 
limited partnership interests as Limited Partners in the Partnership. 
Some of the Lenders may be parties in interest with respect to some of 
the Plans in the Trusts by virtue of such Lenders' (or their 
affiliates') provisions of fiduciary services to such Plans with 
respect to Trust assets other than the Partnership interests. Chase is 
requesting an exemption to permit the Trusts to enter into the Security 
Agreements under the terms and conditions described herein. The Plans 
and the other Limited Partners with the largest interests in the 
Partnership and the extent of their respective capital commitments to 
the Partnership are described as follows:
    (a) Alcoa Master Trust. The Alcoa Master Trust holds the assets of 
13 defined benefit plans (the Alcoa Plans). The total number of 
participants is approximately 33,000, and the approximate fair market 
value of the total assets of the Alcoa Plans held in the Master Trust 
as of December 31, 1995 is $3.6 billion. The fiduciary of the Alcoa 
Plans generally responsible for investment decisions is the Benefit 
Investment Committee, which is responsible for reviewing and 
authorizing the investment in the Partnership to which this proposed 
exemption relates. The Alcoa Master Trust has made a capital commitment 
of $25 million to the Partnership.
    (b) Polaroid Pension Trust. The Polaroid Pension Trust holds the 
assets of the Polaroid Pension Plan, a defined benefit plan with 13,775 
participants and assets of approximately $760 million. The fiduciary of 
the Polaroid Pension Trust responsible for reviewing and authorizing 
the investment in the Partnership to which this proposed exemption 
relates is Polaroid Fund Manager. The Polaroid Pension Trust has 
undertaken a $25 million capital commitment to the Partnership.
    (c) NYNEX Master Pension Trust. The NYNEX Master Pension Trust 
holds the assets of the NYNEX Pension Plan and the NYNEX Management 
Pension Plan, both defined benefit plans. As of December 31, 1994, the 
NYNEX Pension Plan had 97,498 participants and approximately $6.6 
billion in total assets. The NYNEX Management Pension Plan had 49,880 
participants and approximately $7 billion in assets as of December 31, 
1994. The fiduciary of the NYNEX Master Pension Trust generally 
responsible for investment decisions is Mr. Frederick V. Salerno, 
(Chief Financial Officer/Business Development of NYNEX Corporation). 
Mr. Salerno is the fiduciary responsible for reviewing and authorizing 
the investment in the Partnership to which this proposed exemption 
relates. The NYNEX Master Pension Trust has undertaken a $25 million 
capital commitment to the Partnership.
    (d) General Motors. General Motors Corporation has established the 
Third Plaza Trust (the TP Trust) of which Mellon Bank, N.A. is the 
trustee, and the Fourth Plaza Trust (the FP Trust), of which Mellon 
Bank, N.A. is also the trustee, to hold, manage and invest funds for 
various Plans (the GM Plans). The GM Plans are as follows:
    (1) The General Motors Hourly Plan (the GM Hourly Plan), a defined 
benefit plan with 609,669 participants as of September 30, 1995, and 
assets with a total value of approximately 37.8 billion dollars on that 
date. Assets of the GM Hourly Plan are held in the TP Trust. Assets of 
the Saturn Individual Retirement Plan for Represented Team Members (a 
defined benefit plan with 7,138 participants as of September 30, 1995), 
the Saturn Personal Choices Retirement Plan for Non-Represented Team 
Members (a defined benefit plan with 1,977 participants as of September 
30, 1995), the Employees' Retirement Plan for GMAC Mortgage Corporation 
(a defined benefit plan with 3,106 participants as of December 31, 
1995), the National Car Rental System Inc. Hourly Paid Employees 
Pension Plan (a defined benefit plan with 3,106 participants as of 
December 31, 1994) and the National Car Rental System Inc. Salaried 
Employees Pension Plan (a defined benefit plan with 1,439 participants 
as of December 31, 1994) are also held in the TP Trust. The TP Trust 
has undertaken a $75 million commitment to the Partnership.
    (2) The General Motors Retirement Program for Salaried Employees 
(the Salaried Plan), a defined benefit pension plan with 218,299 
participants as of September 30, 1995, and assets with a total value of 
approximately 21.7 billion dollars as of that date. Assets of the GM 
Salaried Plan are held in the FP Trust. The FP Trust has undertaken a 
total capital commitment of $75,000,000 to the Partnership.
    The fiduciary responsible for authorizing and overseeing the GM 
Plans' investment in the Partnership and, subsequently, for monitoring 
such investment, is the General Motors Investment Management 
Corporation (GMIMC). GMIMC is a separately incorporated, wholly owned 
subsidiary of General Motors Corporation.
    (e) The applicant represents that as of the date of the filing of 
its application for the exemption proposed herein, the only Plans which 
are Investors are described in paragraphs (a) through (d) above, or are 
eligible for relief under Prohibited Transaction Exemption 96-23 (PTE 
96-23, 61 FR 15975, April 10, 1996), the class exemption for 
transactions determined by in-house asset managers.<SUP>8 The applicant 
represents that it is possible that one or more other Plans may become 
Investors at some time in the future, and requests relief for any such 
Plan under the exemption proposed herein, provided the Plan meets the 
standards and conditions set forth herein.
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    \8\ The Department expresses no opinion herein with respect to 
the applicability of PTE 96-23 to any such Plans.
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    8. Investors which are not ERISA-covered plans:
    (a) California State Teachers Retirement System, which has 
undertaken a total capital commitment of $150,000,000;
    (b) Commonwealth of Pennsylvania Public School Employees' 
Retirement System, which has undertaken a total capital commitment of 
$150,000,000;
    (c) New York State Common Retirement Fund, which has undertaken a 
total capital commitment of $50,000,000;
    (d) Public Employees' Retirement Association of Colorado, which has 
undertaken a total capital commitment of $50,000,000; and
    (e) Lazard Freres Real Estate Investors, which has undertaken a 
total capital commitment of $20,000,000.
    9. Chase represents that the Partnership has obtained an opinion of 
counsel that the Partnership will constitute a ``venture capital 
operating

[[Page 68801]]

company'' under the Department's plan asset regulations [29 CFR 2510.3-
101(c)] if the Partnership is operated in accordance with the 
Subscription Agreement and the private placement memorandum distributed 
in connection with the private placement of the limited partnership 
interests.<SUP>9
---------------------------------------------------------------------------

     9 The Department expresses no opinion herein as to whether the 
Partnership will constitute a venture capital operating company 
under the regulations at 29 CFR 2510.3-101.
---------------------------------------------------------------------------

    10. Chase represents that the Security Agreement constitutes a form 
of credit security which is customary among financing arrangements for 
real estate limited partnerships, wherein the financing institutions do 
not obtain security interests in the real property assets of the 
partnership. Chase also represents that the obligatory execution of the 
Security Agreement by the Investors for the benefit of the Lenders was 
fully disclosed in the Offering as a requisite condition of investment 
in the Partnership during the private placement of the limited 
partnership interests. Chase represents that the only direct 
relationship between any of the Investors and any of the Lenders is the 
execution of the Security Agreements. All other aspects of the 
transaction, including the negotiation of all terms of the Facility, 
are exclusively between the Lenders and the Partnership. Chase 
represents that the proposed executions of the Security Agreements will 
not affect the abilities of the Trusts to withdraw from investment and 
participation in the Partnership. The only Plan assets to be affected 
by the proposed transaction are each Plan's limited partnership 
interests in the Partnership and the related Plan obligations as 
Investors to respond to drawdowns up to the total amount of each Plan's 
capital commitment to the Partnership.
    11. Chase represents that neither it nor any Lender acts or has 
acted in any fiduciary capacity with respect to any Trust's investment 
in the Partnership and that Chase is independent of and unrelated to 
those fiduciaries (the Trust Fiduciaries) responsible for authorizing 
and overseeing the Trusts' investments in the Partnership. Each Trust 
Fiduciary represents independently that its authorization of Trust 
investment in the Partnership was free of any influence, authority or 
control by the Lenders. The Trust Fiduciaries represent that the 
Trust's investments in and capital commitments to the Partnership were 
made with the knowledge that each Investor would be required 
subsequently to grant a security interest in the Partnership to the 
Lenders and to honor drawdowns made on behalf of the Lenders without 
recourse to any defenses against the General Partner. Each Trust 
Fiduciary individually represents that it is independent of and 
unrelated to Chase and the Lenders and that the investment by the Trust 
for which that Trust Fiduciary is responsible continues to constitute a 
favorable investment for the Plans participating in that Trust and that 
the execution of the Security Agreement is in the best interests and 
protective of the participants and beneficiaries of such Plans.
    12. In summary, the applicants represent that the proposed 
transactions satisfy the criteria of section 408(a) of the Act for the 
following reasons: (1) The Plans' investments in the Partnership were 
authorized and are overseen by the Trust Fiduciaries, which are 
independent of the Lenders; (2) None of the Lenders have any influence, 
authority or control with respect to the Plans' investments in the 
Partnership or the Plans' executions of the Security Agreements; and 
(3) The Trust Fiduciaries invested in the Partnership on behalf of the 
Plans with the knowledge that the Security Agreements are required of 
all Limited Partners investing in the Partnership.

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

General Information

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

    Signed at Washington, DC, this 24th day of December, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 96-33183 Filed 12-27-96; 8:45 am]
BILLING CODE 4510-29-P