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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Washington National Retirement Plan et al. [Notices] [04/09/1997]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Washington National Retirement Plan et al. [04/09/1997]

[PDF Version]

Volume 62, Number 68, Page 17209-17214

[DOCID:fr09ap97_dat-129]

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10345, et al.]

 
Proposed Exemptions; Washington National Retirement Plan et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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

Written Comments and Hearing Requests

    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) number of the person 
making the comment or request, and (3) 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, NW., Washington, DC 
20210. Attention: Application No. stated in each Notice of

[[Page 17210]]

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, NW., 
Washington, DC 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.

Washington National Retirement Plan (the Plan), Located in 
Lincolnshire, IL

[Application No. D-10345]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of 
the Code, shall not apply to the cash sale by the Plan of five venture 
capital limited partnership interests (the Venture Capital Funds) and a 
private placement bond issue (the Private Placement Bond Issue) <SUP>1 
to Washington National Insurance Company (the Employer), a party in 
interest with respect to the Plan.
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    \1\ The interests in the Venture Capital Funds and the Private 
Placement Bond Issue are collectively referred to herein as the 
Interests.
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    This proposed exemption is subject to the following conditions:

    (a) All terms and conditions of the sale are at least as 
favorable to the Plan as those obtainable in an arm's length 
transaction with an unrelated party.
    (b) The sale is a one-time transaction for cash.
    (c) The fair market value of the Interests is determined by a 
qualified, independent appraiser.
    (d) The Plan does not pay any commissions, costs or other 
expenses in connection with the sale.
    (e) With respect to each Venture Capital Fund Interest, the Plan 
receives as consideration an amount that is no less than the greater 
of (1) its investment basis in such Interest or (2) the fair market 
value of the Interest on the date of the sale.
    (f) With respect to the Private Placement Bond Issue, the Plan 
receives as consideration an amount that is no less than the greater 
of (1) the remaining principal balance of such Interest or (2) the 
fair market value of the Interest on the date of the sale.

Summary of Facts and Representations

    1. The Plan is a defined benefit plan having total assets with an 
aggregate fair market value of $22,925,300 as of June 30, 1996. As of 
September 11, 1996, the Plan had 964 participants. The trustees of the 
Plan (the Trustees) are Robert W. Patin, Thomas C. Scott and Thomas 
Pontarelli. The Trustees are charged with overseeing the investments 
and investment philosophy of the Plan. The Employer, an insurance 
company, maintains its principal place of business in Lincolnshire, 
Illinois.
    2. Included among the assets of the Plan are Interests in five 
Venture Capital Funds and one Private Placement Bond Issue. The 
Interests, which represent approximately 6.2 percent of the Plan's 
total assets, were all purchased on behalf of the Plan by the then-
existing Trustees during the 1970's and 1980's. In this regard, the 
Interests in the Venture Capital Funds were acquired by the Plan at the 
inception of the respective limited partnerships whereas the Interest 
in the Private Placement Bond Issue was acquired by the Plan directly 
from Merrill Lynch, Hubbard Inc., as underwriter. With the exception of 
the Employer (see Representation 4 below), it is represented that none 
of the general partners, limited partners or holders, in the case of 
the Private Placement Bond Issue, is a party in interest with respect 
to the Plan.
    The Interests are further described as follows:
    (a) The Narragansett First Fund (NFF), a Venture Capital Fund, is a 
Rhode Island limited partnership that was formed on December 17, 1982 
primarily for the purpose of making investments in leveraged buyout 
transactions with the objective of capital appreciation. NFF has one 
general partner, Narraganset Management Partners (NMP), also a Rhode 
Island limited partnership and 35 limited partners consisting of 
corporations, partnerships and trusts. The total funding commitment for 
NFF was $75.2 million. Of this amount, $66.7 million was actually 
funded. Although NFF was scheduled to terminate on December 17, 1995, 
NMP temporarily deferred the liquidation of the assets of NFF. The 
partnership is now fully invested and is presently in a liquidation 
mode.
    On December 15, 1982, the Plan entered into a subscription 
agreement to invest $500,000 in NFF. As of March 31, 1996, the Plan had 
funded $446,885 of the capital commitment representing a 0.67 percent 
interest in NFF. Since the inception of its investment in NFF, the Plan 
has received cash disbursements totaling $1,369,523 leaving an 
investment basis of $0.
    (b) TCW Special Placements Fund I (TCW I), a Venture Capital Fund, 
is a California limited partnership that was formed on March 12, 1985 
for the purpose of allowing investors to pool their assets in order to 
provide financing to highly-leveraged companies for expansions, 
acquisitions, management buyouts and capital restructurings. TCW 
Capital, a California partnership serves as the general partner of TCW 
I. As general partner, TCW Capital makes all investment decisions and 
has exclusive responsibility for the management of TCW I. TCW I is 
fully invested and is expected to terminate in 1997.
    On February 28, 1985, the Plan entered into a subscription 
agreement to fund $500,000 to TCW I. As of March 31, 1996, the Plan had 
funded $500,000 of this commitment. The total funding commitment for 
TCW I was $105.6 million of which the full amount was funded. 
Therefore, the Plan's interest in TCW I is 0.47 percent. Since its 
investment in TCW I, the Plan has received cash disbursements totaling 
$414,870 leaving an investment basis of $85,130.
    (c) Narragansett Capital Partners--B (NCP-B), a Venture Capital 
Fund, was formed as a limited partnership in Providence, Rhode Island 
on January 14, 1987 for the purpose of investing in

[[Page 17211]]

equity and equity-related securities in leveraged buyout transactions. 
The general partner of NCP-B is Narraganset Capital Associates, L.P. 
(NCA), a Rhode Island limited partnership. The total funding commitment 
for NCP-B was $63.6 million of which $50.5 million was actually funded. 
NCP-B is fully invested and is currently in an investment liquidation 
mode.
    On December 16, 1986, the Plan entered into a subscription 
agreement to fund $500,000 of NCP-B. As of March 31, 1996 the Plan had 
funded $397,306 of this commitment. Therefore, the Plan's interest in 
NCP-B is 0.01 percent. Since its investment in NCP-B, the Plan has paid 
management fees totaling $58,057 and has received cash disbursements 
totaling $161,065. Therefore, the Plan's investment basis in NCP-B is 
$294,298.
    (d) TCW Special Placement Fund II (TCW II), a Venture Capital Fund, 
is a California limited partnership that was formed on February 12, 
1987 for the purpose of allowing investors to pool their assets in 
order to provide financing to highly-leveraged companies. TCW Capital 
serves as the general partner of TCW II. The total funding commitment 
for TCW II was $335.3 million of which all such amount was actually 
funded. TCW II is fully invested and is expected to terminate in 1999.
    On February 10, 1986, the Plan entered into a subscription 
agreement to fund $500,000 of TCW II. As of March 31, 1996 the Plan had 
funded $500,000 of this commitment. Therefore, the Plan's interest in 
TCW II is 0.15 percent. Since its investment in TCW II, the Plan has 
received disbursements totaling $446,864 leaving an investment basis of 
$53,136.
    (e) The Shansby Group (Shansby), a Venture Capital Fund, is a 
California limited partnership that was formed on November 3, 1987 for 
the purpose of making equity investments in established businesses in 
consumer industries. The general partner of Shansby is TSG Partners, a 
California limited partnership which has sole responsibility for the 
investment, management and custody of Shansby's assets. Shansby has a 
stated life of ten years and is currently in a liquidation mode. The 
total funding commitment for Shansby was $31.3 million of which all 
$31.3 million was actually funded. The partnership is fully funded and 
is presently in an investment liquidation mode.
    On October 27, 1987, the Plan entered into a subscription agreement 
to fund $500,000 of Shansby. As of March 31, 1996, the Plan had funded 
$500,000 of this commitment. Therefore, the Plan's interest in Shansby 
is 0.16 percent. Since its investment in Shansby, the Plan has received 
disbursements totaling $476,643 leaving an investment basis of $23,357.
    (f) Pennsylvania Mart Properties Secured Notes constitute the 
Private Placement Bond Issue in which the Plan has invested. The 
issuer, Pennsylvania Mart Properties Corp. (PMP) is a special purpose 
corporation. PMP was formed in the mid-1970's to finance up to 100 
percent of the cost of acquiring and constructing a distribution center 
near Morrisville, Pennsylvania. It was intended that the facility would 
be leased to the S.S. Kresge Company (Kresge) or a subsidiary for a 30 
year term.<SUP>2
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     2 It is represented that K-Mart Corporation, an affiliate of 
Kresge is the actual lessee of the distribution center.
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    To obtain funds necessary to acquire the property from Kresge and 
to complete construction, PMP sold secured notes to institutional 
investors. The Private Placement Bond Issue was issued in the aggregate 
principal amount of $22 million and has a maturity date of 30 years or 
January 17, 2007. The Private Placement Bond Issue carries interest at 
the rate of 10.25 percent per annum and is secured by a first mortgage 
on the property and by an assignment of the lease.
    The Plan initially purchased its Interest in the Private Placement 
Bond Issue for $500,000 on December 2, 1976 from Merrill Lynch. At the 
time of the investment, the cost to complete the warehouse facility 
securing the Issue was $18,900,000 or 21.25 percent less than the 
original cost estimate of $24 million. Because the indenture for the 
Private Placement Bond Issue did not permit outstanding debt to exceed 
the final cost of the facility, PMP refunded 21.25 percent of the 
Issue, pro rata, to each investor on January 17, 1977. A total of 
$106,250 in principal was returned to the Plan. On that same date, a 
revised secured note, having a face value of $393,750, was given to the 
Plan. The applicant assumes that the Plan also received an accrued 
interest payment on January 17, 1977 in the amount of $6,406. This 
accrued interest would represent 45 days of interest on the initial 
$500,000 investment from December 2, 1976 to January 1, 1977.
    Since the time of its original investment, the Plan has received 
interest income totaling $723,831. As of January 17, 1997, the 
outstanding principal balance of the Plan's Interest in the Private 
Placement Bond Issue was $267,035. Thus, the Plan's investment basis in 
the Private Placement Bond Issue is $0.
    3. With the exception of NCP-B (as noted in Representation 2), the 
Plan has not been required to pay any management fees in connection 
with its ownership of the other Venture Capital Fund Interests. In this 
regard, all management fees paid by the Plan have been derived from 
capital contributions or have been withheld from distributions. The 
Plan has not paid any fees with respect to its Interest in the Private 
Placement Bond Issue. Other than management fees, the Plan has not been 
required to pay any servicing fees to any outside party to monitor or 
administer the Interests.
    4. The Employer has also invested in four of the Venture Capital 
Funds. It is represented that the Employer acquired its Interests in 
these Funds contemporaneously with the Plan. In this regard, the 
Employer invested $1,494,255 in NFF in return for a 0.02 percent 
interest, $2 million in TCW I in return for a 0.02 percent interest, $2 
million in TCW II for a 0.01 percent interest and $3 million in Shansby 
for a 0.10 percent interest. It is represented that the Employer has 
never invested in the Private Placement Bond Issue. In addition, the 
Employer also has invested $1,587,397 in Narragansett Capital 
Partners--A, a parallel Fund of NCP-B.<SUP>3
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     3 In this proposed exemption, the Department expresses no 
opinion on whether the acquisition and holding by the Plan and the 
Employer of their respective Interests in the Venture Capital Funds 
violated any provision of Part 4 of Title I of the Act.
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    5. Each of the Venture Capital Funds is valued quarterly by an 
advisory committee which is comprised of representative limited 
partners from the respective Funds. It is represented that such 
committee members do not include the Employer or its principals. The 
Plan receives a quarterly statement from each committee summarizing the 
value of the Venture Capital Fund and the value of the Plan's Interest 
in a Venture Capital Fund. In this regard, as of March 31, 1996, the 
fair market values of the Plan's Interests in the Venture Capital Funds 
were reported as follows: $49,094 in NFF; $267,000 in TCW I; $416,665 
in NCP-B; $123,000 in TCW II; and $272,653 in Shansby. By letter dated 
January 27, 1997, Mr. Gregory Barber, who undertakes the specific 
duties of the general partner for NFF and NCP-B, stated that the 
quarterly valuations for these Venture Capital Funds represent the best 
estimate of the fair market value of the portfolio companies. Mr. 
Barber also noted that there were no sales or transfers of Interests in 
the Venture

[[Page 17212]]

Capital Funds resulting from arm's length transactions between 
unrelated parties during 1995 or 1996.
    By letter dated February 7, 1997, Mr. Raymond Henze, Group Managing 
Director of TCW Capital, the general partner of TCW I and TCW II, 
outlined the principals and methods of valuation utilized by TCW 
Capital in valuing the net assets of these Venture Capital Funds. In 
this regard, Mr. Henze stated that--

    (a) Non-publicly traded securities are initially valued at cost 
unless a change in the financial condition or operating results of 
the issuer or guarantor of such securities indicates that there has 
been a permanent impairment in the value of the investment. Such 
investments will not be valued in excess of cost. No change in 
valuation of debt securities is made for fluctuations in market 
interest rates.
    (b) Marketable securities listed on a national securities 
exchange or marketable securities traded in the over-the-counter 
market for which there is a last sales price available are valued at 
the last sales price on the date of valuation. Other marketable 
securities traded in the over-the-counter market are valued at the 
closing bid price as reported by the National Quotations Bureau, 
Inc. or at a discount from the bid price if marketability is limited 
by the size of the holdings relative to trading volume. Securities 
not marketable due to investment letter restrictions but 
constituting part of the class of publicly-traded securities are 
valued at an appropriate discount from the public market price.
    (c) The carrying value of investments in non-publicly traded 
securities and restricted marketable securities is based upon the 
written valuation by a nationally-recognized independent appraiser 
or investment banker. Historically, this has been Deloitte & Touche 
LLP.

    In addition, Mr. Henze stated that during calendar year 1996, there 
were no transfers in TCW I.
    Finally, in a letter dated January 28, 1997, Mr. Charles Esserman, 
General Partner of the Shansby Group stated that the value of the 
assets of the Shansby Group as shown in the quarterly financial 
statement is, in the opinion of the general partners a fair 
representation of the fair market value of such assets as of such 
dates. In addition, Mr. Esserman stated that there have been no sales 
of Interests in the Shansby Group during the last two years.
    6. The Employer proposes to terminate the Plan and wishes to ensure 
that all of the Plan's assets can be efficiently liquidated at their 
fair market value. Because there is no ready market for any the of 
Venture Capital Funds, it is represented that the general partners of 
each Fund are under no obligation to assist in the sale or repurchase 
of the Interests. Since each of the Venture Capital Funds is in a 
liquidation mode, it is represented that even if a purchaser could be 
found, it is unlikely that the purchaser would be willing to pay fair 
market value for the Plan's Venture Capital Fund Interests.
    7. Therefore, the Employer requests an administrative exemption 
from the Department in order to purchase the Plan's Interests in the 
Venture Capital Funds for the greater of: (a) the funded amount of the 
Plan's Interest in the Venture Capital Fund (i.e., the Plan's 
investment basis); or (b) the fair market value of the Venture Capital 
Fund Interests, on the quarterly statement for the most current 
statement available at the time of purchase. In each instance, the 
value attributed to the Venture Capital Interests will be reduced by 
any distributions received prior to such purchase. No fees or 
commissions will be paid by the Plan in connection with its sale of the 
Interests in the Venture Capital Funds. Any costs associated with 
determining the fair market value for these investments will be borne 
by the Employer.
    8. In addition to acquiring the Interests in the Venture Capital 
Funds, the Employer requests administrative exemptive relief in order 
to purchase the Plan's Interest in the Private Placement Bond Issue. 
The proposed sales price for the Interest will be the greater of: (a) 
the independently-appraised fair market value; or (b) the remaining 
principal balance of such Interest. No fees or commissions will be paid 
by the Plan in connection with the sale. Any cost associated with 
determining the fair market value of the Interest in the Private 
Placement Bond Issue will be borne by the Employer.
    9. Because the Private Placement Bond Issue is not valued on a 
continuing basis, the Employer has retained the Allison-Williams 
Company of Minneapolis, Minnesota (Allison-Williams), an independent 
investment banking firm, to value this investment. Specifically, Mr. 
Michael A. Lingvall, Vice President of Allison-Williams, has determined 
the fair market value of the investment. Mr. Lingvall represents that 
he is completely unrelated to the Employer and its principals. He also 
states that he has three years experience in effecting private 
placement sales, valuation and trading and has over eight years 
experience in finance.
    In an appraisal report dated August 20, 1996 and an addendum dated 
November 8, 1996, Mr. Lingvall has placed the market position for the 
Plan's Interest in the Private Placement Bond Issue at 92.06 (or 
$249,203 based upon a principal balance of $267,035). He indicates that 
this represents a spread of approximately 600 points over comparable 
Treasury bonds which he believes is an appropriate benchmark for 
pricing corporate private placements similar to the Interest. In 
determining the fair market value of the Interest, Mr. Lingvall 
represents that he considered such factors as the current Treasury bond 
yield environment, yield spread premiums on similar-term bond issues, 
current credit ratings, security, the size of the Plan's Interest and 
economic factors. In addition, Mr. Lingvall will update his appraisal 
of the Interest prior to the proposed sale.
    10. Thus, based upon the appraisals, the Plan will sell the 
Interests in the Venture Capital Funds for their fair market values 
because, as the following table shows, these amounts exceed the Plan's 
investment basis for each Fund.

----------------------------------------------------------------------------------------------------------------
                     VC Fund                           Cost          Distrib.     Adjusted basis        FMV     
----------------------------------------------------------------------------------------------------------------
NFF.............................................        $500,000      $1,369,523              $0         $49,094
TCW I...........................................         500,000         414,870          85,130         267,000
NCP-B...........................................        *455,363         161,065         294,298         416,665
TCW II..........................................         500,000         446,864          53,136         123,000
Shansby.........................................         500,000         476,643          23,357         272,653
                                                 ---------------------------------------------------------------
      Totals....................................      $2,455,363      $2,868,965        $455,921     $1,128,412 
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*Includes management fees totaling $58,057.                                                                     

    Accordingly, the total sales price for the Interests in the Venture 
Capital Funds will be $1,128,412.
    With respect to the Private Placement Bond Issue, the Plan will 
sell its interest to the Employer for $267,035. As noted in 
Representation 9, this amount denotes the outstanding principal balance 
of such Interest and it exceeds

[[Page 17213]]

the Interest's fair market value of $249,203.
    Therefore, the aggregate sales price for the Venture Capital Fund 
Interests and the Interest in the Private Placement Bond Issue will be 
$1,395,447 ($1,128,412 + $267,035).
    11. In summary, it is represented that the proposed transaction 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because: (a) All terms and conditions of the sale 
will be at least as favorable to the Plan as those obtainable in an 
arm's length transaction with an unrelated party; (b) the sale will be 
a one-time transaction for cash; (c) the fair market value of the 
Interests has been determined by qualified, independent appraisers; (d) 
the Plan will not pay any commissions, costs or other expenses in 
connection with the sale; (e) with respect to each Venture Capital Fund 
Interest, the Plan will receive as consideration an amount that is no 
less than the greater of (1) its investment basis in such Interest or 
(2) the fair market value of the Interest on the date of the sale; and 
(f) with respect to the Private Placement Bond Issue, the Plan will 
receive as consideration an amount that is no less than the greater of 
(1) the remaining principal balance of such Interest or (2) the fair 
market value of the Interest on the date of the sale.

Notice to Interested Persons

    Notice of the proposed exemption will be provided to interested 
persons within 10 days as of the date of publication of the notice of 
pendency in the Federal Register. Such notice will be provided to 
interested persons by first class or interoffice mail. The notice will 
include a copy of the notice of proposed exemption, as published in the 
Federal Register, as well as a supplemental statement, as required 
pursuant to 29 CFR 2570.43(b)(2), which shall inform interested persons 
of their right to comment on and/or to request a hearing. Comments and 
hearing requests with respect to the proposed exemption are due 40 days 
after the date of publication of the proposed exemption in the Federal 
Register.

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

The Kenzer Corporation Thrift Savings Plan and Trust (the Plan), 
Located in New York, New York

[Application No. D-10391]

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 proposed ``restoration payment'' 
(the Restoration Payment) to the Plan by The Kenzer Corporation (the 
Employer), in respect of certain defaulted notes (the Notes), and (2) 
the potential future receipt by the Employer of ``recapture payments'' 
(the Recapture Payments) from the Plan.
    This proposed exemption is subject to the following conditions:
    (1) The Restoration Payment covers the face amount of the Notes and 
accrued interest as of the date of default, plus lost opportunity costs 
attributable to the Notes since the date of default;
    (2) Any Recapture Payments are restricted solely to the amounts, if 
any, recovered by the Plan with respect to the Notes in litigation or 
otherwise; and
    (3) The Employer receives a favorable ruling from the Internal 
Revenue Service that the Restoration Payment does not constitute a 
``contribution'' or other payment that will disqualify the Plan.

Summary of Facts and Representations

    1. The Plan is a 401(k) plan sponsored by the Employer. The 
Employer, a New York corporation, provides executive search services to 
client businesses seeking to fill executive or management level 
positions and is headquartered in New York City. As of June 30, 1996, 
the Plan had total assets of approximately $851,472.<SUP>4 As of 
December 3, 1996, the Plan had approximately 50 participants and 
beneficiaries. The trustees of the Plan (the Trustees) are Robert 
Kenzer, Chairman of the Employer, and Eric Segal, President of the 
Employer.
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    \4\ This figure reflects the fair market value of the Plan's 
assets, valuing the Notes (plus accrued interest) at zero.
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    2. Among the assets of the Plan are the Notes, which are promissory 
notes issued by Bennett Funding, Inc. or an affiliate thereof 
(collectively, Bennett). The Plan acquired the Notes beginning in 
approximately 1991. The Notes consist of four separately issued notes 
in the amounts of $100,000, $100,000, $245,000, and $200,000, 
respectively, for an aggregate face amount of $645,000.
    The applicant represents that the Trustees believed the Notes to be 
secure, safe investments. Documentation issued to the Plan indicated 
that each Note was secured by (a) equipment owned by Bennett which 
Bennett was leasing to unrelated third parties; (b) an assignment of 
the income stream generated by such leases; and (c) a master insurance 
policy issued by one of two insurance companies, which guaranteed the 
income stream from the leases.
    In view of the relatively high interest rates being offered on 
investments which the Trustees considered to be low-risk, the Notes, 
when due, would generally be ``rolled over,'' with both the principal 
and accrued interest being reinvested in new Notes. As represented by 
Bennett, interest paid on each Note was deposited in a so-called 
``Insured Prime Conversion Account'' (IPCA) until the maturity date, at 
which time the interest was added to the principal amount of the Note 
and reinvested in a new Note.
    3. In February, 1996, Bennett announced that it was deferring 
interest payments then coming due on the Notes, which was in fact an 
act of default on the Notes. On April 2, 1996, Bennett filed a petition 
in the United States Bankruptcy Court for the Northern District of New 
York (Cases Nos. 96-61376 et seq), seeking reorganization under Chapter 
11 of the Federal Bankruptcy Code.<SUP>5 Richard M. Breeden, formerly 
Chairman of the Securities and Exchange Commission (S.E.C.), was 
appointed as bankruptcy trustee. Contemporaneously, the S.E.C. filed a 
suit against Bennett in the United States District Court for the 
Southern District of New York, charging numerous acts of fraud and 
violations of the Securities Act of 1933 and the Securities and 
Exchange Act of 1934.
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    \5\ The Department expresses no opinion herein as to whether the 
acquisition and holding of the Notes by the Plan violated any of the 
provisions of Part 4 of Title I in the Act.
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    It appears, among other things, that Bennett had begun, at one 
point, to ``secure'' the Notes with bogus leases of non-existent 
equipment on a wholesale basis. In other cases, Bennett pledged actual 
equipment as security for loans from institutional lenders and 
thereafter pledged the same equipment lease as further security both to 
the lenders and to public purchasers of the Notes. The money being 
raised with the newly issued Bennett Notes was apparently being used to 
pay off the interest due on older Bennett Notes, or being siphoned off 
into unrelated business ventures owned by members of the Bennett 
management. In addition, it was revealed that the Notes were not in any 
manner insured and that the IPCA

[[Page 17214]]

appears to have been a commingled account whose assets were used by 
Bennett in an, as yet, unascertained fashion.
    The result of these alleged fraudulent activities, finally, was a 
build-up of cash obligations which Bennett could no longer pay through 
the sale of new Notes. Bennett's liabilities exceed a billion dollars, 
and amounts due to unsecured creditors, among which Note holders are 
currently included, exceed $800 million. The Employer has filed claims 
with the insurers whose certificates of insurance were issued to 
investors in the Notes. However, these insurers have taken the position 
that such certificates were bogus and that no insurance existed. The 
bankruptcy trustee has sued the insurers, alleging, among other things, 
complicity in Bennett's fraudulent scheme.
    4. Whatever amount, if any, that the Plan is able to recover with 
respect to the Notes in litigation or otherwise, it is likely to suffer 
enormous losses. The Employer proposes, therefore, to make the Plan 
whole with a Restoration Payment covering the face amount of the Notes 
and accrued interest as of February 29, 1996, the end of the last month 
for which interest was credited in respect of the Notes ($771,715), 
plus an amount for lost opportunity costs attributable to the Notes 
(approximately $21,473, as of September 30, 1996) for the period from 
February 29, 1996 to the date immediately prior to the date that the 
Restoration Payment is deposited in the Plan.<SUP>6 The Plan will 
refund the Restoration Payment to the Employer only to the extent of 
any amount that the Plan is able to recover from Bennett. The Employer 
is bearing all expenses of prosecuting the Plan's claims in respect of 
the Notes, including those relating to Bennett's bankruptcy 
proceedings, as well as the costs of this exemption application.
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    \6\ The Department notes the applicant's representation that the 
Plan's lost opportunity costs with respect to the $771,715 will be 
calculated based upon an assumed rate of return equal to the 
interest rate paid on the Plan's money market investments for the 
period from February 29, 1996 to December 31, 1996, and thereafter, 
the interest rate paid on money market funds offered by the Plan to 
participants. (Effective as of January 1, 1997, the Plan permitted 
participants to direct the investment of their respective individual 
accounts).
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    Effective as of January 1, 1997, the Plan was converted to a self-
directed, individual account plan, administered by The Chase Manhattan 
Bank. Therefore, the Restoration Payment will be allocated to each 
participant account in proportion to its allocated share of the net 
asset value of the entire Plan portfolio. The Employer has requested a 
ruling from the Internal Revenue Service that the Restoration Payment 
does not constitute a ``contribution'' or other payment that will 
disqualify the Plan.
    5. 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 Restoration Payment will enable the Plan to immediately 
recover the face amount of the Notes and accrued interest as of the 
date of default, plus lost opportunity costs attributable to the Notes 
since that date; (2) any Recapture Payments will be restricted solely 
to the amounts, if any, recovered by the Plan with respect to the Notes 
in litigation or otherwise; and (3) the Employer must receive a 
favorable ruling from the Internal Revenue Service that the Restoration 
Payment does not constitute a ``contribution'' or other payment that 
will disqualify the Plan.

Notice to Interested Persons

    Notice of the proposed exemption shall be given to all interested 
persons by personal delivery or by first-class mail within 15 days of 
the date of publication of this notice of pendency in the Federal 
Register. Such notice shall include a copy of this notice of pendency 
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 45 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.)

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 3rd day of April, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 97-8973 Filed 4-8-97; 8:45 am]
BILLING CODE 4510-29-P