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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Lehman Brothers, Inc. [Notices] [06/19/1998]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Lehman Brothers, Inc. [06/19/1998]

[PDF Version]

Volume 63, Number 118, Page 33716-33727

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10327, et al.]

 
Proposed Exemptions; Lehman Brothers, Inc.

AGENCY: Pension and Welfare Benefits Administration, Labor.


ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).
    Written comments and hearing requests: All interested persons are 
invited to submit written comments or request for a hearing on the 
pending exemptions, unless otherwise stated in the Notice of Proposed 
Exemption, within 45 days from the date of publication of this Federal 
Register Notice. Comments and requests for a hearing should state: (1) 
the name, address, and telephone 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.

ADDRESS: 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 33717]]

Lehman Brothers Inc. (Lehman) and Lehman Brothers Trust Company and 
Affiliates (LBTC) Located in New York, New York

[Application No. D-10327]

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 lending of securities to Lehman or to 
any other U.S. registered broker-dealer who is an affiliate of Lehman 
(collectively, Lehman Broker-Dealers) by employee benefit plans, 
including commingled investment funds holding plan assets (the Client 
Plans), with respect to which the Lehman Broker-Dealer is a party in 
interest, or for which LBTC or any other affiliate of Lehman, acts as 
directed trustee or custodian and/or securities lending agent (or sub-
agent) for such Client Plan; and (2) the receipt of compensation by 
LBTC in connection with these transactions, provided that the following 
conditions are met:
    1. Neither the Lehman Broker-Dealers nor LBTC has or exercises 
discretionary authority or control with respect to the investment of 
the assets of Client Plans involved in the transaction (other than with 
respect to the investment of cash collateral after the securities have 
been loaned and collateral received), or renders investment advise 
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those 
assets, including decisions concerning a Client Plan's acquisition or 
disposition of securities available for loan;
    2. Before a Client Plan participates in a securities lending 
program and before any loan of securities to the Lehman Broker-Dealers 
is affected, a Client Plan fiduciary who is independent of LBTC and the 
Lehman Broker-Dealers must have:
    (a) Authorized and approved a securities lending authorization 
agreement with LBTC (the Agency Agreement), where LBTC is acting as the 
direct securities lending agent;
    (b) Authorized and approved the primary securities lending 
authorization agreement (the Primary Lending Agreement) with the 
primary lending agent, where LBTC is lending securities under a sub-
agency arrangement with the primary lending agent;<SUP>1</SUP>
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    \1\ When LBTC acts as sub-agent, rather than the primary lending 
agent, the primary lending agent is receiving no section 406(b) of 
the Act relief herein. In such situations, the primary lending agent 
may be provided relief by Prohibited Transaction Class Exemption 
(PTE) 81-6 and PTE 82-63. PTE 81-6 was published at 46 FR 7527, 
January 23, 1981, as amended at 52 FR 18754, May 19, 1987, and PTE 
82-63 was published at 47 FR 14804, April 6, 1982.
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    (c) Approved the general terms of the securities loan agreement 
(the Basic Loan Agreement) between such Client Plan and the borrower, 
the Lehman Broker-Dealers, the specific terms of which are negotiated 
and entered into by LBTC;
    3. A Client Plan may terminate the securities lending agency 
agreement at any time without penalty on five (5) business days notice, 
whereupon the Lehman Broker-Dealers shall deliver securities identical 
to the borrowed securities (or the equivalent in the event of 
reorganization, recapitalization or merger of the issuer of the 
borrowed securities) to the plan within (a) the customary delivery 
period for such securities, (b) five (5) business days, or (c) the time 
negotiated for such delivery by the Client Plan and the Lehman Broker-
Dealers, whichever is less;
    4. LBTC (or another custodian on behalf of the Client Plan) will 
receive from the Lehman Broker-Dealers either by physical delivery, 
book entry in a securities depository, wire transfer or similar means 
collateral consisting of U.S. dollars, securities issued or guaranteed 
by the U.S. Government or its agencies or irrevocable U.S. bank letters 
of credit (issued by an entity other than the Lehman Broker-Dealers) or 
other collateral permitted under Prohibited Transaction Exemption (PTE) 
81-6 (as amended from time to time or, alternatively, any additional or 
superceding class exemption that may be issued to cover securities 
lending by employee benefit plans) <SUP>2</SUP> by the close of 
business on or before the day the loaned securities are delivered to 
the Lehman Broker-Dealers;
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    \2\ The Department notes that this proposed exemption would 
provide relief from the restrictions of section 406(a) as well as 
section 406(b)(1) and (b)(2) of the Act, whereas PTE 81-6 provides 
relief only for securities lending transactions which would violate 
section 406(a) of the Act. Thus, any amendments that may be made by 
the Department to PTE 81-6 which would permit different types of 
assets to be used as collateral for a securities loan would not 
allow the use of such assets as collateral under this proposed 
exemption to the extent that the transactions covered by this 
exemption (if granted) would require relief from section 406(b) of 
the Act.
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    5. The market value of the collateral will initially equal at least 
102 percent of the market value of the loaned securities. If the market 
value of the collateral on the close of trading on a business day falls 
below 100 percent of the market value of the borrowed securities at the 
close of business on that day, the Lehman Broker-Dealers will deliver 
additional collateral on the following day such that the market value 
of the collateral will again equal 102 percent. The Basic Loan 
Agreement will give the Client Plans a continuing security interest in, 
and a lien on, the collateral. LBTC will monitor the level of the 
collateral daily;
    6. All the procedures regarding the securities lending activities 
will at a minimum conform to the applicable provisions of PTE 81-6 and 
PTE 82-63;
    7. In the event the Lehman Broker-Dealer fails to return securities 
within a designated time, the Client Plan will have the right under the 
Basic Loan Agreement to purchase securities identical to the borrowed 
securities and apply the collateral to payment of the purchase price. 
If the collateral is insufficient to satisfy the Lehman Broker-Dealer's 
obligation to return the Client Plan's securities, the Lehman Broker-
Dealer will indemnify the Client Plan with respect to the difference 
between the replacement cost of securities and the market value of the 
collateral on the date the loan is declared in default, together with 
expenses incurred by the Client Plan plus applicable interest at a 
reasonable rate, including any attorneys fees incurred by the Client 
Plan for legal action arising out of default on the loans, or failure 
by the Lehman Broker-Dealer to properly indemnify the Client Plan;
    8. The Client Plan will receive the equivalent of all distributions 
made to the holders of the borrowed securities during the term of the 
loan, including, but not limited to, cash dividends, interest payments, 
shares of stock as a result of stock splits and rights to purchase 
additional securities, or other distributions;
    9. Only Client Plans with total assets having an aggregate market 
value of at least $50 million are permitted to lend securities to the 
Lehman Broker-Dealers; provided, however, that--
    (a) In the case of two or more Client Plans which are maintained by 
the same employer, controlled group of corporations or employee 
organization (the Related Client Plans), whose assets are commingled 
for investment purposes in a single master trust or any other entity 
the assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the 
Plan Asset Regulation), which entity is engaged in securities lending 
arrangements with the Lehman Broker-Dealers, the foregoing $50 million

[[Page 33718]]

requirement shall be deemed satisfied if such trust or other entity has 
aggregate assets which are in excess of $50 million; provided that if 
the fiduciary responsible for making the investment decision on behalf 
of such master trust or other entity is not the employer or an 
affiliate of the employer, such fiduciary has total assets under its 
management and control, exclusive of the $50 million threshold amount 
attributable to plan investment in the commingled entity, which are in 
excess of $100 million.
    (b) In the case of two or more Client Plans which are not 
maintained by the same employer, controlled group of corporations or 
employee organization (the Unrelated Client Plans), whose assets are 
commingled for investment purposes in a group trust or any other form 
of entity the assets of which are ``plan assets'' under the Plan Asset 
Regulation, which entity is engaged in securities lending arrangements 
with the Lehman Broker-Dealers, the foregoing $50 million requirement 
is satisfied if such trust or other entity has aggregate assets which 
are in excess of $50 million (excluding the assets of any Plan with 
respect to which the fiduciary responsible for making the investment 
decision on behalf of such group trust or other entity or any member of 
the controlled group of corporations including such fiduciary is the 
employer maintaining such Plan or an employee organization whose 
members are covered by such Plan). However, the fiduciary responsible 
for making the investment decision on behalf of such group trust or 
other entity--
    (i) Has full investment responsibility with respect to plan assets 
invested therein; and
    (ii) Has total assets under its management and control, exclusive 
of the $50 million threshold amount attributable to plan investment in 
the commingled entity, which are in excess of $100 million.

(In addition, none of the entities described above are formed for the 
sole purpose of making loans of securities.)
    10. With respect to any calendar quarter, at least 50 percent or 
more of the outstanding dollar value of securities loans negotiated on 
behalf of Client Plans will be to unrelated borrowers.
    11. The terms of each loan of securities by the Client Plans to the 
Lehman Broker-Dealer will be at least as favorable to such plans as 
those terms which would exist in a comparable arm's-length transaction 
between unrelated parties;
    12. Each Client Plan will receive monthly reports on the 
transactions, so that an independent fiduciary of such plan may monitor 
the securities lending transactions with the Lehman Broker-Dealer;
    13. Before entering into the Basic Loan Agreement and before a 
Client Plan lends any securities to the Lehman Broker-Dealer, an 
independent fiduciary of such Client Plan will receive sufficient 
information, concerning the financial condition of the Lehman Broker-
Dealer, including the audited and unaudited financial statements of the 
Lehman Broker-Dealer;
    14. The Lehman Broker-Dealer will provide to a Client Plan prompt 
notice at the time of each loan by such plan of any material adverse 
changes in the Lehman Broker-Dealer's financial condition, since the 
date of the most recently furnished financial statements;
    15. With regard to the ``exclusive borrowing'' agreement (as 
described below), the Lehman Broker-Dealer will directly negotiate the 
agreement with a Client Plan fiduciary who is independent of the Lehman 
Broker-Dealers and LBTC, and such agreement may be terminated by either 
party to the agreement at any time; <SUP>3</SUP>
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    \3\ The termination will be without penalty to the Client Plan, 
except for the return to the Lehman Broker-Dealers of a part of any 
flat fee paid by the Lehman Broker-Dealers to the Client Plan, if 
the Client Plan has terminated its exclusive borrowing agreement 
with the Lehman Broker-Dealers.
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    16. The Client Plan: (a) receives a reasonable fee that is related 
to the value of the borrowed securities and the duration of the loan, 
or (b) has the opportunity to derive compensation through the 
investment of cash collateral. In the case of cash collateral, the 
Client Plan may pay a loan rebate or similar fee to the Lehman Broker-
Dealer, if such fee is not greater than the fee the Client Plan would 
pay an unrelated party in an arm's length transaction;
    17. In the event that a Lehman Broker-Dealer is also the securities 
lending agent for a Client Plan, LBTC shall act as securities lending 
sub-agent in connection with any loan of securities to the Lehman 
Broker-Dealer;
    18. Prior to the Client Plan's approval of the lending of its 
securities to the Lehman Broker-Dealers, a copy of the exemption, if 
granted, (and this notice of pendency) will be provided to the Client 
Plan; and
    19. Lehman maintains or causes to be maintained within the United 
States for a period of six years from the date of such transaction such 
records as are necessary to enable the persons described in paragraph 
(20) below to determine whether the conditions of this exemption have 
been met; except that a party in interest with respect to an employee 
benefit plan, other than Lehman or the Lehman Broker-Dealers, shall not 
be subject to a civil penalty under section 502(i) of the Act or the 
taxes imposed by section 4975 (a) or (b) of the Code, if such records 
are not maintained, or are not available for examination as required by 
this section, and a prohibited transaction will not be deemed to have 
occurred if, due to circumstances beyond the control of Lehman or the 
Lehman Broker-Dealers, such records are lost or destroyed prior to the 
end of such six year period;
    20. (i) Except as provided in subparagraph (ii) of this paragraph 
(20) and notwithstanding any provisions of subsections (a)(2) and (b) 
of section 504 of the Act, the records referred to in paragraph (19) 
are unconditionally available at their customary location for 
examination during normal business hours by--
    (a) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the Securities and 
Exchange Commission,
    (b) Any fiduciary of a Client Plan or any duly authorized 
representative of such fiduciary,
    (c) Any contributing employer to any Client Plan, or any duly 
authorized employee or representative of such employer, and
    (d) Any participant or beneficiary of any Client Plan, or any duly 
authorized representative of such participant or beneficiary.
    (ii) None of the persons described in subparagraphs (b)-(d) of this 
paragraph (20) shall be authorized to examine trade secrets of Lehman 
or the Lehman Broker-Dealers, or commercial or financial information 
which is privileged or confidential.

Summary of Facts and Representations

    1. Lehman, a Delaware corporation, is the principal operating 
subsidiary of Lehman Brothers Holdings Inc. (LB Holdings), also a 
Delaware corporation. Lehman is one of the largest full-line investment 
service firms in the United States, and is registered with and 
regulated by the Securities and Exchange Commission (SEC). Lehman is a 
member of the New York Stock Exchange and other principal securities 
exchanges in the United States, and is also a member of the National 
Association of Securities Dealers, Inc. As of November 30, 1995, Lehman 
had $82.6 billion in assets.
    2. Lehman and the Lehman Broker-Dealers acting as principals, 
borrow securities from institutions and either utilize such securities 
to satisfy their own needs, or re-lend these securities to borrowing 
brokerage firms and other

[[Page 33719]]

entities which need a particular security for certain periods of time. 
Borrowers often need securities to satisfy deliveries in cases of short 
sales, or where a broker fails to receive securities it is required to 
deliver. Lehman Broker-Dealers borrow and lend approximately $50 
billion of securities on an average daily basis, and are among the 
largest institutional securities borrowers and lenders in the United 
States. In making such loans, the Lehman Broker-Dealers carefully 
review the credit-worthiness of its counterparties.
    3. LBTC is an affiliate of Lehman, and is a wholly owned 
subsidiary, organized and chartered by LB Holdings as a limited purpose 
trust company under the laws of the State of New York. LBTC has its 
principal executive offices in New York, New York. LBTC provides a 
variety of services to its clients, including custodial services and 
securities lending services as a direct securities lending agent. LBTC 
may also be retained from time to time by primary securities lending 
agents to provide securities lending services in a sub-agent capacity 
with respect to portfolio securities of clients of such primary 
securities lending agents. As a securities lending sub-agent, LBTC's 
role (i.e., negotiating the terms of the loans with borrowers pursuant 
to a client-approved form of a loan agreement, and monitoring receipt 
of, and marking-to-market, the required collateral) parallels those 
under the lending transactions for which LBTC acts as a primary lending 
agent on behalf of its clients.
    4. An institutional investor, such as a pension fund, lends 
securities in its portfolio to a broker-dealer or a bank to earn a fee 
in addition to any interest, dividends, or other distributions paid on 
the loaned securities. The lender generally requires that the security 
loans be fully collateralized, and the collateral usually is cash or 
high quality liquid securities issued by the U.S. Government, or 
Federal Agency obligations or certain bank letters of credit. When the 
collateral is cash, the lender generally invests the cash and rebates a 
portion of the earnings on such collateral to the borrower. The fee 
received by the lender is the difference between the earnings on the 
collateral and the amount of the rebate that is paid to the borrower. 
When a securities loan is collateralized with U.S. Government or 
Federal Agency securities or with letters of credit issued by a bank, 
the fee is paid directly by the borrower to the lender.
    Institutional investors often utilize the services of an agent in 
performing securities lending transactions. The lending agent is paid a 
fee for its services which may be a percentage of the income earned by 
the investor from lending its securities. The applicants represent that 
the essential functions which define a securities lending agent are 
identifying appropriate borrowers of securities and negotiating loan 
terms to the borrowers. Certain services which are ancillary to 
securities lending include monitoring the level of collateral, the 
value of loaned securities, and in some instances, investing the 
collateral.
    5. LBTC and Lehman request an exemption for the lending of 
securities owned by the Client Plans, with respect to which the Lehman 
Broker-Dealer is a party in interest, or for which LBTC will serve as 
directed trustee or custodian and/or securities lending agent (or sub-
agent),<SUP>4</SUP> following disclosure to the Client Plans of LBTC's 
affiliation with the Lehman Broker-Dealer, under either of the two 
arrangements described as Plan A and Plan B, and for receipt of 
compensation by LBTC in connection with such transactions. Neither LBTC 
nor the Lehman Broker-Dealers will have discretionary authority or 
control over the Client Plans' decisions concerning the acquisition or 
disposition of securities available for lending. However, because LBTC 
under the Plan A arrangement and the Lehman Broker-Dealers under the 
Plan B arrangement (as discussed further below), will have discretion 
with respect to whether there is a loan of the Client Plan securities 
to the Lehman Broker-Dealers, the lending of securities to the Lehman 
Broker-Dealers under such arrangements may be outside the scope of 
relief provided by PTE 81-6 and PTE 82-63.<SUP>5</SUP>
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    \4\ Future references to LBTC's performance of services as 
securities lending agent should be deemed to include its parallel 
performance as a securities lending sub-agent, and references to the 
Client Plans should be deemed to include those plans for which LBTC 
is acting as a sub-agent with respect to securities lending 
activities, unless otherwise specifically indicated or by the 
context of reference.
    \5\ PTE 81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR 
18754, May 19, 1987) provides an exemption under certain conditions 
from section 406(a)(1)(A) through (D) of the Act and the 
corresponding provisions of section 4975(c) of the Code for the 
lending of securities that are assets of an employee benefit plan to 
certain broker-dealers or banks which are parties in interest. 
However, condition 1 of PTE 81-6 requires, in part, that neither the 
borrower nor an affiliate of the borrower has discretionary 
authority or control with respect to the investment of the plan 
assets involved in the transaction.
    PTE 82-63 (47 FR 14804, April 6, 1982) provides an exemption 
under specified conditions from section 406(b)(1) of the Act and 
section 4975(c)(1)(E) of the Code for the payment of compensation to 
a plan fiduciary for services rendered in connection with loans of 
plan assets that are securities. PTE 82-63 permits the payment of 
compensation to a plan fiduciary for the provision of securities 
lending services only if the loan of securities itself is not 
prohibited under section 406(a) of the Act.
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    6. When a loan of securities by a Client Plan is collateralized 
with cash, LBTC, at the Client Plan's direction, will either transfer 
such cash collateral to the Client Plan or its designated agent for 
investment. Alternatively, LBTC may invest the cash in short-term 
securities or interest-bearing accounts. In either case, LBTC will 
rebate a portion of the earnings on the cash collateral to the Lehman 
Broker-Dealers on behalf of the Client Plan. The Lehman Broker-Dealers 
will pay a fee to the Client Plan based on the value of the loaned 
securities where the collateral consists of obligations other than 
cash. Under the Plan A arrangement and, in some instances, under the 
Plan B arrangement (see paragraph 24 for the types of lending services 
which may be provided to the Client Plans by LBTC under Plan B 
arrangement), the Client Plan will pay a fee to LBTC for providing 
lending services to the Client Plan, which will reduce the income 
earned by the Client Plan from lending its securities to the Lehman 
Broker-Dealers. The Client Plan and LBTC will agree in advance to this 
fee, which will represent a percentage of the income the Client Plan 
earns from its lending activities.
    Several safeguards, described more fully below, are incorporated 
into the application to ensure the protection of the Client Plans' 
assets involved in these securities lending transactions. In addition, 
the applicants represent that both the Plan A and Plan B arrangements 
described herein incorporate the relevant conditions contained in PTE 
81-6 and PTE 82-63.
    7. Plan A. Where LBTC is the direct securities lending agent, a 
fiduciary of a Client Plan who is independent of LBTC and the Lehman 
Broker-Dealers will sign a securities lending agency agreement (the 
Agency Agreement) with LBTC before the Client Plan participates in the 
LBTC securities lending program. The Agency Agreement will, among other 
things, describe the operation of the lending program, prescribe the 
form of the securities loan agreement to be entered into on behalf of 
the Client Plan with the borrowers, identify the securities which are 
available to be lent, required collateral and daily marking-to-market, 
and provide the list of permissible borrowers, including the Lehman 
Broker-Dealers. The Agency Agreement will also set forth the basis and 
rate for LBTC's compensation from the Client Plan for the performance 
of securities lending services. The Client

[[Page 33720]]

Plan may terminate the Agency Agreement at any time, without penalty, 
on no more than five business days' notice.
    8. The Agency Agreement will contain provisions regarding 
designation by the Client Plan of the Lehman Broker-Dealer as an 
approved borrower. Specifically, the Client Plan will acknowledge that 
the Lehman Broker-Dealer is an affiliate of LBTC. Pursuant to the 
Agency Agreement, LBTC will represent to the Client Plan that each loan 
made to the Lehman Broker-Dealer on behalf of the Client Plan will be 
at market rates, and in no event less favorable to the Client Plan than 
a loan of such securities, made at the same time and under the same 
circumstances, to an unaffiliated borrower.
    9. When LBTC is lending securities under a sub-agency arrangement, 
the primary lending agent will enter into a securities lending agency 
agreement (the Primary Lending Agreement) with a fiduciary of the 
Client Plan, who is independent of such primary lending agent, LBTC and 
the Lehman Broker-Dealers, before the Client Plan participates in the 
securities lending program. Except as set forth in paragraph 10 below, 
the primary lending agent will be unaffiliated with LBTC and the Lehman 
Broker-Dealers. The Primary Lending Agreement will contain substantive 
provisions akin to those in the Agency Agreement described above, 
relating to the description of the operation of the lending program, 
use of an approved form of securities loan agreement, identification of 
securities which are available to be lent, required collateral and 
daily marking-to-market, and provision of a list of approved borrowers 
(which will include the Lehman Broker-Dealers). The Primary Lending 
Agreement will specifically authorize the primary lending agent to 
appoint sub-agents, including LBTC, to facilitate its performance of 
securities lending agency functions. Where LBTC is to act as a sub-
agent, the Primary Lending Agreement will expressly disclose that LBTC 
is to so act. The Primary Lending Agreement will also set forth the 
basis and rate for the primary lending agent's compensation from the 
Client Plan for the performance of securities lending services, and 
will authorize the primary lending agent to pay a portion of its fee, 
as the primary lending agent determines in its sole discretion, to any 
sub-agent(s) it retains pursuant to the authority granted under such 
agreement. The Client Plan may terminate the Primary Lending Agreement 
at any time, without penalty, on no more than five business days' 
notice.
    Pursuant to its authority to appoint sub-agents, the primary 
lending agent will enter into a securities lending sub-agency agreement 
(the Sub-Agency Agreement) with LBTC under which the primary lending 
agent will retain and authorize LBTC, as sub-agent, to lend securities 
of the primary lending agent's clients, subject to the same terms and 
conditions as are specified in the Primary Lending Agreement. Thus, for 
example, the form of basic loan agreement (described in paragraph 12 
below) will be the same as that approved by the Client Plan fiduciary 
in the Primary Lending Agreement, and the list of permissible borrowers 
under the Sub-Agency Agreement (which will include the Lehman Broker-
Dealers) will be limited to those approved borrowers listed as such 
under the Primary Lending Agreement.
    The Sub-Agency Agreement will contain provisions which are in 
substance comparable to those described in paragraphs 7 and 8 above, 
which would appear in the Agency Agreement in situations where LBTC is 
the primary lending agent. In this regard, LBTC will make the same 
representation in the Sub-Agency Agreement as described in paragraph 8 
above with respect to arm's-length dealings with the Lehman Broker-
Dealers. The Sub-Agency Agreement will also set forth the basis and 
rate for LBTC's compensation to be paid by the primary lending agent.
    10. Lehman has been informed that some Client Plans will not be 
able to hire LBTC as direct securities lending agent, because under the 
provisions of that Plan any such agent for such Client Plans is 
required to be registered as a broker-dealer with the Securities and 
Exchange Commission (SEC). In these cases, the applicants propose that 
a Lehman Broker-Dealer, which is registered as a broker-dealer with the 
SEC, will act as a primary lending agent and LBTC will act as sub-
agent. In other respects the sub-agency relationship will operate as 
set forth in paragraph (9) above.
    11. In all cases, LBTC will maintain transactional and market 
records sufficient to assure compliance with its representation that 
all loans to the Lehman Broker-Dealers are effectively at arms-length 
terms. Such records will be provided to the Client Plan fiduciary, who 
is independent of LBTC and the Lehman Broker-Dealers, in the manner and 
format agreed to by the Client Plan fiduciary and LBTC, without charge 
to the Client Plan.
    12. LBTC, under the Agency Agreement, as securities lending agent 
for the Client Plans, will negotiate a master securities borrowing 
agreement with a schedule of modifications attached thereto (the Basic 
Loan Agreement) with the Lehman Broker-Dealers on behalf of the Client 
Plans. An independent fiduciary of the Client Plan will approve the 
form of the Basic Loan Agreement before such fiduciary executes the 
Agency Agreement. The Basic Loan Agreement will specify, among other 
things, the right of the Client Plan to terminate a loan at any time 
and the Client Plan's rights in the event of any default by the Lehman 
Broker-Dealers. The Basic Loan Agreement will set forth the basis for 
compensation to the Client Plan for lending securities to the Lehman 
Broker-Dealers under each category of collateral. The Basic Loan 
Agreement will also contain a requirement that the Lehman Broker-
Dealers must pay all transfer fees and transfer taxes related to the 
security loans.
    13. Prior to making any loans under the Basic Loan Agreement, the 
Lehman Broker-Dealers will furnish its most recent available audited 
and unaudited financial statements to LBTC (assuming LBTC does not 
already possess such statements), which, in turn, will provide such 
statements to the Client Plan before the independent fiduciary of the 
Client Plan is asked to approve the terms of the Basic Loan Agreement. 
The terms of the Basic Loan Agreement will contain a requirement that 
the Lehman Broker-Dealer must give prompt notice at the time of the 
loan of any material adverse changes in its financial condition since 
the date of the most recently furnished financial statements. If any 
such changes have taken place, LBTC will request that the independent 
fiduciary of the Client Plan approve the loan in view of the changed 
financial condition.
    14. As noted above, the agreement by LBTC to provide securities 
lending services, as agent, to a Client Plan will be embodied in the 
Agency Agreement. The Client Plan and LBTC will agree to an arrangement 
under which LBTC will be compensated for its services as the lending 
agent prior to the commencement of any lending activity. Similarly, 
with respect to arrangements under which LBTC is acting as securities 
lending sub-agent, the agreed upon fee arrangement of the primary 
lending agent will be set forth in the Primary Lending Agreement, and 
such agreement will specifically authorize the primary lending agent to 
pay a portion of such fee, as the primary lending agent determines in 
its sole

[[Page 33721]]

discretion, to any sub-agent, including LBTC, which is to provide 
securities lending services to the plan.<SUP>6</SUP>
---------------------------------------------------------------------------

    \6\ The foregoing provisions describe arrangements comparable to 
conditions (c) and (d) of PTE 82-63 which require that the payment 
of compensation to a ``lending fiduciary'' is made under a written 
instrument and is subject to prior written authorization of an 
independent ``authorizing fiduciary.'' In the event that a 
commingled investment fund will participate in the securities 
lending program, the special rule applicable to such funds 
concerning the authorization of the compensation arrangement set 
forth in paragraph (f) of PTE 82-63 will be satisfied.
---------------------------------------------------------------------------

    15. Each time a Client Plan loans securities to the Lehman Broker-
Dealers pursuant to the Basic Loan Agreement, the Lehman Broker-Dealers 
will execute a designation letter specifying the material terms of the 
loan, including the securities to be loaned, the required level of 
collateral, and the fee or rebate payable, and any special delivery 
instructions. The terms of each loan will be at least as favorable to 
the Client Plan as those of a comparable arm's-length transaction 
between unrelated parties.
    16. LBTC will establish each day a written schedule of lending fees 
<SUP>7</SUP> and rebate rates <SUP>8</SUP> to assure uniformity of 
treatment among borrowing brokers and to limit the discretion LBTC 
would have in negotiating securities loans to the Lehman Broker-
Dealers. Loans to the Lehman Broker-Dealers on any day will be made at 
rates on the daily schedule or at rates which may be more advantageous 
to the Client Plans. In no case will the loans be made to the Lehman 
Broker-Dealers at rates or lending fees less advantageous to the Client 
Plan than those on the schedule.
---------------------------------------------------------------------------

    \7\ LBTC will adopt minimum daily lending fees for non-cash 
collateral payable by the Lehman Broker-Dealer to LBTC on behalf of 
the Client Plans. LBTC will submit the method for determining such 
minimum daily lending fees to an independent fiduciary of the Client 
Plan for approval before initially lending any securities to a 
Lehman Broker-Dealer on behalf of a Client Plan.
    \8\ LBTC will adopt maximum daily rebate rates with respect to 
securities loans collateralized with cash collateral. LBTC will 
submit the method for determining such maximum daily rebate rates to 
an independent fiduciary of a Client Plan for approval before 
initially lending any securities to the Lehman Broker-Dealer on 
behalf of such Client Plan.
---------------------------------------------------------------------------

    The rebate rates, which are established for cash collateral loans 
made by the Client Plans, will take into account the potential demand 
for the loaned securities, the applicable benchmark cost of funds 
indices [typically, the U.S. Federal Funds Rate established by the 
Federal Reserve System (Federal Funds), the overnight ``REPO'' 
<SUP>9</SUP> rate, or the like] and the anticipated investment return 
on overnight investments which are permitted by the Client Plan 
Fiduciary. The lending fees, which are established with respect of 
loans made by the Client Plans collateralized by other than cash, will 
be set daily to reflect conditions as influenced by potential market 
demand.
---------------------------------------------------------------------------

    \9\ An overnight ``REPO'' is an overnight repurchase agreement 
which is an arrangement whereby securities dealers and banks finance 
their inventories of Treasury bills, notes, and bonds. The dealer or 
bank sells securities to an investor with a temporary surplus of 
cash, agreeing to buy them back the next day. Such transactions are 
settled in immediately available Federal Funds, usually at a rate 
below the Federal Funds rate (the rate charged by the banks lending 
funds to each other). See Barron's Dictionary of Finance and 
Investment Terms, 2nd Edition (New York, 1987).
---------------------------------------------------------------------------

    LBTC will negotiate rebate rates for cash collateral payable to 
each borrower, including the Lehman Broker-Dealers, on behalf of a 
Client Plan. Where, for example, cash collateral derived from an 
overnight loan is intended to be invested in a generic repurchase 
agreement, any rebate fee determined with respect to an overnight 
repurchase agreement benchmark will be set below the applicable ``ask'' 
quotation therefor. Where cash collateral is derived from a loan with 
an expected maturity date (term loan) and is intended to be invested in 
instruments with similar maturities, the maximum rebate fee will be 
less than the investment return (assuming no investment default). With 
respect to any loan to the Lehman Broker-Dealers, LBTC will not 
knowingly negotiate a rebate rate with respect to such loan which over 
the anticipated term of the loan would produce a zero or negative 
return to the Client Plan (assuming no default on the investments 
related to the cash collateral from such loan where LBTC has investment 
discretion over the cash collateral). LBTC represents that the written 
rebate rate established daily for cash collateral under loans 
negotiated with the Lehman Broker-Dealers will not exceed the rebate 
rate which would be paid to a similarly situated unrelated borrower 
with respect to a comparable securities lending transaction. LBTC will 
disclose the method for determining the maximum daily rebate rate as 
described above to an independent fiduciary of the Client Plan for 
approval before lending any securities to the Lehman Broker-Dealers on 
behalf of the Client Plan.
    17. For collateral other than cash, the applicable lending fee in 
respect of any outstanding loan will be reviewed daily by LBTC for 
competitiveness and adjusted, where necessary, to reflect market terms 
and conditions. With respect to any calendar quarter, at least 50 
percent of the securities loans negotiated on behalf of the Client 
Plans will be to borrowers not affiliated with LBTC, and so the 
competitiveness of the loan fee will be tested in the marketplace. 
Accordingly, the applicants state that loans to the Lehman Broker-
Dealers should result in a competitive rate of income to the lending 
Client Plan. At all times, LBTC will effect loans in a prudent and 
diversified manner.
    The method of determining the actual daily securities lending rates 
(fees and rebates), the minimum lending fees payable by the Lehman 
Broker-Dealers and the maximum rebate payable to the Lehman Broker-
Dealers, will be specified in an exhibit attached to the Agency 
Agreement to be executed between the independent fiduciary of the 
Client Plan and LBTC in cases where LBTC is the direct securities 
lending agent. These methods of determination need not be formulative, 
but may consist of a description of the process involved in determining 
rebate rates and lending fees.
    18. If LBTC reduces the lending fee or increases the rebate rate on 
any outstanding loan to an affiliated borrower (except for any change 
resulting from a change in the value of any index with respect to which 
the fee or rebate is calculated), LBTC, by the close of business on the 
date of such adjustment, shall provide the independent fiduciary of the 
Client Plan with notice that it has adjusted such fee or rebate to such 
affiliated borrower, and that the Client Plan may terminate such loan 
at any time. LBTC shall provide the independent fiduciary with such 
information as the independent fiduciary may reasonably request 
regarding such adjustment.
    19. While LBTC will normally lend securities to requesting 
borrowers on a first come, first served basis, as a means of assuring 
uniformity of treatment among borrowing brokers, in some cases it may 
not be possible to adhere to first come, first served allocation. This 
can occur in instances where (a) the credit limit established for such 
``first in line'' borrower by LBTC and/or the Plan has already been 
satisfied; (b) the ``first in line'' borrower is not approved as a 
borrower by a particular Client Plan whose securities are sought to be 
borrowed; or (c) the ``first in line'' borrower cannot be ascertained, 
as an operational matter, because several borrowers spoke to different 
representatives of LBTC at or about the same time with respect to the 
same security. In situations (a) and (b), loans would normally be 
effected with the ``second in line'' borrower. In situation (c), 
securities would be allocated as equitably as practicable among all 
eligible requesting borrowers.

[[Page 33722]]

    20. LBTC on behalf of the Client Plan will receive collateral from 
Lehman Broker-Dealers by physical delivery, book entry in a securities 
depository, wire transfer or similar means by the close of business on 
or before the day the loaned securities are delivered to the Lehman 
Broker-Dealers. The collateral will consist of U.S. dollars, securities 
issued or guaranteed by the U.S. Government or its agencies or 
irrevocable U.S. bank letters of credit (issued by a person other than 
the Lehman Broker-Dealers or any affiliates thereof) or such other 
types of collateral which might be permitted by the Department under 
PTE 81-6 or any successor.<SUP>10</SUP> The market value of the 
collateral on the close of business on the business day preceding the 
day the loaned securities are delivered to the Lehman Broker-Dealers 
will be at least 102 percent of the then market value of the loaned 
securities. The Basic Loan Agreement will give the Client Plan a 
continuing security interest in and a lien on the collateral. LBTC will 
monitor the level of the collateral daily. If the market value of the 
collateral falls below 100 percent, LBTC will require the Lehman 
Broker-Dealers to deliver by the close of business the next day 
sufficient additional collateral to bring the level back to at least 
102 percent.
---------------------------------------------------------------------------

    \10\ See Footnote 2 above regarding the scope of relief that may 
be provided by the Department in any successor class exemption and 
the type of assets that may be used as collateral for a securities 
loan.
---------------------------------------------------------------------------

    21. Subject to the terms and conditions of the Agency Agreement (or 
the Primary Lending Agreement), LBTC will invest and reinvest all or 
substantially all cash collateral in approved investments designated by 
the applicable Client Plan and identified on a schedule attached to the 
relevant agreement. All approved investments made by LBTC will be for 
the sole account and risk of the applicable Client Plan. These approved 
investments shall not include securities, instruments, transactions and 
investments issued by LBTC or any of its affiliates. From time to time, 
the Client Plan may instruct LBTC in writing not to make any approved 
investment with a certain counterparty, or through a particular 
financial institution or intermediary. Alternatively, the Client Plan 
may also retain the right to directly control the reinvestment of the 
cash collateral.
    22. Each Client Plan participating in the lending program will be 
sent a monthly transaction report. The monthly report will provide a 
list of all security loans outstanding and closed for a specified 
period. The report will identify for each open loan position, the 
securities involved, the value of the security for collateralization 
purposes, the current value of the collateral, the rebate or loan 
premium (as the case may be) at which the security is loaned, and the 
number of days the security has been on loan. At the request of the 
Client Plan, such a report will be provided on a weekly or daily basis, 
rather than a monthly basis. Also, upon request of the Client Plan, 
LBTC will also provide the Client Plan with daily confirmations of 
securities lending transactions.
    In order to provide the means for monitoring lending activity, 
rates on loans to the Lehman Broker-Dealers compared with loans to 
other brokers, and the level of collateral on the loans, it is 
represented that the monthly report will show, on a daily basis, the 
market value of all outstanding security loans to the Lehman Broker-
Dealers and to other borrowers. Further, the monthly report will state 
the daily fees where collateral other than cash is utilized and will 
specify the details used to establish the daily rebate payable to all 
brokers where cash is used as collateral. The monthly report also will 
state, on a daily basis, the rates at which securities are loaned to 
the Lehman Broker-Dealers compared with those at which securities are 
loaned to other brokers. This statement will give an independent Client 
Plan fiduciary information which can be compared to that contained in 
the daily rate schedule.
    23. Only Client Plans with total assets having an aggregate market 
value of at least $50 million are permitted to lend securities to the 
Lehman Broker-Dealers; provided, however, that--
    (a) In the case of two or more Client Plans which are maintained by 
the same employer, controlled group of corporations or employee 
organization (the Related Client Plans), whose assets are commingled 
for investment purposes in a single master trust or any other entity 
the assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the 
Plan Asset Regulation), which entity is engaged in securities lending 
arrangements with the Lehman Broker-Dealers, the foregoing $50 million 
requirement shall be deemed satisfied if such trust or other entity has 
aggregate assets which are in excess of $50 million; provided that if 
the fiduciary responsible for making the investment decision on behalf 
of such master trust or other entity is not the employer or an 
affiliate of the employer, such fiduciary has total assets under its 
management and control, exclusive of the $50 million threshold amount 
attributable to plan investment in the commingled entity, which are in 
excess of $100 million.
    (b) In the case of two or more Client Plans which are not 
maintained by the same employer, controlled group of corporations or 
employee organization (the Unrelated Client Plans), whose assets are 
commingled for investment purposes in a group trust or any other form 
of entity the assets of which are ``plan assets'' under the Plan Asset 
Regulation, which entity is engaged in securities lending arrangements 
with the Lehman Broker-Dealers, the foregoing $50 million requirement 
is satisfied if such trust or other entity has aggregate assets which 
are in excess of $50 million (excluding the assets of any Plan with 
respect to which the fiduciary responsible for making the investment 
decision on behalf of such group trust or other entity or any member of 
the controlled group of corporations including such fiduciary is the 
employer maintaining such Plan or an employee organization whose 
members are covered by such Plan). However, the fiduciary responsible 
for making the investment decision on behalf of such group trust or 
other entity--
    (i) Has full investment responsibility with respect to plan assets 
invested therein; and
    (ii) Has total assets under its management and control, exclusive 
of the $50 million threshold amount attributable to plan investment in 
the commingled entity, which are in excess of $100 million.

(In addition, none of the entities described above are formed for the 
sole purpose of making loans of securities.)

    24. Plan B. The Lehman Broker-Dealers will directly negotiate 
``exclusive borrowing'' agreements with fiduciaries of Client Plans, 
including Client Plans for which LBTC serves as directed trustee or 
custodian, where such fiduciary is independent of the Lehman Broker-
Dealers and LBTC. Under the exclusive borrowing agreement, the Lehman 
Broker-Dealer will have exclusive access for a specified period of time 
to borrow securities of the Client Plan pursuant to certain conditions. 
LBTC will not participate in the negotiation of the exclusive borrowing 
agreement. The involvement of LBTC, if any, will be limited to such 
activities as holding securities available for lending, handling the 
movement of borrowed securities and collateral, and investing or 
depositing any cash collateral and supplying the Client Plans with 
certain reports. The applicants represent that, under the exclusive 
borrowing agreement, neither the Lehman Broker-Dealer nor LBTC will 
perform for the Client Plans the functions which

[[Page 33723]]

constitute the essential functions of a securities lending agent.
    25. Upon delivery of loaned securities to the Lehman Broker-Dealer, 
LBTC, or another custodian on behalf of the Client Plan, will receive 
from the Lehman Broker-Dealer the same day by physical delivery, book 
entry in a securities depository, wire transfer, or similar means 
collateral consisting of U.S. dollars, securities issued or guaranteed 
by the U.S. Government or its agencies or irrevocable U.S. bank letters 
of credit (issued by a person other than a Lehman Broker-Dealer or any 
affiliate thereof) or other non-cash collateral permitted under PTE 81-
6 or any successor. The market value of the collateral at the close of 
business on the business day preceding the day the loaned securities 
are delivered to the Lehman Broker-Dealer will be at least 102 percent 
of the then market value of the loaned securities. LBTC or such other 
custodian, will monitor the level of the collateral daily. If the 
market value of the collateral falls below 100 percent of that of the 
loaned securities, the Lehman Broker-Dealer will deliver sufficient 
additional collateral on the following day such that the market value 
of all collateral will equal at least 102 percent of the market value 
of the loaned securities. The Lehman Broker-Dealer or, in the case of 
some Client-Plans, LBTC, will provide a weekly report to the Client 
Plan showing, on a daily basis, the aggregate market value of all 
outstanding security loans to the Lehman Broker-Dealer, and the 
aggregate market value of the collateral.
    26. Before entering into an exclusive borrowing agreement, the 
Lehman Broker-Dealer will furnish to the Client Plan, if it does not 
already possess such statements, the most recent publicly available 
audited and unaudited statements of its financial condition, as well as 
any other publicly available information which it believes is necessary 
for the Client Plan to determine whether to enter into or renew the 
agreement, and a copy of the final exemption, if granted, together with 
this proposed exemption. The agreement will contain a representation by 
the Lehman Broker-Dealer that, as of each time it borrows securities, 
there has been no material adverse changes in its financial condition. 
All the procedures under the agreement will, at a minimum, conform to 
the applicable provisions of PTE 81-6 and PTE 82-63.
    27. In exchange for the exclusive right to borrow certain 
securities from the Client Plan, the Lehman Broker-Dealer will pay the 
Client Plan either a flat fee, or a minimum flat fee plus a percentage 
(negotiated at the time the exclusive borrowing agreement is entered 
into) of the total balance outstanding of borrowed securities, or a 
percentage of the total balance outstanding without any flat fee. A 
percentage may be established by reference to an objective formula. The 
Lehman Broker-Dealer and the independent fiduciary of the Client Plan 
may agree that different fee arrangements will apply to different 
securities or different groups of securities. Any change in the rate 
paid to the Client Plan will require written consent of the Client Plan 
independent fiduciary. However, such Client Plan's consent will be 
presumed where the rate changes pursuant to an objective formula. In 
such instances, an independent fiduciary of the Client Plan must be 
notified at least 24 hours in advance of the rate change, and the 
independent fiduciary must not object in writing to such change, prior 
to the effective date of the change. Under this fee arrangement, all 
earnings generated by the cash collateral will be returned to the 
Lehman Broker-Dealer. The Client Plan will receive credit for all 
interest, dividends or other distributions on any borrowed securities. 
In addition, under some arrangements, the earnings on the collateral 
due to the Lehman Broker-Dealer, and the dividends, interest, and other 
distributions on the borrowed securities payable to the Client Plan may 
be offset against each other, so that only a net amount will be 
returned to the Lehman Broker-Dealer.
    28. The exclusive borrowing agreement and/or any securities loan 
outstanding may be terminated by either party at any time. Upon 
termination of any securities loan, the Lehman Broker-Dealer will 
deliver any borrowed securities back to the Client Plan within five 
business days of written notice of termination. If the Lehman Broker-
Dealer fails to return the loaned securities or the equivalent thereof, 
the Client Plan will have the right under the agreement to purchase 
securities identical to the borrowed securities and apply the 
collateral to payment of the purchase price and any other expenses of 
the Client Plan associated with the sale and/or purchase. Pursuant to 
the terms of the exclusive borrowing agreement, if the collateral is 
insufficient to satisfy the Lehman Broker-Dealer's obligation to return 
the Client Plan's securities, the Lehman Broker-Dealer will indemnify 
the Client Plan with respect to the difference between the replacement 
cost of the securities and the market value of the collateral on the 
date a loan is declared to be in default together with expenses not 
covered by the collateral, plus applicable interest at a reasonable 
rate.
    29. With regard to those Client Plans for which LBTC provides 
custodial, clearing and/or reporting functions relative to securities 
loans, LBTC and a Client Plan fiduciary independent of LBTC and the 
Lehman Broker-Dealers, will agree in advance and in writing to any fee 
that LBTC is to receive for such services. Such fees, if any, would be 
fixed fees (e.g., LBTC might negotiate to receive a fixed percentage of 
the value of the assets with respect to which it performs these 
services, or to receive a stated dollar amount) and any such fee would 
be in addition to any fee LBTC has negotiated to receive from any such 
Client Plan for standard custodial or other services unrelated to the 
securities lending activity. The arrangement for LBTC to provide such 
functions relative to securities loans to the Lehman Broker-Dealer will 
be terminable by the Client Plan within five business days of receipt 
of written notice without penalty to the Client Plan, except for the 
return to the Lehman Broker-Dealer of a part of any flat fee paid by 
the Lehman Broker-Dealer to the Client Plan, if the Client Plan has 
also terminated its exclusive borrowing agreement with the Lehman 
Broker-Dealer. Before entering into an agreement with the Client Plan 
to provide such functions relative to securities loans to the Lehman 
Broker-Dealer, LBTC will furnish to the Client Plan any publicly 
available information which it believes is necessary for the Client 
Plan to determine whether to enter into or renew the exclusive 
borrowing agreement.
    30. In summary, the applicant represents that the subject 
transactions will satisfy the statutory criteria of section 408(a) of 
the Act and section 4975(c)(2) of the Code because:
    A. Plan A requires approval of the terms of the Basic Loan 
Agreement and the execution of the Agency Agreement (or the Primary 
Lending Agreement) by a Client Plan fiduciary independent of the Lehman 
Broker-Dealers and LBTC before a Client Plan lends any securities to 
the Lehman Broker-Dealers;
    B. Under Plan B, the Lehman Broker-Dealers will directly negotiate 
exclusive borrowing agreement with the Client Plan;
    C. The lending arrangements will permit the Client Plans to lend 
securities to the Lehman Broker-Dealers, which have a substantial 
market position as securities lenders, and will enable the Client Plans 
to earn additional income from the loaned securities while continuing 
to receive any dividends, interest payments and other distributions on 
those securities;

[[Page 33724]]

    D. Neither the Lehman Broker-Dealers nor LBTC has or exercises 
discretionary authority or control with respect to the investment of 
the assets of Client Plans involved in the transaction (other than with 
respect to the investment of cash collateral after the securities have 
been loaned and collateral received, or renders investment advice 
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those 
assets, including decisions concerning a Client Plan's acquisition or 
disposition of securities available for loan;
    E. Before a Client Plan participates in a securities lending 
program and before any loan of securities to the Lehman Broker-Dealers 
is affected, a Client Plan fiduciary who is independent of LBTC and the 
Lehman Broker-Dealers must have:
    (i) Authorized and approved a securities lending authorization 
agreement with LBTC (i.e., the Agency Agreement) with LBTC, where LBTC 
is acting as the direct securities lending agent;
    (ii) Authorized and approved the primary securities lending 
authorization agreement (i.e., the Primary Lending Agreement) with the 
primary lending agent, where LBTC is lending securities under a sub-
agency arrangement with the primary lending agent;
    (iii) Approved the general terms of the securities loan agreement 
(i.e., the Basic Loan Agreement) between such Client Plan and the 
borrower, the Lehman Broker-Dealers, the specific terms of which are 
negotiated and entered into by LBTC;
    F. A Client Plan may terminate any securities lending agency 
agreement at any time without penalty on five (5) business days' 
notice;
    G. LBTC (or another custodian on behalf of the Client Plan) will 
receive from the Lehman Broker-Dealers either by physical delivery, 
book entry in a securities depository, wire transfer or similar means 
collateral consisting of U.S. dollars, securities issued or guaranteed 
by the U.S. Government or its agencies or irrevocable U.S. bank letters 
of credit (issued by an entity other than the Lehman Broker-Dealers) or 
other collateral permitted under PTE 81-6 (as amended from time to time 
or, alternatively, any additional or superceding class exemption that 
may be issued to cover securities lending by employee benefit plans) by 
the close of business on or before the day the loaned securities are 
delivered to the Lehman Broker-Dealers;
    H. The market value of the collateral will initially equal at least 
102 percent of the market value of the loaned securities. If the market 
value of the collateral falls below 100 percent, the Lehman Broker-
Dealers will deliver additional collateral on the following day such 
that the market value of the collateral will again equal 102 percent. 
The Basic Loan Agreement will give the Client Plans a continuing 
security interest in, and a lien, on the collateral. LBTC will monitor 
the level of the collateral daily;
    I. All the procedures regarding the securities lending activities 
will at a minimum conform to the applicable provisions of PTE 81-6 and 
PTE 82-63;
    J. In the event the Lehman Broker-Dealer fails to return securities 
within a designated time, the Client Plan will have the right under the 
Basic Loan Agreement to purchase securities identical to the borrowed 
securities and apply the collateral to payment of the purchase price. 
If the collateral is insufficient to satisfy the Lehman Broker-Dealer's 
obligation to return the Client Plan's securities, the Lehman Broker-
Dealer will indemnify the Client Plan with respect to the difference 
between the replacement cost of securities and the market value of the 
collateral on the date the loan is declared in default, together with 
expenses incurred by the Client Plan plus applicable interest at a 
reasonable rate, including any attorneys fees incurred by the Client 
Plan for legal action arising out of default on the loans, or failure 
by the Lehman Broker-Dealer to properly indemnify the Client Plan;
    K. The Client Plan will receive the equivalent of all distributions 
made to the holders of the borrowed securities during the term of the 
loan, including, but not limited to, cash dividends, interest payments, 
shares of stock as a result of stock splits and rights to purchase 
additional securities, or other distributions;
    L. Only those Client Plans which have assets with an aggregate 
market value of at least $50 million (except for certain Related Client 
Plans or Unrelated Client Plans whose assets are commingled in a group 
trust under the conditions discussed herein) will be permitted to lend 
securities to the Lehman Broker-Dealers;
    M. With respect to any calendar quarter, at least 50 percent or 
more of the outstanding dollar value of securities loans negotiated on 
behalf of Client Plans will be to unrelated borrowers;
    N. The terms of each loan of securities by the Client Plans to the 
Lehman Broker-Dealer will be at least as favorable to such plans as 
those of a comparable arm's-length transaction between unrelated 
parties;
    O. Each Client Plan will receive monthly reports on the 
transactions, including but not limited to the information described in 
paragraph 22 above, so that an independent fiduciary of such plan may 
monitor the securities lending transactions with the Lehman Broker-
Dealer;
    P. Before entering into the Basic Loan Agreement and before a 
Client Plan lends any securities to the Lehman Broker-Dealer, an 
independent fiduciary of such Client Plan will receive sufficient 
information, concerning the financial condition of the Lehman Broker-
Dealer, including the audited and unaudited financial statements of the 
Lehman Broker-Dealer;
    Q. The Lehman Broker-Dealer will provide to a Client Plan prompt 
notice at the time of each loan by such plan of any material adverse 
changes in LBTC's financial condition, since the date of the most 
recently furnished financial statements;
    R. With regard to the ``exclusive borrowing'' agreement, the Lehman 
Broker-Dealer will directly negotiate the agreement with a Client Plan 
fiduciary who is independent of the Lehman Broker-Dealers and LBTC, and 
such agreement may be terminated by either party to the agreement at 
any time;
    S. The Client Plan: (a) receives a reasonable fee that is related 
to the value of the borrowed securities and the duration of the loan, 
or (b) has the opportunity to derive compensation through the 
investment of cash collateral. In the case of cash collateral, the 
Client Plan may pay a loan rebate or similar fee to the Lehman Broker-
Dealer, if such fee is not greater than the fee the Client Plan would 
pay an unrelated party in an arm's length transaction;
    T. In the event that a Lehman Broker-Dealer is also the securities 
lending agent for a Client Plan, LBTC shall act as securities lending 
sub-agent in connection with any loan of securities to the Lehman 
Broker-Dealer; and
    U. Prior to the Client Plan's approval of the lending of its 
securities to the Lehman Broker-Dealers, a copy of the final exemption, 
if granted, (and this notice of pendency) will be provided to the 
Client Plan.
    For Further Information Contact: Ekaterina A. Uzlyan of the 
Department, telephone (202) 219-8883. (This is not a toll-free number.)

[[Page 33725]]

Individual Retirement Accounts (the IRAs) for Roark Young, Russell 
Rice, Mary J. Rice, Bruce Lamchick, Steven McKean and David McKean, and 
Burton Young (Collectively, the Participants) Located in Miami, Florida

[Application No. D-10558-10561, 10565-10566, 10568]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
August 10, 1990). If the exemption is granted, the sanctions resulting 
from the application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code, shall not apply to the cash 
sales (the Sales) of certain stock (the Stock) by the IRAs 
<SUP>11</SUP> to the Applicants, disqualified persons with respect to 
the IRAs, provided that the following conditions were met:
---------------------------------------------------------------------------

    \11\ Because each IRA has only one Participant, there is no 
jurisdiction under 29 CFR Sec. 2510.3-3(b). However, there is 
jurisdiction under Title II of the Act pursuant to section 4975 of 
the Code.
---------------------------------------------------------------------------

    (a) The terms and conditions of the Sales were at least as 
favorable to each IRA as those obtainable in an arm's length 
transaction with an unrelated party;
    (b) The Sale of Stock by each IRA was a one-time transaction for 
cash;
    (c) Each IRA received the fair market value of the Stock as 
established by a qualified, independent appraiser; and
    (d) Each IRA was not required to pay any commissions, costs or 
other expenses in connection with each Sale.
    Effective Date: These proposed exemptions, if granted, will be 
effective as of March 30, 1998.

Summary of Facts and Representations

    1. The IRAs are individual retirement accounts, as described in 
Section 408(a) of the Code. Among the assets of each IRA were shares of 
closely-held stock in Turnberry Financial Services, Inc. (Turnberry), a 
unitary savings and loan holding company located in Aventura, Florida. 
The primary asset held by Turnberry is the Turnberry Bank (the Bank), 
also of Aventura, Florida.
    The applicants describe the Participants, the IRAs, and their 
former holdings of the Stock as follows:
    (a) The IRA of Roark Young, Chairman and CEO of Turnberry and the 
Bank, and majority shareholder in Turnberry, currently holds assets of 
approximately $260,141 which, prior to the Sale, included 6,400 shares 
of the Stock. The IRA acquired most of the Stock from the issuer, at 
various times and various prices, from the period between 1993 and 
1995.
    (b) The IRA of Russell Rice, President of Turnberry, Executive Vice 
President of the Bank, and Director of both, currently holds total 
assets of approximately $22,000 which, prior to the Sale, included 700 
shares of the Stock. The IRA acquired the Stock from other shareholders 
during 1997 at a price of $25, the fair market value at the time of 
purchase.
    (c) The IRA of Mary J. Rice, wife of Russell Rice, currently holds 
total assets of approximately $9,600 which, prior to the Sale, included 
300 shares of the Stock. The IRA acquired the Stock during 1997 at a 
price of $25, the fair market value of the Stock at the time of 
purchase.
    (d) The IRA of Burton Young, Director of the Bank, currently holds 
total assets of approximately $1,563,039 which, prior to the Sale, 
included 4,567 shares of the Stock. The IRA acquired all of the Stock 
from the issuer in October of 1995.
    (e) The IRA of David McKean currently holds total assets of 
approximately $14,000 which, prior to the Sale, included 380 shares of 
the Stock. The IRA acquired most of the Stock from the issuer at 
various times and prices during the period from 1990 to 1997.
    (f) The IRA of Steven McKean currently holds total assets of 
approximately $20,000 which, prior to the Sale, included 715 shares of 
the Stock. The IRA acquired most of the Stock from the issuer at 
various times and various prices during the period of 1990 to 1997.
    (g) The IRA of Bruce Lamchick currently holds total assets of 
approximately $320,000, which, prior to the Sale, included 700 shares 
of the Stock. The IRA acquired the Stock from other shareholders in 
October 1995 for its fair market value.
    2. The applicants request an exemption for the Sale of the Stock by 
each individual IRA to its respective Participant. Business and income 
tax considerations have recently caused Turnberry to elect to be taxed 
as a Subchapter S corporation pursuant to the Code, effective the close 
of business on March 31, 1998. However, section 1361 of the Code only 
permits eligible shareholders to hold stock in a Subchapter S 
corporation. Because the IRAs are not eligible shareholders for 
purposes of the Code, the applicants wished to purchase the Stock from 
their IRAs. The applicants represent that the acquisition of the Stock 
by each IRA was done for investment purposes and that, in fact, each 
IRA made a profit on its original investment.<SUP>12</SUP> Furthermore, 
the applicants represent that the Stock held by the IRAs only 
represented a small portion of the 296,300 shares outstanding.
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    \12\ The Department notes that the Internal Revenue Service has 
taken the position that a lack of diversification of investments may 
raise questions in regard to the exclusive benefit rule under 
section 401(a) of the Code. See, e.g. Rev. Rul. 73-532, 1973-2 C.B. 
128. The Department further notes that section 408(a) of the Code, 
which describes the tax qualification provisions for IRAs, mandates 
that the trust be created for the exclusive benefit of an individual 
or his beneficiaries. However, the Department is expressing no 
opinion in this proposed exemption regarding whether violations of 
the Code have taken place with respect to the purchase and 
subsequent retention of the Stock by some of the Applicants.
    Further, to the extent that Turnberry or the other sellers were 
not disqualified persons with respect to the IRAs under section 
4975(e)(2), the purchase of the Stock would not have constituted a 
prohibited transaction under section 4975(c)(1)(A) of the Code. 
However, the purchase and holding of the Stock by the IRAs of 
officers and directors of Turnberry and/or the Bank raises questions 
under section 4975(c)(1)(D) and (E) depending on the degree (if any) 
of the IRA Participant's interest in the transaction. Section 
4975(c)(1)(D) and (E) of the Code prohibits the use by or for the 
benefit of a disqualified person of the assets of a plan and 
prohibits a fiduciary from dealing with the assets of a plan in his 
own interest or for his own account. The IRA Participants, as 
officers and directors of Turnberry and/or the Bank, may have 
interests in the proposed transactions which may affect their best 
judgment as fiduciaries of their IRAs. In such circumstances, the 
transactions may violate 4975(c)(1)(D) and (E) of the Code. See 
Advisory Opinion 90-20A (June 15, 1990). Accordingly, to the extent 
there were violations of section 4975(c)(1)(D) and (E) of the Code 
with respect to the purchases and holdings of the Stock by the IRAs, 
the Department is extending no relief for these transactions herein.
---------------------------------------------------------------------------

    3. Mr. David A. Harris (Mr. Harris) and Mr. Douglas K. Southard 
(Mr. Southard), both accredited appraisers with Southard Financial, 
located in Memphis, Tennessee, appraised the Stock on July 14, 1997. 
Both Mr. Harris and Mr. Southard represent that they are full-time, 
qualified appraisers, as demonstrated by the fact that they both are 
currently Senior Members of the American Society of Appraisers. In 
addition, Mr. Harris and Mr. Southard represent that they and their 
firm are independent of the Participants. After analyzing the Stock, on 
a marketable minority interest basis which they believed appropriate 
for this transaction, Southard and Mr. Harris concluded that the fair 
market value of the Stock was $30 per share.
    In reaching their conclusion as to the value of the Stock, Mr. 
Harris and Mr. Southard took the weighted average of the asset-based 
approach, the income approach, the market approach using price/book 
value, and the market approach using prior transactions, and arrived at 
a per share value of $29.98.

[[Page 33726]]

After obtaining this number, they rounded the fair market value to 
reflect what they believe is the imprecision inherent in the various 
assumptions used in the fair market value determination.
    4. The applicants represent that the transactions were feasible in 
that each was a one-time transaction for cash. Furthermore, the 
applicants state that the transactions were in the best interest of the 
IRAs because they provided each IRA with the opportunity to dispose of 
the Stock for cash at the fair market value, thus allowing for 
diversification and enhancing liquidity so as to facilitate future 
distributions. Finally, the applicants represent that the transactions 
were protective of the rights of the Participants and beneficiaries 
because each IRA received the fair market value of the Stock, as 
determined by a qualified, independent appraiser, and incurred no 
commissions, costs, or other expenses as a result of each Sale.
    5. In summary, the applicants represent that the proposed 
transactions satisfy the statutory criteria of section 4975(c)(2) of 
the Code because: (a) the terms and conditions of the Sales were at 
least as favorable to each IRA as those obtainable in an arm's length 
transaction with an unrelated party; (b) the Sale of Stock by each IRA 
was a one-time transaction for cash; (c) each IRA received the fair 
market value of the Stock, as established by a qualified, independent 
appraiser; and (d) each IRA was not required to pay any commissions, 
costs or other expenses in connection with each Sale.
    Notice to Interested Persons: Because the applicants are the only 
participants in the IRAS, it has been determined that there is no need 
to distribute the notice of proposed exemption (the Notice) to 
interested persons. Comments and requests for a hearing are due thirty 
(30) days after publication of the Notice in the Federal Register.
    For Further Information Contact: Mr. James Scott Frazier, telephone 
(202) 219-8881. (This is not a toll-free number).

Service Employees International Union Local 252 Welfare Fund (the Fund) 
Located in Wynnewood, Pennsylvania

[Application No. L-10595]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act in accordance with the 
procedures set forth in 29 C.F.R. Part 2570, Subpart B (55 FR 32836, 
August 10, 1990). If the exemption is granted, the restrictions of 
sections 406(a), 406(b)(1) and (b)(2) of the Act shall not apply to the 
proposed sale (the Sale) of certain improved real property located in 
Wynnewood, Pennsylvania (the Property) to the Service Employees 
International Union Local 252 (Local 252), a party in interest with 
respect to the Fund, provided the parties adhere to the following 
conditions:
    (a) The Sale is a one-time transaction for cash;
    (b) The terms and conditions of the Sale are at least as favorable 
to the Fund as those obtainable in an arm's length transaction with an 
unrelated party;
    (c) The Sales price is an amount which represents the greater of: 
(1) the total cost to the Fund of acquiring the Property; or (2) the 
fair market value of the Property on the date of Sale as determined by 
a qualified, independent appraiser;
    (d) The Fund does not incur any expenses with respect to the Sale.

Summary of Facts and Representations

    1. The Fund is a welfare plan providing medical, hospital, and 
disability benefits to approximately 900 health care workers currently 
affiliated with Local 252, a 4000 member labor organization based in 
Wynnewood, Pennsylvania. The Fund was created and is maintained 
pursuant to collective bargaining agreements between Local 252 and 
employers in and around the Philadelphia, Pennsylvania area. The Local 
252 trustee for the Fund is Anthony L. Teti, and the employer trustee 
is Zelick Kaplan. As of April 30, 1997, the Fund held net assets of 
$4,745,862.
    2. Among the assets of the Fund is the Property, a parcel of 
improved real property located at 3 East Wynnewood Road in Wynnewood, 
Pennsylvania. Purchased for $725,000 in July 1994 from an unrelated 
third party, the Property consists of 8,490 square feet of land 
improved with a 5,360 square foot, two-story plus basement office 
building (the Building). The first floor of the Building consists 
primarily of office space with the second floor containing additional 
office space and a meeting room. Currently, the Fund and Local 252 
occupy the Building, the latter leasing the space for its principal 
office.<SUP>13</SUP>
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    \13\ The Fund and Local 252 represent that the lease satisfies 
the requirements of Prohibited Transaction Class Exemption 76-1 (PTE 
76-1, 41 FR 12740, March 26, 1976) and Prohibited Transaction Class 
Exemption 77-10 (PTE 77-10, 42 FR 33918, July 1, 1977), relating to, 
among other things, the leasing of office space by a multiemployer 
plan to a participating employee organization. The Department 
expresses no opinion as to whether the lease satisfies the 
conditions of PTE 76-1 or PTE 77-10.
---------------------------------------------------------------------------

    3. The Fund's need to sell the Property arises out of a recent 
restructuring imposed by the Service Employees International Union (the 
International). According to the applicant, the International has 
ordered the approximately 900 health care workers affiliated with Local 
252 to transfer their membership to two other local organizations whose 
membership also consists of workers in the health care industry. 
Pursuant to the agreement between Local 252 and the International, the 
Fund will be terminated and the assets currently held therein 
transferred to the International's welfare fund. As a result of this 
transfer, the International plans to dispose of the Property. Because 
the Building currently serves as Local 252's principal office, and 
fearing that the Fund faces taking a substantial loss on the sale of 
the Property to an unrelated third party, Local 252 wishes to purchase 
the Property from the Fund.
    4. Paul J. Leis (Mr. Leis), an accredited appraiser with Hayden 
Real Estate, Inc., located in Conshohocken, Pennsylvania, appraised the 
Property on January 21, 1998. Mr. Leis states that he is a qualified 
appraiser, as demonstrated by his status as a Member of the Appraisal 
Institute and a Certified Pennsylvania General Appraiser. In addition, 
Mr. Leis represents that both he and Hayden Real Estate, Inc. are 
independent of the International, Local 252, and the Trustees. After 
inspecting the Property, Mr. Leis determined a fee simple interest in 
the Property is worth $550,000.
    As noted above, the Fund originally paid $725,000 for the Property. 
In light of the fact that this amount exceeds the fair market value 
determined pursuant to Mr. Leis's appraisal, Local 252 represents that 
it will pay $725,000 to the Fund for the Property. Local 252 has 
determined that paying the Fund an amount equal to the Property's 
acquisition price would be in the best interest of the Fund and its 
participants and beneficiaries as it would enable the Fund to recoup 
its original investment.
    5. The applicant represents that the proposed transaction would be 
feasible in that it would be a one-time transaction for cash. 
Furthermore, the applicant states that the transaction would be in the 
best interests of the Fund because the price offered by Local 252 
exceeds that obtainable in a sale to an unrelated third party and 
because it will allow the Fund to recoup its original investment. 
Finally, the applicant asserts that the transaction

[[Page 33727]]

will be protective of the rights of the participants and beneficiaries 
because the Fund will receive a purchase price which is an amount 
representing the greater of: (1) the total cost to the Fund of 
acquiring the Property; or (2) the fair market value of the Property on 
the date of Sale as determined by a qualified, independent appraiser.
    6. In summary, the applicant represents that the proposed 
transaction satisfies the criteria of section 408(a) of the Act for the 
following reasons: (a) the Sale is a one-time transaction for cash; (b) 
the terms and conditions are at least as favorable to the Fund as those 
obtainable in an arm's length transaction with an unrelated party; (c) 
the Sales price is an amount which represents the greater of: (1) the 
total cost to the Fund of acquiring the Property; or (2) the fair 
market value of the Property on the date of Sale as determined by a 
qualified, independent appraiser; and (d) the Fund does not incur any 
expenses with respect to the Sale.
    Notice to Interested Persons: Notice of the proposed exemption 
shall be given 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 pendency of the exemption as published in the Federal 
Register and shall inform interested persons of their right to comment 
and request a hearing with respect to the proposed exemption. Comments 
and requests for a hearing are due on or before ____.
    For Further Information Contact: Mr. James Scott Frazier, telephone 
(202) 219-8881. (This is not a toll-free number).

General Information

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

    Signed at Washington, DC, this 16th day of June, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 98-16335 Filed 6-18-98; 8:45 am]
BILLING CODE 4510-29-P