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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Pacific Income Advisers, Inc. [Notices] [07/20/1998]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Pacific Income Advisers, Inc. [07/20/1998]

[PDF Version]

Volume 63, Number 138, Page 38854-38860

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10324, et al.]

 
Proposed Exemptions; Pacific Income Advisers, 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

[[Page 38855]]

exemption. A request for a hearing must also state the issues to be 
addressed and include a general description of the evidence to be 
presented at the hearing.

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

Notice to Interested Persons

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

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

Pacific Income Advisers, Inc. (PIA), Located in Santa Monica, CA

[Application No. D-10324]

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 32847, August 10, 1990).

Section I--Proposed Exemption Involving Plans Where PIA Is Both a 
Fiduciary or Other Party in Interest With Respect to the Plan and 
Investment Adviser of Certain Trusts in Which the Plans Invest

    If the exemption is granted, the restrictions of sections 406(a) 
and 406(b) of the Act and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(F) of the Code, shall not apply to: (1) The acquisition, sale or 
redemption of trust units (the Units) in the Pacific Income Advisers 
Fixed-Income Group Investment Trust (Fixed Income Trust), the Pacific 
Income Advisers Short-Term Group Investment Trust (Short-Term Trust), 
the Pacific Income Advisers Equity Group Investment Trust (Equity 
Trust), and the Pacific Income Advisers International Group Investment 
Trust (International Trust; each a Trust and collectively, the Trusts), 
by employee plans, and Individual Retirement Accounts (IRA's; 
collectively, the Plan(s)); and (2) the payment of fees by a Trust to 
Pacific Income Advisers (PIA) where PIA is a fiduciary or other party 
in interest with respect to a Plan investing in a Trust and the 
investment adviser to each of the Trusts, provided the conditions of 
Section II are satisfied.

Section II--Conditions

    (1)(a) The investment of a Plan's assets in each of the Trusts and 
the fees to be paid by a Trust to PIA are authorized in writing by a 
Plan fiduciary who is independent of PIA (Independent 
Fiduciary).<SUP>1</SUP> Such authorization shall be consistent with the 
responsibilities, obligations and duties imposed on fiduciaries by Part 
4 of Title I of the Act. In addition, such authorization shall be 
either: (1) Set forth in the investment management agreement between 
the Plan and PIA; (2) indicated in writing prior to each purchase or 
sale; or (3) indicated in writing prior to the commencement of a 
specified purchase or sale program in the Units of the Trusts.
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    \1\ A fiduciary will not be deemed independent of PIA if: (1) 
Such fiduciary is directly or indirectly controlled by PIA or an 
affiliate thereof; (2) such fiduciary or any officer, director, 
partner, highly compensated employee, or the relative of such 
fiduciary is an officer, director, partner, or highly compensated 
employee, of PIA or an affiliate of PIA; and (3) such fiduciary 
directly or indirectly receives any compensation or other 
consideration for that fiduciary's own personal account in 
connection with any transaction described in this proposed 
exemption.
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    (b) PIA does not provide investment advice to a Plan's Independent 
Fiduciary within the meaning of 29 CFR 2510.3-21(c)(1)(ii) with respect 
to a Plan's acquisition of Units of a Trust.
    (2) Prior to making an initial investment in the Units, each Plan's 
Independent Fiduciary shall receive the following written disclosures 
from PIA:
    (a) The proposed exemption and grant notice describing the 
exemptive relief provided herein;
    (b) The applicable Trust's Offering Memorandum, outlining the 
investment objective(s) of the Trust and the policies employed to 
achieve these objectives and a description of all fees associated with 
investment in the Trust; and
    (c) The applicable Trust's Agreement and Declaration of Trust, 
disclosing the structure and manner of operation of the Trust.
    (d) A statement describing the relationship between PIA and the 
Trusts.
    (3) The Independent Fiduciary shall acknowledge in writing that the 
Plan is an ``accredited investor'' as defined in Rule 501 of Regulation 
D of the Securities Act of 1933 (1933 Act). In addition, the 
Independent Fiduciary shall acknowledge in writing that it has not 
relied upon the advice of PIA with respect to the acquisition, sale or 
redemption of the Units.
    (4) No Plan shall pay a sales commission or redemption fee, in 
connection with the acquisition, sale or redemption of the Units of the 
Trusts.
    (5)(a) No participating Plan may invest more than 25% of its total 
assets in the International Trust.
    (b) No Plan, other than a multiple employer welfare arrangement 
(MEWA), a multiple employer trust (MET), or voluntary employee benefit 
association (VEBA), may acquire or hold Units representing more than 
20% of the assets of a Trust.<SUP>2</SUP> A MEWA, MET, or VEBA may 
acquire and hold Units representing up to 35% of the assets of either 
the Short-Term Trust or Fixed Income Trust only. As to investment in 
any other Trust, a MEWA, MET, or

[[Page 38856]]

VEBA may not acquire or hold Units representing more than 20% of the 
assets of such Trust.
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    \2\ A MEWA is defined in section 3(40)(A) of the Act and 
provides benefits described in section 3(1) of the Act for employees 
of two or more employers. Although the term ``MET'' is not used or 
defined in title I of the Act, a MET may be covered by title I of 
the Act, to the extent that it provides benefits described in 
section 3(1) of the Act and it is established or maintained by an 
employer, an employee organization, or both. A VEBA is defined in 
section 501(c)(9) of the Code and is subject to title I to the 
extent that it provides benefits described in section 3(1) of the 
Act and it is established or maintained by an employer, an employee 
organization, or both.
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    (c) For purposes of determining the percentage of the assets of a 
Trust being held by a single Plan, PIA shall first make the calculation 
90 days after the first Unit of a Trust is sold to such Plan.
    (6)(a) At the time the transactions are entered into, the terms of 
the transactions shall be at least as favorable to the Plans as those 
obtainable in arm's length transactions between unrelated parties.
    (b) PIA, including any officer or director of PIA, does not 
purchase or sell shares of the Trusts from or to any Plan Client.
    (c) The price paid or received by a Plan Client for Units of a 
Trust is the net asset value per Unit at the time of the transaction 
and it is the same price which would have been paid or received for the 
Units of a Trust by any other investor at that time. For purposes of 
this paragraph, the term net asset value means the amount for purposes 
of pricing all purchases and sales calculated by dividing the value of 
all securities, determined by an objective method as set forth in each 
Trust's relevant Trust documents and Trust Offering Memorandum, and 
other assets belonging the Trust, less the liabilities charged to such 
Trust, by the total number of Units of the Trust.
    (7) The combined total of all fees paid by a participating Plan 
shall constitute no more than reasonable compensation within the 
meaning of section 408(b)(2)of the Act.
    (8) The Plan does not pay any Plan-level investment management 
fees, investment advisory fees or similar fees to PIA with respect to 
any of the assets of such Plan which are invested in Units of a Trust. 
This condition does not preclude the payment of investment advisory or 
similar fees by the Trusts to PIA under the terms of investment 
management agreements between PIA and each of the Trusts.
    (9) All authorizations and approvals made by the Independent 
Fiduciary regarding investment in a Trust and the fees paid to PIA are 
subject to an annual reauthorization wherein any such prior 
authorization shall be terminable at will by the Plan, without penalty 
to the Plan, upon written notice of termination. A form expressly 
providing an election to terminate the authorization (the Termination 
Form) with instructions on the use of the form must be supplied to the 
Independent Fiduciary no less than annually; provided that the 
Termination Form need not be supplied sooner pursuant to paragraph (10) 
below. The Termination Form must include the following information:
    (a) The authorization is terminable at will by the Plan, without 
penalty to the Plan, upon receipt by PIA of written notice from the 
Independent Fiduciary; and
    (b) Failure of the Independent Fiduciary to return the Termination 
Form will result in continued authorization of PIA to continue to 
engage in the transactions described in Sections I.
    (10) PIA will provide, at least 30 days in advance of the 
implementation of an additional service to a Trust by PIA or a fee 
increase for investment management, investment advisory or similar 
services, a written notice to the Independent Fiduciary of the Plan 
Client explaining the nature and amount of the additional service for 
which a fee is charged or the increase in fees.
    (11) Each Plan shall receive the following:
    (a) A monthly report disclosing the performance and the value of 
the Plan's investment in each of the Trusts. Such monthly report shall 
disclose the extent to which assets of a Plan have been shifted between 
the Trusts by PIA and any fee differential resulting from such shifting 
between the Trusts;
    (b) An audited financial statement of each of the Trusts in which a 
Plan is invested, prepared annually by a independent, certified public 
accountant, including a list of investments of each Trust and their 
valuations, provided to the Plan not later than 45 days after the end 
of the period to which the report relates; and
    (b) An annual statement of a Plan's percentage interest in each 
Trust and the value of the Plan's Units, provided to the Plan not later 
than 45 days after the end of the period to which the report relates. 
Such report shall also include the total fees paid to PIA by each 
Trust. Further, such report shall also include the brokerage fees paid 
by each Trust to unrelated broker-dealers, as well as the total of all 
fees and expenses paid by PIA to third parties.
    (12) Brokerage transactions for the Trusts are performed by 
entities unrelated to PIA for no more than reasonable compensation 
within the meaning of section 408(b)(2) of the Act.
    (13) PIA shall maintain, for a period of six years, the records 
necessary to enable the persons described in paragraph (14) of this 
section to determine whether the conditions of this exemption have been 
satisfied, except that (a) prohibited transaction will not be 
considered to have occurred if, due to circumstances beyond the control 
of PIA, the records are lost or destroyed prior to the end of the six 
year period, and (b) no party in interest other than PIA shall be 
subject to the civil penalty that may be assessed under section 502(i) 
of the Act, or to the taxes imposed by section 4975(a) and (b) of the 
Code, if the records are not maintained, or are not available for 
examination as required by paragraph (13) below.
    (14)(a) Except as provided in section (b) of this paragraph and 
notwithstanding any provisions of subsection (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (13) of this 
section shall be unconditionally available at their customary location 
during normal business hours by:
    (1) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service (the Service);
    (2) Any Independent Fiduciary of a Plan investing in a Trust, or 
any duly authorized representative of such fiduciary;
    (3) Any contributing employer to any Plan investing in a Trust, or 
any duly authorized employee representative of such employer;
    (4) Any participant or beneficiary of any participating Plan 
investing in a Trust, or any duly authorized representative of such 
participant or beneficiary; and
    (5) Any other person or entity investing in a Trust.
    (b) None of the persons described above in subparagraphs (2)-(5) of 
this paragraph (14) shall be authorized to examine the trade secrets of 
PIA or commercial or financial information which is privileged.
    Effective Date: If granted, this proposed exemption will be 
effective August 29, 1997.

Summary of Facts and Representations

    1. PIA, which maintains its headquarters in Santa Monica, 
California, is an investment adviser registered under the Investment 
Advisers Act of 1940, as amended. As of January 1, 1997, PIA rendered 
investment advisory services with respect to $3.1 billion in client's 
assets.
    2. It is represented that in order to offer both lower fees 
relative to the fees charged by PIA for separate account management, 
and to provide an investment vehicle that will facilitate effective 
diversification and management of investor assets, PIA organized each 
Trust as a business trust under the laws of the Commonwealth of 
Massachusetts. The Trusts were organized on August 29, 1997. PIA is the 
investment adviser for each Trust and Imperial Trust Company (Imperial)

[[Page 38857]]

serves as trustee and custodian of each Trust. Imperial is a wholly 
owned subsidiary of Imperial Bank, N.A., and is not affiliated with 
PIA.
    3. With regard to some Plan clients (Plan Clients) who invest in 
the Trusts, PIA has no pre-existing fiduciary relationship. Investments 
in a Trust will only occur with the express written consent of an 
Independent Fiduciary. PIA notes that in the situation where Units of a 
Trust are sold to a Plan Client with which PIA does not have a pre-
existing relationship prior to the Plan Client's initial purchase, a 
prohibited transaction could arise under section 406(a) of the Act upon 
a subsequent purchase or redemption of Units of a Trust. This is 
because a party in interest relationship would have been established by 
virtue of PIA serving as investment adviser and fiduciary with respect 
to the Plan assets invested in the Trusts.<SUP>3</SUP>
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    \3\ PIA represents that the equity participation by all Plans 
investing in Units of a Trust is expected to exceed 25% of the value 
of all Units of each of the Trusts and it has not been established 
that the Trusts are operating companies. Accordingly, it is 
anticipated that the underlying assets of the Trusts will constitute 
``plan assets'' within the meaning of 29 CFR 2510.3-101.
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    4. Also, in some instances, PIA explains that a prohibited 
transaction may arise under section 406(a) of the Act if the Plan 
acquires Units of a Trust where the Plan Client has previously entered 
into a separate account investment management agreement with PIA and 
the Plan Client subsequently wishes to change the nature of its 
relationship with PIA from a separate account investment to an 
investment in a Trust. In such a situation, the Plan will terminate its 
separate account relationship with PIA and invest in the Trusts. The 
initial investment in a Trust may give rise to a prohibited transaction 
because of the pre-existing relationship between PIA and the Plan 
Client.
    5. Further, some Plan Clients may decide to continue the individual 
investment management relationship with PIA or permit PIA, at its 
discretion, to move Plan assets between one or more Trusts, subsequent 
to a Plan's investment in a Trust. In these instances, possible 
violations of sections 406(a) and 406(b) of the Act may occur with 
respect to PIA's sale of Units of a Trust to such Plans. Also, PIA 
represents that the purchase of Units of a Trust by a Plan Client may 
give rise to a prohibited transaction because of the receipt of fees by 
PIA from the Trusts as a result of the investment of Plan assets in a 
Trust. In situations where the Plan Clients decide to continue the 
individual investment management relationships with PIA following the 
investment in the Trusts, PIA represents that it will not receive 
duplicate fees (i.e., a Plan-level investment management fee and a 
Trust-level investment management fee) with respect to the assets of a 
Plan that are invested in a Trust. Specifically, PIA represents that it 
will forego that portion of the plan-level investment management fee to 
which it would be entitled to receive under the investment management 
agreement with the Plans where assets subject to that agreement are 
also invested in a Trust.
    6. PIA represents that it will not act as an investment adviser, 
within the meaning of section 3(21)(A)(ii) of the Act, to such Plan 
Clients which propose to invest in one or more Trusts. PIA represents 
that the decision to invest in a Trust will be made by an Independent 
fiduciary on the basis of his or her own investigation into the 
advisability of investing in one or more Trusts.<SUP>4</SUP> PIA 
represents that under no circumstances will it have discretionary 
authority or control with respect to an Independent Fiduciary's initial 
authorization or approval to acquire Units.
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    \4\ To the extent that in the ordinary course of business, PIA 
provides investment advice to a Plan within the meaning of 
regulation 29 CFR 2510.3-21(c)(1)(ii)(B) and recommends an 
investment of the Plan's assets in a Trust, the presence of an 
independent fiduciary acting on the investment adviser's 
recommendations on behalf of the Plan is not sufficient to insulate 
the adviser from fiduciary liability under section 406(b) of the 
Act. (See Advisory Opinions 84-03A and 84-04A, issued by the 
Department on January 4, 1984.) No relief is being provided herein 
for the provisions of investment advice in connection with the 
Plan's investment in the Trusts.
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    7. With respect to subsequent shifting of assets between the 
various trusts, PIA may have the discretionary authority to effect such 
transactions. However, PIA will obtain authorization or approval from 
the Plan Client prior to shifting assets between the various Trusts. 
Such authorization or approval by an Independent Fiduciary shall be 
either: (1) Set forth in the investment management agreement between 
the Plan Client and the PIA; (2) indicated in writing prior to each 
purchase or sale; or (3) indicated in writing prior to the commencement 
of a specified purchase or sale program in the Trusts.
    8. Each Trust will maintain and pursue a separate investment 
objective by investing in equity and debt securities. For example, the 
objective of the Equity Trust is to provide long-term growth of capital 
by investing primarily in equity securities. PIA represents that the 
Equity Trust is expected to invest a majority of its assets in U.S. 
securities. In addition to investing in equity securities, the Equity 
Trust may as well invest in high-grade debt securities. PIA further 
represents that the Equity Trust will not: (1) Invest more than 10% of 
its assets in the securities of any one issuer, excluding obligations 
of the U.S. Government and its instrumentalities; and (2) invest more 
than 25% of its assets in any one industry.
    The Short-Term Trust's investment profile is similar to that of a 
money market fund. PIA represents that the Short-Term Trust will invest 
its assets only in investment grade debt securities the average 
maturity of which will not exceed three years, including U.S. Treasury 
obligations, U.S. government agency obligations, collateralized 
mortgage obligations (excluding swaps), corporate bonds, commercial 
paper and repurchase agreements. The primary investment objectives of 
the Short-Term Trust are, in order of preference: (1) To preserve 
principal; (2) maintain liquidity; and (3) to maximize the rate of 
return available from investments consistent with these objectives. The 
rate of return objective of the Short-Term Trust is to attain a total 
rate of return that exceeds that available for a Certificate of Deposit 
and other similar short-term investment strategies.
    The investment objective of the Fixed Trust is to maximize its 
total rate of return on its investment portfolio, including realized 
and unrealized appreciation, and to minimize risk. In accordance with 
these investment objectives, the Fixed Trust will invest primarily in 
high quality debt securities which are rated as investment grade by at 
least one of the major credit rating agencies, or judged to be of 
comparable quality, by PIA. It is represented that the Fixed Trust's 
portfolio of securities will be diversified. Specifically, the Fixed 
Trust will not: (1) Invest more than 10% of its total assets in the 
securities of one issuer, excluding obligations of the U.S. government, 
its agencies, and instrumentalities; and (2) invest more than 25% of 
its assets in issuers whose principal business activities are in the 
same industry, excluding obligations of the U.S. Government, its 
agencies, and instrumentalities.
    The applicant believes that the investment in Units of the Short-
Term Trust and Fixed Trust by a MEWA , MET, or VEBA would be an 
effective way for such Plans to manage its assets to meet its regular 
needs for cash to pay benefit claims. In this regard, the applicant 
believes that it would be in the interest of a MEWA, MET, or VEBA to 
own as much as 35% of the Units of each of the Short-Term Trust and 
Fixed Trust.

[[Page 38858]]

    The objective of the International Trust is to achieve growth of 
capital and to earn income. The International Trust will seek to 
achieve these objectives by investing, under normal circumstances, in 
debt securities issued in emerging and developed markets located 
throughout the world including: (1) Debt securities issued or 
guaranteed by U.S. or foreign governments, their agencies, 
instrumentalities or political subdivisions, or by government owned, 
controlled or sponsored entities, including central banks 
(collectively, ``Sovereign Debt''), including Brady Bonds; <SUP>5</SUP> 
(2) interests in issuers organized and operated for the purpose of 
restructuring Sovereign Debt; (3) debt securities issued by foreign 
banks and other foreign business entities; and (4) debt securities 
denominated in or indexed to the currencies of emerging and developed 
markets. PIA represents that under normal circumstances, 75% or more of 
the International Trust's portfolio will be comprised of debt 
instruments of issuers located in global developed markets, including 
the United States. Further, no more than 25% of the International 
Trust's assets will be invested in debt securities of issuers in 
emerging markets. While the International Trust is not restricted in 
the portion of its assets that may be invested in securities of issuers 
located in a single region, under normal conditions the International 
Trust's assets will be invested in the securities of issuers located in 
at least three countries, and the International Trust's investments in 
the securities issued in any one country, other than the United States, 
will not exceed 25% of the International Trust's assets.
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    \5\ Brady Bonds are the most liquid asset class in fixed income 
emerging market securities. These bonds have been issued in exchange 
for outstanding sovereign bank loans in a number of developing 
countries as part of debt reduction/restructuring plans named after 
former Treasury Secretary Nicholas Brady. Brady Bonds have been 
implemented as a method of restructuring debt in emerging markets 
since 1989. All Brady Bonds carry principal and interest collateral 
guarantees in the form of U.S. Treasury securities.
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    9. The Trusts will be treated as partnerships within the meaning of 
Part I of Subchapter K of the Code, and PIA will serve as the sole 
general partner of each Trust with full discretion over management and 
control of the business of each Trust. It is represented that PIA will 
not beneficially own more than 1% of the assets of any Trust. PIA will 
serve as investment adviser for each Trust. Under the investment 
advisory agreements with each Trust, PIA will provide certain 
investment advisory and management services that will primarily involve 
the exercise of investment discretion with respect to each Trust's 
assets. Beneficial owners of the Units (Unitholders) are anticipated to 
include individuals, corporations, Plans and other tax-exempt 
organizations. For its investment advisory services to the Equity 
Trust, Fixed-Income Trusts, Short-Term Trust, and International Trust, 
PIA will be paid an annual fee of .65%, .45%, .35% and .40% 
respectively, of the assets held by each Trust, payable in quarterly 
installments. The fee is a percentage of the value of each Trust. Such 
fee is accrued monthly and is paid to PIA quarterly in arrears. Each 
Plan bears a proportionate share of the fee based upon the value of its 
Units in each Trust. Brokerage and custodial services will be performed 
by unrelated third parties and the fees for such services will be 
charged in addition to PIA's fees. It is represented that the fees paid 
by the Plans will constitute no more than reasonable 
compensation.<SUP>6</SUP>
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    \6\ The Department expresses no opinion herein on whether the 
fees charged by PIA satisfies the terms of section 408(b)(2) of the 
Act.
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    10. Units in the Trusts will be offered to Plans pursuant to a 
Trust Offering Memorandum (the Memorandum). This document describes the 
Trust, the parties involved and their rights, the investment 
objectives, and the fees charged for investment in each of the 
Trusts.<SUP>7</SUP> PIA represents that to the extent that a Plan 
acquires Units of one or more Trusts, that portion of a Plan's assets 
will be diversified because each Trust constitutes a diversified pool 
of securities.
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    \7\ The Department wishes to note that the Act's general 
standards of fiduciary conduct would apply to the investments 
described in this proposed exemption, and that satisfaction of the 
conditions of this proposal should not be viewed as an endorsement 
of the investments by the Department. Section 404 of the Act 
requires, among other things, that a fiduciary discharge his duties 
with respect to a plan solely in the interest of the plan's 
participants and beneficiaries and in a prudent fashion. 
Accordingly, the plan fiduciary must act prudently with respect to 
the decision to enter into an investment transaction. The Department 
further emphasizes that it expects the plan fiduciary to fully 
understand the benefits and risks associated with engaging in a 
specific type of investment, including any changes in the value of 
the investment. Thus, in considering whether to enter into a 
transaction, a fiduciary should take into account its ability to 
provide adequate oversight over the particular investment.
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    11. A Plan fiduciary will determine how much to invest in a Trust 
and such Plan will receive a pro rata interest in the Trust based upon 
its capital account balance as compared to the capital account balances 
of other investors. All investments in the Trust will be paid in cash.
    12. It is represented that prior to accepting a subscription for 
Units from a prospective Plan investor, PIA will furnish to an 
Independent Fiduciary with (a) a copy of the applicable Trust's 
offering Memorandum, which discusses the investment objective(s) of the 
Trust, the policies employed to achieve these objectives, and the 
compensation paid by each Trust to PIA, and fees paid by PIA and the 
Trust to third parties; (b) the fees charged to a Plan by each Trust; 
(c) a Subscription Agreement, which is designed to elicit information 
about the Independent Fiduciary and the Plan to determine whether the 
Plan qualifies as an ``accredited'' investor as set forth in Rule 501 
of Regulation D of the 1933 Act; (d) a copy of the applicable Trust's 
Declaration of Trust; and (e) copies of the notice of proposed 
exemption and notice granting this exemption.
    If a Plan is accepted as an investor in a Trust, the Independent 
Fiduciary will be required to acknowledge in connection with the 
execution of the Subscription Agreement that such fiduciary has 
received copies of the above-noted documents. In addition, the 
Independent Fiduciary will also be required to represent to PIA that 
such fiduciary is (a) independent of PIA, (b) knowledgeable with 
respect to the Plan in administrative matters and funding matters 
related thereto, and (c) capable of making, and in fact has made, an 
independent decision regarding the investment of Plan assets in the 
Trust.
    PIA represents that no officer, director or employee of PIA who 
owns or controls, directly, or indirectly, five percent or more of the 
beneficial ownership or voting power of PIA will be accepted as an 
investor in a Trust. In addition, PIA will not be a sponsor of a Plan 
that invests in Units of a Trust.
    13. It is represented that after a Plan is accepted as a 
Unitholder, PIA will provide each Unitholder with a monthly statement, 
reflecting the performance of the Plan's investment in the Trust, and a 
copy of the Trust's annual audited report.
    14. Each Trust's Declaration of Trust provides that Units may not 
be sold or transferred to a third party without PIA's consent. Because 
Units will not be registered under the 1933 Act, they will be subject 
to the restrictions on transfers imposed thereby under applicable state 
securities laws. In Each Trust's Declaration of Trust, PIA has retained 
the right to dissolve a Trust at anytime.
    15. Although each Trust's Declaration of Trust restricts each 
Unitholder's ability to assign its Units, Unitholders are allowed to 
redeem their Units. To effect a redemption of Units, a Plan must 
instruct PIA in writing at least seven (7) calender days prior to the 
last business day of the month, which is the day on which each Trust's 
assets are

[[Page 38859]]

valued (Valuation Date).<SUP>8</SUP> Redemption requests received by 
PIA in proper form at least seven (7) calendar days prior to the 
month's Valuation Date will result in the Units being redeemed at the 
net asset value per Unit determined on that month's Valuation Date, 
with the cash redemption proceeds transferred to or for the benefit of 
the redeeming Unitholder within seven (7) days thereafter. Redemption 
requests received by PIA fewer than seven (7) days prior to the 
Valuation Date will be effected at the per Unit price at the close of 
business on the next month's Valuation Date, with cash proceeds 
transferred to or for the benefit of the redeeming Plan within seven 
(7) days after that Valuation Date.
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    \8\ Each Trust's Declaration of Trust provides that Imperial, 
the unrelated Trustee, shall determine the value of the assets of 
the Trust on the basis of the following valuation rules:
    (1) Marketable U.S. Government obligations (including guaranteed 
obligations) shall be valued at the dealer bid prices appearing on 
the Valuation Date. Such prices will be taken from recognized 
pricing services.
    (2) Securities listed on a securities exchange for which market 
quotations are available will be valued at the last quoted sales 
price on the Valuation Date or, if there has been no such reported 
sale, at the mean between the current bid and ask prices. Price 
information on listed securities will generally be taken from a 
composite trading tape offered by one of the pricing services. 
Unlisted U.S. securities for which market quotations are readily 
available will be valued at the official market price as quoted by 
the Trustee's pricing vendors.
    (3) In those instances where there is no readily ascertainable 
market value obtainable from any of the sources specified above, 
investments shall be valued on the basis of data obtained from the 
best qualified and available independent sources, including bankers, 
brokers or dealers who may be employees of the unrelated Trustee, 
brokers or dealers who deal in or are familiar with the type of 
investment involved or other qualified appraisers, or by reference 
to the market value of similar investments for which a market value 
is readily ascertainable.
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    16. PIA anticipates that each Trust will incur the following 
expenses: organizational expenses, investment management and 
administration fees, fees for necessary professionals, the costs of 
regulatory compliance, and the costs associated with maintaining the 
Trust's legal existence. Such expenses will be paid by PIA. Each Trust 
will be responsible for paying brokerage commissions of unrelated 
brokers. No Trust will impose sales charges, redemption fees or 
commissions on the acquisition, sale or redemption of Units.
    17. The books of the Trust will be audited annually by independent 
certified public accountants selected by PIA. Each Independent 
Fiduciary will receive a copy of the audited financial report of a 
Trust in which it has invested Plan assets after the close of the 
fiscal year of that Trust. The books and financial records of a Trust 
will be open for inspection by an Independent Fiduciary of, any 
contributing employer to, any participant or beneficiary of, or any 
duly authorized representative of such participant or beneficiary of, a 
Plan investing in Units of that Trust as well as the Department and the 
Internal Revenue Service, during regular business hours.
    18. In summary, it is represented that the proposed transactions 
will meet the statutory criteria for an exemption under section 408(a) 
of the Act because: (a) each Independent Fiduciary will be required to 
represent that he or she is both independent of PIA and sufficiently 
knowledgeable to make an informed decision regarding the transactions 
described herein; (b) the Independent Fiduciary will be solely 
responsible for making the decision with respect to that Plan's initial 
acquisition of Units; (c) no Plan will pay a fee or commission by 
reason of the acquisition, sale or redemption of Units; (d) Unitholders 
will receive monthly statements and copies of the annual report for 
each Trust in which assets are invested; (e) at the time the 
transactions are entered into, the terms of the transactions shall be 
at least as favorable to the Plans as those obtainable in arm's length 
transactions between unrelated parties; (f) the fees paid by the Plans 
shall constitute no more than reasonable compensation; and (g) with 
respect to assets invested in a Trust, no Plan will pay an investment 
management fee at the Plan level to PIA.
    For Further Information Contact: Ms. Janet L. Schmidt of the 
Department, telephone (202) 219-8883. (This is not a toll-free number.)

R & J Hoffman, Inc. Profit Sharing Plan (the Plan), Located in 
Fremont, California

[Application No. D-10572]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to: 
(1) The proposed loan (the Loan) of $53,240 by the Plan to R & J 
Hoffmann, Inc. (the Employer), a disqualified person with respect to 
the Plan; and (2) the personal guarantee of the Loan by Richard and 
Angela Hoffmann (the Hoffmanns), provided the following conditions are 
satisfied: (a) The terms of the Loan are at least as favorable to the 
Plan as those obtainable in an arm's-length transaction with an 
unrelated party; (b) the Loan does not exceed 25% of the assets of the 
Plan; (c) the Loan is secured by a second mortgage on certain real 
property (the Property) which has been appraised by a qualified 
independent appraiser to have a fair market value not less than 150% of 
the amount of the Loan plus the balance of the first mortgage which it 
secures; (d) the Hoffmanns have also personally guaranteed the Loan; 
(e) in the event that the fair market value of the Property is no 
longer adequate to secure all outstanding loans, additional property 
will be pledged to the Plan to secure the Loan at an amount equal to at 
least 150% of the outstanding principal balance of all loans secured by 
the Property; and (f) the Hoffmanns are the only Plan participants to 
be affected by the Loan.<SUP>9</SUP>
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    \9\ Since the Hoffmanns are the sole owner of the Employer and 
the only participants in the Plan, there is no jurisdiction under 
Title I of the Act pursuant to 29 CFR 2510.3-3(b). However, there is 
jurisdiction under Title II of the Act pursuant to section 4975 of 
the Code.
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Summary of Facts and Representations

    1. The Hoffmanns are the 100% owners of the Employer, a California 
corporation, which is the sponsor of the Plan. The Employer is involved 
in the purchasing of lighting fixtures from various countries in the 
Pacific Rim and then selling the fixtures to United States retailers. 
The Hoffmanns are the only participants in the Plan.
    2. The Hoffmanns have requested an exemption that would permit the 
Employer to borrow $53,240 from the Plan. The Plan had total assets of 
$212,963.21 as of June 30, 1997. Therefore, the principal amount of the 
Loan would represent less than 25% of the value of the Plan. The term 
of the Loan will be for a period of five years at an interest rate 
equal to the Prime Rate of Interest of U.S. banks (the Prime Rate) plus 
1.5%, based on the published Prime Rate in the Western Edition of the 
Wall Street Journal, which currently would be 8.5% per annum. The 
interest rate will be adjusted during the term of the Loan whenever 
there is a change in the Prime Rate. The new interest rate will be 
effective immediately after such adjustment and will remain in effect 
until the next time the Prime Rate changes. The Loan will be repaid in 
equal monthly installments of principal and interest using a level 
amortization schedule until there is a change in the Prime Rate, at 
which time a new amortization schedule will be put into

[[Page 38860]]

place. Mr. Jeffrey Good of Wells Fargo Bank, N.A. (the Bank), has 
represented in a letter dated February 27, 1998, that the Bank would 
require a rate of Prime plus .75% in order to make a similar loan to 
the Employer.
    3. The Loan will be secured by the Property, which consists of the 
Hoffmanns' residence, which is located at 1324 Grosventres Court, 
Fremont, California. The Property has been appraised by Karen J. Mann, 
SRA of Mann & Associates, an independent real estate appraiser in 
Fremont, California, to have a fair market value of $540,000 as of 
March 12, 1998. The Property has a first mortgage in the amount of 
$133,382. The Loan would be secured by a second mortgage on the 
Property. Thus, if the Loan is made, the appraised fair market value of 
the Property would represent approximately 289% of the total 
outstanding principal amount of debt secured by the Property, including 
the Loan. The applicant represents that the mortgage to the Plan will 
be duly recorded in the Office of the County Clerk, Alameda County, 
California. The applicant states that in the event the fair market 
value of the Property is no longer adequate to secure all outstanding 
loans, additional property will be pledged to the Plan to secure the 
Loan at an amount equal to at least 150% of the outstanding principal 
balance of all outstanding loans secured by the Property. As additional 
security to the Plan, the Hoffmanns have agreed to personally guarantee 
the Loan. The applicant has submitted a personal balance sheet for the 
Hoffmanns which demonstrates that they have a total net worth of 
$691,804.16 as of March 19, 1998.
    4. In summary, the applicant represents that the proposed 
transaction satisfies the criteria of section 4975(c)(2) of the Code 
because: (a) The Loan represents not more than 25% of the assets of the 
Plan; (b) the terms of the Loan will be not less favorable to the Plan 
than those required by a third party lender, the Bank, if it were to 
make a similar loan; (c) the Loan will be secured by the Hoffmanns' 
personal guarantee and by a second mortgage on the Property, which has 
been determined by a qualified, independent appraiser to have a fair 
market value of approximately 289% of the total principal amount of the 
loans that it will secure; (d) in the event the fair market value of 
the Property is no longer adequate to secure all outstanding loans, 
additional property will be pledged to the Plan to secure the Loan at 
an amount equal to at least 150% of the outstanding principal balance 
of all outstanding loans secured by the Property; and (e) the Hoffmanns 
are the only Plan participants to be affected by the Loan, and they 
desire that the transaction be consummated.
    Notice to Interested Persons: Since the Hoffmanns are the only Plan 
participants to be affected by the proposed transaction, the Department 
has determined that there is no need to distribute the notice of 
proposed exemption to interested persons. Comments and requests for a 
hearing are due within 30 days from the date of publication of this 
notice of proposed exemption in the Federal Register.
    For Further Information Contact: Gary H. Lefkowitz of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest of disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(b) of the act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries and protective of 
the rights of participants and beneficiaries of the plan;
    (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 15th day of July, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 98-19234 Filed 7-17-98; 8:45 am]
BILLING CODE 4510-29-P