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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Harris Trust & Savings Bank [Notices] [08/06/1998]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Harris Trust & Savings Bank [08/06/1998]

[PDF Version]

Volume 63, Number 151, Page 42068-42079

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10349, et al.]

 
Proposed Exemptions; Harris Trust & Savings Bank

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.

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

[[Page 42069]]

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.

Harris Trust & Savings Bank and Its Affiliates (Harris Trust) Located 
in Chicago, Illinois

[Application No. D-10349]

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).
Section I--Exemption for Acquisition of Fund Shares With Assets 
Transferred in-Kind From a CIF
    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, as of March 21, 1997, to the 
acquisition by employee benefit plans (the Plans), including two plans 
sponsored by Harris Trust for its own employees (the In-house Plans), 
of shares of any open-end investment companies (the Funds) registered 
under the Investment Company Act of 1940 (the '40 Act) for which Harris 
Trust is an investment adviser and may provide other services, with 
Plan assets transferred in-kind to the Funds from certain collective 
investment funds maintained by Harris Trust (the CIFs), in connection 
with the termination of the CIFs, provided that the following 
conditions are satisfied:
    (a) For each Plan, a second fiduciary who is unrelated to, and 
independent of, Harris Trust (the Independent Fiduciary) receives prior 
written notice of the in-kind transfer of Plan assets from a CIF to a 
Fund in exchange for shares of the Fund, as well as the disclosures 
described in Section II(f).
    (b) On the basis of the information described in Section II(f), the 
Independent Fiduciary gives prior written approval for each acquisition 
of Fund shares with Plan assets transferred from a CIF and the fees to 
be received by Harris Trust in connection with its services to the 
Fund. Such approval must be consistent with the general fiduciary 
responsibility provisions imposed on fiduciaries by Part 4 of Title I 
of the Act.
    (c) No sales commissions are paid by the Plans in connection with 
the acquisition of Fund shares with Plan assets transferred from a CIF.
    (d) All or a pro rata portion of the assets of a CIF are 
transferred in-kind to a Fund in exchange for shares of the Fund.
    (e) Each Plan receives Fund shares having a total net asset value 
equal to the value of the Plan's pro rata share of the corresponding 
CIF's assets on the date of the in-kind transfer, based on the current 
market value of the CIF's assets as determined in a single valuation 
performed in the same manner and as of the close of business of the 
same day, using independent sources in accordance with Securities and 
Exchange Commission (SEC) Rule 17a-7 <SUP>1</SUP> of the '40 Act and 
the procedures established by the Fund pursuant to Rule 17a-7. Such 
procedures require that all securities for which a current market value 
cannot be obtained by reference to the last sales price for 
transactions reported on a recognized securities exchange or quoted in 
the NASDAQ system, must be valued based upon an average of the highest 
current independent bid and lowest current independent offer, as of the 
close of business on the last business day preceding the in-kind 
transfer, determined on the basis of reasonable inquiry from at least 
three sources that are broker-dealers or pricing services independent 
of Harris Trust;
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    \1\ 17 CFR 270.17a-7.
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    (f) Within 30 days after completion of each acquisition of Fund 
shares with Plan assets transferred in-kind from a CIF, Harris Trust 
sends by regular mail to the Independent Fiduciary a written 
confirmation containing the following information:
    (1) The identity of each security that was valued for purposes of 
the transaction in accordance with Rule 17a-7(b)(4);
    (2) The market price, as of the date of the in-kind transfer, of 
each such security; and
    (3) The identity of each pricing service or market-maker consulted 
in determining the value of such securities.
    (g) Within 90 days after completion of each acquisition of Fund 
shares with Plan assets transferred in-kind from a CIF, Harris Trust 
sends by regular mail to the Independent Fiduciary a written 
confirmation containing the following information:
    (1) The number of CIF units held by the Plan immediately before the 
in-kind transfer, the related per unit value, and the total dollar 
amount of such CIF units; and
    (2) The number of shares in the Funds that are held by the Plan 
immediately after the in-kind transfer, the related per share net asset 
value, and the total dollar amount of such shares.
    (h) The conditions set forth in paragraphs (c), (d), (e), (f), (i), 
(o), (p), and (q) of Section II are satisfied.
Section II--Exemption for Receipt of Fees From the Funds
    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, as of March 21, 1997, to the receipt 
of fees by Harris Trust from the Funds for acting as an investment 
adviser for the Funds, as well as for acting as the custodian, transfer 
agent, sub-administrator for the Funds, or for providing any other 
``secondary service'' (as defined in Section III(i), below) to the 
Funds, in connection with the investment in shares of the Funds by 
Plans for which Harris Trust is a fiduciary (the Client Plans), other 
than the In-house Plans, provided that the following conditions are 
satisfied:
    (a) No sales commissions are paid by the Client Plans in connection 
with the purchase or sale of shares of the Funds, and no redemption 
fees are paid in connection with the sale of such shares by the Client 
Plans to the Funds.
    (b) The price paid or received by a Client Plan for shares of a 
Fund is the net asset value per share, as defined in Section III(f), at 
the time of the transaction, and is the same price which would have 
been paid or received for the shares by any other investor at that 
time.
    (c) Neither Harris Trust nor an affiliate (including officers or 
directors, and other persons, as defined in Section III(b), below) 
purchases from or sells to the Client Plans shares of the Funds.
    (d) For each Client Plan, the combined total of all fees received 
by Harris Trust for its services to the Client Plan, and in connection 
with its services to any of the Funds in which the Client Plan may 
invest, constitutes no more than ``reasonable compensation'' within the 
meaning of section 408(b)(2) of the Act.
    (e) Harris Trust receives no fees payable pursuant to Rule 12b-1 
under the 40 Act (12b-1 fees) in connection with the transactions.
    (f) Prior to the initial investment by a Client Plan in any of the 
Funds, the Independent Fiduciary receives full and

[[Page 42070]]

detailed written disclosure of information concerning the Fund, 
including, but not limited to
    (1) A current prospectus for the Fund;
    (2) A statement describing the fees for investment management, 
investment advisory, or other similar services, any fees for Secondary 
Services, as defined in Section III(i), and all other relevant fees to 
be paid by the Client Plan and by the Fund to Harris Trust, including 
the nature and extent of any differential between the rates of such 
fees;
    (3) The reasons why Harris Trust considers an investment in the 
Fund to be appropriate for the Client Plan;
    (4) A statement describing whether there are any limitations 
applicable to Harris Trust with respect to which assets of a Client 
Plan may be invested in the Fund, and, if so, the nature of such 
limitations; and
    (5) Upon request of the Independent Fiduciary, a copy of the notice 
of exemption, if granted (and a copy of this notice of proposed 
exemption), once published in the Federal Register.
    (g) On the basis of the information described in paragraph (f), the 
Independent Fiduciary gives prior written authorization for
    (1) The investment of assets of the Client Plan in shares of a 
Fund;
    (2) The Funds in which the assets of the Client Plan may be 
invested; and
    (3) The fees to be paid to Harris Trust in connection with its 
services to the Funds.
    Such authorization by the Independent Fiduciary must be consistent 
with the general fiduciary provisions of Part 4 of Title I of the Act.
    (h) The authorization described in paragraph (g) is terminable by 
the Independent Fiduciary at will without penalty to the Client Plan, 
upon written notice of termination to Harris Trust. Harris Trust shall 
effect such termination by selling the shares of the Fund held by the 
Client Plan by the close of the business day following the date of 
receipt by Harris Trust of the termination form (the Termination Form), 
as defined in Section III(j), or any other written notice of 
termination. However, if, due to circumstances beyond the control of 
Harris Trust, the sale cannot be executed within one business day, 
Harris Trust shall have one additional business day to complete such 
sale.
    (i) Each Client Plan receives a credit, either through cash, or, if 
applicable, the purchase of additional shares of the Funds pursuant to 
an annual election made by the Client Plan (which may be revoked at any 
time), of such Client Plan's proportionate share of all investment 
advisory fees charged to the Funds by Harris Trust, including any 
investment advisory fees paid by Harris Trust to third party sub-
advisers, within one business day of the receipt of such fees by Harris 
Trust. The crediting of all such fees to the Client Plans by Harris 
Trust must be audited by an independent accounting firm at least 
annually to verify the proper crediting of the fees to each Client 
Plan.
    (j) In the event of an increase in the rate of any fees paid by the 
Funds to Harris Trust for any investment management services, 
investment advisory services, or other similar services above the rate 
which has been approved previously by an Independent Fiduciary, in 
accordance with paragraph (g), Harris Trust will provide at least 30 
days' written notice (separate from the Fund Prospectus) to each Client 
Plan invested in a Fund which is increasing such fees.
    (k) In the event of an addition of a Secondary Service by Harris 
Trust to a Fund for which a fee is charged, or in the event of an 
increase in a fee paid by the Funds to Harris Trust for any Secondary 
Service (which may result from either an increase in the rate of such 
fee or a decrease in the number or kind of services performed for such 
fee) above the rate which has been approved previously by an 
Independent Fiduciary, in accordance with paragraph (g), Harris Trust 
will provide at least 30 days' written notice (separate from the Fund 
Prospectus) to each Client Plan invested in a Fund which is adding a 
service or increasing its fees. Such notice shall be accompanied by the 
Termination Form.
    (l) The Independent Fiduciary is supplied with a Termination Form 
at the times specified in paragraphs (k), (l), and (m), which expressly 
provides an election to terminate the authorization described in 
paragraph (g), with instructions regarding the use of the Termination 
Form, including the following information:
    (1) The authorization is terminable by the Independent Fiduciary at 
will without penalty to the Client Plan, upon written notice of 
termination to Harris Trust. Harris Trust shall effect such termination 
by selling the shares of the Fund held by the Client Plan by the close 
of the business day following the date of receipt by Harris Trust of 
the Termination Form, or any other written notice of termination. 
However, if, due to circumstances beyond the control of Harris Trust, 
the sale cannot be executed within one business day, Harris Trust shall 
have one additional business day to complete such sale; and
    (2) Failure of the Independent Fiduciary to return the Termination 
Form will be deemed to be an approval of the additional Secondary 
Service for which a fee is charged or an increase in the rate of any 
fees, if such Termination Form is supplied pursuant to paragraphs (k) 
and (l), and will result in continuation of authorization, as described 
in paragraph (g), for Harris Trust to engage in the transactions on 
behalf of the Client Plan.
    (m) The Independent Fiduciary is supplied annually with a 
Termination Form during the first quarter of each calendar year, 
beginning with the calendar year immediately following the date of 
publication in the Federal Register of a notice of exemption for the 
subject transactions. However, the Termination Form need not be 
supplied to the Independent Fiduciary sooner than six months after it 
has been supplied pursuant to paragraphs (k) and (l), except to the 
extent required to disclose either an additional Secondary Service for 
which a fee is charged or an increase in fees.
    (n)(1) With respect to each of the Funds in which a Client Plan 
invests, Harris Trust will provide the Independent Fiduciary of such 
Client Plan:
    (A) at least annually, a copy of an updated prospectus of the Fund;
    (B) upon the request of the Independent Fiduciary, with a report or 
statement (which may take the form of the most recent financial report, 
the current statement of additional information, or some other written 
statement), which contains a description of all fees paid by the Fund 
to Harris Trust; and
    (2) With respect to each of the Funds in which a Client Plan 
invests, in the event such Fund places brokerage transactions with 
Harris Trust, Harris Trust, at least annually, will provide the 
Independent Fiduciary of such Client Plan with a statement specifying:
    (A) the total dollar amount of brokerage commissions of each Fund's 
investment portfolio paid to Harris Trust by such Fund;
    (B) the total dollar amount of brokerage commissions of each Fund's 
investment portfolio that are paid by such Fund to brokerage firms 
unrelated to Harris Trust;
    (C) the average brokerage commissions per share, in cents per 
share, paid to Harris Trust by each portfolio of a Fund; and
    (D) the average brokerage commissions per share, in cents per 
share, paid by each portfolio of a Fund to brokerage firms unrelated to 
Harris Trust.
    (o) All dealings between the Client Plans and the Funds are on a 
basis no

[[Page 42071]]

less favorable to the Client Plans than dealings between the Fund and 
its other shareholders holding shares of the same class as the Client 
Plans.
    (p) Harris Trust maintains for a period of six years the records 
necessary to enable the persons described in paragraph (q) to determine 
whether the conditions of this exemption have been satisfied, except 
that
    (1) a party in interest with respect to a Plan, other than Harris 
Trust, shall not be subject to a civil penalty under section 502(i) of 
the Act or to the taxes imposed by section 4975 (a) and (b) of the 
Code, if such records are not maintained or are not available for 
examination, as required by paragraph (q); and
    (2) a prohibited transaction shall not be deemed to have occurred 
if, due to circumstances beyond Harris Trust's control, such records 
are lost or destroyed prior to the end of the six year period;
    (q) Notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, Harris Trust makes the records referred to in 
paragraph (p) unconditionally available during normal business hours at 
their customary location to the following persons or a duly authorized 
representative thereof:
    (A) the Department or the Internal Revenue Service; (B) any 
fiduciary of a Client Plan with the authority to acquire or dispose of 
shares of the Funds owned by the Client Plan; and (C) any participant 
or beneficiary of a Client Plan. However, none of the persons described 
in (B) or (C) are authorized to examine the trade secrets of Harris 
Trust, or commercial or financial information which is privileged or 
confidential.

Section III--Definitions

    For purposes of this proposed exemption:
    (a) The term ``Harris Trust'' means Harris Trust & Savings Bank and 
any affiliate thereof, as ``affiliate'' is defined in paragraph (b).
    (b) The term ``affiliate'' of a person includes:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The term ``collective investment fund'' or ``CIF'' means a 
common or collective trust fund or pooled investment fund maintained by 
Harris Trust.
    (e) The term ``Fund'' or ``Funds'' means any diversified open-end 
management investment company or companies registered under the `40 Act 
for which Harris Trust serves as an investment adviser, and may also 
provide custodial or other services approved by the Funds.
    (f) The term ``net asset value'' per share means the amount which 
is calculated by dividing the value of all securities (determined by a 
method set forth in a Fund's prospectus and statement of additional 
information) and other assets belonging to each portfolio in the Fund, 
less the liabilities chargeable to each such Fund portfolio, by the 
number of outstanding shares.
    (g) The term ``relative'' means a ``relative'' as defined in 
section 3(15) of the Act (or a ``member of the family'' as defined in 
section 4975(e)(6) of the Code), or a brother, a sister, or a spouse of 
a brother or a sister.
    (h) The term ``Independent Fiduciary'' means a fiduciary of a Plan 
who is unrelated to, and independent of, Harris Trust. For purposes of 
this proposed exemption, a Plan fiduciary will not be deemed to be 
unrelated to, and independent of, Harris Trust if
    (1) such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with Harris Trust;
    (2) such fiduciary, or any officer, director, partner, employee, or 
relative of such fiduciary is an officer, director, partner, or 
employee of Harris Trust (or is a relative of such persons); or
    (3) Such fiduciary directly or indirectly receives any compensation 
or other consideration from Harris Trust for his or her own personal 
account in connection with any transaction described in this proposed 
exemption. However, with respect to the In-house Plans, the Independent 
Fiduciary may receive compensation from Harris Trust in connection with 
the subject transactions, provided that the amount or payment of such 
compensation is not contingent upon, nor in any way affected by, the 
Independent Fiduciary's ultimate decision regarding the Plans' 
participation in the transactions.
    With the exception of the In-house Plans, if an officer, director, 
partner or employee of Harris Trust (or relative of such persons) is a 
director of the Plan fiduciary and abstains from participation in (i) 
the choice of the Plan's investment adviser, (ii) the approval of any 
purchase or sale between the Plan and the Funds, and (iii) the approval 
of any change in fees paid by the Plan in connection with any of the 
subject transactions, then paragraph (g)(2) shall not apply.
    (i) The term ``Secondary Service'' means a service other than an 
investment management, investment advisory, or similar service, which 
is provided by Harris Trust to the Funds, including, but not limited 
to, custodial, accounting, transfer agent, administrative, brokerage, 
or any other service.
    (j) The term ``Termination Form'' means the form supplied to the 
Independent Fiduciary, at the times specified in Section II(k), (l), 
and (m), which expressly provides to the Independent Fiduciary an 
election to terminate at will the authorization described in Section 
II(g) without penalty to the Plan. The Independent Fiduciary may use 
such Termination Form to provide written notice of termination to 
Harris Trust and instruct Harris Trust to effect the termination by 
selling the shares of a Fund held by the Plan by the close of the 
business day following the date of receipt by Harris Trust of the 
Termination Form. However, if, due to circumstances beyond the control 
of Harris Trust, the sale cannot be executed within one business day, 
Harris Trust shall have one additional business day to complete such 
sale.
    (k) The term ``security'' shall have the same meaning as defined in 
section 2(36) of the '40 Act, as amended, 15 USC 80a-2(36)(1996).

    Effective Date: The proposed exemption, if granted, will be 
effective as of March 21, 1997.

Summary of Facts and Representations

    1. Harris Trust & Savings Bank is an Illinois state-chartered bank, 
a member of the Federal Reserve system, and the largest of 14 banks 
owned by Harris Bankcorp, Inc. Harris Bankcorp, Inc. is a wholly owned 
subsidiary of Bankmont Financial Corp., which, in turn, is a wholly 
owned subsidiary of Bank of Montreal, a publicly traded Canadian 
banking institution. Harris Trust & Savings Bank and its affiliates are 
hereafter collectively referred to as Harris Trust.
    As of December 30, 1995, Harris Trust had total assets of 
approximately $17.1 billion. Harris Trust serves as trustee, investment 
manager, and/or custodian for approximately 600 Plans. As of December 
30, 1995, Harris Trust had approximately $162 billion in Plan assets 
under management, of which

[[Page 42072]]

approximately $2 billion was invested in the CIFs.
    2. On January 11, 1996, the sale of a portion of Harris Trust's 
investment management business to Citibank, N.A. was announced. In 
connection with such sale, Harris Trust terminated certain CIFs on 
March 21, 1997 and transferred the CIFs' assets in-kind to the Funds in 
exchange for shares of the Funds. Harris Trust requests an exemption 
for the in-kind transfer of assets of Plans that were invested in these 
CIFs who received shares of the Funds. Harris Trust was a fiduciary for 
Plan assets that were held in these CIFs, and was also an investment 
adviser for the Funds in which the Plans invested.<SUP>2</SUP> The 
Plans that invested in the terminated CIFs included not only the Client 
Plans of Harris Trust but also two In-house Plans.<SUP>3</SUP> In 
addition, Harris Trust represents that conversions of other CIFs to 
Funds, through an in-kind transfer of the CIFs' assets to those Funds 
in exchange for Fund shares, may occur in the future. Thus, Harris 
Trust requests that the proposed exemption cover these future 
conversions, provided that the same terms and conditions discussed 
herein are satisfied.<SUP>4</SUP>
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    \2\ Prohibited Transaction Class Exemptions 77-4 and 97-41 (PTCE 
77-4, 42 FR 18732, April 8, 1977 and PTCE 97-41, 62 FR 42830, August 
8, 1997) permit, under certain conditions, the purchase or sale by 
an employee benefit plan of shares of a registered, open-end 
investment company whose investment adviser is also a fiduciary of 
such plan (but not an employer of employees covered by the plan). In 
Advisory Opinion 94-35A, the Department expressed the view that the 
relief provided by PTCE 77-4 is unavailable for the purchase of 
investment company shares other than for cash. PTCE 97-41 provides, 
under certain conditions, specific relief for the purchase of 
investment company shares with assets transferred in-kind from a 
collective investment fund, but, like PTCE 77-4, does not extend to 
in-house plans, and also requires that the other conditions of PTCE 
77-4 are satisfied (see Section III of PTCE 97-41, 62 FR 42836). 
Thus, Harris Trust has requested that all the conversion 
transactions described herein, as well as its fee arrangement (which 
is outside the scope of relief afforded by either PTCE 77-4 or PTCE 
97-41), be covered by a single individual exemption.
    \3\ Prohibited Transaction Exemption 77-3 (PTCE 77-3, 42 FR 
18734, April 8, 1977) permits, under certain conditions, the 
acquisition or sale of shares of a registered, open-end investment 
company by an employee benefit plan covering only employees of such 
investment company, employees of the investment adviser or principal 
underwriter for such investment company, or employees of any 
affiliated person (as defined therein) of such investment adviser or 
principal underwriter. However, the Department, at this time, offers 
no opinion as to whether PTCE 77-3 covers the purchase of investment 
company shares other than for cash.
    \4\ In addition, Harris intends to offer Client Plans which are 
invested in certain non-terminating CIFs the opportunity to redeem 
for cash all or a portion of their interests in these CIFs and 
purchase shares of a corresponding Fund. These redemption 
transactions will not involve in-kind exchanges and are mentioned 
only in connection with the requested exemption for the receipt of 
fees.
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    Harris Trust also requests an exemption for Harris Trust to receive 
fees from the Funds for services rendered to the Funds, in connection 
with the investments made in Fund shares by Plans for which Harris 
Trust is a fiduciary. This exemption would include those Client Plans 
whose assets were transferred from a terminated CIF but would not 
include assets transferred by the In-house Plans. One affiliate of 
Harris Trust, Harris Trust Bank of Arizona, and a number of the 
community banks of Harris Trust which have trust departments, may offer 
shares of the Funds to their Client Plans. These banks include Harris 
Bank Naperville, Harris Bank Wilmette, N.A., Harris Bank Barrington, 
N.A., Harris Bank Winnetka, N.A., Harris Bank St. Charles, Harris Bank 
Batavia, N.A. and Harris Trust Company of Florida.
    3. The terminated CIFs consisted of the five portfolios of an 
entity known as the Harris Trust and Savings Bank Trust for Collective 
Investment of Employee Benefit Accounts. These portfolios were (i) the 
Government/Agency Intermediate Fund, (ii) the Convertible Fund, (iii) 
the International Equity Fund, (iv) the Balanced Blend Fund, and (v) 
the Special Capital Fund.
    The Funds corresponding to the terminated CIFs consisted of five 
portfolios of Harris Insight Funds (the Insight Funds). These 
portfolios are (i) the Intermediate Government Bond Fund, (ii) the 
Convertible Securities Fund, (iii) the International Fund, (iv) the 
Balanced Fund, and (v) the Small-Cap Value Fund.
    The Insight Funds further consist of the Harris Insight Funds Trust 
and HT Insight Funds, Inc., both open-end, diversified management 
investment companies registered under the ``40 Act. Harris Trust serves 
as investment adviser to each of the Insight Funds. Harris Trust 
retains subadvisers for certain of the Insight Funds to whom it pays a 
direct fee. Harris Trust has also entered into portfolio management 
contracts with an affiliate, Harris Investment Management, Inc., to 
whom Harris Trust pays the investment advisory fees it receives from 
the Funds.
    Harris Trust requests that the exemption cover not only the Insight 
Funds but any mutual fund with respect to which Harris Trust may be the 
investment adviser.

The Conversion Transactions

    4. Harris Trust represents that permitting the acquisition by the 
Plans of Fund shares with Plan assets transferred in-kind to the Funds 
will avoid the transaction costs that would otherwise be incurred in 
liquidating CIF assets and making the same investments for the Funds, 
thus resulting in significant savings, direct and indirect, to the 
Plans. No sales commissions (other than customary transfer charges to 
parties other than Harris Trust) will be paid by the Plans in 
connection with the acquisition of Fund shares with Plan assets 
transferred from a CIF. Harris Trust believes that the Funds will offer 
the Plans advantages over the CIFs as pooled investment vehicles. In 
addition to readily obtainable daily price quotations, ease of trading, 
and faster distributions (shares of a Fund may be distributed in-kind), 
the Plans as shareholders of a Fund would have the opportunity to 
exercise voting and other shareholder rights.
    5. With respect to both the past conversion of CIFs to Funds that 
occurred on March 21, 1997, and the potential conversion of other CIFs 
to Funds that may occur in the future, Harris Trust makes the following 
representations regarding disclosures to the Independent Fiduciaries 
for the Plans. Prior to any conversion, Harris Trust will provide to 
the Independent Fiduciary of each Plan (including that of the In-house 
Plans) written notice of termination of the CIF, as well as full and 
detailed written disclosure of information concerning the Fund, 
including, but not limited to
    (1) A current prospectus for the Fund;
    (2) A statement describing the fees for investment management, 
investment advisory, or other similar services, Secondary Services, and 
all relevant other fees to be paid by the Plan and by the Fund to 
Harris Trust, including the nature and extent of any differential 
between the rates of such fees;
    (3) The reasons why Harris Trust considers an investment in the 
Fund to be appropriate for the Plan;
    (4) A statement describing whether there are any limitations 
applicable to Harris Trust with respect to which assets of a Plan may 
be invested in the Fund, and, if so, the nature of such limitations; 
and
    (5) Upon request of the Independent Fiduciary, a copy of the notice 
of exemption, if granted (and a copy of this notice of proposed 
exemption), once published in the Federal Register.
    On the basis of this information, the Independent Fiduciary must 
give prior written approval for each acquisition of Fund shares with 
Plan assets transferred from a CIF and the fees to be received by 
Harris Trust in connection with its services to the Fund. Such approval 
must be consistent with the general

[[Page 42073]]

fiduciary responsibility provisions of Part 4 of Title I of the Act. 
Plans whose Independent Fiduciaries do not consent to their 
participation in the CIF conversion will have their interests in the 
CIF redeemed in accordance with the terms of the CIF prior to the 
conversion.
    Specifically, with respect to the In-house Plans, Harris Trust 
appointed Magna Trust Company (Magna), formerly known as Illinois State 
Trust Company, as the Independent Fiduciary to oversee and approve the 
in-kind transfer of CIF assets attributable to the In-house Plans that 
were involved in the conversions that occurred on March 21, 1997. Magna 
provides various services to more than 4,900 fiduciary accounts. These 
services include employee benefit plan administration, investment 
management services, and serving as custodian of securities and 
investment advisor for two bank proprietary mutual funds. Magna is 
responsible for more than $2 billion in assets, with $1.2 billion in 
discretionary assets.
    As part of its written report, dated January 24, 1997, Magna 
confirmed both its independence from Harris Trust and its 
qualifications to serve as the Independent Fiduciary for the In-house 
Plans. Magna also represented that it understood and accepted the 
duties, responsibilities, and liabilities in acting as a fiduciary 
under the Act for the In-house Plans. Based on the disclosures made by 
Harris Trust regarding the conversion transactions, Magna determined 
that participation therein was in the best interests of, and 
appropriate for, each In-house Plan.
    In a supplemental report, dated July 7, 1997, Magna represented 
that following the conversion transactions, it was provided by Harris 
Trust with the required confirmation statements. In addition, Magna 
confirmed that the conversion transactions were performed in accordance 
with the proposed exemption.
    6. With respect to both the past conversion of CIFs to Funds that 
occurred on March 21, 1997, and any future conversions of other CIFs to 
Funds that may occur, Harris Trust makes the following representations 
regarding the valuation and other procedures for such transactions.
    All or a pro rata portion of the assets of a CIF are transferred 
in-kind to a Fund in exchange for shares of the Fund distributed to the 
Plans. The assets transferred consist entirely of cash and marketable 
securities. Other CIF assets, or assets which do not meet the 
investment objectives of the Fund, are sold on the open market through 
an unaffiliated brokerage firm prior to the conversion. The current 
market value of the CIF assets is determined by a single valuation for 
each asset, with all valuations performed in the same manner and as of 
the close of business of the same day, in accordance with Rule 17a-7 of 
the '40 Act <SUP>5</SUP> and the procedures established by the Fund 
pursuant to Rule 17a-7. Rule 17a-7 requires, among other things, that 
such transactions be effected at the ``independent current market 
price'' for each security.<SUP>6</SUP> In this regard, the 
``independent current market price'' for specific types of CIF 
securities involved in the conversion is determined as follows:
---------------------------------------------------------------------------

    \5\ Rule 17a-7 provides an exemption from the prohibited 
transaction provisions of section 17(a) of the '40 Act (15 U.S.C. 
80a-7(a)), which prohibit, among other things, transactions between 
an investment company and its investment adviser or affiliates of 
its investment adviser. Thus, Rule 17a-7 permits transactions 
between the Funds and other accounts that use the same or affiliated 
investment advisers, subject to certain conditions that are designed 
to insure fair valuation of the assets involved in the transaction.
    \6\ Rule 17a-7 also includes the following requirements: (a) the 
transaction must be consistent with the investment objectives and 
policies of the Fund, as described in its registration statement; 
(b) the security that is the subject of the transaction must be one 
for which market quotations are readily available; (c) no brokerage 
commissions or other remuneration may be paid in connection with the 
transaction; and (d) the Fund's board of directors (i.e., those 
directors who are independent of the Fund's investment adviser) must 
adopt procedures to insure that the requirements of Rule 17a-7 are 
followed, and determine no less frequently than quarterly that the 
transactions during the preceding quarter were in compliance with 
such procedures.

    (a) If the security is a ``reported security,'' as the term is 
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934 
(the '34 Act)(17 C.F.R. 240.11Aa3-1), the last sale price with 
respect to such security reported in the consolidated transaction 
reporting system (the Consolidated System; or, if there are no 
reported transactions in the Consolidated System that day, the 
average of the highest current independent bid and the lowest 
current independent offer for such security (reported pursuant to 
Rule 11Ac1-1), as of the close of business on the CIF valuation 
date; or
    (b) If the security is not a reported security, and the 
principal market for such security is an exchange, then the last 
sale on such exchange or, if there are no reported transactions on 
such exchange that day, the average of the highest current 
independent bid and lowest current independent offer on the exchange 
as of the close of business on the CIF valuation date; or
    (c) If the security is not a reported security and is quoted in 
the NASDAQ system, then the average of the highest current 
independent bid and lowest current independent offer reported on 
Level 1 of NASDAQ as of the close of business on the CIF valuation 
date; or
    (d) For all other securities, the average of the highest current 
independent bid and lowest current independent offer determined on 
the basis of reasonable inquiry from at least three independent 
sources as of the close of business on the CIF valuation date.

    Harris Trust represents that the values for the securities 
established in determining the amount transferred from the CIF are the 
same values used in determining the amount received by the Fund. Thus, 
each Plan receives Fund shares having a total net asset value equal to 
the value of the Plan's pro rata share of the CIF's assets on the date 
of the in-kind transfer.
    Within 30 days after completion of each acquisition of Fund shares 
with Plan assets transferred in-kind from a CIF, Harris Trust sends by 
regular mail to the Independent Fiduciary a written confirmation 
containing the following information:
    (1) The identity of each security that was valued for purposes of 
the transaction in accordance with Rule 17a-7(b)(4);
    (2) The market price, as of the date of the in-kind transfer, of 
each such security; and
    (3) The identity of each pricing service or market-maker consulted 
in determining the value of such securities.
    Within 90 days after completion of each acquisition of Fund shares 
with Plan assets transferred in-kind from a CIF, Harris Trust sends by 
regular mail to the Independent Fiduciary a written confirmation 
containing the following information:
    (1) The number of CIF units held by the Plan immediately before the 
in-kind transfer, the related per unit value, and the total dollar 
amount of such CIF units; and
    (2) The number of shares in the Funds that are held by the Plan 
immediately after the in-kind transfer, the related per share net asset 
value, and the total dollar amount of such shares.

Harris Trust's Receipt of Fees From the Funds

    7. Prior to the investment by a Client Plan in any of the Funds, 
the Independent Fiduciary receives a full and detailed written 
disclosure of information concerning the Fund, as previously described 
in paragraph 5 above (with respect to the conversion transactions). On 
the basis of this information, the Independent Fiduciary must give 
prior written approval for the investment by the Client Plan in each 
Fund and the fees to be paid to Harris Trust in connection with its 
services to the Fund. Such authorization must be consistent with the 
general fiduciary provisions of Part 4 of Title I of the Act. The 
authorization is terminable by the Independent Fiduciary at will 
without

[[Page 42074]]

penalty to the Client Plan, upon written notice of termination to 
Harris Trust.
    8. Harris Trust represents that there are two levels of fees 
charged to a Client Plan: (i) those fees which Harris Trust charges for 
serving as a trustee, investment manager, or custodian of the Client 
Plan (the Plan-level fees); and (ii) those fees which Harris Trust 
charges to the Funds (the Fund-level fees) for serving as an investment 
adviser to the Fund, as well as for serving as a custodian or transfer 
agent for the Funds or for providing other Secondary Services to the 
Funds. Harris Trust's rebate procedures relating to its Fund-level fees 
are described below. These rebate procedures insure that there is a 
credit of Fund-level fees against all Plan-level investment management 
fees charged to a Client Plan by Harris Trust and eliminates any 
``double fees'' for such services, similar to the requirements of PTCE 
77-4, Part II(c).<SUP>7</SUP>
---------------------------------------------------------------------------

    \7\ As previously noted in Footnote 2, PTCE 77-4 permits, under 
certain conditions, the purchase or sale (for cash) by an employee 
benefit plan of shares of a registered, open-end investment company 
whose investment adviser is also a fiduciary of such plan (but not 
an employer of employees covered by the plan). PTCE 77-4 requires, 
among other things, that the plan not pay an investment management, 
investment advisory, or other similar fee with respect to the plan 
assets invested in such shares for the entire period of such 
investment. However, Section II(c) of PTCE 77-4 states that this 
condition does not preclude the payment of investment advisory fees 
by the investment company under the terms of an investment advisory 
agreement adopted in accordance with section 15 of the '40 Act. 
Section II(c) further states that this condition does not preclude 
the payment of investment advisory fees by the Client Plan, based on 
total plan assets, where a credit representing the Client Plan's pro 
rata share of investment advisory fees paid by the investment 
company has been subtracted.
---------------------------------------------------------------------------

The Rebate Procedures

    In its capacity as a plan fiduciary, Harris Trust charges each 
Client Plan a fee for investment management/trustee services, based 
upon its standard fee schedules and the terms of the specific agreement 
it has with the Client Plan. <SUP>8</SUP> Plan-level fees for 
investment management, investment advisory, or other similar services 
provided by Harris Trust are currently charged in the form of a single 
asset-based investment management fee, which is billed on a quarterly 
basis. There is also a Plan-level trustee fee for basic administrative 
services provided by Harris Trust, as well as other specific service 
fees. Currently, the annual investment management fee ranges from .375% 
to .80% of the market value of the assets calculated at the end of each 
calendar quarter prior to the quarterly billing date, depending upon 
the amount of assets under management. Plan-level fees are subject to 
annual minimums for administration and management, expressed as flat 
dollar amounts.
---------------------------------------------------------------------------

    \8\ Harris Trust represents that all fees paid by the Client 
Plans directly to Harris Trust for services performed by Harris 
Trust are statutorily exempt under section 408(b)(2) of the Act and 
the regulations thereunder. However, the Department expresses no 
opinion herein as to whether the fees received by Harris Trust for 
the provision of services to the Client Plans would comply with the 
requirements of section 408(b)(2).
---------------------------------------------------------------------------

    Harris Trust also provides ``sweep'' services to the Client Plans, 
which allow idle cash to be automatically invested temporarily in Fund 
shares, in order to insure that a Client Plan's assets are fully 
invested at all times. Harris Trust does not charge separate fees for 
the provision of such sweep services. Instead, charges for sweep 
services are built into Harris Trust's Plan-level investment management 
and trustee fees, and any investment advisory fees received by Harris 
Trust from the Fund into which idle cash is swept will be credited back 
to the Client Plan in the manner of other Fund investments. 
<SUP>9</SUP>
---------------------------------------------------------------------------

    \9\ See the Department's letter dated August 1, 1986 to Robert 
S. Plotkin, Assistant Director, Division of Banking Supervision and 
Regulation, Board of Governors of the Federal Reserve System, which 
states the Department's views regarding the application of the 
prohibited transaction provisions of the Act to sweep services 
provided to employee benefit plans by fiduciary banks and the 
potential applicability of certain statutory exemptions.
---------------------------------------------------------------------------

    For its services as investment adviser to the Insight Funds, Harris 
Trust is entitled to receive monthly advisory fees from the Insight 
funds, as disclosed in the prospectus, currently ranging from 
approximately 0.11% to 1.05% of the Funds' assets under management, 
subject to certain voluntary fee waivers. In addition, Harris Trust may 
receive fees from the Insight Funds for certain Secondary Services. 
Harris Trust receives no 12b-1 fees payable pursuant to Rule 12b-1 
under the ``40 Act.
    The Funds accrue daily as an expense payable to Harris Trust a 
ratable portion of Harris Trust's investment advisory and other 
administrative fees, based upon the average daily net asset value of 
the Funds. Such fees are paid by the Fund to Harris Trust monthly in 
arrears. Harris Trust intends that the Client Plans generally will not 
incur any increased fees for investing in the Funds. Harris Trust 
rebates to each Client Plan, on the same business day as the receipt of 
such fees by Harris Trust, the Client Plan's proportionate share of all 
advisory fees payable to Harris Trust by the Funds as of such date. 
Such rebate is effectuated through the purchase of additional shares of 
the Funds. This rebate procedure is approved by the Independent 
Fiduciary at the time it provides its original written approval of the 
investment of a Client Plan's assets in the Funds. Harris Trust 
continues to charge each Client Plan (other than the In-house Plans) 
its full investment management fee for all assets under management, 
including those assets invested in the Funds. The net effect of these 
procedures is that no Client Plan ever pays, in any period, a 
``double'' investment advisory fee for any Client Plan assets invested 
in the Funds. Harris Trust represents that the combined total of all 
fees it receives for its services to a Client Plan, and for its 
services to any of the Funds in which the Client Plan invests, 
constitute no more than ``reasonable compensation'' within the meaning 
of section 408(b)(2) of the Act.
    In the case of the In-house Plans, from which Harris Trust receives 
no Plan-level fees, Harris Trust also rebates to each In-house Plan its 
proportionate share of all advisory fees payable to Harris Trust by the 
Funds through the purchase of additional shares of the Funds, in 
accordance with the procedures described above.
    9. Harris Trust represents that it maintains a system of internal 
accounting controls for the crediting of all Fund-level fees to the 
Client Plans. Harris Trust is audited by its independent accounting 
firm, currently KPMG Peat Marwick LLP (the Auditor), at least annually 
to verify the proper crediting of the fees to each Client Plan. 
Information regarding fees is used in the preparation of required 
financial disclosure reports of the Funds for the benefit of the Client 
Plans.
    Specifically, in performing its audit, the Auditor: (a) reviews and 
tests compliance with the specific operational controls and procedures 
established by the Harris Trust for making credits; (b) verifies, on a 
test basis, the daily credit factors transmitted to Harris Trust by the 
Funds; (c) verifies, on a test basis, the credits paid in total to sum 
of all credits paid to each Client Plans; (d) verifies, on a test 
basis, the credits paid in total to the sum of all credits paid to each 
Client Plan; and (e) recomputes, on a test basis, the amount of the 
credit determined for selected Client Plans and verifies that the 
proper credit was made to the proper Client Plan.
    In the event that either the internal audit by Harris Trust or the 
independent audit by the Auditor identifies an error made in the 
crediting of fees to the Client Plans, Harris Trust will correct the 
error. With respect to any shortfall in credited fees to a Client Plan, 
Harris Trust will make a cash payment to the Client Plan equal to the 
amount of the error plus interest based on the greater of either (a) 
the money market rate

[[Page 42075]]

offered by Harris Trust for the period involved, or (b) the total rate 
of return for shares of the Funds, including dividends, that would have 
been acquired during such period. Any excess credits made to a Client 
Plan will be corrected by an appropriate deduction and reallocation of 
cash during the next payment period to reflect accurately the amount of 
total credits due to the Plan for the period involved.
    10. Harris Trust states that any increase in the rate of fees paid 
by a Fund to Harris Trust must receive the prior written approval from 
every Independent Fiduciary of every plan investing in shares of the 
Fund. Harris Trust uses a ``negative consent'' procedure to obtain such 
approvals. This procedure is described as follows.
    In the event of an increase in the rate of any fees paid by the 
Funds to Harris Trust for any investment management services, 
investment advisory services, or other similar services above that rate 
which has been approved by an Independent Fiduciary for a Client Plan, 
Harris Trust provides at least 30 days' written notice to each Client 
Plan investing in shares of a Fund which is increasing such fees. Such 
notice may take the form of a proxy statement, letter, or similar 
communication that is separate from the Fund Prospectus and must 
explain the nature and amount of the additional service or the nature 
and amount of the increase in fees.
    In the event of an addition of a Secondary Service by Harris Trust 
to a Fund for which a fee is charged, or in the event of an increase in 
a fee paid by the Funds to Harris Trust for any Secondary Service 
(which may result from either an increase in the rate of such fee or a 
decrease in the number or kind of services performed for such fee) 
above that rate which has been approved by an Independent Fiduciary, 
notice provided to Client Plans must be accompanied by a Termination 
Form, which is described in paragraph 11 below.
    However, with respect to the In-house Plans, Harris Trust did not 
retain the Independent Fiduciary for the In-house Plans for purposes of 
reviewing Fund-level fee changes on an on-going basis. Harris Trust 
states that following completion of the conversion transactions on 
March 21, 1997, the In-house Plans' investments in the Funds were 
managed by in-house fiduciaries, consistent with the requirements of 
PTCE 77-3.\10\
---------------------------------------------------------------------------

    \10\  The Department expresses no opinion herein as to whether 
any transactions with the Funds by the In-house Plans are covered by 
PTCE 77-3.
---------------------------------------------------------------------------

    11. Each Independent Fiduciary will be supplied annually with a 
Termination Form during the first quarter of each calendar year, 
beginning with the calendar year immediately following the date of 
publication in the Federal Register of a notice of exemption for the 
subject transactions. However, the Termination Form need not be 
supplied to the Independent Fiduciary sooner than six months after it 
has already been supplied, except to the extent required to disclose 
either an additional Secondary Service for which a fee is charged or an 
increase in fees.
    The Termination Form, which expressly provides an election to 
terminate the authorization, provides instructions regarding the use of 
the Termination Form, including the information discussed in Section 
II(l)(1) and (2), above.
    12. No sales commissions are paid by the Client Plans in connection 
with the purchase or sale of shares of the Funds, and no redemption 
fees are paid in connection with the sale of such shares by the Client 
Plans to the Funds. In addition, neither Harris Trust nor an affiliate 
(including officers or directors, and other persons) will be allowed to 
directly purchase from or sell to the Client Plans any shares of the 
Funds. The price paid or received by a Client Plan for shares of a Fund 
is the net asset value per share at the time of the transaction, and is 
the same price which would have been paid or received for the shares by 
any other investor at that time. Finally, all dealings between the 
Client Plans and the Funds are on a basis no less favorable to the 
Client Plans than dealings between the Fund and its other shareholders.
    13. To insure that the Independent Fiduciary has the information 
necessary to effectively monitor each of the Funds in which a Client 
Plan invests, Harris Trust provides to the Independent Fiduciary 
certain on-going disclosures, as discussed in Section II(n)(1) and (2), 
above.
    In this regard, a Harris Trust affiliate may execute securities 
brokerage transactions for the investment portfolios of certain of the 
Funds. To the extent that Harris Trust does not currently execute 
securities brokerage transactions with respect to any Fund for which a 
fee is paid to Harris Trust, but proposes to do so in the future, 
Harris Trust will provide at least 30 days' written notice to each 
Client Plan investing in shares of such Fund. Such notice will be 
accompanied by a Termination Form allowing the Client Plan an option to 
object to the addition of brokerage services to a Fund, as a Secondary 
Service, by Harris Trust. Failure of the Independent Fiduciary to 
return the Termination Form will be deemed to be approval by the Client 
Plan of brokerage services by Harris Trust. Harris Trust currently has 
one affiliated broker, Harris Investors Direct, Inc. (Harris 
Investors). Harris Trust represents that Harris Investors has not 
provided any brokerage services with respect to the transactions which 
have taken place to date.
    If any Harris Trust affiliate, including Harris Investors, provides 
brokerage services to a Fund, Harris Trust will provide the Independent 
Fiduciary of the Client Plan with a statement at least annually that 
specifies information about the commissions received by the Harris 
Trust affiliate, as discussed in Section II(n)(2)(A) through (D), 
above.
    14. In summary, Harris Trust represents that the subject 
transactions satisfy the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons: (a) the Funds 
provide the Client Plans and the In-house Plans with a more 
advantageous investment vehicle than the CIFs, yet avoid the payment to 
Harris Trust of any duplicative fees for investment management, 
investment advisory, or other similar services;
    (b) with respect to the conversions of CIFs to Funds, an 
Independent Fiduciary approves in advance any transfer of Plan assets 
in exchange for Fund shares and only after full written disclosure of 
information concerning the Funds; (c) each Plan receives Fund shares 
having a total net asset value equal to the value of the Plan's pro 
rata share of the CIF's assets on the date of the in-kind transfer, as 
determined by a single valuation for each asset, with all valuations 
performed in the same manner and as of the close of business of the 
same day, in accordance with the procedures established by the Fund 
pursuant to Rule 17a-7 of the 40 Act (requiring the use of independent 
sources); (d) the Independent Fiduciary receives written confirmation 
of the entire transaction that discloses the number of CIF units held 
by the Plan immediately before the conversion and the number of Fund 
shares held by the Plan immediately after, the related per unit and per 
share values, and the total dollar amount of the CIF units and the Fund 
shares involved in the transaction;
    (e) with respect to any investments in a Fund by the Client Plans 
and the payment of any fees by the Fund to Harris Trust, an Independent 
Fiduciary approves such investments and fees in advance and only after 
full written disclosure of information concerning the Fund, including a 
current prospectus and a statement describing

[[Page 42076]]

all fees to be paid to Harris Trust; (f) any authorizations made by a 
Client Plan regarding investments in a Fund, fees paid by the Fund to 
Harris Trust, or any increases in fees for secondary services provided 
to the Fund by Harris Trust, are terminable by the Independent 
Fiduciary at will, without penalty to the Client Plan, upon written 
notice to Harris Trust; (g) annual audits by an independent accounting 
firm are required to verify the proper crediting to the Client Plans of 
fees charged by Harris Trust to the Funds; (h) the Client Plans and the 
In-house Plans do not pay any commissions or redemption fees in 
connection with their acquisition of Fund shares (either through a 
direct purchase of the shares or through a transfer of CIF assets in 
exchange for the shares) or the Plans' sale of Fund shares; and (i) all 
dealings between the Client Plans and the In-house Plans and the Funds 
are on a basis no less favorable to the Plans than dealings between the 
Fund and its other shareholders.

Notice to Interested Persons

    Harris Trust will provide notice of the proposed exemption to 
interested persons by first-class or overnight mail within 15 days of 
the date of publication of this notice of pendency in the Federal 
Register. Interested persons consist of the Independent Fiduciaries of 
all Plans which had investments in a CIF which terminated on March 21, 
1997. Interested persons also consist of any other Independent 
Fiduciaries for Plans which, at the time this notice is published in 
the Federal Register, have approved, or will approve, any transfer of a 
Plan's assets from a CIF to a Fund, in connection with the termination 
of a CIF prior to the date this proposed exemption is granted. Such 
notice shall include a copy of this notice of the proposed exemption, 
as published in the Federal Register, and shall inform interested 
persons of their right to comment and/or request a hearing with respect 
to the proposed exemption. Comments and requests for a hearing are due 
within 45 days of the date of publication of this notice in the Federal 
Register.
    For Further Information Contact: Ms. Karin Weng of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Individual Retirement Accounts (the IRAs) for Marcia A. Hendrichsen, 
Larry L. Hendrichsen, Lawrence D. Hendrichsen, Located in Burlington, 
Iowa, and William H. Napier, George Rashid, Jr., Jake E. Rashid, Carl 
A. Saunders, and John C. Schuldt, Located in Fort Madison, Iowa 
(Collectively, the Participants)

[Exemption Application Number: D-10547]

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 proposed 
cash sale (the Sale) of certain membership units (the Units) in the 
Catfish Bend Casinos, L.C. (Catfish Bend), by the IRAs <SUP>11</SUP> to 
the Participants, disqualified persons with respect to the IRAs, 
provided that the following conditions are 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 Sale of the Units by each IRA is a one-time transaction for 
cash;
    (b) The terms and conditions of each Sale are at least as favorable 
to each IRA as those obtainable in an arm's length transaction with an 
unrelated party;
    (c) Each IRA receives the fair market value of the Units at the 
time of each Sale; and
    (d) Each IRA is not required to pay any commissions, costs or other 
expenses in connection with each Sale.

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 are certain 
membership Units in Catfish Bend, an Iowa limited liability company 
which operates the riverboat casino Catfish II. Currently, there are 
66,521 Units outstanding which are owned by 496 members.
    The applicants describe the IRAs and their holdings of the Units as 
follows:
    (a) The IRA of Marcia A. Hendrichsen currently holds assets valued 
at approximately $59,127, which includes 20 Units. The IRA originally 
purchased the Units on January 27, 1994 for $2,000.
    (b) The IRA of Larry L. Hendrichsen currently holds assets valued 
at approximately $48,490, which includes 20 Units.
    The IRA originally purchased the Units on January 27, 1994 for 
$2000.
    (c) The IRA of Lawrence D. Hendrichsen currently holds assets 
valued at approximately $49,832, which includes 10 Units. The IRA 
originally purchased the Units on January 27, 1994 for 
$1000.<SUP>12</SUP>
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    \12\ The Department notes that the Units held in the IRAs of 
Marcia, Larry L., and Laurence Hendrichsen, are valued at $250 per 
Unit, based on the Deloitte and Touche appraisal discussed below. 
However, in the case of the remaining IRAs, the participants carried 
the value of the Units at $200 per unit. This amount reflects the 
value of the Units prior to the Deloitte and Touche appraisal, and 
is, in effect, obsolete. Thus, the value of the Catfish interests is 
$250 per Unit as reflected in the aforementioned Deloitte and Touche 
appraisal.
---------------------------------------------------------------------------

    (d) The IRA of William H. Napier currently holds assets valued at 
approximately $20,000, which includes 100 Units. The IRA obtained the 
Units when Mr. Napier rolled them over with the rest of his assets from 
his individual account in the Napier Wright & Wolf law firm plan, which 
originally purchased the Units on January 27, 1994 for $10,000.
    (e) The IRA of George Rashid, Jr. currently holds assets valued at 
approximately $42,434, which includes 200 Units. The IRA originally 
purchased the Units on January 28, 1994 for $20,000.
    (f) The IRA of Jake E. Rashid currently holds assets valued at 
approximately $619,014, which includes 300 Units. The IRA originally 
purchased the Units on January 28, 1994 for $30,000.
    (g) The IRA of Carl A. Saunders currently holds assets valued at 
approximately $36,797, which includes 100 Units. The IRA originally 
purchased the Units on January 31, 1994 for $10,000.
    (h) The IRA of John C. Schuldt, president of Catfish Bend, 
currently holds assets valued at approximately $104,665, which includes 
320 Units. The IRA purchased the Units on June 13, 1994 for $32,000.
    2. The applicants request exemptions for the Sale of the Units by 
each individual IRA to its respective Participant. The applicants 
represent that the IRAs have benefitted from significant appreciation 
and returns since purchasing the Units. The applicants believe that at 
present price levels, an excellent opportunity for the Sale of the 
Units now exists. Accordingly, they wish to sell the Units from their 
respective IRAs to ensure that each IRA realizes a substantial 
profit.<SUP>13</SUP>
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    \13\ 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 Units by some of the Participants.

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[[Page 42077]]

    In addition, the applicants represent that the continued holding of 
the Units will cause the IRAs to incur unrelated business income tax 
(UBIT) pursuant to section 512 of the Code.<SUP>14</SUP> Therefore, 
because of the aforementioned reasons, the applicants seek an exemption 
to purchase the Units from the IRAs.
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    \14\ In this regard, six of the eight IRAs have previously 
incurred and paid UBIT as a result of holding the Units. The other 
two IRAs did not incur UBIT due to the fact that the earnings on the 
Units failed to exceed the $1000 threshold for triggering the tax.
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    3. Gary Hoyer, attorney for Catfish Bend, engaged the Valuation 
Group of Deloitte and Touche (D&T), an independent, qualified appraiser 
located in Chicago, Illinois, to determine the fair market value of the 
Units. The applicants represent that D&T has previously provided 
services for Catfish Bend. However, the applicants state that payments 
made by Catfish Bend to D&T constitute substantially less than one 
percent (1%) of D&T's annual gross revenues. After a comprehensive 
review of all relevant information, D&T valued the interests on a per 
Unit basis at $250.
    In its analysis, D&T sought to determine the fair market value of a 
Unit on a ``nonmarketable minority interest'' basis. According to the 
report submitted by D&T, a nonmarketable minority interest refers to a 
minority position in the equity of an enterprise which is not actively 
traded on a public exchange.
    In valuing the Units, D&T considered the factors described in the 
Internal Revenue Service's Revenue Ruling 59-60, which provides general 
guidelines for valuing ownership interests in closely-held enterprises. 
In addition, the report submitted by D&T indicates that it reviewed the 
historical operational and financial data of Catfish Bend, and 
conducted a thorough onsite inspection of the riverboat before arriving 
at a conclusion as to the value of the Units.
    4. The applicants represent that the proposed transactions will be 
administratively feasible in that each Sale will be a one-time 
transaction for cash. Furthermore, the applicants state that the 
transactions will be in the best interests of the IRAs as they will 
provide each IRA with the opportunity to dispose of the Units for a 
significant profit and eliminate any potential UBIT liability. Finally, 
the applicants assert that the transactions will be protective of the 
rights of each participant and beneficiary as indicated by the fact 
that each IRA will receive the fair market value of the Units, as 
determined by a qualified, independent appraiser on the date of Sale 
and will incur no commissions, costs, or other expenses as a result of 
the Sale.
    5. In summary, the applicants represent that the proposed 
transactions satisfy the statutory criteria of section 4975(c)(2) 
because: (a) the Sale of the Units by each IRA will be a one-time 
transaction for cash; (b) the terms and conditions of each Sale will be 
at least as favorable to each IRA as those obtainable in an arm's 
length transaction with an unrelated party; (c) each IRA will receive 
the fair market value of the Units at the time of each Sale; and (d) 
each IRA will not be 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).

Bernard Chaus, Inc. Employee Savings Plan (the Plan) Located in New 
York, New York

[Application No. D-10606]

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 C.F.R. Part 
2570, Subpart B (55 F.R. 32836, 32847, August 10, 1990). If the 
exemption is granted, the restrictions of sections 406(a), 406(b)(1) 
and (b)(2) and 407(a) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code, shall not apply, effective 
December 24, 1997, to (1) the past acquisition by the the Plan of 
certain stock rights (the Rights) pursuant to a stock rights offering 
(the Offering) by Bernard Chaus, Inc. (the Employer), the sponsor of 
the Plan; (2) the past holding of the Rights by the Plan during the 
subscription period of the Offering; (3) the past disposition or 
exercise of the Rights by the Plan; and (4) the proposed payment by the 
Employer to the Plan of an amount necessary to credit Plan accounts of 
participants affected by an administrative error relating to Rights 
which were not exercised or sold prior to the expiration of the Rights; 
provided the following conditions are satisfied:
    (A) The Plan's acquisition and holding of the Rights occurred in 
connection with the Offering made available to all shareholders of 
common stock of the Employer;
    (B) The acquisition and holding of the Rights by the Plan resulted 
from an independent act of the Employer as a corporate entity and all 
holders of the common stock of the Employer, including the Plan, were 
treated in a substantially similar manner with respect to the Offering;
    (C) All decisions regarding the holding and disposition of the 
Rights by the Plan were made, in accordance with the Plan provisions 
for individually-directed investment of participant accounts, by the 
individual Plan participants whose accounts in the Plan received Rights 
in connection with the Offering, including all determinations regarding 
the exercise or sale of the Rights received through the Offering, 
except for those participants who failed to file timely and valid 
instructions concerning the Rights, in which case the Rights were sold; 
and
    (D) Within 30 days of the date of publication of the final 
exemption in the Federal Register, with respect to the Plan accounts of 
participants affected by an administrative error whereby 27 Rights (of 
the 17,041 Rights received by the Plan) were not exercised or sold 
prior to the expiration of the Rights, the Employer credits the 
affected accounts with an amount equal to the value such accounts would 
have received if the Rights had been sold on the last day of the 
Offering, including interest thereon through the date of such crediting 
at a rate equal to the average rate of earnings on all Plan assets 
during that period.

EFFECTIVE DATE: This exemption, if granted, will be effective as of 
December 24, 1997.

Summary of Facts and Representation

    1. The Employer is a designer, manufacturer and marketer of women's 
apparel. The Employer is incorporated in New York, with its corporate 
headquarters in New York, New York.
    2. The Plan is a defined contribution employee benefit plan with 
provisions intended to satisfy section 401(k) of the Code. The trustee 
of the Plan is the Prudential Trust Company of Moosic, Pennsylvania 
(the Trustee), and the Plan is administered by the Employer.

[[Page 42078]]

    3. The Plan provides for individual participant accounts (the 
Accounts) and participant-directed investment of the Accounts among 
seven investment funds (the Funds), one of which (the Stock Fund) 
invests exclusively in common stock of the Employer (the Stock). As of 
December 19, 1998, the Plan had total assets of approximately $3.4 
million, and the Accounts of 205 Plan participants had balances 
invested or partially invested in the Stock Fund. As of December 17, 
1997 (the Record Date), there were 2,627,727 shares of Stock issued and 
outstanding, of which 17,041 shares, or about 0.65%, were owned by the 
Accounts participating in the Stock Fund.
    4. The Applicant represents that as part of an effort to increase 
capital, the Employer determined it was in the best interests of its 
shareholders to provide for the offering of rights to purchase 
additional shares of newly-issued common stock. Accordingly, on 
December 24, 1997, the Employer commenced the Offering by issuing to 
all holders of Stock, as of the Record Date, one transferable 
subscription Right for each share of Stock held. Each Right conferred 
upon its holder an entitlement to purchase 5.464751 shares of 
additional Stock (the Additional Shares) at price of $1.4309 per 
share<SUP>15</SUP>. The Employer authorized the issuance of up to 
13,977,270 Additional Shares through the Offering. The provisions of 
the Offering included oversubscription privileges which were 
exercisable by Plan participants, whose Accounts received Rights, in 
the same manner as other recipients of the Rights.<SUP>16</SUP>
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    \15\ Except that the Rights issued to Josephine Chaus, the chair 
of the board of directors and principal shareholder of the Employer, 
entitled her to subscribe for and purchase 5.1811105 Additional 
Shares.
    \16\ Oversubscription privileges were exercised by only one Plan 
participant whose Account received Rights.
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    5. The Employer represents that the Offering did not involve any 
guarantee or other assurance that any market in the Rights would 
develop or remain available during the Offering. However, the Stock and 
the Rights were both traded on the New York Stock Exchange (NYSE) 
through the last trading day prior to the expiration of the Offering. 
The terms of the Offering permitted exercise of the Rights commencing 
December 24, 1997 until 5:00 p.m. EST on January 23, 1998, at which 
time any unexercised Rights expired.
    6. In anticipation of the Offering, the Plan was amended to permit 
each Plan participant with an Account balance invested in the Stock 
Fund (the Invested Participants) as of the Record Date to direct the 
Trustee either to exercise or sell Rights attributable to his or her 
Stock Fund account, and such amendment also established the procedure 
for such directions. The Employer represents that on December 24, 1997, 
all Invested Participants were sent, via first class mail, a copy of 
the Offering circular published by the Employer, a letter from the Plan 
administrator providing information about the Offering and describing 
the procedures for participant directions with respect to the Offering, 
and a direction form. The direction forms sent to the Invested 
Participants enabled them to direct the Trustee either to exercise the 
Rights allocated to their Accounts or to sell such Rights on the open 
market. As provided in the amended Plan, with respect to any Invested 
Participant who failed to submit a direction form to the Trustee by 
5:00 p.m. EST on January 19, 1998, or submitted an invalid direction 
form, the Trustee was required to sell the Rights on the open market. 
The Employer represents that this required sale was disclosed to the 
Invested Participants in the informational documents relating to the 
Offering that were sent on December 24, 1997.
    7. For each Invested Participant who directed the Trustee to 
exercise Rights allocated to his or her Account, the funds needed to 
pay the exercise price were obtained by redeeming specific investments 
in one or more Funds in which the Invested Participant's Account was 
invested. The Invested Participants directed the Trustee to sell any 
specific dollar amount from any specific Fund for the cash needed to 
pay the exercise price. Where amounts were redeemed from the Funds 
prior to the last day of the Offering, the amended Plan provided that 
the Trustee deposit the proceeds of such redemptions in a special 
short-term investment account pending the Trustee's payment to the 
subscription agent of the exercise price for the Additional Shares.
    8. Rights were exercisable by an Invested Participant only to the 
extent of funds available in his or her Account in the Plan. If amounts 
in the Invested Participant's Account were insufficient to pay the 
exercise price for the Additional Shares subscribed for, the amended 
Plan provided that the Trustee was to attempt to sell any Rights not 
exercised. The proceeds of any Rights that were sold and any income 
from the special short-term investment account were credited, with 
respect to such sale proceeds, to the Accounts of the Invested 
Participants whose allocable Rights were sold, and in the case of such 
income, to the Accounts of the Invested Participants whose redemption 
proceeds were deposited in the special short-term investment account.
    9. In the event that the market price of the Stock, including the 
effect of any applicable brokerage commissions and other expenses at 
the time the Trustee would submit Rights for exercise, was less than 
the exercise price under the Offering, the amended Plan provided that 
the Trustee would not exercise such Rights. The Employer represents 
that at 5:00 p.m. EST on January 23, 1998, the time of expiration of 
the Offering and the date on which the Trustee exercised Rights on 
behalf of the Invested Participants directing the exercise of the 
Rights, the exercise price of a Right to obtain shares of the Stock was 
less than the market price for shares of the Stock on the NYSE, after 
giving effect to any brokerage commissions and other expenses relating 
to such transactions. Accordingly, the Trustee exercised at that time 
all Rights for which a direction to exercise had been properly 
submitted (i.e., with a valid direction form) by an Invested 
Participant.
    10. The Employer represents that, in order to give the Trustee 
sufficient time to perform the administrative procedures required to 
review participant direction forms and to implement directions, 
including the liquidation of other Plan assets as required to enable an 
Account to purchase the appropriate number of shares of the Stock at 
the exercise price with the Rights, the procedure for participant 
direction with respect to the Offering included timing deadlines for 
the filing of instructions in advance of the expiration of the 
Offering. Accordingly, Invested Participants were required to return 
the direction forms to the Trustee by 5:00 p.m. EST on January 19, 
1998. The Employer states that this deadline for filing instructions 
with the Trustee was specifically and prominently disclosed to all 
Invested Participants in the Offering materials they received on 
December 24, 1997.
    11. The Employer represents the following summary of the Offering:
    (a) All 2,627,727 Rights, including overallotments, were exercised 
in the Offering. Among the 205 Invested Participants, 23 directed the 
exercise of Rights allocated to their Accounts, resulting in the 
exercise of 3,771 Rights, including overallotments, or about 0.147% of 
the total number of Rights exercised.
    (b) Among the Invested Participants, 22 affirmatively directed that 
the Rights allocated to their Accounts be sold, resulting in the sale 
of 3,287 Rights.
    (c) The remainder of the Invested Participants did not respond. In

[[Page 42079]]

accordance with the amended Plan, the Rights allocated to their 
Accounts were sold, resulting in the sale of 9,956 Rights. Because of 
an administrative error in the communications between the Plan 
administrator and the Trustee, 27 Rights allocated to the Accounts were 
not sold prior to the expiration of the Rights. The Employer represents 
that it shall credit the Accounts of the participants affected by this 
administrative error with an amount equal to the value these Accounts 
would have received if the Rights had been sold as planned on the last 
day of the Offering plus interest thereon through the date of such 
crediting at a rate equal to the average rate of earnings on all Plan 
assets during that period.
    (d) The Employer represents that all directions and instructions 
which were filed by the Invested Participants with respect to the 
Offering were observed and executed by the Trustee. In addition, all 
Invested Participants had been notified adequately in advance of the 
Offering of the procedure for directing and instructing the Trustee 
with respect to their Accounts' rights under the Offering. Thus, the 
Employer represents that all actions by the Trustee relating to the 
Offering, with respect to the Accounts, were pursuant to the express 
participant directions, except for the Accounts of participants who 
failed to file timely and valid instructions with the Trustee pursuant 
to the direction procedure. The Employer states that the Trustee's 
action on behalf of Accounts whose participants failed to file 
instructions with the Trustee, which was the sale of the Rights 
received by such Accounts, was disclosed in the explanatory materials 
for the Offering and in the direction forms sent to Invested 
Participants. The Employer states further that all actions taken by the 
Trustee in connection with the Offering were consistent with the 
participant-directed nature of investments under the Plan.
    12. In summary, the applicant represents that the transactions 
satisfied the criteria of section 408(a) of the Act for the following 
reasons: (a) The Plan's acquisition of the Rights resulted from an 
independent act of the Employer; (b) With respect to all aspects of the 
Offering, all holders of the Stock, including the Accounts of Invested 
Participants in the Plan, were treated in a substantially similar 
manner; (c) All decisions with respect to the Plan's acquisition, 
holding and control of the Rights were made by the individual Invested 
Participants with Account balances invested in the Stock Fund, except 
for those who failed to file timely and valid instruction forms, in 
which case the Rights were sold; (d) The disposition or exercise of the 
Rights received by the Invested Participants was executed by the 
Trustee in an orderly manner pursuant to the terms of the Offering 
relating to the submission of valid instruction forms by such 
Participants; and (e) The acquisition and holding of the Rights by the 
Plan affected all of the Invested Participants, and their Accounts held 
only about 0.65% of the Stock outstanding as of the Record Date of the 
Offering.
    For Further Information Contact: Ronald Willett 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 31st day of July 1998.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 98-21001 Filed 8-5-98; 8:45 am]
BILLING CODE 4510-29-P