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Secretary of Labor Thomas E. Perez
Proposed Exemptions; First Security Corporation (FSC) et al. [Notices] [04/22/1999]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; First Security Corporation (FSC) et al. [04/22/1999]

[PDF Version]

Volume 64, Number 77, Page 19807-19816

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10021, et al.]

 
Proposed Exemptions; First Security Corporation (FSC) et al.

AGENCY: Pension and Welfare Benefits Administration, Labor

ACTION: Notice of Proposed Exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction 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

    Unless otherwise stated in the Notice of Proposed Exemption, all 
interested persons are invited to submit written comments, and with 
respect to exemptions involving the fiduciary prohibitions of section 
406(b) of the Act, requests for hearing within 45 days from the date of 
publication of this Federal Register Notice. Comments and 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, NW., Washington, DC 
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, NW., Washington, DC 20210.

Notice to Interested Persons

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

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

[[Page 19808]]

statement of the facts and representations.

First Security Corporation (FSC) Located in Salt Lake City, UT

[Application No. D-10021]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, 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).<SUP>1</SUP>
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    \1\ For purposes of this proposed exemption, reference to 
specific provisions of Title I of the Act, unless otherwise 
specified, refer also to the corresponding provisions of the Code.
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Section I. Proposed Exemption for the In-Kind Transfer of Assets

    If the exemption is granted the restrictions of section 406(a) and 
section 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) shall not apply to the in-kind transfers, 
that occurred on December 28, 1994, to any open-end investment company 
(the Fund or Funds) registered under the Investment Company Act of 1940 
(the Investment Company Act) to which FSC or any of its affiliates 
(collectively, First Security) serves as investment adviser and/or may 
provide other services, of the assets of various employee benefit plans 
(the Plan or Plans) that are held in certain collective investment 
funds (the CIF or CIFs) maintained by First Security, in exchange for 
shares of such Funds, provided that the following conditions were met:
    (a) A fiduciary (the Second Fiduciary) which was acting on behalf 
of each affected Plan and which was independent of and unrelated to 
First Security, as defined in paragraph (g) of Section II below, 
received advance written notice of the in-kind transfer of assets of 
the CIFs in exchange for shares of the Funds, a full and detailed 
written disclosure of information concerning any such Fund including, 
but not limited to--
    (1) A current prospectus for each of the Funds in which such Plan 
considered investing;
    (2) A statement describing the fees for investment management, 
investment advisory, or other similar services, any fees for secondary 
services (Secondary Services), as defined in paragraph (h) of Section 
II below, and all other fees charged to or paid by the Plan and by the 
Funds to First Security, including the nature and extent of any 
differential between the rates of such fees;
    (3) The reasons why First Security considered such investment to be 
appropriate for the Plan;
    (4) A statement describing whether there were any limitations 
applicable to First Security with respect to which assets of a Plan may 
be invested in the Funds, and, if so, the nature of such limitations; 
and
    (5) When available, upon request of the Second Fiduciary, a copy of 
the proposed exemption and/or a copy of the final exemption, if 
granted.
    (b) On the basis of the information described above in paragraph 
(a) of this Section I, the Second Fiduciary authorized in writing--
    (1) The investment of assets of the Plans in shares of the Fund, in 
connection with the transactions set forth in Section I;
    (2) the investment portfolios of the Funds in which the assets of 
the Plans were invested; and
    (3) the fees received by First Security in connection with its 
services to the Funds. Such authorization by the Second Fiduciary was 
consistent with the responsibilities, obligations and duties imposed on 
fiduciaries by Part 4 of Title I of the Act.
    (c) All transferred assets were securities for which market 
quotations were readily available, or cash.
    (d) No sales commissions or redemption fees, including fees that 
are payable pursuant to Rule 12b-1 of the Investment Company Act (the 
12b-1 Fees), were paid by the Plans in connection with the in-kind 
transfers of the assets of the CIFs in exchange for shares of the 
Funds.
    (e) Neither First Security nor its affiliates, including any 
officers or directors, would be permitted to purchase from or sell to 
any of the Plans shares of any of the Funds.
    (f) The Plans were not sponsored or maintained by First Security.
    (g) The transferred assets in exchange for shares of such Funds 
constituted the Plan's pro rata portion of all assets that were held by 
the CIFs prior to the transfer. A Plan not electing to invest in the 
Fund received a cash payment representing a pro rata portion of the 
assets of the terminating CIF before the final liquidation took place.
    (h) The CIFs received shares of the Funds that had a total net 
asset value equal to the value of the transferred assets of the CIFs 
exchanged for such shares on the date of transfer.
    (i) The current market value of the assets of the CIFs transferred 
in-kind in exchange for shares of the Funds was determined in a single 
valuation performed in the same manner and at the close of business on 
the same day, using independent sources in accordance with the 
procedures set forth in Rule 17a-7(b) (Rule 17a-7) under the Investment 
Company Act, as amended from time to time or any successor rule, 
regulation, or similar pronouncement and the procedures established 
pursuant to Rule 17a-7 for the valuation of such assets. Such 
procedures required that all securities for which a current market 
price could not be obtained by reference to the last sale price for 
transactions reported on a recognized securities exchange or NASDAQ 
were to be valued based on 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 CIF transfers 
determined on the basis of reasonable inquiry from at least three 
sources that are broker-dealers or pricing services independent of 
First Security.
    (j) Not later than 30 days after completion of each in-kind 
transfer of assets of the CIFs in exchange for shares of the Funds, 
First Security sent by regular mail to the Second Fiduciary, which was 
acting on behalf of each affected Plan and which was independent of and 
unrelated to First Security, as defined in paragraph (g) of Section II 
below, a written confirmation that contained the following information:
    (1) The identity of each of the assets that was valued for purposes 
of the transaction in accordance with Rule 17a-7(b)(4) under the 
Investment Company Act;
    (2) The current market price, as of the date of the transfer, of 
each such security involved in the purchase of Fund shares; and
    (3) The identity of each pricing service or market maker consulted 
in determining the value of such assets.
    (k) Not later than 90 days after completion of each in-kind 
transfer of assets of the CIFs in exchange for shares of the Funds, 
First Security sent by regular mail to the Second Fiduciary, which was 
acting on behalf of each affected Plan and which was independent of and 
unrelated to First Security, as defined in paragraph (g) of Section II 
below, a written confirmation that contained the following information:
    (1) The number of CIF units held by each affected Plan immediately 
before the conversion (and the related per unit value and the aggregate 
dollar value of the units transferred); and
    (2) the number of shares in the Funds that were held by each 
affected Plan

[[Page 19809]]

following the conversion (and the related per share net asset value and 
the aggregate dollar value of the shares received).
    (l) As to each individual Plan, the combined total of all fees 
received by First Security for the provision of services to the Plans, 
and in connection with the provision of services to any of the Funds in 
which the Plans hold shares acquired in connection with an in-kind 
transfer transaction, was not in excess of ``reasonable compensation'' 
within the meaning of section 408(b)(2) of the Act.
    (m) On an ongoing basis, First Security has provided and will 
continue to provide a Plan investing in a Fund--
    (1) At least annually with a copy of an updated prospectus of such 
Fund; and
    (2) at least annually 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 First Security, upon the 
request of such Second Fiduciary.
    (n) All dealings between the Plans and any of the Funds have been 
and will remain on a basis no less favorable to such Plans than 
dealings between the Funds and other shareholders holding the same 
class of shares as the Plans.
    (o) First Security has maintained and will maintain for a period of 
6 years the records necessary to enable the persons, as described below 
in paragraph (p)(1) of this Section I, to determine whether the 
conditions of this proposed exemption have been met, except that:
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of First Security, 
the records are lost or destroyed prior to the end of the 6 year 
period; and
    (2) no party in interest, other than First Security, 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 below by paragraph (p) of this Section I.
    (p)(1) Except as provided in paragraph (p)(2) of this Section I and 
notwithstanding any provisions of subsection (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (o) of Section II 
above are unconditionally available at their customary location for 
examination during normal business hours by--
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and Exchange 
Commission (the SEC);
    (B) Any fiduciary of each of the Plans who has authority to acquire 
or dispose of shares of any of the Funds owned by such a Plan, or any 
duly authorized employee or representative of such fiduciary; and
    (C) any participant or beneficiary of the Plans or duly authorized 
employee or representative of such participant or beneficiary.
    (2) None of the persons described in paragraph (p)(1)(B) and 
(p)(1)(C) of this Section I shall be authorized to examine trade 
secrets of First Security, or commercial or financial information which 
is privileged or confidential.

Section II. Definitions

    For purposes of this proposed exemption--
    (a) The term ``First Security'' means FSC and any affiliate of FSC, 
as defined in paragraph (b) of this Section II.
    (b) An ``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 ``Fund,'' ``Funds'' or ``Affiliated Funds'' means any 
open-end management investment company or companies registered under 
the Investment Company Act for which First Security serves as 
investment adviser and/or provides any Secondary Service as approved by 
such Funds. As noted in the Preamble, the Funds are also referred to as 
the ``Affiliated Funds'' to distinguish them from certain third party 
funds (the Third Party Funds) for which First Security and its 
affiliates provide subadministrative services and which are not 
involved in conversion transactions that are described herein.
    (e) 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 a method as set forth in a Fund's prospectus 
and statement of additional information, and other assets belonging to 
each of the portfolios in such Fund, less the liabilities charged to 
each portfolio, by the number of outstanding shares.
    (f) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or a ``member of the family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
a sister, or a spouse of a brother or a sister.
    (g) The term ``Second Fiduciary'' means a fiduciary of a plan who 
is independent of and unrelated to First Security. For purposes of this 
exemption, the Second Fiduciary will not be deemed to be independent of 
and unrelated to First Security if:
    (1) Such Second Fiduciary directly or indirectly controls, is 
controlled by, or is under common control with First Security;
    (2) Such Second Fiduciary, or any officer, director, partner, 
employee, or relative of such Second Fiduciary is an officer, director, 
partner, or employee of First Security (or is a relative of such 
persons); or
    (3) Such Second Fiduciary directly or indirectly receives any 
compensation or other consideration for his or her own personal account 
in connection with the transactions described in this proposed 
exemption.
    If an officer, director, partner, or employee of First Security (or 
a relative of such persons), is a director of such Second Fiduciary, 
and if he or she abstains from participation in (A) the choice of the 
Plan's investment manager/adviser or (B) the approval of any purchase 
or sale by the Plan of shares of the Funds, in connection with the 
transactions described in Section I, then paragraph (g)(2) of this 
Section II, shall not apply.
    (h) The term ``Secondary Service'' means a service, other than an 
investment management, investment advisory, or similar service, which 
is provided by First Security to the Funds, including but not limited 
to custodial, accounting, brokerage, administrative, or any other 
service.

EFFECTIVE DATE: If granted, this proposed exemption will be effective 
as of December 28, 1994.

Preamble

    First Security initially filed a request for retroactive and 
prospective exemptive relief (Exemption Application No. D-09916) with 
the Department to permit the in-kind transfer of Plan assets held in 
CIFs maintained by First Security to any Affiliated Fund for which 
First Security might serve as investment adviser and/or provide other 
fiduciary services. In addition, First Security requested that the 
exemption cover any fees it might receive from the Affiliated Funds as 
well as from certain Third Party Funds

[[Page 19810]]

for which it might serve as a custodian, subadministrator or other 
service provider. If granted, the exemption would have been effective 
as of December 28, 1994.
    Upon further consideration, First Security decided to withdraw the 
fee transaction aspect of its exemption request and continue to rely on 
its interpretation of Prohibited Transaction Exemption (PTE) 77-4 (42 
FR 18732, April 8, 1977) with respect to its receipt of fees from the 
Affiliated Funds. In pertinent part, PTE 77-4 permits the purchase and 
sale by an employee benefit plan of shares of a mutual fund when a 
fiduciary with respect to the plan is also the investment adviser of 
the investment company. In addition, Section II(c) of PTE 77-4 
requires, in part, that a plan may pay an investment advisory fee to 
the plan fiduciary based on total plan assets from which a credit has 
been subtracted representing the plan's pro rata share of investment 
advisory fees paid by the plan to the mutual fund.
    The Department expresses no opinion herein on whether interim and 
subsequent fee arrangements adopted by First Security comply with the 
relevant provisions of PTE 77-4. As a result of the uncertainty 
regarding the application of PTE 97-41 <SUP>2</SUP> to the original 
exemption request, the Department has made a determination to propose 
the exemption and limit the scope of exemptive relief to the three 
conversion transactions described below.
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    \2\ PTE 97-41 is a class exemption which permits an employee 
benefit plan (the Client Plan) to purchase shares of one or more 
open-end management investment companies (i.e., Funds) registered 
under the Investment Company Act, the investment adviser for which 
is a bank (the Bank) or a plan adviser (the Plan Adviser) registered 
under the Investment Advisers Act of 1940 (the Advisers Act), that 
also serves as a fiduciary of the Client Plan, in exchange for plan 
assets transferred in-kind to the Fund from a CIF maintained by the 
Bank or the Plan Adviser, in connection with the complete withdrawal 
of a Client Plan's assets from the CIF.
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Summary of Facts and Representations

    1. The parties involved in the in-kind transfer transactions that 
are discussed herein are described as follows:
    (a) FSC is a national association bank holding company/financial 
services corporation incorporated under the laws of the State of 
Delaware and headquartered in the State of Utah. FSC's affiliates 
include the following banks: First Security Bank of New Mexico, N.A.; 
First Security Bank of Oregon; First Security Bank of Utah, N.A. (FSB 
Utah); First Security Bank of Idaho, N.A. (FSB Idaho); First Security 
Trust Company of Nevada (FSB Nevada); First Security Bank of Wyoming; 
and First Security Investment Management, Inc. (FSIM), an indirect, 
wholly owned subsidiary registered as an investment adviser under the 
Advisers Act. As of December 31, 1997, First Security had aggregate 
assets under management of approximately $5.2 billion. FSB Utah 
formerly served as trustee with respect to the CIFs described herein 
and FSIM serves as investment adviser to the Funds also described 
herein.
    (b) The Plans consist of retirement plans qualified under section 
401(a) of the Code, pension plans as defined in section 3(2) of the 
Act, ``plans'' as defined in section 4975(e)(1) of the Code, including 
certain individual retirement accounts (the IRAs) that are subject to 
section 408(a) of the Code and certain Keogh Plans that are qualified 
under section 401(a) of the Code. For these Plans, First Security 
serves as a directed trustee, a discretionary trustee, an investment 
manager or a fiduciary. The Plans also include participant-directed 
plans subject to the provisions of section 404(c) of the Act 
<SUP>3</SUP> but they do not include any plans sponsored by First 
Security.<SUP>4</SUP> Whether a Plan would be an investor in a CIF at 
the time of a conversion transaction or elect to invest in any Fund 
depended solely on the decision of a Plan fiduciary which was 
independent of First Security.
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    \3\ The Department is not providing exemptive relief to such 
Plans to the extent such transactions are covered under section 
404(c) of the Act.
    \4\ The applicants have not requested exemptive relief with 
respect to any investment in the Funds by Plans sponsored by First 
Security. The applicants note that First Security-sponsored plans 
might acquire or redeem shares in the Funds pursuant to Prohibited 
Transaction Exemption (PTE) 77-3 (42 FR 18734, April 8, 1977). PTE 
77-3 permits the acquisition or sale 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, provided certain 
conditions are met. The Department is expressing no opinion in this 
proposed exemption regarding whether any transactions with the Funds 
by First Security-sponsored Plans would be covered by PTE 77-3.
    Similarly, First Security has not requested exemptive relief 
with respect to future purchases or sales of shares of a Fund by 
Plans since it believes such transactions would be covered by PTE 
77-4.
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    (c) The CIFs consisted of certain portfolios of the Affiliated 
Banks of First Security Corporation Investment Trust for Employee 
Benefit Plans. These portfolios were the Common Stock Trust, the Two 
Year Bond Trust and the Intermediate Corporate/Government Bond Trust. 
As of September 30, 1994, the aggregate fair market value of these CIFs 
was approximately $66 million. Participation in the CIFs was open to 
any Plan with respect to which a First Security bank was a fiduciary. 
As described below, the three CIFs were terminated as of December 28, 
1994 following the conversion transactions.
    (d) The Funds consist of separate portfolios of open-end investment 
companies registered under the Investment Company Act. The Funds 
constitute part of the Achievement Funds Trust, a registered, open-end 
series management investment company which has been organized under 
Massachusetts law as an unincorporated business trust. The Funds are 
identified as follows: the Short Term Bond Fund, the Intermediate Bond 
Fund, the Equity Fund, the Balanced Fund, the Idaho Municipal Bond Fund 
and the Short Term Municipal Fund.<SUP>5</SUP>
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    \5\ Although the Idaho Municipal Fund and the Short Term 
Municipal Fund are included within the Achievements Fund Trust, 
these Funds are not offered to Plan investors.
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    FSIM serves as investment adviser to the Funds. In this capacity, 
FSIM makes investment decisions with respect to the assets of each Fund 
and reviews, supervises and administers each Fund's investment program. 
In the future, First Security proposes to serve as the subadministrator 
for the Funds and will provide Secondary Services to the Funds.
    Two classes of beneficial interests (i.e., shares) in the Funds 
have been issued. Retail Class A Shares are offered primarily to 
individuals (including certain non-fiduciary IRA and Keogh accounts). 
Retail Class D Shares are offered to individuals, Plans and IRAs 
through intermediaries such as banks or investment managers. Except for 
their fee structures, the two classes are identical and hold interests 
in the same underlying Fund assets.
    2. First Security represents that it has maintained CIFs as 
investment options for Plans in accordance with requirements under 
Federal or state banking laws that apply to collective investment 
trusts. However for business reasons, it decided to terminate the 
Common Stock Trust, the Two Year Bond Trust and the Intermediate 
Corporate/Government Bond Trust and to offer Plans formerly 
participating in such CIFs alternative investments in certain Funds. 
Because interests in CIFs generally must be liquidated or withdrawn to 
effect distributions, First Security believed that the interests of the 
Plans investing in CIFs would be better served by in-kind transfers to 
the Funds. Overall, First Security believed that the Funds would offer 
Plans

[[Page 19811]]

numerous advantages as pooled investment vehicles, including daily 
valuations reported in newspapers of general circulation, increased 
liquidity, portability, investment consolidation, voting and other 
shareholder rights. Further, First Security wished to expand the range 
of investment options available to Plans by offering other Funds (i.e., 
the Balanced Fund, the International Equity Portfolio and the Small Cap 
Growth Portfolio) that did not correspond to its existing CIFs.
    3. First Security also noted that Plans investing in the Funds 
would periodically receive certain disclosures concerning the Funds. 
Such disclosures would include, but would not be limited to, (a) an 
updated copy of the prospectus provided on an annual basis; and (b) an 
annual report containing audited financial statements of the Funds and 
information regarding such Funds' performance (unless such information 
is included in the prospectus of the Funds) and the fees paid to First 
Security, depending upon the type of Plan account that was established. 
Further, First Security represented that it would report all 
transactions in shares of the Funds in periodic account statements 
provided to the Second Fiduciary of each of the Plans.
    4. Thus, to avoid the potentially large brokerage expenses, on 
December 28, 1994, First Security transferred the assets of the three 
affected CIFs, which assets consisted of cash and marketable 
securities, to corresponding portfolios of the Funds, in exchange for 
shares of such Funds. First Security represents that the in-kind 
transfers were ministerial transactions performed in accordance with 
pre-established, objective procedures which were approved by the board 
of trustees of each Fund. Such procedures require that assets 
transferred to a Fund (a) be consistent with the investment objectives, 
policies, and restrictions of the corresponding portfolios of such 
Fund, (b) satisfy the applicable requirements of the Investment Company 
Act and the Code, and (c) have a readily ascertainable market value 
established by independent sources. In addition, any assets that were 
transferred were required to be liquid and would not be subject to 
restrictions on resale. Assets which did not meet these criteria were 
required to be sold in the open market through an unaffiliated 
brokerage firm prior to any transfer in-kind. Further, prior to 
entering into and following an in-kind transfer transaction, each 
affected Plan would be required to receive certain disclosures from 
First Security and approve such transactions in writing. Accordingly, 
First Security requests retroactive exemptive relief from the 
Department.
    5. In accordance with the criteria described above in 
Representation 4, First Security stated that it conducted the in-kind 
transfer transactions as follows:
    Prior to each in-kind transfer, the assets of the three CIFs were 
reviewed to confirm that they were appropriate investments for the 
corresponding portfolios of the Funds. If any of the assets of such 
CIFs were not appropriate for the Funds, First Security sold the assets 
in the open market through an unaffiliated brokerage firm.
    Participants in the affected CIFs who did not elect to participate 
in the conversion transactions received distributions of the value of 
their interests therein. However, with respect to participants in the 
CIFs who elected to participate in the in-kind transfers and transfer 
their interests to the Funds, the transferred assets constituted the 
participants' and Plans' pro rata portion of all assets that were held 
by the CIF immediately prior to the transfer. Further, the Funds had 
investment objectives and policies that were substantially identical to 
those of the CIFs. Following the in-kind transfers, the affected CIFs 
were terminated.
    No brokerage commissions, redemption fees, 12b-1 Fees or expenses 
(other than customary transfer charges paid to parties other than First 
Security or its affiliates) were charged to the Plans or the CIFs in 
connection with the in-kind transfers of assets into the Funds or would 
be charged with respect to the redemption of shares of such Funds. 
Further, neither First Security nor its affiliates, including any 
officers or directors, were (nor would be) permitted to purchase from 
or sell to any of the Plans shares of the Funds.
    6. First Security provided the Second Fiduciary, as defined in 
Section II(g), for each affected Plan with disclosures announcing the 
termination of the CIFs, summarized the transaction, and otherwise 
complied with provisions of Section I of this proposed exemption. Based 
on these disclosures, the Second Fiduciary from each Plan approved, in 
writing, the in-kind transfer of the CIFs assets to the corresponding 
Funds, in exchange for shares of the Funds, and the receipt by First 
Security of fees for services provided to such Funds.
    7. The assets transferred by the affected CIFs to the Funds 
consisted entirely of cash and securities for which market quotations 
were readily available. The value of the securities in each of the 
three CIFs was determined based on market values as of the close of 
business on December 27, 1994, the last business date prior to the 
transfer. Such values were determined in a single valuation performed 
in the same manner and at the close of business on the same day, using 
independent sources in accordance with the procedures described in Rule 
17a-7 under the Investment Company Act, as amended from time to time or 
any successor rule, regulation or similar pronouncement and the 
procedures established by the Funds pursuant to Rule 17a-7 for the 
valuation of such assets. <SUP>6</SUP> In this regard, First Security 
represents that the ``current market price'' for specific types of CIF 
securities involved in the transactions was determined as follows:
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    \6\ Rule 17a-7 provides an exemption from section 17(a) of the 
Investment Company Act, which prohibits, among other things, 
principal transactions between an investment company and its 
investment adviser or affiliates of the investment adviser. Among 
the conditions of Rule 17a-7 is the requirement that the transaction 
be effected at the ``independent current market price'' for specific 
types of CIF or Plan assets involved in the in-kind transfer.

    (a) If the security was a ``reported security'' as the term is 
defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934 
(the 1934 Act), the last sale price with respect to such security 
reported in the consolidated transaction reporting system (the 
Consolidated System) for December 27, 1994; or if there were 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 under the 1934 Act), as of the close of business on 
December 27, 1994.
    (b) If the security was not a reported security, and the 
principal market for such security was an exchange, then the last 
sale on such exchange on December 27, 1994; or if there were no 
reported transactions on such exchange that day, the average of the 
highest current independent bid and lowest current independent offer 
on such exchange as of the close of business on December 27, 1994.
    (c) If the security was not a reported security and was 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 December 27, 1994.
    (d) For all other securities, the average of the highest current 
independent bid and lowest current independent offer as of the close 
of business on December 27, 1994, determined on the basis of 
reasonable inquiry. (For securities in this category, First Security 
represents that it obtained quotations from at least three sources 
that were either broker-dealers or pricing services independent of 
and unrelated to First Security and used the average of the 
quotations to value the securities, in

[[Page 19812]]

conformance with interpretations by the SEC and practice under Rule 
17a-7.)

    8. The securities received by the corresponding portfolios of the 
Funds were valued by each such portfolio for purposes of the in-kind 
transfers in the same manner and on the same day as such securities 
were valued by the CIFs. The per share value of the shares of each 
portfolio of the Funds issued to the CIFs was based on the 
corresponding portfolio's then current net asset value. As a result of 
this procedure, the aggregate value of the shares of the corresponding 
Fund issued to the CIF was equal to the value of the assets (cash and 
marketable securities) transferred to such portfolio as of the opening 
of business on December 28, 1994. In addition, the value of a Plan's 
investment in shares of a corresponding portfolio, as of the opening of 
business on the date of the transactions (December 28, 1994), was equal 
to the value of such Plan's investment in the corresponding CIFs as of 
the close of business on the last business day prior to the transaction 
(December 27, 1994).
    9. Not later than 30 days after completion of the in-kind transfer 
transaction, First Security sent by regular mail a written confirmation 
of the transaction to each affected Plan. Such confirmation contained: 
(a) the identity of each security that was valued in accordance with 
Rule 17a-7(b)(4), as described above; (b) the price of each such 
security for purposes of the transaction; and (c) the identity of each 
pricing service or market maker consulted in determining the value of 
such securities.
    In addition, not later than 90 days after completion of each in-
kind transfer transaction, First Security sent, by regular mail to the 
Second Fiduciary of each affected Plan, a written confirmation 
containing the following information: (a) the number of CIF units held 
by each affected Plan immediately before the conversion (and the 
related per unit value and the aggregate dollar value of the units 
transferred); and (b) the number of shares in the Funds that were held 
by each affected Plan following the conversion (and the related per 
share net asset value and the aggregate dollar value of the shares 
received).
    10. The requested exemption is also subject to the satisfaction of 
certain general conditions. For example, the transactions are subject 
to the prior authorization of a Second Fiduciary, acting on behalf of 
each of the Plans, who has been provided with full written disclosure 
by First Security. The Second Fiduciary is generally the administrator, 
sponsor or a committee appointed by the sponsor to act as a named 
fiduciary for a Plan.
    With respect to disclosures, the Second Fiduciary of such Plan 
received, in writing, in advance of the investment by a Plan in any of 
the Funds: (a) a current prospectus for each of the Funds in which such 
Plan might invest; (b) a statement describing the fees for investment 
management, investment advisory, or other similar services, any fees 
for Secondary Services, and all other fees to be charged to or paid by 
the Plan and by such Funds to First Security, including the nature and 
extent of any differential between the rates of such fees, (c) the 
reasons why First Security considered such investment to be appropriate 
for the Plan, (d) a statement describing whether there were any 
limitations applicable to First Security with respect to which assets 
of a Plan may be invested in the Funds, and, if so, the nature of such 
limitations. Upon written request, the Second Fiduciary will be 
provided with a copy of the proposed exemption and/or the final 
exemption, if granted.
    On the basis of the information disclosed, the Second Fiduciary of 
a Plan authorized, in writing, the investment of assets of the Plan in 
shares of a Fund in connection with the transactions set forth herein, 
the investment portfolios of the Funds in which the assets of the Plans 
may be invested and the compensation received by First Security in 
connection with its services to the Funds. In addition, the Second 
Fiduciary received each Fund's current prospectus and the written 
disclosures referred to above which specifically referenced the Fund 
and afforded such fiduciary the opportunity to select the Fund for its 
prior authorization. Having obtained the authorization of the Second 
Fiduciary, First Security invested the assets of a Plan among the 
portfolios and in the manner covered by the authorization, subject to 
the satisfaction of the other terms and conditions of the proposed 
exemption.
    In addition to the above, as to each individual Plan, the combined 
total of all fees received by First Security for the provision of 
services to the Plans, and in connection with the provision of services 
to any of the Funds in which the Plans hold shares acquired in 
connection with the in-kind transfers, were required not to be in 
excess of ``reasonable compensation'' within the meaning of section 
408(b)(2) of the Act. Further, all dealings by or between the Plans and 
the Funds were required to remain on a basis which would be at least as 
favorable to the Plans as such dealings are with other shareholders of 
the Funds.
    11. Besides the disclosures provided to the Plan prior to 
investment in any of the Funds, First Security represents that it will 
routinely provide, at least annually to the Second Fiduciary, updated 
prospectuses of the Funds in accordance with the requirements of the 
Investment Company Act and the SEC rules promulgated thereunder. 
Further, the Second Fiduciary will be supplied, at least annually, with 
a report or statement (which may take the form of the most recent 
financial report of such Funds, the current statement of additional 
information, or some other written statement) containing a description 
of all fees paid by the Fund.
    12. In summary, First Security represents that the in-kind transfer 
transactions satisfied the statutory criteria for an exemption under 
section 408(a) of the Act because:
    (a) The CIFs did not pay sales commissions or redemption fees in 
connection with the in-kind transfer of assets to the Funds in exchange 
for shares of the Funds.
    (b) With respect to any in-kind transfer of assets, the CIFs 
received shares of the Funds that were equal in value to the assets of 
the CIFs exchanged for such shares, the latter values determined in a 
single valuation performed in the same manner and at the close of 
business on the same day in accordance with the procedures set forth in 
Rule 17a-7 under the Investment Company Act, as amended from time to 
time or any successor rule, regulation, or similar pronouncement.
    (c) Not later than 30 days after completion of each in-kind 
transfer of assets in exchange for shares of the Funds, the Second 
Fiduciaries of the affected Plans received written confirmation of the 
assets involved in the exchange which were valued by a third-party 
source (e.g., pricing service or market maker) in accordance with Rule 
17a-7(b)(4), the price of such assets and the identity of the pricing 
service or market maker consulted.
    (d) Not later than 90 days after completion of each in-kind 
transfer of assets of the CIFs in exchange for shares of the Funds, 
First Security mailed to each affected Plan a written confirmation of 
the number of CIF units held by such Plan immediately before the 
conversion (and the related per unit value and the aggregate dollar 
value of the units transferred), and the number of shares in the Funds 
that were held by the Plan following the conversion (and the related 
per share net asset value or the aggregate dollar value of the shares 
received).

[[Page 19813]]

    (e) The price paid or received by the Plans for shares in the Funds 
was the net asset value per share at the time of the transaction and 
was the same price for the shares which would have been paid or 
received by any other investor at that time.
    (f) First Security, its affiliates, and officers or directors would 
not be permitted to purchase or sell to any of the Plans shares of any 
of the Funds.
    (g) As to each individual Plan, the combined total of all fees 
received by First Security for the provision of services to the Plans, 
and in connection with the provision of services to any of the Funds in 
which the Plans may invest, was not in excess of ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act.
    (h) Prior to investment by a Plan in any of the Funds, in 
connection with transactions, the Second Fiduciary received a full and 
detailed written disclosure of information concerning such Fund.
    (i) Subsequent to the investment by a Plan in any of the Funds, 
First Security would provide the Second Fiduciary of such Plan with an 
updated copy of the prospectus for each of the Funds in which the Plan 
invests, at least annually as well as other pertinent information.
    (j) All dealings between the Plans and any of the Funds would 
remain on a basis no less favorable to such Plans than dealings between 
the Funds and other shareholders holding the same class of shares as 
the Plans.

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

San Diego Electrical Pension Trust, (the Pension Plan); and San 
Diego Joint Apprenticeship and Training Trust (the Training Plan; 
collectively, the Plans) Located in San Diego, California

[Application Nos. D-10581 and L-10582]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the restrictions 
of section 406(b)(2) of the Act shall not apply to the proposed 
purchase by the Training Plan from the Pension Plan of a minority 
interest (the Minority Interest) in certain improved real property (the 
Property) jointly owned by the Plans, provided that the following 
conditions are satisfied:
    (1) The purchase is a one-time transaction for cash;
    (2) The terms and conditions of the transaction are not less 
favorable to either Plan than those each could obtain in a comparable 
arm's length transaction with an unrelated party;
    (3) The Training Plan pays no more, and the Pension Plan receives 
no less, than the fair market value of the Minority Interest, as of the 
date of the transaction, as determined by a qualified, independent 
appraiser;
    (4) Neither the Pension Plan nor the Training Plan pays any 
commissions or fees in connection with the transaction;
    (5) The trustees of the Plans (other than their common trustees), 
the Pension Plan's investment manager, and a qualified, independent 
fiduciary that has been retained to represent the Training Plan, have 
reviewed the terms and conditions of the transaction and determined 
that such terms and conditions are in the best interests of, and 
appropriate for, their respective Plans; and
    (6) The independent fiduciary for the Training Plan monitors the 
proposed transaction and takes whatever actions necessary to safeguard 
the interests of the Training Plan.

Summary of Facts and Representations

    1. The Plans are multiple employer, jointly trusteed employee 
benefit plans, established pursuant to collective bargaining agreements 
between Local 569, the International Brotherhood of Electrical Workers, 
and the National Electrical Contractors Association, San Diego Chapter, 
Inc. The Plans cover members of Local 569.
    The Pension Plan is a defined benefit plan and, as of January 9, 
1998, had approximately 2,790 participants and beneficiaries. As of 
September 30, 1997, the fair market value of the assets of the Pension 
Plan was $181,250,000.
    The Training Plan is a welfare plan that operates a five-year 
apprenticeship program approved and regulated by the Division of 
Industrial Relations, State of California. As of January 9, 1998, the 
approximate number of apprentices participating in the Training Plan 
was 230. As of December 31, 1997, the fair market value of the assets 
of the Training Plan was $2,930,680.
    Each of the Plans is managed by a board of trustees, with eight 
trustees on each board. Currently, there are three trustees who serve 
on both boards: Mr. Michael Sparks, Mr. Ronald Cooper, and Mr. James 
Aylsworth. These individuals have each signed a sworn affidavit 
removing themselves from all considerations in connection with the 
purchase of the Minority Interest by the Training Plan from the Pension 
Plan.
    2. The Property consists of a two-story commercial office building 
located at 4675 Viewridge Avenue, San Diego, California. The Property 
consists of a land area of 77,101 gross sq. ft. and a building area of 
31,435 gross sq. ft.
    Title to the Property is jointly held, with the Training Plan 
having a 77.6475% interest and the Pension Plan having a 22.3525% 
interest.<SUP>7</SUP> The land relating to the Property was purchased 
by the Plans in August, 1981, from Booth Enterprises, Inc., an 
unrelated party, for a total of $810,168. The Pension Plan and the 
Training Plan subsequently held the land as tenants-in-common, with a 
view to developing the land to provide administrative offices for both 
Plans, as well as training facilities for the Training Plan. The 
building was constructed in 1983, with the majority of the cost 
ultimately paid by the Training Plan, based upon its percentage 
interest in the Property.
---------------------------------------------------------------------------

    \7\ The Department expresses no opinion herein as to whether the 
joint ownership of the Property by the Pension Plan and the Training 
Plan may have violated any of the fiduciary responsibility 
provisions of Part 4 of Title I of the Act.
---------------------------------------------------------------------------

    The Property is the location of the classrooms and administrative 
offices of the Training Plan, as well as the administrative offices for 
the Pension Plan and the San Diego Electrical Health and Welfare Trust 
(the Health Plan). The Health Plan, like the Pension Plan and the 
Training Plan, is a multiple employer plan that covers members of Local 
569. The Pension Plan has been leasing office space in the Property to 
its sister plans (i.e., the Training Plan and the Health 
Plan).<SUP>8</SUP>
---------------------------------------------------------------------------

    \8\ Prohibited Transaction Class Exemption (PTCE) 77-10 (42 FR 
33918, July 1, 1977) provides an exemption, under certain 
conditions, from section 406(b)(2) of the Act for the leasing of 
office space by a multiple employer plan to another such plan with 
common trustees. No individual exemptive relief is proposed herein 
for the leasing of office space in the Property by the Pension Plan 
to the Training Plan and the Health Plan. It is represented that 
such leasing has been done in accordance with the conditions of PTCE 
77-10. However, the Department expresses no opinion herein as to 
whether the conditions of PTCE 77-10 have been satisfied.
---------------------------------------------------------------------------

    3. The Property has been appraised by Lipman Stevens Marshall & 
Thene, Inc. (Lipman, Inc.), a qualified, independent appraiser. Mr. 
Walter J. Stevens, MAI and Vincent G. Ferrer, of Lipman, Inc., are both 
certified real estate appraisers in the State of California. Utilizing 
the sales comparison and the income capitalization approaches to value 
the Property, Messrs. Stevens and Ferrer concluded that the fair market 
value of the Property was $2,000,000, as of August 1, 1997.
    The Minority Interest in the Property has been appraised by 
American Realty

[[Page 19814]]

Advisors (ARA), the Pension Plan's real estate investment 
manager.<SUP>9</SUP> ARA concluded that the fair market value of the 
Minority Interest was $415,756.50, as of November 11, 1997. ARA first 
determined a value of $2,000,000 for the Property overall, utilizing 
the following approaches (but giving greatest weight to the first as 
most accurate): (1) Discounted cash flow analysis; (2) direct 
capitalization analysis; and (3) sales comparison analysis. With 
respect to the Minority Interest, ARA applied a 7% discount factor to 
reflect its illiquidity and derived a value for the Minority Interest 
as follows.
---------------------------------------------------------------------------

    \9\ It is represented that ARA is a ``qualified professional 
asset manager'' (QPAM), as defined in PTCE 84-14 (49 FR 9494, March 
13, 1984), for the Pension Plan. PTCE 84-14, a/k/a the QPAM Class 
Exemption, permits, under certain conditions, parties in interest to 
engage in various transactions with plans whose assets are managed 
by persons, defined for purposes of the exemption as QPAMs, which 
are independent of the parties in interest (with certain limited 
exceptions) and which meet specified financial standards.

Property Value............................................   $2,000,000
Less: 7% Discount.........................................     (140,000)
                                                           -------------
                                                              1,800,000
22.3525% Minority Interest................................   415,756.50


    In its report, ARA explains that a discount factor must be applied 
because investors typically wish to purchase a controlling interest in 
real estate, not minority positions, and the majority owner is the most 
logical purchaser of a minority interest. Thus, ARA concludes that the 
7% discount is appropriate in a purchase of the Minority Interest by 
the Training Plan, as the majority owner of the Property, and no 
premium would be associated with such purchase.
    Mr. Stevens, of Lipman, Inc., reviewed ARA's report and, in a 
letter to the Department dated March 20, 1998, confirmed that the 
valuation methodology used and the fair market value arrived at by ARA 
for the Minority Interest was fair and reasonable.
    4. It is proposed that the Pension Plan and the Training Plan enter 
into a transaction wherein the Training Plan will purchase for cash all 
of the Minority Interest in the Property held by the Pension Plan. The 
purchase price will be an amount equal to the fair market value of the 
Minority Interest ($415,756.50, as of November 11, 1997) as of the date 
of the sale, based on an updated independent appraisal. Neither the 
Pension Plan nor the Training Plan will pay any commissions or fees in 
connection with the transaction.
    The trustees of both Plans, other than their common trustees, have 
reviewed the terms and conditions of the transaction and determined 
that such terms and conditions are in the best interests of, and 
appropriate for, their respective Plans. The Pension Plan trustees 
desire to divest the Pension Plan of its otherwise illiquid Minority 
Interest, while the Training Plan trustees desire to acquire the 
Minority Interest so that the Training Plan will have total ownership 
and control of the Property, over 80% of whose space the Training Plan 
occupies.
    5. The Pension Plan's real estate investment manager, ARA, not only 
has appraised the fair market value of the Minority Interest but, in 
its report dated November 11, 1997, has expressed its approval of the 
proposed sale, which is consistent with ARA's investment strategy of 
ultimately liquidating all of the Pension Plan's direct real estate 
investments. ARA has determined that due to the size of the Pension 
Plan and its ongoing need for liquidity, direct investments in real 
estate are not appropriate for the Pension Plan in the long term. ARA 
is monitoring the three major real estate assets that it manages for 
the Pension Plan to time their disposition. Given the even greater 
illiquidity of a minority interest in real estate, ARA has concluded 
that the Training Plan should take advantage of this opportunity to 
sell its Minority Interest in the Property at fair market value to the 
majority owner.
    6. Amresco Advisors, Inc. (Amresco), a registered investment 
advisor, has been retained to act as an independent fiduciary to 
represent the Training Plan's interests with respect to the proposed 
purchase. Amresco represents that it has extensive experience as a 
fiduciary under the Act and that it is knowledgeable as to the subject 
transaction. Amresco acknowledges and accepts its duties, liabilities, 
and responsibilities in acting as a fiduciary with respect to the 
Training Plan.
    Amresco, in its report dated March 27, 1998, has expressed its 
approval of the proposed purchase because, as explained in detail 
below, it will immediately provide the Training Plan with an excellent 
return on its investment, as well as securing the additional space in 
the Property that will be needed in the future for expansion.
    Amresco has reviewed the appraisal of Lipman, Inc. and concurs with 
their conclusion as to the fair market value of $2,000,000 for the 
Property. Amresco has also reviewed the ARA report and concurs with 
their valuation methodology and their conclusion as to the fair market 
value of $415,756.50 for the Minority Interest.
    Amresco notes that with real estate, the whole is more than the sum 
of its parts. Because of the extremely limited marketability of an 
undivided interest (as opposed to an outright, or whole interest) in 
real estate, the Training Plan is able to purchase the Pension Plan's 
Minority Interest at a 7% discount from its proportionate value of the 
total fee interest in the Property, an economic value that would 
immediately accrue to the Training Plan.
    In addition, Amresco notes that the Training Plan's space 
requirements exceed its approximately 78% proportionate share of the 
Property. Thus, the Training Plan currently must lease an additional 
1,900 sq. ft. in the Property from the Pension Plan <SUP>10</SUP> at 
the rate of $1,400/mo., or $16,800/yr. This lease rate is projected to 
increase soon to approximately $2000/mo., or $24,000/yr. The Training 
Plan will require even more space in the future to accommodate an 
expanding student body, at ever-increasing rents.
---------------------------------------------------------------------------

    \10\ See Footnote 1 regarding PTCE 77-10.
---------------------------------------------------------------------------

    Following the Training Plan's purchase of the Minority Interest, no 
immediate change will occur with respect to occupancy of space in the 
Property. The Training Plan has no re-development plans for the 
Property and, thus, will incur no significant additional expenses, in 
connection with the proposed transaction. It is intended that the 
Training Plan will lease approximately 4,800 sq. ft. of the Property to 
the Pension Plan until such time as the Training Plan needs to fully 
utilize this space. The Pension Plan, in turn, will sublease a portion 
of its space to the Health Plan.<SUP>11</SUP> At rental rates of 
approximately $1.05/sq. ft./mo. and $.35/sq. ft./mo., the lease will 
generate approximately $3,350/mo., or $40,320/yr., in net rental income 
to the Training Plan.
---------------------------------------------------------------------------

    \11\ It is represented that the proposed lease of office space 
in the Property by the Training Plan to the Pension Plan, if the 
exemption is granted, as well as the sublease of office space by the 
Pension Plan to the Health Plan, will meet the conditions for 
exemptive relief under PTCE 77-10.
---------------------------------------------------------------------------

    Thus, Amresco states that the combination of a projected $24,000/
yr. savings in rent, plus $40,320/yr. in net rental income, or $64,320/
yr., will provide an immediate 15% return on the Training Plan's 
$415,756.50 investment. In addition, the Training Plan, instead of 
being a renter, will enjoy the benefits of equity ownership in real 
estate, such as any appreciation in value.
    In anticipation of the proposed transaction, the collective 
bargaining parties have designated new money of $0.37 per hour worked 
to fund the purchase price for the Minority Interest. Since the 
purchase price is being

[[Page 19815]]

specially funded by an increase in the contribution rate to the 
Training Plan required to be met by contributing employers, Amresco 
states that the Training Plan will have sufficient cash available to 
purchase the Minority Interest without affecting the ordinary 
operational costs and liquidity needs of the Training Plan.
    Amresco, as the independent fiduciary for the Training Plan, will 
monitor the proposed transaction and take whatever actions necessary to 
safeguard the interests of the Training Plan.
    7. In summary, the applicant represents that the proposed 
transaction satisfies the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons:
    (a) The purchase will be a one-time transaction for cash; (b) the 
terms and conditions of the transaction will not be less favorable to 
either Plan than those each could obtain in a comparable arm's length 
transaction with an unrelated party; (c) the Training Plan will pay no 
more, and the Pension Plan will receive no less, than the fair market 
value of the Minority Interest, as of the date of the transaction, as 
determined by a qualified, independent appraiser; (d) neither the 
Pension Plan nor the Training Plan will pay any commissions or fees in 
connection with the transaction; (e) the trustees of the Plans (other 
than their common trustees), the Pension Plan's real estate investment 
manager (i.e., ARA), and a qualified, independent fiduciary (i.e., 
Amresco) representing the Training Plan, have reviewed the terms and 
conditions of the transaction and determined that such terms and 
conditions are in the best interests of, and appropriate for, their 
respective Plans; and (f) Amresco will monitor the proposed transaction 
and take whatever actions necessary to safeguard the interests of the 
Training Plan.

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

Hanson Operating Company, Inc. Defined Benefit Pension Plan (the 
Plan) Located in Roswell, New Mexico

[Application No. D-10702]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to the proposed sale by the Plan of certain 
closely-held stock (the Stock) to Douglas L. McBride and Basil R. 
Willis, parties in interest with respect to the Plan, provided that the 
following conditions are satisfied: (a) the sale is a one-time 
transaction for cash; (b) the Plan pays no commissions nor other 
expenses relating to the sale; and (c) the Plan receives an amount that 
is no less than the fair market value of the Stock as of the date of 
the sale, as determined by a qualified, independent appraiser.

Summary of Facts and Representations

    1. The Plan is a defined benefit pension plan established by Hanson 
Operating Company, Inc. (the Employer). The Employer, a New Mexico 
corporation, is engaged in the business of oil and gas exploration and 
is located in Roswell, New Mexico. As of June 30, 1998, the Plan had 12 
participants and beneficiaries and total assets of approximately 
$808,183.01. The trustees of the Plan are Mr. McBride and Mr. Willis 
(the Applicants), who are also officers of the Employer.
    2. Among the assets of the Plan is the Stock, which consists of 
7,500 shares of common stock of Commerce Bankshares of Roswell Inc. 
(CBR), a closely-held one-bank holding company organized under the laws 
of the State of New Mexico. CBR's subsidiary bank is the Valley Bank of 
Commerce (the Bank), a state-chartered commercial bank. The Applicants 
represent that they acquired 7,500 shares of the Stock for the Plan in 
1992 in a limited offering at $20 per share, for a total cost of 
$150,000. Neither of the Applicants was or is related to CBR or the 
Bank.
    3. The Stock was appraised by Patten, MacPhee & Associates, Inc. 
(Patten, MacPhee), a qualified, independent appraiser located in 
Denver, Colorado that performs annual valuations of the Stock. In a 
cover letter dated August 25, 1998, accompanying the appraisal report, 
Ms. E. Jayne MacPhee and Mr. Gary M. Schwartz state that their firm has 
performed over 200 common stock and intangible asset valuations for 
clients nationwide.
    The appraisal states that as of June 30, 1998, the 151,218 shares 
of common stock of CBR issued and outstanding were held by 60 
shareholders, and the Plan owned 7,500 shares of the Stock, or 
approximately 4.96%. As of June 30, 1998, the 7,500 shares of the Stock 
had an estimated fair market value of approximately $76.30 per share, 
or a total value of $572,250, which represents approximately 71% of the 
assets of the Plan.<SUP>12</SUP>
---------------------------------------------------------------------------

    \12\ The Department expresses no opinion herein as to whether 
the Plan's acquisition and holding of the Stock violated any of the 
general fiduciary responsibility provisions of Part 4 of Title I of 
the Act. However, the Department notes that section 404(a) of the 
Act requires, among other things, that a plan fiduciary act 
prudently and solely in the interest of the plan's participants and 
beneficiaries when making investment decisions on behalf of the 
plan. Section 404(a) of the Act also requires that a plan fiduciary 
diversify the investments of a plan so as to minimize the risk of 
large losses, unless under the circumstances it is clearly prudent 
not to do so.
---------------------------------------------------------------------------

    Patten, MacPhee performed another appraisal of the Stock's value, 
as of December 31, 1998, for purposes of the Plan's annual report. As 
of December 31, 1998, there were 149,208 shares of common stock of CBR 
issued and outstanding, which were held by 57 shareholders. As of that 
date, the 7,500 shares of the Stock had an estimated fair market value 
of approximately $80.95 per share, or a total value of $607,125.
    Each appraisal states, in regard to the valuation methodology, that 
a number of documents and information sources were considered, as well 
as the elements for the valuation of corporate stock as set forth in 
the Internal Revenue Service's Revenue Ruling 59-60. Such valuation 
elements included: the financial condition of both the Bank and CBR; 
strengths of current management, market share, economic conditions, and 
competitive factors; the fair market value of the underlying assets and 
liabilities of the Bank and CBR; historical and projected earnings; and 
sales of other banks and bank holding company stock within the 
southwestern United States. The appraisals state that, inasmuch as the 
Bank represents the only significant asset and activity of CBR, many of 
the foregoing factors were considered solely in regard to the Bank. In 
addition, since much of the published information utilized in valuation 
relates to the transfer of control, the appraisals focussed on those 
issues which influence the market values of minority interests, namely 
marketability, liquidity risk, and lack of control.
    4. The Applicants propose to purchase 5,500 of the 7,500 shares of 
the Stock held by the Plan for the fair market value of the Stock as of 
the date of the sale, based upon an updated independent appraisal. Mr. 
McBride proposes to purchase 3,000 shares of the Stock, and Mr. Willis 
proposes to purchase 2,500 shares of the Stock. Based upon an appraised 
value for the Stock, as of December 31, 1998, of

[[Page 19816]]

$80.95 per share, 5,500 shares of the Stock have a total value of 
$445,225. The sale will be a one-time transaction for cash, and the 
Plan will pay no commissions nor other expenses relating to the sale.
    The Applicants represent that following a large benefit 
distribution made by the Plan in 1993, the proportion of Plan assets 
represented by the Stock rose to 28%. At that time, the Applicants, as 
trustees of the Plan, determined that future contributions due to the 
Plan from the Employer, plus dividends paid on the Stock, would keep 
the assets of the Plan diversified and provide the liquidity needed to 
make benefit payments. However, the Stock has appreciated so much over 
the last few years that the Plan has been fully funded, and no 
additional Employer contributions have been allowed.
    Although the Stock has been a good investment for the Plan, the 
Applicants, as Plan trustees, have determined that the proposed sale of 
5,500 shares of the Stock is in the best interests of, and appropriate 
for, the Plan because such sale will enhance the liquidity and 
diversification of the assets of the Plan. In addition, the sale will 
reduce the risk of loss to the Plan in the event that the market value 
of the Stock should decline in the future, or in the event that the 
Stock, because it is not publicly traded, cannot be sold expeditiously 
when the Plan requires the funds to make benefit payments, forcing a 
distress sale in order to generate cash. Finally, the Applicants, as 
Plan trustees, have determined that the continued holding by the Plan 
of the remaining 2,000 shares of the Stock will not adversely affect 
the Plan's liquidity needs.
    5. In summary, the Applicants represent that the proposed 
transaction satisfies the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons: (a) the sale will 
be a one-time transaction for cash; (b) the Plan will pay no 
commissions nor other expenses relating to the sale; (c) the Plan will 
receive an amount that is no less than the fair market value of the 
Stock as of the date of the sale, as determined by a qualified, 
independent appraiser; and (d) the sale will enhance the liquidity and 
diversification of the assets of the Plan, as well as reduce the risk 
of loss to the Plan, in the event that the market value of the Stock 
should decline in the future.

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

General Information

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

    Signed at Washington, DC, this 19th day of April, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 99-10104 Filed 4-21-99; 8:45 am]
BILLING CODE 4510-29-P