62622 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

2Since Mr. Franklin is the sole owner of F&D and

the only participant in the Plan, there is no

jurisdiction under Title I of the Act pursuant to 29

CFR 2510.3–3(b). However, there is jurisdiction

under Title II of the Act pursuant to section 4975

of the Code.

of the date of the publication of the

Notice in the Federal Register on July

11, 1997. All comments and requests for

hearing were due by August 25, 1997.

Subsequently, on two occasions the

applicant requested additional time

within which to notify interested

persons. Accordingly, the Department

agreed to extend the comment period to

October 29, 1997.

As of the close of the extended

comment period, the Department had

received no requests for hearing.

However, the Department did receive a

comment letter from the applicant,

EBPLife, dated September 3, 1997, in

which the applicant confirmed the July

1, 1997, sale by First Data Corporation

of its administrative service affiliate,

First Health, to an unrelated company.

As a result of that sale, EBPLife no

longer has current plan sponsor clients

with respect to which it, or its Affiliates,

provides both reinsurance and nondiscretionary administrative services.

Accordingly, the Department has

determined to amend the effective date

of the exemption to cover the period

from April 15, 1994, the date the

application was filed, to July 1, 1997,

the date when the First Health was sold.

After full consideration and review of

the entire record, including the written

comment filed by the applicant, the

Department has determined to grant the

exemption, as modified and clarified

above. The comment submitted by the

applicant to the Department has been

included as part of the public record of

the exemption application. The

complete application file, including all

supplemental submissions received by

the Department, is available for public

inspection in the Public Documents

Room of the Pension Welfare Benefits

Administration, Room N–5638, U.S.

Department of Labor, 200 Constitution

Avenue NW., Washington, DC 20210.

For a complete statement of the facts

and representations supporting the

Department’s decision to grant this

exemption refer to the Notice published

on July 11, 1997, 62 FR 37299.

FOR FURTHER INFORMATION CONTACT:

Angelena C. Le Blanc of the Department,

telephone (202) 219–8883. (This is not

a toll-free number.)

Franklin & Davis, P.C. Profit Sharing

Plan (the Plan), Located in Troy,

Michigan

[Prohibited Transaction No. 97–62;

Exemption Application No. D–10450]

Exemption

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 two loans (the Loans) totaling

$229,000 to Franklin & Davis, P.C.

(F&D), the Plan’s sponsor and a

disqualified person with respect to the

Plan, by the individual account (the

Account) of Bruce W. Franklin (Mr.

Franklin), provided the following

conditions are satisfied: (a) The terms of

the Loans are at least as favorable to the

Plan as those obtainable in arm’s-length

transactions with an unrelated party; (b)

the Loans do not exceed 25% of the

assets of the Account; (c) the first Loan

(Loan 1) is secured by a second

mortgage on certain real property which

has been appraised by a qualified

independent appraiser to have a fair

market value not less than 150% of the

amount of Loan 1 plus the balance of

the first mortgage which it secures; (d)

the second Loan (Loan 2) is secured by

certain securities which have a fair

market value not less than 200% of

Loan 2; and (e) the fair market value of

the collateral remains at least equal to

the percentages described in conditions

(c) and (d), above, throughout the

duration of the Loans.2

For a more complete statement of the

facts and representations supporting the

Department’s decision to grant this

exemption, refer to the notice of

proposed exemption published on

October 2, 1997 at 62 FR 51692.

FOR FURTHER INFORMATION CONTACT: Gary

H. Lefkowitz of the Department,

telephone (202) 219–8881. (This is not

a toll-free number.)

General Information

The attention of interested persons is

directed to the following:

(1) The fact that a transaction is the

subject of an exemption under section

408(a) of the Act and/or section

4975(c)(2) of the Code does not relieve

a fiduciary or other party in interest or

disqualified person from certain other

provisions to which the exemptions

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) These exemptions are

supplemental to and not in derogation

of, any other provisions of the Act and/

or the Code, including statutory or

administrative exemptions and

transactional 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

(3) The availability of these

exemptions is subject to the express

condition that the material facts and

representations contained in each

application accurately describes all

material terms of the transaction which

is the subject of the exemption.

Signed at Washington, D.C., this 19th day

of November, 1997.

Ivan Strasfeld,

Director of Exemption Determinations,

Pension and Welfare Benefits Administration,

U.S. Department of Labor.

[FR Doc. 97–30827 Filed 11–21–97; 8:45 am]

BILLING CODE 4510–29–P

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

[Application No. D–10328, et al.]

Proposed Exemptions; MS Commodity

Investments Portfolio II, L.P. (the

Partnership, et al.)

AGENCY: Pension and Welfare Benefits

Administration, Labor.

ACTION: Notice of proposed exemptions.

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
Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices 62623

1For purposes of this exemption, references to

specific provisions of Title I of the Act, unless

otherwise specified, refer also to the corresponding

provisions of the Code.

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. llll, stated in each

Notice of Proposed Exemption. The

applications for exemption and the

comments received will be available for

public inspection in the Public

Documents Room of Pension and

Welfare Benefits Administration, U.S.

Department of Labor, Room N–5507,

200 Constitution Avenue, N.W.,

Washington, D.C. 20210.

Notice to Interested Persons

Notice of the proposed exemptions

will be provided to all interested

persons in the manner agreed upon by

the applicant and the Department

within 15 days of the date of publication

in the Federal Register. Such notice

shall include a copy of the notice of

proposed exemption as published in the

Federal Register and shall inform

interested persons of their right to

comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The

proposed exemptions were requested in

applications filed pursuant to section

408(a) of the Act and/or section

4975(c)(2) of the Code, and in

accordance with procedures set forth in

29 CFR Part 2570, Subpart B (55 FR

32836, 32847, August 10, 1990).

Effective December 31, 1978, section

102 of Reorganization Plan No. 4 of

1978 (43 FR 47713,October 17, 1978)

transferred the authority of the Secretary

of the Treasury to issue exemptions of

the type requested to the Secretary of

Labor. Therefore, these notices of

proposed exemption are issued solely

by the Department.

The applications contain

representations with regard to the

proposed exemptions which are

summarized below. Interested persons

are referred to the applications on file

with the Department for a complete

statement of the facts and

representations.

MS Commodity Investments Portfolio

II, L.P. (the Partnership) and Morgan

Stanley Commodities Management, Inc.

(MSCM, Collectively the Applicants),

Located in New York, NY

[Application Nos. D–10328 and D–10329]

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, August 10, 1990).

Section I. Covered Transactions

If the exemption is granted, the

restrictions of section 406(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 (D), shall not apply, effective

April 3, 1996, to the acquisition or

redemption of units (the Units or Unit)

in the Partnership by certain plans (the

Plans or Plan) that invest in the

Partnership, where MSCM, the general

partner of the Partnership, and/or its

affiliates are parties in interest and/or

disqualified persons with respect to

such Plans; provided that the

conditions, as set forth below in Section

II are satisfied as of the effective date of

this exemption.1

Section II. General Conditions

This proposed exemption, if granted,

will be subject to the express condition

that the material facts and

representations contained in the

applications are true and complete, and

that the applications accurately describe

all material terms of the transactions to

be consummated pursuant to the

exemption.

(a) Prior to the investment of the

assets of a Plan in the Partnership, a

fiduciary of such Plan (the Plan

Fiduciary or Plan Fiduciaries) who is/

are independent of MSCM and its

affiliates must approve such investment.

(b) MSCM has determined and

documented and will determine and

document, pursuant to a written

procedure, that the decision of a Plan to

invest in the Partnership was and will

be made by a Plan Fiduciary who was

and is independent of MSCM and its

affiliates and who was and is capable of

making an informed investment

decision about investing in the

Partnership.

(c) The independent Plan Fiduciary of

each Plan investing in the Partnership

has retained and will retain complete

discretion with respect to transactions

initiated by such Plan involving the

acquisition or redemption of Units in

the Partnership.

(d) Neither MSCM nor its affiliates

has any discretionary authority or

control with respect to the investment of

assets by Plans in the Partnership nor

renders investment advice (within the

meaning of 29 CFR 2510.3–21(c) with

respect to the investment of such assets.

(e) No Plan investing in the

Partnership has acquired and held or

will acquire or hold Units in the

Partnership that represent more than 20

percent (20%) of the assets of the

Partnership.

(f) At the time of any acquisition of

Units by a Plan, the aggregate value of

the Units acquired and held by such

Plan does not exceed 10 percent (10%)

of the assets of such Plan.

(g) At the time transactions are

entered into, the terms of such

transactions are at least as favorable to

the Plans as those obtainable in arm’s

length transactions with an unrelated

party.

(h) No Plan has paid or will pay a fee

or commission to MSCM or any of its

affiliates by reason of the acquisition or

redemption of Units in the Partnership.

(i) The total fees paid to MSCM have

constituted and will constitute no more

than reasonable compensation, within

the meaning of sections 408(b)(2) and

408(c)(2) of the Act.

(j) Only Plans with assets having an

aggregate market value of at least $25

million have been and will be permitted

to invest in the Partnership, except that

in the case of two or more Plans

maintained by a single employer or

controlled group of employers, the $25

million dollar requirement may be met

by aggregating the assets of such Plans,

if the assets are commingled for

investment purposes in a single master

trust.

(k) Prior to making an investment in

the Partnership, the independent Plan

Fiduciary of each potential Plan

investor, and/or such Plan investor’s

authorized representative has been and

will be provided by MSCM or by an

affiliate with a written copy of the

following offering materials:

(1) the Private Placement

Memorandum of the Partnership (the

Memorandum) (which contains among

other things, a description of the

offering of Units, all material facts

concerning the purpose, structure, and

operation of the Partnership, as well as

any associated risk factors, and a

description of the relationships existing
62624 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

between MSCM, Morgan Stanley Asset

Management Inc. (MSAM), Morgan

Stanley & Co. Incorporated (MS&Co),

and Morgan Stanley Group Inc. (the MS

Group));

(2) the then-current limited

partnership agreement (the LP

Agreement) between MSCM and the

investors in the Partnership; and

(3) the then-current subscription

agreement (the Subscription Agreement)

(an executed copy of which is delivered

to a subscriber and/or its authorized

representative as soon as practicable

following such subscriber’s investment

in the Partnership) and the Investor

Certification previously furnished by

MSCM or its affiliates to the

independent Plan Fiduciaries for

completion which contains information

about each potential Plan investor,

specifies such Plan’s proposed

investment in the Partnership, and

documents the fact that the investment

decision is being made by an

independent Plan Fiduciary who is

capable of making an informed

investment decision about investing in

the Partnership.

(l) With respect to the ongoing

participation in the Partnership, the

independent Plan Fiduciary of each

Plan invested in the Partnership has

received and will receive, within the

time periods specified below, the

following additional written disclosures

from MSCM or from its affiliates:

(1) within ninety (90) days after the

close of each fiscal year, audited

financial statements of the Partnership,

prepared annually by a qualified,

independent, public accountant

including:

(i) a balance sheet; (ii) a statement of

income or a statement of loss; (iii) the

net asset value of the Partnership, as of

the end of the two preceding fiscal

years; (iv) either: (A) the net asset value

per outstanding Unit as of the end of the

reporting period or (B) the total value of

each participant’s interest in the

Partnership as of the end of such period;

(v) a statement of changes in partner’s

capital; and (vi) the amount of the total

fees paid to MSCM or to its affiliates by

the Partnership during such period.

(2) within thirty (30) days after the

end of each calendar month, a monthly

statement of account prepared by

MSCM or by its affiliates containing the

following unaudited financial

information:

(i) the total amount of realized net

gain or loss on commodity interest

positions liquidated during the

reporting period; (ii) the change in

unrealized net gain or loss on

commodity interest positions during

such reporting period; (iii) the total

amount of net gain or loss from all other

transactions in which the Partnership

engaged during such reporting period;

(iv) the total amount of management

fees, advisory fees, brokerage

commissions, and other fees for

commodity interests and other

investment transactions incurred or

accrued by the Partnership during such

reporting period; (v) the net assets value

of the Partnership as of the beginning of

such reporting period; (vi) the total

amount of additions to Partnership

capital made during such reporting

period; (vii) the total amount of

withdrawals from and redemption of

Units in the Partnership during such

reporting period; (viii) the total net

income or loss of the Partnership during

such reporting period; (ix) the net assets

value of the Partnership as of the end of

such reporting period; and (x) either (A)

the net asset value per outstanding Unit

as of the end of such reporting period

or (B) the total value of each

participant’s interest in the Partnership

as of the end of such reporting period.

(m) The Partnership has not engaged

and will not engage in swaps

transactions, as defined in Section III(d)

below.

(n) The Partnership has not invested

in and will not invest in any entity in

which MS Group or any of its affiliates

has an ownership interest.

(o) Affiliates of MSCM have not

invested in and will not invest in the

Partnership.

(p) The non-U.S. commodity trading

activities of the Partnership has been

and will be limited to the London

Metals Exchange (the LME).

(q) The Applicants have not accepted

and will not accept subscriptions from

Plans which permit participants to

exercise control over the decision to

acquire or redeem Units;

(r) MSCM has maintained and shall

maintain, for a period of six years, the

records necessary to enable the persons

described in paragraph (s) of this

Section II to determine whether the

conditions of this exemption have been

met, except that (a) a prohibited

transaction will not be considered to

have occurred if, due to circumstances

beyond the control of MSCM and/or its

affiliates, the records are lost or

destroyed prior to the end of the six (6)

year period, and (b) no party in interest

or disqualified person other than MSCM

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 have not been maintained or

are not maintained, or have not been

available or are not available for

examination as required by paragraph

(s) of this Section II below.

(s)(1) Except as provided in

subsection (2) of this paragraph (s) and

notwithstanding any provisions of

subsections (a)(2) and (b) of section 504

of the Act, the records referred to in

paragraph (r) of this Section II shall be

unconditionally available at their

customary location during normal

business hours by:

(a) any duly authorized employee or

representative of the Department or the

Internal Revenue Service;

(b) any fiduciary of any Plan investing

as a limited partner in the Partnership

or any duly authorized representative of

such fiduciary;

(c) any contributing employer to any

Plan investing as a limited partner or

any duly authorized employee

representative of such employer;

(d) any participant or beneficiary of

any participating Plan investing as a

limited partner, or any duly authorized

representative of such participant or

beneficiary; and

(e) any other limited partner.

(2) None of the persons described

above in subparagraphs (b)–(e) of

paragraph (s)(1) of this Section II shall

be authorized to examine the trade

secrets of MSCM or commercial or

financial information which is

privileged or confidential.

Section III. Definitions

For purposes of this exemption:

(a) An affiliate of a person includes—

(1) any person directly or indirectly

through one or more intermediaries,

controlling, controlled by, or under

common control of such person. (For

purposes of this subsection, the term

‘‘control’’ means the power to exercise

a controlling influence over the

management or policies of a person

other than an individual.)

(2) any officer, director, or partner in

such person, and

(3) any corporation or partnership of

which such person is an officer,

director, or a 5 percent (5%) or more

partner or owner.

(b) A Plan or the Plans has not

included and will not include any

individual account plan(s) where

participants have the right to exercise

control over the decision to acquire or

redeem Units.

(c) A Plan Fiduciary or Plan

Fiduciaries is defined as a fiduciary or

fiduciaries of a Plan who is/are

independent of MSCM and its affiliates.

(d) A swap transaction is defined as

an individually negotiated, nonstandardized agreement between two

parties to exchange cash flows at

specified intervals known as payment or
Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices 62625

2The final exemption for PTCE 84–14 was

published in the Federal Register on March 13,

1984, (49 FR 9494), and the proposed exemption

was published in the Federal Register on December

21, 1982, (47 FR 56945).

settlement dates. The cash flows of a

swap are either fixed, or calculated for

each settlement date by multiplying the

quantity of the underlying asset

(notional principal amount) by specified

reference rates or prices. Depending

upon the type of underlying asset, the

great majority of these transactions are

classified into interest rate, currency,

commodity, or equity swaps. Interim

payments are generally netted, with the

difference being paid by one party to the

other.

EFFECTIVE DATE: If the proposed

exemption is granted, the exemption

will be effective retroactively, as of

April 3, 1996, the date the Partnership

was organized.

Summary of Facts and Representations

1. The MS Group is a publicly-traded

company whose shares are listed on the

New York Stock Exchange. The MS

Group is a worldwide financial services

firm employing more than 9,000 people

which provides, directly or through its

subsidiaries, services to a large and

diversified group of clients and

customers, including corporations,

governments, and individual investors.

One subsidiary of the MS Group is

MS&Co, a Delaware corporation with

business offices in New York, New

York. MS&Co is a registered futures

commission merchant, a member of the

National Futures Associations (NFA), a

registered broker-dealer, a member of

the National Association of Securities

Dealers, and a member of most major

United States and foreign commodity

exchanges.

MSCM, a Delaware corporation, is a

wholly-owned subsidiary of the MS

Group. Since June 4, 1992, MSCM has

been a registered commodity pool

operator and commodity trading advisor

and, as of the same date, has been a

member of the NFA in such capacities.

Currently, MSCM serves as the trading

advisor for several U.S. and offshore

funds. As of January 31, 1997, MSCM

had $10 million in total assets and $8.5

million in total shareholder’s equity. As

of January 31, 1997, MSCM had total

assets under management of

approximately $130,740,000.

Another wholly-owned subsidiary of

the MS Group, MSAM, a Delaware

corporation, is registered with the

Securities and Exchange Commission as

an investment adviser, is registered with

the Commodity Futures Trading

Commission as a commodity trading

advisor, and is a member of the NFA in

such capacity. MSAM also meets the

definition of a ‘‘qualified professional

asset manager’’ as contained in Part V of

the Department’s Prohibited Transaction

Class Exemption 84–14.2

2. The Partnership is a Delaware

limited partnership with offices in New

York, New York. The aggregate fair

market value of the total assets of the

Partnership, as of August 15, 1996, was

approximately $15 million. The

Partnership was organized on April 3,

1996, in order to trade, buy, sell, or

otherwise acquire, hold, or dispose of

commodity futures contracts (the

Commodity Interests) on U.S.

commodity exchanges and on non-U.S.

commodity exchanges. It is represented

that the Partnership may engage in the

business of trading commodity interests

directly or through partnerships, joint

ventures, or similar arrangements.

It is represented that the trading

strategy of the Partnership has been and

will be applied to a broad range of

commodities, including commodity

interests on metals, energy products,

grains, livestock, and other commodities

selected by MSCM from time to time. It

is represented that the assets of the

Partnership has consisted and will

consist solely of cash, Treasury

securities, and positions with respect to

exchange-traded futures contracts.

Further, the Applicants have agreed as

a condition of this exemption that the

Partnership will not engage in swaps

transactions, as defined in Section III(d)

above.

The Applicants represent that the

Partnership has invested and will invest

solely in assets for which independent,

objective pricing information is readily

available. In this regard, the Applicants

state that the Partnership’s open futures

positions are valued by reference to the

closing price for each futures contract

on the applicable commodity exchange.

It is represented that the current value

of any Treasury securities has been and

will be determined by reference to

prices established in over-the-counter

transactions by persons unaffiliated

with MSCM.

It is further represented that the

trading strategy of the Partnership has

been and will be limited in the

following manner: (a) The Partnership

has maintained and will maintain only

long positions in Commodity Interests;

(b) The Partnership has traded and will

trade only futures contracts that are or

may be traded on U.S. commodity

exchanges or the LME; (c) the

Partnership has not traded and will not

trade interests on financial instruments

(including stock indices) and foreign

currencies; (d) the underlying value of

the positions entered into in the

commodity interest markets has been

and will be targeted at 1.0 times the

assets of the Partnership; (e) at the time

of the initial closing and thereafter upon

every portfolio reweighting: a minimum

of 10 percent (10%) of the Partnership’s

assets has been and will be exposed to

commodity sectors in energy, precious

metals, and base metals; a maximum of

25 percent (25%) of the Partnership’s

assets have been and will be exposed to

any one sector; and a maximum of 15

percent (15%) of the Partnership’s assets

have been and will be exposed to one

particular commodity.

The Applicants have agreed that as a

condition of this exemption, any nonU.S. commodity trading activities of the

Partnership will be limited to the LME,

which is subject to substantial

regulation by the Securities and Futures

Authority and the Securities Investment

Board in the United Kingdom.

3. MSCM, as the sole discretionary

general partner of the Partnership,

controls, conducts, and manages the

business of the Partnership, including

executing various documents on behalf

of the Partnership, determining the

distributions, if any, of profits and

income, and supervising the liquidation

of the Partnership. It is represented that

the affairs of the Partnership will be

wound up and the Partnership

liquidated as soon as practicable upon

the first to occur of: (a) December 31,

2026, or (b) certain other terminating

events, as set forth in the LP Agreement.

In addition, MSCM has retained

MSAM, an affiliate of MSCM, as the

trading advisor for the Partnership and

cash management advisor with overall

responsibility for the investment of the

assets of the Partnership and for the

Partnership’s trading. MSAM has

selected MSCM to make trading

decisions on behalf of the Partnership of

Commodity Interests on all U.S.

exchanges and on the LME. It is

represented that notwithstanding any

such delegation, MSAM remains liable

to the Partnership for the trading of

Commodity Interests on behalf of the

Partnership, to the same extent as if

MSAM alone were making the actual

trading decision regarding such

Commodity Interests.

With respect to the trading of

Commodity Interests by the Partnership,

MSCM has retained: (1) MS&Co to act as

the futures commission merchant with

respect to trading by the Partnership on

U.S. exchanges; and (2) Morgan Stanley

International Limited to act as the

futures commission merchant with

respect to trading by the Partnership on

the LME. In this regard, the Applicants
62626 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

3The Applicants maintain that the Incentive Fee

structure, described herein, is comparable in several

respects to the performance fee arrangements

previously reviewed by the Department of Labor in

certain advisory opinion letters, 86–20A. 86–21A,

and 89–31A. In this regard, the Applicants have not

requested relief for the receipt of the Incentive Fee

by MSAM and/or by its affiliates. The Department,

herein, offers no opinion as to whether the

Incentive Fee structure violates any provision of the

prohibited transaction provisions of section 406 of

the Act, nor is the Department providing relief,

herein, for the receipt by MSCM or by its affiliates

of any Incentive Fee.

4Rule 506 provides a special exemption for

limited offers and sales of securities by an issuer

without regard to the dollar amount of the offering.

In particular, Rule 506(b)(2)(i) limits to 35 the

number of non-accredited investors in an offering.

have represented that, in connection

with the Partnership’s commodity

trading activities, any transaction on the

LME with respect to which it eventuates

that an affiliate of MSCM is the formal

counterparty, will be a ‘‘blind

transaction’’ (i.e., one in which the

identity of the counterparty is not

within the knowledge or control of

MSCM or any affiliate thereof). The

Applicants represent that, in connection

with any commodity trading on the

LME, the Partnership and any affiliates

of MSCM will retain independent floor

brokers. Although it is possible that the

Partnership and an affiliate of MSCM

will use the same floor broker, the

Applicants represent that MSCM will

instruct any floor broker retained on

behalf of the Partnership not to cross

trades with an affiliate of MSCM.

4. The Partnership pays monthly to

MSCM an administrative fee (the

Administrative Fee) computed daily and

equal to a percentage of the net assets

of the Partnership, as of the beginning

of each day (before deduction of an

incentive fee (the Incentive Fee)

described below). It is represented that

MSCM, as general partner, is

responsible for paying all of the

ordinary administrative expenses,

brokerage commissions, any per

transaction service charges, and any

other similar fees with respect to trading

by the Partnership. To the extent any

expenses exceed the amount of the

Administrative Fee paid to MSCM, the

Partnership is not responsible for the

payment of any such additional

expenses. However, it is represented

that MSCM received from the

Partnership reimbursement for

organizational expenses and initial

offering costs.

Further, the Partnership pays monthly

to MSAM for services, as described

above, a management fee (the

Management Fee) computed daily and

equal to a percentage of the net assets

of the Partnership as of the beginning of

each day, before deduction of the

Incentive Fee, as more fully described in

the paragraph below. In consideration

for making trading decisions with

respect to the Partnership with regard to

its commodity interest trading, MSAM

pays to MSCM 80 percent (80%) of such

Management Fee and 100 percent

(100%) of the Incentive Fee.

With respect to the Incentive Fee, it

is represented that the Partnership pays

to MSAM at the end of each annual

incentive period an Incentive Fee equal

to a percentage of the amount that the

Partnership’s net performance exceeds a

target return. Net performance equals

the realized and unrealized trading

profits and losses of the Partnership

plus interest income credited to the

Partnership, less the Management Fee,

the Administrative Fee, and other fees

and costs of the Partnership (but not

including the Incentive Fee, initial

offering costs, and extraordinary

expenses). Net Performance is measured

over a period of not less than one (1)

year. The target return against which

this performance is compared is a

predetermined objective index. It is

represented that the calculation of the

Incentive Fee complies with the terms

and conditions of SEC Rule 205–3 and

is reviewed by an independent

accounting firm as part of an annual

audit of the Partnership’s financial

statements.3

5. It is represented that Units in the

Partnership have been and will be

offered to investors under exemptions

from registration, pursuant to section

4(2) of the Securities Act of 1933 (the

1933 Act) and Rule 506 of Regulation D

promulgated thereunder.4 It is

represented that, as the Partnership is

not a private investment company, it is

not required to limit the number of its

investors to 100.

The Memorandum provided for an

initial offering of Units in the

Partnership for sale through MS&Co for

a period of thirty (30) days from the date

of the Memorandum (i.e., May 23,

1996), subject to the discretion of

MSCM to shorten or extend such period.

No minimum amount of sales of Units

was necessary in order for the initial

offering to close. In this regard, it is

represented that the date of the initial

closing was July 1, 1996.

Following the initial closing, Units in

the Partnership have been and will be

continually offered on a daily basis

through MS&Co to new investors who

are qualified and to existing limited

partners of the Partnership in a private

offering (the Continuous Offering). In

this regard, the Partnership may

continue indefinitely to sell Units,

subject to the discretion of MSCM

which may at any time or from time to

time terminate and recommence the

offering. The Applicants have agreed, as

a condition of this exemption, that

affiliates of MSCM will not be permitted

to invest in the Partnership.

After the initial offering, the

minimum investment in the Partnership

per subscriber is $5,000,000, with a

$50,000 minimum for additional

investments by existing limited partners

in the Partnership, subject to exceptions

at the discretion of MSCM. There is no

limit on the total capitalization of the

Partnership. It is represented that as of

April 2, 1997, the capital of the

Partnership totaled $25,400,000.

During the Continuous Offering, Units

have been and will be issued as of the

close of business each business day at

a price per Unit equal to the net asset

value per Unit, as of the date of

issuance. The net asset value of a Unit

is defined as net assets allocated to

capital accounts divided by the

aggregate number of Units. It is

represented that the net assets of the

Partnership are determined in

accordance with generally accepted

accounting principles consistently

applied under the accrual basis of

accounting. It is represented that the

market values of the Commodity

Interests of the Partnership are

determined by MSCM in good faith on

a basis consistently applied in

accordance with generally accepted

accounting principles.

6. The Applicants maintain that the

assets of the Partnership may be deemed

to be plan assets pursuant to 29 CFR

2510.3–101 of regulations issued by the

Department (the Plan Asset

Regulations). Under the Plan Asset

Regulations, when a plan acquires an

equity interest in an entity, such as the

Partnership, which interest is not a

publicly offered security (as in the case

of the Units), nor a security issued by

an investment company registered

under the Investment Company Act of

1940, the underlying assets of the entity

will be deemed to include plan assets,

if 25 percent (25%) of the outstanding

interests of such entity are held by

‘‘benefit plan investors,’’ as defined in

the Plan Asset Regulations. It is

anticipated that prior to the grant of this

proposed exemption the equity

participation by Plans in the Partnership

may exceed 25 percent (25%) of the

total value of all of the Partnership

Units. If and when such event occurs,

the underlying assets of the Partnership

will constitute ‘‘plan assets’’ within the

meaning of 29 CFR 2510.3–101.

Accordingly, the Applicants have

requested that the exemption be

effective, as of April 3, 1996, the date on

which the Partnership was organized.
Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices 62627

5Section 406(b)(2) of the permits any reasonable

arrangement with a party in interest, for services

necessary for the establishment or operation of a

plan, provided that no more than reasonable

compensation is received therefor. The Department

express no opinion, herein, as to whether the

provision of services to the Partnership by MSCM

and/or its affiliates and the compensation received

therefor satisfy the terms and conditions of section

408(b)(2) of the Act.

6The Applicants believe that the analysis

contained in Advisory Opinion 82–26A (June 9,

1982) is applicable to the provision of multiple

services by MSCM and/or its affiliates. This opinion

involved the provision of multiple services where

a fiduciary did not use the authority, control, or

responsibility which made it a fiduciary to cause

the plan to select such fiduciary or to pay any fee

for the provision of services by such fiduciary. In

addition, the Applicants rely on Advisory Opinion

82–62A (December 8, 1982) which involved a

fiduciary’s decision to retain an affiliate to provide

services to a plan, where the fee for such services

was paid by the plan sponsor not by the plan and

where the fiduciary of the plan was not in a

position to benefit, or to cause a person to whom

the fiduciary had an interest to benefit from such

decision at the expense of such plan. Thus, the

Department is not offering relief, herein, for the

provision of multiple services by MSCM and/or its

affiliates.

7The Department wishes to note that ERISA’s

general standards of fiduciary conduct would apply

to the investment described in this proposed

exemption, and that satisfaction of the conditions

of this proposal should not be viewed as an

endorsement of the investment by the Department.

Section 404 of ERISA requires, among other things,

Continued

7. Once the assets of the Partnership

are deemed to be assets of the Plans

which invest in the Partnership, by

virtue of its discretionary authority and

control over such assets as general

partner, MSCM becomes a fiduciary

within the meaning of section 3(21) of

the Act, and a party in interest, pursuant

to section 3(14)(A) of the Act, with

respect to any Plan which invests in the

Partnership.

Further, the MS Group anticipates

that Plans for which the MS Group or

its affiliates perform services will invest

in the Partnership. In this regard, as set

forth in the most recent Memorandum,

it is represented that the MS Group or

its affiliates provide: (a) Brokerage

services to plans; (b) asset management

and/or investment advisory services to

plans; and (c) services to plans as

custodian, clearing agent, and/or

trustee. Accordingly, MSCM may also

be a party in interest with respect to

Plans which invest in the Partnership by

virtue of the affiliation of MSCM with

other entities that are fiduciaries of

Plans or that provide services to such

Plans. It is further represented that other

partners of the Partnership, as yet

unidentified, may also be parties in

interest with respect to Plans which

invest in the Partnership.

8. The Applicants seek a retroactive

exemption for the acquisition of Units

in the Partnership by Plans from MSCM,

the general partner of the Partnership,

and other potential parties in interest

with respect to such Plans, which may

constitute prohibited transactions

between such Plans and such parties in

interest under section 406(a) of the Act.

In this regard, the acquisition of Units

by the Plans may be characterized as an

indirect sale by each existing partner of

the Partnership of a portion of its

Partnership interest to such investing

Plan (and a corresponding transfer of

Plan assets) in violation of section

406(a)(1)(A) and/or 406(a)(1)(D) of the

Act. Likewise, the redemption of Units

by a Plan may be characterized as an

indirect sale of a portion of such Plan’s

redeemed interest in the Partnership to

each remaining partner (and a

corresponding transfer of Plan assets) in

violation of section 406(a)(1)(A) and/or

406(a)(1)(D) of the Act, if a party in

interest to the Plan is involved.

Accordingly, the Applicants request an

administrative exemption from the

Department with respect to the

acquisition and redemption of Units in

the Partnership by Plan investors.

As discussed above, the Applicants

have represented that MSCM and its

affiliates provide various investmentrelated services to Plans that may invest

in the Partnership and also provide

comparable services to the Partnership.

In this regard, the Applicants are of the

opinion that in the ordinary course of

trading of commodities futures, any

prohibited transactions that may arise,

other than those for which relief is

proposed herein, would result from the

Partnership engaging in trading through

a futures commission merchant that is a

party in interest with respect to a Plan

invested in the Partnership. To the

extent that the provision of services by

MSCM and its affiliates to the

Partnership constitutes an indirect

furnishing of services to Plans invested

in the Partnership which is prohibited

under section 406(a) of the Act, the

Applicants intend to rely on the

statutory exemption provided by section

408(b)(2) of the Act.5 Furthermore, the

Applicants represent that any brokerage

fees paid to affiliates of MSCM have not

and will not be expenses of the

Partnership but have been and will be

paid by MSCM. Finally, with respect to

the selection of MSCM or an affiliate to

provide services to the Partnership for a

fee, the Applicants represent that

neither MSCM nor any of its affiliates

have investment discretion or render

investment advice with respect to any

assets of the plans used to purchase

Units in the Partnership. As a result, it

is the Applicant’s opinion that the

furnishing of these services have not

and will not constitute an act of selfdealing prohibited by section 406(b) of

the Act.6

9. At the time the application for

exemption was submitted to the

Department, it was represented that the

Plans that have been or may be affected

by the grant of this proposed exemption

could not be determined. Upon

submission of the application, MSCM

represented that it did not anticipate

investment in the Partnership by

individual retirement accounts, by

Keogh plans, and or by employee

benefit plans which provide for

participant-directed investments.

However, the application did not

preclude such investment to the extent

that such plans could satisfy the

investor certification requirements and

other conditions, as set forth in the

Subscription Agreement. The

Applicants anticipate that sponsors or

fiduciaries of plans providing for

participant-directed investment may

wish to include Units in a diversified

portfolio that is one of several

designated investment alternatives.

However, as a condition of the

exemption, the Applicants have agreed

not to accept subscriptions by Plans

which permit participants to exercise

control over the decision to acquire or

redeem Units.

10. Only Plans with assets having an

aggregate market value of at least $25

million will be permitted to invest in

the Partnership, except that in the case

of two or more Plans maintained by a

single employer or controlled group of

employers, the $25 million dollar

requirement may be met by aggregating

the assets of such Plans, if the assets are

commingled for investment purposes in

a single master trust. In addition, prior

to accepting a subscription from a

prospective Plan investor, the Plan

Fiduciaries who are independent of the

Applicants and their affiliates complete

certain investor certification

representations in the Subscription

Agreement. In this regard, each Plan

and/or its authorized representative is

required to represent that such Plan is

an ‘‘accredited investor,’’ within the

meaning of Rule 501(a) of Regulation D

promulgated under the 1933 Act, and a

‘‘qualified eligible participant,’’ as

defined in Rule 4.7 under the

Commodities Exchange Act, as

amended. Each Plan and/or its

authorized representative is also

required to represent that such Plan,

together with any advisers retained by

it, has sufficient knowledge and

experience in financial and business

matters so as to be capable of evaluating

the merits and risks of investing in the

Partnership.7 Furthermore, each
62628 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

that a fiduciary discharge his duties with respect to

a plan solely in the interest of the plan’s

participants and beneficiaries and in a prudent

fashion. Accordingly, the plan fiduciary must act

prudently with respect to the decision to enter into

an investment transaction. The Department further

emphasizes that it expects the plan fiduciary to

fully understand the benefits and risks associated

with engaging in a specific type of investment,

following disclosure to such fiduciary of all

relevant information. In addition, such plan

fiduciary must be capable of periodically

monitoring the investment, including any changes

in the value of the investment. Thus, in considering

whether to enter into a transaction, a fiduciary

should take into account its ability to provide

adequate oversight of the particular investment.

8The Department is not expressing an opinion on

whether the Applicants or their affiliates would be

deemed to be fiduciaries under section 3(21)(A)(ii)

of the Act. In this regard, the Department believes,

as a general matter, that when a person is deemed

a fiduciary by virtue of rendering investment advice

described in regulation section 2510.3–

21(c)(1)(ii)(B), the presence of an unrelated second

fiduciary acting on the investment adviser’s

recommendations on behalf of the Plan is not

sufficient to insulate the investment adviser from

fiduciary liability under section 406(b) of the Act.

The Department’s regulation section 2510.3–

21(c)(1)(ii)(B) presupposes the existence of a second

fiduciary who by agreement or conduct manifests

a mutual understanding to rely on the investment

adviser’s recommendations as a primary basis for

the investment of Plan assets. In the presence of

such an agreement or understanding, the rendering

of investment advice involving self-dealing such as

the acquisition of Units in the Partnership which

results in the payment of fees to the adviser, will

subject the investment adviser to liability under

section 406(b) of the Act. The Department is unable

to conclude that fiduciary self-dealing of this type

(if present) is in the interests or protective of the

Plans and their participants and beneficiaries. If,

however, the unrelated second fiduciary has not

agreed to rely on the investment adviser’s

recommendations, the investment adviser will not

be deemed to be a fiduciary under section

3(21)(A)(ii) because the requirements of regulation

section 2510.3–(21)(c)(1)(ii)(B) will not be met.

Accordingly, the Department has limited exemptive

relief for the acquisition or redemption of

Partnership Units to section 406(a) violations only.

subscriber that is purchasing Units with

the assets of a Plan is required to

represent: (a) That it has evaluated for

itself the merits of the investment; (b)

that it has not solicited and has not

received from the Partnership, from

MSCM, or from any affiliate thereof any

evaluation or investment advice in

respect of the advisability of such an

investment in light of the Plan’s assets,

cash needs, investment policies or

strategy, overall portfolio, or

diversification of assets; (c) that it is not

relying on and has not relied on MSCM,

or on any affiliate thereof, for any such

investment advice; and (d) that neither

MSCM nor its affiliates has investment

discretion with respect to the assets of

the Plan which have been or will be

used to acquire or redeem Units.8

11. Prior to investing in the

Partnership, each potential investor

and/or its authorized representative

(including a Plan and/or a Plan

Fiduciary) has been and will be

provided with a copy of: (a) The

Memorandum (which contains, among

other things, a description of the

offering and the relationships existing

between MSCM, MSAM, MS&Co, and

the MS Group; (b) the then-current LP

Agreement; (c) the then-current

Subscription Agreement (an executed

copy of which is also delivered to a

subscriber and or its authorized

representative, including a Plan and/or

a Plan Fiduciary, as soon as practicable

following investment in the Partnership

by such subscriber). Further, the

Applicants represent that a copy of this

notice of proposed exemption (the

Notice) and a copy of the final

exemption (the Final Exemption), if

granted, will be provided to all Plans

that invest in the Partnership

subsequent to the publication of the

Final Exemption in the Federal

Register.

12. It is represented that MSCM has

distributed and will distribute to each

Plan that invests in the Partnership as

a limited partner (a) within ninety (90)

days after the close of each fiscal year

of the Partnership, audited financial

statements (including a balance sheet; a

statement of income or a statement of

loss; the net asset value of the

Partnership, as of the end of the two

preceding fiscal years; either (A) the net

asset value per outstanding Unit as of

the end of the reporting period or (B) the

total value of each participant’s interest

in the Partnership as of the end of such

period; a statement of changes in

partner’s capital; and the amount of the

total fees paid to MSCM or to its

affiliates by the Partnership during such

period.

It is also represented that MSCM has

distributed and will distribute to each

Plan that invests in the Partnership as

a limited partner within thirty (30) days

after the end of each calender month, a

report for such month specifying, among

other things: (i) The total amount of

realized net gain or loss on commodity

interest positions liquidated during the

reporting period; (ii) the change in

unrealized net gain or loss on

commodity interest positions during

such reporting period; (iii) the total

amount of net gain or loss from all other

transactions in which the Partnership

engaged during such reporting period;

(iv) the total amount of management

fees, advisory fees, brokerage

commissions, and other fees for

commodity interests and other

investment transactions incurred or

accrued by the Partnership during such

reporting period; (v) the net assets value

of the Partnership as of the beginning of

such reporting period; (vi) the total

amount of additions to Partnership

capital made during such reporting

period; (vii) the total amount of

withdrawals from and redemption of

Units in the Partnership during such

reporting period; (viii) the total net

income or loss of the Partnership during

such reporting period; (ix) the net assets

value of the Partnership as of the end of

such reporting period; and (x) either (A)

the net asset value per outstanding Unit

as of the end of such reporting period

or (B) the total value of each

participant’s interest in the Partnership

as of the end of such reporting period.

13. It is represented that a capital

account is established for each partner

in the Partnership, including the Plans.

However, in this regard, it is

represented that investors in the

Partnership may not allocate invested

funds to any specific investment.

Instead, the funds raised through the

offering of Units have been and will be

deposited in an account maintained by

the Partnership with MS&Co or to the

extent the Partnership trades on the

LME, deposited in certain accounts

maintained with non-U.S. banks and

foreign brokers.

14. Under current federal and state

income tax laws, MSCM (in its capacity

as general partner of the Partnership)

may be required to maintain

contributions to the capital of the

Partnership in cash for all fiscal years in

amounts which equal at least one

percent (1%) of the aggregate capital

contributions to the Partnership by all

partners for all fiscal years (including

contributions by MSCM). On July 1,

1996, the date of the closing of the

initial offering of Units in the

Partnership, MSCM had contributed

$120,694 to the Partnership. As of

January 31, 1997, the aggregate

contributions by MSCM to the

Partnership totaled $172,000. The

Applicants represent that, MSCM will

not maintain an interest in the

Partnership that exceeds one percent

(1%) of the aggregate capital

contributions to the Partnership by all

partners. In the event that MSCM’s

interest in the Partnership exceeds this

amount by more than a de minimis

amount, MSCM shall, within five (5)

business days, reduce its interest to the

permitted level by accepting additional

subscriptions, if possible, or by

withdrawing any portion of its interest

in the Partnership that is in excess of

one percent (1%) of the Partnership’s

capital, as permitted under the LP

Agreement.

15. It is represented that a limited

partner in the Partnership, including a

Plan, may sell or transfer Units or any

interest therein in the Partnership only

with the consent of MSCM. Such
Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices 62629

consent may be withheld in the sole

discretion of MSCM as general partner

of the Partnership.

A limited partner, including a Plan,

may withdraw all or part of its capital

contributions and undistributed profits,

if any, by requiring the Partnership to

redeem all or part of its Units, effective

as of the close of each business day.

Redemptions may only be made in

amounts greater than or equal to

$20,000, unless the limited partner,

including a Plan, is redeeming all of its

interest in the Partnership. A limited

partner may not make a partial

redemption of Units that would reduce

the net asset value of such limited

partner’s unredeemed Units, as of the

effective date of the redemption, to less

than $5,000,000 or the amount of such

limited partner’s initial investment,

whichever is less. Requests for

redemption must be made by letter in a

form acceptable to MSCM and must be

received by MSCM at its offices at least

two full business days prior to the

effective date of the redemption.

In addition, MSCM may, in its sole

discretion as general partner, require

any limited partner, including a Plan, to

redeem all of its Units or a portion of

such Units upon written notice to such

limited partner. No fee or other charge

is payable by a limited partner,

including a Plan, upon redemption of its

Units. It is represented that any

distributions to a limited partner from

the Partnership in redemption of Units

have been and will be made in cash.

16. It is represented that the requested

exemption is protective of the rights of

the participants and beneficiaries of

affected Plans in that the decision to

invest in the Partnership has been and

will be made by a Plan Fiduciary who

is independent of MSCM and its

affiliates. In this regard, such Plan

Fiduciaries retain complete discretion

with respect to transactions initiated by

a Plan investor involving the acquisition

or redemption of Units. In addition,

investors in the Partnership are

furnished with audited financial

statements and periodic reports that

enable the Plan Fiduciaries to monitor

the investment activities of the

Partnership and permit such parties to

discharge their oversight

responsibilities.

Further protections are afforded by

appropriate limitations which are

placed on Plan investment in the

Partnership. In this regard, no single

Plan investor is permitted under any

circumstances to acquire or hold an

amount of Units which causes the

investment by such Plan to exceed 20

percent (20%) of the total assets of the

Partnership. In addition, at the time of

any acquisition of Units by a Plan, the

aggregate value of the Units acquired

and held by such Plan has not and will

not exceed 10 percent (10%) of the total

assets of such Plan.

17. The Applicants maintain that the

terms and conditions of this proposed

exemption provide additional

safeguards for the protection of Plans

which invest in the Partnership. In this

regard, as a condition of this exemption,

MS&Co and its affiliates have agreed

that the Partnership has not invested

and will not invest in any entity in

which MS&Co or any of its affiliates has

an ownership interest. In addition, the

Partnership has not engaged and will

not engage in swaps transactions, as

defined in Section III (d) above, nor

does the Partnership anticipate making

any investment in U.S. or off-shore

funds. Furthermore, it is represented

that the Partnership does not anticipate

making any equity investments in

entities for which a party in interest

with respect to any Plan invested in the

Partnership has an ownership interest.

18. The Applicants represent that the

requested exemption would be

administrative feasible, because the

transactions involved have been and

will be well-documented through

professionally maintained books and

records which are subject to government

review and independent, certified

audits. As such, it is represented that

the transactions can be readily

monitored to ensure compliance with

the terms of the exemption. In addition,

the Applicants have borne and will bear

all of the costs of the exemption

applications and will be responsible for

the costs of notifying interested persons.

19. It is represented that the requested

exemption is in the interest of the

affected Plans (and their participants

and beneficiaries) in that the

Partnership provides Plans with the

type of investment medium and risk

factors that such Plans desire in their

investment portfolios.

Moreover the transactions are in the

interest of the Plans which invest in the

Partnership, because no placement fee

or other sales charge has been or will be

payable by the Partnership or by

investors in connection with the

offering of the Units. In addition, Plans

have been and will be permitted to

redeem their investments in the

Partnership upon reasonably short

notice, without the payment of fees or

penalties of any sort. In this regard, it

is represented that MSCM, MSAM,

MS&Co, the MS Group or their affiliates

do not receive any fees in connection

with the acquisition or redemption of

Units by Plan investors.

20. In summary, it is represented that

the proposed transactions meet the

statutory criteria for an exemption

under section 408(a) of the Act and

section 4975(c)(2) of the Code because:

(a) The participation by Plans in the

Partnership has been and will be

approved by Plan Fiduciaries prior

investment by Plans in the Partnership;

(b) The Applicants have instituted

and maintained and will institute and

maintain a written procedure and

records establishing criteria for

determining that the Plan Fiduciaries

are independent of the Applicants and

their affiliates and are sufficiently

knowledgeable to make an informed

decision regarding the investment by

Plans in the Partnership;

(c) A Plan Fiduciary maintains

complete discretion with respect to

acquiring or redeeming Units in the

Partnership on behalf of a Plan;

(d) Neither MSCM nor its affiliates

has any discretionary authority or

control with respect to the investment of

assets of the Plans in Units of the

Partnership nor renders investment

advice with respect to the investment of

those assets;

(e) No Plan has acquired and held or

will acquire or hold Units in the

Partnership that represents more than

20 percent (20%) of the assets of the

Partnership;

(f) At the time of any acquisition of

Units by a Plan, the aggregate value of

the Units acquired or held by such Plan

has not and will not exceed 10 percent

(10%) of the assets of such Plan;

(g) The terms of each acquisition or

redemption of Partnership Units has

been and will be at least as favorable to

an investing Plan as those obtainable in

an arm’s length transaction with an

unrelated party;

(h) No Plan has paid or will pay a fee

or commission by reason of the

acquisition or redemption of

Partnership Units;

(i) The total fees paid to MSCM or

their affiliates with respect to services

rendered have constituted and will

constitute no more than reasonable

compensation, within the meaning of

sections 408(b)(2) and 408(c)(2) of the

Act;

(j) Only Plans with assets having an

aggregate market value of at least $25

million have been and will be permitted

to invest in the Partnership, except that

in the case of two or more Plans

maintained by a single employer or

controlled group of employers, the $25

million dollar requirement may be met

by aggregating the assets of such Plans,

if the assets are commingled for

investment purposes in a single master

trust.
62630 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

9 In the case of a private placement memorandum,

such memorandum must contain substantially the

same information that would be disclosed in a

prospectus if the offering of the certificates were

made in a registered public offering under the

Securities Act of 1933. In the Department’s view,

the private placement memorandum must contain

sufficient information to permit plan fiduciaries to

make informed investment decisions.

10PTE 89–93 permits, as of July 22, 1987, certain

transactions between CFC and employee benefit

plans where CFC may be deemed to be a party in

interest with respect to the plans as a result of

providing services to a trust in situations where the

assets of the trust are considered to be ‘‘plan assets’’

as a result of the plans acquiring significant

ownership interests in the trust in the form of passthrough certificates.

(k) The Applicants have made and

will make periodic written disclosures

to Plans with respect to the financial

condition of the Partnership;

(l) The Partnership has not engaged

and will not engage in swaps

transactions, as defined in Section III(d)

above;

(m) The Partnership has not invested

and will not invest in any entity in

which MS&Co or any of its affiliates has

an ownership interest;

(n) Affiliates of MSCM have not

invested in and will not invest in the

Partnership;

(o) The non-U.S. commodity trading

activities of the Partnership has been

and will be limited to the LME;

(p) The Applicants have not accepted

and will not accept subscriptions by

Plans which permit participants to

exercise control over the decision to

acquire or redeem Units; and

(q) As of the effective date of this

exemption and thereafter, MSCM has

maintained and shall maintain for a

period of time the records necessary to

enable certain persons to determine

whether the conditions of this

exemption have been met.

Notice to Interested Persons

Those persons who may be interested

in the pendency of the requested

exemption will include prospective

Plan investors, and Plan Fiduciaries of

Plans which have already invested in

the Partnership. Because the Applicants

are uncertain as to which Plans will

invest in the Partnership, the

Department has determined that the

only practical form of providing notice

to interested persons of the pendency of

this proposed exemption is the

distribution by the Applicants of a copy

of the Notice, as published in the

Federal Register, and a copy of the

supplemental statement, in the form set

forth in the Department’s regulations

under 29 CFR § 2570.43(b)(2) to any

Plan investors who at the time the

Notice is published are interested in

investing in the Partnership, and to the

fiduciaries of all Plans that are invested

in the Partnership at the time the Notice

is published. Such distribution will be

effected by first-class mail within fifteen

(15) days of the publication of the

Notice in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

Angelena C. Le Blanc of the Department,

telephone (202) 219–8883. (This is not

a toll-free number.)

National Rural Utilities Cooperative

Finance Corporation (CFC), Located in

Washington, D.C.

[Application No. D–10394]

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—Transactions

A. If this proposed exemption is

granted, effective November 18, 1997,

the restrictions of sections 406(a) of the

Act and the taxes imposed by section

4975(a) and (b) of the Code, by reason

of section 4975(c)(1)(A) through (D) of

the Code, shall not apply to the

following transactions relating to the

refinancing by CFC of certain rural

utility cooperative loans made to the

Kansas Electric Power Cooperative, Inc.

(KEPCO), and certain notes issued by

KEPCO in connection with such loans

which are assigned to trusts for which

CFC acts as servicer, and certificates

evidencing interests in such trusts:

(1) The direct or indirect sale,

exchange or transfer of certificates in the

initial issuance of certificates between

CFC or an underwriter and an employee

benefit plan when CFC, the underwriter,

or the trustee is a party in interest with

respect to such plan;

(2) The direct or indirect acquisition

or disposition of certificates by a plan in

the secondary market for such

certificates;

(3) The continued holding of

certificates acquired by a plan pursuant

to subsection I.A.(1) or (2); and

(4) The purchase by CFC of existing

notes issued by KEPCO from the

existing trusts and the contribution by

CFC of new notes to new trusts pursuant

to the refinancing of KEPCO’s existing

loans on the scheduled refinancing date

(i.e. December 18, 1997).

B. If the proposed exemption is

granted, effective November 18, 1997,

the restrictions of sections 406(a) and

406(b) of the Act and the taxes imposed

by section 4975(a) and (b) of the Code,

by reason of section 4975(c) of the Code,

shall not apply to transactions in

connection with the servicing,

management and operation of a trust,

provided:

(1) Such transactions are carried out

in accordance with the terms of a

binding trust agreement; and

(2) The trust agreement is provided to,

or described in all material respects in,

the prospectus or private placement

memorandum provided to investing

plans before they purchase certificates

issued by the trust.9

C. If this proposed exemption is

granted, effective November 18, 1997,

the restrictions of sections 406(a) of the

Act and the taxes imposed by sections

4975(a) and (b) of the Code, by reason

of sections 4975(c)(1)(A) through (D) of

the Code, shall not apply to any

transactions to which those restrictions

or taxes would otherwise apply merely

because a person is deemed to be a party

in interest or disqualified person

(including a fiduciary) with respect to a

plan by virtue of providing services to

the plan (or by virtue of having a

relationship to such service provider

described in section 3(14)(F), (G), (H) or

(I) of the Act or section 4975(e)(2)(F),

(G), (H) or (I) of the Code), solely

because of the plan’s ownership of

certificates issued pursuant to this

proposed exemption or issued pursuant

to Prohibited Transaction Exemption

89–93 (PTE 89–93, 54 FR 45816,

October 31, 1989).10

Section II—General Conditions

A. The relief described under Section

I of this proposed exemption will be

available only if the following

conditions are met:

(1) The acquisition of certificates by a

plan is on terms (including the

certificate price) that are at least as

favorable to the plan as they would be

in an arm’s-length transaction with an

unrelated party;

(2) The rights and interests evidenced

by the certificates are not subordinated

to the rights and interests evidenced by

other certificates of the same trust;

(3) The certificates acquired by the

plan have received a rating at the time

of such acquisition that is in one of the

three highest generic rating categories

from either Standard & Poor’s Ratings

Service (S&P’s) or Moody’s Investors

Service, Inc. (Moody’s; together, the

Rating Agencies);

(4) The trustee is not an affiliate of

any other member of the Restricted
Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices 62631

11For a listing of the Underwriter Exemptions, see

Section V(h) of PTE 95–60, 60 FR 35925, July 12,

1995.

Group. However, the trustee shall not be

considered to be an affiliate of CFC, as

servicer, solely because the trustee has

succeeded to the rights and

responsibilities of CFC pursuant to the

terms of a trust agreement providing for

such succession upon the occurrence of

one or more events of default by CFC;

(5) The sum of all payments made to

and retained by the underwriters in

connection with the distribution or

placement of certificates represents not

more than reasonable compensation for

underwriting or placing the certificates;

the sum of all payments made to and

retained by CFC, as sponsor, pursuant to

the assignment of obligations (or

interests therein) to the trust represents

not more than the fair market value of

such obligations (or interests); and the

sum of all payments made to and

retained by CFC, as servicer, represents

not more than reasonable compensation

for CFC’s services under the trust

agreement and reimbursement of CFC’s

reasonable expenses in connection

therewith;

(6) The plan investing in such

certificates is an ‘‘accredited investor’’

as defined in Rule 501(a)(1) of

Regulation D of the Securities and

Exchange Commission (SEC) under the

Securities Act of 1933;

(7) Any swap transaction entered into

by KEPCO which is assigned to a trust

is entered into with a bank or other

financial institution of high credit

standing, initially Morgan Guaranty

Trust Company of New York (Morgan),

with a credit rating of at least AA or an

equivalent rating from the Rating

Agencies;

(8) The bank or other financial

institution acting as the swap

counterparty to the trust is required, if

there is an adverse change in such

counterparty’s credit rating, to either: (i)

Post collateral with the trustee of the

trust in an amount, determined daily,

equal to all payments owed by the

counterparty if the swap transaction

were terminated; or (ii) find a

replacement swap counterparty for the

trust, within a specified period under

the terms of the swap agreement with

the trust, which has a credit rating of at

least AA or an equivalent rating from

the Rating Agencies; provided that if the

swap counterparty fails to abide by its

obligations under either (i) or (ii) above,

the swap agreement shall terminate in

accordance with the rights and

obligations of each counterparty under

the terms thereof, which shall be

enforced by the trustee to protect the

rights of certificateholders of such trust;

(9) Each swap transaction between a

trust and Morgan, or other swap

counterparty, in connection with the

refinancing of KEPCO’s loans requires

payments to be made to the trust

monthly (or at such other times as

required under the swap agreement) and

requires payments to be made by the

trust no less frequently than semiannually, but in no event shall the trust

be obligated to make payments to a

swap counterparty more frequently than

those which it is entitled to receive from

a swap counterparty;

(10) The certificateholders have the

right to exit the transaction by tendering

the certificates to an underwriter

(initially, Alex. Brown & Sons, Inc.) for

purchase at par (plus accrued interest)

on seven (7) days’ notice;

(11) The U.S. Government guarantees

the payment of principal and interest on

the loans made by CFC to KEPCO;

(12) The purchase of notes issued by

KEPCO from the existing trusts is for a

price which is at least equal to the

outstanding principal balance of such

notes, plus accrued (but unpaid)

interest, at the time of the scheduled

refinancing of the loans made by CFC to

KEPCO (i.e. December 18, 1997); and

(13) The certificates are not sold to

any plans established and maintained

by KEPCO or CFC, or to plans for which

any other member of the Restricted

Group (as defined in Section III.E.

below) is an investment fiduciary for the

assets of the plan that are to be invested

in the certificates.

B. Neither CFC nor the trustee shall be

denied the relief that would be provided

under Section I of this proposed

exemption if the provision of Section

II.A.(6) above is not satisfied with

respect to acquisition or holding by a

plan of such certificates, provided that:

(1) Such condition is disclosed in the

prospectus or private placement

memorandum; and (2) in the case of a

private placement of certificates, the

trustee obtains a representation from

each initial purchaser which is a plan

that it is in compliance with such

condition, and obtains a covenant from

each initial purchaser to the effect that,

so long as such initial purchaser (or any

transferee of such initial purchaser’s

certificates) is required to obtain from

its transferee a representation regarding

compliance with the Securities Act of

1933, any such transferees will be

required to make a written

representation regarding compliance

with the condition set forth in Section

II.A.(6) above.

Section III—Definitions

For purposes of this proposed

exemption:

A. Certificate means:

(1) A certificate—

(a) That represents a beneficial

ownership interest in the assets of a

trust; and

(b) That entitles the holder to passthrough payments of principal, interest,

and/or other payments made with

respect to the assets of such trust.

For purposes of this proposed

exemption, references to ‘‘certificates

representing an interest in a trust’’

include certificates denominated as debt

which are issued by a trust.

B. Trust means an investment pool,

the corpus of which is held in trust, and

consists solely of:

(1) One or more notes issued by

KEPCO which shall be guaranteed as to

payment of principal and interest by the

U.S. Government, acting through the

U.S. Department of Agriculture’s

Administrator of the Rural Utilities

Service (RUS), including fractional

undivided interests in any such

obligations;

(2) Property which has secured any of

the obligations described in subsection

B.(1);

(3) Undistributed cash or temporary

investments made therewith maturing

no later than the next date on which

distributions are to be made to

certificateholders; and

(4) Rights of the trustee under the

trust agreement, and rights under any

insurance policies, third-party

guarantees, swap agreements, contracts

of suretyship and other credit support

arrangements with respect to any

obligations described in subsection

B.(1).

C. Underwriter means an entity which

has received an individual prohibited

transaction exemption from the

Department that provides relief for the

operation of asset pool investment trusts

that issue ‘‘asset-backed’’ pass-through

securities to plans, that is similar in

format and structure to this proposed

exemption (the Underwriter

Exemptions); 11 any person directly or

indirectly, through one or more

intermediaries, controlling, controlled

by or under common control with such

entity; and any member of an

underwriting syndicate or selling group

of which such firm or person described

above is a manager or co-manager with

respect to the certificates.

D. Trustee means the trustee of the

trust, and in the case of certificates

which are denominated as debt

instruments, also means the trustee of

the indenture trust.

E. Restricted Group with respect to a

class of certificates means:
62632 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

(1) Each underwriter/remarketing

agent;

(2) The trustee;

(3) CFC;

(4) KEPCO;

(5) The swap counterparty/liquidity

provider; or

(6) Any affiliate of a person described

in subsection E.(1)–(5) above.

F. Affiliate of another person

includes:

(1) Any person directly or indirectly,

through one or more intermediaries,

controlling, controlled by, or under

common control with such other

person;

(2) Any officer, director, partner,

employee, relative (as defined in section

3(15) of the Act), a brother, a sister, or

a spouse of a brother or sister of such

other person; and

(3) Any corporation or partnership of

which such other person is an officer,

director or partner.

G. Control means the power to

exercise a controlling influence over the

management or policies of a person

other than an individual.

H. A person will be independent of

another person only if:

(1) Such person is not an affiliate of

that other person; and

(2) The other person, or an affiliate

thereof, is not a fiduciary who has

investment management authority or

renders investment advice with respect

to any assets of such person.

I. Sale includes the entrance into a

forward delivery commitment (as

defined in subsection J. below),

provided:

(1) The terms of the forward delivery

commitment (including any fee paid to

the investing plan) are no less favorable

to the plan than they would be in an

arm’s-length transaction with an

unrelated party;

(2) The prospectus or private

placement memorandum is provided to

an investing plan prior to the time the

plan enters into the forward delivery

commitment; and

(3) At the time of this delivery, all

conditions of this proposed exemption

applicable to sales are met.

J. Forward delivery commitment

means a contract for the purchase or

sale of one or more certificates to be

delivered at an agreed future settlement

date. The term includes both mandatory

contracts (which contemplate obligatory

delivery and acceptance of the

certificates) and optional contracts

(which give one party the right but not

the obligation to deliver certificates to,

or demand delivery of certificates from,

the other party).

K. Reasonable compensation has the

same meaning as that term is defined in

29 CFR 2550.408c–2.

L. Trust Agreement means the

agreement or agreements among KEPCO,

CFC and the trustee establishing a trust.

In the case of certificates which are

denominated as debt instruments, Trust

Agreement also includes the indenture

entered into by the trustee of the trust

issuing such certificates and the

indenture trustee.

M. RUS means the U.S. Department of

Agriculture, acting through the

Administrator of the Rural Utilities

Service or any successor to the

guarantee obligations of such

organization.

The Department notes that this

proposed exemption, if granted, will be

included within the meaning of the term

‘‘Underwriter Exemption’’ as it is

defined in Section V(h) of the Grant of

the Class Exemption for Certain

Transactions Involving Insurance

Company General Accounts, which was

published in the Federal Register on

July 12, 1995 (see PTE 95–60, 60 FR

35925).

EFFECTIVE DATE: This proposed

exemption, if granted, will be effective

as of November 18, 1997.

Preamble

On October 31, 1989, the Department

granted an individual administrative

exemption under section 408(a) of the

Act to CFC (PTE 89–93) for several

prohibited transactions relating to CFC’s

role as a financial intermediary in the

refinancing of various loans to rural

utility cooperatives. CFC now proposes

that two of the loans involving KEPCO

that were refinanced using the structure

involved in PTE 89–93 be refinanced

through a new series of transactions.

CFC requests a new individual

exemption for these refinancing

transactions.

CFC states that the restructured

KEPCO loans and the trust structure

through which interests in these loans

will be offered to institutional investors,

including employee benefit plans, are in

many respects similar to the

transactional structure presented in PTE

89–93. However, under the new

refinancing structure, the interest rate

on the trust certificates will be a

variable rate rather than a fixed rate

guaranteed by the U.S. Government. The

floating rate will be paid through an

interest rate swap transaction between

the trust and a bank or other financial

institution acting as a swap

counterparty (initially, Morgan). Thus,

the variable rate on the certificates will

not be guaranteed by the U.S.

Government, although if the bank fails

to make the variable rate payments, as

required, the fixed rate guaranteed

payments on the notes will be applied

to the variable rate payments due on the

certificates.

In addition, the new exemption

requested by CFC has been expanded to

include: (i) The purchase by CFC of the

existing KEPCO notes and the

contribution of amended KEPCO notes

to the new trusts; and (ii) the servicing,

management and operation of the trusts

in a manner that is generally the same

as the relief provided by the Department

in other exemptions involving assetbacked securities (i.e., the Underwriter

Exemptions).

Summary of Facts and Representations

1. The Applicant. CFC is a taxexempt, not-for-profit cooperative

association organized in 1969 under the

laws of the District of Columbia. CFC

was established by its members to

provide them with a source of financing

to supplement the loan programs of RUS

(which was formerly known as the Rural

Electrification Administration (REA)), a

guarantor of loans made to rural electric

utilities. CFC is a finance company that

makes loans to its rural utility system

members to enable them to acquire,

construct and operate electric

distribution, generation, transmission

and related facilities. Most CFC longterm loans to its members are made in

conjunction with concurrent loans from

RUS and are secured equally and ratably

with RUS’ loans by a single mortgage.

The principal and interest obligations

under CFC’s loans are guaranteed by

RUS (the RUS Guarantee).

CFC also provides guarantees for taxexempt financings of pollution control

facilities and other properties

constructed or acquired by its members,

and provides guarantees of other debt in

connection with certain leases and other

transactions of its members. CFC

presently has loans outstanding to its

members in the aggregate principal

amount of approximately $8.0 billion

and has guaranteed on behalf of

members an additional $2.3 billion in

obligations. CFC acts as the servicer

under six trusts that were established in

1988 to refinance certain rural utility

cooperative loans guaranteed by REA in

transactions eligible for the exemption

provided by PTE 89–93. CFC also

provides financial advisory services to

its members.

As of May 31, 1996, CFC’s 1051

members were generally non-profit

cooperative electric utilities and service

organizations and represented

approximately 95 percent of the total

number of such entities in the United

States. As of December 31, 1995, CFC’s

member systems owned approximately

$66.5 billion (before depreciation of

$19.4 billion) in total utility plants and
Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices 62633

12Note Three, originally deposited in Trust K–3,

matured by its terms on December 4, 1988, and the

certificates representing ownership interests in

Trust K–3 were redeemed and Trust K–3 was

terminated by the Trustee.

equipment. Funds for CFC’s programs

are derived primarily from the sale to its

members of its subordinated debt, the

sale of collateral trust bonds, mediumterm notes and commercial paper in the

capital markets and from retained

earnings. As of May 31, 1996, outside

investors held approximately $1 billion

of CFC collateral trust bonds, $604

million of CFC medium term notes and

$4.7 billion of CFC commercial paper.

CFC has approximately $1.0 billion

principal amount of bonds listed on the

New York Stock Exchange and

registered under Section 12(b) of the

Securities Exchange Act of 1934.

In the refinancing transactions that

are the subject of this proposed

exemption, CFC will act as the servicer

of the new trust that will be established

for purposes of holding the note or notes

(with the RUS Guarantee) that are

issued by KEPCO, a rural utility

cooperative (KEPCO Notes). In addition,

there will be a fixed to floating interest

rate swap entered into between KEPCO

and Morgan Guaranty Trust Company of

New York (Morgan), a financial

counterparty of high credit standing.

The interest rate swap will be assigned

to the trust by KEPCO. CFC will service

the KEPCO Note(s) and the RUS

Guarantee in accordance with the terms

and conditions of the trust agreement

(the Trust Agreement) under which the

trust (the Trust) will be established.

2. The Trustee. The Trustee, which is

The First National Bank of Chicago

(First Chicago), is the legal owner of the

assets in the Trust. The Trustee is also

a party to, or beneficiary of, all the

documents and instruments deposited

in the Trust. The Trustee is responsible

for enforcing all the rights created by the

Trust in favor of the certificateholders.

In the proposed transactions, the

Trustee will be an independent entity

and, therefore, will be unrelated to CFC,

KEPCO, the swap counterparty and the

underwriter. The Trustee will monitor

and administer the swap agreement that

will be assigned to the Trust.

CFC represents that the Trustee will

be a substantial financial institution or

trust company experienced in trust

activities. The Trustee receives a fee for

its services, which will be specified in

the trust agreement and will be

disclosed in the prospectus or private

placement memorandum relating to the

offering of the certificates.

3. The Underwriter. It is anticipated

that the certificates will be registered

under the Securities Act of 1933 and

will be sold in a public offering on a

firm commitment basis. Each

underwriter will be an entity which has

received an individual prohibited

transaction exemption from the

Department that provides relief for the

operation of asset pool investment trusts

that issue so-called ‘‘asset-backed’’ passthrough securities to plans (an

Underwriter Exemption), an affiliate of

such entity, or a member of an

underwriting syndicate of which such

entity is a manager or co-manager (see

Section III.C above). The lead

underwriter will act as the remarketing

agent (Remarketing Agent) with respect

to the certificates. If the certificates are

sold to institutional investors in a

private placement under Section 4(2) of

the Securities Act and Rule 144A

thereunder, the registered broker-dealer

acting as placement agent will also act

as the Remarketing Agent with respect

to the certificates. The role of the

Remarketing Agent is described further

below.

4. The Swap Counterparty. The swap

counterparty will be a bank or financial

institution of high credit standing with

a credit rating of at least AA or an

equivalent rating from the Rating

Agencies. As noted earlier, initially the

swap counterparty will be Morgan.

Morgan will continue to be the swap

counterparty unless there is an event,

such as a credit rating downgrade of

Morgan, which requires a replacement

of the swap counterparty under the

terms of the swap. Thus, if there is such

an adverse change in Morgan’s credit

rating, the swap agreement will require

Morgan to either: (i) post collateral with

the Trustee of the Trust in an amount,

determined daily, equal to all payments

owed by Morgan if the swap transaction

were to be terminated by KEPCO; or (ii)

find a replacement swap counterparty

for the Trust, within a specified period,

which has a credit rating of at least AA

or an equivalent rating from the Rating

Agencies. Otherwise, the swap

agreement will terminate in accordance

with its terms and the Trustee will be

responsible for enforcing all rights

created in favor of the certificateholders

of the Trust.

The Subject Transactions

5. The proposed transactions for

which exemptive relief is requested are

described by the Applicant in the

context of certain refinancing

arrangements involving loans that were

made by CFC to KEPCO (i.e. Kansas

Electric Power Cooperative Inc). These

refinancing transactions were initiated

with the cooperation of the U.S.

Department of Agriculture, acting

through the Administrator of RUS. The

Applicant represents that the subject

transactions have been designed to

further a U.S. Congressional policy to

facilitate the reduction of the financing

costs for rural electric power

cooperatives and to reduce the U.S.

Government’s possible exposure as the

guarantor of the debt of such

cooperatives.

6. In 1988, KEPCO had outstanding

certain loans from the U.S. Federal

Financing Bank (the FFB Loans) which

were guaranteed by RUS (then, the

REA). Pursuant, to Section 306A of the

Rural Electrification Act of 1936, as

amended (the RE Act) and the

implementing regulations thereunder

(the Regulations), the FFB loans were

refinanced in the following manner.

First, CFC loaned KEPCO the amount

necessary to prepay the FFB Loans

pursuant to a Loan Agreement, dated as

of February 15, 1988 (the Loan

Agreement). To evidence its repayment

obligations to CFC, KEPCO executed

three lender loan notes (the Notes).

Then, CFC deposited each of the three

Notes in a separate grantor trust—Trust

K–1, Trust K–2, and Trust K–3

(collectively, the 1988 Trusts), pursuant

to three Trust Agreements between CFC,

KEPCO and First Chicago, as Trustee.

The original REA guarantee of the FFB

Loans (the Guarantees) was transferred

to each of the Notes before they were

deposited in the 1988 Trusts.

The obligations of (i) CFC to service

the Notes while they were in the 1988

Trusts, (ii) the U.S. Government acting

through the Administrator of the REA,

as guarantor, to guarantee payment of

principal and interest (as defined in the

Loan Agreement) on the Notes under the

Guarantees, and (iii) the Trustee with

respect to the Guarantees, were

contained in a Loan Guarantee and

Servicing Agreement dated February 15,

1988 (the Loan Guarantee Agreement).

Trust K–1, Trust K–2, and Trust K–3

issued certificates of beneficial interest

in the assets of the 1988 Trusts (the

Series 1988 Certificates) to CFC as

depositor of the 1988 Trusts. CFC then

sold the Series 1988 Certificates (other

than from Trust K–3) to investors

pursuant to a registered public offering

of the Series 1988 Certificates. The

Applicant states that these transactions

were the subject of the relief provided

by PTE 89–93, and similar refinancing

transactions were effected for other rural

electric cooperatives.

Note One and Note Two (the

Outstanding Notes), which were

deposited in Trust K–1 and Trust K–2,

respectively, will mature on December

4, 2002 and December 4, 2017,

respectively. 12 Pursuant to the terms of

the Loan Agreement, Note One and Note
62634 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

13This premium amount will be distributed to the

certificateholders of the Series 1988 Certificates

issued by Trust K–1 and Trust K–2.

14Morgan has the obligation to continue to make

timely payments under the Swap Agreement even

in the event of a default by KEPCO. In such

instances, Morgan will look to the guarantee

provided by the U.S. Government for future

payments of interest on the Amended Outstanding

Notes, which the Trustee will use to make the semiannual payments to Morgan under the Swap

Agreement.

Two will become available for purchase

at the election of KEPCO by a purchaser

designated by KEPCO on any business

day on or after the day immediately

prior to December 15, 1997. The Series

1988 Certificates representing

ownership interests in Trust K–1 and

Trust K–2 are subject to purchase or

redemption upon the prepayment or

purchase of the Outstanding Notes.

7. The Proposed Refinancing

Transaction. KEPCO and RUS are

proposing to refinance the Outstanding

Notes using the transactions described

below. KEPCO will redeem the

outstanding Series 1988 Certificates by

exercising, on December 18, 1997 (the

Refinancing Date), the right given in the

Loan Agreement to have the

Outstanding Notes purchased by CFC at

a specified premium over par 13 (plus

accrued interest), and the Outstanding

Notes will thereafter be amended (the

Amended Outstanding Notes) to reduce

the guaranteed interest rate payable by

KEPCO or by RUS, as guarantor of the

Outstanding Notes.

CFC will direct the Trustee (i.e. First

Chicago), as trustee of Trust K–1 and

Trust K–2, to terminate Trust K–1 and

Trust K–2 after the owners of the Series

1988 Certificates are paid in full. The

Trustee will be directed to transfer the

Amended Outstanding Notes, with the

Guarantees attached, to a single new

grantor trust (the Series 1997 Trust)

established pursuant to the Trust

Agreement. The Trustee of the Series

1997 Trust will be First Chicago.

This refinancing structure was

designed to lock in current interest rates

for new loans to KEPCO as of the

preliminary closing date for such

refinancing (December 20, 1996),

instead of waiting until the actual

Refinancing Date (December 18, 1997)

when rates may be higher. In particular,

KEPCO has entered into a forward

interest rate swap agreement (the Swap

Agreement) with Morgan as the swap

counterparty. KEPCO will assign its

right to receive and make payments

under the Swap Agreement, effective as

of the Refinancing Date, to the Trustee

for the Series 1997 Trust (i.e. First

Chicago). Morgan is currently rated

AAA by S&P and Aa1 by Moody’s. The

Swap Agreement will require Morgan to

post collateral with the Trustee, for the

benefit of certificate-holders, if Morgan’s

credit ratings are reduced to below AA

or an equivalent rating by the Rating

Agencies during the term of the Swap

Agreement. Such collateral must be in

the form of highly stable and liquid

fixed-income securities, such as shortterm debt securities issued and/or

guaranteed by the U.S. Government or

an agency or instrumentality thereof or

debt securities issued by non-U.S.

Government entities which have credit

ratings comparable to those of the

certificates. The amount of such

collateral will be determined daily and

will be equal to all payments owed by

Morgan under the Swap Agreement in

the event the swap were terminated.

Pursuant to the terms of the Swap

Agreement, KEPCO will agree to pay a

fixed rate of interest to Morgan on each

December 4th and June 4th following

the Refinancing Date until the maturity

of the Amended Outstanding Notes. In

return, Morgan will agree to pay to

KEPCO a variable rate of interest at the

times interest is payable on the Series

1997 Certificates. As noted earlier,

KEPCO will assign its right to receive

and make payments under the Swap

Agreement to the Trustee on the

Refinancing Date. On such date, CFC

will deposit the Amended Outstanding

Notes, with the RUS Guarantees

attached, into the Series 1997 Trust. The

Series 1997 Trust will issue certificates

of beneficial interest (the Series 1997

Certificates) which will have interest

distributable to holders of the Series

1997 Certificates (the Series 1997

Certificateholders) at a variable market

rate of interest. The variable market rate

will be initially set by the Remarketing

Agent, and reset weekly by the

Remarketing Agent, based on an

independent index for 30-day

commercial paper known as the H.15

Index, which is compiled daily by the

New York Federal Reserve Bank. The

variable rate of interest on the Series

1997 Certificates will determine the

variable rate of interest payable to the

Trustee by Morgan pursuant to the

Swap Agreement, which payments will

be distributed monthly to the Series

1997 Certificateholders, or at other

times as set forth in the Series 1997

Trust Agreement. The initial variable

rate on the certificates will be known to

investors, including plans,

approximately one week before the

Refinancing Date.

When installments or payments are

made by KEPCO on the Amended

Outstanding Notes, the funds are placed

in a segregated account established in

the name of the Trustee (on behalf of

certificateholders) to hold funds

received between distribution dates.

The account is under the sole control of

the Trustee. However, the account’s

assets are invested at the direction of

CFC in short-term securities described

in the Trust Agreement which have

received a rating comparable to the

rating assigned to the certificates. In

addition, CFC will furnish a report on

the operation of the Trust to the Trustee

on a monthly basis.

Because of the structure of the

refinancing, the credit behind the Series

1997 Certificates will be bifurcated.

First, if KEPCO fails to pay the Trustee

any amounts on the KEPCO Notes,

Series 1997 Certificateholders will look

to the guarantee provided by the U.S.

Government (acting through RUS) for

payment of principal, which will

continue to be distributed to Series 1997

Certificateholders annually each

December 15. Second, Series 1997

Certificateholders will look to the credit

of Morgan for the variable rate payments

of interest to be made on the Series 1997

Certificates.14 If Morgan fails to make

any variable rate payment when due,

amounts received by the Trustee from

KEPCO (or RUS as guarantor) for

interest on the Amended Outstanding

Notes, less a servicing fee payable to

CFC, will become payable, to the extent

of the amount of the defaulted payment,

to the Series 1997 Certificateholders.

Morgan, or another financial institution

of comparable credit standing selected

by Morgan, will provide liquidity

support for the tender rights (Tender

Rights) that attach to the Series 1997

Certificates. The Tender Rights will

enable certificateholders to sell the

Series 1997 Certificates back to the

Remarketing Agent at any time upon

seven (7) days notice.

As noted earlier, the documentation

executed and delivered for the KEPCO

refinancing will be executed in three

closings:

(i) The preliminary closing on

December 20, 1996, at which time most

of the operative documents were

executed and delivered (the Preliminary

Closing);

(ii) The Deposit Date closing on

November 18, 1997 (the Deposit Date

Closing), at which time the offering

documentation was delivered and CFC

deposited the purchase price for

KEPCO’s Outstanding Notes with the

Series 1988 Trustee and gave advance

notice that the purchase is to occur on

December 18, 1997; and

(iii) The Refinancing Date closing on

December 18, 1997, at which time

KEPCO’s Outstanding Notes will be

purchased by CFC from the 1988 Trusts
Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices 62635

15As noted earlier, the 7-day reset by the

Remarketing Agent will be priced based on the H.15

Index, a 30-day commercial paper index, which is

compiled daily by the New York Federal Reserve

Bank. The H.15 Index is readily available to fixed

income investors through data services,

conversations with broker-dealers, on-line reports,

and other transactions in which such investors

participate. This information would be used by

certificateholders on a continuous basis to

determine both the anticipated level of repricing as

well as to evaluate whether the repriced certificates

continue to meet their investment needs.

and the amended Outstanding Notes

will be delivered to the Trustee of the

Series 1997 Trust, after which the Series

1997 Certificates will be issued and sold

to investors.

The Applicant states that in order to

eliminate or to minimize creditors’

risks, forward purchase transactions are

structured so that as little as possible is

left to the discretion of the parties after

the first commitment is made.

Consequently, virtually all of the

binding commitments for the proposed

refinancing were made at the

Preliminary Closing. The fixed rate

payable to Morgan by KEPCO under the

Swap Agreement (i.e. 7.654 percent per

annum) was established at the time of

the signing of such Agreement. That

fixed rate, plus the servicing fee payable

to CFC, will determine the new

guaranteed interest rate on the

Amended Outstanding Notes, effective

upon the sale of the Certificates to the

Underwriters on the Refinancing Date.

KEPCO and CFC entered into a First

Amendment to the Loan Agreement at

the Preliminary Closing which obligates

CFC, subject to certain conditions, to

provide the funds for the purchase of

Note One and Note Two on the Deposit

Date Closing. In addition, the First

Amendment to the Loan Agreement

contains the operative amendments to

the Loan Agreement, which will serve to

reduce the interest rate on the

Outstanding Notes and to remove any

call protection or call premium from the

Outstanding Notes. The amendments

will become effective on the

Refinancing Date. However, if upon

issuance of the Certificates to CFC the

Certificates are not sold to the

Underwriter for any reason, CFC will

hold the Certificates and receive the

existing fixed interest rate on the

Amended Outstanding Notes. Pursuant

to a separate agreement, KEPCO will

make up any loss CFC may incur in

funding the carrying of the Certificates

and will receive a credit for any ‘‘float’’

CFC realizes while holding the

Certificates. The RUS does not

guarantee any such additional payments

to CFC that may be required from

KEPCO.

8. The Sale of the Certificates. At the

Preliminary Closing, KEPCO and CFC

entered into a forward certificate

purchase agreement with Alex. Brown &

Sons, Inc. (Alex Brown), as Underwriter

of the Series 1997 Certificates, pursuant

to which KEPCO and CFC obligated

themselves, subject to certain

conditions, to sell the Series 1997

Certificates to Alex Brown on the

Refinancing Date. Alex Brown

committed to purchase and resell the

Series 1997 Certificates at par on such

date in a firm commitment public

offering registered with the SEC. The

prospectus (or private placement

memorandum if the sale to investors is

converted to a private placement under

SEC Rule 144A) for the Certificates will

provide detailed information about the

Amended Outstanding Notes, the RUS

Guarantee, the Trust, the Swap

Agreement, and the rights and

entitlements of the Series 1997

Certificateholders. The compensation

payable to CFC, as servicer of the Trusts,

and to the Trustee will be set forth in

the Trust Agreement and will be

described in detail in the prospectus

relating to the Series 1997 Certificates.

The Applicant states that once the

lower fixed guaranteed interest rate on

the Amended Outstanding Notes is

established and the Series 1997

Certificates are sold to investors, neither

the KEPCO nor RUS will ever have to

pay more than such rate. Morgan, as the

swap counterparty, will be paying the

‘‘market rate’’ on the Series 1997

Certificates for the remaining terms of

the Notes. Consequently, Morgan has an

interest in insuring that the Series 1997

Certificates are sold at an appropriate

market rate and that such rate is reset

weekly at an appropriate market rate. If

investors (including plans) are not

satisfied with the variable interest rates

paid on the Series 1997 Certificates, as

reset weekly by the Remarketing Agent,

then such Certificateholders may

exercise their Tender Rights to require

the Remarketing Agent to repurchase

the Certificates at par plus accrued

interest. In such instances, Morgan or

another qualified financial institution of

comparable credit quality will stand

behind the Remarketing Agent with

liquidity support to enable that entity to

honor the Tender Rights.

The rate payable for the Series 1997

Certificates will be determined by a

Remarketing Agent (initially, Alex

Brown) as being the minimum rate of

interest necessary, in the Remarketing

Agent’s judgment, to enable the

Remarketing Agent to sell the Series

1997 Certificates at par. As noted above,

when the Series 1997 Certificates are in

the ‘‘weekly rate mode’’, the

Certificateholders will have the right at

all times to exercise their Tender Rights

to tender their Certificates for

repurchase by the Remarketing Agent at

par (plus accrued interest) on any

business day upon seven (7) days

notice.15 CFC, as servicer, will verify

and confirm to the Trustee the

information provided by Morgan and

the Remarketing Agent for the variable

interest rate payments.

Although the Series 1997 Trust

Agreement permits the swap

counterparty (i.e. Morgan) and the

Remarketing Agent (i.e. Alex Brown) to

lengthen the interest reset period from

seven (7) days (and the right to tender

Certificates would exist only at the end

of such longer reset period), any such

change will result in a mandatory

repurchase of all outstanding certificates

(at par plus accrued interest) before it

becomes effective. Thus, any

Certificateholders that want to continue

to invest in the Certificates under the

new conditions will have to make an

affirmative decision to do so. As stated

above, in order to assure the operation

of these provisions regarding Tender

Rights of Certificateholders, KEPCO will

enter into a liquidity protection

agreement with Morgan pursuant to

which Morgan will agree to provide, or

cause another qualified financial

institution of comparable credit quality

to provide, a liquidity facility during the

term of the Swap Agreement.

The Swap Agreement will be in effect

until the maturity of the Series 1997

Certificates. After the Refinancing Date,

the financial condition or performance

of KEPCO will not affect the

requirement of Morgan’s performance

under the Swap Agreement. However,

KEPCO and RUS (should RUS become

the payor of the Amended Outstanding

Notes pursuant to the Guarantees) will

have the right to terminate the Swap

Agreement and prepay or purchase the

Amended Outstanding Notes at any

time after the Refinancing Date (after

providing notice as specified in the

Loan Agreement and the Trust

Agreement). There are no prepayment

penalties attached to KEPCO’s right to

prepay the Amended Outstanding

Notes. However, with respect to the

resulting termination of the Swap

Agreement, prior to prepaying or

purchasing the Amended Outstanding

Notes, any termination payment owing

under the Swap Agreement must be

paid by KEPCO (or RUS). Consequently,

depending on market conditions and

interest rates, KEPCO (or RUS) could be

obligated to make a payment to Morgan

or could be entitled to receive a
62636 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

16 In no event will the Trust be obligated to make

termination payments to Morgan, or another swap

counterparty, in the event KEPCO purchases the

Amended Outstanding Notes.

17The Department wishes to note that ERISA’s

general standards of fiduciary conduct would apply

to the investment described in this proposed

exemption, and that satisfaction of the conditions

of this proposal should not be viewed as an

endorsement of the investment by the Department.

Section 404 of ERISA requires, among other things,

that a fiduciary discharge his duties with respect to

a plan solely in the interest of the plan’s

participants and beneficiaries and in a prudent

fashion. Accordingly, the plan fiduciary must act

prudently with respect to the decision to enter into

an investment transaction. The Department further

emphasizes that it expects the plan fiduciary to

fully understand the benefits and risks associated

with engaging in a specific type of investment,

following disclosure to such fiduciary of all

relevant information. In addition, such plan

fiduciary must be capable of periodically

monitoring the investment, including any changes

in the value of the investment. Thus, in considering

whether to enter into a transaction, a fiduciary

should take into account its ability to provide

adequate oversight of the particular investment.

18See PTE 84–14, 49 FR 9494, March 13, 1984

(regarding transactions entered into for plans by a

‘‘qualified professional asset manager’’ or

‘‘QPAM’’), PTE 90–1, 55 FR 2891, January 29, 1990

(regarding transactions entered into by insurance

company separate accounts), PTE 91–38, 56 FR

31966, July 12, 1991 (regarding transactions entered

into by bank collective investment funds), PTE 95–

60, 60 FR 35925, July 12, 1995 (regarding

transactions entered into by insurance company

general accounts), or PTE 96–23, 61 FR 15975, April

10, 1996 (regarding transactions entered into for

plans by ‘‘in-house’’ asset managers). In this regard,

the Department is not providing any opinion in this

proposed exemption as to whether the conditions

of such class exemptions would be met for a swap

transaction between the Trust and Morgan, or any

other bank or financial institution acting as a swap

counterparty to the Trust.

payment from Morgan, in the event of

termination of the Swap Agreement.16

The Applicant states that the

refinancing is intended to emulate, as

closely as possible, the 1988

refinancing, except that the certificates

will have a variable rate of return. The

parties to the 1997 transaction are the

same as the parties to the 1988

transaction with the exception of

Morgan and Alex Brown—the parties

involved in making the Series 1997

Certificates available as variable rate

securities. As with the 1988 refinancing,

the Applicant anticipates that the

Certificates will be acquired by

employee benefit plans subject to the

Act.

CFC is participating in this

transaction to facilitate the refinancing

of the existing loans (as evidenced by

Note One and Note Two) to KEPCO

under applicable U.S. Department of

Agriculture regulations and guarantee

programs. CFC does not intend to take

a proprietary interest in the Amended

Outstanding Notes. The purchase of the

Amended Outstanding Notes by CFC

and the contribution of such Notes to

the Series 1997 Trust will occur

virtually simultaneously and will be for

the same consideration. CFC will

continue to receive servicing fees for the

Series 1997 Trust (as discussed below)

and a fee for the 30-day period between

its prepayment of the purchase price for

the Amended Outstanding Notes and

the closing of the sale of the Series 1997

Certificates to the Underwriters on the

Refinancing Date.

The Series 1997 Certificates will have

received one of the three highest ratings

available from either S&P or Moody’s, or

both. The Applicant states that these

ratings will be based, in part, on the

RUS Guarantee and the high credit

standing of Morgan as the swap

counterparty and the liquidity provider.

In this regard, the entire KEPCO

refinancing transaction (including the

proposed swap transaction) has been

reviewed by Moody’s and S&P for the

purpose of rating the certificates. S&P

has concluded the following: (a) the

long-term rating on the certificates

would be the lower of (i) ‘‘AAA’’, based

on the guarantee provided by the U.S.

Government acting through the

Administrator of the RUS, or (ii) the

rating of the swap counterparty (i.e.

Morgan, which is currently rated

‘‘AAA’’). The short-term rating on the

certificates would be the short-term

rating of the entity providing the

standby certificate purchase agreement.

This entity will be either Morgan or

another financial institution that is rated

P–1, the highest short-term credit rating

available. Moody’s has also concluded

that the certificates would be rated Aa1

(long-term) and P–1 (short-term), based

on the guaranty provided by the U.S.

Government, the swap agreement with

Morgan, and the standby certificate

purchase agreement provided by either

Morgan or another P–1 rated entity.

9. Disclosure. The prospectus (or

private placement memorandum) to be

issued in connection with the original

issuance of the Series 1997 Certificates,

will contain information material to a

fiduciary’s decision to invest in the

Certificates, including:

(i) Information concerning the

payment terms of, and the rating of, the

Series 1997 Certificates;

(ii) A description of the operation of

the Trust as a separate entity and of how

the Trust was formed by CFC;

(iii) Identification of First Chicago as

the independent trustee for the Trust;

(iv) A description of the assets

contained in the Trust (i.e. the

Amended Outstanding Notes, the RUS

Guarantee and the swap, including their

principal terms and their material legal

aspects, as well as financial information

regarding Morgan, as the swap

counterparty);

(v) A description of CFC, its role in

the refinancing and its role as the

servicer of the Trust;

(vi) A description of the Trust

Agreement, including a description of

the procedures for collection of

payments on the Notes, the payments to

be made under the Swap Agreement and

the procedures for making distributions

to certificateholders; a description of the

accounts into which such payments are

deposited and from which such

distributions are made; identification of

the servicing compensation that may be

deducted from any payments before

distributions are made to

certificateholders; a description of

periodic statements to be provided to

the Trustee and provided to or made

available to certificateholders by the

Trustee; and a description of the events

that constitute events of default under

the Trust Agreement and a description

of the Trustee’s and the

certificateholders’ remedies with respect

thereto;

(vii) A description of the RUS

Guarantee;

(viii) A general discussion of the

principal federal income tax

consequences of the purchase,

ownership and disposition of the passthrough certificates by a typical

investor;

(ix) A general discussion of the

fiduciary and prohibited transaction

considerations that are to be taken into

account by a fiduciary under the Act

considering the purchase of the Series

1997 Certificates, 17 including a brief

description of the exemption (if granted)

and a discussion of the potential need

for compliance by plan investors with

certain prohibited transaction class

exemptions issued by the Department in

connection with the swap transaction; 18

(x) A description of the underwriters’

plan for distributing the pass-through

certificates to investors, including the

structure and operation of the variable

interest rate reset mechanism; and

(xi) Information about the scope and

nature of the secondary market for the

certificates, the operation of the put

rights, the role of the liquidity provider

and financial information regarding the

liquidity provider (which will be

Morgan or a financial institution of

comparable credit standing).

10. The RUS Guarantee. The

Applicant states that RUS has endorsed

on each Outstanding Note its guarantee

of the timely payment of principal and

interest on such Note and, on or before

the Preliminary Closing, will have

consented to an amendment of each

Outstanding Note to lower the
Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices 62637

19 It should be noted that the notional principal

amount for the swap transaction between the Trust

and Morgan, used to determine the payments to be

made between the parties, initially will be

$57,390,000. As principal payments on the KEPCO

Notes are received by the Trustee and passedthrough to the certificateholders, the notional

principal amount for the swap transaction will be

adjusted to equal the outstanding principal balance

of the certificates. It should also be noted that,

based on the confirmation statement submitted by

Morgan, all payments made between the parties

will be based on the applicable notional principal

amount, the day count fractions, the fixed or

floating rates (determined by objective third party

sources) designated under the swap agreement,

calculated on a one-to-one ratio and not on a

multiplier of such rates or with formulas that

produce leveraged amounts. However, because the

payments will be made between the parties on

different dates, there will be no netting of

payments. Thus, both parties will be responsible for

making the full payments that are due on the

designated dates (i.e. semi-annually for KEPCO and

monthly for Morgan).

guaranteed interest rate thereon and to

make the other amendments described

below for the servicing of the

Outstanding Notes. The RUS Guarantee

is a full faith and credit obligation of the

United States of America. RUS will be

required to pay the Trust the amount of

any principal and interest not paid

when due on an Outstanding Note

within five business days of notice of

such default from CFC, acting in its

capacity as servicer.

11. Servicing of KEPCO’s Loans. CFC

will contract with RUS and the Trust to

service the Amended Outstanding

Notes, thereby establishing an agency

relationship (as the ‘‘Servicer’’) with

respect to the Trustee in a manner that

complies with the RE Act and the

Regulations and described in the terms

of the Trust Agreement.

Under the Trust Agreement, the

Trustee appoints the Servicer as its

attorney-in-fact to prosecute any claims

to enforce or collect on each Amended

Outstanding Note and Guarantee.

However, the Servicer as such attorneyin-fact may not rescind, cancel, release,

waive or reschedule the right to collect

the unpaid balance on any such Note

from KEPCO or RUS. If a court holds

that the Servicer is not entitled or able

to enforce an Amended Outstanding

Note or Guarantee, the Trustee, on

behalf of the Trust, is obligated to take

such steps as the Servicer deems

necessary to enforce such Note or

Guarantee.

In administering, servicing and

enforcing an Amended Outstanding

Note or Guarantee according to the

terms of the Trust Agreement, the

Servicer after a default in payment on

such Note is obligated to exercise such

of the rights and powers vested in it by

the Trust Agreement and to use the

same degree of care and skill in their

exercise as a prudent person would

exercise or use under the circumstances

in the conduct of such person’s own

affairs. Prior to a default in payment on

an Amended Outstanding Note, the

Servicer is obligated to perform only

those duties that are specifically set

forth in the Trust Agreement. The

Servicer has no liability for any error of

judgment made in good faith by it

(unless it is proved that the Servicer was

negligent in ascertaining the pertinent

facts) or for any action it takes or omits

to take in good faith in accordance with

a direction received by it from the

Trustee or the Certificateholders.

In addition to enforcing the Trustee’s

rights under the Amended Outstanding

Note (including the RUS Guarantee)

held by the Trust, CFC as the Servicer

for the Trust is obligated to fulfill a

number of administrative and notice

functions under the Trust Agreement.

For example, the Servicer is obligated to

deliver a notice to KEPCO and the

Trustee specifying the date any payment

is due on the Note held by such Trust

and the amount of such payment. The

Servicer is responsible for notification

of RUS of any default in the payment of

interest and principal on the Amended

Outstanding Note held in the Trust. The

Servicer is obligated to submit to RUS

reports assessing the causes behind, and

seriousness of, the default. The Servicer

is also obligated to notify RUS of any

known violations, defaults or conditions

which might lead to a default or

violation by KEPCO under the Loan

Agreement, the Loan Guarantee

Agreement or an Amended Outstanding

Note. The Servicer is further obligated

to notify RUS of any redemption of the

Amended Outstanding Note held by a

Trust and to calculate the amount

payable on such Note and the related

Certificates pursuant to any redemption

or purchase of such Note.

The Servicer will handle the billing of

Note payments from KEPCO, and will

notify RUS promptly of any default

under a Loan and of adverse

developments affecting KEPCO, but

payments on the Note will be made

directly to the Trustee and not to CFC.

The Trustee will be responsible for

monitoring and enforcing the Swap

Agreement. In this regard, the Servicer

will verify and confirm to the Trustee

the information provided by Morgan

and the Remarketing Agent with respect

to the variable rate of return. The

Servicer will also prepare for

distribution by the Trustee to

Certificateholders regular semiannual

reports concerning distributions on the

Certificates and its fees, as well as tax

information required by

Certificateholders. No less often than

annually, an independent public

accountant will audit the books and

records of the Trust. Upon completion,

copies of the auditor’s reports will be

provided to the Trustee.

12. Servicing Compensation. The

Servicer will be compensated out of

payments on the KEPCO Notes. The

servicing fee (out of which the Servicer

will pay the Trustee’s fees and

expenses) will total not more than

approximately 1⁄10 of one (1) percent per

annum of the principal amount of the

Notes. Because the return to the

certificateholders is based upon the

floating rate payments made under the

Swap Agreement, these reimbursements

will not affect the payments to

certificateholders.

The Servicer may transfer its duties

and obligations with the consent of 51

percent of the certificateholders and the

swap counterparty. The Servicer may

also be terminated following certain

defaults or events of bankruptcy relating

to the Servicer. The insolvency of the

Trustee or the Servicer will not affect

the certificateholders’ rights, because

the Servicer will not hold any Trust

assets, and assets held in a fiduciary

capacity by the Trustee should not be

subject to claims of the Trustee’s general

creditors.

13. Description of Certificates. Each

Certificate will represent a fractional

undivided interest in the Trust. The

Certificates will be issued in

denominations of $100,000 (and in

integral multiples of $5,000 above such

amount), and will not be divisible into

certificates with original principal

amounts below $100,000. The

Certificates will be transferable, and

may be listed on a national securities

exchange. Payments on the Certificates

will represent a pass-through of both (i)

payments of principal received by the

Trustee on the KEPCO Notes held by the

Trust, and (ii) the payments to be made

by Morgan under the Swap

Agreement.19 Interest on the KEPCO

Notes will be payable semi-annually,

whereas interest on the floating-rate

Certificates will be paid monthly (or on

such other periodic basis as may be

reset in accordance with the Trust

Agreement). Principal payments on both

the KEPCO Notes and the Certificates

will be payable annually for the period

during which each Note amortizes.

The Certificates will be prepaid at any

time a Note is prepaid. The Notes will

be prepayable at the KEPCO’s option in

whole (but not in part) at any time at

par. KEPCO will be required to

accompany its notice of prepayment (to

be given in advance in order to permit

the Trustee in turn to notify

certificateholders of the impending

retirement of the Certificates) with cash
62638 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

20See 29 CFR 2510.3–101.

equal to the amount that will be due on

such Note at the time of prepayment.

This procedure will assure that funds

will be available for the prepayment of

the Note at the appropriate time. These

funds will be invested in obligations

issued by the United States or in

repurchase agreements.

With the exception of prepayments by

KEPCO, all payments on the Note

obligations are supported by the full

faith and credit of the United States. If

KEPCO defaults in making its payments

or in its other obligations to RUS, RUS

has the option either to pay under the

RUS Guarantee principal and interest as

they fall due on the KEPCO Note, to

proceed against KEPCO and to assume

KEPCO’s obligations under the KEPCO

Note or, if KEPCO could at that time

make an optional prepayment of the

KEPCO Note, to optionally prepay or

purchase the Note. The Trustee (or the

Servicer as its agent), and not the

certificateholders, will enforce

payments due on the KEPCO Notes (or

the RUS Guarantee) and the Trustee will

enforce payments due under the Swap

Agreement. However, a specified

percentage of certificateholders may

direct the time, method and place of

exercising any remedy available to the

Trustee or the Servicer, subject to

customary trust indenture exceptions.

The Trustee may not resign until the

Trust is liquidated and the proceeds

distributed to certificateholders, unless

a successor Trustee has been designated

and has accepted such trusteeship.

14. Distributions for the Certificates.

Scheduled distributions on the

Certificates attributable to payments of

principal on the KEPCO Notes will be

made 11 days (in the case of regular

payments of principal) following the

corresponding payment on the Note.

This interval will allow time for the

Servicer to notify RUS if there is a

default by KEPCO in making a payment

on the Note and to permit the five

business days that RUS has requested

before it is obligated to make a payment

under the guarantee to elapse before the

payment date on the Certificates. As a

consequence, if KEPCO defaults, the full

faith and credit guarantee payment will

fall due before the scheduled payment

on the Certificates. As indicated above,

if KEPCO elects to prepay its Loan,

distributions on the Certificates will be

made only after advance receipt of the

amounts to be prepaid. This procedure

will permit notice of the resulting

distribution to be given to

certificateholders.

During these periods pending

distribution, payments on the KEPCO

Notes received by the Trust will be

invested at the direction of CFC, as

servicer for the Trust, in: (i) obligations

issued by the United States (and

supported by its full faith and credit), or

(ii) repurchase agreements with respect

to such obligations, over-collateralized

on a basis that will not result in a

reduction in the ratings of the

Certificates. All such investments must

mature before the next scheduled

distribution date on the Certificates. The

obligations collateralizing the

repurchase agreements in question

would be marked to market on a daily

basis and kept in the possession of the

Trustee or in its control through bookentry, unless the Rating Agencies

indicate that this is not necessary to

maintain the Certificates’ rating. The

Applicant states that assuming all

amounts then due on the KEPCO Notes

have been paid in full, any yield on

these investments will be returned to

KEPCO (or to RUS to the extent of any

unreimbursed payments on the RUS

Guarantee). The Applicant states further

that such yield will not flow through to

the Servicer or the certificateholders, or

increase the return on their investment,

and the prospectus (or private

placement memorandum) will make this

clear to the certificateholders.

Other Information

15. The Applicant represents the

proposed exemption (if granted) for plan

investments in the Certificates and the

participation by CFC in the refinancing

program would be effective as of

November 18, 1997, the Deposit Closing

Date for the refinancing of KEPCO’s

existing loans. The plans affected by the

requested exemption are those plans

that will acquire and hold Certificates

representing an interest in a trust

established under a trust agreement as

described herein, including any plans

that own certificates for trusts that were

established as a part of the 1988

refinancings. The Applicant states that

the Certificates will not be sold to plans

established by KEPCO or CFC, or to

plans for which either the Trustee, the

swap counterparty/liquidity provider, or

the underwriter/remarketing agent (or

any affiliate of any of the foregoing

entities) is an investment fiduciary for

the assets of the plan that are to be

invested in the Certificates.

16. The Applicant represents that the

Department’s regulations defining plan

assets for purposes of the prohibited

transaction provisions of the Act 20

provide that a plan that acquires an

equity interest in an entity, such as

certificates of beneficial ownership in a

grantor trust, will be required under

certain circumstances to treat the

underlying assets of the entity as assets

of the plan for purposes of the Act.

Generally, this ‘‘plan asset lookthrough’’ occurs if there is significant

participation by benefit plan investors

(i.e. 25 percent or more) and the class

of equity interests in question are not:

(i) held by 100 or more investors

independent of the issuer and of each

other, (ii) freely transferable, and (iii)

either registered under Section 12(b) or

12(g) of the Securities Exchange Act of

1934 (the ’34 Act) or sold as a part of

an offering pursuant to an effective

registration statement under the

Securities Act of 1933, and then timely

registered under Section 12(b) or 12(g)

of the ’34 Act. In this regard, the

Applicant states that although there will

be no restrictions imposed on the

transfer of the Certificates and CFC

intends to cause the registration

requirements to be satisfied, the

Certificates may be held by fewer than

100 independent investors at the

conclusion of the initial offering.

Therefore, if benefit plan investors

(including employee benefit plans

covered by the Act, governmental plans,

etc.) hold, in the aggregate, Certificates

representing a 25 percent or greater

interest in the Trust, the plan

certificateholder’s assets will be deemed

to include assets of the Trust.

As discussed herein, CFC performs

certain services for the Trust as agent for

the Trustee according to the terms of the

Trust Agreement. CFC will be

compensated for such services out of

interest payments on KEPCO’s Note

before payments are made by the Trust

to Morgan under the Swap Agreement.

The Trustee also has duties and

responsibilities for the assets of the

Trust for which it will be compensated.

Therefore, if the assets of the Trust are

deemed to be ‘‘plan assets’’ for the

reasons discussed above, the activities

of CFC for the Trust would cause it to

become a service-provider to the

participating plans.

The Applicant states that this ‘‘service

provider’’ status gives rise to potential

prohibited transactions between the

participating plans and CFC. In

addition, the ‘‘plan asset look-through’’

may create prohibited transactions

between the participating plans and any

other parties in interest with respect to

such plans that have a relationship to

the trust (i.e. members of the Restricted

Group, as defined in Section III.E).

17. In summary, the Applicant

represents that the proposed

transactions will satisfy the statutory

criteria of section 408(a) of the Act

because:

(a) The decision to acquire a

certificate will be made on behalf of a
Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices 62639

21A component of the Plan is an employee stock

ownership plan (ESOP) of the stock bonus variety,

with its assets held under a separate trust and

invested in the stock of Pentair.

plan by a fiduciary of the plan who is

independent of CFC after receipt of full

and detailed disclosure of all material

features of the trust and the certificates,

including all applicable fees and

charges.

(b) The assets of the Trust (i.e. the

notes, the RUS Guarantee and the Swap

Agreement) are described to prospective

purchasers of certificates. Neither CFC

nor the Trustee has discretion to

substitute assets once the Trust has been

formed (except in the limited

circumstances where KEPCO is required

to obtain a substitute swap agreement

from another financial institution of

comparable credit quality).

(c) KEPCO’s notes are guaranteed as to

principal and interest by the United

States of America and the certificates

will be rated in one of the three highest

rating categories by S&P’s and/or

Moody’s.

(d) All actions by CFC and the Trustee

with respect to the trust, the assets of

the Trust, the certificates and

certificateholders will be governed by

the Trust Agreement, which will be

available to plan fiduciaries for their

review prior to the plan’s investment in

certificates.

(e) The certificates will bear a variable

rate of return that will be generally reset

weekly; any change in the reset period

will require a new investment decision

by the certificateholder because of the

mandatory redemption (at par plus

accrued interest) feature of the

certificates.

(f) The variable rate should be closely

related to a published independent

index (e.g. the H.15 index for 30-day

commercial paper, as compiled by the

New York Federal Reserve Bank) so that

it can be readily monitored by

certificateholders. Given the historical

range of reset rates, and the put and

redemption features of the certificates,

any adverse change in the variable rate

would have only a de minimis impact

on a plan investor’s overall return on

the certificates.

(g) Alex Brown, a currently identified

underwriter, anticipates that it will

make a secondary market in the

certificates, and the certificateholders

will have certain put rights (at par plus

accrued interest) which are supported

by a liquidity facility provided by a

financial institution that is rated in one

of the three highest rating categories by

S&P’s and/or Moody’s.

(h) All fees and charges under the

Trust and for the Certificates are fixed

and reasonable and are disclosed to

certificateholders.

(i) CFC and the Trustee will maintain

books and records of all transactions

which will be subject to annual audit by

a certified public accountant.

(j) The certificates will be offered and

sold in a public offering or an exempt

private placement, with full disclosure

in the prospectus or private placement

memorandum.

Notice to Interested Persons

Those persons who may be interested

in the pendency of the requested

exemption will include prospective

plan investors, and fiduciaries of plans

which have already invested in

certificates of a trust which holds an

existing KEPCO Note. Because CFC is

uncertain as to which plans will invest

in a new trust, the Department has

determined that the only practical form

of providing notice to interested persons

is the publication of this notice of

proposed exemption in the Federal

Register. However, with respect to plans

that are invested in a trust holding an

existing KEPCO Note at the time this

notice is published, CFC will distribute

in redemption notices for the

outstanding certificates of the existing

trusts a statement that plan investors

may request a copy of this notice of

proposed exemption within 15 days of

the receipt of the notice of redemption.

CFC represents that transmittal of

redemption notices will occur shortly

after the publication of this notice of

proposed exemption in the Federal

Register.

Comments and requests for a public

hearing are due within sixty (60) days

following the publication of this notice

in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr.

E.F. Williams of the Department,

telephone (202) 219–8194. (This is not

a toll-free number.)

Pentair Retirement Savings and Stock

Incentive Plan (the Plan), Located in St.

Paul, MN

[Application No. D–10472]

Proposed Exemption

The Department of Labor 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) and 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 past sale by the Plan (the Sale) of

the Plan’s remaining interest (the

Interest) in two guaranteed investment

contracts (the GICs) of Confederation

Life Insurance Company (CL) to Pentair,

Inc. (Pentair), the sponsoring employer

and a party in interest with respect to

the Plan; provided the following

conditions were met:

(1) The Sale was a one-time

transaction for cash;

(2) The Plan received no less than the

fair market value of the Interests at the

time of the Sale;

(3) The Plan and its participants and

beneficiaries have not incurred any

expenses or any losses from the Sale;

and

(4) Any future distributions from the

GICs that exceed the consideration paid

by Pentair to the Plan for the Interests

shall be paid to the Plan and allocated

to the respective accounts of the affected

Plan participants.

EFFECTIVE DATE: This proposed

exemption, if granted, will be effective

on June 13, 1997.

Summary of Facts and Representations

1. Pentair, a Minnesota corporation

and located in St. Paul, is a publicly

held corporation whose stock is traded

on the New York Stock Exchange. It is

a diversified manufacturer and vendor

of electrical and electronic enclosures,

portable and stationary tools and

equipment, water products, and

sporting and law enforcement

ammunition.

The Plan, established by Pentair on

January 1, 1984, is a defined

contribution plan that is intended to

qualify under section 401(a) of the Code.

The Plan includes a cash or deferred

arrangement that is intended to qualify

under section 401(k) of the Code.21 As

of December 31, 1996, the Plan had

approximately 9,700 participants and

total assets with a fair market value of

approximately $270,000,000. The Plan

provides for individual participant

accounts and permits its participants to

self-direct their respective accounts in

the Plan (other than the ESOP part of

the Plan) into various investment

options pursuant to section 404(c) of the

Act, including an investment option

referred to as the Pooled Stable Return

Trust (the PSR Fund), which acquires

and holds a pool of fixed income

investments. As of December 31, 1996,

the PSR Fund held assets with a total

fair market value of approximately

$72,000,000.

Pentair, as named Plan fiduciary,

delegates the administrative

responsibilities of the Plan to a Plan
62640 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

22Book value represents total deposits under the

GICs plus interest at the rates guaranteed under the

GICs (the Contract Rates) through August 12, 1994,

less previous withdrawals.

Committee (the Committee), currently

comprised of Richard W. Ingman, Debby

S. Knutson, John T. Moynihan, and Roy

T. Rueb, each of whom is an employee

of Pentair. Two of the members of the

Committee, Richard W. Ingman and Roy

T. Rueb (the Fund Trustees), are also the

trustees of the PSR Fund.

2. Among the fixed income

investments purchased by the Fund

Trustees on behalf of the PSR Fund are

the GICs, described as follows:

(a) Contract No. 62541 is a single

deposit contract acquired from CL on

July 26, 1991, for $3,500,000, with a

maturity date on June 30, 1996,

providing for a guaranteed rate of

compound interest at 8.53 percent

through maturity.

(b) GIC No. 62608 is a single deposit

contract acquired from CL on January

22, 1992, for $5,000,000, with a maturity

date on December 31,1996, and which

provides for a guaranteed rate of simple

interest at 7.21 percent through

maturity.

3. On August 11, 1994, Canadian

insurance company regulatory

authorities seized the assets of CL

because of serious liquidity problems

confronting CL. On August 12, 1994 (the

Seizure Date), the assets of CL located

in the United States of America were

seized by the Insurance Commissioner

for the State of Michigan. On the

Seizure Date, legal action was taken to

freeze the operations of CL in the United

States and to initiate a rehabilitation

CL’s operations in the United States.

Pentair represents that, as of August 12,

1994, the book value of both of the GICs

totaled $9,685,734.43 (the Seizure Date

Values).22 Pentair represents that as of

the Seizure Date, GIC No. 62541 had a

book value of $4,491,311.71 and GIC

No. 62608 had a book value of

$5,194,422.72, with the total

representing approximately 11.7 percent

of the total assets in the PSR Fund as of

the Seizure Date. Immediately after the

Seizure Date, the Fund Trustees took

action to freeze a portion of the account

balance of each participant account

invested in the PSR Fund, and the

frozen amount of each such account

equaled the percentage of the total PSR

Fund assets represented by the Seizure

Date Value of the GICs, approximately

11.7% as of the Seizure Date.

4. Subsequent to the Seizure Date, a

formal plan of rehabilitation of CL (the

Rehab Plan) was developed which

offered contract holders such as the PSR

Fund the option of participation in the

Rehab Plan, by receiving payments over

several years, or nonparticipation in the

Rehab Plan by receiving a lump sum

settlement. The Rehab Plan was

approved by rehabilitation authorities

on October 23, 1996, and became final

21 days later, and the Fund Trustees

elected that the PSR Fund participate in

the Rehab Plan. The Fund Trustees

represent that pursuant to the Rehab

Plan, the Plan has already received from

CL’s available liquid assets in excess of

100 percent of the Seizure Date Values

of the GICs, and that they anticipate

from the Rehab Plan an eventual

recovery of approximately 110% of the

Seizure Date Values. Pentair represents

that as of June 13, 1997, the Plan had

received a total of $9,723,592 from the

Rehab Plan with respect to its

investments in the GICs, and that these

funds were immediately invested in the

PSR Fund’s money market fund.

In addition to the funds realized from

the Rehab Plan, the Plan has received

funds from a state guaranty association.

During development of the Rehab Plan,

the State of Minnesota, through its

Minnesota Life and Health Insurance

Guaranty Association (MGA), accepted

and confirmed guaranty coverage for the

two GICs and thereby provided

additional funds to compensate those

affected Plan participants residing in

Minnesota. Pentair represents that

62.221 percent of the PSR Fund’s

investment in the GICs was allocable to

the participant accounts of Minnesota

residents. Pentair represents that as of

June 13, 1997, the Plan had received a

total of $1,307,732 from MGA with

respect to its investments in the GICs,

and that these funds were immediately

invested in the PSR Fund’s money

market fund.

Pentair represents that in addition to

the funds realized from the Rehab Plan

and MGA, as of June 13, 1997 the PSR

Fund had also earned a total of $59,080

in interest on the Rehab Plan and MGA

payments which had been deposited in

the PSR Fund’s money market account.

5. In order to assure that all affected

participants, regardless of their state of

residency, receive a timely and

equivalent recovery of their frozen

account balances invested in the GICs,

and in order to restore to all affected

Plan participants complete access to

their entire account balances invested in

the PSR Fund, Pentair represents that it

proceeded on June 13, 1997 to purchase

from the Plan the Interest, which is the

PSR Fund’s entire remaining interest in

the GICs (the Interest) by depositing

cash into the PSR Fund. For this past

purchase of the Interest from the Plan

for cash, Pentair requests as exemption

under the terms and conditions

described herein.

6. Pentair represents that it purchased

the Interest from the Plan by depositing

cash into the PSR Fund in the amount

of $635,672, which was the amount

necessary to enable the Plan to have

received, from all sources, a total

recovery on the GICs in the amount of

$11,726,076 (the Total Recovery

Amount). Pentair represents that in

receiving the Total Recovery Amount,

the Plan recovered the Seizure Date

Values of the GICs plus interest thereon

at the Contract Rates through the

maturity dates of each GIC, plus postmaturity interest on each GIC at the rate

of five percent from the maturity dates

through March 31, 1997, the date

established under the Rehab Plan for

contract valuation. Pentair represents

that the 5 percent rate of interest was

the rate of interest established under the

Rehab Plan, and accepted by MGA, for

the purposes of crediting earnings to the

GICs after their contract maturity dates.

7. Pentair represents that by

purchasing the Interest from the PSR

Fund, it has assumed all risks with

respect to the future payments by the

Rehab Plan and MGA with respect to

the GICs. Upon receipt of the purchase

price for the Interest, the Fund Trustees

were able to lift the freeze on the

portion of the participant accounts

invested in the GICs and they restored

to each affected account its pro-rata

share in the Total Recovery Amount.

Pentair represents that it proceeded

with the purchase of the Interest on June

13, 1997 in order that affected Plan

participants residing outside Minnesota

would not be required both to await

future Rehab Plan and to accept a lesser

recovery with respect to their frozen

account balances. Pentair represents

that its purchase of the Interest also

enabled all affected participants,

regardless of residency, to have

immediate access to their account

balances for purposes of making

investment transfers, obtaining hardship

withdrawals or plan loans, and

receiving distributions of the portion of

their account balances which had been

frozen when they became entitled for

distributions. Pentair represents that in

the event the amount of future

distributions from the GICs exceeds the

purchase price paid to the Plan for the

Interest, such excess amounts shall be

transferred to the Plan and allocated pro

rata among the accounts of the affected

Plan participants.

8. In summary, the applicant

represents that the transaction satisfies

the criteria of section 408(a) of the Act

because (a) the Sale was a one-time

transaction for cash; (b) the purchase
Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices 62641

23Because Mr. Herzog is the only participant in

the Plan, there is no jurisdiction under 29 CFR

§ 2510.3–3(b). However, there is jurisdiction under

Title II of the Act pursuant to section 4975 of the

Code.

price paid by Pentair for the Interest

enabled the Plan to have recovered the

Total Recovery Amount, representing

the sum of (i) the book value of the GICs

as of the Seizure Date, (ii) Contract Rate

interest thereon through the GICs’

maturity dates, (iii) post-maturity

interest at the rate of 5 percent through

March 31, 1997; (c) the transaction

enabled the PSR Fund to avoid any risk

associated with the continuation of the

Rehab Plan and enabled the participants

to direct PSR Fund assets to other

investments; and (d) the Plan did not

incur any expenses or suffer any losses

from the transaction.

FOR FURTHER INFORMATION CONTACT: Mr.

C.E. Beaver of the Department,

telephone (202) 219–8881. (This is not

a toll-free number.)

Robert H. Herzog Profit Sharing Plan,

(the Plan) Located in Santa Barbara,

California

[Application No. D–10494]

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

a certain residential condominium (the

Property) by the Plan 23 to Robert H.

Herzog (Mr. Herzog), a disqualified

person with respect to the Plan,

provided that the following conditions

are met:

(a) The Sale is a one-time transaction

for cash;

(b) The terms and conditions of the

Sale are at least as favorable to the Plan

as those obtainable in an arm’s length

transaction with an unrelated party;

(c) The Plan receives the fair market

value of the Property at time of the Sale;

and

(d) The Plan is not required to pay

any commissions, costs or other

expenses in connection with the Sale.

Summary of Factual Representations

1. The Plan is a profit sharing plan

which was established by Mr. Herzog,

the sole participant and beneficiary. As

of August 1997, the Plan held assets

valued at approximately $141,500. The

trustee of the Plan is Mr. Herzog.

2. The Property is a residential

condominium unit located at 362 Old

Mammoth Road, Unit 62, Sherwin

Villas in Mammoth Lakes, California.

The Property consists of one bedroom,

one-and-a-quarter baths and has a total

living area of 704 square feet. The

specific zoning classification and

description of the Property is ‘‘RF–2

Residential Multiple Family.’’

3. According to the applicant, the

Plan originally acquired the Property as

a real estate investment. The Plan

purchased the Property in October 1996

from an unrelated third party in a cash

transaction for $40,271, including

expenses. The applicant represents that

the Plan has rented out the Property on

a short-term basis to visitors of the

Mammoth Lakes resort, and all income

and expenses attributable to the

Property are applied to the Plan. Since

purchasing the Property, the Plan has

spent approximately $9,723 on

improvements but, because of rental

income, has shown a net profit of

approximately $945.

Mr. Herzog represents that the

Property has not been leased to, or used

by, any disqualified persons.

4. The applicant requests an

exemption for the proposed sale of the

Property by the Plan to Mr. Herzog.

According to Mr. Herzog, he desires to

sell the Property because it has failed to

produce the desired rate of return and

because it has become unwieldy

investment from a management

perspective. As noted above, the Plan

would receive cash for the Property in

an amount equal to the fair market value

of such Property, as determined by a

qualified, independent appraiser at the

time of the Sale.

The applicant represents that the

proposed transaction would be feasible

in that it would be a one-time

transaction for cash. Furthermore, the

applicant states that the transaction

would be in the best interests of the

Plan because it would permit the Sale

of the Property, enabling the Plan to

invest the proceeds from the Sale in

assets with a higher rate of return.

Finally, the applicant asserts that the

transaction will be protective of the

rights of the participant and beneficiary

as indicated by the fact that the Plan

will receive the fair market value of the

Property, 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. Cheryl L. Schafer (Ms. Schafer), an

accredited appraiser with Mammoth

Lakes Appraisal, located in Mammoth

Lakes, California, appraised the

Property on July 14, 1997. Ms. Schafer

states that she is a full time qualified,

independent appraiser, as demonstrated

by her status as a Certified Residential

Real Estate Appraiser licensed by the

State of California. In addition, Ms.

Schafer represents that both she and her

firm are independent of Mr. Herzog.

After inspecting the Property, Ms.

Schafer determined that a fee simple

interest in the Property is worth

$50,000.

In her appraisal, Ms. Schafer relied

primarily on the direct sales comparison

approach. According to Ms. Schafer this

method best represents the actions of

buyers and sellers in the marketplace.

This method of appraisal involves an

analysis of similar recently sold

properties in the area in question so as

to derive the most probable sales price

of the Property. Ms. Schafer’s appraisal

indicates that she compared the

Property to six recently sold

condominium units in the Mammoth

Lakes area before reaching a conclusion

as to the value of the Property.

6. In summary, the applicant

represents that the proposed transaction

satisfies the statutory criteria of section

4975(c)(2) of the Code because: (a) The

terms and conditions of the Sale would

be at least as favorable to the Plan as

those obtainable in an arm’s length

transaction with an unrelated party; (b)

the Sale would be a one-time cash

transaction allowing the Plan to invest

in assets with a higher rate of return; (c)

the Plan would receive the fair market

value of the Property, established by a

qualified independent appraiser; and (d)

the Plan would not be required to pay

any commissions, costs or other

expenses in connection with the Sale.

Notice to Interested Persons

Because Mr. Herzog is the only

participant in the Plan, 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).

CoreStates GIC and BIC Fund (the

Fund), Located in Philadelphia,

Pennsylvania

[Application No. D–10522]

Proposed Exemption

The Department of Labor is

considering granting an exemption
62642 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

25The applicant represents that PLHIGA’s

coverage of interest on a GIC’s principal (a) is

limited to the four years prior to the rehabilitation

date during which the GIC was in effect, (b) does

not exceed 2 percentage points below the Moody

Corporate Bond Average, and (c) for the period after

the rehabilitation date up to the date of payment by

PLHIGA, does not exceed 3 percentage points below

the Moody Corporate Bond Yield Average.

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) and 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 sale (the Sale) by the Fund of the

Fund’s remaining interest in two

Guaranteed Investment Contracts (the

GICs) of Confederation Life Insurance

Company (CL) to CoreStates Bank, N.A.

(the Bank), a party in interest with

respect to the Fund; provided (1) the

Sale was a one-time transaction for cash,

(2) the Fund received no less than the

fair market value of the GICs at the time

of the Sale, (3) the Fund and its

participants and beneficiaries did not

incur any costs or expenses with respect

to the Sale, and (4) any future

distributions from the GICs that exceed

the consideration paid to the Fund by

the Bank in the Sale shall be paid to the

Fund and allocated to the respective

accounts of the affected employee

benefit plans.

EFFECTIVE DATE: This exemption, if

granted, will be effective as of December

31, 1997.

Summary of Facts and Representations

1. The Bank, which is the applicant,

is a wholly-owned subsidiary of

CoreStates Financial Corp., a bank

holding company organized under

federal and Pennsylvania laws and

located in Philadelphia. The Bank is the

successor to Hamilton Bank, which the

Bank acquired in 1980. The Bank offers

traditional commercial banking services

to individuals and privately and

publicly created entities located in the

Middle Atlantic states.

Until 1993, Hamilton Bank served as

trustee or investment custodian for

approximately 250 employee benefit

plans, and had investment discretion for

either some or all of the assets of such

plans (the Plans). Commencing in 1993,

the Bank undertook such activities and

duties for the Plans. The Plans include

both defined benefit and defined

contribution plans, such as profit

sharing, money purchase pension,

401(k), and Keogh plans.

2. The Fund is a pooled fund

sponsored and administered by the

Bank in which the Plans invest portions

of their assets. The investments made by

the Fund are limited to guaranteed

investment contracts issued by

insurance companies and to bank

investment contracts issued by banks.

The applicant states that CoreStates

Investment Advisers, Inc. (Advisers), a

wholly-owned subsidiary of the Bank, is

the investment adviser for the Fund and

has investment discretion over the

assets of the Fund. The applicant

represents that with respect to each Plan

that has invested in the Fund, the

determination to invest Plan assets in

the Fund is made by a fiduciary of the

Plan independent of the Bank or by the

participants of a Plan which provides

for self-directed investment of

individual participant accounts. As of

September 30, 1997, the applicant

represents that the fair market value of

the assets of the Fund was

approximately $5,638,341.

3. The Fund has invested a portion of

its assets in the two GICs issued by CL,

a Canadian insurance corporation doing

business in the United States through

branches in the states of Georgia and

Michigan. The two GICs involved in the

transaction for which the exemption is

requested are described as follows:

GIC No. 61977 GIC No. 62403

Date Purchased .................................................................................................................... Dec. 4, 1989 .......... March 1, 1991.

Original Maturity Date ........................................................................................................... Dec. 3, 1994 .......... April 30, 1996.

Amount Deposited ................................................................................................................ $500,000.00 ........... $1,000,000.00.

Contract Rate of Interest ...................................................................................................... 8.50 percent ........... 8.20 percent.

8/12/94 Book Value 24 ........................................................................................................... $528,615.00 ........... $1,036,045.00

24Book Value is the sum of the total principal deposits plus interest thereon at the rates guaranteed under the terms of the GICs, less previous

withdrawals.

4. On August 11, 1994, the Canadian

insurance regulatory authorities placed

CL into liquidation and a winding-up

process. On August 12, 1994, the

insurance authorities of the state of

Michigan commenced legal action to

place the U.S. operations of CL into

rehabilitation, which involved

liquidating the assets of CL and

establishing the methodology for

determining and paying its contractual

obligations. The applicant represents

that a plan of rehabilitation (the Rehab

Plan) has been approved by the

rehabilitation authorities, and payments

to CL contract holders, including the

Fund, commenced under the Rehab

Plan in April of 1997.

In addition to the amounts paid to the

Fund by CL under the Rehab Plan, the

GICs have also been afforded protection

by the Pennsylvania Life and Health

Insurance Guaranty Association

(PLHIGA). Under the terms of the

enabling statute of PLHIGA, the

principal amount of the GICs was fully

insured, and a substantial portion the

interest due under the terms of the GICs

was also insured by PLHIGA.25

5. The applicant states that In

accordance with the Rehab Plan,

substantial payments have been made

by CL to the Fund with respect to the

GICs. The applicant represents that in

combination with the additional

payments to the Fund by PLHIGA, the

Fund already has recovered 100 percent

of is principal investment in the GIC,

plus substantial portions of the interest

due under the GICs within the limits of

PLHIGA’s coverage. The applicant

represents that CL has predicted that

some additional amounts will be paid

from various reserve funds over the next

few years as the remaining assets of CL

are liquidated.

The details of payments to the Fund

are as follows:

GIC No.

61977

GIC No.

62403

Paid 4/25/97 by CL .................................................................................................................................................. $458,773.70 $910,105.36

Paid 5/20/97 by CL .................................................................................................................................................. 9,578.40 5,429.83
Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices 62643

GIC No.

61977

GIC No.

62403

Paid 5/27/97 by CL .................................................................................................................................................. 60,480.93 120,522.70

Paid 5/30/97 by PLHIGA .......................................................................................................................................... 75,085.11 164,396.53

Paid 9/2/97 by CL .................................................................................................................................................... 11.96 23.73

Total to date received ....................................................................................................................................... 603,930.10 1,220,478.15

Projected future payments ....................................................................................................................................... 3,714.00 8,347.00

6. In order to enable the Fund and its

participating Plans to achieve a

completed liquidation of the Fund’s

investment in the GICs and avoid

additional accounting expenses related

to monitoring and allocating future

Rehab Plan payments, the Bank

proposes to purchase the Fund’s

remaining interests in the GICs by

acquiring the Fund’s right to all future

payments from CL pursuant to the

Rehab Plan with respect to the GICs.

The Bank is requesting an exemption for

this purchase transaction under the

terms and conditions described herein.

As purchase price for all rights to future

CL payments with respect to the GICs,

the Bank proposes to pay the Fund cash

in the amount of $12,061.00, which the

applicant represents to be the amount of

projected future payments on the GICs

as calculated in accordance with the

terms of the Rehab Plan. The Bank

intends the cash sale transaction to take

place December 31, 1997. The applicant

represents that the Sale will enable the

Plans invested in the Fund and their

affected participants and beneficiaries to

realize immediately the future Rehab

Plan payments with respect to the GICs

without awaiting the four years which is

estimated for complete payment under

the Rehab Plan. The applicant

represents that the Fund and the Plans

will not incur any costs or expenses

with respect to the sale transaction. In

the event the Bank should receive future

payments on behalf of the GICs in

excess of the purchase price of

$12,061.00, such excess amounts shall

be transferred to the Fund.

The applicant represents that the

valuation methodologies used to

determine the projected future

payments on the GICs have been

reviewed and accepted by the Michigan

Insurance Commissioner, the Circuit

Court of Ingham County, Michigan, the

National Organization of Life and

Health Guaranty Associations, and

ACLIC, an organization of large

financial institutions and plan sponsors

that invested in CL GICs.

7. In summary, the applicant

represents that the proposed transaction

satisfies the criteria of section 408(a) of

the Act because (a) the Sale will be a

one-time transaction for cash; (b) the

transaction will enable the Fund to

avoid the additional administrative

costs that will be experienced from

retention of the Fund’s remaining

interests in the GICs; (c) no costs or

expenses will be incurred by the Fund

with respect to the Sale; (d) the plans

participating in the Fund, and their

participants and beneficiaries, will

receive promptly all anticipated

amounts owed by CL rather than over an

anticipated next four years; and (e) any

future distributions from the GICs that

exceed the consideration paid to the

Fund by the Bank in the Sale shall be

paid to the Fund and allocated to the

accounts of the Plans invested in the

Fund at the time of the Sale.

FOR FURTHER INFORMATION CONTACT: Mr.

C.E. Beaver of the Department,

telephone (202) 219–8881. (This is not

a toll-free number.)

Hawaii Laborers’ Apprenticeship and

Training Trust Fund (the Trust Fund)

[Application No. L–10485]

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, August 10, 1990). If the

exemption is granted, the restrictions of

sections 406(a), 406 (b)(1) and (b)(2) of

the Act shall not apply to the purchase

of a certain parcel of unimproved real

property (the Property) by the Trust

Fund from the Laborers International

Union of North America, Local 368,

AFL–CIO (a/k/a the Hawaii Laborers

Union), a party in interest with respect

to the Plan, provided that the following

conditions are met:

(a) The purchase of the Property by

the Trust Fund is a one-time transaction

for cash;

(b) The Trust Fund pays no more than

the lesser of: (i) $1,570,000; or (ii) the

fair market value of the Property as

determined at the time of the

transaction;

(c) The fair market value of the

Property is established by an

independent, qualified real estate

appraiser that is unrelated to the Hawaii

Laborers Union or any other party in

interest with respect to the Trust Fund;

(d) The Trust Fund does not pay any

commissions or other expenses with

respect to the transaction;

(e) The Hawaiian Trust Company, Ltd.

(Hawaiian Trust), acting as an

independent, qualified fiduciary for the

Trust Fund, determines that the

proposed transaction is in the best

interest of the Trust Fund and its

participants and beneficiaries;

(f) Hawaiian Trust monitors various

aspects of the purchase of the Property

until closing, including the

environmental reports concerning the

Property, and takes whatever action is

necessary to protect the interests of the

Trust Fund; and

(g) The purchase price paid by the

Trust Fund for the Property represents

no more than 25 percent of the Trust

Fund’s total assets at the time of the

transaction.

Summary of Facts and Representations

1. The Trust Fund is an

apprenticeship training plan the assets

of which are subject to the fiduciary

responsibility provisions of Part 4 of

Title I of the Act. The Trust Fund is also

established and administered pursuant

to the provisions of section 302 of the

Labor Management Relations Act of

1947. Currently, there are approximately

2800 participants and beneficiaries

covered by the Trust Fund. As of May

1997, the Trust Fund had total assets of

$6,221,075.

2. The Property is a parcel of

unimproved real property located at 96–

150 Farrington Highway in Waiawa on

the island of Oahu in the State of

Hawaii. The Property is currently

owned by the Hawaii Laborers’ Union

(the Union).

The Property is an irregularly shaped

parcel with a gross land area of 3,981

acres or approximately 173,412 square

feet. Approximately, 40,000 square feet

of the Property is adjacent to the

Waiawa Stream and is considered

unusable for development. Thus, the

usable portion of the Property

represents approximately 133,412

square feet. The Property is
62644 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

26The Department is providing no opinion in this

proposed exemption as to whether the current

expenditures made by the Trust Fund for providing

training, or whether future expenditures to be made

by the Trust Fund for the construction of the

Building and for the maintenance of the Building

as a training facility, are or will be consistent with

the fiduciary responsibilities contained in Part 4 of

Title I of the Act. In this regard, the Department

notes that section 404(a) of the Act requires, among

other things, that plan fiduciaries act prudently and

solely in the interest of the plan and its participants

and beneficiaries when providing benefits to such

participants and beneficiaries and defraying

reasonable expenses of administering the plan.

27Other sites, as stated by The Hallstrom Group,

Inc. (the Trust Fund’s real estate appraiser for the

Property as discussed in Paragraph 4 above) were

valued at $40 per square foot, $37.85 per square

foot, $24.73 per square foot, and $31 per square

foot, whereas the Property was determined to be

$11.75 per usable square foot. In addition, Art

Balmaceda of Prudent Investors’ Choice Realty Inc.,

an independent realtor in Honolulu, Hawaii,

investigated two other properties for the Trust

Fund. One property was 97,936 square feet

(approximately 73 percent of the size of the

Property) and valued at $2.5 million or $25.53 per

square foot. The other property, which was

approximately 7.52 acres and valued at $8.9

million, was too expensive for the Trust Fund.

28Hallstrom’s appraisal notes that there is a 12-

foot wide easement, in favor of the Hawaiian

Electric Company, for power poles and overhead

electrical wires. However, the Hawaiian Electric

Company is currently negotiating with the Trust

Fund to cancel the existing easement and relocate

it so as not to interfere with the proposed Building.

undeveloped and partially overgrown

with trees and shrubs along its

perimeter. The interior portions of the

Property are terraced, due to varying

topography, with open yard areas.

The Property was recently re-zoned as

an I–2 Intensive Industrial District. In

this regard, the I–2 zoning designation

is intended to set aside areas of Waiawa

for a full range of industrial uses

necessary to support the city. The

applicant states that the current zoning

designation will allow for the planned

construction of a building to be used as

a training school for participants in the

Hawaii Laborers’ Union apprenticeship

and training plan (see Paragraph 3

below). The Property is located at the

fringe of the Pearl City commercial area

and is in close proximity to major

freeways in Waiawa. Real estate

appraisals of the Property state that an

industrial complex which maximizes

allowed density would represent the

highest and best use of the site.

3. The applicant states that the Trust

Fund’s trustees (the Fund Trustees)

would like to have the Trust Fund

purchase the Property from the Union,

a party in interest with respect to the

Trust Fund. The proposed transaction

would allow the Trust Fund to construct

a building on the Property for use as a

training facility for the Trust Fund’s

participants. At the present time,

training classes are being held in

temporary quarters—10 by 40 foot

trailers—which limit the amount of

students per class. The Fund Trustees

believe that the Property is an ideal

location for a training facility.

Current plans call for the construction

of a three-story building (the Building),

which will house six classrooms, a

multi-purpose room, a kitchen,

restrooms, and storage areas. In

addition, a dormitory for neighboring

island students and caretaker’s quarters

will be located on the second floor of

the Building. The third floor of the

Building will accommodate the

administrative offices. The Building

would be designed to meet the

applicable zoning specifications.

The Building will provide a

permanent facility for classrooms and

‘‘hands-on’’ training for laborer

employment in various construction

trades as well as housing

accommodations for trainees from the

neighboring islands. The Trust Fund

currently lodges the trainees in hotels,

which is fairly expensive for the Trust

Fund.26

The applicant states that if the Trust

Fund is unable to purchase the

Property, it will have to consider other

locations which are more expensive and

possibly not as conducive to the

activities for the proposed training

facility. According to information

supplied by independent real estate

appraisers,27 the cost of purchasing a

similarly sized property suitable to the

Trust Fund would be almost twice the

cost of the proposed transaction. Thus,

the applicant represents that if the Trust

Fund is unable to proceed with the

proposed transaction, and if no other

affordable properties are available, the

Trust Fund’s existence may be in

jeopardy.

4. The Property was appraised by

James E. Hallstrom, Jr., MAI, SRA, of

The Hallstrom Group, Inc. (Hallstrom),

a real estate consultant and appraisal

firm located in Honolulu, Hawaii.

Hallstrom determined that the fair

market value of the net usable area (i.e.,

approximately 133,412 square feet) of

the Property was approximately

$1,570,000, as of January 31, 1997.

Thus, based on Hallstrom’s appraisal,

the unusable portion of the Property

does not add any value to the Property.

The applicant states that in the

proposed transaction the Trust Fund

would not pay any additional amount to

acquire this portion of the Property.

Hallstrom utilized a sales comparison

methodology in valuing the Property.

Hallstrom compared the Property with

recent sales of four other industrial

zoned properties, all within immediate

and/or competitive market areas of the

Property. In order to equate these four

transactions with the Property,

Hallstrom made adjustments for various

comparative factors including

appreciation/depreciation over time,

location, zoning, frontage/access, off-site

improvements, current easements and

restrictions,28 physical characteristics,

and size. After making the necessary

adjustments, Hallstrom concluded that

the unencumbered fee simple interest in

the Property would have a fair market

value of approximately $11.75 per

usable square foot, which would be

rounded to a total of approximately

$1,570,000. Hallstrom also concluded

that an industrial complex, such as the

Trust Fund’s proposed training facility,

would represent the highest and best

use of the Property.

5. The Union has agreed to sell the

Property to the Trust Fund for

$1,570,000 in cash, subject to the review

and approval of an independent

fiduciary (see Paragraph 6 below). The

parties will obtain an updated appraisal

of the Property from Hallstrom at the

time of the proposed transaction to

ensure that the appraised amount (i.e.,

$1,570,000) still reflects the fair market

value of the Property at that time. The

parties have agreed that the Trust Fund

will pay the lesser of either: (i)

$1,570,000, or (ii) the fair market value

of the Property at the time of the

transaction. In addition, the applicant

states that the Trust Fund will not pay

any commissions, transaction costs, or

other expenses associated with the sale

of the Property by the Union, other than

the fees necessary for services of the

Trust Fund’s independent fiduciary,

Hawaiian Trust. Thus, the Union will

pay, among other things, the costs of the

title search and title insurance

premiums, the cost of recording the

deeds conveying title to the Property to

the Plan, all sales and transfer taxes

(including the conveyance tax), the

escrow fees, and the cost of Hallstrom’s

appraisal.

6. Hawaiian Trust has been appointed

by the Fund Trustees to act as an

independent fiduciary for the Trust

Fund for purposes of the proposed

transaction. Hawaiian Trust represents

that it is a trust company organized

under the laws of Hawaii and that it

exercises fiduciary powers similar to

those of national banks. Hawaiian Trust

states that it is an experienced fiduciary

in matters concerning employee benefit

plans subject to the Act and is also

experienced with real estate

transactions and investments. Hawaiian

Trust acknowledges its duties,

responsibilities and liabilities in acting
Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices 62645

29C.W. Associates, Inc. d/b/a GeoLabs-Hawaii

(GeoLabs), a geotechnical engineering firm in

Honolulu, Hawaii, was hired to conduct a soil

analysis of the Property. An October 14, 1997 letter

from GeoLabs states that the Property will support

the proposed Building utilizing spread footing

foundations.

30M&E Pacific, Inc. (M&E), an independent,

qualified environmental assessment firm located in

Honolulu, Hawaii, has conducted a Phase I report,

as of October 1997. The purpose of the Phase I

report was to inventory the presence of potential

on-site hazardous waste or hazardous substance

contamination (e.g. hydrocarbons), and to detect

potential noncompliance in relation to current and

past activities conducted on or adjacent to the

Property. According to the findings of M&E, there

is no physical evidence of environmental concerns

regarding the Property. However, two previous

petroleum pipeline spills have been documented in

the vicinity of the Property. Thus, M&E

recommends further groundwater sampling on the

southern boundary of the Property to determine the

extent of any contamination.

In this regard, Hawaiian Trust will ensure that

appropriate groundwater sampling tests are

conducted prior to the transaction.

as a fiduciary for the Trust Fund for

purposes of the proposed transaction.

Hawaiian Trust represents that it is an

independent fiduciary and not an

affiliate of, or related to, the entities

involved in the subject transaction. In

this regard, Hawaiian Trust certifies

that: (i) less than one (1) percent of its

total deposits, or outstanding loans, are

attributable to the deposits of, or loans

to, the Union and its affiliates; and (ii)

less than one (1) percent of its annual

income (measured on the basis of the

prior year’s income) comes from

business derived from the Union and its

affiliates.

7. Hawaiian Trust has reviewed all of

the terms and conditions of the

proposed purchase of the Property by

the Trust Fund. Hawaiian Trust’s review

and analysis included an on-site

inspection of the Property as well as

meetings with the appraiser, Hallstrom,

and a thorough review of their most

recent appraisal of the Property.

Hawaiian Trust states that Hallstrom’s

appraisal has considered all of the

factors necessary to accurately

determine the fair market value of the

Property, including its location vis-a-vis

Waiawa Stream, the Hawaiian Electric

Company’s easement, the applicable

zoning restrictions for industrial usage,

the Property’s accessibility to the

Farrington Highway, and the offsite

improvements surrounding the

Property.

Based of this review and analysis,

Hawaiian Trust concludes that the

proposed transaction would be in the

best interests of the Trust Fund and its

participants and beneficiaries. In this

regard, Hawaiian Trust states that the

purchase of the Property would be a

prudent transaction taking into

consideration that the Trust Fund will

be using this site as a training facility.

Hawaiian Trust states that the agreed

upon purchase price of $1,570,000,

based on the Hallstrom appraisal,

accurately reflects the current market

value of the Property.

Hawaiian Trust states further that it

will monitor the proposed purchase of

the Property by the Trust Fund and will

take whatever actions are necessary to

protect the interests of the Trust Fund’s

participants and beneficiaries with

regard to the transaction. To this end,

Hawaiian Trust represents that it will

ensure that the current appraisal of the

Property is updated at the time of the

transaction and that the Trust Fund

pays no more than the fair market value

of the Property. Hawaiian Trust will

also ensure that the purchase price paid

by the Trust Fund represents no more

than 25 percent of the Trust Fund’s total

assets at the time of the transaction.

Hawaiian Trust represents that the

Trust Fund will be able to meet all of

its current expenses after the proposed

transaction and that the transaction will

not adversely affect the Trust Fund’s

liquidity needs. By letter dated August

22, 1997, Hawaiian Trust states that it

has reviewed the Trust Fund’s most

recent financial information, including

audited financial reports for the past six

years, budget and financial statements

for the last three full years, and the

revised budget for the current plan year

through July 31, 1997. In addition,

Hawaiian Trust states that it spoke with

the Trust Fund’s Investment Manager,

Brian H. Morikuni of T.M. Hogan, Inc.,

regarding the latest asset valuations and

investment earnings. These valuations

show that the proposed purchase price

of $1.57 million should be less than 25

percent of the Trust Fund’s total assets

as of December 1997 (the projected time

of closing).

Hawaiian Trust is responsible for

ensuring that inspections of the

Property are conducted by appropriate

professionals prior to the transaction.

These inspections will ensure that there

are no hidden or unapparent surface or

subsurface conditions on the Property—

including soils, subsoils, geologic

formulations, ground water or drainage

conditions—that would adversely affect

improvements and the value of the

Property. Hawaiian Trust will review

the latest soil analysis 29 and

environmental assessment 30 (Phase I)

reports for the Property, prior to the

proposed transaction. In the event that

there are significant environmental

concerns regarding the Property (e.g.

groundwater contamination exceeding

State or Federal standards), Hawaiian

Trust will not approve the proposed

purchase of the Property by the Trust

Fund. Hawaiian Trust will also verify

the cancellation of the Hawaiian Electric

Company’s easement (see Footnote 2

herein) prior to the transaction. Finally,

Hawaiian Trust represents that it will

continue to review and monitor the

proposed transaction until closing to

ensure that the transaction is in the best

interests of the participants and

beneficiaries of the Trust Fund.

8. In summary, the applicant states

that the proposed transaction will

satisfy the statutory criteria of section

408(a) of the Act because: (a) The

purchase of the Property by the Trust

Fund will be a one-time transaction for

cash; (b) the Trust Fund will pay no

more than the lesser of either

$1,570,000, or the fair market value of

the Property as determined at the time

of the transaction; (c) the fair market

value of the Property will be established

by an independent, qualified real estate

appraiser; (d) the Trust Fund will not

pay any commissions or other expenses

with respect to the transaction, other

than the services of an independent

fiduciary (as described herein); (e)

Hawaiian Trust, acting as the Trust

Fund’s independent fiduciary, has

determined that the proposed

transaction would be in the best interest

of the Trust Fund and its participants

and beneficiaries; (f) Hawaiian Trust

will monitor the proposed transaction

and will take whatever actions are

necessary to protect the interests of the

Trust Fund; and (g) the purchase price

paid by the Trust Fund for the Property

will represent no more than 25 percent

of the Trust Fund’s total assets at the

time of the transaction.

FOR FURTHER INFORMATION CONTACT: Mr.

E.F. Williams of the Department,

telephone (202) 219–8194. (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
62646 Federal Register / Vol. 62, No. 226 / Monday, November 24, 1997 / Notices

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 19th day of

November, 1997.

Ivan Strasfeld,

Director of Exemption Determinations,

Pension and Welfare Benefits Administration,

U.S. Department of Labor.

[FR Doc. 97–30826 Filed 11–21–97; 8:45 am]

BILLING CODE 4510–29–P

NATIONAL ARCHIVES AND RECORDS

ADMINISTRATION

Advisory Committee on the Records of

Congress; Meeting

AGENCY: National Archives and Records

Administration.

ACTION: Notice of meeting.

SUMMARY: In accordance with the

Federal Advisory Committee Act, the

National Archives and Records

Administration (NARA) announces a

meeting of the Advisory Committee on

the Records of Congress. The committee

advises NARA on the full range of

programs, policies, and plans for the

Center for Legislative Archives in the

Office of Records Services.

DATES: December 8, 1997, from 10 a.m.

to 11:30 a.m.

ADDRESSES: United States Capitol

Building, Room H130.

FOR FURTHER INFORMATION CONTACT:

Michael L. Gillette, Director, Center for

Legislative Archives, (202) 501–5350.

SUPPLEMENTARY INFORMATION:

Agenda

Update—Electronic Records Task Force

Report—Abraham Lincoln

Commemoration

Report—Project 2000 Proposals

Update—Center for Legislative Archives

Other current issues and new business

The meeting is open to the public.

Dated: November 18, 1997.

Mary Ann Hadyka,

Committee Management Officer.

[FR Doc. 97–30797 Filed 11–21–97; 8:45 am]

BILLING CODE 7515–01–P

NATIONAL COMMUNICATIONS

SYSTEM

National Security Telecommunications

Advisory Committee

AGENCY: National Communications

System (NCS).

ACTION: Notice of meeting.

SUMMARY: A meeting of the President’s

National Security Telecommunications

Advisory Committee will be held on

Thursday, December 11, 1997, from 9:30

a.m. to 11:30 a.m. The Business Session

will be held at the Department of State,

2101 C Street NW., Washington, DC.

The Executive Session will be held at

the Old Executive Office Building, 16th

and Pennsylvania Avenue NW.,

Washington, DC. The agenda is as

follows:

—Call to Order/Welcoming Remarks

—Eligible Receiver

—NCS Manager’s Report

—IES Report of Activities

—PCCIP Report

—Industry Executive Subcommittee

(IES) Reports

—Summary of Work Plan

Accomplishments

—IATF/IIG Infrastructure

Assessments

—Recommendations to the NSTAC

Principals

—Adjournment

The meeting is classified at the

SECRET level. Due to the sensitive

nature of the issues listed above, the

meeting will be closed to the public in

the interest of national defense.

FOR FURTHER INFORMATION: Please

contact Ms. Janet Jefferson (703) 607–

6209 or write the Manager, National

Communications System, 701 S. Court

House Rd., Arlington, VA 22204–2198.

Dennis Bodson,

Chief, Technology and Standards.

[FR Doc. 97–30804 Filed 11–21–97; 8:45 am]

BILLING CODE 5000–03–M

NATIONAL CREDIT UNION

ADMINISTRATION

Information Collection; Comment

Request for Reinstatement

DATES: November 24, 1997.

The National Credit Union

Administration (NCUA) intends to

submit the following public information

collection request to the Office of

Management and Budget (OMB) for

review and reinstatement under the

Paperwork Reduction Act of 1995 (Pub.

L. 104–13, 44 U.S.C. Chapter 35). This

information collection is published to

obtain comments from the public.

Public comments are encouraged and

will be accepted until January 23, 1998.

Copies of the information collection

request, with applicable supporting

documentation, may be obtained by

calling the NCUA Clearance Officer,

Betty May, (703–518–6414). Comments

and/or suggestions regarding the

information collection request should be

directed to Mrs. May at the National

Credit Union Administration, 1775

Duke Street, Alexandria, Virginia

22314–3428; Fax No. 703–518–6433; email address: bettym@ncua.gov within

60 days from the date of this publication

in the Federal Register.

OMB Number: 3133–0015.

Form Number: 4000, 4001, 4008,

4012, 4015, 4016, 4401, 9500, 9600.

Type of Review: Reinstatement,

without change, of a previously

approved collection for which approval

has expired.

Title: Federal Credit Union Charter

Application and Field of Membership

Amendments.

Description: The Federal Credit Union

Act sets forth the requirements for

establishing a credit union based on a

type of field of membership. The data

collection is necessary to determine that

the application for the charter/

amendment is in compliance with the

FCU Act. Respondents are credit union

officials or applicants for credit union

charters.

Respondents:

Estimated No. of Respondents/

Recordkeepers: 5725.

Estimated Burden Hours Per

Response: 3.6.

Frequency of Response: On occasion.

Estimated Total Annual Burden

Hours: 20,303.