[Federal Register Volume 60, Number 67 (Friday, April 7, 1995)]
[Notices]
[Pages 17809-17824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8395]



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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9511, et al.]


Proposed Exemptions; Bank of America Illinois, et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restriction 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 
request for a hearing should state: (1) The name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing. A request for a hearing must also state the issues to be 
addressed and include a general description of the evidence to be 
presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least 
three [[Page 17810]] copies) should be sent to the Pension and Welfare 
Benefits Administration, Office of Exemption Determinations, Room N-
5649, U.S. Department of Labor, 200 Constitution Avenue NW., 
Washington, DC 20210. Attention: Application No. stated in each Notice 
of Proposed Exemption. The applications for exemption and the comments 
received will be available for public inspection in the Public 
Documents Room of Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-5507, 200 Constitution Avenue NW., 
Washington, DC 20210.

Notice to Interested Persons

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

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

Bank of America Illinois, Located in Chicago, IL

[Exemption Application Nos. D-9511, D-9512 and D-9513]

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--Exemption for Purchases and Sales
    If the exemption is granted, effective September 1, 1993, the 
restrictions of section 406(a)(1)(A) through (D) and section 406(b) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (F) of the 
Code, shall not apply to the purchase and sale by employee benefit 
plans (the Plans), to which the Bank serves as fiduciary, of shares in 
the Prime Fund, the Government Securities Fund, and the Treasury Fund, 
three open-end money market mutual fund portfolios (collectively 
referred to as the Funds), to which the Bank of America Illinois, and 
its affiliates (the Bank) provide investment advisory and other 
services, in connection with the Supplemental Sweep Service (as defined 
in paragraph (a) of section IV below), provided that the conditions of 
Section III are met.
Section II--Exemption for Receipt of Fees
    If the exemption is granted, effective September 1, 1993, the 
restrictions of section 406(a)(1)(A) through (D) and section 406(b) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (F) of the 
Code, shall not apply to the receipt of fees by the Bank from the Funds 
for providing investment advisory and other services to the Funds, in 
connection with the investment of the assets of the Plans in the Funds, 
for which the Bank provides investment advisory and other services, 
provided that the conditions of Section III are met.
Section III--Conditions
    (a) The Bank does not have investment discretion or render 
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with 
respect to the Plan assets invested in the Funds pursuant to this 
proposed exemption.
    (b) No sales commissions or redemption fees are paid by the Plans 
in connection with the purchase or sale of shares in the Funds.
    (c) The Bank does not receive any fees payable pursuant to Rule 
12b-1 under the Investment Company Act of 1940 (the 12b-1 Fees) in 
connection with the transactions.
    (d) The price paid or received by a Plan for shares in a Fund is 
the net asset value per share on the date of the transaction, as 
defined in section IV(a), and is the same price which would have been 
paid or received for the shares by any other investor on that date.
    (e) Prior to the Bank's receipt of fees paid by each Fund with 
respect to Plan assets invested therein, each Plan receives a credit of 
such Plan's proportionate share of all fees charged to the Fund by the 
Bank.
    (f) The Plans are not employee benefit plans sponsored or 
maintained by the Bank.
    (g) A second fiduciary who is independent of and unrelated to the 
Bank or any of its affiliates (the Second Fiduciary), receives full 
written disclosure of information concerning the Fund(s), including but 
not limited to:
    (1) A current prospectus for each fund in which a Plan is 
considering investing;
    (2) A statement describing the fees for investment advisory or 
similar services, and all other fees to be charged to or paid by the 
Plan or the Funds, including the nature and extent of any differential 
between the rates of such fees;
    (3) The reason why the Bank may consider such investment to be 
appropriate for the Plan; and
    (4) Upon request of the Second fiduciary, a copy of the proposed 
exemption and/or a copy of the final exemption, if granted once such 
documents become available.
    (h) On the basis of the information described above in paragraph 
(g) of section III, the Second Fiduciary authorizes in writing the 
investment of assets of the Plan in each particular Fund, the fees to 
be paid by the Fund and the Plan to the Bank, and the credit to the 
Plan of fees received by the Bank from the Funds for investment 
advisory and other services, consistent with the responsibilities, 
obligations, and duties imposed on fiduciaries by part 4 of Title I of 
the Act.
    (i) The Second Fiduciary referred to in paragraph (g) of section 
III, or any successor thereto, is notified of any change in the rates 
of the fees referred to in paragraph (g) of section III and approves in 
writing the continued holding of any Fund shares acquired by the Plan 
prior to such change and still held by the Plan.
    (j) The Bank provides annually, written disclosures to the Second 
Fiduciary which are provided to all shareholders of the Fund(s), which 
establish the rate of return of the Fund(s) absent the credit paid to 
the Plans for fees paid by the Funds to the Bank.
    (k) The combined total of all fees received by the Bank for the 
provision of services to the Plans, and in connection with the 
provision of services to any of the Funds in which the Plans may 
invest, are not in excess [[Page 17811]] of ``reasonable compensation'' 
within the meaning of section 408(b)(2) of the Act.
    (l) All dealings between the Plans and the Funds are on a basis no 
less favorable to the Plans than dealings between the Funds and other 
shareholders of the Funds.
    (m) The Bank shall maintain, for a period of six years, the records 
necessary to enable the persons described in paragraph (n) below to 
determine whether the conditions of this exemption have been met, 
except that (1) a prohibited transaction will not be considered to have 
occurred, if due to circumstances beyond the control of the Bank, the 
records are lost or destroyed prior to the end of the six year period, 
and (2) no party in interest other than the Bank shall be subject to 
the civil penalty that may be assessed under section 502(l) of the Act, 
or the taxes imposed by section 4975(a) and (b) or the code, if the 
records are not available for examination as required by section (n) 
below;
    (n) (1) Except as provided in section (2) of this paragraph and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (l) above 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 a Plan who has the authority to acquire or 
dispose of the interests of the Plan or any duly authorized 
representative of such fiduciary;
    (C) Any contributing employer to any Plan that has an interest in 
any of the Funds or any duly authorized employee or representative of 
such employer; and
    (D) Any participant or beneficiary of any Plan that has an interest 
in the Funds or any duly authorized representative of such participant 
or beneficiary.
    (2) None of the persons described in paragraphs (k)(1)(B) through 
(D) shall be authorized to examine the trade secrets of the Bank's 
commercial or financial information which is privileged or 
confidential.
Section IV--Definitions
    For purposes of this proposed exemption:
    (a) Supplemental Sweep Service means the transfer of shares in the 
Funds between the Bank and the Plans by means of the Banks's internal 
accounting procedures at the end of the Supplemental Sweep Period, in 
connection with Plan orders to purchase shares in the Funds that the 
Bank is otherwise unable to settle prior to the Supplemental Sweep 
Period, and Plan orders to purchase or redeem shares in the Funds that 
are received by the Bank during the Supplemental Sweep Period. A Plan 
order to purchase or redeem shares in the Fund(s) pursuant to the 
Supplemental Sweep Service occurs solely as a result of investment 
decisions, deposits or withdrawals, directed by an independent Second 
Fiduciary.
    (b) Supplemental Sweep Period means the period of time on each 
business day after the Funds stop accepting orders for the purchase or 
redemption of shares in the Funds and before the Bank's close of 
business.
    (c) The term ``net asset value'' means the amount for purposes of 
pricing all purchase and sale of shares in the Funds calculated by 
dividing the value of all securities, determined by a method as set 
forth in the Fund's prospectus and statement of additional information, 
and other assets belonging to the Fund or portfolio of the Fund, less 
the liabilities charged to each such portfolio or fund, by the number 
of outstanding shares.
    (d) An ``affiliate'' of a person includes:
    (1) Any persons directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control, 
with the person;
    (2) Any officer, director, employee, relative of, or partner in any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (e) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (f) The term ``relative'' means a ``relative'' as that term is 
defined in section 3(15) of the Act (or a ``member of the family'' as 
that term is defined in section 4975(e)(6) of the Code), or a brother, 
a sister, or a spouse of a brother or sister.
    (g) A fiduciary will not be deemed to be an independent fiduciary 
with respect to the Bank and its affiliates if:
    (1) The fiduciary directly or indirectly controls, is controlled 
by, or is under common control with the Bank or any affiliate:
    (2) The fiduciary, or any officer, director, partner, employee or 
relative of such fiduciary, is an officer, director partner, or 
employee of the Bank or any affiliate (or is a relative of such 
persons); or
    (3) The fiduciary directly or indirectly receives any compensation 
or other consideration for his or her own personal account in 
connection with any transaction described in this proposed exemption.
    If an officer, director, partner, or employee of the Bank (or a 
relative of such persons), is a director of such Second Fiduciary, and 
if he or she abstains from participation in (i) the choice of the 
Plan's investment manager/adviser, (ii) the approval of any purchase or 
sale by the Plan of shares of the Funds, and (iii) the approval of any 
change of fees charged to or paid by the Plan, in connection with any 
of the transactions described in sections I and II above, then 
paragraph (g)(2) of section III above, shall not apply.
    The availability of this proposed exemption would be subject to the 
express condition that the material facts and representations contained 
in the application are true and complete, and that the application 
accurately describes all material facts which are the subject of this 
exemption.

Summary of Facts and Representations

    1. The Bank, which is comprised of Bank of America Illinois, and 
its wholly owned subsidiary, Continental Trust Company, provides a full 
range of fiduciary services to qualified employee benefit plans, 
welfare plans, and governmental retirement plans. Such services include 
trustee and custodial services, discretionary and directed investment 
of plan assets, and all related securities processing activities, 
domestic and foreign. As of December 31, 1994, the Bank provided 
investment management and custodial services with respect to total 
assets of approximately $179 billion.
    The Plans are comprised of retirement plans qualified under section 
401(a) of the Code, pension plans that meet the definition of pension 
plan set forth in section 3(2) of the Act and section 4975(e)(1) of the 
Code, with respect to which the Bank serves as a trustee, or investment 
fiduciary. In addition, the Bank states that it may offer the Funds, 
under the arrangement described herein, to welfare plans.
    2. The Bank provides the Plans with the opportunity to purchase 
shares in the Funds, to which the Bank provides investment advisory and 
other services, in connection with existing and expanded cash 
management sweep services. The Bank states that it currently invests 
certain assets of the Plans in a short term collective investment fund 
(the Collective Fund) maintained by the Bank in connection with the 
provision of sweep services. In this regard, the Bank represents that 
the addition of the Funds as short term [[Page 17812]] investment 
alternatives will result in greater investment choice, greater 
diversification and reduced risk for the Plans.\1\

    \1\The Bank represents that it invests the assets of plans 
covering its employees in the Funds on terms that are identical to 
the terms of the proposed exemption set forth herein. In this 
regard, the Bank states that this arrangement meets the terms and 
conditions of Prohibited Transaction Exemption (PTE) 77-3 (42 FR 
18734, April 8, 1977). The Department expresses no opinion as to 
whether PTE 77-3 provides relief for the purchase or sale of shares 
in the Funds by plans covering employees of the Bank pursuant to the 
arrangement described herein.
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    3. The Funds are comprised of the Prime Fund, the Government 
Securities Fund and the Treasury Fund, each of which is a money market 
mutual fund portfolio of the 231 Funds, an open-end management 
investment company organized as a Massachusetts business trust (the 
Trust). The Trust is organized under the Investment Company Act of 
1940, as amended. Fund shares offered by the Trust are registered under 
the Securities Act of 1933.
    The assets of the Prime Fund are invested in a diversified 
portfolio of U.S. Dollar denominated money market instruments, 
including: Obligations issued or guaranteed by the U.S. Government, its 
agencies or instrumentalities, bank obligations, including certificates 
of deposits, time deposits, bankers' acceptances and debt securities 
issued or supported by domestic banks or domestic branches of foreign 
banks; short-term corporate obligations including commercial loan 
participations, commercial paper, corporate bonds, privately placed 
commercial paper, and participation interests in trusts or special 
purpose vehicles backed by consumer or commercial credit receivables; 
and municipal securities including taxable and tax-exempt general 
obligations, revenue obligations, private activity and industrial 
development bonds.
    The assets of the Government Securities Fund are invested 
exclusively in obligations issued or guaranteed by the U.S. Government, 
its agencies or instrumentalities; receipts evidencing separately 
traded interest and principal components of U.S. Government obligations 
(including TIGRs and CATS); and repurchase agreements collateralized by 
government obligations.
    The Treasury Fund invests its assets exclusively in obligations 
issued by the U.S. Treasury, and repurchase agreements relating to such 
Treasury obligations.
    4. The Bank states that the Plans pay a short term cash management 
fee (Cash Management Fee) of .12 percent of average daily assets to the 
Bank in connection with Plan investments in the short term collective 
investment fund maintained by the Bank. In addition, each Plan pays a 
trustee fee to the Bank of between .01 percent and .15 percent of all 
Plan assets under the Bank's custody. The Bank negotiates its trustee 
fees with each Plan individually. The Bank represents that Plan assets 
are invested in the Funds as an alternative to the short term 
collective investment fund.\2\ In order to avoid charging double fees 
with respect to Plan assets invested in the Funds, the Bank credits all 
fees attributable to Plan assets invested therein, payable to the Bank 
by the Funds, to the Plans. In this regard, the Bank states that its 
crediting to the Plans of all fees to be paid by the Funds to the Bank 
results in no additional cost to any of the Plans with respect to Plan 
assets invested in shares in the Funds.

    \2\The Bank represents that it invests cash collateral provided 
to the Plans by borrowers of securities in connection with 
securities lending transactions (the Collateral), in the Funds. The 
Bank states that it receives a securities lending fee which is part 
of the Plans' net return from the investment of the Collateral. In 
this regard, The Bank represents that the securities lending service 
is separate from the cash management service. According to the Bank, 
no Cash Management Fee, or investment management fee, is paid by the 
Plans to the Bank with respect to the management of the Collateral.
    The Bank states that it is relying on the relief provided by 
PTEs 81-6 (46 FR 7527, January 23, 1981) and 82-63 (47 FR 14804, 
April 6, 1982) for the securities lending transactions and its 
receipt of fees in connection therewith. In addition, The Bank 
represents that it is relying on PTE 77-4 (42 FR 18732, April 8, 
1977) for relief for the investment of the Collateral in the Funds.
    The Bank is not requesting, and the Department is not providing, 
any relief with regard to the investment of the Collateral in the 
Funds. In this regard, the Department expresses no opinion as to the 
availability of the relief provided by PTE's 81-6 and 82-63 for the 
Plan's securities lending activities and securities lending fees 
paid by the Plan in connection therewith, nor the availability of 
PTE 77-4 for the investment of the Collateral in shares of the 
Funds.
    Nevertheless, the Department notes that the relief provided by 
PTE 77-4 is predicated on, among other things, avoiding the payment 
of double investment management, investment advisory or similar fees 
by a plan to a fiduciary of the plan, or any affiliate, which also 
serves as investment advisor to the mutual fund company. In this 
regard, it is the Department's view that whether a particular 
service constitutes the provision of investment advisory services or 
similar services depends on the particular facts and circumstances 
of each case. The Department emphasizes that, regardless of whether 
an administrative exemption may be applicable, it expects the plan 
fiduciary with investment management responsibility to consider the 
totality of fees to be paid by the plan directly, and/or indirectly, 
prior to entering into the arrangement in order to determine that 
the fees to be paid by the plan do not exceed reasonable 
compensation for the particular advisory service offered.
    The fees payable to the Bank by the Funds are accrued daily and 
paid to the Bank on the first day of the following month, in arrears. 
On the same day, the Bank credits to the Plans their proportionate 
shares of all fees to be paid by the Funds to the Bank with respect to 
Plan assets invested therein.
    The Bank states that it discloses annually in writing to the Plans: 
The total rate of return earned on their shares in the Fund(s) which 
includes the amounts received by the Plan from the Bank as a credit of 
the fees paid by the Fund(s) to the Bank in connection with Plan assets 
invested therein; and the portion of the rate of return which is 
attributable to the amounts credited by the Bank to the Plans. In 
addition, the Bank represents that it discloses to the Second Fiduciary 
annually in writing the rate of return earned on shares in the Fund(s) 
held by investors other than the Plans.
    5. The Bank states that it does not have investment discretion with 
respect to Plan assets involved in the purchase or sale of shares in 
the Funds for which relief is requested.\3\ Purchases and redemptions 
of shares in the Funds are solely the result of investment directions 
from a Second Fiduciary. The Bank represents that only liquid Plan 
assets awaiting distribution, or investment, are used to purchase 
shares in the Funds. The Bank states that it has no discretion with 
respect to the amount of liquid assets available for investment in the 
funds. The liquid assets of the Plans are always the proceeds of other 
assets which have been liquidated, or new assets transferred to the 
Bank, at the direction of a Second Fiduciary.

    \3\The Bank represents that it invests plan assets with respect 
to which it has investment discretion in the Funds. In this regard, 
the Bank represents that such transactions meet the terms and 
conditions of PTE 77-4. The Department expresses no opinion as to 
the availability of the relief provided by PTE 77-4 for such 
transactions.
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    The Bank states that it has no discretion with respect to how 
liquid assets of the Plans are invested. The Bank represents that the 
investment of the liquid assets of a Plan in the Funds is either 
specifically directed by a Second Fiduciary, or pursuant to standing 
orders by a Second Fiduciary to invest any daily cash balances in the 
Fund absent the Bank's receipt of any other investment directions.
    6. The Bank states that share purchases and redemption requests 
communicated by the Bank to the Funds are transmitted each business day 
prior to the time established by the Fund (currently expected to be 
2:00 P.M. Central Standard Time) (the Cutoff Time) for same-day 
processing and payment of transaction requests. If a transaction 
triggering a purchase or redemption of Fund shares is processed by the 
Bank prior to the Cutoff Time, the [[Page 17813]] Bank, in turn, 
transmits the purchase or redemption request to the Fund, which 
executes the request that same day.
    The Bank states that additions to customer accounts (including 
additions made to cover Fund purchase requests placed prior to the 
Cutoff Time) and withdrawals from customer accounts may occur 
subsequent to the Cutoff Time but prior to the close of business for 
the Bank (the Posting Time). The Bank represents that in order to 
provide additional opportunities for same-day processing of Plan 
purchase and redemption requests with respect to shares in the Funds, 
it offers a Supplemental Sweep Service. The Supplemental Sweep Service 
provides for the settlement of deposits and withdrawals late each 
business day subsequent to the Cutoff Time but prior to the Posting 
Time (the Supplemental Sweep Period).
    The Bank represents that the Supplemental Sweep Service assures the 
overnight investment of any Plan assets to which it applies in order to 
maximize the return to the Plans by providing an additional period 
during which the Plan's otherwise idle assets would be invested. In 
addition, the Bank represents that the Supplemental Sweep Service helps 
to meet the liquidity needs of the Plans by providing an opportunity 
for the Plans to, in effect, redeem shares in the Funds and withdraw 
assets during the Supplemental Sweep Period.
    The Bank states that the Supplemental Sweep Service is for selected 
institutional customers, primarily Plans, and is effective for purchase 
orders which cannot be settled prior to the Supplemental Sweep Period 
and for purchase and withdrawal orders received during the Supplemental 
Sweep Period each business day.
    7. The Bank represents that shares acquired by the Plans through 
the Supplemental Sweep Service are, in some cases, first acquired by 
the Bank and subsequently allocated to customers which have assets 
available to be swept as of the Posting Time on that same day. In 
addition, in order to facilitate prompt redemption of customer shares 
on the same day that the customer wishes to redeem them, the Bank 
processes the customer redemption requests received during the 
Supplemental Sweep Period internally by providing immediate credit to 
the customer for the Fund Shares.
    The Bank represents that the price paid, or received by, a Plan for 
shares in a Fund purchased, or redeemed, pursuant to the Supplemental 
Sweep Service is the net asset value per share for all other purchases 
and redemptions of shares in the Fund on that date.
    8. The Bank represents that its acquisition of shares from the 
Funds through the Supplemental Sweep Service is based on estimates of 
the prospective purchase and sale of shares in the Funds by the Plans 
during the Supplemental Sweep Period.
    Immediately prior to the Supplemental Sweep Period on each business 
day, the Bank estimates the approximate number of shares of each fund 
which its customers will require as of the Posting Time later that same 
day (in addition to the number of shares needed to cover net customer 
purchase and sale orders placed prior to the Cutoff Time). The Bank 
then purchases that number of shares of each Fund prior to the Cutoff 
time as trustee, nominee or in some other capacity for its customers. 
The books of the Fund's transfer agent carry only one account for all 
purchases and redemptions of Fund shares by the Bank, and reflect the 
Bank as the owner of all Fund shares purchased. The Bank's books, 
however, reflect its purchase of shares in the Funds as trustee, 
nominee, or other capacity for its customer accounts, or as principal, 
on a provisional basis.
    Later in the day, at the end of the Supplemental Sweep Period, the 
Bank determines the precise number of each Fund's shares needed by its 
customers. Based on its determination, the Bank adjusts the provisional 
purchase entries previously made on its books to reflect the net 
purchase or redemption of Fund shares by each customer account (or by 
the Bank in its own name) in the amount necessary to satisfy the net 
purchase needs of its customers at the end of the Supplemental Sweep 
Period. Appropriate final entries are made in the Bank's trust and 
corporate accounting systems to reflect the previous day's transaction 
activity and the respective ownership positions of the Bank and its 
customers as of the previous day's Cutoff Time. The books of the 
transfer agent of the respective Fund, however reflect no net change 
(i.e., change in number of shares outstanding) in the record ownership 
position of the Bank as a result of the Bank's adjustments; all 
adjustments of Fund shares among the Bank and its various customers 
would be internal bookkeeping adjustments made by the Bank.
    In the event that the Bank, on a given business day, underestimated 
the number of any Fund's shares which were required by its customers, 
the Bank allocates any shares the Bank had previously purchased to 
customer accounts which purchased Fund shares between the Posting Time 
and the Cutoff Time on a pro rata basis by reflecting on the Bank's 
books the redemption of Fund shares owned or purchased by the Bank and 
the simultaneous purchase by its customers, from the Fund, of the 
corresponding number of fund shares. The balance of each customer's 
funds that was intended to be invested in the Funds during the 
Supplemental Sweep Period which remain uninvested after this adjustment 
process are temporarily invested in the Bank's deposits paying a rate 
of interest equivalent to the net return on Fund shares for that day 
(subject to certain regulatory requirements) and subsequently are 
invested in Fund shares the next business day.\4\ The Bank represents 
that each customer including the Plans realizes an equivalent return on 
its invested funds for the day.

    \4\The Bank represents that it intends to rely on section 
408(b)(4) of the Act with regard to the investment of Plan assets in 
deposits of the Bank. The Department expresses no opinion as to 
whether the relief provided by section 408(b)(4) of the Act is 
available for the investment of Plan assets in deposits of the Bank 
pursuant to the arrangement described herein.
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    However, if the Bank overestimated the number of Fund shares 
required by its customers on a given business day, any excess Fund 
shares are placed in the Bank's investment portfolio or trading 
account.
    The Bank represents that, in any event, customers who redeem Fund 
Shares during the Supplemental Sweep Period pursuant to the 
Supplemental Sweep Service are provided with immediate provisional 
credit for the value of Fund shares. Such redemptions ultimately are 
reflected on the Bank's books as having occurred as of the Cutoff Time 
in the manner described above. Accordingly, such shares are allocated 
to other customer accounts or to the Bank's own investment or trading 
account, through the netting procedures. The Bank states that all such 
entries are made on its own internal accounting systems effective as of 
the previous day's Cutoff Time, and result in no net change in the 
transfer agent's records reflecting the Bank's record ownership of Fund 
shares. The Bank represents that in effect, the Bank is acting 
functionally as a sub-transfer agent to effect post-Cutoff redemptions 
by the Fund.
    9. In summary, the Bank represents that the proposed transactions 
satisfy the statutory criteria of section 408(a) of the Act and 
4975(c)(2) of the Code because: (a) The Funds provide the Plans with a 
more effective investment vehicle than the Collective Fund 
[[Page 17814]] currently maintained by the Banks without any increase 
in fees paid to the Bank; (b) a Second Fiduciary must authorize in 
writing the investment of Plan assets in the Funds and the payment of 
any fees to the Bank by the Plans and the Funds, after receiving full 
written disclosure, including a prospectus for the Funds and a 
statement describing the fee structure; (c) no sales fees or redemption 
fees are paid by the Plans in connection with the acquisition or sale 
of shares of the Funds; and (d) all dealings between the Plans and the 
Funds, the Bank, or any affiliated person, are on a basis no less 
favorable to the Plans than such dealings are with the other 
shareholders.

FOR FURTHER INFORMATION CONTACT: Eric Berger of the Department, 
telephone (202) 219-8971. (This is not a toll-free number.)
Mellon Bank, N.A. (Mellon) and Its Affiliates Located in Pittsburgh, 
Pennsylvania

[Application No. D-9724]

Proposed Exemption

Section I--Exemption for Cross-Trading Between Certain Accounts
    The restrictions of sections 406(a)(1)(A) and 406(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) of the Code, shall not apply 
to (1) the purchase and sale of securities (including the stock of 
Mellon Bank Corporation (MBC)) between Indexed Accounts, as defined in 
Section IV(a); and (2) the purchase and sale of securities, including 
the common stock of MBC, between Indexed Accounts and various large 
accounts (the Large Accounts) pursuant to portfolio restructuring 
programs of the Large Accounts; provided that the following conditions 
and the General Conditions of Section III are met:
    (a) The Indexed Account is based on an index which represents the 
investment performance of a specific segment of the public market for 
equity or debt securities in the United States and/or foreign 
countries. The organization creating and maintaining the index must be 
(1) engaged in the business of providing financial information, 
evaluation, advice or securities brokerage services to institutional 
clients, (2) a publisher of financial news or information, or (3) a 
public stock exchange or association of securities dealers. The index 
must be created and maintained by an organization independent of Mellon 
and its affiliates. The index must be a generally accepted standardized 
index of securities which is not specifically tailored for the use of 
Mellon or its affiliates.
    (b) The price for the securities is set at the current market value 
for the securities on the date of the transactions. For equity 
securities, the price shall be the closing price for the security on 
the day of trading; unless the security was added to or deleted from an 
index underlying an Indexed Account after the close of trading, in 
which case the price shall be the opening price for that security on 
the next business day after the announcement of the addition or 
deletion. For debt securities, the price shall be the fair market value 
determined as of the close of the day of trading pursuant to Rule 17a-
7(b) issued by the Securities and Exchange Commission under the 
Investment Company Act of 1940.
    (c) The transaction takes place within three business days of the 
``triggering event'' giving rise to the cross-trade opportunity. A 
triggering event is defined as:
    (1) A change in the composition or weighting of the index 
underlying an Indexed Account by the organization creating and 
maintaining the index;
    (2) A change in the overall level of investment in an Indexed 
Account as a result of investments and withdrawals made on the 
Account's regularly scheduled opening date; provided, however, that 
Mellon does not change the level of investment in the Indexed Account 
through investments or withdrawals of assets of any employee benefit 
plan maintained by Mellon or its affiliates (the Mellon Plans) for 
which Mellon has investment discretion; or
    (3) A declaration by Mellon (recorded on Mellon's records) that a 
``triggering event'' has occurred, which will be made upon an 
accumulation of cash in an Indexed Account attributable to interest or 
dividends on, and/or tender offers for, portfolio securities equal to 
not more than .5 percent of the Indexed Account's total value.
    (d) With respect to any Indexed Account that is model-driven, no 
cross-trades are engaged in by the Account for 10 business days 
subsequent to any change made by Mellon to the model underlying the 
Account.
    (e) In the event that the amount of a particular security which all 
of the Indexed Accounts or Large Accounts propose to sell on a given 
day is less than the amount of such security which all of the Indexed 
Accounts or Large Accounts propose to buy, or vice versa, the direct 
cross-trade opportunity must be allocated by Mellon among potential 
buyers or sellers of the security on a pro rata basis.
    (f) An Indexed Account does not participate in a cross-trade if 
more than 10 percent of the assets of the Indexed Account at the time 
of the proposed cross-trade are comprised of assets of Mellon Plans for 
which Mellon exercises investment discretion.
    (g) Prior to any proposed cross-trading by an Indexed Account or a 
Large Account, Mellon provides to each employee benefit plan invested 
in the Account information which describes the existence of the cross-
trading program, the ``triggering events'' which will create cross-
trade opportunities, the pricing mechanism that will be utilized for 
securities purchased or sold by the Accounts, and the allocation 
methods and other procedures which will be implemented by Mellon for 
its cross-trading practices. Any employee benefit plan which 
subsequently invests in the Indexed Account or Large Account shall be 
provided the same information prior to or immediately after the plan's 
initial investment in the Account.
    (h) With respect to cross-trade transactions involving a Large 
Account:
    (1) Total assets of the Large Account are in excess of $50 million.
    (2) Fiduciaries or other appropriate decisionmakers of the Large 
Account who are independent of Mellon are, prior to any cross-trade 
transactions, fully informed of the cross-trade technique and provide 
advance written approval of the cross-trade transactions.
    Such authorization shall be terminable at will by the Large Account 
upon receipt by Mellon of written notice of termination. A form 
expressly providing an election to terminate the authorization, with 
instructions on the use of the form, must be supplied to the 
authorizing Large Account fiduciary concurrent with the receipt of the 
written information describing the cross-trading program. The 
instructions for such form must include the following information:
    (i) The authorization is terminable at will by the Large Account, 
without penalty to the Large Account, upon receipt by Mellon of written 
notice from the authorizing Large Account fiduciary; and
    (ii) Failure to return the termination form will result in the 
continued authorization of Mellon to engage in cross-trade transactions 
on behalf of the Large Account.
    (3) Within 45 days of the completion of the Large Account's 
portfolio restructuring program, the Large Account's fiduciaries shall 
be fully appraised in writing of the transaction 
[[Page 17815]] results. However, if the program takes longer than three 
months to complete, interim reports of the transaction results will be 
made within 30 days of the end of each three month period.
    (4) The Large Account transactions occur only in situations where 
Mellon has been authorized to restructure all or a portion of the Large 
Account's portfolio into an Indexed Account (including a separate 
account based on an index or computer model) or to act as a ``trading 
adviser'' in carrying out a Large Account-initiated liquidation or 
restructuring of its portfolio.
    (i) Mellon receives no additional direct or indirect compensation 
as a result of any cross-trade transactions.
    (j) Mellon does not purchase or sell any debt securities issued by 
Mellon or an affiliate for the Indexed Accounts.
Section II--Exemption for the Acquisition, Holding and Disposition of 
MBC Stock
    The restrictions of sections 406(a)(1)(D), 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)(D) and (E) of the 
Code, shall not apply to the acquisition, holding or disposition of the 
common stock of MBC (the MBC Stock) by Indexed Accounts, if the 
following conditions and the General Conditions of Section III are met:
    (a) The acquisition or disposition of the MBC stock is for the sole 
purpose of maintaining strict quantitative conformity with the relevant 
index upon which the Indexed Account is based.
    (b) In the event that MBC Stock is added to an index on which an 
Indexed Account is based or is added to the portfolio of the Indexed 
Account which tracks an index that includes MBC Stock, all acquisitions 
necessary to bring the Indexed Account's holdings of MBC Stock to its 
capitalization weighting in the index, other than cross-trade 
transactions meeting the conditions of Section I, shall comply with 
Rule 10b-18 of the Securities and Exchange Commission (SEC) under the 
Securities Exchange Act of 1934, including the limitations regarding 
the price paid for such stock.
    (c) Subsequent to acquisitions necessary to bring the Indexed 
Account's holdings of MBC Stock to its capitalization weighting in the 
index pursuant to the restrictions of SEC Rule 10b-18, all aggregate 
daily purchases of MBC stock, other than cross-trade purchases meeting 
the conditions of Section I, shall not constitute more than the greater 
of: (1) 15 percent of the stock's average daily trading volume for the 
previous five days; or (2) 15 percent of the stock's trading volume on 
the date of the transaction.
    (d) If the necessary number of shares of MBC stock cannot be 
acquired within 10 business days from the date of the event which 
causes the particular Indexed Account to require MBC stock, Mellon 
shall appoint a fiduciary which is independent of Mellon and its 
affiliates to design acquisition procedures and monitor Mellon's 
compliance with such procedures.
    (e) All purchases and sales of MBC stock, other than cross-trades 
meeting the conditions of Section I, shall be executed on the national 
exchange on which MBC stock is primarily traded.
    (f) No transactions shall involve purchases from, or sales to, 
Mellon or any affiliate, officer, director or employee of Mellon or any 
party in interest with respect to a plan which has invested in an 
Indexed Account. This requirement does not preclude purchases and sales 
of MBC stock in cross-trade transactions meeting the conditions of 
Section I, provided that the Indexed Accounts are not maintained by 
Mellon primarily for the investment of assets of Mellon or any 
affiliate, including officers, directors or employees of Mellon other 
than in connection with a Mellon Plan.
    (g) No more than five (5) percent of the total amount of MBC stock 
issued and outstanding at any time shall be held in the aggregate by 
the Indexed Accounts which hold plan assets.
    (h) MBC stock shall constitute no more than two (2) percent of the 
value of any independent third-party index on which the investments of 
an Indexed Account are based.
    (i) A plan fiduciary independent of Mellon authorizes the 
investment of such plan's assets in an Indexed Account which purchases 
and/or holds MBC stock.
    (j) A fiduciary independent of Mellon and its affiliates shall 
direct the voting of the MBC stock held by an Indexed Account on any 
matter in which shareholders of MBC stock are required or permitted to 
vote.
Section III--General Conditions
    (a) Mellon maintains or causes to be maintained for a period of six 
years from the date of the transaction the records necessary to enable 
the persons described in paragraph (b) of this Section to determine 
whether the conditions of the exemption have been met, except that (1) 
a prohibited transaction will not be considered to have occurred if, 
due to circumstances beyond the control of Mellon, the records are lost 
or destroyed prior to the end of the six-year period, and (2) no party 
in interest other than Mellon shall be subject to the civil penalty 
that may be assessed under section 502(i) of the Act or to the taxes 
imposed by section 4975(a) and (b) of the Code if the records are not 
maintained or are not available for examination as required by 
paragraph (b) below.
    (b)(1) Except as provided in paragraph (b)(2) and notwithstanding 
any provisions of section 504(a)(2) and (b) of the Act, the records 
referred to in paragraph (a) of this Section are available at their 
customary location for examination during normal business hours by--
    (A) Any duly authorized employee or representative of the 
Department of Labor or the Internal Revenue Service,
    (B) Any fiduciary of a plan participating in an Indexed Account who 
has authority to acquire or dispose of the interests of the plan, or 
any duly authorized employee or representative of such fiduciary,
    (C) Any contributing employer with respect to any plan 
participating in an Indexed Account or any duly authorized employee or 
representative of such employer, and
    (D) Any participant or beneficiary of any plan participating in an 
Indexed Account, or any duly authorized employee or representative of 
such participant or beneficiary.
    (2) None of the persons described in paragraph (b)(1)(B) through 
(D) shall be authorized to examine trade secrets of Mellon, any of its 
affiliates, or commercial or financial information which is privileged 
or confidential.
Section IV--Definitions

    (a) Indexed Account--Any Index Fund or Model-Driven Fund.
    (b) Index Fund--Any investment fund, account or portfolio 
sponsored, maintained, trusteed, or managed by Mellon or an affiliate 
in which one or more investors invest that is designed to replicate the 
capitalization-weighted composition of an independently maintained 
securities index which satisfies the conditions of Section I(a) and 
Section II(h).
    (c) Model-Driven Fund--Any investment fund, account or portfolio 
sponsored, maintained, trusteed, or managed by Mellon or an affiliate, 
in which one or more investors invest which is based on computer models 
using prescribed objective criteria to transform an independently 
maintained securities index which satisfies the conditions of Section 
I(a) and Section II(h).
    (d) Opening date--The regularly-scheduled date on which investments 
in [[Page 17816]] or withdrawals from an Indexed Account may be made.
    (e) Large Account--An account of an investor that is either: (1) An 
employee benefit plan within the meaning of section 3(3) of the Act 
that has $50 million or more in total assets; or (2) an institutional 
investor, other than an investment company registered under the 
Investment Company Act of 1940 (i.e. a mutual fund), such as an 
insurance company separate account or general account, a governmental 
plan, a university endowment fund, a charitable foundation fund, or a 
trust or other fund which is exempt from taxation under section 501(a) 
of the Code, that has total assets in excess of $50 million. As noted 
in Section I(g)(4), a ``Large Account'' shall only be an account to 
which Mellon has been authorized to restructure all or a portion of the 
portfolio for such account into an Indexed Account or to which Mellon 
has been authorized to act as a ``trading adviser'' (as defined below) 
in connection with a specific liquidation or restructuring program for 
the account.
    (f) Trading adviser--A person whose role is limited to arranging a 
Large Account-initiated liquidation or restructuring of an equity or 
debt portfolio within a stated period of time so as to minimize 
transaction costs. The person must not be a fiduciary with investment 
discretion for any underlying asset allocation, restructuring or 
liquidation decisions for the account in connection with such 
transactions.
    (g) Affiliate--Any person, directly or indirectly through one or 
more intermediaries, controlling, controlled by, or is under common 
control with Mellon (except Mellon/McMahon Real Estate Advisors, Inc.).

Summary of Facts and Representations

    1. Mellon is a national bank and a subsidiary of MBC, which is the 
twenty-third largest bank holding company in the U.S. with assets of 
approximately $37 billion. Mellon is licensed to operate a trust 
department, which is regulated by the Office of the Comptroller of the 
Currency. Within the trust department, Mellon provides a variety of 
fiduciary services, including acting as trustee of employee benefit 
plans subject to the Act. Currently, Mellon acts as fiduciary of 
institutional accounts, including employee benefit plans, with assets 
totaling approximately $481 billion. Additionally, certain affiliates 
of Mellon provide trust or investment management services to various 
employee benefit plans. Mellon and its affiliates are, to the extent of 
the provision of such services, fiduciaries of these plans. For 
purposes of this proposed exemption, Mellon does not include Mellon/
McMahon Real Estate Advisors, Inc., as an ``affiliate'' because that 
entity is being sold.
    2. In its capacity as fiduciary of an employee benefit plan, Mellon 
may be either directed by an independent plan fiduciary or a plan 
participant that has the ability to direct investments for his/her plan 
account under the plan document. Alternatively, in those cases in which 
Mellon manages the investments, Mellon represents that it does not 
exercise any discretionary authority over whether an employee benefit 
plan invests in particular Funds, such as the Mellon S&P 500 Index 
Funds, except for a relatively small number of plans which subscribe to 
Mellon's Portfolio Management in Funds (PMF) services (as discussed 
below in Paragraph 13).
    Mellon manages the different collective investment funds in various 
ways to enable plan assets to be diversified to reduce risk and to be 
invested in the types of investments that a particular manager for a 
plan may determine is appropriate at a particular time. Index Funds and 
Model-Driven Funds (the Funds) are two examples of the Bank's 
collective investment funds which include plan investors.
Index and Model-Driven Funds

    3. An Index Fund may be an individual or collective investment 
fund, the objective of which is the replication of the performance of 
an independently-maintained stock or bond index representing the 
performance of a specific segment of the public market for equity or 
debt securities. The Index Funds are passively managed, in that the 
choice of stocks or bonds purchased and sold, and the volume purchased 
and sold, are made according to predetermined third party indices 
rather than according to active evaluation of the investments.
    4. A Model-Driven Fund may be an individual or collective 
investment fund, the performance of which is based on computer models 
using prescribed objective criteria to transform an independently-
maintained stock or bond index representing the performance of a 
specific segment of the public market for equity or debt securities. 
The portfolio of a Model-Driven Fund is determined by the details of 
the computer model, which examines structural aspects of the stock or 
bond market rather than the underlying values of such securities. An 
example of a Model-Driven Fund would include a fund which 
``transforms'' an index, making investments according to a computer 
model which uses such data as the following: (a) Earnings, dividends 
and price-earning ratios for common stocks included in the index; (b) 
current yields on corporate bonds and money market instruments; (c) the 
duration, maturity structure, yield and sector/quality weights for 
bonds included in the index; and (d) historical standard deviations and 
correlations between asset classes.
    Mellon represents that the process for the establishment and 
operation of all Indexed Accounts which are model-driven is very 
disciplined. Clear-cut rules are established for each model. Since the 
Model-Driven Funds operate pursuant to pre-specified computer programs, 
the rules and programs are changed only infrequently. However, to the 
extent that there is any change made by Mellon to a model underlying an 
Indexed Account, no cross-trades will be engaged in by the Account for 
10 business days subsequent to such change. Thereafter, an Indexed 
Account that is model-driven will engage in cross-trade transactions if 
the cross-trade opportunity results from any ``triggering event'' 
described herein (see Paragraph 5 below).
    Mellon currently offers more than 60 collective investment funds 
that are invested according to the criteria of various third-party 
indexes or are model-driven based on such indexes. For example, some 
Funds track the Russell 2000 Index,\5\ while other Funds track the 
Standard & Poors 500 Composite Stock Price Index (the S&P 500 
Index).\6\ Most of the Funds track stock indexes, although some Funds 
[[Page 17817]] track indexes of debt securities, such as the Lehman 
Brothers Bond Indices.\7\

    \5\The Russell 2000 Index was established and is maintained by 
the Frank Russell Company, which is not an affiliate of Mellon. The 
Russell 2000 Index is a subset of the larger Russell 3000 Index. The 
Russell 3000 Index consists of the largest 3,000 publicly traded 
stocks of U.S. domiciled corporations, as identified by the Frank 
Russell Company, and includes large, medium and small stocks. The 
Russell 3000 Index represents approximately 98% of the total market 
capitalization of all U.S. stocks that trade on the New York and 
American Stock Exchanges and in the NASDAQ over-the-counter market. 
The Russell 2000 Index consists of approximately 2,000 of the 
smallest stocks within the Russell 3000 Index, and is therefore a 
broadly diversified index of small capitalization stocks, 
representing less than 10 percent of the U.S. equity market in total 
capitalization.
    \6\The S&P 500 Index is composed of 500 stocks that are traded 
on the New York Stock Exchange, American Stock Exchange, and the 
NASDAQ National Market System. The S&P 500 is a market value-
weighted index (i.e. shares outstanding times stock price) in which 
each company's influence on the Index's performance is directly 
proportional to its market value.
    \7\The indexes of debt securities used by Mellon for the Funds, 
such as the Lehman Brothers Bond Indices, consist primarily of high-
quality fixed-income securities representing the U.S. government, 
corporate, and mortgage-backed securities sectors of the bond market 
in the U.S. Mellon currently has approximately 14 debt Index Funds.
---------------------------------------------------------------------------

    In addition to Funds that are collective investment funds, Mellon 
has investment responsibility for individual investment funds which are 
separate portfolios for various client accounts, including employee 
benefit plans, where the portfolio is invested in accordance with a 
third-party index. Such individual investment funds and collective 
investment funds are referred to herein as Indexed Accounts (see 
Paragraph 6 below). Mellon states that the ability of all Indexed 
Accounts to cross-trade securities with each other, or to invest in MBC 
Stock when the stock is included in an index, would improve Mellon's 
tracking of such indexes.
Cross Trades

    5. Mellon represents that cross-trades will be made within three 
business days of the ``triggering event'' giving rise to the cross-
trade opportunity. A ``triggering event'' is limited to: (i) A change 
in the composition or weighting of the index underlying an Indexed 
Account by the organization creating and maintaining the index; (ii) a 
change in the overall investments in an Indexed Account as a result of 
a net investment or withdrawal on the Account's regularly-scheduled 
opening date (provided that Mellon does not change the level of 
investment in the Indexed Account through investments or withdrawals of 
assets of any Mellon Plans for which Mellon has investment discretion); 
and (iii) a declaration by Mellon that a ``triggering event'' has 
occurred upon an accumulation in the Indexed Account of cash 
attributable to interest or dividends on, and/or tender offers for, 
portfolio securities equal to not more than .5 percent of the value of 
the Indexed Account.
    Mellon states that frequent purchases and sales of securities by 
the Indexed Accounts are required to accomplish portfolio balances that 
conform with the particular indexes. In addition, some securities 
transactions may be prompted by a client plan's request to add funds 
to, or withdraw funds from, an Indexed Account. Under any of these 
circumstances, Mellon's disposition of a particular security for one 
Indexed Account may involve a security which may be needed by another 
Account, thus presenting an opportunity to save substantial commissions 
for both the liquidating Account and the acquiring Account. This saving 
is enabled by a cross-trade transaction, which involves matching 
Mellon's sell orders for a particular day with its buy orders for the 
same day, and the execution of trades between the Accounts in off-
market transactions. Under current procedures, all securities 
transactions, including cross-trades between Indexed Accounts 
maintained by Mellon, are executed by a broker on behalf of a 
purchasing or selling Account at the direction of Mellon, dealing with 
a second broker acting on behalf of the other purchasing or selling 
party.
    6. Mellon proposes to take advantage of opportunities to direct the 
cross-trading of securities directly between various Indexed Accounts. 
Such Indexed Accounts will include: (i) Collective investment funds for 
employee benefit plans, (ii) separate employee benefit plan trust 
accounts that are not commingled in a collective fund, (iii) other 
large fiduciary accounts such as governmental plans, university 
endowment funds, charitable foundation funds and personal trusts, (iv) 
common or collective trust funds containing assets of governmental 
plans, university endowments, charitable foundations or personal 
trusts, and (v) mutual funds and other institutional accounts for which 
Mellon or an affiliate serves as an investment manager or investment 
advisor.
    Mellon represents that by participating in its cross-trading 
program, the Accounts will benefit by not incurring the transaction 
costs involved in dealing with a broker-dealer or ``market maker'' for 
the particular securities to effect the transactions. Such transaction 
costs include brokerage commissions and/or the market-maker's bid/offer 
spread on prices for such securities. Mellon maintains that 
transactions involving equity securities on the open market between 
unrelated parties require brokerage commissions equal to at least two 
cents per share for each sale or purchase transaction. However, the 
brokerage commissions that would be paid for each proposed cross trade 
of equity securities would be equal to approximately .05 cents per 
share, reflecting only the necessary record-keeping costs for the 
brokers. For debt securities, Mellon states that cross-trades would 
produce transactions cost savings by eliminating the bid/offer spread 
that normally would be paid to a broker-dealer to acquire or sell such 
securities. Mellon also represents that participation in the cross-
trading program may enable the Accounts to obtain earlier opportunities 
to acquire or sell certain securities. The applicant represents that 
all brokers used in cross trade transactions would be unrelated to and 
independent of Mellon and its affiliates.
    Mellon states that the price for the securities involved in any 
cross-trade will be set at the current market value for the securities 
on the date of the transactions.
    For equity securities, the price will be the closing price for the 
security on the day of trading; unless the security was added to or 
deleted from an index underlying an Indexed Account after the close of 
trading, in which case the price shall be the opening price for that 
security on the next business day after the announcement of the 
addition or deletion.
    Mellon will use independent pricing services to value all equity 
securities which are cross-traded by the Indexed Accounts. The primary 
service currently used by Mellon for pricing domestic equity securities 
is Interactive Data Corporation, a subsidiary of Dunn & Bradstreet 
Corporation. For pricing foreign equity securities, Mellon uses Morgan 
Stanley & Co. or Vestek Systems. The applicable independent pricing 
service provides the price in local currency rates and, if that 
currency is other than U.S. dollars, also provides the U.S. Dollar 
exchange rate. The equity securities are valued at the close of the 
day, and thus equity security cross-trades would in all cases be 
executed at the closing price received by Mellon from the relevant 
independent pricing service. In addition, the same independent pricing 
service will be employed to value any given equity security for both 
the buy and sell sides of all cross-trades involving that equity 
security. The identity of the applicable independent pricing service 
for each equity security will be recorded on Mellon's records and will 
be made available to any participant in the cross-trading program upon 
request. If the independent pricing service for any particular equity 
security is changed, a single new independent pricing service will be 
selected for future pricings of that equity security.
    For debt securities, the price will be the fair market value 
determined as of the close of the day of trading pursuant to SEC Rule 
17a-7(b) under the Investment Company Act of 1940. SEC Rule 17a-7(b) 
contains four possible means of determining ``current market'' value 
for either debt or equity securities depending on such factors as 
whether the security is a reported security and whether its principal 
market is an exchange. Mellon states that all debt securities that are 
not a reported [[Page 17818]] security or traded on an exchange would 
be valued based on an average of the highest current independent bid 
and lowest current independent offer, as of the close of business on 
the day of the cross-trade. Such prices would be determined in 
accordance with Rule 17a-7(b)(4) on the basis of reasonable inquiry 
from at least three sources that are broker-dealers or market-makers 
independent of Mellon, except in those circumstances where fewer than 
three independent sources exist to price a certain debt security (in 
which event closing price quotations will be obtained from all 
available sources).
    Mellon intends that the requested exemption for cross-trade 
transactions would apply, in addition to existing Indexed Accounts 
currently maintained, to all Indexed Accounts which it may create in 
the future which satisfy the conditions of the exemption, if granted.
    7. Mellon proposes to engage in cross-trade transactions between 
the Indexed Accounts and various Large Accounts that have total assets 
in excess of $50 million. Mellon states that a Large Account could be 
either: (i) An employee benefit plan within the meaning of section 3(3) 
of the Act; or (ii) a portfolio of an institutional investor, other 
than an investment company registered under the Investment Company Act 
of 1940 (i.e. a mutual fund), such as an insurance company separate 
account or general account, a governmental plan, a university endowment 
fund, a charitable foundation fund, or a trust or other fund which is 
exempt from taxation under section 501(a) of the Code.
    Cross-trades between an Indexed Account and a Large Account would 
occur only when the fiduciary or other appropriate decision-maker for 
the Large Account, which is independent of Mellon and its affiliates, 
is fully informed of the cross-trade technique, provides advance 
written approval of such transactions, and is fully apprised of the 
transaction results. Further, cross trades involving a Large Account 
will be limited to those situations where Mellon has been authorized to 
restructure all or a portion of the Large Account's assets into an 
Indexed Account, or where Mellon is otherwise acting as a trading 
adviser for a Large Account portfolio restructuring. Such 
restructurings generally occur in connection with a Large Account 
decision to invest in one of Mellon's Index or Model-Driven Funds, but 
they may also involve requests for Mellon to carry out a restructuring 
program independent of future investments in any of the Funds. In the 
latter instance, Mellon's only role is that of a trading adviser, 
carrying out a Large Account-initiated liquidation or restructuring. 
When a Large Account engages Mellon to invest in a collective 
investment fund that is index or model-driven or to arrange its own 
passively-managed individual portfolio, the Large Account's assets must 
be transformed into a portfolio that tracks a third-party index. In 
implementing the transformation, Mellon is limited to recreating the 
required portfolio and is not involved in any active investment 
management decisions. The impetus for the investment comes from the 
independent fiduciaries or other independent decision-makers for these 
Large Accounts. By performing cross-trades with existing Index Accounts 
where possible, Mellon would reduce the overall transactions costs by 
both parties to the cross-trade. Mellon would have a similar lack of 
discretion in the case of Large Accounts which request Mellon or an 
affiliate to restructure a specific portfolio by liquidation. Mellon 
would act as the trading advisor to the Large Account, arranging for 
the securities transactions within a stated time so as to minimize 
transaction costs. The opportunity to engage in cross-trades with Index 
Accounts occurs only when those Accounts are required to purchase the 
same securities which the Large Account is selling.
    8. Mellon represents that its cross-trading program will be 
effected pursuant to a proportional allocation system which will ensure 
that no Indexed Account or Large Account will be favored over any other 
such Account. In the event that the amount of a particular security 
which all of the Indexed Accounts or Large Accounts propose to sell on 
a given day is less than the amount of such security which all such 
Accounts propose to buy, or vice versa, the direct cross-trade 
opportunity would be allocated among all potential buyers or sellers of 
the security on a pro rata basis. Thus, all of the Indexed Accounts or 
Large Accounts participating in its cross-trade program will have 
opportunities to participate on a proportional basis in any cross-trade 
transactions during the operation of the program. This aspect of the 
proposed cross-trading program would be part of the information 
disclosed in writing to the fiduciaries or other decisionmakers of the 
Large Accounts and to all employee benefit plans which invest in the 
Index or Model-Driven Funds that are collective investment funds 
maintained by Mellon or to all such plans that invest in any other 
Indexed Account. In this regard, Mellon states that prior to any cross-
trading by an Indexed Account or a Large Account, each employee benefit 
plan invested in the Account will be provided information which 
describes the existence of the cross-trading program, the ``triggering 
events'' which will create cross-trade opportunities, the pricing 
mechanism that will be utilized for securities purchased or sold by the 
Accounts, and the allocation methods and other procedures which will be 
implemented by Mellon for its cross-trading practices. Any employee 
benefit plan which subsequently invests in the Indexed Account or Large 
Account will also be provided the same information prior to or 
immediately after the plan's initial investment in the Account.

Acquisition, Holding and Disposition of MBC Stock

    9. Mellon is also proposing that each Indexed Account be permitted 
to invest in the MBC Stock if such stock is included among the 
securities listed in the index utilized by the Indexed Account.\8\ For 
example, MBC Stock is one of the stocks included in the S&P 500. 
Because of the prohibitions of section 406 and 407 of the Act, the 
Mellon S&P 500 Index Funds and other Indexed Accounts holding plan 
assets which track the S&P 500 Index currently are not permitted to 
invest in MBC stock. Mellon states that the exclusion of MBC Stock from 
such Index Funds or other Indexed Accounts creates tracking error. To 
correct the tracking error, Mellon proposes to purchase on the open 
market, and hold, on behalf of all Indexed Accounts which hold plan 
assets, the number of shares of MBC Stock necessary to replicate 
correctly the weighting of MBC Stock in the portfolio relative to the 
S&P 500 Index.\9\

    \8\While certain of the debt indexes used by Mellon for the 
Indexed Accounts may include debt securities issued by Mellon or an 
affiliate (Mellon Debt), Mellon states that it does not acquire 
Mellon Debt for any of its Indexed Accounts. Therefore, Mellon is 
not requesting relief for any transactions involving Mellon Debt.
    \9\In this regard, Mellon is not requesting any relief from 
section 407(a) of the Act in connection with the acquisition and 
holding of MBC Stock by the Mellon Plans which invest in the Mellon 
S&P 500 Index Funds.
---------------------------------------------------------------------------

    Mellon represents that when MBC Stock is added to an index on which 
an Indexed Account is based or is added to the portfolio of an Indexed 
Account which tracks an index that includes MBC Stock, all acquisitions 
necessary to bring the Indexed Account's holdings of MBC Stock to its 
capitalization weighting in the index, other than through cross-trade 
transactions meeting the conditions of Section I, will comply with the 
SEC Rule 10b-18, including the limitations regarding the price paid for 
such stock. Such acquisitions of [[Page 17819]] MBC Stock would occur 
when an Indexed Account is first able to hold MBC Stock, such as 
purchases that will occur for all Indexed Accounts that track the S&P 
500 Index, or when MBC Stock is added to an Indexed Account's portfolio 
as a result of the stock being added to another underlying index used 
by the Account. SEC Rule 10b-18 provides a ``safe harbor'' for issuers 
of securities from section 9(a)(2) of the Securities Exchange Act of 
1934 and SEC Rule 10b-5 (which generally prohibits persons from 
manipulating the price of a security and engaging in fraud in 
connection with the purchase or sale of a security).
    Mellon states that the conditions imposed by SEC Rule 10b-18 for 
purchases of MBC Stock would be as follows: (a) All purchases would be 
made from or through only one broker on any single day; (b) no 
purchases would constitute the opening transaction in MBC Stock; (c) 
purchases would not occur within one-half hour before the scheduled 
close of trading on the NYSE; (d) the price would not be higher than 
the current independent bid quotation or the last independent sale 
price on the exchange, whichever is higher; and (e) if the purchases of 
MBC Stock are not block purchases as defined by SEC Rule 10b-18(b)(4), 
the total amount of purchases on any one day would not exceed the 
higher of one round lot or the number of round lots closest to 25 
percent of the trading volume for MBC Stock on that day.
    In addition, subsequent to the initial acquisitions necessary to 
bring an Indexed Account's holdings of MBC Stock to its capitalization 
weighting in the index pursuant to the restrictions of SEC Rule 10b-18, 
Mellon states that all aggregate daily purchases of MBC Stock will not 
constitute more than the greater of either: (i) 15 percent of the 
stock's average daily trading volume for the previous five days, or 
(ii) 15 percent of the stock's trading volume on the date of the 
transaction.
    All additional purchases or subsequent sales of MBC Stock by the 
Indexed Accounts that are made on a daily basis merely to track the S&P 
500 Index or other appropriate index would be accomplished either 
through cross-trade transactions, subject to the conditions of Section 
I of the proposed exemption, or on the open market, subject to the 
conditions of Section II the proposed exemption. However, daily 
purchases of MBC Stock, which occur after all acquisitions of such 
stock have been made in order to bring the Indexed Account's holdings 
to the capitalization weighting of MBC Stock in the index, would not be 
subject to the restrictions of Rule 10b-18, but would be subject to the 
other conditions of Section II of this proposed exemption. In this 
regard, Mellon believes that the restrictions of Rule 10b-18 are not 
necessary for the volume of transactions which will be required by the 
Indexed Accounts for daily tracking of an index in order to respond to 
changes in the composition or weighting of MBC Stock in the index.
    Mellon represents that no more than 5 percent of the total 
outstanding shares of MBC Stock will be held in the aggregate by the 
Indexed Accounts which hold plan assets. In addition, Mellon states 
that the MBC Stock will not constitute more than 2 percent of the value 
of any independent third-party index on which investments of an Indexed 
Account are based.
    10. Mellon will appoint an independent fiduciary for the purposes 
of developing trading procedures for the initial acquisition of MBC 
Stock on the open market by the Indexed Accounts that track the S&P 500 
Index. The independent fiduciary will allow the Indexed Accounts to 
acquire MBC Stock in the amounts necessary to track the S&P 500 Index 
while minimizing the impact of the acquisitions on the market for MBC 
Stock during the acquisition period. The independent fiduciary will 
also monitor Mellon's compliance with the trading procedures for 
accomplishing this goal.
    The independent fiduciary and its principals will be completely 
independent from Mellon and its affiliates. The independent fiduciary 
will also be experienced in developing and operating investment 
strategies for individual and collective investment funds that track 
third-party indexes, such as the S&P 500 Index. In addition, Mellon 
will require the independent fiduciary to represent that neither it nor 
its principals, employees, or affiliates holds or controls any shares 
of MBC Stock. During the exercise of the trading program by Mellon, no 
principal employee of the independent fiduciary nor the fiduciary 
itself will engage in any trading of any kind in MBC Stock. 
Furthermore, the independent fiduciary will not act as the broker for 
any purchases or sales of MBC Stock and will not receive any 
commissions as a result of the trading program.
    11. The independent fiduciary will have as its primary goal the 
development of a trading program that minimizes the market impact of 
purchases made pursuant to the initial acquisition program by the 
Indexed Accounts. Thus, price increases that would be detrimental to 
the interests of any employee benefit plan investors will be minimized. 
The trading activities will be conducted in a low-profile, mechanical, 
non-discretionary manner. In this regard, the independent fiduciary 
will be required to utilize a computerized trading program that will 
engage in a number of small purchases over the course of each day, 
randomly timed. Such a program will allow Mellon to acquire the 
necessary shares of MBC Stock for the Indexed Accounts that track the 
S&P 500 Index with minimum impact on the market and in a manner that 
will be in the best interests of any employee benefit plans that 
maintain or participate in such Accounts.
    12. The independent fiduciary will also be required to monitor 
Mellon's compliance with the trading program and procedures developed 
for the initial acquisition of MBC Stock. The independent fiduciary 
will receive duplicate confirmation slips of all trades as well as the 
``time and tape'' of all NYSE transactions in MBC Stock completed 
immediately before and after each transaction and a time/price/quantity 
record of all completed or attempted trades. The independent fiduciary 
will be required to review the activities weekly to determine 
compliance with the trading procedures and notify Mellon and the 
Department should any non-compliance be detected. Should the trading 
strategy need modifications due to unforeseen events or consequences, 
the independent fiduciary will be required to consult with Mellon and 
must approve in advance any alteration of the trading procedures. All 
purchases of MBC Stock by the Indexed Accounts pursuant to the 
independent fiduciary's trading program will comply with SEC Rule 10b-
18 and the conditions of the proposed exemption.
    13. If Mellon provides Portfolio Management in Funds (i.e. PMF) 
services to a plan, Mellon exercises some discretion in allocating and 
reallocating the plan's assets among various collective investment 
funds, including Mellon's S&P 500 Index Funds and other Index or Model-
Driven Funds. These allocations are based on a plan's investment 
objectives, risk profile and market conditions. However, Mellon makes 
the following representations with respect to the purchase, directly or 
indirectly, of MBC Stock by plans utilizing PMF (PMF Plans):

    (a) Mellon represents that any prohibited transactions (other 
than cross-trade transactions described herein) which might occur as 
a result of the discretionary allocation and reallocation of plan 
assets among collective investment funds will be 
[[Page 17820]] exempt from the prohibitions of section 406 of the 
Act by reason of section 408(b)(8).\10\

    \10\In the absence of regulations, the Department is not 
prepared at this time to indicate whether section 408(b)(8) applies 
to transactions described in section 406(b) of the Act. Accordingly, 
the Department expresses no opinion as to whether Mellon's 
discretionary allocation and reallocation services for any 
collective investment funds maintained by Mellon satisfy the 
requirements of section 408(b)(8) of the Act and is not proposing 
any exemptive relief beyond that offered by section 408(b)(8).
---------------------------------------------------------------------------

    (b) Before MBC Stock is purchased by an Index or Model-Driven 
Fund, the appropriate independent fiduciary for each PMF Plan which 
is currently invested or could be invested in such Funds will be 
furnished an explanation and a simple form to return on which 
approval or disapproval of investments in the Fund including MBC 
Stock could be indicated, together with a postage-paid return 
envelope. If the form is not received by Mellon within 30 days, 
Mellon may obtain a verbal response by telephone. If a verbal 
response is obtained by telephone, Mellon will confirm the 
fiduciary's decision in writing within five business days. In the 
event no response is obtained from a PMF Plan fiduciary, the assets 
of the plan will not be invested in any Index or Model-Driven Fund 
which invests in MBC Stock and any plan assets currently invested in 
such Funds at that time would be withdrawn.
    (c) Each new management agreement with a PMF Plan will contain 
language specifically approving or disapproving the investment in 
any Index or Model-Driven Fund which might hold MBC Stock. The 
fiduciary for each current PMF Plan will be informed that the 
existing management agreement could be modified in the same way. 
However, if the PMF Plan fiduciary does not specifically approve 
language in the agreement allowing the investment of plan assets in 
Funds which might hold MBC Stock, then no such investment will be 
made by Mellon.
    (d) Each PMF Plan will be informed on a quarterly basis of any 
investment in or withdrawal from any Index or Model-Driven Fund 
holding MBC Stock. The PMF Plan would be granted the election to 
override Mellon's discretionary decision to invest in or withdraw 
from such Funds. If the PMF Plan overrides Mellon's decision to 
invest in or withdraw from the Funds, then Mellon will carry out the 
plan's election as soon as possible after being notified of such 
election.

    14. In the event a third-party index utilized by Mellon for any 
Indexed Account (in addition to the S&P 500 Index) adds MBC Stock or if 
Mellon is otherwise unable to satisfy an Indexed Accounts' needs for 
MBC Stock through cross-trades with other Indexed Accounts, Mellon will 
acquire the necessary shares of MBC Stock on the open market. If Mellon 
is required to purchase MBC Stock in the open market on behalf of any 
Indexed Account in those circumstances, Mellon will determine whether 
the stock can be acquired within 10 business days. If the MBC Stock 
cannot be acquired within 10 business days, Mellon will appoint an 
independent fiduciary to establish the procedures to be used to acquire 
the MBC Stock and monitor Mellon's compliance with those procedures. 
The fiduciary will be unrelated to and independent of Mellon and will 
have expertise in the operation of index funds.
    15. Mellon will appoint an independent fiduciary which will direct 
the voting of the MBC Stock held by the Mellon S&P 500 Index Funds or 
other Indexed Accounts. The independent fiduciary will be a consulting 
firm specializing in corporate governance issues and proxy voting on 
behalf of public and private pension funds, banks, trust companies, 
money managers, insurance companies and other institutional investors 
with large equity portfolios. The fiduciary will be required to 
develop, and supply to Mellon, a corporate ownership manual which will 
act as a guideline to the voting of proxies by institutional 
fiduciaries, and their current voting guidelines. Mellon will provide 
the independent fiduciary with all necessary information regarding the 
Indexed Accounts that hold MBC Stock, the amount of MBC Stock held by 
the Indexed Accounts on the record date for shareholder meetings of 
MBC, and all proxy and consent materials with respect to MBC Stock. The 
independent fiduciary will maintain records with respect to its 
activities as an independent fiduciary on behalf of the Indexed 
Accounts, including the number of MBC Stock shares voted, the manner in 
which they were voted, and the rationale for the vote if the vote was 
not consistent with the independent fiduciary's corporate ownership 
manual and the current voting guidelines in effect at the time of the 
vote. The independent fiduciary will supply Mellon with the information 
after each shareholder meeting. The independent fiduciary will be 
required to acknowledge that it will be acting as a fiduciary with 
respect to the plans which invest in the Mellon S&P 500 Index Funds or 
other Indexed Accounts which own MBC Stock, when voting such stock.
    16. In summary, the applicant represents that the proposed cross-
trading transactions will satisfy the criteria of section 408(a) of the 
Act for the following reasons: (a) An Indexed Account will buy or sell 
securities only in response to various ``triggering events'' which are 
not within Mellon's control or discretion; (b) a Large Account will 
engage in cross trades only in situations where the investment 
decisions relating to a particular portfolio restructuring program for 
the Large Account are made by a fiduciary or other appropriate 
decision-maker which is independent of Mellon; (c) all cross trade 
transactions, including cross-trades involving MBC Stock, will occur 
within three business days of the ``triggering event'' necessitating 
the purchase or sale; (d) no cross-trades will be engaged in by an 
Indexed Account that is model-driven for 10 business days subsequent to 
any change made by Mellon to the model underlying the Account; (e) the 
price for all securities will be the current market value for the 
securities on the date of the transaction, which for equity securities 
will be set at the closing (or opening, where appropriate) price for 
the securities on the day of trading as determined by independent 
pricing services, and for debt securities will be determined based on 
quotations received from independent broker-dealers or market-makers as 
of the close of the day pursuant to the procedures described in SEC 
Rule 17a-7(b); (f) the Indexed Accounts and the Large Accounts will 
save significant amounts of money on brokerage commissions; and (g) 
Mellon will receive no additional compensation as a result of the 
proposed cross trades nor with respect to the acquisition, holding and 
disposition of MBC Stock.
    The applicant further represents that the proposed MBC Stock 
transactions will satisfy the criteria of section 408(a) of the Act for 
the following reasons: (a) The acquisition, holding and disposition of 
MBC Stock by an Indexed Account will occur solely to maintain strict 
quantitative conformity with the underlying index; (b) all purchases of 
MBC Stock by the Mellon S&P 500 Index Funds or other Indexed Accounts 
which occur as a result of such stock being added to an index on which 
an Indexed Account is based or being added to the portfolio of the 
Indexed Account which tracks an index that includes MBC Stock, will be 
made on the open market and will comply with the restrictions of SEC 
Rule 10b-18; (c) subsequent to the initial acquisitions necessary to 
bring an Indexed Account's holdings of MBC Stock to its capitalization 
weighting in the index pursuant to the restrictions of SEC Rule 10b-18, 
all aggregate daily purchases of MBC Stock will not constitute more 
than the greater of either (i) 15 percent of the stock's average daily 
trading volume for the previous five days, or (ii) 15 percent of the 
stock's trading volume on the date of the transaction; (d) no more than 
5 percent of the total outstanding shares of MBC Stock will be 
[[Page 17821]] held in the aggregate by the Indexed Accounts which hold 
plan assets; (e) the MBC Stock will not constitute more than 2 percent 
of the value of any independent third-party index on which investments 
of an Indexed Account are based; (f) the initial acquisitions of MBC 
Stock by the Mellon S&P 500 Index Funds will be monitored by a 
fiduciary independent of Mellon in an attempt to minimize market 
disturbances; and (g) a fiduciary independent of Mellon will direct the 
voting of any MBC Stock held by the Indexed Accounts.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department, 
telephone (202) 219-8194. (This is not a toll-free number.)

Analex Corporation (Analex), Analex Corporation Retirement Plan (the 
Plan) Located in Brook Park, OH

[Application No. D-9786]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of 
the Code shall not apply retroactively to the past loan (the Past Loan) 
made by the Plan to Analex (the Employer) in accordance with the 
following conditions:

    (1) The terms and conditions of the Past Loan were at least as 
favorable to the Plan as those obtainable by the Plan under similar 
circumstances in arm's-length transactions with unrelated parties;
    (2) The amount of the Plan's assets involved in the Past Loan 
did not exceed 15% of the Plan's total assets at any time during the 
transaction;
    (3) The Past Loan was at all times secured by collateral which 
was valued at not less than 200% of the value of the Past Loan;
    (4) Prior to the disbursement under the Loan agreement, an 
independent, qualified fiduciary determined on behalf of the Plan 
that the Past Loan was in the best interests of the Plan as an 
investment for the Plan's portfolio, and protective of the Plan and 
its participants and beneficiaries;
    (5) The independent, qualified fiduciary reviewed the terms and 
conditions of the exemption and the Past Loan, including the 
applicable interest rate, the sufficiency of the collateral, the 
financial condition of the Employer and compliance with the 15% of 
Plan assets maximum loan amount, prior to approving the disbursement 
under the Loan agreement;
    (6) The fiduciary is monitoring the Past Loan to ensure 
compliance with the terms and conditions of the exemption and the 
Loan agreement;
    (7) The Plan suffers no loss as a result of the Past Loan; and
    (8) The Past Loan will be fully repaid by May 31, 1995.
Temporary Nature of Exemption

    If granted, this proposed exemption would be effective for the 
period from July 12, 1994 through May 31, 1995, the date by which the 
Past Loan will be repaid.

Summary of Facts and Representations

    1. The Plan is a profit sharing plan with a salary reduction 
feature. There were 394 Plan participants and total assets of 
$9,222,172 as of December 31, 1993. The Plan provides for participant 
direction with respect to employee contributions to the Plan, and 
provides that an Administrative Committee will direct the investment of 
Employer contributions. Donald M. Zucker of Sorin, Zucker & Warfield, 
Inc., the independent, qualified fiduciary (the Independent Fiduciary), 
acted on behalf of the Plan with respect to the Past Loan.
    2. The Employer is a Nevada corporation maintaining its principle 
place of business in Brook Park, Ohio and operating in Florida, 
Colorado, Texas, California, Virginia and New Mexico. The Employer 
provides engineering services to commercial and government entities.
    3. On July 20, 1993, the Department published a notice of proposed 
exemption for prospective exemptive relief for a series of loans to the 
Employer by the Plan (58 FR 38792). The final exemption (PTE 93-65) was 
published in the Federal Register on September 22, 1993 at 58 FR 49325. 
The exemption was expressly conditioned on compliance with the 
limitations set forth therein. Among other conditions, PTE 93-65 was 
subject to the condition that the Independent Fiduciary would monitor 
the Loans to ensure compliance with the terms and conditions of the 
exemption and the Loans. Under the terms of PTE 93-65, the Independent 
Fiduciary was also responsible for reviewing, among other things, the 
financial condition of the Employer prior to approving each 
disbursement under the Loan agreement.
    Section 6.4 of the written Loan agreement between the Plan and the 
Employer provides that the Employer must maintain at all times certain 
net worth requirements. In addition, section 6.5 of the Loan agreement 
requires that the Employer maintain at all times a certain ratio of 
current assets to current liabilities. (The net worth test and the 
current ratio test are hereinafter referred to as the Covenants.)
    The Employer represents that only one loan was made to the Employer 
pursuant to PTE 93-65. It is represented that a $1.3 million loan was 
made on September 29, 1993 and that the outstanding balance on that 
loan as of December 13, 1994 was $991,525.41. On July 12, 1994, the 
Employer entered into a settlement agreement regarding certain claims 
with respect to activities of Xanalex Corporation, a predecessor 
corporation to the Employer, which resulted in the Employer's failure 
to satisfy the Covenants.
    4. The Employer now seeks a retroactive exemption for the Past Loan 
by the Plan to the Employer from the point in time when the Employer 
failed to satisfy the Covenants. In support of its request for 
retroactive relief, the Employer and the Independent Fiduciary maintain 
that the interests of the Plan and its participants and beneficiaries 
were fully protected throughout the duration of the Past Loan. In this 
regard, the Independent Fiduciary was engaged to act on behalf of the 
Plan with respect to the Past Loan. Any disbursement under the Loan 
agreement required prior approval by the Independent Fiduciary and 
could not be made unless the Independent Fiduciary found that such 
disbursement was appropriate and in the interests of the Plan and its 
participants and beneficiaries.
    As further protection for the Plan and its participants and 
beneficiaries, the Past Loan was collateralized by recorded perfected 
security interests in accounts receivable (the Accounts Receivable) of 
the Employer. Upon entering into the Past Loan, the Independent 
Fiduciary received from the Employer any and all documentation needed 
to evidence the Plan's security interest in the collateral securing the 
Past Loan and the Independent Fiduciary ensured that appropriate 
documentation was recorded to perfect the Plan's security interest. The 
Independent Fiduciary was also responsible for ensuring that, at no 
time while the Past Loan was outstanding, was the fair market value of 
the Accounts Receivable securing such Loan less than 200% of the 
outstanding face amount of such Past Loan.
    5. The Independent Fiduciary maintains that, once apprised of the 
pending breach of the Covenants, it took appropriate steps to protect 
the interests of the Plan and its participants and beneficiaries. In 
this regard, the Independent Fiduciary represents that, 
[[Page 17822]] pursuant to its request, the default interest rate was 
applied to calculate interest payments due after the Covenants were 
breached.\11\ In addition, the Independent Fiduciary retained 
independent counsel in June, 1994 to represent the interests of the 
Plan in connection with the anticipated breach of the Covenants.

    \11\The interest rate applicable upon breach of the Covenants is 
the greater of 9% or the Advance Rate plus 2%. The Advance Rate is 
defined as the greater of 7% or the prime rate as published in the 
Wall Street Journal.
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    6. The Independent Fiduciary represents that the Plan suffered no 
loss as a result of the loan program and no term or condition of the 
Past Loan was inconsistent with the terms and conditions described in 
PTE 93-65, except for the failure to satisfy the Covenants. In 
addition, the Independent Fiduciary represents that payments under the 
Past Loan have remained current. Finally, the Employer will pay off the 
remaining balance under the Past Loan no later than May 31, 1995.
    7. In summary, the applicant represents that the past transaction 
meets the statutory criteria for an exemption under section 408(a) of 
the Act because: (a) The terms and conditions of the Past Loan were at 
least as favorable to the Plan as those obtainable by the Plan under 
similar circumstances in arm's length transactions with unrelated third 
parties; (b) the Plan's independent fiduciary reviewed the terms and 
conditions of the proposed exemption and the Past Loan and determined 
that the Loan was in the best interest of the Plan's participants and 
beneficiaries; (c) the independent fiduciary reviewed and approved the 
Past Loan prior to making the disbursement; (d) the Past Loan was at 
all times secured by collateral which was valued at not less that 200% 
of the balance of the Loan; (e) the amount of the Past Loan did not 
exceed 15% of the fair market value of the Plan's assets; (f) the 
Employer will pay off the balance on the Past Loan by May 31, 1995; and 
(g) except for the failure to satisfy the Covenants, the Past Loan 
satisfied all other conditions of PTE 93-65.

FOR FURTHER INFORMATION CONTACT: Virginia J. Miller of the Department, 
telephone (202) 219-8971. (This is not a toll-free number.)
Washington Mortgage Corporation, Inc. (WMC) Located in Seattle, 
Washington

[Application No. D-9814]

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) as follows:
    I. 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) of the 
Code, shall not apply to: 1) the sale, exchange or transfer between WMC 
and its affiliates and certain employee benefit plans (the Plans) of 
certain construction loans or participation interests therein to non- 
party in interest entities; and 2) the sale, exchange or transfer 
between WMC and its affiliates and the Plans of any construction or 
permanent loan made by a Plan to a party in interest, and the resulting 
extension of credit therefrom, provided that:
    (a) The terms of the transactions are not less favorable to the 
Plans than the terms generally available in arm's-length transactions 
between unrelated parties;
    (b) Such sales, exchanges or transfers are expressly approved by a 
Plan fiduciary independent of WMC and its affiliates who has authority 
to manage or control those Plan assets being invested in mortgages or 
participation interests therein;
    (c) No investment management, advisory, underwriting fee or sales 
commission or similar compensation is paid to WMC or any of its 
affiliates with regard to such sale, exchange or transfer;
    (d) The decision to invest in a loan or a participation interest 
therein is not part of an arrangement under which a fiduciary of a 
Plan, acting with the knowledge of WMC or its affiliate, causes a 
transaction to be made with or for the benefit of a party in interest 
(as defined in section 3(14) of the Act) with respect to the Plan;
    (e) At the time of its acquisition of a loan or participation 
interest therein, no Plan will have more than 25% of its assets 
invested in construction and permanent mortgages;
    (f) WMC and its affiliates do not and will not act as fiduciaries 
with regard to any Plan investing in permanent and construction loans 
and interests therein as described in this proposed exemption; and
    (g) WMC shall maintain or will cause to be maintained, for the 
duration of any loan or participation interest therein sold to a Plan 
pursuant to this exemption, such records as are necessary to determine 
whether the conditions of this exemption have been met. The records 
mentioned above must be unconditionally available at their customary 
location for examination for purposes reasonably related to protecting 
rights under the Plans, during normal business hours, by: Any trustee, 
investment manager, employer of Plan participants, employee 
organization whose members are covered by a Plan, participant or 
beneficiary of a Plan.
    II. 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) of the 
Code shall not apply to any transactions to which such restrictions 
would otherwise apply merely because WMC or any of its affiliates is 
deemed to be a party in interest with respect to a Plan by virtue of 
providing services to the Plan in connection with the subject loan 
transactions (or because it has a relationship to such service provider 
described in section 3(14)(F), (G), (H), or (I) of the Act), solely 
because of the ownership of a loan or participation interest therein as 
described in this exemption by such Plan.
    III. Definitions. For purposes of this exemption,
    (a) An ``affiliate'' of WMC includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with WMC,
    (2) Any officer, director, employee, relative of, or partner in any 
such person, and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (b) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    Temporary Nature of Exemption: If the proposed exemption is 
granted, it will be effective only for those transactions entered into 
within eight years of the date on which the Final Grant of this 
proposed exemption is published in the Federal Register.

Summary of Facts and Representations

    1. WMC has originated income property (commercial and multifamily) 
loans since 1949 for major institutional buyers, including pension 
funds, life insurance companies and thrift institutions. In 1988, WMC 
was acquired by Puget Sound Bancorp as a wholly owned subsidiary.
    2. Through the decade of the 1980's and until 1993, WMC and its 
affiliates engaged in permanent and construction loan origination and 
servicing activities involving Plans as lenders. These activities were 
conducted pursuant to the descriptions contained in proposed 
[[Page 17823]] and final prohibited transaction exemptions granted by 
the Department. These exemptions were PTE 85-1 (50 FR 1004, January 8, 
1985), and PTE 89-78 (54 FR 35951, August 30, 1989). These exemptions 
were obtained to allow WMC and its bank and non-bank affiliates to 
engage in loan origination, sale and service activity and other 
(unrelated) banking and non-banking commercial activity with Plans, 
which would otherwise be prohibited under section 406(a) of the Act and 
section 4975 of the Code.\12\ PTE 85-1 does not provide for any 
expiration date, and PTE 89-78 expired on August 30, 1994.

    \12\PTE 85-1 exempted transactions involving permanent loans 
made to non-party in interest entities. PTE 89-78 provided relief 
for transactions involving construction loans made to non-party in 
interest entities, and construction and permanent loans made to 
parties in interest.
---------------------------------------------------------------------------

    3. In 1993, through a series of acquisitions involving national 
financial institutions, WMC became a subsidiary of KeyCorp, one of the 
largest bank holding companies in the U.S. KeyCorp owns 21 banks and 
trust companies and several related financial services companies, with 
more than 1,300 branch and affiliate offices in 23 states. As of 
December 31, 1994, KeyCorp had assets of $64.6 billion.
    4. At present, WMC maintains offices in Seattle and Tacoma, 
Washington, but does not do any loan originations. Following the 
expiration of PTE 89-78 on August 30, 1994, WMC did not originate any 
new loans to Plans. Prior loans are now serviced elsewhere except for a 
loan made by the Carpenters Retirement Trust of Western Washington, 
which is being serviced by KeyCorp Mortgage, Inc., an affiliate of WMC. 
The applicant represents that seven other loans were placed with Plans 
by WMC or its affiliates pursuant to PTE 89-78. The applicant 
represents that no Plan has suffered any loss or default with respect 
to any of these loans. To allow WMC and its affiliates to resume loan 
origination and servicing activities with Plans, as a subsidiary of 
KeyCorp or on its own following possible acquisition by outsiders, 
KeyCorp has applied for renewal of PTE 89-78 to augment the relief 
afforded under PTE 85-1.
    5. The proposed activities of WMC and its affiliates may be 
summarized as follows:
    (1) WMC works on behalf of the borrower/developer in putting 
together construction and permanent financing for commercial and 
multifamily residential real estate projects. The role of WMC is to 
provide or arrange for all of the construction financing and to arrange 
a negotiated permanent commitment, so that construction financing is 
paid off when the building is completed. In some cases, WMC or its 
affiliates also participate in funding the construction or permanent 
loans. WMC works on behalf of the borrower/developer to secure 
permanent financing alternatively by: (a) Committing directly to the 
borrower for permanent financing, with the intention of later securing 
a permanent lender; (b) committing to the borrower based on a 
commitment for permanent financing provided by another lending 
institution to WMC; or (c) securing for the borrower, directly, a 
commitment from another lending institution for the permanent 
financing, with such a commitment going directly from the lender to the 
borrower, but assigned to WMC during the construction phase as 
additional collateral and security for the construction loan.
    (2) Loan servicing might be done by WMC or an affiliate. Fees paid 
to the servicer would run 1/8% to 1% per annum on the outstanding 
principal balance of permanent loans. Servicing fees for construction 
loans are determined as a percentage of the outstanding balance of the 
loans. The applicant represents that all fees and charges are set in 
advance in accordance with prevailing market conditions.\13\

    \13\The Department is not proposing any relief herein for the 
receipt of fees beyond that which is provided by the statutory 
exemption contained in section 408(b)(2) of the Act.
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    (3) In conducting these permanent and construction loan 
origination, sales and servicing activities, WMC and its affiliates 
would not act as a fiduciary to any lending Plan. Rather, all decisions 
to invest in a loan would be made by Plan fiduciaries independent of 
WMC and its affiliates. In the case of loans made to parties in 
interest, these fiduciaries will also be independent of the party 
receiving the loan proceeds.\14\ If construction is to be performed by 
a contributing employer or other party in interest, WMC would require a 
written statement executed by the independent fiduciary that its 
decision to invest was not influenced or controlled by the borrower or 
any other party in interest.\15\

    \14\The applicant represents that no loan acquired by a Plan 
which is made to a party in interest will be a loan to a fiduciary 
or an affiliate thereof. In this regard, the Department notes that 
any such loan would involve violations of section 406(b) of the Act 
for which no relief is being proposed herein.
    The applicant represents that, with respect to the subject 
loans, construction and other services related to the project may, 
or may not, be performed by a party in interest. The Department 
notes, as it did in the proposal to both PTE 85-1 and 89-78, that 
where the construction on the property which secures the loan is by 
a contributing employer to the Plan and a principal of such employer 
exercises fiduciary authority in approving the Plan's investment in 
the loan, a separate prohibited transaction under section 406(b) of 
the Act may occur, which transaction would not be covered by this 
proposed exemption. See also condition (d) of Part I of this 
proposed exemption which has the effect of precluding relief under 
section 408(a) of the Act for certain transactions undertaken for 
the benefit of parties in interest.
    \15\The Department is not proposing exemptive relief herein for 
any violation of section 406(b) of the Act resulting from the 
provision of such construction services. See footnote above.
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    (4) WMC's responsibilities in the administration or servicing of 
loans sold to Plans will vary depending on the loan type. For example, 
construction loans will involve: (a) Releasing construction loan draws 
and hold backs as various conditions of the construction loan are 
satisfied; (b) adjustment of hard-line cost items in the construction 
loan budget to reflect actual costs; (c) making certain the borrower 
corrects any non-monetary defaults; (d) implementing borrower-requested 
change orders approved by WMC staff or independent inspectors; (e) 
clearing mechanics' liens placed on the property during the course of 
construction; and (f) insuring general compliance by all parties with a 
construction loan agreement and related agreements.
    (5) Any loan in default will involve decisions by the independent 
Plan fiduciary, or by WMC in accordance with pre- approved guidelines 
set forth in the loan documents. The loan documents, including default 
guidelines, would be approved by the independent fiduciary. A Plan, 
acting through its independent fiduciary, would also retain the ability 
(with WMC's consent) to transfer, assign or otherwise dispose of its 
interest in any construction loan, without payment of any fee or 
penalty.
    (6) As to purchase of either permanent or construction loans, or 
interests therein, Plans would not pay WMC an investment management, 
investment advisory, sales commission or similar fee. In addition, 
Plans would not pay more for any loan interest than would be paid by an 
unrelated party in an arm's-length transaction.
    6. WMC represents that as a result of being a party in interest 
with respect to Plans by virtue of servicing by it or affiliates of the 
subject loans or participations purchased thereby, WMC and its 
affiliates would be prohibited from engaging in other commercial 
transactions with these Plans, such as the making of loans, which 
transactions have nothing to do with the mortgages or participation 
interests held by the Plans. The Department has considered WMC's 
request for relief for such transactions and has decided that 
[[Page 17824]] because the servicing relationship is established as a 
necessary result of the purchase of a mortgage or participation 
interest by a Plan, subsequent transactions between the parties 
otherwise prohibited by section 406(a) are not likely to present an 
inherent abuse potential. Accordingly, the Department has determined 
that it would be appropriate to propose the relief from section 406(a) 
contained in Part II of the proposed exemption.
    7. In summary, the applicant represents that the proposed 
transactions satisfy the criteria contained in section 408(a) of the 
Act because: (a) The Plans will pay no more for the mortgages and 
participation interests therein than would be paid by an unrelated 
party in an arm's-length transaction; (b) all Plan decisions to invest 
in mortgages and participation interests will be made by a Plan 
fiduciary independent of WMC and its affiliates; (c) at the time of its 
acquisition of a loan or a participation therein, no Plan will have 
more than 25% of its assets invested in construction or permanent 
mortgages; (d) the terms of the construction or permanent loans will 
not be less favorable to the Plans than the terms generally available 
in arm's-length transactions with unrelated parties; and (e) no 
investment management, advisory, underwriting fee or sales commission 
will be paid to WMC or any of its affiliates with regard to such sale, 
exchange or transfer.
    Notice to Interested Persons: The applicant represents that notice 
will be provided to all trustees of Plans currently holding loan 
investments originated and/or serviced by WMC and/or its affiliates. In 
addition, WMC agrees to provide a copy of the notice of proposed 
exemption and any subsequent grant of such exemption to all employee 
benefit plans with whom WMC may contract in the future to provide 
services as described herein. Such notification will be provided prior 
to WMC entering into a contract to provide such services.

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

General Information

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

    Signed at Washington, DC, this 31st day of March, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 95-8395 Filed 4-6-95; 8:45 am]
BILLING CODE 4510-29-P