19086 Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices

Determinations Issued Under The DavisBacon and Related Acts’’. This

publication is available at each of the 50

Regional Government Depository

Libraries and many of the 1,400

Government Depository Libraries across

the country.

The general wage determinations

issued under the Davis-Bacon and

related Acts are available electronically

by subscription to the FedWorld

Bulletin Board System of the National

Technical Information Service (NTIS) of

the U.S. Department of Commerce at

(703) 487–4630.

Hard-copy subscriptions may be

purchased from: Superintendent of

Documents, U.S. Government Printing

Office, Washington, D.C. 20402, (202)

512–1800.

When ordering hard-copy

subscription(s), be sure to specify the

State(s) of interest, since subscriptions

may be ordered for any or all of the six

separate volumes, arranged by State.

Subscriptions include an annual edition

(issued in January or February) which

includes all current general wage

determinations for the States covered by

each volume. Throughout the remainder

of the year, regular updates will be

distributed to subscribers.

Signed at Washington, D.C. this 7th Day of

April 1995.

Alan L. Moss,

Director, Division of Wage Determinations.

[FR Doc. 95–9003 Filed 4–13–95; 8:45 am]

BILLING CODE 4510–27–M

Pension and Welfare Benefits

Administration

[Application No. D–09660, et al.

Proposed Exemptions; Paloma

Securities L.P. & Boston Global

Advisors, Inc. et al.

AGENCY: Pension and Welfare Benefits

Administration, Labor.

ACTION: Notice of proposed exemptions.

SUMMARY: This document contains

notices of pendency before the

Department of Labor (the Department) of

proposed exemptions from certain of the

prohibited transaction restrictions of the

Employee Retirement Income Security

Act of 1974 (the Act) and/or the Internal

Revenue Code of 1986 (the Code).

Written Comments and Hearing

Requests

All interested persons are invited to

submit written comments or request for

a hearing on the pending exemptions,

unless otherwise stated in the Notice of

Proposed Exemption, within 45 days

from the date of publication of this

Federal Register Notice. Comments and

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

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, D.C. 20210. Attention:

Application No. stated in each Notice of

Proposed Exemption. The applications

for exemption and the comments

received will be available for public

inspection in the Public Documents

Room of Pension and Welfare Benefits

Administration, U.S. Department of

Labor, Room N–5507, 200 Constitution

Avenue NW., Washington, D.C. 20210.

Notice to Interested Persons

Notice of the proposed exemptions

will be provided to all interested

persons in the manner agreed upon by

the applicant and the Department

within 15 days of the date of publication

in the Federal Register. Such notice

shall include a copy of the notice of

proposed exemption as published in the

Federal Register and shall inform

interested persons of their right to

comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The

proposed exemptions were requested in

applications filed pursuant to section

408(a) of the Act and/or section

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

accordance with procedures set forth in

29 CFR part 2570, subpart B (55 FR

32836, 32847, August 10, 1990).

Effective December 31, 1978, section

102 of Reorganization Plan No. 4 of

1978 (43 FR 47713, October 17, 1978)

transferred the authority of the Secretary

of the Treasury to issue exemptions of

the type requested to the Secretary of

Labor. Therefore, these notices of

proposed exemption are issued solely

by the Department.

The applications contain

representations with regard to the

proposed exemptions which are

summarized below. Interested persons

are referred to the applications on file

with the Department for a complete

statement of the facts and

representations.

Paloma Securities L.P. (Paloma) &

Boston Global Advisors, Inc. (BGA),

Located in Boston, Massachusetts

[Application No. D–09660]

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)(1) (A)

through (D) and 406(b)(1) and (2) of the

Act and the sanctions resulting from the

application of section 4975 of the Code,

by reason of section 4975(c)(1) (A)

through (E) of the Code, shall not apply

to the lending of securities to Paloma by

employee benefit plans (including

commingled investment funds holding

plan assets) for which BGA, an affiliate

of Paloma, acts as securities lending

agent (or sub-agent) and to the receipt of

compensation by BGA in connection

with these transactions, provided that

the following conditions are met:

1. Neither BGA, Paloma nor an

affiliate of either has discretionary

authority or control with respect to the

investment of the plan assets involved

in the transaction, or renders investment

advice (within the meaning of 29 CFR

2510.3–21(c) with respect to those

assets;

2. Any arrangement for BGA to lend

plan securities to Paloma in either an

agency or sub-agency capacity will be

approved in advance by a plan fiduciary

who is independent of Paloma and

BGA;

3. A plan may terminate the agency or

sub-agency arrangement at any time

without penalty on five business days

notice;

4. The plan will receive from Paloma

(either by physical delivery or by book

entry in a securities depository, wire

transfer or similar means) by the close

of business on or before the day the

loaned securities are delivered to

Paloma, collateral consisting of cash,

securities issued or guaranteed by the

U.S. Government or its agencies or

instrumentalities, or irrevocable bank

letters of credit issued by a person other

than Paloma or an affiliate thereof, or

any combination thereof, or other

collateral permitted under PTE 81–6,

having, as of the close of business on the

preceding business day, a market value
Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices 19087

1The company’s name was legally changed to

Paloma Securities L.P. from AKT Associates L.P.

effective June 1, 1993.

2PTE 81–6 (46 FR 7527, January 23, 1981, as

amended at 52 FR 18754, May 19, 1987) provides

an exemption under certain conditions from section

406(a)(1) (A) through (D) of the Act and the

corresponding provisions of section 4975(c) of the

Code for the lending of securities that are assets of

an employee benefit plan to certain broker-dealers

or banks which are parties in interest.

PTE 82–63 (47 FR 14804, April 6, 1982) provides

an exemption under specified conditions from

section 406(b)(1) of the Act and section

4975(c)(1)(E) of the Code for the payment of

compensation to a plan fiduciary for services

rendered in connection with loans of plan assets

that are securities.

3For the sake of simplicity, future references to

BGA’s performance of services as securities lending

agent should be deemed to include its parallel

performance as securities lending sub-agent and

references to client-plans should be deemed to refer

to plans for which BGA is acting as sub-agent with

respect to securities lending activities, unless

otherwise indicated specifically or by the context of

the reference.

4Condition 1 of PTE 81–6 requires, in part, that

neither the borrower nor an affiliate of the borrower

has discretionary authority or control with respect

to the investment of the plan assets involved in the

transaction.

PTE 82–63 permits the payment of compensation

to a plan fiduciary for the provision of securities

lending services only if the loan of securities itself

is not prohibited under section 406(a) of the Act.

initially equal to at least 102 percent of

the market value of the loaned securities

and, if the market value of the collateral

falls below 100 percent, Paloma will

deliver addition collateral on the

following day such that the market

value of the collateral will again equal

102 percent;

5. All procedures regarding the

securities lending activities will at a

minimum conform to the applicable

provisions of Prohibited Transaction

Exemptions (PTEs) 81–6 and 82–63;

6. Paloma will indemnify the plan

against any losses due to its use of the

borrowed securities;

7. The plan will receive the

equivalent of all distributions made to

holders of the borrowed securities

during the term of the loan, including,

but not limited to, cash dividends,

interest payments, shares of stock as a

result of stock splits and rights to

purchase additional securities, or other

distributions;

8. Prior to any plan’s approval of the

lending of its securities to Paloma, a

copy of this exemption, if granted, (and

the notice of pendency) will be

provided to the plan; and

9. Only plans with total assets having

an aggregate market value of at least $50

million will be permitted to lend

securities to Paloma.

Summary of Facts and Representations

1. Paloma is a Delaware limited

partnership which is a broker-dealer

registered with the Securities and

Exchange Commission (SEC) and a

member of the National Association of

Securities Dealers.1 As of December 31,

1993, Paloma had in excess of $400

million in combined equity. Paloma is

approximately 99 percent owned by

Paloma Partners Holdings L.P. (PPH),

which in turn is more than 90 percent

owned by Paloma Partners, L.P. (PPLP),

a Delaware limited partnership.

2. Acting as principal, Paloma

actively engages in the borrowing and

lending of securities, with daily

outstanding loan volume averaging

several billion dollars. Paloma utilizes

borrowed securities to satisfy the

trading requirements of the Paloma

group, or to re-lend to other brokerdealers and others who need a

particular security for various periods of

time. All borrowings by Paloma conform

to the Federal Reserve Board’s

Regulation T. Pursuant to Regulation T,

permitted borrowing purposes include

making delivery of securities in the case

of short sales, failures of a broker to

receive securities it is required to

deliver or other similar situations.

3. BGA, a wholly owned subsidiary of

PPH, was organized as a Delaware

corporation in August 1993 with its

principal office in Boston. BGA is a

broker-dealer and investment advisor, in

each case registered as such with the

SEC.

4. BGA was formed to provide

securities lending services, as agent, to

institutional clients. BGA, pursuant to

authorization from its client, negotiates

the terms of loans with borrowers

pursuant to a client-approved form of

loan agreement and otherwise acts as a

liaison between the lender (and its

custodian) and the borrower to facilitate

the lending transaction. BGA has

responsibility for monitoring receipt of

all required collateral and marking such

collateral to market daily so that

adequate levels of collateral are

maintained. BGA also monitors and

evaluates on a continuing basis the

performance and creditworthiness of the

borrowers. BGA does not act as a

custodian with respect to the client’s

portfolio of securities being loaned.

Custody of such securities is lodged

with the client’s bank or other

custodian. However, BGA may be

authorized from time to time by a client

to receive and hold pledged collateral

and invest cash collateral pursuant to

guidelines established by the client. All

of BGA’s procedures for lending

securities are designed to comply with

the applicable conditions of Prohibited

Transaction Exemption (PTE) 81–6 and

PTE 82–63.2

5. BGA may be retained occasionally

by primary securities lending agents to

provide securities lending services in a

sub-agent capacity with respect to

portfolio securities of clients of such

primary lending agents. As securities

lending sub-agent, BGA’s role under the

lending transactions (i.e., negotiating

the terms of loans with borrowers

pursuant to a client-approved form of

loan agreement and monitoring receipt

of, and marking to market, required

collateral) parallels those under lending

transactions for which BGA acts as

primary lending agent on behalf of its

clients.

6. When a loan is collateralized with

cash, the cash will be invested for the

benefit and at the risk of the client, and

resulting earnings (net of a rebate to the

borrower) comprise the compensation to

the plan in respect of such loan. Where

collateral consists of obligations other

than cash, the borrower pays a fee (loan

premium) directly to the lending plan.

7. Paloma and BGA request an

exemption for the lending of securities

owned by certain pension plans for

which BGA serves as securities lending

agent or sub-agent (referred to

hereinafter as client-plans) 3 to Paloma,

following disclosure of its affiliation

with Paloma, and for the receipt of

compensation by BGA in connection

with such transactions. BGA will have

no discretionary authority or control

over these client-plans’ decisions

concerning the acquisition or

disposition of securities available for

loan. Its discretion will be limited to

activities such as negotiating the terms

of the securities loans with Paloma and

(to the extent granted by the plan

fiduciary) investing any cash collateral

received in respect of the loans. Because

BGA, under the proposed arrangement,

would have discretion to lend plan

securities to Paloma, and because

Paloma is an affiliate of BGA, the

lending of securities to Paloma by plans

for which BGA serves as securities

lending agent (or sub-agent) may be

outside the scope of relief provided by

PTE 81–6 and PTE 82–63.4

Several safeguards, described more

fully below, are incorporated in the

application in order to ensure the

protection of the plan assets involved in

the transactions. In addition, the

applicants represent that the proposed

lending program incorporates the

relevant conditions contained in PTE

81–6 and PTE 82–63.

8. Where BGA is the direct securities

lending agent, a fiduciary of a clientplan who is independent of BGA and

Paloma will sign a securities lending
19088 Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices

5The foregoing provisions describe arrangements

comparable to conditions c and d of PTE 82–63

which require that the payment of compensation to

a ‘‘lending fiduciary’’ is made under a written

instrument and is subject to prior written

authorization of an independent ‘‘authorizing

fiduciary.’’ In the event that a commingled

investment fund will participate in the securities

lending program, the special rule applicable to such

funds concerning the authorization of the

compensation arrangement set forth in paragraph f

of PTE 82–63 will be satisfied.

agency agreement with BGA (the

Agency Agreement) before the plan

participates in a securities lending

program. The Agency Agreement will,

among other things, describe the

operation of the lending program,

prescribe the form of securities loan

agreement (Loan Agreement) to be

entered into on behalf of the plan with

borrowers, specify the securities which

are available to be lent, required margin

and daily marking-to-market, and

provide a list of permissible borrowers,

including Paloma. The Agency

Agreement will also set forth the basis

and rate for BGA’s compensation from

the plan for the performance of

securities lending services.

9. The Agency Agreement will

contain provisions to the effect that if

Paloma is designated by the client-plan

as an approved borrower (i) the clientplan will acknowledge that Paloma is an

affiliate of BGA and (ii) BGA will

represent to the client-plan that each

and every loan made to Paloma on

behalf of the client-plan will be at

market rates and in no event less

favorable to the client-plan than a loan

of such securities, made at the same

time and under the same circumstances,

to an unaffiliated borrower.

10. When BGA is lending securities

under a sub-agency arrangement, the

primary lending agent will enter into a

securities lending agency agreement (the

primary lending agreement) with a

fiduciary of a client-plan who is

independent of such primary lending

agent, BGA or Paloma, before the plan

participates in the securities lending

program. The primary lending agent

will be unaffiliated with BGA or

Paloma. The primary lending agreement

will contain substantive provisions akin

to those in the Agency Agreement

relating to the description of the

operation of the lending program, use of

an approved form of Loan Agreement,

specification of securities which are

available to be lent, required margin and

daily marking-to-market, and provision

of a list of approved borrowers (which

will include Paloma). The primary

lending agreement will specifically

authorize the primary lending agent to

appoint sub-agents, to facilitate its

performance of securities lending

agency functions. Where BGA is to act

as such a sub-agent the primary lending

agreement will expressly disclose that

BGA is to so act. The primary lending

agreement will also set forth the basis

and rate for the primary lending agent’s

compensation from the client-plan for

the performance of securities lending

services and will authorize the primary

lending agent to pay a portion of its fee,

as the primary lending agent determines

in its sole discretion, to any sub-agent(s)

it retains pursuant to the authority

granted under such agreement.

Pursuant to its authority to appoint

sub-agents, the primary lending agent

will enter into a securities lending subagency agreement (the Sub-Agency

Agreement) with BGA under which the

primary lending agent will retain and

authorize BGA, as sub-agent, to lend

securities of the primary lending agent’s

client-plans, subject to the same terms

and conditions as are specified in the

primary lending agreement. Thus, for

example, the form of Loan Agreement

will be the same as that approved by the

plan fiduciary in the primary lending

agreement and the list of permissible

borrowers under the Sub-Agency

Agreement (which will include Paloma)

will be limited to those approved

borrowers listed as such under the

primary lending agreement.

BGA represents that the Sub-Agency

Agreement will contain provisions

which are in substance comparable to

those described in paragraphs 8 and 9

above, which would appear in an

Agency Agreement in situations where

BGA is the primary lending agent. In

this regard, BGA will make the same

representation in the Sub-Agency

Agreement as described in paragraph 9

above with respect to arm’s-length

dealing with Paloma. The Sub-Agency

Agreement will also set forth the basis

and rate for BGA’s compensation to be

paid by the primary lending agent.

11. In all cases, BGA will maintain

transactional and market records

sufficient to assure compliance with its

representation that all loans to Paloma

are effectively at arm’s-length terms.

Such records will be provided to the

appropriate plan fiduciary in the

manner and format agreed to with the

lending fiduciary, without charge to the

plan. A client-plan may terminate the

Agency Agreement (or the primary

lending agreement) at any time, without

penalty to the plan, on five business

days notice.

12. BGA will enter into the same form

of Loan Agreement with Paloma on

behalf of client-plans as it does with all

other borrowers. An independent

fiduciary of the client-plan will approve

the terms of the Loan Agreement. The

Loan Agreement will specify, among

other things, the right of the client-plan

to terminate a loan at any time and the

plan’s rights in the event of any default

by Paloma. The Loan Agreement will

explain the basis for compensation to

the client-plan for lending securities to

Paloma under each category of

collateral. The Loan Agreement also will

contain a requirement that Paloma must

pay all transfer fees and transfer taxes

related to the security loans.

13. Before entering into the Loan

Agreement, Paloma will furnish its most

recent available audited and unaudited

financial statements to BGA, and in turn

such statements will be provided to a

client-plan before the plan is asked to

approve the terms of the Loan

Agreement. The Loan Agreement will

contain a requirement that Paloma must

give prompt notice at the time of a loan

of any material adverse changes in its

financial condition since the date of the

most recently furnished financial

statements. If any such changes have

taken place, BGA will not make any

further loans to Paloma unless an

independent fiduciary of the plan has

approved the loan in view of the

changed financial condition.

14. As noted above, the agreement by

BGA to provide securities lending

services, as agent, to a client-plan will

be embodied in the Agency Agreement.

The client-plan and BGA will agree to

the arrangement under which BGA will

be compensated for its services as

lending agent prior to the

commencement of any lending activity.

Such agreed upon fee arrangement will

be set forth in the Agency Agreement

and thereby will be subject to the prior

written approval of a fiduciary of the

client-plan who is independent of

Paloma and BGA. Similarly, with

respect to arrangements under which

BGA is acting as securities lending subagent, the agreed upon fee arrangement

of the primary lending agent will be set

forth in the primary lending agreement,

and such agreement will specifically

authorize the primary lending agent to

pay a portion of such fee, as the primary

lending agent determines in its sole

discretion, to any sub-agent, including

BGA, which is to provide securities

lending services to the plan.5 The clientplan will be provided with any

reasonably available information which

is necessary for the plan fiduciary to

make a determination whether to enter

into or continue to participate under the

Agency Agreement (or the primary

lending agreement) and any other

reasonably available information which
Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices 19089

the plan fiduciary may reasonably

request.

15. Each time a plan loans securities

to Paloma pursuant to the Loan

Agreement, BGA will reflect in its

records the material terms of the loan,

including the securities to be loaned,

the required level of collateral, and the

fee or rebate payable. The terms of each

loan will be at least as favorable to the

client-plan as those of a comparable

arm’s-length transaction between

unrelated parties.

16. The client-plan will be entitled to

the equivalent of all interest, dividends

and distributions on the loaned

securities during the loan period. The

Loan Agreement will provide that the

client-plan may terminate any loan at

any time. Upon a termination, Paloma

will be contractually obligated to return

the loaned securities to the client-plan

within five business days of notification

(or such longer period of time permitted

pursuant to a class exemption). If

Paloma fails to return the securities

within the designated time, the clientplan will have the right under the Loan

Agreement to purchase securities

identical to the borrowed securities and

apply the collateral to payment of the

purchase price and any other expenses

of the plan associated with the sale and/

or purchase.

17. BGA will establish each day a

written schedule of lending fees and

rebate rates in order to assure

uniformity of treatment among

borrowing brokers and to limit the

discretion BGA would have in

negotiating securities loans to Paloma.

Loans to Paloma on any day will be

made at rates on the daily schedule or

at rates which may be more

advantageous to the client-plans. In no

case will loans be made to Paloma at

rates below those on the schedule. The

rebate rates (in respect of cashcollateralized loans made by clientplans) which are established will take

into account the potential demand for

loaned securities, the applicable benchmark cost of funds indices (typically,

Federal Funds, overnight repo rate or

the like) and anticipated investment

return on overnight investments which

are permitted by the relevant plan

fiduciary. The lending fees (in respect of

loans made by client-plans

collateralized by other than cash) which

are established will be set daily to

reflect conditions as influenced by

potential market demand.

BGA will negotiate rebate rates for

cash collateral payable to each

borrower, including Paloma, on behalf

of a plan. Where, for example, cash

collateral derived from an overnight

loan is intended to be invested in a

generic repurchase agreement, any

rebate fee determined with respect to an

overnight repurchase agreement

benchmark will be set below the

applicable ‘‘ask’’ quotation therefor.

Where cash collateral is derived from a

loan with an expected maturity date

(term loan) and is intended to be

invested in instruments with similar

maturities, the maximum rebate fee will

be less than the investment return

(assuming no investment default). With

respect to any loan to Paloma, BGA will

never negotiate a rebate rate with

respect to such loan which would

produce a zero or negative return to the

client-plan (assuming no default on the

investments related to the cash

collateral from such loan where BGA

has investment discretion over the cash

collateral). BGA represents that the

written rebate rate established daily for

cash collateral under loans negotiated

with Paloma will not exceed the rebate

rate which would be paid to a similarly

situated unrelated borrower with

respect to a comparable securities

lending transaction. BGA will disclose

the method for determining the

maximum daily rebate rate as described

above to an independent fiduciary of a

client-plan for approval before lending

any securities to Paloma on behalf of the

plan.

18. For collateral other than cash, the

applicable loan fee in respect of any

outstanding loan is reviewed daily for

competitiveness and adjusted, where

necessary, to reflect market terms and

conditions. With respect to any calendar

quarter, on average 50 percent or more

of the outstanding dollar value of

securities loans negotiated on behalf of

client-plans will be to unrelated

borrowers, and so the competitiveness

of the loan fee will be tested in the

marketplace. Accordingly, loans to

Paloma should result in competitive rate

income to the lending client-plan. At all

times, BGA will effect loans in a

prudent and diversified manner. BGA

will lend securities to requesting

borrowers on a ‘‘first come, first served’’

basis, as a means of assuring uniformity

of treatment among borrowers.

19. Under the Loan Agreement,

Paloma will agree to indemnify and

hold harmless the applicable client-plan

(including the sponsor and fiduciaries

of such client-plan) from any and all

damages, losses, liabilities, costs and

expenses (including attorney’s fees)

which the client-plan may incur or

suffer arising in any way from the use

by Paloma of the loaned securities or

any failure of Paloma to deliver loaned

securities in accordance with the

provisions of the Loan Agreement or to

otherwise comply with the terms of the

Loan Agreement.

20. The client-plan will receive

collateral from Paloma by physical

delivery, book entry in a securities

depository, wire transfer or similar

means by the close of business on or

before the day the loaned securities are

delivered to Paloma. The collateral will

consist of cash, securities issued or

guaranteed by the U.S. Government or

its agencies or irrevocable bank letters of

credit (issued by a person other than

Paloma or its affiliates) or such other

types of collateral which might be

permitted by the Department under a

class exemption. The market value of

the collateral on the close of business on

the day preceding the day of the loan

will be at least 102 percent of the market

value of the loaned securities. The Loan

Agreement will give the client-plan a

continuing security interest in and a

lien on the collateral. BGA will monitor

the level of the collateral daily. If the

market value of the collateral falls below

100 percent (or such greater percentage

as agreed to by the parties) of that of the

loaned securities, BGA will require

Paloma to deliver by the close of

business the next day sufficient

additional collateral to bring the level

back to at least 102 percent.

21. Each client-plan participating in

the lending program will be sent a

monthly transaction report. The

monthly report will provide a list of all

security loans outstanding and closed

for a specified period. The report will

identify for each open loan position, the

securities involved, the value of the

security for collateralization purposes,

the current value of the collateral, the

rebate or loan premium (as the case my

be) at which the security is loaned, and

the number of days the security has

been on loan.

22. Only client-plans with total assets

having an aggregate market value of at

least $50 million will be permitted to

lend securities to Paloma. This

restriction is intended to assure that any

lending to Paloma will be monitored by

an independent fiduciary of above

average experience and sophistication

in matters of this kind.

23. In summary, the applicants

represent that the described transactions

will satisfy the statutory criteria of

section 408(a) of the Act because: (1)

The form of the Loan Agreement

pursuant to which any loan is effected

will be approved by a fiduciary of the

client-plan who is independent of

Paloma and BGA before a client-plan

lends any securities to Paloma; (2) the

lending arrangements will permit the

client-plans to lend to Paloma, a major

borrower of securities, and will enable
19090 Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices

6The applicant states that the GE Capital

Mortgage Services, Inc. REMIC Multi-Class PassThrough Certificates, Series 1993–17, Class 17–A20

(the GE CMO) was a publicly-offered security. In

this regard, the applicant notes that if a plan

acquires a publicly-offered security that grants the

plan an equity interest in an entity, the plan’s assets

include the security but not any of the underlying

assets of the entity (see 29 CFR 2510.3–101(a)(2)

and (b)). Therefore, the applicant represents that the

assets of the Plans that own the GE CMO do not

include any of the mortgages underlying the GE

CMO.

The applicant states further that if a plan acquires

a ‘‘guaranteed governmental mortgage pool

certificate’’, the plan’s assets include the certificate

but not any of the mortgages underlying such

certificate (see 29 CFR 2510.3–101(i). A ‘‘guaranteed

governmental mortgage pool certificate’’ is a

certificate (i) that is backed by, or evidences an

interest in, specified mortgages or participation

interests, and (ii) whose interest and principal

the plans to diversify the list of eligible

borrowers and earn additional income

from the loaned securities on a secured

basis, while continuing to receive any

dividends, interest payments and other

distributions due on those securities; (3)

the client-plan will receive sufficient

information concerning Paloma’s

financial condition before the plan

lends any securities to Paloma; (4) the

collateral on each loan to Paloma

initially will be at least 102 percent of

the market value of the loaned

securities, which is in excess of the 100

percent collateral required under PTE

81–6, and will be monitored daily by

BGA; (5) the client-plans will receive a

monthly report, so that an independent

fiduciary of the client-plans also may

monitor loan activity, fees, the level of

the collateral and loan return/yield; (6)

BGA will have no discretionary

authority or control over the plan’s

acquisition or disposition of securities

available for loan; (7) the terms of each

loan will be at least as favorable to the

plans as those of a comparable arm’slength transaction between unrelated

parties; and (8) all the procedures under

the proposed transactions will, at a

minimum, conform to the applicable

provisions of PTE 81–6 and PTE 82–63.

FOR FURTHER INFORMATION CONTACT:

Louis Campagna of the Department,

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

a toll-free number.)

Bank of Ashland, Inc. (the Bank),

Located in Ashland, Kentucky

[Application Nos. D–09841 thru D–09843]

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 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) through (E) of

the Code, shall not apply as of

December 23, 1994, to the cash sale of

certain collateralized mortgage

obligations (CMOs) by six employee

benefit plans for which the Bank acts as

trustee (the Plans) to Ashland

Bankshares, Inc. (the Holding

Company), a party in interest with

respect to the Plans, provided that the

following conditions were met:

(a) Each sale was a one-time

transaction for cash;

(b) Each Plan received an amount

which was equal to the greater of (i) the

outstanding principal balance for the

CMOs owned by the Plan, plus accrued

but unpaid interest, at the time of sale,

(ii) the amortized cost for the CMOs

owned by the Plan, plus accrued but

unpaid interest, as determined by the

Bank based on the outstanding principal

balance for each CMO on the date of

sale, or (iii) the fair market value of the

CMOs owned by the Plan as determined

by an independent, qualified appraiser

at the time of the sale;

(c) The Plans did not pay any

commissions or other expenses with

respect to the sale;

(d) The Bank, as trustee of the Plans,

determined that the sale of the CMOs is

in the best interests of each Plan and

their participants and beneficiaries at

the time of the transaction;

(e) The Bank took all appropriate

actions necessary to safeguard the

interests of the Plans and their

participants and beneficiaries in

connection with the transactions; and

(f) Each Plan received a reasonable

rate of interest on the CMOs during the

period of time it held the CMOs.

EFFECTIVE DATE: The proposed

exemption, if granted, will be effective

as of December 23, 1994.

Summary of Facts and Representations

1. The Bank is a wholly-owned

subsidiary of the Holding Company. The

Bank serves as trustee of the Plans and

has investment discretion for the assets

of the Plans.

The Plans are the John O. Jones, M.D.,

PSC Money Purchase Pension Plan (the

Jones Plan); the Michael G. Ehrie, Jr.,

M.D., PSC Money Purchase Pension

Plan (the Ehrie Pension Plan); the

Michael G. Ehrie, Jr., M.D., PSC Profit

Sharing Plan (the Ehrie P/S Plan); the

Simons Real Estate Money Purchase

Pension Plan (the Simons Plan); the

Buchanan Sound & Communications,

Inc. Profit Sharing Plan (the Buchanan

Plan); and the Bank of Ashland, Inc.

Profit Sharing Plan (the Bank Plan). All

of the Plans are defined contribution

plans.

As of December 23, 1994, the Jones

Plan had five participants and total

assets of $713,790; the Ehrie Pension

Plan had seven participants and total

assets of $322,168; the Ehrie P/S Plan

had seven participants and total assets

of $363,513; the Simons Plan had two

participants and total assets of $134,791;

the Buchanan Plan had 32 participants

and total assets of $97,841; and the Bank

Plan had 58 participants and total assets

of $2,427,300. Thus, as of December 23,

1994, the Plans had 111 participants

and total assets of approximately

$4,059,403.

2. The Bank represents that at various

times during the third and fourth

quarters of 1993 and the first quarter of

1994, assets of the Plans were invested

in the CMOs. The CMOs were

purchased by the Bank from brokerdealers that were independent of the

Plans as well as the Bank and its

affiliates (including the Holding

Company). The CMOs are investment

products through which investors

purchase an interest in a pool of

residential mortgage loans. Investors

receive payments of principal and

interest. The interest payments change

monthly in relation to a specific index,

such as the London Interbank Offered

Rate (LIBOR) or the U.S. Federal

Reserve’s Cost of Funds Index (COFI),

contained in a formula used to calculate

the interest rate for such securities. The

repayment of principal is usually

guaranteed by various U.S. government

agencies, such as the Federal Home

Loan Mortgage Corporation (FHLMC or

‘‘Freddie Mac’’) or the Federal National

Mortgage Association (FNMA or

‘‘Fannie Mae’’).

3. The CMOs are described as follows:

(i) FHLMC Multiclass Mortgage

Participation Certificates, Series 1625,

Class SB, SE, and SJ; (ii) FHLMC

Multiclass Mortgage Participation

Certificates, Series 1655, Class S; (iii)

FNMA Guaranteed REMIC PassThrough Certificates, Fannie Mae

REMIC Trust 1993–102, Class S; (iv)

FNMA Guaranteed REMIC PassThrough Certificates, Fannie Mae

REMIC Trust 1993–110, Class SH; (v)

FNMA Guaranteed REMIC PassThrough Certificates, Fannie Mae

REMIC Trust 1993–139, Class SL and

SC; (vi) FNMA Guaranteed REMIC PassThrough Certificates, Fannie Mae

REMIC Trust 1993–202, Class VJ; and

(vii) GE Capital Mortgage Services, Inc.,

REMIC Multi-Class Pass-Through

Certificates, Series 1993–17, Class 17–

A20.6
Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices 19091

payments are guaranteed by the Government

National Mortgage Association (GNMA), FHLMC, or

FNMA. Thus, the applicant represents that since all

of the CMOs, except for the GE CMO, have interest

and principal payments payable under the CMO

guaranteed by either FHLMC or FNMA, the assets

of the Plans do not include any of the mortgages

underlying such CMOs.

7The Department is expressing no opinion in this

proposed exemption regarding whether the

acquisition and holding of the CMOs by the Plans

violated any of the fiduciary responsibility

provisions of Part 4 of Title I of the Act.

The Department notes that section 404(a) of the

Act requires, among other things, that a fiduciary

of a plan act prudently, solely in the interest of the

plan’s participants and beneficiaries, and for the

exclusive purpose of providing benefits to

participants and beneficiaries when making

investment decisions on behalf of a plan. Section

404(a) of the Act also states that a plan fiduciary

should diversify the investments of a plan so as to

minimize the risk of large losses, unless under the

circumstances it is clearly prudent not to do so.

In this regard, the Department is not providing

any opinion as to whether a particular category of

investments or investment strategy would be

considered prudent or in the best interests of a plan

as required by section 404 of the Act. The

determination of the prudence of a particular

investment or investment course of action must be

made by a plan fiduciary after appropriate

consideration to those facts and circumstances that,

given the scope of such fiduciary’s investment

duties, the fiduciary knows or should know are

relevant to the particular investment or investment

course of action involved, including the plan’s

potential exposure to losses and the role the

investment or investment course of action plays in

that portion of the plan’s investment portfolio with

respect to which the fiduciary has investment

duties (see 29 CFR 2550.404a–1). The Department

also notes that in order to act prudently in making

investment decisions, a plan fiduciary must

consider, among other factors, the availability, risks

and potential return of alternative investments for

the plan. Thus, a particular investment by a plan,

which is selected in preference to other alternative

investments, would generally not be prudent if such

investment involves a greater risk to the security of

a plan’s assets than comparable investments

offering a similar return or result.

All of the certificates mentioned

above are structured as a real estate

mortgage investment conduit (‘‘REMIC’’)

under section 860D of the Code. The

various classes of certificates receive

principal and interest payments in

differing portions and at differing times

from the cash flows provided from the

monthly payments received on the

underlying mortgages.

The repayment of principal from the

underlying mortgages fluctuates

significantly. To facilitate the

structuring of such REMICs, the

prepayments on the pools of mortgages

are commonly measured relative to a

variety of prepayment models. The

model used for these REMICs is the

Public Securities Association’s standard

prepayment model or ‘‘PSA’’. This

model assumes that mortgages will

prepay at an annual rate of .2% in the

first month after origination, then the

prepayment rate increases at an annual

rate of .2% per month up to the 30th

month after origination and then the

prepayment rate is constant at 6% per

annum in the 30th and later months.

This assumption is called 100 PSA.

The REMIC structure allocates

principal payments to the various

classes in varying amounts as principal

payments are made. The exact date of

repayment of all principal to any class

of certificates is not known until the

final maturity date. The maturity for the

various classes is referred to as the

‘‘weighted average life’’ (WAL). The

WAL of a security refers to the average

amount of time expressed in years that

will elapse from the date of its issuance

until each dollar of principal has been

repaid to the investor based on the PSA

assumption. The holders of all classes of

the certificates will receive all of their

principal back. However, the timing of

when that principal is returned is

dependent on how quickly the

underlying mortgages are repaid or

refinanced. In no event will the time for

the recovery of principal exceed the

final maturity date of the underlying

mortgages.

Each month the monthly payments on

the underlying mortgages are collected

and distributed to the holders of the

various REMIC classes. Interest on the

certificates is paid monthly and is

determined according to a specific

formula. The certificates owned by the

Plans, described in further detail below,

are ‘‘inverse floaters’’ with an interest

rate indexed to one month LIBOR or

COFI. These certificates are ‘‘inverse

floaters’’ because the formula used to

calculate the interest rate, which adjusts

monthly for each certificate, usually

raises the rate when the index falls and

lowers the rate when the index rises.

All of the CMOs were purchased by

the Bank, as trustee of the Plans, from

either Mark Ross (Mr. Ross) of Kemper

Securities, Inc. (Kemper Securities),

located in Houston, Texas, or Robert

Conroy (Mr. Conroy) of First

Institutional Securities, Inc. (FIS),

located in Clifton, New Jersey. The Bank

states that neither the brokers (i.e. Mr.

Ross and Mr. Conroy) nor their

brokerage firms have any relationship to

the Plans, the employers which

maintain the Plans, the Bank, or any

affiliates of the Bank.

A description of each of the CMOs,

including the respective interest rate

formulas, WAL and PSA assumptions

are set forth below in the APPENDIX.

4. At the time of purchase, the Bank

anticipated that interest rates generally

would decline and that each CMO

would be retired within three years of

the date of purchase due to prepayments

of the underlying mortgages in each

pool as obligors refinanced their

mortgages at lower interest rates. The

Bank thought that the CMOs would

yield the Plans a high rate of return as

well as offset the adverse effects

declining interest rates would have on

the Plans’ floating rate assets during this

period. The Bank states that the ideal

time to buy CMOs that are ‘‘inverse

floaters’’ is when interest rates, as

measured by indices such as LIBOR or

COFI, are high and are expected to go

down during the time the investor is

holding the CMOs. However, when

interest rates rise, the rate of return on

the CMOs goes down and the securities

become less valuable. The Bank notes

that initially the Plans were receiving

monthly interest payments on the CMOs

at rates that were significantly above the

market rate, as measured by interest rate

indexes at the time. As a result of

increases in interest rates during 1994,

and the expectation of additional

interest rate increases, the Bank

anticipated that the CMOs would not be

retired for at least 15 years because of

the projected decrease in the

prepayments of mortgages held in each

pool. Furthermore, as a result of the

increase in interest rates, both the rate

of return on the CMOs (as measured by

the monthly interest payments) and the

market value of the CMOs decreased

significantly. Thus, the Bank states that

it became increasing difficult to find

third party investors who were willing

to purchase the CMOs from the Plans

without the Plans incurring significant

losses on their investments.7

5. Robert W. Nichols (Mr. Nichols),

First Vice President of Morgan Keegan

& Company, Inc., an independent,

qualified appraiser located in Louisville,

Kentucky, calculated the fair market

value of the CMOs held by the Plans as

of December 15, 1994. Mr. Nichols

solicited bids for all of the CMOs from

at least three different independent

broker-dealers, including First National

Bank of Knoxville in Knoxville,

Tennessee; First Commerce Securities in

Memphis, Tennessee; and Merrill Lynch

Institutional Sales in Charleston, West

Virginia. Based on pricing information

obtained from these broker-dealers, Mr.

Nichols advised the Bank that the fair

market value of the CMOs was

significantly below the original

purchase price of the CMOs (as noted in

the table below in Paragraph 6). The

Bank states that Mr. Nichols is not

related to or associated with the Bank,

the Holding Company, the Plans or any

of the brokers involved in the purchases

of the CMOs.

6. In addition, the Bank calculated the

value of the CMOs held by the Plans as

of December 23, 1994, using an
19092 Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices

8As noted previously in Paragraph 3, the WAL for

a CMO is determined at the time of purchase based

on various assumptions about the speed of

principal repayments and interest rate changes,

using financial data provided by independent

sources (such as Bloomberg Financial Markets). The

Bank states that changes to the formula for

calculating the amortized cost based on WAL

assumptions other than at the time of purchase

would not provide an administratively acceptable

method of allocating the premium for a CMO

because such a method would require constant

adjustments which are not material to the concept

of income recognition as it relates to CMOs.

9For example, assume that a particular CMO

investment has been held by a Plan for 6 months.

If the WAL at the time of purchase of the CMO was

2.02 years and the cost was 102.25 based on the par

value being referred to as 100, the formula would

be (((102.25 ¥ 100 = 2.25) / 2.02 × 12 = 24.24) =

.09282178) × ((2.02 × 12 = 24.24) ¥ 6) = 1.69307

+ 100 = 101.69307). As the formula indicates, the

amortized cost using the WAL at purchase would

be 101.69307 as compared to the actual cost of

102.25. Therefore, the Bank states that the

amortized cost formula caused the Plan to be paid

an amount for this CMO investment which was

slightly less than the Plan’s original cost (i.e. basis)

but more than the total remaining principal balance

plus accrued but unpaid interest.

10The formula for the annualized rate of return

for the months held was as follows: (Interest income

collected less amortization of premiums realized)

divided by (average outstanding balance) divided

by (average months held) and multiplied by 12.

amortized cost computation. The Bank

states that the computation of the

amortized cost was arrived at by a series

of computations. First, the Bank

determined the amount of the premium

paid upon purchase (Purchase price ¥

100 = Premium). The par value or face

value of a bond is referred to as 100. The

Bank states that since all of CMOs paid

interest monthly, the premium was

allocated monthly in order to be

properly matched to the income. The

number of months that the premium

was allocated over was determined by

the WAL at the time of purchase

(expressed in years) multiplied by

twelve (WAL × 12 = amortizing

months).8 Then, the Bank determined

the amount of premium that was

allocated to each month by dividing the

premium by the amortizing months. To

determine how much premium still

remained to be amortized, the Bank

subtracted from the amortizing months

those months that the Plan actually held

the CMO. The Bank states that the

remaining months were multiplied by

the monthly premium amount to arrive

at the premium balance. The premium

was added to the par price (i.e. 100) to

arrive at the amortized cost remaining

for the CMO. Thus, the Bank states that

the formula for calculating amortized

cost was as follows: 9

E:\GRAPHICS\EN14AP95.000

The Bank also calculated the

remaining principal balance on the

CMO investments held by each Plan as

of December 23, 1994, based on the face

amount of the securities and the

principal and interest payments

received by the Plans through that date.

As shown in the table below, the

amortized cost of the CMOs held by the

Plans exceeded the remaining principal

balances on the CMOs at the time of the

transaction. In addition, the table below

shows the fair market value of the CMOs

held by each Plan, based on Mr.

Nichols’ appraisal of the CMOs on

December 15, 1994.

Plan Amort. cost Prin. bal. Mkt. value

Jones Plan ................................................................................................................................... $226,612 $224,473 $105,711

Ehrie Pension Plan ...................................................................................................................... 79,449 78,410 41,581

Ehrie P/S Plan ............................................................................................................................. 105,046 104,028 52,924

Simons Plan ................................................................................................................................ 23,085 22,745 12,002

Buchanan Plan ............................................................................................................................ 18,240 18,192 10,445

Bank Plan .................................................................................................................................... 646,699 644,433 302,519

The Bank determined that a sales

price for the CMOs owned by each of

the Plans based on amortized cost, plus

the total principal and interest

payments received by the Plans as of the

date of sale, would produce a total

return to the Plans which would exceed

the Plans’ total original cost for the

CMOs (as illustrated below).

Plan Interest collected

Principal rec.’d

+ amort. cost Total receipts Total cost

Jones Plan ....................................................................................................... $25,372 $242,078 $267,450 $246,254

Ehrie Pension Plan .......................................................................................... 8,060 86,039 94,099 86,812

Ehrie P/S Plan ................................................................................................. 11,367 115,849 127,216 117,982

Simons Plan .................................................................................................... 2,716 25,313 28,029 25,717

Buchanan Plan ................................................................................................ 1,414 20,049 21,463 20,100

Bank Plan ........................................................................................................ 72,953 693,782 766,735 705,680

The Bank represents that each Plan

received a reasonable rate of interest on

the CMOs during the period of time it

held the CMOs. In this regard, the Bank

states that the weighted annualized rate

of interest received by each Plan on its

CMOs, net of amortization cost, was as

follows: (i) 8.19% for the Jones Plan; (ii)

8.06% for the Ehrie Pension Plan; (iii)

7.58% for the Ehrie P/S Plan; (iv) 8.68%

for the Simons Plan; (v) 7.09% for the

Buchanan Plan; and (vi) 8.23% for the

Bank Plan.10

7. The Bank represents that when the

market value and the availability of

buyers for the CMOs declined, the

CMOs became illiquid investments.

Therefore, the Bank believed that the

CMOs were no longer suitable

investments for the Plans. The Bank

states that any sale of the CMOs on the

open market would have produced

significant losses for the Plans and the

individual accounts of each Plan
Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices 19093

participant involved. In order to prevent

such losses, the Bank sold the CMOs to

the Holding Company at an amount

which for each Plan was the greater of

either: (i) The outstanding principal

balance for the CMOs owned by the

Plan, plus accrued but unpaid interest,

at the time of sale; (ii) the amortized

cost for the CMOs owned by the Plan,

plus accrued but unpaid interest, as

determined by the Bank based on the

outstanding principal balance for each

CMO on the date of sale; or (iii) the fair

market value of the CMOs owned by the

Plan as determined by an independent,

qualified appraiser at the time of the

sale.

The Bank, as trustee of the Plans,

believed that the transactions were in

the best interests of the Plans and their

participants and beneficiaries. The Bank

states that the transactions allowed the

Plan participants to divest themselves of

an illiquid investment and shifted to the

Holding Company the risks associated

with selling the CMOs during the

current interest rate environment. As a

result, the individual participants in the

Plans were no longer subject to the

losses that would have resulted from the

participants receiving a distribution of

their account balances based on the fair

market value of the CMOs. The Bank

wanted to sell the CMOs to the Holding

Company by December 31, 1994, in

order to benefit participants of the Plans

receiving distributions from their

individual accounts during 1995. In this

regard, the Bank notes that distributions

made to Plan participants are based on

the fair market value of the plan assets

at the year-end valuation. At the time of

the transaction, the fair market value of

the CMOs was substantially less than

the amount the Plans received as a

result of the transactions.

8. The Bank represents that it took all

appropriate actions necessary to

safeguard the interests of the Plans and

their participants and beneficiaries in

connection with the sale of the CMOs to

the Holding Company. The Bank

ensured that each Plan received the

appropriate amount of cash from the

Holding Company in exchange for such

Plan’s CMOs. The Bank reviewed an

updated appraisal of the CMOs to

ensure that there was an accurate

calculation by the independent

appraiser of the fair market value of

each of the CMOs held by the Plans,

based on pricing information obtained

from independent broker-dealers. The

Bank also ensured that the Plans did not

pay any commissions or other expenses

in connection with the transactions.

9. In summary, the applicant

represents that the transactions satisfied

the statutory criteria of section 408(a) of

the Act and section 4975 of the Code

because: (a) Each sale was a one-time

transaction for cash; (b) each Plan

received an amount which was equal to

the greater of either (i) the outstanding

principal balance for the CMOs owned

by the Plan, plus accrued but unpaid

interest, at the time of sale, (ii) the

amortized cost for the CMOs owned by

the Plan, plus accrued but unpaid

interest, as determined by the Bank

based on the outstanding principal

balance for each CMO on the date of

sale, or (iii) the fair market value of the

CMOs owned by the Plan as determined

by an independent, qualified appraiser

at the time of the sale; (c) the Plans did

not pay any commissions or other

expenses with respect to the sale; (d) the

Bank, as trustee of the Plans,

determined that the sale of the CMOs

was in the best interests of each Plan

and its participants and beneficiaries;

(e) the Bank took all appropriate actions

necessary to safeguard the interests of

the Plans and their participants and

beneficiaries in connection with the

transactions; and (f) each Plan received

a reasonable rate of interest on the

CMOs during the period of time it held

the CMOs.

Notice to Interested Persons

The applicant states that notice of the

proposed exemption shall be made by

first class mail to the appropriate Plan

fiduciaries within fifteen (15) days

following the publication of the

proposed exemption in the Federal

Register. This notice shall include a

copy of the notice of proposed

exemption as published in the Federal

Register and a supplemental statement

(see 29 CFR 2570.43(b)(2)) which

informs interested persons of their right

to comment on and/or request a hearing

with respect to the proposed exemption.

Comments and requests for a public

hearing are due within forty-five (45)

days following the publication of the

proposed exemption in the Federal

Register.

Appendix

A. The FHLMC Multiclass Mortgage

Participation Certificates, Series 1625,

Class SB, SE and SJ, were issued by

Freddie Mac as part of an issue of

multiclass participation certificates with

45 various classes in the total amount of

$1.5 trillion. The Bank, as trustee of the

Plans, purchased portions of three of

those classes on December 2, 1993. The

Certificates are secured by first lien

residential mortgages with an original

term to maturity of 180 months or less.

This REMIC uses a 200 PSA

assumption regarding principal

repayment (2 times 100 PSA). The WAL

for classes SB, SE and SJ based on a 200

PSA was 3.4, 2.0 and 2.0 years,

respectively, at the time of purchase.

The formula for the interest on class

SB is 57.000005—(LIBOR×6.785715)

with a minimum rate of 0.0% and a

maximum rate of 9.5%. For class SE, the

interest is 17.999996—

(LIBOR×2.571428) with a minimum rate

of 0.0% and a maximum rate of

17.999996%. For class SJ, the interest is

18.529405—(LIBOR×2.647058) with a

minimum rate of 0.0% and a maximum

rate of 18.529405%. ‘‘LIBOR’’ refers to

one-month LIBOR, a rate established

daily by independent market data

sources in London, England, based on

the arithmetic mean of quotations

offered by creditworthy international

banks dealing in Eurodollars. LIBOR

moves up or down daily as the interest

rates charged by such banks move up or

down. The movement of LIBOR has an

inverse relationship on the interest paid

on all inverse floating rate classes. As

interest rates increased from February

through December 1, 1994, the interest

paid on most of these classes declined.

The initial interest rates for classes SB,

SE and SJ were 9.5%, 9.803569% and

10.091908%, respectively. The interest

rates as of December 1, 1994 for classes

SB, SE and SJ were 9.5%, 2.57% and

2.65%. The interest rates can drop to

0.0% for classes SB, SE and SJ if LIBOR

reaches or exceeds 8.4, 8.0 and 7.0

percent, respectively. LIBOR on

December 23, 1994 was 5.94%.

B. The FHLMC Multiclass Mortgage

Participation Certificates, Series 1655,

Class S, were issued by Freddie Mac as

part of an issue of multiclass certificates

with 20 various classes in the total

amount of $500 million. The Bank, as

trustee of the Plans, purchased a portion

of a class on December 7, 1993. The

Certificates are secured by first lien

residential mortgages with an original

term to maturity of 180 months or less.

This REMIC uses a 250 PSA

assumption regarding principal

repayment (2.5 times 100 PSA). The

WAL for class S based on a 250 PSA

was 3.5 years at the time of purchase.

The formula for the interest on class

S is 18.983333333—(LIBOR x 2.333333)

with a minimum rate of 3.0% and a

maximum rate of 18.98333333%. As

discussed above, the movement of

LIBOR has an inverse relationship on

the interest paid on all inverse floating

rate classes. As interest rates increased

from February through December 1994,

the interest paid on the class S

securities declined. The initial interest

rate was 11.5458%. As of December 15,

1994, the interest rate was 4.54%. The

interest rate can drop to 3.0% if LIBOR

reaches 6.85% or higher. As noted
19094 Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices

11 The applicant states that COFI is adjusted

monthly, instead of daily.

above, LIBOR was 5.94% on December

23, 1994.

C. The FNMA Guaranteed REMIC

Pass-Through Certificates, Fannie Mae

REMIC Trust 1993–102, Class S, were

issued by Fannie Mae as part of an issue

of pass-through certificates with 18

various classes in the total amount of

$500 million. The Bank, as trustee of the

Plans, purchased a portion of one class

on September 2, 1993. The Certificates

are secured by first lien residential

mortgages with an original term to

maturity of 180 months or less.

This REMIC uses a 175 PSA

assumption regarding principal

repayment (1.75 times 100 PSA). The

WAL for class S based on a 175 PSA

was 3.5 years at the time of purchase.

The formula for the interest on class

S is 26.95598—(LIBOR x 3.85086) with

a minimum rate of 0.0% and a

maximum rate of 26.95598%. The

movement of LIBOR has an inverse

relationship on the interest paid on all

inverse floating rate classes. As interest

rates increased from February through

December 1994, the interest paid on

class S securities declined. The initial

interest rate was 14.92206%. As of

December 23, 1994, the interest rate was

3.97%. The interest rate can drop to

0.0% if LIBOR reaches 7% or higher.

D. The FNMA Guaranteed REMIC

Pass-Through Certificates, Fannie Mae

REMIC Trust 1993–110, Class SH, were

issued by Fannie Mae as part of an issue

of pass-through certificates with 28

various classes in the total amount of

$925 million. The Bank, as trustee of the

Plans, purchased a portion of one class

on October 5, 1993. The Certificates are

secured by first lien residential

mortgages with an original term to

maturity of 360 months or less.

This REMIC uses a 200 PSA

assumption regarding principal

repayment (2 times 100 PSA). The WAL

for class SH based on a 200 PSA was 2.8

years at the time of purchase.

The formula for the interest on class

SH is 16.9929—(COFI × 1.857144) with

a minimum rate of 0.0% and a

maximum rate of 16.9929%. In this

case, ‘‘COFI’’ refers to the U.S. Federal

Reserve’s 11th District Cost of Funds

Index for the second month next

preceding the month in which such

interest accrual period commences.

COFI moves up or down as interest rates

move up or down. The movement of

COFI will have an inverse relationship

on the interest paid on all inverse

floating rate classes. COFI does not react

immediately to changes in interest rates.

Unlike most of the other certificates

discussed herein, the interest paid on

class SH securities declined only

slightly during the period from February

to December, 1994. The initial interest

rate was 9.24677%. As of December 1,

1994, the interest rate was 9.217%.

However, additional interest rate

increases will significantly decrease the

interest rate on these certificates. The

interest rate can drop to 0.0% if COFI

reaches 9.15% or higher. COFI was

4.367% for December 1994.11

E. The FNMA Guaranteed REMIC

Pass-Through Certificates, Fannie Mae

REMIC Trust 1993–139, Class SL and

SC, were issued by Fannie Mae as part

of an issue of pass-through certificates

with 59 various classes in the total

amount of $1,650,350,872. The Bank, as

trustee of the Plans, purchased a portion

of two classes on September 7 and 21,

1993. The Certificates are secured by

first lien residential mortgages with an

original term to maturity of 360 months

or less.

This REMIC uses a 200 PSA

assumption regarding principal

repayment (2 times 100 PSA). The WAL

for class SL and SC based on a 200 PSA

was 4.0 and 3.5 years, respectively, at

the time of purchase.

The formula for the interest on class

SL is 70.05484—(LIBOR × 8.193548)

with a minimum rate of 0.0% and a

maximum rate of 12.7%. For class SC,

the interest is 23.94—(LIBOR × 2.8) with

a minimum rate of 0.0% and a

maximum rate of 23.94%. The

movement of LIBOR has an inverse

relationship on the interest paid on all

inverse floating rate classes. As interest

rates increased from February through

December 1994, the interest paid on the

class SC securities declined. The initial

interest rates for SL and SC classes were

12.7% and 15.015%, respectively. As of

December 23, 1994, the interest rates

were 12.7% and 8.2%, respectively. The

interest rate for both the SL and SC class

can drop to 0.0% if LIBOR reaches or

exceeds 8.55%. As noted above, LIBOR

was 5.94% on December 23, 1994.

F. The FNMA Guaranteed REMIC

Pass-Through Certificates, Fannie Mae

REMIC Trust 1993–202, Class VJ, were

issued by Fannie Mae as part of an issue

of pass-through certificates with 76

various classes in the total amount of $2

trillion. The Bank, as trustee of the

Plans, purchased a portion of one class

on October 28, 1993. The Certificates are

secured by first lien residential

mortgages with an original term to

maturity of 360 months or less.

This REMIC uses a 200 PSA

assumption regarding principal

repayment (2 times 100 PSA). The WAL

for class VJ based on a 200 PSA was 3.5

years at the time of purchase.

The formula for the interest on class

VJ is 21.58 ¥ (LIBOR × 2.6) with a

minimum rate of 0.0% and a maximum

rate of 21.58%. The movement of LIBOR

has an inverse relationship on the

interest paid on all inverse floating rate

classes. As interest rates increased from

February through December 1994, the

interest paid on class VJ securities

declined. The initial interest rate was

13.455%. As of December 23, 1994, the

interest rate was 6.06%. The interest

rate can drop to 0.0% if LIBOR reaches

8.3% or higher.

G. The GE Capital Mortgage Services,

Inc., REMIC Mult-Class Pass-Through

Certificates, Series 1993–17, Class 17–

A20, were issued by GE Capital

Mortgage Services, Inc., as part of an

issue of pass-through certificates with

28 senior classes and 6 junior classes in

the total amount of $493,750,000. The

Bank, as trustee of the Plans, purchased

a portion of one of the senior classes on

November 30, 1993. The Certificates are

secured by first lien residential

mortgages with an original term to

maturity of 360 months or less.

This REMIC uses a 340 PSA

assumption regarding principal

repayment (3.4 times 100 PSA). The

WAL for class A20 based on a 340 PSA

was 2.5 years at the time of purchase.

The repayment of principal is not

guaranteed by any U.S. Government

Agency. As with the other REMICs, the

timing of when the principal is returned

is dependent on how quickly the

underlying mortgages are actually

repaid or refinanced.

The formula for the interest on class

A20 is 17.875 ¥ (LIBOR × 2.166666)

with a minimum rate of 0.0% and a

maximum rate of 17.875%. The

movement of LIBOR has an inverse

relationship on the interest paid on all

inverse floating rate classes. As interest

rates increased from February through

December 1994, the interest paid on

class A20 securities declined. The

initial interest rate was 10.96875%. As

of December 23, 1994, the interest rate

was 4.87%. The interest rate can drop

to 0.0% if LIBOR reaches 8.25% or

higher.

FOR FURTHER INFORMATION CONTACT: Mr.

E.F. Williams of the Department,

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

a toll-free number.)

The Neiman Marcus Group, Inc.

Employee Savings Plan (the Plan),

Located in Chestnut Hill, Massachusetts

[Application No. D–09917]

Proposed Exemption

The Department is considering

granting an exemption under the

authority of section 408(a) of the Act
Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices 19095

12The Department notes that the decisions to

acquire and hold the GIC are governed by the

fiduciary responsibility requirements of Part 4,

Subtitle B, Title I of the Act. In this proposed

exemption, the Department is not proposing relief

for any violations of Part 4 which may have arisen

as a result of the acquisition and holding of the GIC.

13 The Department notes that this exemption, if

granted, will not affect the rights of any participant

or beneficiary with respect to claims under section

404 of the Act in connection with any aspect of the

GIC transactions.

and section 4975(c)(2) of the Code and

in accordance with the procedures set

forth in 29 C.F.R. part 2570, subpart B

(55 FR 32836, August 10, 1990). If the

exemption is granted the restrictions of

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

the Act and the sanctions resulting from

the application of section 4975 of the

Code, by reason of section 4975(c)(1) (A)

through (E) of the Code, shall not apply

to (1) proposed interest-free loans to the

Plan (the Loans) by The Neiman Marcus

Group, Inc. (the Employer), the sponsor

of the Plan, with respect to guaranteed

investment contract number 62638 (the

GIC) issued by Confederation Life

Insurance Company (Confederation

Life); and (2) the Plan’s potential

repayment of the Loans (the

Repayments); provided that the

following conditions are satisfied:

(A) No interest and/or expenses are

paid by the Plan;

(B) The Loans are made in lieu of

amounts due the Plan under the terms

of the GIC;

(C) The Repayments are restricted to

cash proceeds paid to the Plan by

Confederation Life and/or any state

guaranty association or other

responsible third party making payment

with respect to the GIC (the GIC

Proceeds), and no other Plan assets are

used to make the Repayments; and

(D) The Repayments will be waived to

the extent the Loans exceed the GIC

Proceeds.

Summary of Facts and Representations

1. The Plan is a defined contribution

plan which includes a cash or deferred

arrangement under section 401(k) of the

Code, and which provides for employer

matching contributions and additional

employer discretionary contributions.

As of September 30, 1994 the Plan had

approximately 7,805 participants and

total assets of approximately

$68,729,722. The trustee of the Plan is

Wachovia Bank of North Carolina, N.A.

(the Trustee). The Employer, a Delaware

public corporation with its principal

place of business in Chestnut Hill,

Massachusetts, is a retailer of clothing,

fashion apparel, and home furnishings.

2. The Plan provides for individual

participant accounts (the Accounts) and

for participant-directed investment of

each Account. Plan participants direct

investment of their Accounts among

options (the Funds) offered by the Plan.

Participants’ directions and changes of

directions, with respect to investment of

the Accounts among the Funds, are

permitted on a quarterly basis. The

Funds include a fixed income fund (the

F.I. Fund), which invests in, among

other things, guaranteed investment

contracts issued by insurance

companies.

2. Among the assets of the F.I. Fund

is the GIC, a guaranteed investment

contract issued to the Plan in 1992 by

Confederation Life Insurance Company

(Confederation Life), a Canadian

insurance company doing business in

the United States. The GIC is a singledeposit, benefit-responsive contract,

principal amount $3,500,000, earning

interest at a guaranteed annual rate of

7.91 percent (the Contract Rate). The

GIC’s terms enable the F.I. Fund to make

withdrawals (the Withdrawals) to effect,

in accordance with the terms of the

Plan, benefit distributions, in-service

withdrawals, participant loans, and

participant-directed transfers of

Account balances to other Funds offered

by the Plan (the Withdrawal Events).

Interest at the Contract Rate is credited

daily, calculated on the balance

remaining deposited under the GIC. If

interest earned under the GIC exceeds

the amount withdrawn, the difference is

paid annually (the Interest Payments) on

the anniversary date of the GIC’s

effective date. All Interest Payments

have been made when due through

April 3, 1994. The terms of the GIC also

require Confederation Life to make a

final payment to the Plan on March 31,

1997 (the Maturity Payment) in the

amount of the GIC’s accumulated book

value, representing total principal

deposits plus interest earnings at the

Contract Rate less previous

withdrawals. As of December 31, 1994,

the GIC had a total accumulated book

value of $3,684,555.

3. Commencing August 11, 1994 (the

Receivership Date), insurance regulatory

authorities in Canada and the state of

Michigan instituted proceedings to

place Confederation Life in receivership

(the Receivership) 12, and normal

account activity with respect to

Confederation Life contracts was stayed

pending resolution of the Receivership.

Since the commencement of the

Receivership, the Plan has received no

payments under the GIC to enable the

F.I. Fund to fund Withdrawal Events,

and the Employer represents that it is

uncertain whether, or to what extent,

the Plan will receive any payments to

enable funding of future Withdrawal

Events. Additionally, the Employer

represents that it is uncertain whether

and to what extent the Maturity

Payment under the GIC will be paid.

The Employer desires to alleviate the

F.I. Fund of risks associated with

investments in the GIC, and to enable

the F.I. Fund to resume and continue

funding the Withdrawal Events.

Accordingly, the Employer proposes to

make loans to the Plan (the Loans) in

lieu of the amounts due from

Confederation Life under the terms of

the GICs, and is requesting an

exemption for the Loans, and for their

potential repayment (the Repayments)

by the Plan, under the terms and

conditions described herein.

5. The Employer and the Trustee will

execute a written agreement embodying

all the terms and conditions of the

Loans and the Repayments (the

Agreement). Under the Agreement, the

Employer agrees to make a Loan to the

F.I. Fund each time Confederation Life

fails to pay the Plan the full amount of

any Withdrawal in accordance with the

terms of the Plan. The amount of each

Loan will be the difference between the

amount due the Plan as a Withdrawal

and the amounts actually paid with

respect to that Withdrawal by

Confederation Life, any conservator,

liquidator, trustee or other person

performing similar functions with

respect to Confederation Life, or any

state guaranty fund or other person or

entity (other than the Employer) acting

as surety, insurer or guarantor with

respect to Confederation Life with

respect to the GIC (collectively, the GIC

Payors). The Loans will be made only in

lieu of amounts due with respect to

Withdrawals to fund Withdrawal

Events, but not in lieu of amounts due

the Plan in the form of the annual

Interest Payments. In the event the

Receivership and any rehabilitation of

Confederation Life are not resolved by

January 1, 2001, the Employer will make

a final Loan in the amount of the

Maturity Payment which would have

been due March 31, 1997, less all

previous Advances pursuant to the

Agreement. The Employer will not

credit interest under the Agreement past

March 31, 1997, and that portion of any

Account which is attributable to

amounts remaining invested in the GIC

after March 31, 1997 will cease to earn

interest under the Agreement.13 Any

Loans made by the Employer after the

maturity date of March 31, 1997 will be

based on the Maturity Value of the GIC.

6. The Agreement provides that the

Loans are to be repaid, but only from

payments made to the Plan pursuant to

the GIC by the GIC Payors. No other
19096 Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices

14For purposes of this exemption, reference to

provisions of Title I of the Act, unless otherwise

specified, refer also to the corresponding provisions

of the Code.

15 Guarantee Mutual is not requesting, nor is the

Department providing exemptive relief herein with

respect to the distributions of stock to plans that

Guarantee Mutual or its affiliates maintain for their

own employees. Guarantee Mutual represents that

such stock would constitute qualifying employer

securities within the meaning of section 407(d)(5)

of the Act and that section 408(e) of the Act would

apply to such distributions. In this regard, the

Department expresses no opinion on whether such

distributions would satisfy the terms and

conditions of section 408(e) of the Act.

Plan assets will be available for

repayment of the Loans. If amounts

received by the Plan from the GIC

Payors (the GIC Proceeds) are not

sufficient to repay fully the Loans, the

Agreement provides that the Employer

will have no recourse against the Plan,

or against any participants or

beneficiaries of the Plan, for the unpaid

amount. To the extent the Plan receives

GIC Proceeds in excess of the total

amount of the Loans, such additional

amounts will be retained by the Plan

and allocated among the Accounts

invested in the F.I. Fund.

7. In summary, the applicant

represents that the proposed transaction

satisfies the criteria of section 408(a) of

the Act for the following reasons: (1)

The Loans enable the Plan to resume the

full funding of the Withdrawal Events;

(2) The Loans will protect the Plan’s

investment in the GIC; (3) The Plan will

pay no interest or incur any expenses

with respect to the Loans; (4)

Repayment of the Loans will be

restricted to payments by the GIC Payors

and no other Plan assets will be

involved in the transactions; (5)

Repayment of the Loan will be waived

to the extent the Plan recoups less from

the GIC Payors than the total amount of

the Loans; and (6) In the event the Plan

receives GIC Proceeds in excess of the

Guaranteed Amount, such amounts will

be retained by the Plan and allocated

among the Accounts.

FOR FURTHER INFORMATION CONTACT:

Ronald Willett of the Department (202)

219–8881. (This is not a toll-free

number.)

Guarantee Mutual Life Company

(Guarantee Mutual), Located in Omaha,

NE

[Application No. D–09941]

Proposed Exemption

Based on the facts and representations

set forth in the application, the

Department is considering granting an

exemption under the authority of

section 408(a) of the Act and in

accordance with the procedures set

forth in 29 CFR Part 2570, Subpart B (55

FR 32836, 32847, August 10, 1990).14

Section I. Covered Transaction

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 the proposed receipt of common

stock of The Guarantee Life Companies,

Inc. (GLCI), or the receipt of cash or

policy credits by an eligible

policyholder (the Eligible Policyholder)

of Guarantee Mutual which is an

employee benefit plan (the Plan), other

than an Eligible Policyholder which is

a plan sponsored by Guarantee Mutual

for its own employees,15 in exchange for

the termination of such Eligible Plan

Policyholder’s membership interest in

Guarantee Mutual, in accordance with

the terms of a plan of demutualization

(the Plan of Conversion or the

Conversion Plan) adopted by Guarantee

Mutual and implemented pursuant to

the Nebraska Insurers Demutualization

Act (the Demutualization Act), Nebraska

Revised Statutes, Sections 44–6101

through 44–6120.

The proposed exemption is subject to

the general conditions set forth below in

Section II.

Section II. General Conditions

(a) The Conversion Plan is

implemented in accordance with

procedural and substantive safeguards

that are imposed under Nebraska law

and is subject to the review and

supervision by the Director of the

Department of Insurance of the State of

Nebraska (the Director).

(b) The Director reviews the terms of

the options that are provided to Eligible

Policyholders of Guarantee Mutual, as

part of such Director’s review of the

Conversion Plan, and the Director only

approves the Conversion Plan following

a determination that such Conversion

Plan is fair and equitable to all Eligible

Policyholders.

(c) Each Eligible Policyholder has an

opportunity to comment on the

Conversion Plan and decide whether to

vote to approve such Conversion Plan

after full written disclosure is given

such Eligible Policyholder by Guarantee

Mutual, of the terms of the Conversion

Plan.

(d) Any election by an Eligible Plan

Policyholder to receive stock, cash or

policy credits, pursuant to the terms of

the Conversion Plan is made by one or

more independent fiduciaries (the

Independent Fiduciaries) of such Plan

and neither Guarantee Mutual nor any

of its affiliates exercises any discretion

or provides investment advice with

respect to such election.

(e) After each Eligible Policyholder

entitled to receive stock is allocated at

least 10 shares of common stock,

additional consideration is allocated to

Eligible Policyholders who own

participating policies based on actuarial

formulas that take into account each

participating policy’s contribution to the

surplus of Guarantee Mutual which

formulas have been approved by the

Director.

(f) All Eligible Plan Policyholders

participate in the transactions on the

same basis within their class groupings

as other Eligible Policyholders that are

not Plans.

(g) No Eligible Policyholder pays any

brokerage commissions or fees in

connection with their receipt of stock or

in connection with the implementation

of the commission-free sales program.

(h) All of Guarantee Mutual’s

policyholder obligations remain in force

and are not affected by the Conversion

Plan.

Section III. Definitions

For purposes of this proposed

exemption:

(a) The term ‘‘Guarantee Mutual’’

means Guarantee Mutual Insurance

Company and any affiliate of Guarantee

Mutual as defined in paragraph (b) of

this Section III.

(b) An ‘‘affiliate’’ of Guarantee Mutual

includes—

(1) Any person directly or indirectly

through one or more intermediaries,

controlling, controlled by, or under

common control with Guarantee

Mutual. (For purposes of this paragraph,

the term ‘‘control’’ means the power to

exercise a controlling influence over the

management or policies of a person

other than an individual.)

(2) Any officer, director or partner in

such person, and

(3) Any corporation or partnership of

which such person is an officer, director

or a 5 percent partner or owner.

(c) The term ‘‘Eligible Policyholder’’

means a policyholder who is eligible to

vote and to receive consideration in a

demutualization. Such policyholder is a

policyholder of the mutual insurer on

the day the plan of conversion is

adopted by the board of directors of the

insurer.

(d) The term ‘‘policy credit’’ means an

increase in accumulation account value

(to which no surrender or similar

charges are applied) in the general

account or an increase in a dividend

accumulation on a policy.
Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices 19097

Summary of Facts and Representations

1. Guarantee Mutual is a mutual life

insurance company organized in 1901

under the laws of the State of Nebraska.

It provides group life and health

insurance to employers and life

insurance and annuities to individuals.

Guarantee Mutual transacts business in

forty-six states and District of Columbia.

As of December 31, 1993, Guarantee

Mutual had total assets of

approximately $975 million and more

than $20 billion of life insurance

policies in force.

As a mutual life insurance company,

Guarantee Mutual has no stockholders.

Policyholders are members of Guarantee

Mutual and are entitled to vote to elect

directors of the company and would be

entitled to share in the assets of the

company if it were liquidated.

2. Guarantee Mutual is the sole

stockholder of two stock life insurance

companies—(a) Guarantee American

Life Company (GALC), a Nebraskadomiciled life insurer incorporated in

1982; and (b) Guarantee Protective Life

Company (GPLC), a life insurer

incorporated in Minnesota in 1936 and

acquired by Guarantee Mutual in 1992

and redomesticated to Nebraska in 1993.

GALC is principally engaged in

reinsuring a portion of certain

Guarantee Mutual insurance obligations.

GPLC ceded its group life, health and

credit insurance lines to nonaffiliated

insurance pursuant to reinsurance

agreements that were completed in late

1992 and early 1993. Currently, GPLC is

not underwriting any new business. In

addition to these insurance companies,

Guarantee Mutual owns 100 percent of

the stock of Guarantee Financial

Services, Inc., a non-insurance company

incorporated in 1990 in Nebraska that

has not yet conducted any operations.

3. Guarantee Mutual provides a wide

variety of insurance products to

employee benefit plans covered by

provisions of the Act and the Code.

Guarantee Mutual has actively marketed

its products to employee benefit plans

and had as of September 30, 1994,

approximately 32,100 in force policies

and contracts held on behalf of

employee pension and welfare plans.

These include approximately 1,700

policies and contracts funding pension

and profit sharing plans and over 30,400

contracts providing welfare benefit plan

coverage such as group life, short- and

long-term disability, accidental death

and dismemberment and group health

coverage.

4. On February 1, 1994, Guarantee

Mutual’s Board of Directors authorized

management to develop a plan of

demutualization pursuant to which

Guarantee Mutual would be converted

from a mutual life insurance company

to a stock life insurance company by

operation of Nebraska law. The Board of

Directors formally adopted the

Conversion Plan on December 15, 1994.

The ultimate result of the Conversion

Plan will be a structure in which all of

Guarantee Mutual’s stock will be held

by a holding company, GLCI, which has

been organized under Delaware law for

this purpose. Eligible Policyholders of

Guarantee Mutual will receive stock of

GLCI or, in certain cases, cash or policy

credits and their membership interests

and rights in the surplus of Guarantee

Mutual will be extinguished. Any

election by the Plan to receive stock,

cash or policy credits pursuant to the

Conversion Plan will be made by one or

more Independent Fiduciaries of such

Plan and neither Guarantee Mutual nor

any of its affiliates will exercise any

discretion or render investment advice

with respect to such election.

Under the Conversion Plan, two steps

will deem to occur simultaneously on

the effective date of the transaction.

First, Guarantee Mutual will be deemed

to issue common stock to a transfer

agent for the respective accounts of

Eligible Policyholders entitled to receive

stock under the Conversion Plan.

Second, the transfer agent will be

deemed to transfer such shares, on

behalf of the Eligible Policyholders, to

GLCI in exchange for an equal number

of shares of GLCI stock. GLCI will then

issue such shares of GLCI stock

registered in the respective names of the

Eligible Policyholders entitled to receive

stock.

5. The initial public offering (the IPO),

in which shares of GLCI stock will be

sold for cash, is to occur on the effective

date of the demutualization which is

anticipated to take place during the

second half of 1995. GLCI will

contribute a portion of the proceeds

from the IPO to Guarantee Mutual in an

amount at least equal to the amount

required to pay cash and fund the

crediting of policy credits to Eligible

Policyholders who are to receive such

consideration. As promptly as possible

after the effective date, GLCI will pay,

or cause Guarantee Mutual to pay, cash

or policy credits to Eligible

Policyholders entitled under the

Conversion Plan to receive such

consideration.

GLCI stock will be publicly-traded. In

this regard, an application will be made

to list its stock on the National

Association of Securities Dealers

Automated Quotations National Market

System.

6. According to the applicant, the

principal purpose of the

demutualization is to enhance

Guarantee Mutual’s strategic and

financial flexibility by creating a

corporate structure that will make it

potentially possible to obtain additional

capital from sources that are unavailable

to the company as a mutual insurer. In

addition, the applicant represents that

the conversion of Guarantee Mutual

from a mutual life insurance company

to a stock life insurance company will

enable Guarantee Mutual to use stock

options or other equity-based

compensation arrangements in order to

attract and retain talented employees.

Moreover, the applicant notes that

Eligible Policyholders will benefit by

receiving marketable securities, cash or

policy credits in the demutualization.

The applicant further represents that the

Conversion Plan will not, in any way,

change premiums or reduce policy

benefits, values, guarantees or other

policy obligations of Guarantee Mutual

to its policyholders and contractholders.

7. The applicant has outlined the

procedural requirements under

Nebraska law for life insurance

company demutualization. In this

regard, the Demutualization Act

provides an approval process for

demutualization of a life insurance

company under Nebraska law. A

conversion plan must be approved by

the Director as well as by Eligible

Policyholders.

The Demutualization Act requires that

a mutual insurer wishing to convert to

a stock insurer file an application with

the Director. The application must

include: (a) A plan of conversion that

contains a description of the structure

and form of the proposed consideration

to the policyholders and the projected

range of the number of shares of capital

stock to be issued by the new stock

insurer; (b) a certification that the plan

of conversion has been adopted by a

vote of not less than two-thirds of the

members of the mutual insurer’s board

of directors; (c) certification adopted by

not less than two-thirds of the members

of the mutual insurer’s board of

directors that the plan is fair and

equitable to the policyholders; (d)

certified copies of the proposed

amendments to the insurer’s articles of

incorporation and bylaws to effectuate

the conversion; and (e) a form of the

proposed notice to policyholders,

describing the plan of conversion and

informing policyholders of procedures

for the meeting of policyholders and the

policyholder vote on the plan.

The Director must make an initial

determination to approve or disapprove

an application after conducting a public

hearing, at which any interested person

may appear or otherwise be heard. The
19098 Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices

16Although Guarantee Mutual is uncertain about

the number of policyholders that will vote on the

Conversion Plan, it points out that it has

approximately 155,000 policyholders who are

eligible to vote. Guarantee Mutual also represents

that prior to the public hearing, it will provide each

Eligible Policyholder with a summary of the

Conversion Plan, a notice of the public hearing and

a more detailed policyholder information statement.

17 Guarantee Mutual represents that under

sections 44–6103, 44–6106 and 44–6109 of

Nebraska Insurance Law, the stock, cash, policy

credits or other compensation resulting from the

demutualization plan must be distributed to

‘‘policyholders,’’ as determined by the records of

the mutual life insurance company. Guarantee

Mutual further represents that an insurance or

annuity policy that provides benefits under an

employee benefit plan, typically designates the

employer that sponsors the plan, or a trustee acting

on behalf of the plan, as the policyholder. In this

regard, Guarantee Mutual asserts that it is required

under Nebraska Insurance Law to make

distributions resulting from the demutualization

plan to the employer or the plan sponsor when they

are the designated policyholder on the plan policy.

In general, it is the Department’s view that, if an

insurance policy (including an annuity contract)

was purchased with assets of an employee benefit

plan, and if there exist any participants covered

under the plan (as defined at 29 CFR 2510.3–3) at

the time when Guarantee Mutual incurs the

obligation to distribute stock, cash, policy credits or

other compensation, then such consideration would

constitute an asset of such plan. Under these

circumstances, the appropriate plan fiduciaries

must take all necessary steps to safeguard the assets

of the plan in order to avoid engaging in a violation

of the fiduciary responsibility provisions of the Act.

18For purposes of allocating the consideration,

Guarantee Mutual represents that all policyholders

will be treated the same within their class

groupings.

insurer must give such interested person

reasonable notice of the public hearing

as the Director in his or her discretion

requires. After the public hearing, the

Director will approve the application

only if he or she finds that (a) the plan

of conversion is fair and equitable to the

policyholders; (b) the plan does not

deprive the policyholders of their

property rights or due process of law; (c)

the new stock insurer would meet the

minimum requirements to be issued a

certificate of authority by the Director to

transact business in Nebraska; and (d)

that the continued operations of the new

stock insurer would not be hazardous to

future policyholders and the public.

After the Director makes an initial

determination to approve an

application, the insurer is required to

hold a meeting of its policyholders to

vote on the plan. The Demutualization

Act requires that the insurer give at least

30 days notice prior to the time fixed for

the meeting, by first-class mail to the

last-known address of each

policyholder, that the plan of

conversion will be voted upon at a

meeting of the policyholders. The notice

must also include a brief description of

the plan and a statement that the

Director has initially approved it.

Policyholders may vote in person or by

written proxy. Each policyholder is

entitled to only one vote regardless of

the number of policies owned by the

policyholder. The plan of

demutualization must be approved by

the affirmative vote of at least two-thirds

of the policyholders who vote on the

plan.16

After receiving certification from the

insurer that the plan of demutualization

has been approved by the policyholders,

the Director will enter a final order

approving the insurer’s application. The

demutualization will take effect under

Nebraska law after the insurer certifies

that the conditions set forth in the plan

of demutualization have been satisfied

and the Director issues a certificate of

authority to the insurer.

Under Nebraska law, the

consideration given to policyholders

may be stock, cash, a combination of

stock and cash, or such other valuable

consideration as the Director may

approve. Policyholders are not required

to be given preemptive rights unless the

Director so orders.

The Demutualization Act permits the

Director to engage the services of

experts to assist in determining whether

a plan of conversion meets the

requirements of the Demutualization

Act. In the case of Guarantee Mutual,

the Director has retained actuaries, Ernst

& Young; legal advisers, LeBoeuf, Lamb,

Green & MacRae and Kennedy, Holland,

Delacy & Svoboda; and investment

banking firm, Donaldson, Lufkin &

Jenrette, Inc., as consultants.

A final order by the Director to

approve an application pursuant to the

Demutualization Act is subject to

judicial review in the Nebraska courts in

accordance with the Nebraska

Administrative Procedure Act.

7. Guarantee Mutual’s Conversion

Plan provides for Eligible Policyholders,

whose membership interests in the

mutual company will be extinguished in

the demutualization, to receive common

stock of GLCI, or cash or policy credits.

For this purpose, an Eligible

Policyholder generally is the owner of

one or more policies in force on the date

that Guarantee Mutual’s Board of

Directors adopted the Conversion

Plan.17 In order to determine the

amount of consideration to which each

Eligible Policyholder is entitled, each

Eligible Policyholder will be allocated

(but not issued) a number of shares of

common stock equal to the sum of (a)

a fixed component of consideration

equal to 10 shares of GLCI stock which

will be subject to proportional

adjustment; and (b) where the Eligible

Policyholder owns one or more

participating policies, an additional

number of shares based on actuarial

formulas that take into account each

participating policy’s past and expected

future contributions to the surplus of

Guarantee Mutual.

8. Certain Eligible Policyholders will

receive cash or policy credits instead of

stock. The amount of cash or policy

credits will be determined by reference

to the price per share at which GLCI

stock is offered to the public in the

IPO.18 Eligible Policyholders whose

mailing address is outside the United

States, or to whom mail is undeliverable

at the address in Guarantee Mutual’s

records, will receive cash in lieu of

stock, in an amount equal to the value

of the stock such policyholders would

otherwise have received based on the

price of GLCI stock in the IPO

contemplated by the Plan of Conversion.

In addition, the Plan of Conversion

provides that Eligible Policyholders

who are allocated a number of shares of

GLCI stock which is less than or equal

to the maximum number of shares

specified by the Board of Directors of

Guarantee Mutual, may receive cash

instead of stock. The maximum number

of shares designated by the Board of

Directors may not be less than 10 shares

nor may it exceed 40 shares. Such

maximum amount is, however, subject

to proportional adjustment.

Certain other Eligible Policyholders,

namely owners of individual retirement

annuities, tax sheltered annuities or

certain other policies issued directly to

plan participants in qualified pension or

profit sharing plans will receive policy

credits equal in value to the stock

allocated to such Eligible Policyholders.

Under Nebraska law, a plan of

conversion must specify the

consideration to be given to

policyholders and the Director must

find that the plan is fair and equitable

to the policyholders and does not

deprive them of their property rights or

due process of law. Moreover, the

Director must approve any

consideration (such as policy credits)

other than cash or stock.

9. The Conversion Plan also provides

for a commission-free program that is to

begin after the ninetieth day following

the effective date of the demutualization

and before the 12 month anniversary of

such effective date at a time determined

by the Board of Directors of GLCI to be

appropriate and in the best interests of

GLCI and its stockholders. The program,

which will continue for 3 months, will

be available to any Eligible Policyholder

who receives, under the Plan of

Conversion, fewer shares than the
Federal Register / Vol. 60, No. 72 / Friday, April 14, 1995 / Notices 19099

19 Guarantee Mutual notes that the performance of

services by Chemical Bank or its affiliates under the

commission-free sales program will not involve any

fiduciary activity on behalf of Eligible Plan

Policyholders. Guarantee Mutual further represents

that it will not retain an affiliate to effect securities

transactions to take place under the commissionfree sales program.

maximum number of shares entitled to

receive cash as consideration.

In the program, such Eligible

Policyholders will be entitled to sell, at

prevailing market prices, all the shares

of GLCI stock received by the Eligible

Policyholder in the demutualization.

Specifically, Chemical Bank, which is

unrelated to Guarantee Mutual, or one

of Chemical Bank’s affiliates, will effect

sales of stock under the commission-free

sales program.19 No brokerage

commissions, mailing charges,

registration fees or other administrative

or similar expenses will be charged in

connection with the receipt of stock or

the implementation of the commissionfree sales program. The commission-free

program will also offer Eligible

Policyholders the opportunity to

purchase enough shares to round-up

their holdings to 100 shares, again

without paying any fees, charges or

commissions (the Round Up Feature).

Participation in the Round Up Feature

will be made available to all Eligible

Policyholders who on the commissionfree program’s record date hold fewer

than a number of shares (not more than

99) specified by the Board of Directors

of Guarantee Mutual.

10. In summary, it is represented that

the proposed transaction will satisfy the

statutory criteria for an exemption

under section 408(a) of the Act because:

(a) The Conversion Plan will be

implemented in accordance with

procedural and substantive safeguards

that are imposed under Nebraska law

and will be subject to the review and

supervision by the Director.

(b) The Director will review the terms

of the options that are provided to

Eligible Policyholders of Guarantee

Mutual as part of such Director’s review

of the Conversion Plan, and will

approve the Conversion Plan following

a determination that such Conversion

Plan is fair and equitable to all Eligible

Policyholders.

(c) Each Eligible Policyholder will

have an opportunity to comment orally

or in writing on the Conversion Plan

and decide whether to vote to approve

in writing such Demutualization Plan

after full written disclosure is given

such policyholder by State Mutual, of

the terms of the Conversion Plan.

(d) Any election by an Eligible

Policyholder which is a Plan to receive

stock, cash or policy credits, pursuant to

the terms of the Conversion Plan will be

made by one or more Independent

Fiduciaries of such plan and neither

State Mutual nor any of its affiliates will

exercise any discretion or provides

investment advice with respect to such

election.

(e) After each Eligible Policyholder is

allocated at least 10 shares of stock,

additional consideration allocated to

Eligible Policyholders who own

participating policies will be based on

actuarial formulas that take into account

each participating policy’s contribution

to the surplus of Guarantee Mutual

which formulas have been approved by

the Director.

(f) All Plans that are Eligible

Policyholders will participate in the

transactions on the same basis within

their class groupings as other Eligible

Policyholders that are not Plans.

(g) No Eligible Policyholder will pay

any brokerage commissions or fees in

connection with such Eligible

Policyholder’s receipt of stock or in

connection with the implementation of

the commission-free sales program.

(h) All of State Mutual’s policyholder

obligations will remain in force and will

not be affected by the Conversion Plan.

Notice to Interested Persons

Guarantee Mutual will provide notice

of the proposed exemption to all

Eligible Plan Policyholders within 14

days of the publication of the notice of

pendency in the Federal Register. Such

notice will be provided to interested

persons by first class mail and will

include a copy of the notice of proposed

exemption as published in the Federal

Register. The notice will also inform

interested persons of their right to

comment on the proposed exemption.

Comments with respect to the notice of

proposed exemption are due within 44

days after the date of publication of this

exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms.

Jan D. Broady 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 11th day of

April, 1995.

Ivan Strasfeld,

Director of Exemption Determinations,

Pension and Welfare Benefits Administration,

U.S. Department of Labor.

[FR Doc. 95–9254 Filed 4–13–95; 8:45 am]

BILLING CODE 4510–29–P

Wage and Hour Division

[Administrative Order No. 662]

Special Industry Committee for All

Industries in American Samoa;

Appointment; Convention; Hearing

1. Pursuant to section 5 and 6(a)(3) of

the Fair Labor Standards Act (FLSA) of

1938, as amended (29 U.S.C. 205,

206(a)(3)), and Reorganization Plan No.

6 of 1950 (3 CFR, 1949–53 Comp., p.

1004) and 29 CFR part 511, I hereby

appoint special Industry Committee No.

21 for American Samoa.

2. Pursuant to section 5, 6(a)(3) and 8

of FLSA, as amended (29 U.S.C. 205,

206(a)(3), and 208), reorganization Plan