97-26072. Proposed Exemptions; State Street Bank and Trust  

  • [Federal Register Volume 62, Number 191 (Thursday, October 2, 1997)]
    [Notices]
    [Pages 51684-51697]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 97-26072]
    
    
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    DEPARTMENT OF LABOR
    
    Pension and Welfare Benefits Administration
    [Application No. D-10159, et al.]
    
    
    Proposed Exemptions; State Street Bank and Trust
    
    AGENCY: Pension and Welfare Benefits Administration, Labor.
    
    ACTION: Notice of proposed exemptions.
    
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    SUMMARY: This document contains notices of pendency before the 
    Department of Labor (the Department) of proposed exemptions from 
    certain of the prohibited transaction restrictions of the Employee 
    Retirement Income Security Act of 1974 (the Act) and/or the Internal 
    Revenue Code of 1986 (the Code).
    
    Written Comments and Hearing Requests
    
        All interested persons are invited to submit written comments or 
    request for a hearing on the pending exemptions, unless otherwise 
    stated in the Notice of Proposed Exemption, within 45 days from the 
    date of publication of this Federal Register Notice. Comments and 
    requests for a hearing should state: (1) The name, address, and 
    telephone
    
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    number of the person making the comment or request, and (2) the nature 
    of the person's interest in the exemption and the manner in which the 
    person would be adversely affected by the exemption. A request for a 
    hearing must also state the issues to be addressed and include a 
    general description of the evidence to be presented at the hearing.
    
    ADDRESSES: All written comments and request for a hearing (at least 
    three copies) should be sent to the Pension and Welfare Benefits 
    Administration, Office of Exemption Determinations, Room N-5649, U.S. 
    Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 
    20210. Attention: Application No. ________________, stated in each 
    Notice of Proposed Exemption. The applications for exemption and the 
    comments received will be available for public inspection in the Public 
    Documents Room of Pension and Welfare Benefits Administration, U.S. 
    Department of Labor, Room N-5507, 200 Constitution Avenue, N.W., 
    Washington, D.C. 20210.
    
    Notice to Interested Persons
    
        Notice of the proposed exemptions will be provided to all 
    interested persons in the manner agreed upon by the applicant and the 
    Department within 15 days of the date of publication in the Federal 
    Register. Such notice shall include a copy of the notice of proposed 
    exemption as published in the Federal Register and shall inform 
    interested persons of their right to comment and to request a hearing 
    (where appropriate).
    
    SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
    applications filed pursuant to section 408(a) of the Act and/or section 
    4975(c)(2) of the Code, and in accordance with procedures set forth in 
    29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). 
    Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
    of 1978 (43 FR 47713, October 17, 1978) transferred the authority of 
    the Secretary of the Treasury to issue exemptions of the type requested 
    to the Secretary of Labor. Therefore, these notices of 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.
    
    State Street Bank and Trust Company Located in Boston, 
    Massachusetts
    
    [Application No. D-10159]
    
    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 (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,1 shall not apply to 
    the lending of securities to State Street Bank and Trust Company (State 
    Street), acting through its Financial Markets Group (FMG) (formerly the 
    Money Market Division of the Capital Markets Area) or acting through 
    any other division or U.S. affiliate of State Street that is a 
    successor to the activities of FMG; and shall not apply to the lending 
    of securities to any U.S. registered broker-dealers affiliated with 
    State Street (the Affiliated Broker Dealers) 2 by employee 
    benefit plans (the Client Plans or the Client Plan), including 
    commingled investment funds holding plan assets for which State Street, 
    through its Master Trust Services Division (the Trust Division) acts as 
    directed trustee or custodian, and for which State Street, through its 
    Global Securities Lending Division or any other similar division of 
    State Street or U.S. affiliate of State Street or of its parent 
    (collectively, GSL) acts as securities lending agent (or sub-agent); 
    and shall not apply to the receipt of compensation by GSL in connection 
    with the proposed transactions, provided that the following conditions 
    are met:
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        \1\ For purposes of this proposed exemption, references to 
    specific provisions of Title I of the Act, unless otherwise 
    specified, refer also to the corresponding provisions of the Code.
        \2\ FMG, any division or U.S. affiliate of State Street that 
    becomes a successor to the activities of FMG, and the Affiliated 
    Broker Dealers are collectively referred to, herein, as the SSB 
    Group.
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        a. Neither State Street, the SSB Group, GSL, nor any other division 
    or affiliate of State Street has or exercises discretionary authority 
    or control with respect to the investment of the assets of Client Plans 
    involved in the transaction (other than with respect to the investment 
    of cash collateral after securities have been loaned and collateral 
    received) or renders investment advice (within the meaning of 29 CFR 
    2510.3-21(c)) with respect to such assets, including decisions 
    concerning a Client Plan's acquisition or disposition of securities 
    available for loan;
        b. Before a Client Plan participates in a securities lending 
    program and before any loan of securities to the SSB Group is effected, 
    the fiduciary of such plan who is independent of State Street, GSL, the 
    SSB Group, and any other division or affiliate of State Street must 
    have:
        (1) Authorized and approved the securities lending authorization 
    agreement with GSL (the Agency Agreement), where GSL is acting as the 
    direct securities lending agent; or
        (2) Authorized and approved the primary securities lending 
    authorization agreement (the Primary Lending Agreement) with the 
    primary lending agent, where GSL is lending securities under a sub-
    agency arrangement with the primary lending agent 3; and
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        \3\ The Department, herein, is not providing relief for 
    securities lending transactions engaged in by primary lending 
    agents, other the GSL, beyond that provided, pursuant to Prohibited 
    Transaction Class Exemption 81-6 (PTCE 81-6) and Prohibited 
    Transaction Class Exemption 82-63 (PTCE 82-63). PTCE 81-6 was 
    granted 46 FR 7527, January 23, 1981, as amended at 52 FR 18754, May 
    19, 1987. The Notice of Proposed Exemption for application numbers 
    D-5598 and D-5776 was published at 46 FR 10570, February 3, 1981. 
    PTCE 82-63 was granted 47 FR 14804, April 6, 1982. The Notice of 
    Proposed Class Exemption was published at 46 FR 7518, January 23, 
    1981, as amended at 46 FR 10570, February 3, 1981.
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        (3) Approved the general terms of the securities loan agreement 
    (the Loan Agreement) between such Client Plan and the borrower, the SSB 
    Group, the specific terms of which are negotiated and entered into by 
    GSL;
        c. A Client Plan may terminate the Agency Agreement or the Primary 
    Lending Agreement at any time, without penalty to such plan, on five 
    (5) business days notice;
        d. The Client Plan will receive from the SSB Group (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 the SSB Group, 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 State Street or an 
    affiliate thereof, or any combination thereof, or other collateral 
    permitted under PTCE 81-6 (as amended from time to time or, 
    alternatively, any additional or superseding class exemption that may 
    be issued to cover securities lending by employee benefit plans);
        e. The market value of the collateral must, as of the close of 
    business on the
    
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    preceding business day, initially equal at least 102 percent (102%) of 
    the market value of the loaned securities. If the market value of the 
    collateral falls below 100 percent (100%) (or such greater percentage 
    agreed to by the parties) of the loaned securities, GSL will require 
    the SSB Group to deliver additional collateral by the close of business 
    on the following day such that the market value of the collateral will 
    again equal at least 102 percent (102%). The Loan Agreement will give 
    the Client Plans a continuing security interest in, title to, or the 
    rights of a secured creditor with respect to the collateral and a lien 
    on the collateral. GSL will monitor the level of the collateral daily;
        f. All GSL's procedures regarding the securities lending activities 
    will at a minimum conform to the applicable provisions of PTCE 81-6 and 
    PTCE 82-63;
        g. State Street will agree to indemnify and hold harmless each 
    lending Client Plan (including the sponsor and fiduciaries of such 
    Client Plan) against any and all damages, losses, liabilities, costs, 
    and expenses (including attorneys' fees) which the Client Plan may 
    incur or suffer directly arising out of the lending of the securities 
    of such Client Plan to the SSB Group;
        h. The Client Plan will receive the equivalent of all distributions 
    made to holders of the borrowed securities during the term of any 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;
        i. Prior to any Client Plan's approval of the lending of its 
    securities to the SSB Group, a copy of this Notice of Proposed 
    Exemption and a copy of the final exemption, if granted, will be 
    provided to the Client Plan;
        j. Only Client Plans with total assets having an aggregate market 
    value of at least $50 million will be permitted to lend securities to 
    the SSB Group;
        k. The terms of each loan of securities by the Client Plans to the 
    SSB Group will be at least as favorable to such plans as those of a 
    comparable arm's-length transaction between unrelated parties;
        l. Each Client Plan will receive monthly reports on the 
    transactions, including but not limited to the information described in 
    paragraph 26 below, so that an independent fiduciary of such plan may 
    monitor the securities lending transactions with the SSB Group;
        m. Before entering into the Loan Agreement and before a Client Plan 
    lends any securities to the SSB Group, an independent fiduciary of such 
    Client Plan will receive sufficient information, concerning the 
    financial condition of State Street, including but not limited to 
    audited and unaudited financial statements of State Street's parent 
    corporation; and
        n. The SSB Group will provide to a Client Plan prompt notice at the 
    time of each loan by such plan of any material adverse changes in State 
    Street's financial condition, since the date of the most recently 
    furnished financial statements.
    
    Summary of Facts and Representations
    
        1. State Street is a wholly-owned subsidiary of State Street Boston 
    Corporation, a bank holding company organized in 1970 under the laws of 
    the Commonwealth of Massachusetts. As a Massachusetts trust company and 
    a member bank of the Federal Reserve System, State Street is a 
    ``bank,'' as defined in both section 202(a)(2) of the Investment 
    Advisers Act of 1940 and section 581 of the Code. As of December 31, 
    1994, State Street's total assets were $21.7 billion, of which $16 
    billion (or 74%) were investment securities and money market assets and 
    $3.2 billion (or 15%) were loans.
        2. State Street, through its Trust Division, provides custodial 
    services, trustee, and related fiduciary services to its customers. In 
    this regard, the Trust Division has more than $1.6 trillion of assets 
    under custody and, as custodian, services $664 billion of pension and 
    other assets for U.S. pension plans, government plans, and other tax 
    exempt investors in North American. In addition, with $675 billion of 
    mutual fund assets under custody, it is represented that the Trust 
    Division services 36 percent (36%) of registered funds. It is 
    represented that at year-end 1994, the Trust Division also had $210 
    billion of bonds under trusteeship and $160 billion of assets under 
    management.
        3. State Street, acting through GSL, also provides securities 
    lending services to many of State Street's institutional clients. GSL, 
    on behalf of State Street's securities lending clients, negotiates the 
    terms of loans with borrowers, pursuant to a client-approved form of 
    loan agreement the terms of which may be modified from time to time 
    with the approval of the client, and otherwise acts as a liaison 
    between the lender and the borrower to facilitate the lending 
    transaction. As securities lending agent, GSL also has responsibility 
    for monitoring receipt of all required collateral and for marking such 
    collateral to market daily, so that adequate levels of collateral are 
    maintained. To the extent agreed upon with the client, GSL is also 
    responsible for investing the cash collateral after securities have 
    been loaned and collateral received. GSL also monitors and evaluates on 
    a continuing basis the performance and creditworthiness of the 
    borrowers of securities.
        GSL also may be retained from time to time by primary securities 
    lending agents to provide securities lending services in a sub-agency 
    capacity with respect to portfolio securities of the clients of such 
    primary lending agents. As securities lending sub-agent, GSL's role in 
    the lending transaction (i.e., negotiating the terms of loans with 
    borrowers, pursuant to a client-approved form of loan agreement the 
    terms of which may be modified from time to time with the approval of 
    the client, monitoring receipt of collateral, marking to market 
    required collateral, and investing cash collateral) parallels the role 
    under lending transactions in which GSL acts as primary lending agent 
    on behalf of its clients.
        The borrowers with whom GSL usually transacts as agent for the 
    lender are typically broker-dealers who use borrowed securities to 
    satisfy their trading requirements or to ``re-lend'' securities to 
    other broker-dealers, and others who need a particular security for 
    various periods of time. All such borrowing by broker-dealers is 
    required to conform to the Federal Reserve Board's Regulation T. 
    Borrowing purposes which are permitted, pursuant to Regulation T, 
    include the delivery of securities in the case of short sales, the 
    failure of a broker to receive securities it is required to deliver, or 
    other similar situations.
        4. State Street itself, however, acting through the SSB Group, is 
    also a borrower of securities, and indeed acts in this capacity, after 
    full disclosure and consent, with respect to many of GSL's 
    institutional clients, such as public pension plans which are not 
    covered by the Act. The SSB Group, as borrower, uses borrowed 
    securities to meet its obligations to deliver securities in connection 
    with its short sales, trade fails, or other similar situations, and to 
    engage in repurchase transactions with third parties.4 
    Acting as principal, the SSB
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        \4\ It is represented that Regulation T of the Federal Reserve 
    Board does not apply to the borrowing of securities by the SSB 
    Group, because the SSB Group is part of a bank.
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        Group actively engages in the borrowing and lending of securities, 
    with a daily outstanding loan volume averaging $2 billion.
        5. It is represented that GSL currently does not lend to the SSB 
    Group the
    
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    securities of any of State Street's trust or custody clients covered by 
    the Act, although as noted above, after full disclosure and consent, 
    GSL does lend U.S. government securities to the SSB Group for certain 
    of its clients who are not covered by the Act. It is represented that 
    the SSB Group and GSL have each developed an accounting system and 
    safeguards to service the needs of its respective client base. It is 
    represented that whenever trades are effected between GSL, acting as 
    securities lending agent, and the SSB Group, as borrower, such trades 
    are accomplished in the same manner as between completely independent 
    third parties. In this regard, such trades take place pursuant to an 
    established protocol, primarily over the telephone and through computer 
    trading screens used by all participants in the industry.
        6. State Street proposes to offer to Client Plans, for which the 
    Trust Division of State Street serves as directed trustee or custodian, 
    and GSL serves as securities lending agent (or sub-agent), the 
    opportunity to lend securities to the SSB Group.5 In 
    addition, State Street proposes that GSL and the SSB Group receive 
    compensation in connection with such securities lending transactions. 
    It is represented that State Street is a party in interest and a 
    fiduciary with respect to the Client Plans, pursuant to section 
    3(14)(A) of the Act, and a service provider to such plans, pursuant to 
    section 3(14)(B) of the Act. Because the Trust Division, GSL, and the 
    SSB Group are all part of the same legal entity, State Street, the 
    lending of securities to the SSB Group by Client Plans for which the 
    Trust Division serves as directed trustee or custodian and for which 
    GSL serves as securities lending agent (or sub-agent) could be deemed 
    to be a prohibited transaction under section 406(a)(1) (A) through (D) 
    of the Act for which exemptive relief would be necessary. In addition, 
    because State Street, through GSL, would be acting as securities 
    lending agent (or sub-agent) and, through the SSB Group, would be the 
    borrower of securities from the Client Plans, the proposed transactions 
    could be deemed to be prohibited under section 406 (b)(1) and (b)(2) of 
    the Act, as well.
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        \5\ For the sake of simplicity, future references to GSL'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 GSL is acting as sub-agent with respect to securities 
    lending activities, unless otherwise indicated specifically or by 
    the context of the reference.
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        7. With respect to various prohibited transactions which arise in 
    certain situations involving securities lending, there are two relevant 
    class exemptions, PTCE 81-6 and PTCE 82-63. PTCE 81-6 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. In this regard, condition number one of PTCE 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. PTCE 82-63 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. In this regard, PTCE 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 (i.e. a loan of 
    securities to a non-party in interest).
        Under the proposed arrangement, because GSL would have discretion 
    to lend securities of the Client Plans to the SSB Group, and because 
    both GSL and the SSB Group are divisions of State Street, the lending 
    of securities to the SSB Group by the Client Plans for which GSL serves 
    as securities lending agent (or sub-agent) may be outside the scope of 
    relief provided by PTCE 81-6 and by PTCE 82-63. Accordingly, State 
    Street has requested the Department to grant relief from section 
    406(a)(1) (A) through (D), (b)(1), and (b)(2) of the Act and the 
    corresponding provisions of the Code which would permit the SSB Group 
    to borrow securities from those Client Plans for which State Street, 
    through its Trust Division will be acting as directed trustee or 
    custodian, and through GSL will be acting as securities lending agent 
    (or sub-agent).
        In addition, State Street has requested relief from section 
    406(a)(1) (A) through (D), (b)(1), and (b)(2) and the corresponding 
    provisions of the Code which would permit GSL and the SSB Group to 
    receive compensation from a Client Plan in connection with the proposed 
    securities lending transactions. In this regard, it is represented that 
    the SSB Group will be compensated as any other independent borrower of 
    Client Plan securities would be (e.g., by receiving an agreed rebate 
    payment). In no event, will rates paid to the SSB Group be 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.
        8. If the requested exemption is granted, GSL represents that it 
    intends to employ the same procedures currently used in the case of 
    securities loans to unrelated third party borrowers and which GSL has 
    already incorporated into similar arrangements with institutional 
    clients not covered by the Act. Specifically, it is represented that 
    State Street will adopt and implement procedural safeguards that all 
    trades affected will take place at the same ``arms'' length'' prices 
    that would have been negotiated with similarly-situated third party 
    borrowers. In this regard, it is represented that the SSB Group, as 
    borrower, will receive a rebate fee comparable to the fee received by 
    independent borrowers, and GSL, as lender's agent for Client Plans, 
    will receive a fee specified in the agreement with such plans for 
    securities lending services. In this regard, it is represented that 
    such securities lending services will include monitoring the collateral 
    and acting appropriately to protect the interest of the lender in the 
    event of default by the borrower. It is further represented that with 
    respect to each Client Plan to which the proposed exemption would 
    apply, neither State Street, the SSB Group, GSL, nor any other division 
    or affiliate of State Street has or exercises discretionary authority 
    or control with respect to the investment of the assets of the plan 
    involved in the transaction (other than with respect to the investment 
    of cash collateral after securities have been loaned and collateral 
    received), or renders investment advice (within the meaning of 29 CFR 
    2510.3-21(c) with respect to those assets, including decisions 
    concerning a Client Plan's acquisition or disposition of securities 
    available for loan. Accordingly, it is represented that GSL will not be 
    in a position to influence the portfolio holdings of its Client Plans 
    in a manner that might increase or decrease the securities available 
    for lending to the SSB Group (or any other borrower). In addition, 
    State Street represents that the proposed lending program incorporates 
    the relevant conditions contained in class exemptions PTCE 81-6 and 
    PTCE 82-63.
        9. Several safeguards, described more fully below, are incorporated 
    into this exemption in order to ensure the protection of the assets of 
    the Client Plans involved in the proposed transactions. In this regard, 
    where GSL
    
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    is the direct securities lending agent, a fiduciary of a Client Plan 
    who is independent of State Street, GSL, the SSB Group, and any other 
    division or affiliate of State Street will sign the Agency Agreement 
    before such Client 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 the Loan Agreement to be 
    entered into on behalf of the Client Plan with borrowers, specify the 
    securities which are available to be loaned, and prescribe that a 
    borrower (including the SSB Group) is required to deliver collateral 
    having a value in excess of the value of the loaned securities (i.e. 
    not less than 102% or, in some cases, a higher agreed-upon percentage). 
    In addition, the Agency Agreement will provide that the securities will 
    be marked-to-market daily and provide a list of permissible borrowers, 
    including the SSB Group.
        The Agency Agreement will also set forth the basis and the method 
    for GSL's compensation from a Client Plan for the performance of 
    securities lending services. As set forth more fully below, the basis 
    for GSL's compensation will be its fixed percentage share of the 
    return, if any, on cash collateral or the applicable interest due on a 
    non-cash collateral loan. The actual rate of return that will be 
    divided between the Client Plan and GSL in such pre-agreed percentage 
    will vary each day (and indeed during the day from time to time) 
    according to the investment performance from each loan of securities. 
    It is represented that GSL's share with respect to each Client Plan 
    will be negotiated with such Client Plan and thereafter set forth in 
    the Agency Agreement on the date such agreement is executed.
        10. The Agency Agreement will contain provisions to the effect that 
    if the SSB Group is designated by a Client Plan as an approved 
    borrower, (i) such Client Plan will acknowledge that the SSB Group, 
    GSL, and the Trust Division are, or may be deemed to be, the same legal 
    entity, and (ii) GSL will represent to such Client Plan that each and 
    every loan made to the SSB Group on behalf of such plan will be at 
    market rates and will in no event be less favorable to such Client Plan 
    than a loan of such securities, made at the same time and under the 
    same circumstances, to an unaffiliated borrower.
        11. When GSL is lending securities under a sub-agency arrangement, 
    the primary lending agent will enter into a Primary Lending Agreement 
    with a fiduciary of a Client Plan, before such plan participates in the 
    securities lending program. It is represented that it is the 
    responsibility of the primary lending agent to obtain the approval of 
    the fiduciary of the Client Plan to such Primary Lending Agreement. It 
    is represented that the primary lending agent will be independent of 
    GSL and the SSB Group. As State Street will not be a party to the 
    Primary Lending Agreement, it is represented that the sub-agency 
    arrangement between GSL and the primary lending agent will obligate the 
    primary lending agent to provide assurance that the primary lending 
    agent was independent of the fiduciary of the Client Plan.
        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 
    loaned, prescription that a borrower is required to deliver collateral 
    having a specified value in excess of the value of the loaned 
    securities, and a list of approved borrowers (including the SSB Group). 
    The Primary Lending Agreement will specifically authorize the primary 
    lending agent to appoint sub-agents, including GSL, to facilitate its 
    performance of securities lending agency functions. Where GSL is 
    appointed to act as such a sub-agent, GSL would require that the 
    primary lending agent represent to GSL that the primary lending agent 
    has received prior approval of or has the authority to make the 
    decision to hire GSL.
        The Primary Lending Agreement will also set forth the basis and the 
    method 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 sub-agency agreement 
    (the Sub-Agency Agreement) with GSL under which the primary lending 
    agent will retain and authorize GSL, as sub-agent, to lend the 
    securities of the primary lending agent's Client Plans, in a manner 
    consistent with the terms and conditions as specified in the Primary 
    Lending Agreement. It is represented that the Primary Lending Agreement 
    and the Sub-Agency Agreement will not necessarily have identical terms, 
    because the procedures that State Street uses in operating its lending 
    program will be spelled out in its form agreement, and these may not be 
    identical to how the primary lending agent operates its own program. 
    For example, State Street may require that its Sub-Agency Agreement 
    contain certain specific provisions which the primary lending agent may 
    not have requested from the Client Plan. One such requirement is that 
    collateral initially equal 102 percent (102%) of the value of the 
    loaned securities, whereas the primary lending agent may have been 
    authorized to make loans of securities at less than 102 percent (102%) 
    collateral. State Street may also require recordkeeping in addition to 
    that specified in the Primary Lending Agreement and may require 
    different notice provisions.
        GSL represents that the Sub-Agency Agreement will contain 
    provisions which are in substance comparable to those described in 
    paragraphs 9 and 10 above, which would appear in an Agency Agreement in 
    situations where GSL is the primary lending agent. In this regard, GSL 
    will make representations in the Sub-Agency Agreement, as described in 
    paragraph 10 above, with respect to arm's-length dealing with the SSB 
    Group. The Sub-Agency Agreement will also set forth the basis and 
    method for GSL's compensation to be paid by the primary lending agent.
        12. In all cases, GSL will maintain records sufficient to assure 
    compliance with its representation that all loans to the SSB Group are 
    effectively at arm's-length terms. Such records will be provided to the 
    appropriate independent fiduciary of a Client Plan in the manner and 
    format agreed to with such fiduciary and without charge to such Client 
    Plan. A Client Plan may terminate the Agency Agreement at any time, 
    without penalty to such plan, on five (5) business days notice. It is 
    further represented that the Primary Lending Agreement may be subject 
    to a similar termination provision, if the primary lending agent is 
    relying on PTCE 81-6.
        13. GSL, on behalf of the Client Plans, will enter into a Loan 
    Agreement with the SSB Group that is in substantially similar form to 
    the one used from time to time, with all other borrowers. It is 
    represented that the Loan Agreement cannot be identical to that used 
    with an unrelated party, in part because, special disclosures must be 
    made to Client Plans, regarding the relationship between GSL, the SSB 
    Group, and the Trust Division, as operations divisions of State Street. 
    However, it is represented that the economic terms and procedures 
    required by the Loan Agreement will be identical to those negotiated 
    with unrelated borrowers.
    
    [[Page 51689]]
    
        Although GSL will negotiate with the SSB Group the terms of any 
    specific loan, the general terms 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 State Street. The Loan Agreement will 
    specify, among other things, the right of the Client Plan, acting 
    through GSL, to terminate a loan at any time and such plan's rights in 
    the event of any default by the SSB Group. The Loan Agreement will 
    explain the basis for compensation to the Client Plan for lending 
    securities to the SSB Group under each category of collateral. The Loan 
    Agreement also will contain a requirement that the SSB Group must pay 
    all transfer fees and transfer taxes related to the loans of 
    securities.
        14. Before entering into the Loan Agreement, State Street will 
    furnish its most recent available audited and unaudited financial 
    statements of its parent, State Street Boston Corporation, to GSL, and 
    in turn such statements will be made available to each Client Plan 
    before such plan is asked to approve the terms of the Loan Agreement. 
    The Loan Agreement will contain a requirement that the SSB Group must 
    provide to the Client Plan prompt notice at the time of a loan by such 
    plan of any material adverse changes in State Street's financial 
    condition, since the date of the most recently furnished financial 
    statements. If any such changes have taken place, GSL will not make any 
    further loans to the SSB Group, unless an independent fiduciary of such 
    Client Plan has approved the loan in view of the changed financial 
    condition.
        15. As noted in paragraph 9 and 10, the agreement by GSL to provide 
    securities lending services, as agent, to a Client Plan will be 
    embodied in the Agency Agreement. The Client Plan and GSL will, prior 
    to the commencement of any lending activity, agree to the fee 
    arrangement, as described in paragraph 9 above, under which GSL will be 
    compensated for its services as lending agent. 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 such Client 
    Plan who is independent of the SSB Group and GSL.
        Similarly, with respect to such arrangements under which GSL is 
    acting as securities lending sub-agent, 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 the fee, as the primary lending agent 
    determines in its sole discretion, to any sub-agent, including GSL, 
    which is to provide securities lending services to the Client 
    Plans.6 A Client Plan will be provided with any reasonably 
    available information which is necessary for the independent fiduciary 
    of such plan 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 such 
    fiduciary may reasonably request.
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        \6\ The foregoing provisions describe arrangements comparable to 
    conditions (c) and (d) of PTCE 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 participates in the securities lending 
    program, the special rule applicable to such funds concerning the 
    authorization of the compensation arrangement, as set forth in 
    paragraph (f) of PTCE 82-63, must be satisfied.
    ---------------------------------------------------------------------------
    
        16. Each time a Client Plan loans securities to the SSB Group, 
    pursuant to the Loan Agreement, GSL 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. When a 
    loan is collateralized with cash, the cash will be invested for the 
    benefit of and at the risk of the Client Plan, and resulting earnings 
    (net of a rebate rate to the borrower and the fee to the lending agent) 
    comprise the compensation to such plan with respect to the loan. Where 
    the collateral consists of obligations other than cash, the borrower 
    will pay a fee (loan premium) directly to the Client Plan. 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.
        17. The Client Plan will receive the equivalent of all 
    distributions made to holders of the borrowed securities during the 
    term of any 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. The 
    Loan Agreement will provide that the Client Plan may terminate any loan 
    at any time. Upon a termination, the SSB Group will be contractually 
    obligated to return the loaned securities to the Client Plan within 
    five (5) business days of notification (or such longer period of time 
    permitted pursuant to PTCE 81-6, as amended or superseded). If the SSB 
    Group fails to return the securities within the designated time, the 
    Client Plan 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 
    such plan associated with the sale and/or purchase.
        18. GSL will establish each day separate written schedules of 
    lending fees and rebate rates to assure uniformity of treatment among 
    borrowing brokers and to limit the discretion that GSL would have in 
    negotiating securities loans to the SSB Group. Loans to all borrowers 
    of a given security on that day will be made at rates or lending fees 
    on the relevant daily schedules or at rates or lending fees which may 
    be more advantageous to the Client Plans. It is represented that in no 
    case will loans be made to the SSB Group at rates or lending fees less 
    advantageous to the Client Plans than those on the schedule. The daily 
    schedule of rebate rates will be based on the current value of the 
    clients' reinvestment vehicles and on market conditions, as reflected 
    by demand for securities by borrowers other than the SSB Group. As with 
    rebate rates, the daily schedule of lending fees will also be based on 
    market conditions, as reflected by demand for securities by borrowers 
    other than the SSB Group, and will generally track the rebate rates 
    with respect to the same security or class of security.
        19. GSL will adopt maximum daily rebate rates for cash collateral 
    payable to the SSB Group on behalf of a lending Client Plan. Separate 
    maximum daily rebate rates will be established with respect to loans of 
    designated classes of securities such as U.S. government securities, 
    U.S. equities and corporate bonds, international fixed income 
    securities, and international equities. With respect to each designated 
    class of securities, the maximum rebate rate will be the lower of: (i) 
    The one month LIBOR rate, minus a stated percentage of such LIBOR rate 
    and, (ii) the client's actual reinvestment rate for the relevant cash 
    collateral, minus a stated percentage of such reinvestment rate, as 
    pre-approved by the independent fiduciary of the Client Plan. Thus, 
    when cash is used as collateral, the daily rebate rate will always be 
    lower than the rate of return to the Client Plans from authorized 
    investments for cash collateral by such stated percentage as shall be 
    pre-approved by the independent fiduciary. GSL will submit the formula 
    for determining the maximum daily rebate rates to an independent 
    fiduciary of the Client Plan for approval before lending any securities 
    to the SSB Group on behalf of such plan.
        20. GSL will also adopt minimum daily lending fees for non-cash 
    collateral payable by the SSB Group to
    
    [[Page 51690]]
    
    GSL on behalf of the Plan. Separate minimum daily lending fees will be 
    established with respect to loans of designated classes of securities, 
    such as U.S. government securities, U.S. equities and corporate bonds, 
    international fixed income securities, and international equities. With 
    respect to each designated class of securities, the minimum lending fee 
    will be stated as a percentage of the principal value of the loaned 
    securities. GSL will submit such minimum daily lending fees to an 
    independent fiduciary of the Client Plan for approval before initially 
    lending any securities to the SSB Group on behalf of such plan.
        21. For collateral other than cash, the lending fees charged the 
    previous day will be reviewed by GSL for competitiveness. Based on the 
    demand of the marketplace, this daily fee tends to remain constant and, 
    with respect to domestic securities and international debt securities, 
    is currently at least one twentieth of one percent of the principal 
    value of the loaned securities. With respect to international equity 
    securities, the daily fee is currently one fifth of one percent of the 
    principal value of the loaned securities. Because 50 percent (50%) or 
    more of securities loans by Client Plans will be to unrelated brokers 
    or dealers,7 the competitiveness of GSL's fee schedule will 
    be continuously tested in the marketplace. Accordingly, loans to the 
    SSB Group should result in a competitive rate of income to the lending 
    Client Plan.
    ---------------------------------------------------------------------------
    
        \7\ It is represented that this 50 percent (50%) requirement 
    applies regardless of the type of collateral used to secure the 
    loan.
    ---------------------------------------------------------------------------
    
        The method of determining the daily securities lending rates (fees 
    and rebates), the minimum lending fees payable by the SSB Group and the 
    maximum rebate payable to the SSB Group will be specified in an exhibit 
    attached to the Agency Agreement to be executed between the independent 
    fiduciary of the Client Plan and GSL in cases where GSL is the direct 
    securities lending agent.
        22. Should GSL recognize prior to the end of a business day that, 
    with respect to new and/or existing loans, it must change the rebate 
    rate or lending fee formula in the best interest of Client Plans, it 
    may do so (i) with respect to borrowers other than the SSB Group, at 
    the end of such business day, and (ii) with respect to the SSB Group, 
    upon GSL's receipt of a written approval of the Client Plan's 
    independent fiduciary.8
    ---------------------------------------------------------------------------
    
        \8\ GSL represents that it will not initiate any modification in 
    such rates or fees which would be detrimental to the Client Plans.
    ---------------------------------------------------------------------------
    
        GSL may propose a change in the lending fee or rebate rate 
    determination, as applicable, with respect to an outstanding loan by 
    delivering written notice of the effective date and the new 
    determination pursuant to which a lending fee or rebate rate, as the 
    case may be, may be determined at least five (5) business days before 
    the date of the proposed change. In the event that the Client Plans 
    does not consent to such change by not providing GSL with 
    acknowledgment of its consent in writing by such means that will ensure 
    receipt by GSL prior to 10:00 A.M. New York time, on the effective date 
    of the change, then GSL will not make such change. The applicant 
    represents that allowing GSL to request a modification to the lending 
    fee or the rebate rate formula with respect to an existing loan to the 
    SSB Group when market conditions change will be beneficial to the 
    Client Plans. According to the applicants, in the absence of the 
    ability to make such modification, the SSB Group may be forced by 
    market conditions to terminate the loan and seek better terms 
    elsewhere. Such termination may then force the Client Plan to seek new 
    borrowers for its securities who, in light of the changed market 
    conditions, are likely to negotiate for the lending fee or rebate rate 
    which the SSB Group would have received or paid had GSL had the written 
    authority from the independent fiduciary of the Client Plan to decrease 
    the lending fee or increase the rebate rate.
        23. While GSL will normally lend securities to requesting 
    borrowers, including, for these purposes, the SSB Group, on a ``first 
    come, first served'' basis, as a means of assuring uniformity of 
    treatment among borrowers, it should be recognized that in some cases 
    it may not be possible to adhere to a ``first come, first served'' 
    allocation. This can occur, for instance, where (a) the credit limit 
    established for such borrower by GSL and/or the Client Plan has already 
    been satisfied; (b) the ``first in line'' borrower is not approved as a 
    borrower by the particular Client Plan whose securities are sought to 
    be borrowed; or (c) the ``first in line'' borrower cannot be 
    ascertained, as an operational matter, because several borrowers spoke 
    to different GSL representatives at or about the same time with respect 
    to the same security. In situations (a) and (b), loans would normally 
    be effected with the ``second in line.'' In situation (c), securities 
    would be allocated equitably among all eligible borrowers.
        24. Under the Loan Agreement, State Street will agree to indemnify 
    and hold harmless each lending Client Plan (including the sponsor and 
    fiduciaries of such Client Plan) against any and all damages, losses, 
    liabilities, costs, and expenses (including attorneys' fees) which the 
    Client Plan may incur or suffer directly arising out of the lending of 
    the securities of such Client Plan to the SSB Group. Accordingly, State 
    Street will assure the Client Plan that the rate of return on each loan 
    will at a minimum equal the transactional cost to the plan of lending 
    securities to the SSB Group. The applicants contend that, as a result 
    of this indemnity, the rate of return earned by Client Plans from 
    lending to the SSB Group will, in total, exceed the return from lending 
    securities to other brokers.
        25. The Client Plan will receive collateral from the SSB Group 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 the SSB Group. The 
    collateral will consist 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 State Street or 
    its affiliates) or any combination thereof, or such other types of 
    collateral which might be permitted by the Department under PTCE 81-6, 
    as amended or superseded, relating to securities lending activities. 
    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 (102%) of 
    the market value of the loaned securities. The Loan Agreement will give 
    the Client Plan a continuing security interest in, title to, or the 
    rights of a secured creditor with respect to the collateral and a lien 
    on the collateral. GSL will monitor the level of the collateral daily. 
    If the market value of the collateral falls below 100 percent (100%) 
    (or such greater percentage agreed to by the parties) of that of the 
    loaned securities, GSL will require the SSB Group to deliver by the 
    close of business the next day sufficient additional collateral to 
    bring the level back to at least 102 percent (102%).
        26. Each Client Plan participating in the lending program will be 
    sent a monthly transaction report which 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 may be) at which the security is loaned, and the number of days 
    the security has been on loan.
    
    [[Page 51691]]
    
        In order to provide the means for monitoring lending activity, 
    rates on loans to the SSB Group compared with loans to other brokers, 
    and the level of collateral on the loans, it is represented that the 
    monthly report will show, on a daily basis, the market value of all 
    outstanding security loans to the SSB Group and to other borrowers as 
    compared to the total collateral held for both categories of loans. 
    Further, the monthly report will state the daily fees where collateral 
    other than cash is utilized and will specify the details used to 
    establish the daily rebate payable to all brokers where cash is used as 
    collateral. The monthly report also will state, on a daily basis, the 
    rates at which securities are loaned to the SSB Group compared with 
    those at which securities are loaned to other brokers. This statement 
    will give an independent fiduciary information which can be compared to 
    that contained in the daily rate schedule.
        27. With respect to the proposed transactions, GSL will make and 
    retain for six (6) months tape recordings evidencing all securities 
    loan transactions with the SSB Group. Also, if requested by the lending 
    customer, GSL shall provide daily confirmations of securities lending 
    transactions; and GSL shall provide to lending customers monthly 
    account reports, or if requested by the customer, weekly, or daily 
    reports, setting forth for each transaction made or outstanding during 
    the relevant reporting period the loaned securities, the related 
    collateral, rebates and loan premiums, and such other information in 
    such format as shall be agreed to by the parties.
        28. Only Client Plans with total assets having an aggregate market 
    value of at least $50 million will be permitted to lend securities to 
    the SSB Group. This restriction is intended to assure that any lending 
    to the SSB Group will be monitored by an independent fiduciary of above 
    average experience and sophistication in matters of this kind.
        29. State Street represents that the proposed transactions are in 
    the interest of the Client Plans in that the lending of securities is 
    an attractive investment opportunity. In this regard, a Client Plan 
    which participates in securities lending is able to earn a fee for 
    lending the securities to the borrower while continuing to receive the 
    economic benefits of receiving dividends, interest payments, and other 
    distributions made with respect to the loaned securities.
        It is represented that failure to grant the requested exemption 
    will limit the number of companies to whom the Client Plans can lend 
    securities by excluding the SSB Group, an active securities borrower 
    that currently borrows securities in lending transactions or in 
    connection with reverse repurchase agreements worth in excess of $5 
    billion daily.
        30. It is represented that the proposed exemption is 
    administratively feasible, in that it will not require any ongoing 
    involvement by the Department. In this regard, it is represented that 
    compliance with the requirements of the exemption can be readily 
    monitored by the independent fiduciaries of the Client Plans, as well 
    as by State Street's own internal audit and compliance personnel. 
    Further, it is represented that State Street will bear the cost of 
    filing the application for exemption and the costs associated with the 
    transfers of the loaned securities.
        31. In summary, the applicants represent that the described 
    transactions will satisfy the statutory criteria of section 408(a) of 
    the Act because:
        (a) Neither State Street, the SSB Group, GSL, nor any other 
    division or affiliate of State Street will have or exercise 
    discretionary authority or control with respect to the investment of 
    plan assets involved in the transaction (other than with respect to the 
    investment of cash collateral after securities have been loaned and 
    collateral received), or render investment advice (within the meaning 
    of 29 CFR 2510.3-21(c)) with respect to those assets, including 
    decisions concerning a Client Plan's acquisition or disposition of 
    securities available for loan;
        (b) Before a Client Plan participates in a securities lending 
    program and before any loan of securities is effected, the fiduciary of 
    such plan who is independent of State Street, GSL, the SSB Group, and 
    any other division or affiliate of State Street will authorize and 
    approve the Agency Agreement or the Primary Lending Agreement, as 
    appropriate, and will approve the general terms of the Loan Agreement 
    between the Client Plan and the SSB Group;
        (c) a Client Plan may terminate the Agency Agreement at any time, 
    without penalty to such plan, on five (5) business days notice;
        (d) the Client Plans will receive from the SSB Group a continuing 
    security interest in, title to, or the rights of a secured creditor 
    with respect to the collateral and a lien on various forms of 
    collateral on each loan to the SSB Group which initially will be worth 
    at least 102 percent (102%) of the market value of the loaned 
    securities, and which will be monitored daily by GSL to insure that the 
    market value of the collateral never falls below 100 percent (100%) of 
    the market value of the loaned securities (or such greater percentage 
    agreed to by the parties);
        (e) all the procedures under the proposed transactions will, at a 
    minimum, conform to the applicable provisions of PTCE 81-6 and PTCE 82-
    63;
        (f) State Street will indemnify and hold harmless each lending 
    Client Plan (including the sponsor and fiduciaries of such Client Plan) 
    against any and all damages, losses, liabilities, costs, and expenses 
    (including attorneys' fees) which the Client Plan may incur or suffer 
    directly arising out of the lending of the securities of such Client 
    Plan to the SSB Group;
        (g) the lending arrangements will permit the Client Plans to lend 
    to the SSB Group, a major borrower of securities, and will enable such 
    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;
        (h) prior to any Client Plan's approval of the lending of its 
    securities to the SSB Group, a copy of this Notice of Proposed 
    Exemption and a copy of the final exemption, if granted, will be 
    provided to the Client Plan;
        (i) only Client Plans with total assets having an aggregate market 
    value of at least $50 million will be permitted to lend securities to 
    the SSB Group;
        (j) the terms of each loan of securities between the Client Plans 
    and the SSB Group will be at least as favorable to such plans as those 
    of a comparable arm's-length transaction between unrelated parties;
        (k) the Client Plans will receive monthly reports, so that an 
    independent fiduciary of such plans may monitor the securities lending 
    transactions with the SSB Group;
        (l) Before entering into the Loan Agreement and before a Client 
    Plan lends any securities to the SSB Group, an independent fiduciary of 
    such Client Plan will receive sufficient information, concerning the 
    financial condition of State Street, including but not limited to 
    audited and unaudited financial statements of State Street's parent 
    corporation; and
        (m) The SSB Group will provide to a Client Plan prompt notice at 
    the time of each loan by such plan of any material adverse changes in 
    State Street's financial condition, since the date of the most recently 
    furnished financial statements.
    
    [[Page 51692]]
    
    Notice to Interested Persons
    
        Included among those persons who may be interested in the pendency 
    of the proposed exemption are the investment committee(s) or trustee(s) 
    of any Client Plan(s) which are interested in lending securities to the 
    SSB Group. It is represented that the applicant will furnish at its 
    cost these various classes of interested persons with a copy of the 
    Notice of Proposed Exemption (the Notice), plus a copy of the 
    supplemental statement (Supplemental Statement), as required, pursuant 
    to 29 CFR 2570.43(b)(2) within fifteen (15) calendar days of 
    publication of the Notice in the Federal Register. Notification will be 
    provided to all the investment committee(s) or trustee(s) of any Client 
    Plan(s) which are interested in lending securities to the SSB Group 
    either by hand delivery or by mailing first class of a copy of the 
    Notice, plus a copy of the Supplemental Statement. It is represented 
    that the applicant will at its cost provide a copy of such Notice and a 
    copy of the final exemption, if granted, to Client Plans after the 
    final exemption has been issued and prior to any Client Plan's approval 
    of the lending of securities to the SSB Group.
    
    FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the 
    Department, telephone (202) 219-8883. (This is not a toll-free number.)
    
    Franklin & Davis, P.C. Profit Sharing Plan (the Plan) Located in Troy, 
    Michigan
    
    [Application No. D-10450]
    
    Proposed Exemption
    
        The Department is considering granting an exemption under the 
    authority of section 4975(c)(2) of the Code and in accordance with the 
    procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
    32847, August 10, 1990). If the exemption is granted, the sanctions 
    resulting from the application of section 4975 of the Code, by reason 
    of section 4975(c)(1) (A) through (E) of the Code, shall not apply to 
    two proposed loans (the Loans) totaling $229,000 to Franklin & Davis, 
    P.C. (F&D), the Plan's sponsor and a disqualified person with respect 
    to the Plan, by the individual account (the Account) of Bruce W. 
    Franklin (Mr. Franklin), provided the following conditions are 
    satisfied: (a) The terms of the Loans are at least as favorable to the 
    Plan as those obtainable in arm's-length transactions with an unrelated 
    party; (b) the Loans do not exceed 25% of the assets of the Account; 
    (c) the first Loan (Loan 1) is secured by a second mortgage on certain 
    real property (the Property) which has been appraised by a qualified 
    independent appraiser to have a fair market value not less than 150% of 
    the amount of Loan 1 plus the balance of the first mortgage which it 
    secures; (d) the second Loan (Loan 2) is secured by certain securities 
    (the Securities) which have a fair market value not less than 200% of 
    Loan 2; and (e) the fair market value of the collateral remains at 
    least equal to the percentages described in conditions (c) and (d), 
    above, throughout the duration of the Loans.9
    ---------------------------------------------------------------------------
    
        \9\ Since Mr. Franklin is the sole owner of F&D and the only 
    participant in the Plan, there is no jurisdiction under Title I of 
    the Act pursuant to 29 CFR 2510.3-3(b). However, there is 
    jurisdiction under Title II of the Act pursuant to section 4975 of 
    the Code.
    ---------------------------------------------------------------------------
    
    Summary of Facts and Representations
    
        1. F&D is a corporation located in Troy, Michigan, which is engaged 
    in the practice of law. The Plan is a defined contribution plan with 
    one participant, Mr. Franklin, who is also the Plan's trustee. As of 
    March 31, 1997, Mr. Franklin's Account balance was approximately 
    $916,000.
        2. F&D wishes to borrow $229,000 from the Account, which represents 
    25% of the current fair market value of the Account. The money will be 
    loaned to F&D in two separate Loans. The Loans will each be amortized 
    over a 10 year period, with equal monthly payments of principal and 
    interest over the 10 year term. The interest rate for each Loan will be 
    9.5% per annum. The total monthly payments for the Loans will be 
    $2,963.20 per month. Ms. Linda Walden, Vice President of First Citizens 
    Bank (the Bank) of Newnan, Georgia, has represented in a letter dated 
    June 26, 1997 that the Bank would lend money to F&D at the same terms 
    as those of the Loans.
        3. Loan 1 will be secured by the Property, which consists of Mr. 
    and Mrs. Franklin's residence, which is located at 3631 Brookside, 
    Bloomfield Township, Michigan. The Property has been appraised by Mr. 
    James Valiquett, an independent appraiser in Farmington, Michigan, to 
    have a fair market value of $720,000 as of October 8, 1996. The 
    Property has a first mortgage in the amount of $335,136. Loan 1 would 
    be secured by a second mortgage on the Property in the amount of 
    $144,864. Thus, the appraised fair market value of the Property would 
    represent 150% of the total outstanding principal amount of debt 
    secured by the Property. The applicant represents that the mortgage to 
    the Plan will be duly recorded.
        4. Loan 2, which will be in the principal amount of $84,136, will 
    be secured by the Securities. The Securities are publicly traded stock 
    owned by Mr. and Mrs. Franklin, and consist of 257,084 shares of Royal 
    Silver Mines, Inc. which is traded on the NASDAQ stock exchange. The 
    Securities are currently valued at $192,813, which represents 
    approximately 230% of the principal amount of Loan 2. The applicant 
    represents that the Plan's security interest in the Securities will be 
    duly recorded.
        5. In summary, the applicant represents that the proposed 
    transactions satisfy the criteria contained in section 4975(c)(2) of 
    the Code for the following reasons: (a) The Loans represent not more 
    than 25% of the assets of the Account; (b) the terms of the Loans will 
    be at least as favorable to the Plan as those obtainable in arm's-
    length transactions with an unrelated party, as demonstrated by the 
    letter from the Bank; (c) Loan 1 will be secured by a second mortgage 
    on the Property, which has been determined by a qualified, independent 
    appraiser to have a fair market value of not less than 150% of the 
    total principal amount of the loans that it will secure; (d) Loan 2 
    will be secured by the Securities, which are publicly traded securities 
    with a current fair market value of approximately 230% of Loan 2; and 
    (e) Mr. Franklin is the only participant in the Plan to be affected by 
    the transactions, and he desires that the transactions be consummated.
    
    NOTICE TO INTERESTED PERSONS: Since Mr. Franklin is the only Plan 
    participant to be affected by the proposed transactions, the Department 
    has determined that there is no need to distribute the notice of 
    proposed exemption to interested persons. Comments and requests for a 
    hearing are due within 30 days from the date of publication of this 
    notice of proposed exemption in the Federal Register.
    
    FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department, 
    telephone (202) 219-8881. (This is not a toll-free number.)
    
    The Sperry Rail, Inc. Retirement Plan (the Plan) Located in Danbury, 
    Connecticut
    
    [Application No. D-10452]
    
    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
    
    [[Page 51693]]
    
    FR 32836, 32847, August 10, 1990). If the exemption is granted, the 
    restrictions of sections 406(a), 406(b)(1) and (b)(2) of the Act and 
    the sanctions resulting from the application of section 4975 of the 
    Code, by reason of section 4975(c)(1)(A) through (E) of the Code, shall 
    not apply to the proposed loan (the Loan) by the Plan of $965,000 to 
    Sperry Rail, Inc. (Sperry), the Plan sponsor and a party in interest 
    with respect to the Plan, provided the following conditions are 
    satisfied: (a) The Loan does not exceed 25% of the assets of the Plan; 
    (b) the Loan is at terms not less favorable to the Plan than those 
    obtainable in an arm's-length transaction with an unrelated party; (c) 
    the Loan is secured by personal property (the Property) that has been 
    appraised by an independent appraiser as having a fair market value not 
    less than 200% of the principal amount of the Loan; (d) an independent 
    fiduciary has reviewed the proposed Loan on behalf of the Plan and has 
    determined that the Loan is in the best interest of the Plan and its 
    participants and beneficiaries; and (e) the Plan's independent 
    fiduciary will monitor the Loan throughout its duration to ensure that 
    it remains in the best interest of the Plan and continues to meet the 
    conditions of the exemption proposed herein.
    
    Summary of Facts and Representations
    
        1. Sperry, the Plan sponsor, is in the railroad track inspection 
    business and maintains its executive offices in Danbury, Connecticut. 
    Sperry is a member of a controlled group of corporations. The other 
    members of the controlled group are Sperry's parent corporation, 
    Longview Holdings, Inc. (LHI), and Longview Inspection, Inc., another 
    subsidiary of LHI. The Plan is a defined benefit plan that has 
    approximately 192 participants and assets of $4,062,320 as of July 1, 
    1997.
        2. Sperry has requested the exemption proposed herein to permit it 
    to borrow $965,000 from the Plan. The Loan is to be repaid over a 
    period of 15 years. The interest rate for the Loan is to be 1.5% plus 
    the yield on 30 year Treasury Bonds on the outstanding balance, which 
    is currently approximately 6.90% (which, when added to the 1.5% yields 
    approximately 8.40%). For the first three years of the Loan, Sperry 
    will make equal monthly payments of principal and interest in the 
    amount of $5,361.11. The interest rate (and monthly payment amount) 
    will be adjusted every 3 years to an amount equal to 1.5% above the 
    then-current yield on 30 year U.S. Treasury Bonds. The applicant 
    represents that when the interest rate is reset, it shall never be less 
    than the interest rate applicable at the start of the Loan. Mr. J. 
    Scott Bognar, Vice President of Putnam Trust (the Bank), a subsidiary 
    of Bank of New York, has reviewed the proposed terms of the Loan and 
    has determined that they constitute fair market value terms and are 
    commercially reasonable.
        3. The Loan will be secured by the Property, which consists of a 
    Sperry Induction Detector Car bearing registration number: SRS 148, and 
    Sperry spare parts inventory, together with all accessions, 
    accessories, attachments, parts, equipment and repairs which may be 
    affixed to or used in connection with the Property. The applicant 
    represents that the Plan will have a first priority interest in the 
    Property, and Sperry will execute such financing statements as are 
    necessary to perfect the Plan's interest in the Property. The Property 
    has been appraised by R.L. Banks & Associates, Inc. (Banks), 
    Transportation Economists and Engineers, an independent expert with 
    offices in Washington, D.C. Banks has determined that as of December 
    27, 1996, the fair market value of Car Number 148 was $803,720, and the 
    value of the Sperry spare parts inventory was $1,500,000. Thus, Banks 
    has appraised the Property to have a total fair market value of 
    $2,303,720 as of December 27, 1996. This would represent approximately 
    2.4 times the principal amount of the Loan.
        4. Mr. Paul Mishkin, a certified public accountant has been 
    retained by the Plan to be its independent fiduciary with respect to 
    the proposed Loan. Mr. Mishkin represents that he has more than 25 
    years' experience in both private industry and public accounting 
    working with large publicly-held corporations as well as significant 
    private companies. He has spent a substantial portion of that time 
    analyzing corporate structures and evaluating financial alternatives. 
    Mr. Mishkin represents that he has no financial interest in Sperry or 
    its related entities, nor does he provide any services to Sperry or its 
    affiliates. Mr. Mishkin has reviewed the terms of the proposed Loan and 
    has determined that they are equal or more favorable to the Plan than 
    those obtainable from an unrelated borrower. Mr. Mishkin represents 
    that the Loan is appropriate for the Plan and in the best interest of 
    the Plan's participants and beneficiaries and protective of their 
    rights.
        5. Mr. Mishkin represents that he will monitor and enforce 
    compliance with the terms of the Loan. He will monitor monthly payments 
    made by Sperry. In the event payments are not made on a timely basis, 
    he will explore all avenues of recovery, including the right to sell 
    the Property. Additionally, Mr. Mishkin will periodically inspect the 
    condition of the Property, including obtaining current appraisals at 
    Sperry's expense, to insure that the collateral maintains a value of 
    200% of the outstanding Loan amount at all times. If the collateral 
    value falls below 200%, Mr. Mishkin has the authority to require Sperry 
    to add additional collateral to restore the Plan's secured interest to 
    200%. Alternatively, Mr. Mishkin has the authority to accelerate 
    repayments of principal consistent with any collateral shortfall.
        6. In summary, the applicant represents that the proposed 
    transaction satisfies the criteria of section 408(a) of the Act 
    because: (a) The Loan represents not more than 25% of the assets of the 
    Plan; (b) the Loan is at terms not less favorable to the Plan than 
    those obtainable in an arm's-length transaction with an unrelated 
    party, as demonstrated by the representation from the Bank; (c) the 
    Loan is secured by the Property, which has been appraised by an 
    independent appraiser as having a fair market value approximately 240% 
    of the principal amount of the Loan; (d) Mr. Mishkin, the Plan's 
    independent fiduciary, has reviewed the proposed Loan on behalf of the 
    Plan and has determined that the Loan is in the best interest of the 
    Plan and its participants and beneficiaries; and (e) the Plan's 
    independent fiduciary will monitor the Loan throughout its duration to 
    ensure that it remains in the best interest of the Plan and continues 
    to meet the conditions of the exemption proposed herein.
    
    FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department, 
    telephone (202) 219-8881. (This is not a toll-free number.)
    
    Crown American Properties L.P. Retirement Savings Plan (the Plan) 
    Located in Johnstown, Pa.
    
    [Application No. D-10454]
    
    Proposed Exemption
    
        The Department is considering granting an exemption under the 
    authority of section 408(a) of the Act and section 4975(c)(2) of the 
    Code and in accordance with the procedures set forth in 29 CFR Part 
    2570, Subpart B (55 FR 32836, August 10, 1990). If the exemption is 
    granted, the restrictions of section 406(a), 406 (b)(1) and (b)(2), and 
    section 407(a) of the Act and the sanctions resulting from the 
    application of section 4975 of the Code, by reason of section 
    4975(c)(1) (A) through (E) of the Code, shall not apply to the 
    purchase, holding or sale by participant-
    
    [[Page 51694]]
    
     directed accounts in the Plan of shares of Crown American Realty Trust 
    (the Crown REIT), an affiliate of Crown American Properties L.P. (Crown 
    American), the Plan's sponsor and, as such, a party in interest with 
    respect to the Plan, provided that the following conditions are met:
        (A) Any purchase or sale of the Crown REIT shares by a participant 
    account (an Account) is made solely in accordance with the directions 
    of the participant whose account is making the purchase or sale;
        (B) Immediately following any purchase of the Crown REIT shares by 
    an Account, the percentage of the total value of the Account invested 
    in the Crown REIT shares does not exceed 25 percent, as measured based 
    on the value of the assets held by such Account as of the close of the 
    prior business day;
        (C) Compliance with the terms and conditions of this proposed 
    exemption, including the 25 percent limit described in Paragraph (B) 
    above, is monitored by PNC Bank, National Association, as the Plan's 
    trustee, which is independent of the Crown REIT and Crown American or 
    any affiliate thereof;
        (D) With respect to any decisions made by a Plan participant for a 
    purchase or sale of Crown REIT shares by an Account, neither Crown 
    American, PNC, nor any of their affiliates has discretionary authority 
    or control with respect to the investment of the Plan assets involved 
    in the transaction, other than as required for PNC to monitor and 
    enforce compliance with the 25 percent limit described in Paragraph (C) 
    above, or renders any investment advice [within the meaning of 29 CFR 
    2510.3-21(c)] with respect to those assets;
        (E) All purchases and sales of the Crown REIT shares by the Plan 
    are executed:
        (1) for cash;
        (2) on the national exchange on which the Crown REIT shares are 
    primarily traded (the Primary Exchange); and
        (3) at the prevailing market price for the Crown REIT shares on the 
    Primary Exchange at the time of the transaction;
        (F) Notwithstanding the provisions contained in (E) above, 
    purchases and sales of the Crown REIT shares may occur between the 
    Accounts within the Plan in order to avoid brokerage commissions and 
    other transaction costs, provided that the price received by each 
    Account is equal to the closing price for the Crown REIT shares on the 
    NYSE on the date of the transaction;
        (G) Crown American maintains for a period of six years the records 
    necessary to enable the persons described below in paragraph (H) to 
    determine whether the conditions of this exemption have been met, 
    except that (1) a prohibited transaction will not be considered to have 
    occurred if, due to circumstances beyond the control of Crown American, 
    the records are lost or destroyed prior to the end of the six-year 
    period, and (2) no party in interest other than Crown American or an 
    affiliate shall be subject to the civil penalty that may be assessed 
    under section 502(i) of the Act or to the taxes imposed by section 4975 
    (a) and (b) of the Code if the records are not maintained or are not 
    available for examination as required by paragraph (H) below; and
        (H)(1) Except as provided below in paragraph (H)(2) and 
    notwithstanding any provisions of section 504(a)(2) of the Act, the 
    records referred to in paragraph (G) are unconditionally available at 
    their customary location for examination during normal business hours 
    by--
        (i) Any duly authorized employee or representative of the 
    Department or the Internal Revenue Service,
        (ii) Any fiduciary of the Plan or any duly authorized employee or 
    representative of such fiduciary, and
        (iii) Any participant or beneficiary of the Plan or duly authorized 
    employee or representative of such participant or beneficiary;
        (2) None of the persons described in paragraph (H)(1) (ii) and 
    (iii) shall be authorized to examine trade secrets of Crown American, 
    or commercial or financial information which is privileged or 
    confidential.
    
    Summary of Facts and Representations
    
        1. The Plan is a defined contribution plan sponsored by Crown 
    American. The Plan is a profit sharing plan that allows for elective 
    deferral contributions by Plan participants in accordance with section 
    401(k) of the Code. Elective deferrals may not exceed 15 percent of a 
    participant's compensation. In addition, Crown American may make 
    matching contributions and employer contributions.
        As of June 30, 1997, the Plan had approximately $5.6 million in 
    assets and covered 449 participants and beneficiaries.
        The trustee of the Plan is PNC, a banking corporation with its 
    principal place of business in Pittsburgh, Pennsylvania. PNC is 
    independent of Crown American and its affiliates.
        Plan participants are responsible for determining how their 
    contributions and account balances are to be allocated among the 
    investment options available under the Plan. The eleven current 
    investment options are an investment contract fund, two fixed income 
    funds, two balanced funds, an S&P 500 Index Fund, two growth funds, a 
    small-capitalization equity fund, and two international funds.
        2. Crown American is a Delaware limited partnership through which 
    the Crown REIT conducts its business operations. Crown American 
    currently has about 400 employees who are engaged in executive, asset 
    and property management, leasing, development, construction, financial, 
    legal and administrative operations relating to the shopping center 
    businesses owned by the Crown REIT.
        The sole general partner of Crown American is the Crown REIT, which 
    also owned a 74.47 percent interest in Crown American as of August 31, 
    1996. The other 25.53 percent interests are limited partnership 
    interests owned by Crown Investment Trust, a Delaware business trust, 
    and Crown American Investment Company, a Delaware corporation, each 
    owned by the persons who developed the Crown REIT. The Crown REIT, as 
    sole general partner, controls the management of Crown American, 
    although Crown Investment Trust and Crown American Investment Company 
    have approval rights over certain decisions.
        3. The Crown REIT is a Maryland real estate investment trust that 
    owns interests in a number of enclosed shopping mall properties. The 
    Crown REIT conducts its business activities through two partnerships, 
    one of which is Crown American.
        The Crown REIT was created in 1993. The Crown REIT has one class of 
    equity interests, entitled ``Common Shares of Beneficial Interest'' 
    (i.e. the Shares). There were 27,667,636 Shares outstanding as of April 
    15, 1997. The Shares are traded on the New York Stock Exchange (NYSE), 
    which is currently considered the Primary Exchange for purposes of the 
    proposed exemption (see Condition (E)(2) and (E)(3) above).
        The average trading volume for the Shares is currently 
    approximately 300,000 Shares per week. The applicant states that the 
    average daily trading volume during 1996 was 96,100 Shares, and the 
    annual trading volume during that year was 18,696,300 Shares, or 
    approximately $148.6 million at the current stock price of $8 per 
    share, as of July 1997. The applicant states further that during the 
    period from July 1996 until June 1997, the price per share of the 
    Shares fluctuated from a low of $7.25 to a high of $8.75.10
    ---------------------------------------------------------------------------
    
        \10\ The applicant states that based on current Plan assets of 
    $5.6 million, the maximum amount that could be transferred into the 
    Shares as an investment option for the Plan would be $1.4 million 
    (25 percent of $5.6 million). This amount would represent 
    approximately .8 percent of the annual trading volume. The maximum 
    annual projected new funds that could be invested in the Shares, 
    based on 25 percent of annual Plan contributions, could not exceed 
    $260,000 at current contribution rates, which would be just under .2 
    percent of the annual trading volume. Thus, the applicant does not 
    anticipate that trading by the Plan in the Shares will exceed one 
    (1) percent of annual trading volume during the first year, or .2 
    percent of annual trading volume during subsequent years. Since not 
    all participants will be investing up to 25 percent of their 
    Accounts in the Shares, and because trading will be spread out over 
    time with transactions being netted between Accounts when possible, 
    the applicant states that the actual percentages are likely to be 
    much lower. Therefore, the projected impact of the Plan's trading on 
    overall trading activity and the market value of the Shares is 
    expected to be negligible.
    
    ---------------------------------------------------------------------------
    
    [[Page 51695]]
    
        4. Crown American, as the named fiduciary of the Plan, has 
    determined that it would be prudent and in the interests of the Plan's 
    participants and beneficiaries to make the Shares available as an 
    investment option under the Plan, to supplement the eleven current 
    investment options. Crown American states that the Shares are the 
    equivalent of ``employer securities' \11\ with respect to the Plan (see 
    discussion in Paragraph 5 below). Therefore, Crown American believes 
    that having the Shares available as an investment option would allow 
    the Plan participants to share in the growth of their employer's 
    business. Crown American represents that since the Shares are currently 
    traded daily on the NYSE, they should be considered a liquid investment 
    that can be easily valued on a daily basis.
    ---------------------------------------------------------------------------
    
        \11\ Section 407(d)(1) of the Act states that an ``employer 
    security'' is a security issued by an employer of employees covered 
    by the plan, or by an affiliate of such employer.
    ---------------------------------------------------------------------------
    
        If the proposed exemption is granted, Plan participants will 
    decide, as an additional investment option under the Plan, whether to 
    invest any of their account balances (i.e. Accounts) in the Shares. 
    Participants will be allowed to: (a) allocate a specified percentage of 
    their elective deferral contributions to an investment in the Shares, 
    and/or (b) transfer amounts from their investments in other Plan 
    investment options to the Shares. The Plan will require that a Plan 
    participant could not invest more than 25 percent of the assets in the 
    Account in the Shares, measured at the time of any proposed investment 
    in Shares using the Account values as of the previous business day.
        Compliance with the 25 percent limitation will be monitored by PNC, 
    the Plan's trustee, as an independent plan fiduciary. If more than 25 
    percent of an Account is already invested in Shares, or if a directed 
    investment would cause the Account to exceed the 25 percent limit, PNC 
    will not permit any additional investment by that Account in the 
    Shares.
        Purchases and sales of Shares by the Plan, which would result 
    solely from participant contributions or investment transfer decisions, 
    will be executed on the NYSE at the prevailing market price (subject to 
    applicable brokerage commissions) at the time of such transactions. 
    However, to avoid brokerage commissions and other transaction costs, 
    purchases and sales will be made between the Accounts to the extent 
    possible (i.e. ``netted'' transactions). Any such ``netted'' 
    transactions will be valued at the closing market price for the Shares 
    on the NYSE on the date of the transaction and would be executed in a 
    non-discretionary, mechanical manner. \12\ All purchases and sales of 
    the Shares by the Plan will be for cash.
    ---------------------------------------------------------------------------
    
        \12\ The applicant states that purchases and sales between the 
    Accounts would be considered intra-Plan transactions that would not 
    create separate prohibited transactions under section 406 of the 
    Act. In this regard, the Department is providing no opinion in this 
    proposed exemption as to whether cross-trades of employer securities 
    between participant accounts within a plan would violate any 
    provisions of Part 4 of Title I of the Act. However, the Department 
    notes that section 406(b)(2) of the Act prohibits a plan fiduciary 
    from acting, in his individual or in any other capacity, in any 
    transaction on behalf of a party (or represent a party) whose 
    interests are adverse to the interests of the plan or the interests 
    of its participants and beneficiaries. [emphasis added]
    ---------------------------------------------------------------------------
    
        PNC will not be providing brokerage services to the Plan. PNC will 
    place all trades of the Shares for execution through an independent 
    broker-dealer.
        Crown American states that it would not render any investment 
    advice, within the meaning of section 3(21)(A)(ii) of the Act, to any 
    participant regarding the investment of that participant's Account in 
    the Shares.
        5. Crown American is the employer of the employees covered by the 
    Plan. Crown American represents that because the Crown REIT owns a 75.6 
    percent interest in Crown American, the Crown REIT would be considered 
    an ``affiliate'' of Crown American within the meaning of the Act.\13\
    ---------------------------------------------------------------------------
    
        \13\ Section 407(d)(7) of the Act states that a person other 
    than a corporation is treated as an ``affiliate'' of another person 
    to the extent provided by regulation. The applicant states that the 
    Department has taken the position that in the absence of 
    regulations, a 50 percent ownership test, which is the threshold for 
    determining affiliation of corporations, should be used for 
    determining whether a corporation would be an ``affiliate'' of a 
    partnership or joint venture under section 407(d)(7). See DOL Info. 
    Ltr. To Gary Quintiere, WSB File No. DL0398 at 2 (Feb. 25, 1994); 
    see also ERISA Adv. Op. 80-55A (where a joint venture owning 65 
    percent of the interests in a corporation was considered an 
    affiliate of the corporation). Therefore, the applicant states that 
    the same 50 percent threshold should apply for purposes of 
    determining affiliation among non-corporate entities. In this 
    regard, the Department is providing no opinion herein as to whether 
    such non-corporate entities would be considered ``affiliates'' of 
    one another.
    ---------------------------------------------------------------------------
    
        Crown American states that the Shares are ``securities'' within the 
    meaning of section 2(1) of the Securities Act of 1933, and as such are 
    ``securities'' for purposes of Title I of the Act (see section 3(20) of 
    the Act defining the term ``security''). Crown American states further 
    that the Shares, as securities issued by the Crown REIT, would be 
    securities issued by an affiliate of an employer of employees covered 
    by the Plan, and thus ``employer securities'' with respect to the Plan 
    under section 407(d)(1) of the Act (as noted previously in Footnote 1). 
    However, under section 407(a)(1)(A), a Plan may acquire and hold only 
    those employer securities that are ``qualifying employer securities''. 
    In order to be a ``qualifying employer security'' (QES), section 
    407(d)(5) requires that an employer security must be either stock, a 
    marketable obligation, or an interest in certain types of publicly-
    traded partnerships (as defined in section 7704(b) of the Code).
        The applicant states that the Shares are not marketable obligations 
    (as defined under section 407(e) of the Act) or interests in a 
    ``publicly-traded partnership,'' as defined under the Code,\14\ which 
    would allow such Shares to meet the definition of QES under section 
    407(d)(5)(C) of the Act.\15\ In addition, the applicant represents that 
    it is not clear whether the Shares would be considered ``stock'' within 
    the meaning of section 407(d)(5) of the Act because, under Maryland 
    law, a ``share'' of a real estate investment trust is defined as a 
    transferable unit of beneficial interest in a real estate investment 
    trust, without any reference to the term ``stock''.\16\ The applicant 
    notes that the term ``stock'' is used under Maryland law solely in
    
    [[Page 51696]]
    
    connection with describing interests in a corporation, whereas a real 
    estate investment trust takes the form of an unincorporated trust.
    ---------------------------------------------------------------------------
    
        \14\ The applicant notes that a real estate investment trust 
    such as the Crown REIT, takes the form of a corporation, trust or 
    association, each of which is distinguished in the Code from a 
    partnership (see section 856(a) of the Code).
        \15\ The applicant also notes that to meet the requirements of 
    section 407(d)(5)(C) of the Act, a partnership must be an ``existing 
    partnership'' as defined in section 10211(c)(2)(A) of the Revenue 
    Act of 1987. This provision requires that the partnership have 
    existed or have applied for existence as a publicly-traded 
    partnership as of December 17, 1987. Because the Crown REIT was not 
    established until 1993, it cannot meet this definition.
        \16\ See Md. Corp. & Assoc. Sec. 8-101(c).
    ---------------------------------------------------------------------------
    
        The applicant states that if the Shares are not considered to be 
    QES, the Plan cannot rely on the statutory exemption under section 
    408(e) of the Act to obtain relief for the prohibitions of section 406 
    and 407 relating to transactions involving employer securities that are 
    QES.\17\ Therefore, the applicant requests an exemption under section 
    408(a) of the Act to enable the Accounts in the Plan to acquire, hold, 
    or dispose of the Shares, subject to the conditions discussed herein.
    ---------------------------------------------------------------------------
    
        \17\ The Department is providing no opinion herein as to whether 
    the proposed transactions could meet the conditions necessary for 
    relief under section 408(e) of the Act and the regulations 
    thereunder.
    ---------------------------------------------------------------------------
    
        6. PNC will be retained as an independent fiduciary for the Plan 
    for purposes of the proposed exemption. PNC represents that it is 
    independent of Crown American and its affiliates, including the Crown 
    REIT. PNC does have business relationships with Crown American and the 
    Crown REIT, including certain banking services and commercial loans. 
    However, PNC states that to the extent it has provided services to 
    Crown American or an affiliate in the past, its annual gross income for 
    such services was less than one-tenth of one (1) percent of its total 
    annual gross income. In addition, PNC has made, and may continue to 
    make, certain construction or permanent loans to the Crown REIT along 
    with other banks in connection with properties owned by the Crown REIT. 
    PNC states that such loans represent a de minimis percentage of PNC's 
    outstanding loan portfolio. PNC does not expect that any such loans 
    will affect its independence for purposes of its duties and 
    responsibilities as an independent fiduciary for the Plan in connection 
    with the proposed transactions involving the Shares.\18\ Moreover, as 
    discussed further in Paragraph 9, PNC is not providing any 
    recommendations or other investment advice as a fiduciary to the Plan 
    participants regarding whether to invest in the Shares.
    ---------------------------------------------------------------------------
    
        \18\ The Department notes that section 404(a) of the Act 
    requires, among other things, that a plan fiduciary act prudently 
    and solely in the interests of the plan and its participants and 
    beneficiaries.
    ---------------------------------------------------------------------------
    
        7. PNC represents that it is an experienced fiduciary which 
    currently serves as trustee of a number of participant-directed 
    employee pension plans subject to the Act, including plans that invest 
    in employer securities. In addition, PNC represents that it has had 
    experience with transactions involving publicly-traded shares of a real 
    estate investment trust.
        PNC has submitted a statement, dated April 15, 1997, whereby it 
    acknowledges that it will be acting as a fiduciary to the Plan under 
    the Act for purposes of the proposed transactions involving the Shares, 
    and that it understands its duties, liabilities and responsibilities 
    under the Act.
        8. The applicant has submitted a letter agreement between Crown 
    American and PNC (the I/F Agreement), which describes the duties of PNC 
    as the Plan's independent fiduciary in connection with the proposed 
    transactions. The I/F Agreement states that it shall be PNC's 
    responsibility to monitor compliance by the Accounts with all of the 
    conditions of this proposed exemption.
        PNC will purchase and sell the Shares, as the Plan's trustee, in 
    accordance with participant instructions. PNC will execute all 
    transactions on the NYSE at the prevailing market price for the Shares, 
    except to the extent such transactions can be accomplished through 
    transfers between Accounts using the NYSE closing price to value the 
    Shares. PNC will value the Shares for the Accounts on a daily basis 
    using the NYSE prices.
        PNC will ensure that following any purchase of Shares by an 
    Account, the percentage of the total value of the Account invested in 
    Shares does not exceed 25 percent, as measured based on the value of 
    the assets held by the Account as of the close of the prior business 
    day. In this regard, PNC's recordkeeping system will monitor whether an 
    initial investment allocation or contribution allocation would cause 
    the Account to exceed the 25 percent limit, and will not permit the 
    allocation if that would be the result. Any other participant-initiated 
    transaction involving the Shares, such as a reallocation among Plan 
    investments or reallocation of future contributions, will be requested 
    using a paper form. The completed form will be reviewed initially by 
    Crown and then by the responsible Client Service Officer at PNC to 
    ensure that the 25 percent limit will not be exceeded as a result of 
    the particular transaction. The Client Service Officer at PNC will 
    approve the transaction as complying with this requirement before it is 
    processed by PNC, as the Plan's trustee. However, the 25 percent 
    limitation under the proposed exemption will not be violated if an 
    Account's investment in Shares exceeds 25 percent of the value of the 
    Account solely by reason of an increase in value of the Shares or a 
    decrease in value of the other assets in the Account after such Shares 
    are acquired by the Account.
        9. PNC represents that it would be appropriate for Crown to add the 
    Shares as an investment option for participants of the Plan for the 
    following reasons:
        (a) Participants will be able to decide whether or not to invest 
    their Account balances in the Shares, and how much of their Account 
    balances to invest in or transfer from such Shares. They are familiar 
    with the issuer because they work for Crown, and they will receive 
    quarterly financial statements and annual reports of the issuer just as 
    any other shareholder;
        (b) The Shares will be one of a series of diverse and varied 
    investment options available to Plan participants, and as a real estate 
    equity investment will help complement the other options as part of an 
    overall, well-diversified portfolio;
        (c) The Shares are traded on the NYSE, so that (i) participants 
    will be able to follow any changes in the price of the Shares each 
    business day in newspapers of general circulation, and (ii) the Plan 
    will have a readily available avenue for purchasing or selling the 
    Shares as determined by participant investment decisions; and
        (d) A participant's investment in the Shares could not exceed 25 
    percent of his or her total Account balance at time of purchase, 
    preventing the Account from becoming unduly concentrated in the Shares.
        However, PNC states further that its statements regarding the 
    Shares do not constitute a recommendation or investment advice as to 
    whether any Plan participant should invest in the Shares as an 
    investment option under the Plan. Thus, PNC's role as the Plan's 
    independent fiduciary under the proposed exemption is limited to 
    enforcing the terms and conditions stated herein and does not extend to 
    the underlying investment decisions made by Plan participants as to 
    whether the Shares are an appropriate investment for particular 
    Accounts.
        The applicant states that a communication statement will be sent by 
    Crown and PNC to each Plan participant regarding the addition of the 
    Shares as an investment option for the Plan and describing how this 
    investment option will operate. The communication statement will 
    describe, among other things, the information that Plan participants 
    will receive about their Share investments on an ongoing basis and the 
    relationships that exist between PNC and Crown or its affiliates.
        10. In summary, the applicant represents that the proposed 
    transactions will meet the statutory
    
    [[Page 51697]]
    
    criteria of section 408(a) of the Act because: (a) Plan participants 
    will be able to invest in ``equity'' interests of the Crown REIT (i.e. 
    the Shares), which will allow them to share in the growth of their 
    employer's business; (b) no Plan participant will be able to invest 
    more than 25 percent of his or her Account in the Shares, so that an 
    Account's assets will not be unduly concentrated in Shares; (c) 
    compliance with the terms and conditions of the proposed exemption, 
    including the 25 percent limitation, will be monitored by an 
    independent Plan fiduciary (i.e. PNC); (d) the Shares will be acquired 
    and sold for cash by the Accounts; (e) the acquisition and disposition 
    of the Shares will occur on the NYSE, except to the extent that such 
    transactions can be ``netted'' between the Accounts to avoid brokerage 
    commissions and other transaction costs; (f) all transactions involving 
    the Shares will be either (i) executed on the open market at the then-
    current NYSE prices, or (ii) ``netted'' between the Accounts using the 
    NYSE closing price for the Shares on the date of the transaction, as 
    determined by PNC, as the Plan's independent fiduciary; (g) Plan 
    participants will decide whether or not to invest their Account 
    balances in the Shares, and how much of their Account balances to 
    invest in or transfer from such Shares (subject to the 25 percent limit 
    required herein), and will receive quarterly financial statements and 
    annual reports of the issuer just as any other shareholder; and (h) 
    PNC, as the Plan's independent fiduciary, has determined that it would 
    be appropriate for Crown to add the Shares as an investment option for 
    the Plan's participants to complement other investment options as part 
    of an overall, well-diversified portfolio, but is not providing any 
    recommendations or investment advice to Plan participants in connection 
    with their proposed investments in the Shares.
    
    FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department, 
    telephone (202) 219-8194. (This is not a toll-free number.)
    
    General Information
    
        The attention of interested persons is directed to the following:
        (1) The fact that a transaction is the subject of an exemption 
    under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
    does not relieve a fiduciary or other party in interest of disqualified 
    person from certain other provisions of the Act and/or the Code, 
    including any prohibited transaction provisions to which the exemption 
    does not apply and the general fiduciary responsibility provisions of 
    section 404 of the Act, which among other things require a fiduciary to 
    discharge his duties respecting the plan solely in the interest of the 
    participants and beneficiaries of the plan and in a prudent fashion in 
    accordance with section 404(a)(1)(b) of the act; nor does it affect the 
    requirement of section 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 26th day of September, 1997.
    Ivan Strasfeld,
    Director of Exemption Determinations, Pension and Welfare Benefits 
    Administration, U.S. Department of Labor.
    [FR Doc. 97-26072 Filed 10-1-97; 8:45 am]
    BILLING CODE 4510-29-U
    
    
    

Document Information

Published:
10/02/1997
Department:
Pension and Welfare Benefits Administration
Entry Type:
Notice
Action:
Notice of proposed exemptions.
Document Number:
97-26072
Pages:
51684-51697 (14 pages)
Docket Numbers:
Application No. D-10159, et al.
PDF File:
97-26072.pdf