95-9254. Proposed Exemptions; Paloma Securities L.P. & Boston Global Advisors, Inc. et al.

[Federal Register Volume 60, Number 72 (Friday, April 14, 1995)]
[Notices]
[Pages 19086-19099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9254]

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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09660, et al.

Proposed Exemptions; Paloma Securities L.P. & Boston Global
Advisors, Inc. et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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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
request for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.

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

Notice to Interested Persons

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

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

Paloma Securities L.P. (Paloma) & Boston Global Advisors, Inc. (BGA),
Located in Boston, Massachusetts

[Application No. D-09660]

Proposed Exemption

The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a)(1) (A) through (D) and
406(b)(1) and (2) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1) (A) through (E) of the Code, shall not apply to the lending
of securities to Paloma by employee benefit plans (including commingled
investment funds holding plan assets) for which BGA, an affiliate of
Paloma, acts as securities lending agent (or sub-agent) and to the
receipt of compensation by BGA in connection with these transactions,
provided that the following conditions are met:
1. Neither BGA, Paloma nor an affiliate of either has discretionary
authority or control with respect to the investment of the plan assets
involved in the transaction, or renders investment advice (within the
meaning of 29 CFR 2510.3-21(c) with respect to those assets;
2. Any arrangement for BGA to lend plan securities to Paloma in
either an agency or sub-agency capacity will be approved in advance by
a plan fiduciary who is independent of Paloma and BGA;
3. A plan may terminate the agency or sub-agency arrangement at any
time without penalty on five business days notice;
4. The plan will receive from Paloma (either by physical delivery
or by book entry in a securities depository, wire transfer or similar
means) by the close of business on or before the day the loaned
securities are delivered to Paloma, collateral consisting of cash,
securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities, or irrevocable bank letters of credit issued by a
person other than Paloma or an affiliate thereof, or any combination
thereof, or other collateral permitted under PTE 81-6, having, as of
the close of business on the preceding business day, a market value
[[Page 19087]] initially equal to at least 102 percent of the market
value of the loaned securities and, if the market value of the
collateral falls below 100 percent, Paloma will deliver addition
collateral on the following day such that the market value of the
collateral will again equal 102 percent;
5. All procedures regarding the securities lending activities will
at a minimum conform to the applicable provisions of Prohibited
Transaction Exemptions (PTEs) 81-6 and 82-63;
6. Paloma will indemnify the plan against any losses due to its use
of the borrowed securities;
7. The plan will receive the equivalent of all distributions made
to holders of the borrowed securities during the term of the loan,
including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to purchase
additional securities, or other distributions;
8. Prior to any plan's approval of the lending of its securities to
Paloma, a copy of this exemption, if granted, (and the notice of
pendency) will be provided to the plan; and
9. Only plans with total assets having an aggregate market value of
at least $50 million will be permitted to lend securities to Paloma.

Summary of Facts and Representations

1. Paloma is a Delaware limited partnership which is a broker-
dealer registered with the Securities and Exchange Commission (SEC) and
a member of the National Association of Securities Dealers.^{1 As of
December 31, 1993, Paloma had in excess of $400 million in combined
equity. Paloma is approximately 99 percent owned by Paloma Partners
Holdings L.P. (PPH), which in turn is more than 90 percent owned by
Paloma Partners, L.P. (PPLP), a Delaware limited partnership.

^{1The company's name was legally changed to Paloma
Securities L.P. from AKT Associates L.P. effective June 1, 1993.
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2. Acting as principal, Paloma actively engages in the borrowing
and lending of securities, with daily outstanding loan volume averaging
several billion dollars. Paloma utilizes borrowed securities to satisfy
the trading requirements of the Paloma group, or to re-lend to other
broker-dealers and others who need a particular security for various
periods of time. All borrowings by Paloma conform to the Federal
Reserve Board's Regulation T. Pursuant to Regulation T, permitted
borrowing purposes include making delivery of securities in the case of
short sales, failures of a broker to receive securities it is required
to deliver or other similar situations.
3. BGA, a wholly owned subsidiary of PPH, was organized as a
Delaware corporation in August 1993 with its principal office in
Boston. BGA is a broker-dealer and investment advisor, in each case
registered as such with the SEC.
4. BGA was formed to provide securities lending services, as agent,
to institutional clients. BGA, pursuant to authorization from its
client, negotiates the terms of loans with borrowers pursuant to a
client-approved form of loan agreement and otherwise acts as a liaison
between the lender (and its custodian) and the borrower to facilitate
the lending transaction. BGA has responsibility for monitoring receipt
of all required collateral and marking such collateral to market daily
so that adequate levels of collateral are maintained. BGA also monitors
and evaluates on a continuing basis the performance and
creditworthiness of the borrowers. BGA does not act as a custodian with
respect to the client's portfolio of securities being loaned. Custody
of such securities is lodged with the client's bank or other custodian.
However, BGA may be authorized from time to time by a client to receive
and hold pledged collateral and invest cash collateral pursuant to
guidelines established by the client. All of BGA's procedures for
lending securities are designed to comply with the applicable
conditions of Prohibited Transaction Exemption (PTE) 81-6 and PTE 82-
63.^{2

\2\PTE 81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR
18754, May 19, 1987) provides an exemption under certain conditions
from section 406(a)(1) (A) through (D) of the Act and the
corresponding provisions of section 4975(c) of the Code for the
lending of securities that are assets of an employee benefit plan to
certain broker-dealers or banks which are parties in interest.
PTE 82-63 (47 FR 14804, April 6, 1982) provides an exemption
under specified conditions from section 406(b)(1) of the Act and
section 4975(c)(1)(E) of the Code for the payment of compensation to
a plan fiduciary for services rendered in connection with loans of
plan assets that are securities.
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5. BGA may be retained occasionally by primary securities lending
agents to provide securities lending services in a sub-agent capacity
with respect to portfolio securities of clients of such primary lending
agents. As securities lending sub-agent, BGA's role under the lending
transactions (i.e., negotiating the terms of loans with borrowers
pursuant to a client-approved form of loan agreement and monitoring
receipt of, and marking to market, required collateral) parallels those
under lending transactions for which BGA acts as primary lending agent
on behalf of its clients.
6. When a loan is collateralized with cash, the cash will be
invested for the benefit and at the risk of the client, and resulting
earnings (net of a rebate to the borrower) comprise the compensation to
the plan in respect of such loan. Where collateral consists of
obligations other than cash, the borrower pays a fee (loan premium)
directly to the lending plan.
7. Paloma and BGA request an exemption for the lending of
securities owned by certain pension plans for which BGA serves as
securities lending agent or sub-agent (referred to hereinafter as
client-plans)^{3 to Paloma, following disclosure of its affiliation
with Paloma, and for the receipt of compensation by BGA in connection
with such transactions. BGA will have no discretionary authority or
control over these client-plans' decisions concerning the acquisition
or disposition of securities available for loan. Its discretion will be
limited to activities such as negotiating the terms of the securities
loans with Paloma and (to the extent granted by the plan fiduciary)
investing any cash collateral received in respect of the loans. Because
BGA, under the proposed arrangement, would have discretion to lend plan
securities to Paloma, and because Paloma is an affiliate of BGA, the
lending of securities to Paloma by plans for which BGA serves as
securities lending agent (or sub-agent) may be outside the scope of
relief provided by PTE 81-6 and PTE 82-63.^{4

\3\For the sake of simplicity, future references to BGA's
performance of services as securities lending agent should be deemed
to include its parallel performance as securities lending sub-agent
and references to client-plans should be deemed to refer to plans
for which BGA is acting as sub-agent with respect to securities
lending activities, unless otherwise indicated specifically or by
the context of the reference.
^{4Condition 1 of PTE 81-6 requires, in part, that neither
the borrower nor an affiliate of the borrower has discretionary
authority or control with respect to the investment of the plan
assets involved in the transaction.
PTE 82-63 permits the payment of compensation to a plan
fiduciary for the provision of securities lending services only if
the loan of securities itself is not prohibited under section 406(a)
of the Act.
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Several safeguards, described more fully below, are incorporated in
the application in order to ensure the protection of the plan assets
involved in the transactions. In addition, the applicants represent
that the proposed lending program incorporates the relevant conditions
contained in PTE 81-6 and PTE 82-63.
8. Where BGA is the direct securities lending agent, a fiduciary of
a client-plan who is independent of BGA and Paloma will sign a
securities lending [[Page 19088]] agency agreement with BGA (the Agency
Agreement) before the plan participates in a securities lending
program. The Agency Agreement will, among other things, describe the
operation of the lending program, prescribe the form of securities loan
agreement (Loan Agreement) to be entered into on behalf of the plan
with borrowers, specify the securities which are available to be lent,
required margin and daily marking-to-market, and provide a list of
permissible borrowers, including Paloma. The Agency Agreement will also
set forth the basis and rate for BGA's compensation from the plan for
the performance of securities lending services.
9. The Agency Agreement will contain provisions to the effect that
if Paloma is designated by the client-plan as an approved borrower (i)
the client-plan will acknowledge that Paloma is an affiliate of BGA and
(ii) BGA will represent to the client-plan that each and every loan
made to Paloma on behalf of the client-plan will be at market rates and
in no event less favorable to the client-plan than a loan of such
securities, made at the same time and under the same circumstances, to
an unaffiliated borrower.
10. When BGA is lending securities under a sub-agency arrangement,
the primary lending agent will enter into a securities lending agency
agreement (the primary lending agreement) with a fiduciary of a client-
plan who is independent of such primary lending agent, BGA or Paloma,
before the plan participates in the securities lending program. The
primary lending agent will be unaffiliated with BGA or Paloma. The
primary lending agreement will contain substantive provisions akin to
those in the Agency Agreement relating to the description of the
operation of the lending program, use of an approved form of Loan
Agreement, specification of securities which are available to be lent,
required margin and daily marking-to-market, and provision of a list of
approved borrowers (which will include Paloma). The primary lending
agreement will specifically authorize the primary lending agent to
appoint sub-agents, to facilitate its performance of securities lending
agency functions. Where BGA is to act as such a sub-agent the primary
lending agreement will expressly disclose that BGA is to so act. The
primary lending agreement will also set forth the basis and rate for
the primary lending agent's compensation from the client-plan for the
performance of securities lending services and will authorize the
primary lending agent to pay a portion of its fee, as the primary
lending agent determines in its sole discretion, to any sub-agent(s) it
retains pursuant to the authority granted under such agreement.
Pursuant to its authority to appoint sub-agents, the primary
lending agent will enter into a securities lending sub-agency agreement
(the Sub-Agency Agreement) with BGA under which the primary lending
agent will retain and authorize BGA, as sub-agent, to lend securities
of the primary lending agent's client-plans, subject to the same terms
and conditions as are specified in the primary lending agreement. Thus,
for example, the form of Loan Agreement will be the same as that
approved by the plan fiduciary in the primary lending agreement and the
list of permissible borrowers under the Sub-Agency Agreement (which
will include Paloma) will be limited to those approved borrowers listed
as such under the primary lending agreement.
BGA represents that the Sub-Agency Agreement will contain
provisions which are in substance comparable to those described in
paragraphs 8 and 9 above, which would appear in an Agency Agreement in
situations where BGA is the primary lending agent. In this regard, BGA
will make the same representation in the Sub-Agency Agreement as
described in paragraph 9 above with respect to arm's-length dealing
with Paloma. The Sub-Agency Agreement will also set forth the basis and
rate for BGA's compensation to be paid by the primary lending agent.
11. In all cases, BGA will maintain transactional and market
records sufficient to assure compliance with its representation that
all loans to Paloma are effectively at arm's-length terms. Such records
will be provided to the appropriate plan fiduciary in the manner and
format agreed to with the lending fiduciary, without charge to the
plan. A client-plan may terminate the Agency Agreement (or the primary
lending agreement) at any time, without penalty to the plan, on five
business days notice.
12. BGA will enter into the same form of Loan Agreement with Paloma
on behalf of client-plans as it does with all other borrowers. An
independent fiduciary of the client-plan will approve the terms of the
Loan Agreement. The Loan Agreement will specify, among other things,
the right of the client-plan to terminate a loan at any time and the
plan's rights in the event of any default by Paloma. The Loan Agreement
will explain the basis for compensation to the client-plan for lending
securities to Paloma under each category of collateral. The Loan
Agreement also will contain a requirement that Paloma must pay all
transfer fees and transfer taxes related to the security loans.
13. Before entering into the Loan Agreement, Paloma will furnish
its most recent available audited and unaudited financial statements to
BGA, and in turn such statements will be provided to a client-plan
before the plan is asked to approve the terms of the Loan Agreement.
The Loan Agreement will contain a requirement that Paloma must give
prompt notice at the time of a loan of any material adverse changes in
its financial condition since the date of the most recently furnished
financial statements. If any such changes have taken place, BGA will
not make any further loans to Paloma unless an independent fiduciary of
the plan has approved the loan in view of the changed financial
condition.
14. As noted above, the agreement by BGA to provide securities
lending services, as agent, to a client-plan will be embodied in the
Agency Agreement. The client-plan and BGA will agree to the arrangement
under which BGA will be compensated for its services as lending agent
prior to the commencement of any lending activity. Such agreed upon fee
arrangement will be set forth in the Agency Agreement and thereby will
be subject to the prior written approval of a fiduciary of the client-
plan who is independent of Paloma and BGA. Similarly, with respect to
arrangements under which BGA is acting as securities lending 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 such fee, as the primary lending agent determines in its sole
discretion, to any sub-agent, including BGA, which is to provide
securities lending services to the plan.^{5 The client-plan will be
provided with any reasonably available information which is necessary
for the plan fiduciary to make a determination whether to enter into or
continue to participate under the Agency Agreement (or the primary
lending agreement) and any other reasonably available information which
[[Page 19089]] the plan fiduciary may reasonably request.

^{5The foregoing provisions describe arrangements
comparable to conditions c and d of PTE 82-63 which require that the
payment of compensation to a ``lending fiduciary'' is made under a
written instrument and is subject to prior written authorization of
an independent ``authorizing fiduciary.'' In the event that a
commingled investment fund will participate in the securities
lending program, the special rule applicable to such funds
concerning the authorization of the compensation arrangement set
forth in paragraph f of PTE 82-63 will be satisfied.
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15. Each time a plan loans securities to Paloma pursuant to the
Loan Agreement, BGA will reflect in its records the material terms of
the loan, including the securities to be loaned, the required level of
collateral, and the fee or rebate payable. The terms of each loan will
be at least as favorable to the client-plan as those of a comparable
arm's-length transaction between unrelated parties.
16. The client-plan will be entitled to the equivalent of all
interest, dividends and distributions on the loaned securities during
the loan period. The Loan Agreement will provide that the client-plan
may terminate any loan at any time. Upon a termination, Paloma will be
contractually obligated to return the loaned securities to the client-
plan within five business days of notification (or such longer period
of time permitted pursuant to a class exemption). If Paloma fails to
return the securities within the designated time, the 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 the plan
associated with the sale and/or purchase.
17. BGA will establish each day a written schedule of lending fees
and rebate rates in order to assure uniformity of treatment among
borrowing brokers and to limit the discretion BGA would have in
negotiating securities loans to Paloma. Loans to Paloma on any day will
be made at rates on the daily schedule or at rates which may be more
advantageous to the client-plans. In no case will loans be made to
Paloma at rates below those on the schedule. The rebate rates (in
respect of cash-collateralized loans made by client-plans) which are
established will take into account the potential demand for loaned
securities, the applicable bench-mark cost of funds indices (typically,
Federal Funds, overnight repo rate or the like) and anticipated
investment return on overnight investments which are permitted by the
relevant plan fiduciary. The lending fees (in respect of loans made by
client-plans collateralized by other than cash) which are established
will be set daily to reflect conditions as influenced by potential
market demand.
BGA will negotiate rebate rates for cash collateral payable to each
borrower, including Paloma, on behalf of a plan. Where, for example,
cash collateral derived from an overnight loan is intended to be
invested in a generic repurchase agreement, any rebate fee determined
with respect to an overnight repurchase agreement benchmark will be set
below the applicable ``ask'' quotation therefor. Where cash collateral
is derived from a loan with an expected maturity date (term loan) and
is intended to be invested in instruments with similar maturities, the
maximum rebate fee will be less than the investment return (assuming no
investment default). With respect to any loan to Paloma, BGA will never
negotiate a rebate rate with respect to such loan which would produce a
zero or negative return to the client-plan (assuming no default on the
investments related to the cash collateral from such loan where BGA has
investment discretion over the cash collateral). BGA represents that
the written rebate rate established daily for cash collateral under
loans negotiated with Paloma will not exceed the rebate rate which
would be paid to a similarly situated unrelated borrower with respect
to a comparable securities lending transaction. BGA will disclose the
method for determining the maximum daily rebate rate as described above
to an independent fiduciary of a client-plan for approval before
lending any securities to Paloma on behalf of the plan.
18. For collateral other than cash, the applicable loan fee in
respect of any outstanding loan is reviewed daily for competitiveness
and adjusted, where necessary, to reflect market terms and conditions.
With respect to any calendar quarter, on average 50 percent or more of
the outstanding dollar value of securities loans negotiated on behalf
of client-plans will be to unrelated borrowers, and so the
competitiveness of the loan fee will be tested in the marketplace.
Accordingly, loans to Paloma should result in competitive rate income
to the lending client-plan. At all times, BGA will effect loans in a
prudent and diversified manner. BGA will lend securities to requesting
borrowers on a ``first come, first served'' basis, as a means of
assuring uniformity of treatment among borrowers.
19. Under the Loan Agreement, Paloma will agree to indemnify and
hold harmless the applicable client-plan (including the sponsor and
fiduciaries of such client-plan) from any and all damages, losses,
liabilities, costs and expenses (including attorney's fees) which the
client-plan may incur or suffer arising in any way from the use by
Paloma of the loaned securities or any failure of Paloma to deliver
loaned securities in accordance with the provisions of the Loan
Agreement or to otherwise comply with the terms of the Loan Agreement.
20. The client-plan will receive collateral from Paloma by physical
delivery, book entry in a securities depository, wire transfer or
similar means by the close of business on or before the day the loaned
securities are delivered to Paloma. The collateral will consist of
cash, securities issued or guaranteed by the U.S. Government or its
agencies or irrevocable bank letters of credit (issued by a person
other than Paloma or its affiliates) or such other types of collateral
which might be permitted by the Department under a class exemption. The
market value of the collateral on the close of business on the day
preceding the day of the loan will be at least 102 percent of the
market value of the loaned securities. The Loan Agreement will give the
client-plan a continuing security interest in and a lien on the
collateral. BGA will monitor the level of the collateral daily. If the
market value of the collateral falls below 100 percent (or such greater
percentage as agreed to by the parties) of that of the loaned
securities, BGA will require Paloma to deliver by the close of business
the next day sufficient additional collateral to bring the level back
to at least 102 percent.
21. Each client-plan participating in the lending program will be
sent a monthly transaction report. The monthly report will provide a
list of all security loans outstanding and closed for a specified
period. The report will identify for each open loan position, the
securities involved, the value of the security for collateralization
purposes, the current value of the collateral, the rebate or loan
premium (as the case my be) at which the security is loaned, and the
number of days the security has been on loan.
22. Only client-plans with total assets having an aggregate market
value of at least $50 million will be permitted to lend securities to
Paloma. This restriction is intended to assure that any lending to
Paloma will be monitored by an independent fiduciary of above average
experience and sophistication in matters of this kind.
23. In summary, the applicants represent that the described
transactions will satisfy the statutory criteria of section 408(a) of
the Act because: (1) The form of the Loan Agreement pursuant to which
any loan is effected will be approved by a fiduciary of the client-plan
who is independent of Paloma and BGA before a client-plan lends any
securities to Paloma; (2) the lending arrangements will permit the
client-plans to lend to Paloma, a major borrower of securities, and
will enable [[Page 19090]] the plans to diversify the list of eligible
borrowers and earn additional income from the loaned securities on a
secured basis, while continuing to receive any dividends, interest
payments and other distributions due on those securities; (3) the
client-plan will receive sufficient information concerning Paloma's
financial condition before the plan lends any securities to Paloma; (4)
the collateral on each loan to Paloma initially will be at least 102
percent of the market value of the loaned securities, which is in
excess of the 100 percent collateral required under PTE 81-6, and will
be monitored daily by BGA; (5) the client-plans will receive a monthly
report, so that an independent fiduciary of the client-plans also may
monitor loan activity, fees, the level of the collateral and loan
return/yield; (6) BGA will have no discretionary authority or control
over the plan's acquisition or disposition of securities available for
loan; (7) the terms of each loan will be at least as favorable to the
plans as those of a comparable arm's-length transaction between
unrelated parties; and (8) all the procedures under the proposed
transactions will, at a minimum, conform to the applicable provisions
of PTE 81-6 and PTE 82-63.

FOR FURTHER INFORMATION CONTACT: Louis Campagna of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)

Bank of Ashland, Inc. (the Bank), Located in Ashland, Kentucky

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

Proposed Exemption

EFFECTIVE DATE: The proposed exemption, if granted, will be effective
as of December 23, 1994.

Summary of Facts and Representations

1. The Bank is a wholly-owned subsidiary of the Holding Company.
The Bank serves as trustee of the Plans and has investment discretion
for the assets of the Plans.
The Plans are the John O. Jones, M.D., PSC Money Purchase Pension
Plan (the Jones Plan); the Michael G. Ehrie, Jr., M.D., PSC Money
Purchase Pension Plan (the Ehrie Pension Plan); the Michael G. Ehrie,
Jr., M.D., PSC Profit Sharing Plan (the Ehrie P/S Plan); the Simons
Real Estate Money Purchase Pension Plan (the Simons Plan); the Buchanan
Sound & Communications, Inc. Profit Sharing Plan (the Buchanan Plan);
and the Bank of Ashland, Inc. Profit Sharing Plan (the Bank Plan). All
of the Plans are defined contribution plans.
As of December 23, 1994, the Jones Plan had five participants and
total assets of $713,790; the Ehrie Pension Plan had seven participants
and total assets of $322,168; the Ehrie P/S Plan had seven participants
and total assets of $363,513; the Simons Plan had two participants and
total assets of $134,791; the Buchanan Plan had 32 participants and
total assets of $97,841; and the Bank Plan had 58 participants and
total assets of $2,427,300. Thus, as of December 23, 1994, the Plans
had 111 participants and total assets of approximately $4,059,403.
2. The Bank represents that at various times during the third and
fourth quarters of 1993 and the first quarter of 1994, assets of the
Plans were invested in the CMOs. The CMOs were purchased by the Bank
from broker-dealers that were independent of the Plans as well as the
Bank and its affiliates (including the Holding Company). The CMOs are
investment products through which investors purchase an interest in a
pool of residential mortgage loans. Investors receive payments of
principal and interest. The interest payments change monthly in
relation to a specific index, such as the London Interbank Offered Rate
(LIBOR) or the U.S. Federal Reserve's Cost of Funds Index (COFI),
contained in a formula used to calculate the interest rate for such
securities. The repayment of principal is usually guaranteed by various
U.S. government agencies, such as the Federal Home Loan Mortgage
Corporation (FHLMC or ``Freddie Mac'') or the Federal National Mortgage
Association (FNMA or ``Fannie Mae'').
3. The CMOs are described as follows: (i) FHLMC Multiclass Mortgage
Participation Certificates, Series 1625, Class SB, SE, and SJ; (ii)
FHLMC Multiclass Mortgage Participation Certificates, Series 1655,
Class S; (iii) FNMA Guaranteed REMIC Pass-Through Certificates, Fannie
Mae REMIC Trust 1993-102, Class S; (iv) FNMA Guaranteed REMIC Pass-
Through Certificates, Fannie Mae REMIC Trust 1993-110, Class SH; (v)
FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae REMIC Trust
1993-139, Class SL and SC; (vi) FNMA Guaranteed REMIC Pass-Through
Certificates, Fannie Mae REMIC Trust 1993-202, Class VJ; and (vii) GE
Capital Mortgage Services, Inc., REMIC Multi-Class Pass-Through
Certificates, Series 1993-17, Class 17-A20.\6\

\6\The applicant states that the GE Capital Mortgage Services,
Inc. REMIC Multi-Class Pass-Through Certificates, Series 1993-17,
Class 17-A20 (the GE CMO) was a publicly-offered security. In this
regard, the applicant notes that if a plan acquires a publicly-
offered security that grants the plan an equity interest in an
entity, the plan's assets include the security but not any of the
underlying assets of the entity (see 29 CFR 2510.3-101(a)(2) and
(b)). Therefore, the applicant represents that the assets of the
Plans that own the GE CMO do not include any of the mortgages
underlying the GE CMO.
The applicant states further that if a plan acquires a
``guaranteed governmental mortgage pool certificate'', the plan's
assets include the certificate but not any of the mortgages
underlying such certificate (see 29 CFR 2510.3-101(i). A
``guaranteed governmental mortgage pool certificate'' is a
certificate (i) that is backed by, or evidences an interest in,
specified mortgages or participation interests, and (ii) whose
interest and principal payments are guaranteed by the Government
National Mortgage Association (GNMA), FHLMC, or FNMA. Thus, the
applicant represents that since all of the CMOs, except for the GE
CMO, have interest and principal payments payable under the CMO
guaranteed by either FHLMC or FNMA, the assets of the Plans do not
include any of the mortgages underlying such CMOs.
[[Page 19091]]

All of the certificates mentioned above are structured as a real
estate mortgage investment conduit (``REMIC'') under section 860D of
the Code. The various classes of certificates receive principal and
interest payments in differing portions and at differing times from the
cash flows provided from the monthly payments received on the
underlying mortgages.
The repayment of principal from the underlying mortgages fluctuates
significantly. To facilitate the structuring of such REMICs, the
prepayments on the pools of mortgages are commonly measured relative to
a variety of prepayment models. The model used for these REMICs is the
Public Securities Association's standard prepayment model or ``PSA''.
This model assumes that mortgages will prepay at an annual rate of .2%
in the first month after origination, then the prepayment rate
increases at an annual rate of .2% per month up to the 30th month after
origination and then the prepayment rate is constant at 6% per annum in
the 30th and later months. This assumption is called 100 PSA.
The REMIC structure allocates principal payments to the various
classes in varying amounts as principal payments are made. The exact
date of repayment of all principal to any class of certificates is not
known until the final maturity date. The maturity for the various
classes is referred to as the ``weighted average life'' (WAL). The WAL
of a security refers to the average amount of time expressed in years
that will elapse from the date of its issuance until each dollar of
principal has been repaid to the investor based on the PSA assumption.
The holders of all classes of the certificates will receive all of
their principal back. However, the timing of when that principal is
returned is dependent on how quickly the underlying mortgages are
repaid or refinanced. In no event will the time for the recovery of
principal exceed the final maturity date of the underlying mortgages.
Each month the monthly payments on the underlying mortgages are
collected and distributed to the holders of the various REMIC classes.
Interest on the certificates is paid monthly and is determined
according to a specific formula. The certificates owned by the Plans,
described in further detail below, are ``inverse floaters'' with an
interest rate indexed to one month LIBOR or COFI. These certificates
are ``inverse floaters'' because the formula used to calculate the
interest rate, which adjusts monthly for each certificate, usually
raises the rate when the index falls and lowers the rate when the index
rises.
All of the CMOs were purchased by the Bank, as trustee of the
Plans, from either Mark Ross (Mr. Ross) of Kemper Securities, Inc.
(Kemper Securities), located in Houston, Texas, or Robert Conroy (Mr.
Conroy) of First Institutional Securities, Inc. (FIS), located in
Clifton, New Jersey. The Bank states that neither the brokers (i.e. Mr.
Ross and Mr. Conroy) nor their brokerage firms have any relationship to
the Plans, the employers which maintain the Plans, the Bank, or any
affiliates of the Bank.
A description of each of the CMOs, including the respective
interest rate formulas, WAL and PSA assumptions are set forth below in
the APPENDIX.
4. At the time of purchase, the Bank anticipated that interest
rates generally would decline and that each CMO would be retired within
three years of the date of purchase due to prepayments of the
underlying mortgages in each pool as obligors refinanced their
mortgages at lower interest rates. The Bank thought that the CMOs would
yield the Plans a high rate of return as well as offset the adverse
effects declining interest rates would have on the Plans' floating rate
assets during this period. The Bank states that the ideal time to buy
CMOs that are ``inverse floaters'' is when interest rates, as measured
by indices such as LIBOR or COFI, are high and are expected to go down
during the time the investor is holding the CMOs. However, when
interest rates rise, the rate of return on the CMOs goes down and the
securities become less valuable. The Bank notes that initially the
Plans were receiving monthly interest payments on the CMOs at rates
that were significantly above the market rate, as measured by interest
rate indexes at the time. As a result of increases in interest rates
during 1994, and the expectation of additional interest rate increases,
the Bank anticipated that the CMOs would not be retired for at least 15
years because of the projected decrease in the prepayments of mortgages
held in each pool. Furthermore, as a result of the increase in interest
rates, both the rate of return on the CMOs (as measured by the monthly
interest payments) and the market value of the CMOs decreased
significantly. Thus, the Bank states that it became increasing
difficult to find third party investors who were willing to purchase
the CMOs from the Plans without the Plans incurring significant losses
on their investments.^{7

\7\The Department is expressing no opinion in this proposed
exemption regarding whether the acquisition and holding of the CMOs
by the Plans violated any of the fiduciary responsibility provisions
of Part 4 of Title I of the Act.
The Department notes that section 404(a) of the Act requires,
among other things, that a fiduciary of a plan act prudently, solely
in the interest of the plan's participants and beneficiaries, and
for the exclusive purpose of providing benefits to participants and
beneficiaries when making investment decisions on behalf of a plan.
Section 404(a) of the Act also states that a plan fiduciary should
diversify the investments of a plan so as to minimize the risk of
large losses, unless under the circumstances it is clearly prudent
not to do so.
In this regard, the Department is not providing any opinion as
to whether a particular category of investments or investment
strategy would be considered prudent or in the best interests of a
plan as required by section 404 of the Act. The determination of the
prudence of a particular investment or investment course of action
must be made by a plan fiduciary after appropriate consideration to
those facts and circumstances that, given the scope of such
fiduciary's investment duties, the fiduciary knows or should know
are relevant to the particular investment or investment course of
action involved, including the plan's potential exposure to losses
and the role the investment or investment course of action plays in
that portion of the plan's investment portfolio with respect to
which the fiduciary has investment duties (see 29 CFR 2550.404a-1).
The Department also notes that in order to act prudently in making
investment decisions, a plan fiduciary must consider, among other
factors, the availability, risks and potential return of alternative
investments for the plan. Thus, a particular investment by a plan,
which is selected in preference to other alternative investments,
would generally not be prudent if such investment involves a greater
risk to the security of a plan's assets than comparable investments
offering a similar return or result.
---------------------------------------------------------------------------

5. Robert W. Nichols (Mr. Nichols), First Vice President of Morgan
Keegan & Company, Inc., an independent, qualified appraiser located in
Louisville, Kentucky, calculated the fair market value of the CMOs held
by the Plans as of December 15, 1994. Mr. Nichols solicited bids for
all of the CMOs from at least three different independent broker-
dealers, including First National Bank of Knoxville in Knoxville,
Tennessee; First Commerce Securities in Memphis, Tennessee; and Merrill
Lynch Institutional Sales in Charleston, West Virginia. Based on
pricing information obtained from these broker-dealers, Mr. Nichols
advised the Bank that the fair market value of the CMOs was
significantly below the original purchase price of the CMOs (as noted
in the table below in Paragraph 6). The Bank states that Mr. Nichols is
not related to or associated with the Bank, the Holding Company, the
Plans or any of the brokers involved in the purchases of the CMOs.
6. In addition, the Bank calculated the value of the CMOs held by
the Plans as of December 23, 1994, using an amortized cost computation.
The Bank states that the computation of the amortized cost was arrived
at by a series of computations. First, the Bank determined the amount
of the premium paid upon purchase (Purchase price - 100 = Premium). The
par value or face value of a bond is referred to as 100. The Bank
states that since all of CMOs paid interest monthly, the premium was
allocated monthly in order to be properly matched to the income. The
number of months that the premium was allocated over was determined by
the WAL at the time of purchase (expressed in years) multiplied by
twelve (WAL x 12 = amortizing months).^{8 Then, the Bank
determined the amount of premium that was allocated to each month by
dividing the premium by the amortizing months. To determine how much
premium still remained to be amortized, the Bank subtracted from the
amortizing months those months that the Plan actually held the CMO. The
Bank states that the remaining months were multiplied by the monthly
premium amount to arrive at the premium balance. The premium was added
to the par price (i.e. 100) to arrive at the amortized cost remaining
for the CMO. Thus, the Bank states that the formula for calculating
amortized cost was as follows:^{9 [[Page 19092]]

\8\As noted previously in Paragraph 3, the WAL for a CMO is
determined at the time of purchase based on various assumptions
about the speed of principal repayments and interest rate changes,
using financial data provided by independent sources (such as
Bloomberg Financial Markets). The Bank states that changes to the
formula for calculating the amortized cost based on WAL assumptions
other than at the time of purchase would not provide an
administratively acceptable method of allocating the premium for a
CMO because such a method would require constant adjustments which
are not material to the concept of income recognition as it relates
to CMOs.
\9\For example, assume that a particular CMO investment has been
held by a Plan for 6 months. If the WAL at the time of purchase of
the CMO was 2.02 years and the cost was 102.25 based on the par
value being referred to as 100, the formula would be (((102.25 - 100
= 2.25) / 2.02 x 12 = 24.24) = .09282178) x ((2.02 x 12 =
24.24) - 6) = 1.69307 + 100 = 101.69307). As the formula indicates,
the amortized cost using the WAL at purchase would be 101.69307 as
compared to the actual cost of 102.25. Therefore, the Bank states
that the amortized cost formula caused the Plan to be paid an amount
for this CMO investment which was slightly less than the Plan's
original cost (i.e. basis) but more than the total remaining
principal balance plus accrued but unpaid interest.
---------------------------------------------------------------------------

[GRAPHIC][TIFF OMITTED]TN14AP95.000

The Bank also calculated the remaining principal balance on the CMO
investments held by each Plan as of December 23, 1994, based on the
face amount of the securities and the principal and interest payments
received by the Plans through that date. As shown in the table below,
the amortized cost of the CMOs held by the Plans exceeded the remaining
principal balances on the CMOs at the time of the transaction. In
addition, the table below shows the fair market value of the CMOs held
by each Plan, based on Mr. Nichols' appraisal of the CMOs on December
15, 1994.

------------------------------------------------------------------------
Plan Amort. cost Prin. bal. Mkt. value
------------------------------------------------------------------------
Jones Plan.............. $226,612 $224,473 $105,711
Ehrie Pension Plan...... 79,449 78,410 41,581
Ehrie P/S Plan.......... 105,046 104,028 52,924
Simons Plan............. 23,085 22,745 12,002
Buchanan Plan........... 18,240 18,192 10,445
Bank Plan............... 646,699 644,433 302,519
------------------------------------------------------------------------

The Bank determined that a sales price for the CMOs owned by each
of the Plans based on amortized cost, plus the total principal and
interest payments received by the Plans as of the date of sale, would
produce a total return to the Plans which would exceed the Plans' total
original cost for the CMOs (as illustrated below).

----------------------------------------------------------------------------------------------------------------
Principal
Plan Interest rec.'d + Total receipts Total cost
collected amort. cost
----------------------------------------------------------------------------------------------------------------
Jones Plan...................................... $25,372 $242,078 $267,450 $246,254
Ehrie Pension Plan.............................. 8,060 86,039 94,099 86,812
Ehrie P/S Plan.................................. 11,367 115,849 127,216 117,982
Simons Plan..................................... 2,716 25,313 28,029 25,717
Buchanan Plan................................... 1,414 20,049 21,463 20,100
Bank Plan....................................... 72,953 693,782 766,735 705,680
----------------------------------------------------------------------------------------------------------------

The Bank represents that each Plan received a reasonable rate of
interest on the CMOs during the period of time it held the CMOs. In
this regard, the Bank states that the weighted annualized rate of
interest received by each Plan on its CMOs, net of amortization cost,
was as follows: (i) 8.19% for the Jones Plan; (ii) 8.06% for the Ehrie
Pension Plan; (iii) 7.58% for the Ehrie P/S Plan; (iv) 8.68% for the
Simons Plan; (v) 7.09% for the Buchanan Plan; and (vi) 8.23% for the
Bank Plan.^{10

\10\The formula for the annualized rate of return for the months
held was as follows: (Interest income collected less amortization of
premiums realized) divided by (average outstanding balance) divided
by (average months held) and multiplied by 12.
---------------------------------------------------------------------------

7. The Bank represents that when the market value and the
availability of buyers for the CMOs declined, the CMOs became illiquid
investments. Therefore, the Bank believed that the CMOs were no longer
suitable investments for the Plans. The Bank states that any sale of
the CMOs on the open market would have produced significant losses for
the Plans and the individual accounts of each Plan
[[Page 19093]] participant involved. In order to prevent such losses,
the Bank sold the CMOs to the Holding Company at an amount which for
each Plan was the greater of either: (i) The outstanding principal
balance for the CMOs owned by the Plan, plus accrued but unpaid
interest, at the time of sale; (ii) the amortized cost for the CMOs
owned by the Plan, plus accrued but unpaid interest, as determined by
the Bank based on the outstanding principal balance for each CMO on the
date of sale; or (iii) the fair market value of the CMOs owned by the
Plan as determined by an independent, qualified appraiser at the time
of the sale.
The Bank, as trustee of the Plans, believed that the transactions
were in the best interests of the Plans and their participants and
beneficiaries. The Bank states that the transactions allowed the Plan
participants to divest themselves of an illiquid investment and shifted
to the Holding Company the risks associated with selling the CMOs
during the current interest rate environment. As a result, the
individual participants in the Plans were no longer subject to the
losses that would have resulted from the participants receiving a
distribution of their account balances based on the fair market value
of the CMOs. The Bank wanted to sell the CMOs to the Holding Company by
December 31, 1994, in order to benefit participants of the Plans
receiving distributions from their individual accounts during 1995. In
this regard, the Bank notes that distributions made to Plan
participants are based on the fair market value of the plan assets at
the year-end valuation. At the time of the transaction, the fair market
value of the CMOs was substantially less than the amount the Plans
received as a result of the transactions.
8. The Bank represents that it took all appropriate actions
necessary to safeguard the interests of the Plans and their
participants and beneficiaries in connection with the sale of the CMOs
to the Holding Company. The Bank ensured that each Plan received the
appropriate amount of cash from the Holding Company in exchange for
such Plan's CMOs. The Bank reviewed an updated appraisal of the CMOs to
ensure that there was an accurate calculation by the independent
appraiser of the fair market value of each of the CMOs held by the
Plans, based on pricing information obtained from independent broker-
dealers. The Bank also ensured that the Plans did not pay any
commissions or other expenses in connection with the transactions.
9. In summary, the applicant represents that the transactions
satisfied the statutory criteria of section 408(a) of the Act and
section 4975 of the Code because: (a) Each sale was a one-time
transaction for cash; (b) each Plan received an amount which was equal
to the greater of either (i) the outstanding principal balance for the
CMOs owned by the Plan, plus accrued but unpaid interest, at the time
of sale, (ii) the amortized cost for the CMOs owned by the Plan, plus
accrued but unpaid interest, as determined by the Bank based on the
outstanding principal balance for each CMO on the date of sale, or
(iii) the fair market value of the CMOs owned by the Plan as determined
by an independent, qualified appraiser at the time of the sale; (c) the
Plans did not pay any commissions or other expenses with respect to the
sale; (d) the Bank, as trustee of the Plans, determined that the sale
of the CMOs was in the best interests of each Plan and its participants
and beneficiaries; (e) the Bank took all appropriate actions necessary
to safeguard the interests of the Plans and their participants and
beneficiaries in connection with the transactions; and (f) each Plan
received a reasonable rate of interest on the CMOs during the period of
time it held the CMOs.

Notice to Interested Persons

The applicant states that notice of the proposed exemption shall be
made by first class mail to the appropriate Plan fiduciaries within
fifteen (15) days following the publication of the proposed exemption
in the Federal Register. This notice shall include a copy of the notice
of proposed exemption as published in the Federal Register and a
supplemental statement (see 29 CFR 2570.43(b)(2)) which informs
interested persons of their right to comment on and/or request a
hearing with respect to the proposed exemption. Comments and requests
for a public hearing are due within forty-five (45) days following the
publication of the proposed exemption in the Federal Register.

Appendix

A. The FHLMC Multiclass Mortgage Participation Certificates, Series
1625, Class SB, SE and SJ, were issued by Freddie Mac as part of an
issue of multiclass participation certificates with 45 various classes
in the total amount of $1.5 trillion. The Bank, as trustee of the
Plans, purchased portions of three of those classes on December 2,
1993. The Certificates are secured by first lien residential mortgages
with an original term to maturity of 180 months or less.
This REMIC uses a 200 PSA assumption regarding principal repayment
(2 times 100 PSA). The WAL for classes SB, SE and SJ based on a 200 PSA
was 3.4, 2.0 and 2.0 years, respectively, at the time of purchase.
The formula for the interest on class SB is 57.000005--
(LIBOR x 6.785715) with a minimum rate of 0.0% and a maximum rate of
9.5%. For class SE, the interest is 17.999996--(LIBOR x 2.571428) with
a minimum rate of 0.0% and a maximum rate of 17.999996%. For class SJ,
the interest is 18.529405--(LIBOR x 2.647058) with a minimum rate of
0.0% and a maximum rate of 18.529405%. ``LIBOR'' refers to one-month
LIBOR, a rate established daily by independent market data sources in
London, England, based on the arithmetic mean of quotations offered by
creditworthy international banks dealing in Eurodollars. LIBOR moves up
or down daily as the interest rates charged by such banks move up or
down. The movement of LIBOR has an inverse relationship on the interest
paid on all inverse floating rate classes. As interest rates increased
from February through December 1, 1994, the interest paid on most of
these classes declined. The initial interest rates for classes SB, SE
and SJ were 9.5%, 9.803569% and 10.091908%, respectively. The interest
rates as of December 1, 1994 for classes SB, SE and SJ were 9.5%, 2.57%
and 2.65%. The interest rates can drop to 0.0% for classes SB, SE and
SJ if LIBOR reaches or exceeds 8.4, 8.0 and 7.0 percent, respectively.
LIBOR on December 23, 1994 was 5.94%.
B. The FHLMC Multiclass Mortgage Participation Certificates, Series
1655, Class S, were issued by Freddie Mac as part of an issue of
multiclass certificates with 20 various classes in the total amount of
$500 million. The Bank, as trustee of the Plans, purchased a portion of
a class on December 7, 1993. The Certificates are secured by first lien
residential mortgages with an original term to maturity of 180 months
or less.
This REMIC uses a 250 PSA assumption regarding principal repayment
(2.5 times 100 PSA). The WAL for class S based on a 250 PSA was 3.5
years at the time of purchase.
The formula for the interest on class S is 18.983333333--(LIBOR x
2.333333) with a minimum rate of 3.0% and a maximum rate of
18.98333333%. As discussed above, the movement of LIBOR has an inverse
relationship on the interest paid on all inverse floating rate classes.
As interest rates increased from February through December 1994, the
interest paid on the class S securities declined. The initial interest
rate was 11.5458%. As of December 15, 1994, the interest rate was
4.54%. The interest rate can drop to 3.0% if LIBOR reaches 6.85% or
higher. As noted [[Page 19094]] above, LIBOR was 5.94% on December 23,
1994.
C. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae
REMIC Trust 1993-102, Class S, were issued by Fannie Mae as part of an
issue of pass-through certificates with 18 various classes in the total
amount of $500 million. The Bank, as trustee of the Plans, purchased a
portion of one class on September 2, 1993. The Certificates are secured
by first lien residential mortgages with an original term to maturity
of 180 months or less.
This REMIC uses a 175 PSA assumption regarding principal repayment
(1.75 times 100 PSA). The WAL for class S based on a 175 PSA was 3.5
years at the time of purchase.
The formula for the interest on class S is 26.95598--(LIBOR x
3.85086) with a minimum rate of 0.0% and a maximum rate of 26.95598%.
The movement of LIBOR has an inverse relationship on the interest paid
on all inverse floating rate classes. As interest rates increased from
February through December 1994, the interest paid on class S securities
declined. The initial interest rate was 14.92206%. As of December 23,
1994, the interest rate was 3.97%. The interest rate can drop to 0.0%
if LIBOR reaches 7% or higher.
D. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae
REMIC Trust 1993-110, Class SH, were issued by Fannie Mae as part of an
issue of pass-through certificates with 28 various classes in the total
amount of $925 million. The Bank, as trustee of the Plans, purchased a
portion of one class on October 5, 1993. The Certificates are secured
by first lien residential mortgages with an original term to maturity
of 360 months or less.
This REMIC uses a 200 PSA assumption regarding principal repayment
(2 times 100 PSA). The WAL for class SH based on a 200 PSA was 2.8
years at the time of purchase.
The formula for the interest on class SH is 16.9929--(COFI x
1.857144) with a minimum rate of 0.0% and a maximum rate of 16.9929%.
In this case, ``COFI'' refers to the U.S. Federal Reserve's 11th
District Cost of Funds Index for the second month next preceding the
month in which such interest accrual period commences. COFI moves up or
down as interest rates move up or down. The movement of COFI will have
an inverse relationship on the interest paid on all inverse floating
rate classes. COFI does not react immediately to changes in interest
rates. Unlike most of the other certificates discussed herein, the
interest paid on class SH securities declined only slightly during the
period from February to December, 1994. The initial interest rate was
9.24677%. As of December 1, 1994, the interest rate was 9.217%.
However, additional interest rate increases will significantly decrease
the interest rate on these certificates. The interest rate can drop to
0.0% if COFI reaches 9.15% or higher. COFI was 4.367% for December
1994.^{11

\ 11\ The applicant states that COFI is adjusted monthly,
instead of daily.
---------------------------------------------------------------------------

E. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae
REMIC Trust 1993-139, Class SL and SC, were issued by Fannie Mae as
part of an issue of pass-through certificates with 59 various classes
in the total amount of $1,650,350,872. The Bank, as trustee of the
Plans, purchased a portion of two classes on September 7 and 21, 1993.
The Certificates are secured by first lien residential mortgages with
an original term to maturity of 360 months or less.
This REMIC uses a 200 PSA assumption regarding principal repayment
(2 times 100 PSA). The WAL for class SL and SC based on a 200 PSA was
4.0 and 3.5 years, respectively, at the time of purchase.
The formula for the interest on class SL is 70.05484--(LIBOR x
8.193548) with a minimum rate of 0.0% and a maximum rate of 12.7%. For
class SC, the interest is 23.94--(LIBOR x 2.8) with a minimum rate of
0.0% and a maximum rate of 23.94%. The movement of LIBOR has an inverse
relationship on the interest paid on all inverse floating rate classes.
As interest rates increased from February through December 1994, the
interest paid on the class SC securities declined. The initial interest
rates for SL and SC classes were 12.7% and 15.015%, respectively. As of
December 23, 1994, the interest rates were 12.7% and 8.2%,
respectively. The interest rate for both the SL and SC class can drop
to 0.0% if LIBOR reaches or exceeds 8.55%. As noted above, LIBOR was
5.94% on December 23, 1994.
F. The FNMA Guaranteed REMIC Pass-Through Certificates, Fannie Mae
REMIC Trust 1993-202, Class VJ, were issued by Fannie Mae as part of an
issue of pass-through certificates with 76 various classes in the total
amount of $2 trillion. The Bank, as trustee of the Plans, purchased a
portion of one class on October 28, 1993. The Certificates are secured
by first lien residential mortgages with an original term to maturity
of 360 months or less.
This REMIC uses a 200 PSA assumption regarding principal repayment
(2 times 100 PSA). The WAL for class VJ based on a 200 PSA was 3.5
years at the time of purchase.
The formula for the interest on class VJ is 21.58 - (LIBOR x 2.6)
with a minimum rate of 0.0% and a maximum rate of 21.58%. The movement
of LIBOR has an inverse relationship on the interest paid on all
inverse floating rate classes. As interest rates increased from
February through December 1994, the interest paid on class VJ
securities declined. The initial interest rate was 13.455%. As of
December 23, 1994, the interest rate was 6.06%. The interest rate can
drop to 0.0% if LIBOR reaches 8.3% or higher.
G. The GE Capital Mortgage Services, Inc., REMIC Mult-Class Pass-
Through Certificates, Series 1993-17, Class 17-A20, were issued by GE
Capital Mortgage Services, Inc., as part of an issue of pass-through
certificates with 28 senior classes and 6 junior classes in the total
amount of $493,750,000. The Bank, as trustee of the Plans, purchased a
portion of one of the senior classes on November 30, 1993. The
Certificates are secured by first lien residential mortgages with an
original term to maturity of 360 months or less.
This REMIC uses a 340 PSA assumption regarding principal repayment
(3.4 times 100 PSA). The WAL for class A20 based on a 340 PSA was 2.5
years at the time of purchase. The repayment of principal is not
guaranteed by any U.S. Government Agency. As with the other REMICs, the
timing of when the principal is returned is dependent on how quickly
the underlying mortgages are actually repaid or refinanced.
The formula for the interest on class A20 is 17.875 - (LIBOR x
2.166666) with a minimum rate of 0.0% and a maximum rate of 17.875%.
The movement of LIBOR has an inverse relationship on the interest paid
on all inverse floating rate classes. As interest rates increased from
February through December 1994, the interest paid on class A20
securities declined. The initial interest rate was 10.96875%. As of
December 23, 1994, the interest rate was 4.87%. The interest rate can
drop to 0.0% if LIBOR reaches 8.25% or higher.

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

The Neiman Marcus Group, Inc. Employee Savings Plan (the Plan),
Located in Chestnut Hill, Massachusetts

[Application No. D-09917]

Proposed Exemption

The Department is considering granting an exemption under the
authority of section 408(a) of the Act [[Page 19095]] and section
4975(c)(2) of the Code and in accordance with the procedures set forth
in 29 C.F.R. part 2570, subpart B (55 FR 32836, August 10, 1990). If
the exemption is granted the restrictions of sections 406(a), 406
(b)(1) and (b)(2) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1) (A) through (E) of the Code, shall not apply to (1) proposed
interest-free loans to the Plan (the Loans) by The Neiman Marcus Group,
Inc. (the Employer), the sponsor of the Plan, with respect to
guaranteed investment contract number 62638 (the GIC) issued by
Confederation Life Insurance Company (Confederation Life); and (2) the
Plan's potential repayment of the Loans (the Repayments); provided that
the following conditions are satisfied:
(A) No interest and/or expenses are paid by the Plan;
(B) The Loans are made in lieu of amounts due the Plan under the
terms of the GIC;
(C) The Repayments are restricted to cash proceeds paid to the Plan
by Confederation Life and/or any state guaranty association or other
responsible third party making payment with respect to the GIC (the GIC
Proceeds), and no other Plan assets are used to make the Repayments;
and
(D) The Repayments will be waived to the extent the Loans exceed
the GIC Proceeds.

Summary of Facts and Representations

1. The Plan is a defined contribution plan which includes a cash or
deferred arrangement under section 401(k) of the Code, and which
provides for employer matching contributions and additional employer
discretionary contributions. As of September 30, 1994 the Plan had
approximately 7,805 participants and total assets of approximately
$68,729,722. The trustee of the Plan is Wachovia Bank of North
Carolina, N.A. (the Trustee). The Employer, a Delaware public
corporation with its principal place of business in Chestnut Hill,
Massachusetts, is a retailer of clothing, fashion apparel, and home
furnishings.
2. The Plan provides for individual participant accounts (the
Accounts) and for participant-directed investment of each Account. Plan
participants direct investment of their Accounts among options (the
Funds) offered by the Plan. Participants' directions and changes of
directions, with respect to investment of the Accounts among the Funds,
are permitted on a quarterly basis. The Funds include a fixed income
fund (the F.I. Fund), which invests in, among other things, guaranteed
investment contracts issued by insurance companies.
2. Among the assets of the F.I. Fund is the GIC, a guaranteed
investment contract issued to the Plan in 1992 by Confederation Life
Insurance Company (Confederation Life), a Canadian insurance company
doing business in the United States. The GIC is a single-deposit,
benefit-responsive contract, principal amount $3,500,000, earning
interest at a guaranteed annual rate of 7.91 percent (the Contract
Rate). The GIC's terms enable the F.I. Fund to make withdrawals (the
Withdrawals) to effect, in accordance with the terms of the Plan,
benefit distributions, in-service withdrawals, participant loans, and
participant-directed transfers of Account balances to other Funds
offered by the Plan (the Withdrawal Events). Interest at the Contract
Rate is credited daily, calculated on the balance remaining deposited
under the GIC. If interest earned under the GIC exceeds the amount
withdrawn, the difference is paid annually (the Interest Payments) on
the anniversary date of the GIC's effective date. All Interest Payments
have been made when due through April 3, 1994. The terms of the GIC
also require Confederation Life to make a final payment to the Plan on
March 31, 1997 (the Maturity Payment) in the amount of the GIC's
accumulated book value, representing total principal deposits plus
interest earnings at the Contract Rate less previous withdrawals. As of
December 31, 1994, the GIC had a total accumulated book value of
$3,684,555.
3. Commencing August 11, 1994 (the Receivership Date), insurance
regulatory authorities in Canada and the state of Michigan instituted
proceedings to place Confederation Life in receivership (the
Receivership)^{12, and normal account activity with respect to
Confederation Life contracts was stayed pending resolution of the
Receivership. Since the commencement of the Receivership, the Plan has
received no payments under the GIC to enable the F.I. Fund to fund
Withdrawal Events, and the Employer represents that it is uncertain
whether, or to what extent, the Plan will receive any payments to
enable funding of future Withdrawal Events. Additionally, the Employer
represents that it is uncertain whether and to what extent the Maturity
Payment under the GIC will be paid. The Employer desires to alleviate
the F.I. Fund of risks associated with investments in the GIC, and to
enable the F.I. Fund to resume and continue funding the Withdrawal
Events. Accordingly, the Employer proposes to make loans to the Plan
(the Loans) in lieu of the amounts due from Confederation Life under
the terms of the GICs, and is requesting an exemption for the Loans,
and for their potential repayment (the Repayments) by the Plan, under
the terms and conditions described herein.

\12\The Department notes that the decisions to acquire and hold
the GIC are governed by the fiduciary responsibility requirements of
Part 4, Subtitle B, Title I of the Act. In this proposed exemption,
the Department is not proposing relief for any violations of Part 4
which may have arisen as a result of the acquisition and holding of
the GIC.
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5. The Employer and the Trustee will execute a written agreement
embodying all the terms and conditions of the Loans and the Repayments
(the Agreement). Under the Agreement, the Employer agrees to make a
Loan to the F.I. Fund each time Confederation Life fails to pay the
Plan the full amount of any Withdrawal in accordance with the terms of
the Plan. The amount of each Loan will be the difference between the
amount due the Plan as a Withdrawal and the amounts actually paid with
respect to that Withdrawal by Confederation Life, any conservator,
liquidator, trustee or other person performing similar functions with
respect to Confederation Life, or any state guaranty fund or other
person or entity (other than the Employer) acting as surety, insurer or
guarantor with respect to Confederation Life with respect to the GIC
(collectively, the GIC Payors). The Loans will be made only in lieu of
amounts due with respect to Withdrawals to fund Withdrawal Events, but
not in lieu of amounts due the Plan in the form of the annual Interest
Payments. In the event the Receivership and any rehabilitation of
Confederation Life are not resolved by January 1, 2001, the Employer
will make a final Loan in the amount of the Maturity Payment which
would have been due March 31, 1997, less all previous Advances pursuant
to the Agreement. The Employer will not credit interest under the
Agreement past March 31, 1997, and that portion of any Account which is
attributable to amounts remaining invested in the GIC after March 31,
1997 will cease to earn interest under the Agreement.^{13 Any Loans
made by the Employer after the maturity date of March 31, 1997 will be
based on the Maturity Value of the GIC.

^{13 The Department notes that this exemption, if granted,
will not affect the rights of any participant or beneficiary with
respect to claims under section 404 of the Act in connection with
any aspect of the GIC transactions.
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6. The Agreement provides that the Loans are to be repaid, but only
from payments made to the Plan pursuant to the GIC by the GIC Payors.
No other [[Page 19096]] Plan assets will be available for repayment of
the Loans. If amounts received by the Plan from the GIC Payors (the GIC
Proceeds) are not sufficient to repay fully the Loans, the Agreement
provides that the Employer will have no recourse against the Plan, or
against any participants or beneficiaries of the Plan, for the unpaid
amount. To the extent the Plan receives GIC Proceeds in excess of the
total amount of the Loans, such additional amounts will be retained by
the Plan and allocated among the Accounts invested in the F.I. Fund.
7. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act for the
following reasons: (1) The Loans enable the Plan to resume the full
funding of the Withdrawal Events; (2) The Loans will protect the Plan's
investment in the GIC; (3) The Plan will pay no interest or incur any
expenses with respect to the Loans; (4) Repayment of the Loans will be
restricted to payments by the GIC Payors and no other Plan assets will
be involved in the transactions; (5) Repayment of the Loan will be
waived to the extent the Plan recoups less from the GIC Payors than the
total amount of the Loans; and (6) In the event the Plan receives GIC
Proceeds in excess of the Guaranteed Amount, such amounts will be
retained by the Plan and allocated among the Accounts.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department (202)
219-8881. (This is not a toll-free number.)

Guarantee Mutual Life Company (Guarantee Mutual), Located in Omaha,
NE

[Application No. D-09941]

Proposed Exemption

Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990).^{14

14For purposes of this exemption, reference to provisions of
Title I of the Act, unless otherwise specified, refer also to the
corresponding provisions of the Code.
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Section I. Covered Transaction
If the exemption is granted, the restrictions of section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (D) of
the Code, shall not apply to the proposed receipt of common stock of
The Guarantee Life Companies, Inc. (GLCI), or the receipt of cash or
policy credits by an eligible policyholder (the Eligible Policyholder)
of Guarantee Mutual which is an employee benefit plan (the Plan), other
than an Eligible Policyholder which is a plan sponsored by Guarantee
Mutual for its own employees,^{15 in exchange for the termination of
such Eligible Plan Policyholder's membership interest in Guarantee
Mutual, in accordance with the terms of a plan of demutualization (the
Plan of Conversion or the Conversion Plan) adopted by Guarantee Mutual
and implemented pursuant to the Nebraska Insurers Demutualization Act
(the Demutualization Act), Nebraska Revised Statutes, Sections 44-6101
through 44-6120.

^{15Guarantee Mutual is not requesting, nor is the
Department providing exemptive relief herein with respect to the
distributions of stock to plans that Guarantee Mutual or its
affiliates maintain for their own employees. Guarantee Mutual
represents that such stock would constitute qualifying employer
securities within the meaning of section 407(d)(5) of the Act and
that section 408(e) of the Act would apply to such distributions. In
this regard, the Department expresses no opinion on whether such
distributions would satisfy the terms and conditions of section
408(e) of the Act.
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The proposed exemption is subject to the general conditions set
forth below in Section II.
Section II. General Conditions
(a) The Conversion Plan is implemented in accordance with
procedural and substantive safeguards that are imposed under Nebraska
law and is subject to the review and supervision by the Director of the
Department of Insurance of the State of Nebraska (the Director).
(b) The Director reviews the terms of the options that are provided
to Eligible Policyholders of Guarantee Mutual, as part of such
Director's review of the Conversion Plan, and the Director only
approves the Conversion Plan following a determination that such
Conversion Plan is fair and equitable to all Eligible Policyholders.
(c) Each Eligible Policyholder has an opportunity to comment on the
Conversion Plan and decide whether to vote to approve such Conversion
Plan after full written disclosure is given such Eligible Policyholder
by Guarantee Mutual, of the terms of the Conversion Plan.
(d) Any election by an Eligible Plan Policyholder to receive stock,
cash or policy credits, pursuant to the terms of the Conversion Plan is
made by one or more independent fiduciaries (the Independent
Fiduciaries) of such Plan and neither Guarantee Mutual nor any of its
affiliates exercises any discretion or provides investment advice with
respect to such election.
(e) After each Eligible Policyholder entitled to receive stock is
allocated at least 10 shares of common stock, additional consideration
is allocated to Eligible Policyholders who own participating policies
based on actuarial formulas that take into account each participating
policy's contribution to the surplus of Guarantee Mutual which formulas
have been approved by the Director.
(f) All Eligible Plan Policyholders participate in the transactions
on the same basis within their class groupings as other Eligible
Policyholders that are not Plans.
(g) No Eligible Policyholder pays any brokerage commissions or fees
in connection with their receipt of stock or in connection with the
implementation of the commission-free sales program.
(h) All of Guarantee Mutual's policyholder obligations remain in
force and are not affected by the Conversion Plan.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``Guarantee Mutual'' means Guarantee Mutual Insurance
Company and any affiliate of Guarantee Mutual as defined in paragraph
(b) of this Section III.
(b) An ``affiliate'' of Guarantee Mutual includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Guarantee Mutual. (For purposes of this paragraph, the term
``control'' means the power to exercise a controlling influence over
the management or policies of a person other than an individual.)
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an
officer, director or a 5 percent partner or owner.
(c) The term ``Eligible Policyholder'' means a policyholder who is
eligible to vote and to receive consideration in a demutualization.
Such policyholder is a policyholder of the mutual insurer on the day
the plan of conversion is adopted by the board of directors of the
insurer.
(d) The term ``policy credit'' means an increase in accumulation
account value (to which no surrender or similar charges are applied) in
the general account or an increase in a dividend accumulation on a
policy. [[Page 19097]]

Summary of Facts and Representations

1. Guarantee Mutual is a mutual life insurance company organized in
1901 under the laws of the State of Nebraska. It provides group life
and health insurance to employers and life insurance and annuities to
individuals. Guarantee Mutual transacts business in forty-six states
and District of Columbia. As of December 31, 1993, Guarantee Mutual had
total assets of approximately $975 million and more than $20 billion of
life insurance policies in force.
As a mutual life insurance company, Guarantee Mutual has no
stockholders. Policyholders are members of Guarantee Mutual and are
entitled to vote to elect directors of the company and would be
entitled to share in the assets of the company if it were liquidated.
2. Guarantee Mutual is the sole stockholder of two stock life
insurance companies--(a) Guarantee American Life Company (GALC), a
Nebraska-domiciled life insurer incorporated in 1982; and (b) Guarantee
Protective Life Company (GPLC), a life insurer incorporated in
Minnesota in 1936 and acquired by Guarantee Mutual in 1992 and
redomesticated to Nebraska in 1993. GALC is principally engaged in
reinsuring a portion of certain Guarantee Mutual insurance obligations.
GPLC ceded its group life, health and credit insurance lines to
nonaffiliated insurance pursuant to reinsurance agreements that were
completed in late 1992 and early 1993. Currently, GPLC is not
underwriting any new business. In addition to these insurance
companies, Guarantee Mutual owns 100 percent of the stock of Guarantee
Financial Services, Inc., a non-insurance company incorporated in 1990
in Nebraska that has not yet conducted any operations.
3. Guarantee Mutual provides a wide variety of insurance products
to employee benefit plans covered by provisions of the Act and the
Code. Guarantee Mutual has actively marketed its products to employee
benefit plans and had as of September 30, 1994, approximately 32,100 in
force policies and contracts held on behalf of employee pension and
welfare plans. These include approximately 1,700 policies and contracts
funding pension and profit sharing plans and over 30,400 contracts
providing welfare benefit plan coverage such as group life, short- and
long-term disability, accidental death and dismemberment and group
health coverage.
4. On February 1, 1994, Guarantee Mutual's Board of Directors
authorized management to develop a plan of demutualization pursuant to
which Guarantee Mutual would be converted from a mutual life insurance
company to a stock life insurance company by operation of Nebraska law.
The Board of Directors formally adopted the Conversion Plan on December
15, 1994.
The ultimate result of the Conversion Plan will be a structure in
which all of Guarantee Mutual's stock will be held by a holding
company, GLCI, which has been organized under Delaware law for this
purpose. Eligible Policyholders of Guarantee Mutual will receive stock
of GLCI or, in certain cases, cash or policy credits and their
membership interests and rights in the surplus of Guarantee Mutual will
be extinguished. Any election by the Plan to receive stock, cash or
policy credits pursuant to the Conversion Plan will be made by one or
more Independent Fiduciaries of such Plan and neither Guarantee Mutual
nor any of its affiliates will exercise any discretion or render
investment advice with respect to such election.
Under the Conversion Plan, two steps will deem to occur
simultaneously on the effective date of the transaction. First,
Guarantee Mutual will be deemed to issue common stock to a transfer
agent for the respective accounts of Eligible Policyholders entitled to
receive stock under the Conversion Plan. Second, the transfer agent
will be deemed to transfer such shares, on behalf of the Eligible
Policyholders, to GLCI in exchange for an equal number of shares of
GLCI stock. GLCI will then issue such shares of GLCI stock registered
in the respective names of the Eligible Policyholders entitled to
receive stock.
5. The initial public offering (the IPO), in which shares of GLCI
stock will be sold for cash, is to occur on the effective date of the
demutualization which is anticipated to take place during the second
half of 1995. GLCI will contribute a portion of the proceeds from the
IPO to Guarantee Mutual in an amount at least equal to the amount
required to pay cash and fund the crediting of policy credits to
Eligible Policyholders who are to receive such consideration. As
promptly as possible after the effective date, GLCI will pay, or cause
Guarantee Mutual to pay, cash or policy credits to Eligible
Policyholders entitled under the Conversion Plan to receive such
consideration.
GLCI stock will be publicly-traded. In this regard, an application
will be made to list its stock on the National Association of
Securities Dealers Automated Quotations National Market System.
6. According to the applicant, the principal purpose of the
demutualization is to enhance Guarantee Mutual's strategic and
financial flexibility by creating a corporate structure that will make
it potentially possible to obtain additional capital from sources that
are unavailable to the company as a mutual insurer. In addition, the
applicant represents that the conversion of Guarantee Mutual from a
mutual life insurance company to a stock life insurance company will
enable Guarantee Mutual to use stock options or other equity-based
compensation arrangements in order to attract and retain talented
employees. Moreover, the applicant notes that Eligible Policyholders
will benefit by receiving marketable securities, cash or policy credits
in the demutualization. The applicant further represents that the
Conversion Plan will not, in any way, change premiums or reduce policy
benefits, values, guarantees or other policy obligations of Guarantee
Mutual to its policyholders and contractholders.
7. The applicant has outlined the procedural requirements under
Nebraska law for life insurance company demutualization. In this
regard, the Demutualization Act provides an approval process for
demutualization of a life insurance company under Nebraska law. A
conversion plan must be approved by the Director as well as by Eligible
Policyholders.
The Demutualization Act requires that a mutual insurer wishing to
convert to a stock insurer file an application with the Director. The
application must include: (a) A plan of conversion that contains a
description of the structure and form of the proposed consideration to
the policyholders and the projected range of the number of shares of
capital stock to be issued by the new stock insurer; (b) a
certification that the plan of conversion has been adopted by a vote of
not less than two-thirds of the members of the mutual insurer's board
of directors; (c) certification adopted by not less than two-thirds of
the members of the mutual insurer's board of directors that the plan is
fair and equitable to the policyholders; (d) certified copies of the
proposed amendments to the insurer's articles of incorporation and
bylaws to effectuate the conversion; and (e) a form of the proposed
notice to policyholders, describing the plan of conversion and
informing policyholders of procedures for the meeting of policyholders
and the policyholder vote on the plan.
The Director must make an initial determination to approve or
disapprove an application after conducting a public hearing, at which
any interested person may appear or otherwise be heard. The
[[Page 19098]] insurer must give such interested person reasonable
notice of the public hearing as the Director in his or her discretion
requires. After the public hearing, the Director will approve the
application only if he or she finds that (a) the plan of conversion is
fair and equitable to the policyholders; (b) the plan does not deprive
the policyholders of their property rights or due process of law; (c)
the new stock insurer would meet the minimum requirements to be issued
a certificate of authority by the Director to transact business in
Nebraska; and (d) that the continued operations of the new stock
insurer would not be hazardous to future policyholders and the public.
After the Director makes an initial determination to approve an
application, the insurer is required to hold a meeting of its
policyholders to vote on the plan. The Demutualization Act requires
that the insurer give at least 30 days notice prior to the time fixed
for the meeting, by first-class mail to the last-known address of each
policyholder, that the plan of conversion will be voted upon at a
meeting of the policyholders. The notice must also include a brief
description of the plan and a statement that the Director has initially
approved it. Policyholders may vote in person or by written proxy. Each
policyholder is entitled to only one vote regardless of the number of
policies owned by the policyholder. The plan of demutualization must be
approved by the affirmative vote of at least two-thirds of the
policyholders who vote on the plan.\16\

\16\Although Guarantee Mutual is uncertain about the number of
policyholders that will vote on the Conversion Plan, it points out
that it has approximately 155,000 policyholders who are eligible to
vote. Guarantee Mutual also represents that prior to the public
hearing, it will provide each Eligible Policyholder with a summary
of the Conversion Plan, a notice of the public hearing and a more
detailed policyholder information statement.
---------------------------------------------------------------------------

After receiving certification from the insurer that the plan of
demutualization has been approved by the policyholders, the Director
will enter a final order approving the insurer's application. The
demutualization will take effect under Nebraska law after the insurer
certifies that the conditions set forth in the plan of demutualization
have been satisfied and the Director issues a certificate of authority
to the insurer.
Under Nebraska law, the consideration given to policyholders may be
stock, cash, a combination of stock and cash, or such other valuable
consideration as the Director may approve. Policyholders are not
required to be given preemptive rights unless the Director so orders.
The Demutualization Act permits the Director to engage the services
of experts to assist in determining whether a plan of conversion meets
the requirements of the Demutualization Act. In the case of Guarantee
Mutual, the Director has retained actuaries, Ernst & Young; legal
advisers, LeBoeuf, Lamb, Green & MacRae and Kennedy, Holland, Delacy &
Svoboda; and investment banking firm, Donaldson, Lufkin & Jenrette,
Inc., as consultants.
A final order by the Director to approve an application pursuant to
the Demutualization Act is subject to judicial review in the Nebraska
courts in accordance with the Nebraska Administrative Procedure Act.
7. Guarantee Mutual's Conversion Plan provides for Eligible
Policyholders, whose membership interests in the mutual company will be
extinguished in the demutualization, to receive common stock of GLCI,
or cash or policy credits. For this purpose, an Eligible Policyholder
generally is the owner of one or more policies in force on the date
that Guarantee Mutual's Board of Directors adopted the Conversion
Plan.\17\ In order to determine the amount of consideration to which
each Eligible Policyholder is entitled, each Eligible Policyholder will
be allocated (but not issued) a number of shares of common stock equal
to the sum of (a) a fixed component of consideration equal to 10 shares
of GLCI stock which will be subject to proportional adjustment; and (b)
where the Eligible Policyholder owns one or more participating
policies, an additional number of shares based on actuarial formulas
that take into account each participating policy's past and expected
future contributions to the surplus of Guarantee Mutual.

\17\Guarantee Mutual represents that under sections 44-6103, 44-
6106 and 44-6109 of Nebraska Insurance Law, the stock, cash, policy
credits or other compensation resulting from the demutualization
plan must be distributed to ``policyholders,'' as determined by the
records of the mutual life insurance company. Guarantee Mutual
further represents that an insurance or annuity policy that provides
benefits under an employee benefit plan, typically designates the
employer that sponsors the plan, or a trustee acting on behalf of
the plan, as the policyholder. In this regard, Guarantee Mutual
asserts that it is required under Nebraska Insurance Law to make
distributions resulting from the demutualization plan to the
employer or the plan sponsor when they are the designated
policyholder on the plan policy.
In general, it is the Department's view that, if an insurance
policy (including an annuity contract) was purchased with assets of
an employee benefit plan, and if there exist any participants
covered under the plan (as defined at 29 CFR 2510.3-3) at the time
when Guarantee Mutual incurs the obligation to distribute stock,
cash, policy credits or other compensation, then such consideration
would constitute an asset of such plan. Under these circumstances,
the appropriate plan fiduciaries must take all necessary steps to
safeguard the assets of the plan in order to avoid engaging in a
violation of the fiduciary responsibility provisions of the Act.
---------------------------------------------------------------------------

8. Certain Eligible Policyholders will receive cash or policy
credits instead of stock. The amount of cash or policy credits will be
determined by reference to the price per share at which GLCI stock is
offered to the public in the IPO.\18\ Eligible Policyholders whose
mailing address is outside the United States, or to whom mail is
undeliverable at the address in Guarantee Mutual's records, will
receive cash in lieu of stock, in an amount equal to the value of the
stock such policyholders would otherwise have received based on the
price of GLCI stock in the IPO contemplated by the Plan of Conversion.

\18\For purposes of allocating the consideration, Guarantee
Mutual represents that all policyholders will be treated the same
within their class groupings.
---------------------------------------------------------------------------

In addition, the Plan of Conversion provides that Eligible
Policyholders who are allocated a number of shares of GLCI stock which
is less than or equal to the maximum number of shares specified by the
Board of Directors of Guarantee Mutual, may receive cash instead of
stock. The maximum number of shares designated by the Board of
Directors may not be less than 10 shares nor may it exceed 40 shares.
Such maximum amount is, however, subject to proportional adjustment.
Certain other Eligible Policyholders, namely owners of individual
retirement annuities, tax sheltered annuities or certain other policies
issued directly to plan participants in qualified pension or profit
sharing plans will receive policy credits equal in value to the stock
allocated to such Eligible Policyholders.
Under Nebraska law, a plan of conversion must specify the
consideration to be given to policyholders and the Director must find
that the plan is fair and equitable to the policyholders and does not
deprive them of their property rights or due process of law. Moreover,
the Director must approve any consideration (such as policy credits)
other than cash or stock.
9. The Conversion Plan also provides for a commission-free program
that is to begin after the ninetieth day following the effective date
of the demutualization and before the 12 month anniversary of such
effective date at a time determined by the Board of Directors of GLCI
to be appropriate and in the best interests of GLCI and its
stockholders. The program, which will continue for 3 months, will be
available to any Eligible Policyholder who receives, under the Plan of
Conversion, fewer shares than the [[Page 19099]] maximum number of
shares entitled to receive cash as consideration.
In the program, such Eligible Policyholders will be entitled to
sell, at prevailing market prices, all the shares of GLCI stock
received by the Eligible Policyholder in the demutualization.
Specifically, Chemical Bank, which is unrelated to Guarantee Mutual, or
one of Chemical Bank's affiliates, will effect sales of stock under the
commission-free sales program.\19\ No brokerage commissions, mailing
charges, registration fees or other administrative or similar expenses
will be charged in connection with the receipt of stock or the
implementation of the commission-free sales program. The commission-
free program will also offer Eligible Policyholders the opportunity to
purchase enough shares to round-up their holdings to 100 shares, again
without paying any fees, charges or commissions (the Round Up Feature).
Participation in the Round Up Feature will be made available to all
Eligible Policyholders who on the commission-free program's record date
hold fewer than a number of shares (not more than 99) specified by the
Board of Directors of Guarantee Mutual.

\19\Guarantee Mutual notes that the performance of services by
Chemical Bank or its affiliates under the commission-free sales
program will not involve any fiduciary activity on behalf of
Eligible Plan Policyholders. Guarantee Mutual further represents
that it will not retain an affiliate to effect securities
transactions to take place under the commission-free sales program.
---------------------------------------------------------------------------

10. In summary, it is represented that the proposed transaction
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The Conversion Plan will be implemented in accordance with
procedural and substantive safeguards that are imposed under Nebraska
law and will be subject to the review and supervision by the Director.
(b) The Director will review the terms of the options that are
provided to Eligible Policyholders of Guarantee Mutual as part of such
Director's review of the Conversion Plan, and will approve the
Conversion Plan following a determination that such Conversion Plan is
fair and equitable to all Eligible Policyholders.
(c) Each Eligible Policyholder will have an opportunity to comment
orally or in writing on the Conversion Plan and decide whether to vote
to approve in writing such Demutualization Plan after full written
disclosure is given such policyholder by State Mutual, of the terms of
the Conversion Plan.
(d) Any election by an Eligible Policyholder which is a Plan to
receive stock, cash or policy credits, pursuant to the terms of the
Conversion Plan will be made by one or more Independent Fiduciaries of
such plan and neither State Mutual nor any of its affiliates will
exercise any discretion or provides investment advice with respect to
such election.
(e) After each Eligible Policyholder is allocated at least 10
shares of stock, additional consideration allocated to Eligible
Policyholders who own participating policies will be based on actuarial
formulas that take into account each participating policy's
contribution to the surplus of Guarantee Mutual which formulas have
been approved by the Director.
(f) All Plans that are Eligible Policyholders will participate in
the transactions on the same basis within their class groupings as
other Eligible Policyholders that are not Plans.
(g) No Eligible Policyholder will pay any brokerage commissions or
fees in connection with such Eligible Policyholder's receipt of stock
or in connection with the implementation of the commission-free sales
program.
(h) All of State Mutual's policyholder obligations will remain in
force and will not be affected by the Conversion Plan.

Notice to Interested Persons

Guarantee Mutual will provide notice of the proposed exemption to
all Eligible Plan Policyholders within 14 days of the publication of
the notice of pendency in the Federal Register. Such notice will be
provided to interested persons by first class mail and will include a
copy of the notice of proposed exemption as published in the Federal
Register. The notice will also inform interested persons of their right
to comment on the proposed exemption. Comments with respect to the
notice of proposed exemption are due within 44 days after the date of
publication of this exemption in the Federal Register.

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

General Information

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

Signed at Washington, DC, this 11th day of April, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 95-9254 Filed 4-13-95; 8:45 am]
BILLING CODE 4510-29-P}}}}}}}}}}}}}}}}}}}

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Document Information

Effective Date:: 12/23/1994
Published:: 04/14/1995
Department:: Pension and Welfare Benefits Administration
Entry Type:: Notice
Action:: Notice of proposed exemptions.
Document Number:: 95-9254
Dates:: The proposed exemption, if granted, will be effective as of December 23, 1994.
Pages:: 19086-19099 (14 pages)
PDF File:: 95-9254.pdf