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Secretary of Labor Hilda L. Solis
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EBSA Notices

Proposed Exemptions; H. Ray McPhail (Mr. McPhail) and the H. Ray McPhail Profit Sharing Plan (the Plan)   [4/7/2000]
[PDF]
[Federal Register: April 7, 2000 (Volume 65, Number 68)]
[Notices]               
[Page 18354-18377]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ap00-120]                         

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10678, et al.]

 
Proposed Exemptions; H. Ray McPhail (Mr. McPhail) and the H. Ray 
McPhail Profit Sharing Plan (the Plan)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
requests for a hearing should state: (1) the name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing.

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210. 
Attention: Application No. ______, stated in each Notice of Proposed 
Exemption. The applications for exemption and the comments received 
will be available for public inspection in the Public Documents Room of 
the Pension and Welfare Benefits Administration, U.S. Department of 
Labor, Room N-5638, 200 Constitution Avenue, NW, Washington, DC 20210.

Notice to Interested Persons

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

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), 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.

H. Ray McPhail (Mr. McPhail) and the H. Ray McPhail Profit Sharing 
Plan (the Plan) Located in Atlanta, Georgia

[Exemption Application No. D-10678]

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 32826, 32847, August 10, 1990). If the exemption 
is granted, the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to the proposed sale (the Sale) of four parcels 
of unimproved real property (the Property) and loan (the Loan) from the 
Plan to Mr. McPhail,\1\ a disqualified person with respect to the Plan, 
provided that the following conditions are met:
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    \1\ Since Mr. McPhail is the only participant in the Plan, there 
is no jurisdiction under Title I of the Act pursuant to 29 CFR 
2510.3-3(b). However, there is jurisdiction under Title II of the 
Act pursuant to section 4975 of the Code.
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    (1) With respect to the Sale:
    (A) The terms and conditions of the Sale will be at least as 
favorable to the Plan as those obtainable in an arm's length 
transaction with an unrelated party;
    (B) The Sale will occur at a price which includes the greater of 
$270,000 or the Property's fair market value as established by a 
qualified, independent appraiser;
    (C) The Sale Price will also include a premium of $30,000 (the 
Assemblage Value) due to Mr. McPhail's ownership of unimproved real 
property located adjacent to the Property;
    (D) The Plan will pay no fees or commissions with respect to the 
Sale; and
    (E) Mr. McPhail will pay $60,000 or 20% of the Sale Price in cash 
with the balance paid for by the Loan; and
    (2) With Respect to the Loan:
    (A) The interest rate on the Loan (the Interest Rate) will be 7%, a 
rate set by the Macon Bank for a real estate loan having terms similar 
to the Loan;
    (B) The Loan terms are at least favorable to the Plan as those 
obtainable in an arm's length transaction with an unrelated party;
    (C) The Loan is secured by a first security interest on the certain 
real property, which has been appraised by a qualified independent 
appraiser to have a fair market value not less than 150% of the 
principal amount of the Loan; and
    (D) The outstanding balance of the Loan will never exceed 20% of 
the assets of the Plan throughout the duration of the Loan;
    (E) The fair market value of the collateral remains at least equal 
to 150% of the outstanding principal balance plus accrued but not 
unpaid interest, throughout the duration of the Loan; and
    (3) Should any employee of the Plan Sponsor become eligible for 
Plan participation, the new participant will be enrolled in another 
qualified retirement plan or the Loan will be immediately repaid.

Summary of Facts and Representations

    1. The H. Ray McPhail Company (the McPhail Co.) is a Georgia 
company engaged in the purchase and sale of real estate. The McPhail 
Co. is solely owned

[[Page 18355]]

by Mr. McPhail and is the sponsor of the Plan. The Plan is a defined 
contribution plan located in Atlanta, Georgia and having Mr. McPhail as 
its sole participant. The Plan had total assets of approximately 
$3,420,136 as of October 31, 1998.
    2. The assets of the Plan include the Property. The Property 
comprises approximately 3.66 acres of unimproved real property located 
in Highlands, North Carolina. The Property is divided into four lots. 
Two of the lots are interior lots and the other two lots have frontage 
on Lake Sequoyah. The Property was acquired for $293,000 on November 
23, 1994 from Elizabeth Nielson, an unrelated party.
    3. Since its acquisition, the Property has not generated any income 
for the Plan. The Plan has, however, incurred certain expenses as a 
result of the Plan's ownership of the Property. In this regard, the 
applicant represents that the Plan has incurred a total of $3,169.33 in 
property taxes. In addition, the applicant represents that the Plan has 
incurred expenses in the amount of $1,685 for consulting fees resulting 
from the Plan's attempt to develop the Property.
    4. The Property was appraised by Thomas Ringle (Mr. Ringle), an 
appraiser independent of the Plan and certified in the State of North 
Carolina. Mr. Ringle calculated the Property's fair market value (the 
Fair Market Value) using the sales comparison approach and compared the 
Property to similar unimproved properties located near the Property. 
Based on these comparisons, Mr. Ringle determined the Fair Market Value 
to be $270,000 as of June 9, 1998.
    Mr. Ringle also calculated an additional value for the Property for 
purposes of the Sale (i.e., the Assemblage Value). Mr. Ringle 
represents that the Assemblage Value is due to Mr. McPhail's ownership 
of unimproved real property located adjacent to the Property and 
reflects the higher value property owners are willing to pay for 
adjoining parcels of property. Based on his analysis of the Property, 
Mr. Ringle calculated that the Assemblage Value to be $30,000.
    Mr. Ringle determined that the sales price of the Property for 
purposes of the Sale (the Sale Price) should be a sum equal to the Fair 
Market Value and the Assemblage Value. As a result, Mr. Ringle 
determined the Sale Price to be $300,000.
    5. The applicant is proposing the sale of the Property from the 
Plan to Mr. McPhail for $300,000 (i.e., the Sale). The applicant 
represents that Mr. McPhail proposes to pay 20% of the Sales Price in 
cash to the Plan as a down payment on the Property with the Plan 
loaning Mr. McPhail the remaining 80% balance (i.e., the Loan). In this 
regard, the applicant represents that the Loan will be for 15 years at 
seven percent (7%) interest (i.e., the Interest Rate). The Interest 
Rate represents an interest rate set by the Macon Savings Bank (Macon) 
located in Highlands, North Carolina, for a real estate loan having 
similar terms as the Loan. The applicant represents that Macon is an 
independent party with respect to the Plan.
    As a result, Mr. McPhail proposes the following terms for the Sale: 
$60,000 in cash paid by Mr. McPhail to the Plan as a down payment on 
the Property; and $2,157.19 paid by Mr. McPhail to the Plan each month 
for 179 months. As security on the Loan, Mr. McPhail will pledge the 
Property and additional unimproved real property having a fair market 
value of $435,000 as of September 3, 1999, as determined by John 
Meadows of John Cleveland Realty, an independent real estate broker. 
The security interest securing the Loan will be a first security 
interest and will be perfected in accordance with North Carolina law. 
In addition, the property securing the Loan, will be insured against 
casualty loss for an amount which is not less than the Loan balance 
throughout the duration of the Loan. The Plan will be listed as a loss 
payee on the insurance policy.
    6. The applicant represents that the proposed Sale is in the best 
interest of the Plan due to the high expense the Plan anticipates will 
be necessary for a sale of the Property to unrelated third parties. The 
applicant further represents that the Property was originally purchased 
by the Plan with the intent that the Plan would resell the Property to 
unrelated parties. The applicant notes that, subsequent to the purchase 
of the Property by the Plan, the Plan determined that the Property 
could not be sold to third parties without the expenditure of Plan 
assets on certain costly improvements, including the construction, 
grading and paving of a road.
    The applicant additionally represents that the proposed Loan is 
protective of the Plan since the Loan will be secured with real 
property having a fair market value in excess of the Property and the 
Interest Rate is set according to current market rates for similar 
transactions.
    Finally, the applicant represents that the Sale is administratively 
feasible since the proposed Sale will allow the Plan to liquidate its 
investment in the Property at a price which will maximize value to the 
Plan and is a one-time transaction in which the Plan will pay no fees 
or transaction costs.
    7. In summary, the applicant represents that the proposed 
transaction satisfies the criteria of section 4975(c)(2) of the Code 
because,
    (1) With respect to the Sale:
    (A) The terms and conditions of the Sale will be at least as 
favorable to the Plan as those obtainable in an arm's length 
transaction with an unrelated party;
    (B) The Sale will occur at a price which includes the greater of 
$270,000 or the Property's fair market value as established by a 
qualified, independent appraiser;
    (C) The Sale Price will also include a premium of $30,000 (the 
Assemblage Value) due to Mr. McPhail's ownership of unimproved real 
property located adjacent to the Property;
    (D) The Plan will pay no fees or commissions with respect to the 
Sale; and
    (E) Mr. McPhail will pay $60,000 or 20% of the Sale Price in cash 
with the balance paid for by the Loan; and
    (2) With Respect to the Loan:
    (A) The interest rate on the Loan (the Interest Rate) will be 7%, a 
rate set by the Macon Bank for a real estate loan having terms similar 
to the Loan;
    (B) The Loan terms are at least favorable to the Plan as those 
obtainable in an arm's length transaction with an unrelated party;
    (C) The Loan is secured by a first security interest on the certain 
real property, which has been appraised by a qualified independent 
appraiser to have a fair market value not less than 150% of the 
principal amount of the Loan; and
    (D) The outstanding balance of the Loan will never exceed 20% of 
the assets of the Plan throughout the duration of the Loan;
    (E) The fair market value of the collateral remains at least equal 
to 150% of the outstanding principal balance plus accrued but not 
unpaid interest, throughout the duration of the Loan; and
    (3) Should any employee of the Plan Sponsor become eligible for 
Plan participation, the new participant will be enrolled in another 
qualified retirement plan or the Loan will be immediately repaid.
    For Further Information Contact: J. Martin Jara of the Department, 
telephone (202) 219-8883 (this is not a toll free number).

[[Page 18356]]

Triumph Capital Group, Inc., Located in Boston, MA

[Application No. D-10708]

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) 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, effective July 22, 1997, to the making, by an employee benefit 
plan subject to the Act (the Plan), of capital contributions to any 
private equity fund (the Triumph Fund) that is organized, sponsored 
and/or managed by Triumph Capital Group, Inc. and/or any of its 
affiliates (collectively, Triumph) pursuant to a contractual obligation 
by a Plan having an interest in the Triumph Fund.\2\
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    \2\ As discussed herein, Triumph Funds are generally expected to 
be organized as venture capital operating companies that are managed 
by Triumph.
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    This proposed exemption is subject to the following conditions:
    a. At the time the Plan undertakes the obligation to make such 
capital contributions (the Determination Date), the Triumph Fund is not 
a party in interest with respect to the Plan.
    b. The decision to make a capital contribution to a Triumph Fund is 
made on behalf of the Plan by a Plan fiduciary which is independent of 
and unrelated to Triumph and the portfolio company whose interest is 
acquired by the Triumph Fund.
    c. Triumph does not otherwise provide investment advice as a 
fiduciary to the Plan, within the meaning of the Department's 
regulations at 29 CFR 2510.3-21(c), with respect to such Plan's assets 
that are invested in the Triumph Fund.
    d. At the Determination Date, the Plan has aggregate assets that 
are in excess of $50 million; provided, however, that in the case of:
    (1) Two or more Plans which are not maintained by the same 
employer, controlled group of corporations or employee organization 
(the Unrelated Plans), whose assets are invested in a Triumph Fund 
through a group trust, an insurance company pooled separate account or 
any other form of entity the assets of which are ``plan assets'' under 
the Department's regulations at 29 CFR 2510.3-101 (the Plan Asset 
Regulation), the foregoing $50 million requirement shall be satisfied 
if such trust, separate account, or other entity has aggregate assets 
which are in excess of $50 million, provided further that the fiduciary 
responsible for making the investment decision on behalf of such group 
trust, insurance company pooled separate account, or other entity has--
    i. Full investment responsibility \3\ with respect to the plan 
assets invested therein; and
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    \3\ For purposes of this exemption, the term ``full investment 
responsibility'' means that the fiduciary responsible for making the 
investment decision has and exercises discretionary management 
authority over all of the assets of the group trust or other plan 
assets entity.
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    ii. Total assets under its management and control, exclusive of the 
assets invested in the Triumph Fund, which are in excess of $100 
million, for Triumph Funds established after the date this notice of 
proposed exemption is published in the Federal Register.
    (2) Two or more Plans which are maintained by the same employer, 
controlled group of corporations or employee organization (the Related 
Plans), whose assets are invested in a Triumph Fund through a master 
trust or any other entity the assets of which are ``plan assets'' under 
the Plan Asset Regulation, the $50 million requirement shall in any 
event be satisfied if such trust or other entity has aggregate assets 
which are in excess of $50 million, provided, further, that, in the 
case of a Triumph Fund established after the date the notice granting 
the exemption is published in the Federal Register, in addition to the 
$50 million requirement, if the fiduciary responsible for making the 
investment decision on behalf of such master trust or other entity is 
not the employer or an affiliate of the employer, then such fiduciary 
has total assets under its management and control, exclusive of the 
assets invested in the Triumph Fund, which are in excess of $100 
million.
    e. The Triumph Fund is a party in interest with respect to the Plan 
solely by reason of a relationship to a portfolio company which is a 
service provider to a Plan, as described in Section 3(14)(H) or (I) of 
the Act, including a fiduciary with respect to such Plan.
    f. The capital commitment of the Plan (together with the capital 
commitments of any other Plans maintained by the same employer, 
controlled group of corporations or employee organization) with respect 
to the Triumph Fund, does not exceed 15 percent of the total capital 
commitments made by all investors with respect to such Triumph Fund, 
determined at the later of (i) the Determination Date, or (ii) the date 
on which the Triumph Fund first becomes a party in interest with 
respect to such Plan.
    g. At the Determination Date the percentage of the Plan's assets 
committed to be invested in the Triumph Fund does not exceed 5 percent 
of the Plan's total assets.
    h. At the Determination Date, a Plan's aggregate capital commitment 
to all Triumph Funds does not exceed 25 percent of the Plan's total 
assets.
    i. The Plan receives the following initial and ongoing disclosures 
with respect to the Triumph Fund;
    (1) A copy of the private placement memorandum applicable to the 
Triumph Fund or another comparable document containing substantially 
the same information;
    (2) A copy of the limited partnership or other agreement 
establishing the Triumph Fund;
    (3) A copy of the subscription agreement applicable to the Triumph 
Fund, if any;
    (4) Copies of this proposed exemption and the final exemption, if 
granted, once such documents are published in the Federal Register; and
    (5) Periodic, but no less frequently than annually, reports 
relating to the overall financial position and operational results of 
the Triumph Fund, including copies of the Triumph Fund's annual 
financial statements.
    j. With respect to capital contributions made to a Triumph Fund by 
a Plan after the date this proposed exemption is granted, Triumph 
maintains or causes to be maintained, for a period of six (6) years 
from the date of the transaction, the records necessary to enable the 
persons described in paragraph (k) to determine whether the conditions 
of the exemption have been met, except that--
    (1) A prohibited transaction will not be considered to have 
occurred, if due to circumstances beyond the control of Triumph, the 
records are lost or destroyed prior to the end of the six year period; 
and
    (2) No party in interest, other than Triumph, shall be subject to 
the civil penalty that may be assessed under section 502(i) of the Act, 
or to the taxes imposed by section 4975(a) and (b) of the Code, if the 
records are not maintained, or are not available for examination as 
required by paragraph (k).
    k. (1) Except as provided in paragraph (k)(2) and notwithstanding 
any provisions of subsection (a)(2) and (b) of section 504 of the Act, 
the records referred to in paragraph (j) are unconditionally available 
at their customary location for examination during normal business 
hours by--

[[Page 18357]]

    (A) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (B) Any fiduciary of a Plan which has an interest in the Triumph 
Fund and has the authority to acquire or dispose of the interest of the 
Plan in the Triumph Fund, or any duly authorized employee or 
representative of such fiduciary; and
    (C) Any participant or beneficiary of any Plan which has an 
interest in the Triumph Fund, or duly authorized representative of such 
participant or beneficiary.
    (2) None of the persons described in paragraph (k)(1)(B) and 
(k)(1)(C) shall be authorized to examine trade secrets of Triumph or 
commercial or financial information which is privileged or 
confidential.
    Effective Date: If granted, this proposed exemption will be 
effective as of July 22, 1997.

Summary of Facts and Representations

    1. Triumph Capital Group, Inc., is a Delaware corporation which, 
together with its affiliates (collectively referred to herein as 
``Triumph'') has organized, sponsored and/or managed six (6) private 
equity (or high-yield debt) funds, involving total capital commitments 
of approximately one (1) billion dollars. The investors in the Triumph 
Funds are primarily sophisticated institutional investors, including 
employee benefit plans that are subject to the Act, private 
foundations, government plans, endowments and other tax exempt 
organizations, and a few wealthy individuals. The applicant represents 
that private equity funds, such as the Triumph Funds, allow Plans, 
particularly those having significant asset bases, to achieve greater 
diversification by asset class. As such, many of the investors in the 
existing Triumph Funds, and many potential investors in future Triumph 
Funds, will be Plan investors that are covered by the Act.
    2. Each Triumph Fund in which any Plan invests is organized and 
operated so that the assets of such Triumph Fund will not be deemed to 
be ``plan assets'' under the Plan Asset Regulation. In most cases, this 
results from the fact that the Triumph Fund is operated in a manner 
which causes such Fund to qualify as a venture capital operating 
company.\4\ In some cases, it may be the result of the fact that the 
equity participation in the Triumph Fund by benefit plan investors is 
not significant (i.e., 75 percent or more of the equity interest in the 
entity is held by non-benefit plan investors).\5\
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    \4\ The Department's regulation at 29 CFR 2510.3-101(c) defines 
the term ``operating company'' as an entity that is primarily 
engaged, directly or through a majority-owned subsidiary or 
subsidiaries, in the production or sale of a product or service 
other than the investment of capital. The term ``operating company'' 
includes a ``venture capital operating company.''
    29 CFR 2510.3-101(d) provides, in part, that an entity is a 
``venture capital operating company'' if at least 50 percent of its 
assets are invested in venture capital investments, and the entity, 
in the ordinary course of its business, actually exercises 
management rights with respect to one or more operating companies in 
which it invests. 29 CFR 2510.3-101(d)(3) explains that a venture 
capital investment is an investment in an operating company (other 
than a venture capital operating company) as to which the investor 
has or obtains management rights. The term ``management rights'' is 
defined under 29 CFR 2510.3-101(d)(3)(ii) to mean contractual rights 
directly between the investor and an operating company to 
substantially participate in, or substantially influence the conduct 
of, the management of the operating company.
    \5\ The Department's regulation at 2510.3-101(f)(1) states, in 
pertinent part, that equity participation in an entity by benefit 
plan investors is ``significant'' on any date, if immediately after 
the most recent acquisition of any equity interest in the entity, 25 
percent or more of the value of any class of equity interests in the 
entity is held by benefit plan investors.
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    3. The Triumph Funds have typically been structured as limited 
partnerships with Triumph serving as general partner and, in some 
cases, having an interest as limited partner. (Triumph Funds organized 
in the future may be organized using different structures, such as 
limited liability companies.) The Triumph Funds are managed by Triumph 
which receives a pre-specified management fee as well as a pre-
specified incentive allocation after investors have received 
distributions in excess of their capital contributions plus a pre-
specified minimum rate of return. Because the Triumph Funds are 
generally expected to be organized as venture capital operating 
companies, the applicant represents that none of the Triumph Funds will 
hold ``plan assets'' and that the compensation paid to Triumph by the 
Triumph Funds will not be subject to the prohibitions under the Act. 
\6\
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    \6\ The Department is providing no opinion with regard to 
whether a Triumph Fund is a venture capital operating company or 
whether the equity participation by Plans investing in a Triumph 
Fund is not significant. In addition, the Department is not 
expressing any views with respect to the compensation that is paid 
to Triumph by a Triumph Fund.
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    One of Triumph's more recent funds, Triumph Partners III, L.P., has 
aggregate capital commitments of approximately $595,550,000 from 49 
individual and institutional investors. Of the institutional investors, 
6 investors are Plans that are covered under the provisions of the Act. 
These Plans have made a total capital commitment to Triumph Partners 
III, L.P. of $170,300,000.
    4. Triumph Funds typically involve multiple closings with investors 
making their investment commitments (and therefore having a 
Determination Date) over a six to nine month period. Because of this 
staging, Triumph proposes, for purposes of the 15% limit contained in 
condition (f) above, to test each Plan investor's capital commitment 
with respect to the Triumph Fund in relation to the total capital 
commitments made by all the investors with respect to such Triumph 
Fund, at the later of (a) the Determination Date, or (b) the date on 
which the Triumph Fund first becomes a party in interest with respect 
to such Plan investor.
    Each investor in a Triumph Fund, including each Plan investor, 
enters into a binding commitment to make capital contributions to the 
Triumph Fund in an amount specified by the investor. However, the 
investors' capital commitments typically are not funded at the outset. 
Rather, the capital is drawn down over time as the Triumph Fund 
identifies and makes its venture capital and other investments. 
Generally, capital is called down in installments ranging from 2.5 
percent to 10 percent of the total commitment. In most cases, all of 
the capital commitments will have been drawn down within 3 to 5 years 
of the establishment of the Triumph Fund.
    5. The Triumph Funds' investments include a wide variety of 
portfolio companies.\7\ Specifically, the Triumph Funds may acquire 
interests in portfolio companies which are involved, either directly or 
through subsidiaries, in various aspects of the financial services 
industry. Triumph believes that the flexibility to acquire such 
investments is necessary to enable the Triumph Funds to maximize 
investment opportunities and investment returns. In Triumph's view, 
business opportunities can arise in connection with start-up or later-
stage companies (including spinoffs and management buy-outs of existing

[[Page 18358]]

business operations) in virtually any type of business.
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    \7\ According to the applicant, the term ``portfolio company'' 
refers to each of the operating companies in which a private equity 
fund has made an investment. Thus, for example, when a private 
equity fund, such as a Triumph Fund, makes an investment in a start-
up, high tech company, that company becomes one of the private 
equity fund's portfolio companies and will remain so as long as the 
private equity fund retains its investment in that high tech 
company. Similarly, if a private equity fund acquires an interest in 
an investment management firm, the investment management firm will 
become a portfolio company of the private equity fund.
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    6. Triumph Funds may acquire interests in portfolio companies that 
are involved in providing money management services, brokerage services 
or other types of services which may be utilized by Plans and 
institutional investors. The portfolio company may be, or may become, a 
party in interest with respect to one or more Plans which hold an 
interest in the Triumph Fund when such portfolio company, or any 
subsidiary thereof, performs services for a Plan. The services may 
include fiduciary services (e.g., management of assets of the Plan 
other than those invested in a Triumph Fund). In no event will the 
portfolio company or its subsidiary act in a fiduciary capacity with 
respect to the assets of the Plan that are invested in the Triumph 
Fund.
    If the Triumph Fund owns, directly or indirectly, a 10 percent or 
more interest in a service provider to a Plan, Triumph notes that the 
Fund will become a party in interest with respect to such Plan under 
section 3(14)(H) or (I) of the Act.\8\ Since a Triumph Fund frequently 
purchases a 10 percent or more interest in a portfolio company, Triumph 
represents that it is possible that a Triumph Fund could become a 10 
percent or more owner of a service provider and a party in interest 
with respect to each Plan as to which the portfolio company (or one of 
its subsidiaries) is a service provider. Once a Triumph Fund becomes a 
party in interest with respect to a Plan, Triumph states that the Plan 
would be prohibited from engaging in any transaction with that Triumph 
Fund.
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    \8\ In this regard, it is noted that the corresponding section 
of the Code relating to ``disqualified persons'' (see section 
4975(e)(2)(H) and (I)) does not contain a similar provision which 
would make the owner of 10 percent or more of a service provider a 
disqualified person with respect to a Plan. Nevertheless, because 
the service provider is a ``disqualified person'' under section 
4975(e)(2)(B) of the Code, Triumph has requested that the exemption 
extend to both the Code and the Act in order to avoid any potential 
concerns regarding the possibility of indirect prohibited 
transactions.
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    If a Triumph Fund were to become a party in interest with respect 
to a Plan, Triumph is concerned that a capital contribution made by the 
Plan subsequent to the Triumph Fund's becoming a party in interest 
would violate section 406(a)(1)(D) of the Act notwithstanding the fact 
that the capital contribution is being made pursuant to a pre-existing 
binding contractual commitment made by the Plan at a time when the 
Triumph Fund was not a party in interest. Therefore, to resolve these 
potential technical violations of the Act, Triumph has requested an 
administrative exemption from the Department.\9\
---------------------------------------------------------------------------

    \9\ The Department is providing no opinion in this proposed 
exemption regarding whether, or to what extent, a Plan engaging in 
the subject transaction with a Triumph Fund would violate section 
406(a) of the Act, once the Triumph Fund becomes a party in interest 
with respect to the Plan, under the circumstances described herein.
---------------------------------------------------------------------------

    7. The requested exemption is subject to a number of conditions 
that will apply both retroactively and prospectively. First, the 
Triumph Fund's party in interest status will, in all cases, arise after 
the Determination Date, i.e., after the Plan investor has made a 
binding commitment to invest in the Triumph Fund, including its 
commitment to make future capital contributions to the Triumph Fund. 
Second, the decision to undertake the obligation to make a binding 
commitment must be made on behalf of the Plan by a Plan fiduciary which 
is independent of and unrelated to Triumph and the portfolio company. 
Third, Triumph must not otherwise provide investment advice to the 
Plan, within the meaning of the Department's regulation at 29 CFR 
2510.3-21(c) (defining when an investment adviser to a plan becomes a 
fiduciary by reason of the advice), with respect to such Plan's assets 
that are invested in the Triumph Fund. Fourth, at the Determination 
Date, the Plan must have aggregate assets that are in excess of $50 
million, subject to special rules addressing investments in a Triumph 
Fund by entities holding the assets of multiple plans, such as group 
trusts and master trusts. Fifth, at the later of the Determination Date 
or the date on which the Triumph Fund first becomes a party in interest 
with respect to such Plan investor, the capital commitment of the Plan 
(together with the capital commitments of any other Plans maintained by 
the same employer, controlled group of corporations, or employee 
organization) with respect to the Triumph Fund, must not exceed 15 
percent of the total capital commitments with respect to such Triumph 
Fund. Sixth, at the Determination Date, the percentage of the Plan's 
assets committed to be invested in the Triumph Fund must not exceed 5 
percent of the Plan's total assets. Seventh, at the Determination Date, 
a Plan's aggregate capital commitment with respect to all Triumph Funds 
must not exceed 25 percent of such Plan's total assets.
    8. The conditions of the proposed exemption also require that each 
Plan receive the following initial and ongoing written disclosures from 
Triumph: (a) A copy of the private placement memorandum applicable to 
the Triumph Fund or another comparable document containing 
substantially the same information; (b) a copy of the limited 
partnership or other agreement establishing the Triumph Fund; (c) a 
copy of the subscription agreement applicable to the Triumph Fund, if 
any; (d) copies of the proposed exemption and the final exemption, if 
granted, once such documents are published in the Federal Register; and 
(e) periodic, but no less frequently than annually, reports relating to 
the overall financial position and operational results of the Triumph 
Fund including copies of the Triumph Fund's annual financial 
statements. In addition, with respect to capital contributions made to 
a Triumph Fund by a Plan after the date this proposed exemption is 
granted, Triumph will maintain or cause to be maintained for a period 
of six (6) years from the date of each transaction, records of each 
Plan investing in a Triumph Fund and each portfolio company comprising 
a Triumph Fund. Such records will enable the Department and other 
persons to determine whether the terms and conditions of the exemption 
are being met.
    9. If the exemption is not granted, Triumph represents that it and 
the Triumph Funds would be required to make one of several adjustments 
designed to avoid the prohibited transaction concern that is the 
subject of this request. However, Triumph states that it does not 
believe these adjustments would be in the best interest of existing or 
prospective Plan investors. In this regard, Triumph represents that it 
might attempt to avoid the problem by not acquiring any portfolio 
companies which are, directly or indirectly, service providers to any 
of a Triumph Fund's Plan investors. However, Triumph does not consider 
this alternative satisfactory because it would limit the Triumph Fund's 
potential range of investments and diminish the expected investment 
return of such Fund. Moreover, Triumph points out that a portfolio 
company which is not a service provider at the time of the Triumph 
Fund's investment might become a service provider at some time in the 
future. Under these circumstances, Triumph represents that it would be 
impractical to restrict the activities of all portfolio companies in 
which the Triumph Fund invests to assure that no such portfolio company 
would ever become a service provider to any Triumph Fund's Plan 
investors. According to Triumph, such restriction

[[Page 18359]]

would be contrary to the best interest of the Triumph Funds and their 
investors, particularly, their Plan investors.
    As another alternative, Triumph represents that it could limit the 
offering of interests in the Triumph Funds to those Plans which could 
take advantage of Prohibited Transaction Exemption (PTE) 84-14 (49 FR 
9494 March 13, 1984), the Class Exemption for Plan Asset Transactions 
Determined by Independent Qualified Professional Asset Managers (QPAMs) 
or PTE 96-23 (61 FR 15975, April 10, 1996), the Class Exemption for 
Plan Asset Transactions Determined by In-House Asset Managers 
(INHAMs).\10\ However, Triumph believes that such an approach would be 
unduly restrictive and not in the best interest of the Plans since 
relatively few Plans could take advantage of PTE 96-23. In addition, in 
the absence of this proposed exemption, each Plan would be forced to 
hire a QPAM in order to meet the conditions of PTE 84-14, and incur an 
additional expense in order to invest in a Triumph Fund, if the Plan's 
named fiduciary would otherwise make that decision itself.
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    \10\ PTE 84-14 permits various parties which are related to 
employee benefit plans to engage in transactions involving plan 
assets if, among other conditions, the assets are managed by QPAMs 
(i.e., banks, savings and loan associations, insurance companies or 
investment advisers registered under the Investment Advisers Act of 
1940), which are independent of the parties in interest involved in 
such transactions and meet certain specified financial standards. 
PTE 96-23 permits various transactions involving employee benefit 
plans whose assets are managed by INHAMs and parties in interest to 
such plans, who are service providers, or their affiliates (other 
than the INHAM and its affiliates).
---------------------------------------------------------------------------

    10. In summary, it is represented that the proposed transactions 
satisfy the statutory criteria of section 408(a) of the Act because: 
(a) The Triumph Fund's party in interest status with respect to the 
Plan will arise after the Plan has made its binding commitment to 
invest in the Triumph Fund, including its commitment to make future 
capital contributions to the Triumph Fund; (b) the decision by a Plan 
to make capital contributions to the Triumph Fund has been and will be 
made on behalf of the Plan by a Plan fiduciary which is independent of 
and unrelated to Triumph and the portfolio company that is acquired by 
the Triumph Fund; (c) Triumph will not otherwise provide investment 
advice to the Plan, within the meaning of 29 CFR 2510.3-21(c) of the 
Act, with respect to such Plan's assets that are invested in the 
Triumph Fund; (d) at the later of the Determination Date, or the date 
on which the Triumph Fund first becomes a party in interest with 
respect to such Plan investor, the capital commitment of the Plan 
(together with the capital commitment of any other related Plans 
maintained by the same employer, controlled group of corporations, or 
employee organization) will not exceed more than 15 percent of the 
total outstanding capital commitments made by all investors with 
respect to the Triumph Fund; (e) at the Determination Date, the 
percentage of the Plan's assets committed to be invested in the Triumph 
Fund has not and will not exceed 5 percent of the Plan's total assets, 
and the Plan's aggregate commitment to all Triumph Funds has not and 
will not exceed 25 percent of the Plan's total assets; (f) a Plan 
investing in a Triumph Fund has or will have, either alone or in 
combination with other plans, assets that are in excess of $50 million 
(as described under the conditions contained herein); and (g) Triumph 
has made or will make written disclosures to the Plan regarding the 
Triumph Fund, both at the time of the initial commitment to invest in 
such Fund as well as on an ongoing basis.

Notice to Interested Persons

    Those persons who may be interested in the pendency of the 
requested exemption include fiduciaries of Plans whose assets are 
currently invested in a Triumph Fund. Accordingly, the Department has 
determined that the only practical form of providing notice to such 
Plan fiduciaries is the distribution, by Triumph, of a copy of the 
proposed exemption by first class mail within 15 days of the date of 
publication of the pendency notice in the Federal Register. The notice 
will include a copy of the notice of proposed exemption, as published 
in the Federal Register, as well as a supplemental statement, as 
required pursuant to 29 CFR 2570.43(b)(2), which shall inform 
interested persons of their right to comment on the pending exemption. 
Comments with respect to the proposed exemption are due 45 days after 
the date of publication of the proposed exemption in the Federal 
Register.
    For Further Information Contact: Ms. Janet Schmidt of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

The Fidelity Mutual Life Insurance Company (In Rehabilitation) 
(FML) Located in Radnor, PA

[Application No. D-10712]

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).\11\
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    \11\ For 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.
---------------------------------------------------------------------------

Section I. Covered Transactions
    If the exemption is granted, the restrictions of section 406(a) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the 
Code, shall not apply to (1) the receipt of certain stock (the Plan 
Stock) issued by Fidelity Insurance Group, Inc. (Group), a wholly owned 
subsidiary of FML, or (2) the receipt of plan credits (the Plan 
Credits), by or on behalf of a mutual member (the Mutual Member) of 
FML, which is an employee benefit plan (the Plan), other than the 
Employee Pension Plan of Fidelity Mutual Life Insurance Company (the 
FML Plan), in exchange for such Mutual Member's membership interest 
(the Membership Interest) in FML, in accordance with the terms of a 
plan of rehabilitation (the Third Amended Plan of Rehabilitation), 
approved by the Pennsylvania Commonwealth Court (the Court) and 
supervised by both the Court and a rehabilitator (the Rehabilitator) 
appointed by the Pennsylvania Insurance Commissioner (the 
Commissioner).
    This proposed exemption is subject to the following conditions set 
forth below in Section II.
Section II. General Conditions
    (a) The Third Amended Plan of Rehabilitation is approved by the 
Court, implemented in accordance with procedural and substantive 
safeguards that are imposed under Pennsylvania law and is subject to 
review and/or supervision by the Commissioner and the Rehabilitator. 
The Court determines whether the Third Amended Plan of Rehabilitation 
is fair and equitable to Mutual Members.
    (b) Each Mutual Member has an opportunity to vote and comment on 
the Third Amended Plan of Rehabilitation at hearings held by the Court 
after full written disclosure is given to such Mutual Member by FML of 
the terms of the Plan.
    (c) Participation by all Mutual Members in the Third Amended Plan 
of Rehabilitation, if approved by the Court, is mandatory, although 
Mutual Members may disclaim Plan Stock.
    (d) Any determination by a Mutual Member which is a Plan to receive 
Plan Stock or Plan Credits is made by one or more independent 
fiduciaries of such

[[Page 18360]]

Plan and not by FML, Group or Fidelity Life Insurance Company (FLIC). 
Consequently, neither FML nor any of its affiliates will exercise 
investment discretion nor render ``investment advice'' within the 
meaning of 29 CFR 2510.3-21(c) with respect to an independent Plan 
fiduciary's decision to elect Plan Stock or Plan Credits.
    (e) Twenty percent of the Plan Stock is allocated to a Mutual 
Member based upon voting rights and eighty percent is allocated to a 
Mutual Member on the basis of the contribution of the Mutual Member's 
insurance or annuity contract (the Contract) to the surplus of FML. The 
contribution to FML's surplus is the actuarial calculation of both the 
historical and expected future profit contribution of the Contracts 
that have contributed to the surplus (i.e., the net earnings) of FML. 
The actuarial formulas are approved by the Court and the Commissioner.
    (f) The value of Plan Stock or Plan Credits that will be received 
by a Mutual Member will reflect the aggregate price paid by an 
independent investor (the Investor) to Group for common Stock (the 
Common Stock) and for plan credit shares (the Plan Credit Shares) in 
convertible preferred stock (the Preferred Stock) issued by Group.
    (g) All Mutual Members that are Plans participate in the 
transactions on the same basis as all other Mutual Members that are not 
Plans.
    (h) No Mutual Member pays any brokerage commissions or fees in 
connection with the receipt of Plan Stock or Plan Credits.
    (i) All of FML's obligations to contractholders (the 
Contractholders) of the company which are Mutual Members remain in 
force upon endorsement and transfer to FLIC and are not affected by the 
Third Amended Plan of Rehabilitation.
Section III. Definitions
    For purposes of this proposed exemption:
    (a) The term ``FML'' means the Fidelity Mutual Life Insurance 
Company (In Rehabilitation) and any affiliate of FML as defined in 
paragraph (c) of this Section III.
    (b) The term ``FLIC'' means the Fidelity Life Insurance Company and 
any affiliate of FLIC as defined in paragraph (c) of this Section III.
    (c) An ``affiliate'' of FML or FLIC includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with FML or FLIC; (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.) or
    (2) Any officer, director or partner in such person.
    (c) The term ``Mutual Member'' means a Contractholder whose name 
appears on FML's records as an owner of an FML Contract on the Record 
Date of the Third Amended Plan of Rehabilitation.
    (d) The term ``Investor'' means the person (e.g., individual, 
corporation, partnership, joint venture, etc.) selected by the 
Rehabilitator and approved by the Court to be the purchaser under the 
Investment Agreement.
    (e) The term ``Group Stock'' refers to shares of Group Common Stock 
and to Group Preferred Stock, which will have a cumulative, annual 
dividend equal to 7 percent of its liquidation value. The Preferred 
Stock will be Series A stock having a par value of $0.01 per share and 
a liquidation preference and a redemption value of $25 per share.
    (f) The term ``Plan Stock'' means the 3 million shares of Group 
Common Stock and the 2.8 million of Group Preferred Stock that will be 
allocated to Mutual Members.
    (g) The term ``Plan Credit'' means either (1) additional paid up 
insurance for a traditional life policy or (2) credits to the account 
values for Contracts that are not traditional (such as a flexible 
premium policy). Under FML's Third Amended Plan of Plan of 
Rehabilitation, Plan Credits are to be allocated to certain Mutual 
Members in lieu of Plan Stock.
    (h) The term ``Plan Credit Shares'' includes those shares of Plan 
Stock (i.e., the 15,000 to 180,000 shares of Group Common Stock) and 
any shares of Group Preferred Stock to be issued and sold by Group to 
the Investor to fund Plan Credits.
    (i) The term ``Policyholder Stock'' means those shares of Group 
Common or Group Preferred Stock that will be issued and distributed to 
Mutual Members, consisting of Plan Stock plus any shares of Group Stock 
(in excess of Plan Stock) issued for purposes of correcting errors in 
the allocation of Plan Stock, less Plan Credit Shares and any 
disclaimed shares.
    (j) The term ``Investor Stock'' means the 3.1 million shares of 
Group Common Stock (other than Plan Stock) and the Plan Credit Shares 
which, under the Third Amended Plan of Rehabilitation, are sold to the 
Investor pursuant to bid procedures and the Investment Agreement.

Summary of Facts and Representations

    1. FML is a mutual life insurance company that was founded in 1878 
and organized to conduct a life insurance business in Pennsylvania. FML 
maintains its principal place of business at 250 King of Prussia Road, 
Radnor, Pennsylvania. Prior to the rehabilitation proceedings that are 
described herein, FML was licensed to issue life insurance policies in 
47 states and the District of Columbia.
    Because FML has been organized as a mutual form of life insurance 
company, it has no stockholders. Instead, the owners of its Contracts 
(i.e., the Contractholders) have a dual legal relationship with FML. In 
this regard, the Contractholders are vested with rights in the company, 
such as such as the right to vote and the right to an allocable portion 
of the divisible surplus. In addition, the Contractholders have 
contractual rights under their Contracts with FML.
    FML has approximately 3,997 Contracts that are related to qualified 
Plans. FML also sponsors the FML Plan, a defined benefit plan, which 
had 254 participants and total assets of $17,282,009 as of December 31, 
1998.
    2. FML owns all of the stock of Group, a Pennsylvania-domiciled 
stock corporation. Group, in turn, owns all of the stock of FLIC, also 
a Pennsylvania corporation. Group purchased the FLIC stock from an 
unrelated party on June 30, 1995. FLIC is a stock life insurance 
company duly licensed, chartered and domesticated in Pennsylvania and 
is qualified to conduct a life insurance business in substantially all 
jurisdictions where FML has business, except in New York and New 
Hampshire. FLIC has filed applications for licenses to conduct business 
in these states.
    3. During late 1990, the Pennsylvania Insurance Department began 
monitoring FML's operations because of concern over FML's extensive 
real estate holdings, decline in surplus and unrealized capital losses. 
In response to an increase in Contract surrenders and loan requests for 
the period October 26 to November 5, 1992, the Pennsylvania Insurance 
Department and FML's Board of Directors petitioned the Court for an 
Order of Rehabilitation. As a result, FML was placed in rehabilitation 
by an order of the Court on November 6, 1992, pursuant to the 
Pennsylvania Insurance Department Act, as amended. Under the Order of 
Rehabilitation, a moratorium was imposed on cash distributions, 
Contract surrenders, withdrawals and policy loans, except in certain 
hardship situations. At the time of the rehabilitation, FML had assets 
with a book value of approximately $1.2 billion. Of this amount, a 
significant portion of FML's assets was comprised

[[Page 18361]]

of real estate and mortgages which were non-performing, illiquid and 
overvalued.
    4. On June 30, 1994, the Rehabilitator filed the original Plan of 
Rehabilitation for The Fidelity Mutual Life Insurance Company (the 
Original Plan of Rehabilitation) with the Court. The Original Plan of 
Rehabilitation called for the transfer of FML insurance policies to 
``Newco,'' the name designated for the stock life insurance company 
that was to be purchased by FML and Group. Under the Original Plan of 
Rehabilitation, all Contractholders of FML would be allocated one share 
of Group Stock, all Mutual Members would be made whole for any 
``Impairment'' \12\ through the allocation of Group Stock, and any 
remaining Group Stock would be allocated to creditors on a pro rata 
basis. Contractholders could opt out of the Original Plan of 
Rehabilitation, surrender their policies and receive the liquidation 
value of their cash surrender values plus one share of Group Stock. 
Contractholders remaining with Newco would also be subject to a 
continued moratorium charge (i.e., a charge based upon the suspension, 
by the Court, of cash distributions, Contract surrenders, withdrawals 
and policy loans) of 16 percent during the first year and 8 percent 
during the second year if they surrendered their policies. Further, a 
trust was to be created under the Original Plan of Rehabilitation to 
hold the stock during the moratorium period and then dispose of such 
stock by distributing it to Contractholders and creditors. Finally, the 
Original Plan of Rehabilitation provided that an Investor could provide 
a capital infusion to Newco through Group that would be sufficient to 
meet risk-based capital requirements and that such Investor would 
receive unspecified securities of Group in return. Notice was sent to 
Contractholders and other interested persons of the filing of the 
Original Plan and objections were due by November 1, 1994.
---------------------------------------------------------------------------

    \12\ Under the Original Plan, the term ``Impairment'' was 
defined as ``* * * the sum of (a) the loss of interest which would 
have been credited to Participating Contractholders in the normal 
course of business had FML not been placed in rehabilitation, as 
determined by the Receiver, and (b) the loss of liquidity due to the 
limited access of Participating Contractholders to their cash 
values, as determined by the Receiver.''
---------------------------------------------------------------------------

    5. After the filing of the Original Plan of Rehabilitation with the 
Court in June 1994, the Rehabilitator proceeded to work with an 
investment banker to solicit and select an Investor.\13\ On January 12, 
1995, the Rehabilitator filed an Amended Plan for the Rehabilitation of 
The Fidelity Mutual Life Insurance Company (the First Amended Plan of 
Rehabilitation) with the Court which included an Investment Agreement 
executed by the Presidential Life Insurance Company (Presidential). The 
framework for the First Amended Plan of Rehabilitation was similar to 
the Original Plan, with additional definition. The First Amended Plan 
of Rehabilitation provided that 10 million shares of Group Stock would 
be placed in a stock trust to be distributed to Contractholders for 
Impairment \14\ and thereafter, if any shares remained, to creditors 
with allowed claims. The First Amended Plan of Rehabilitation also 
provided that Group could sell up to 49.9 percent of Group Common Stock 
to Presidential in exchange for an investment of up to $45 million and 
could sell $25 million in debt instruments to the Presidential Life 
Corporation. The moratorium charge applicable to Contractholder cash 
values upon surrender after closing was reduced to 14 percent during 
the first year and 8 percent during the second year. Further, the 
liquidation value that Contractholders would receive if electing to opt 
out of the First Amended Plan of Rehabilitation was approximately 89 
percent of their cash surrender value. Notice of the filing of the 
First Amended Plan of Rehabilitation was provided to all 
Contractholders and other interested persons and objections had to be 
filed by March 31, 1995.
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    \13\ It is represented that many of the objections concerning 
the Original Plan of Rehabilitation related to the fact that the 
Plan had not included an Investor and that there was no certainty 
that an Investor could be found.
    \14\ Impairment under the First Amended Plan of Rehabilitation 
was defined as ``* * * the loss of liquidity due to the lack of 
access of Participating Contractholders to their Surrender Values 
measured from the Rehabilitation Date to the Closing Date * * *'' 
Aggregate Impairment was estimated to have a value of $40 million as 
of September 30, 1994.
---------------------------------------------------------------------------

    6. In January 1995, a new Commissioner was appointed who became the 
new Rehabilitator for FML. In March 1995, the Court approved the 
appointment of a Policyholder Committee at the request of a group of 
former FML agents. Subsequently, the Policyholder Committee engaged 
counsel, an accounting firm and an investment banking firm. Also, in 
March 1995, a bidder who was not selected as the Investor objected to 
the First Amended Plan of Rehabilitation and ultimately sought 
permission to intervene and propose an alternative rehabilitation plan. 
In May 1995, the Policyholder Committee filed objections to the First 
Amended Plan of Rehabilitation and specifically objected to the 
selected investor, Presidential. Also in May 1995, Presidential 
petitioned the Court for permission to intervene in the rehabilitation 
proceedings. In early September 1995, the Deputy Rehabilitator for FML 
resigned and a Deputy Commissioner from the Pennsylvania Insurance 
Department was assigned to oversee the daily affairs of FML. 
Negotiations with the Policyholder Committee, Presidential, and the 
objecting bidder continued during the remainder of 1995 through 1996. 
In May 1996, Presidential filed a petition for payment of expenses and 
liquidated damages under the 1995 Stock Purchase Agreement and the 
Policyholder Committee and former FML agents objected to that petition.
    7. On June 25, 1996, the Rehabilitator filed the Second Amended 
Plan for the Rehabilitation of The Fidelity Mutual Life Insurance 
Company (the Second Amended Plan of Rehabilitation) with the Court. The 
framework for the Second Amended Plan was substantially the same as the 
predecessor Plans but there were significant differences. For example, 
the concept of Plan Credits was introduced for the first time. In 
addition, Group could sell 35 percent of its issued and outstanding 
common stock to the Investor under bid procedures to be approved by the 
Court. However, Group could not issue any debt instruments. The other 
65 percent of the Group Stock was to be allocated to Contractholders 
and creditors, except that the stock would no longer be held and 
distributed by a stock trust, but would be distributed directly to the 
Contractholders and creditors around the Closing Date. Based on an 
assumed Closing Date of June 30, 1997, Impairment had increased to an 
estimated total of $57.1 million. Also, the Liquidation Value as of 
September 30, 1995 was estimated to be 95 percent of the cash surrender 
value of any Contractholder who elected to opt out of the Plan. The 
moratorium period of two years in the previous Plans was reduced to one 
year and the moratorium charge would be equal to the Liquidation 
Discount (5 percent of September 30, 1995).
    Notice of the filing of the Second Amended Plan of Rehabilitation 
was not sent to Contractholders and other interested persons because 
the Policyholder Committee filed significant objections to both the 
Notice Package and the Second Amended Plan of Rehabilitation, including 
an objection asserting that the Contractholders should receive cash 
rather than Group Stock for Impairment. In July 1996,

[[Page 18362]]

Presidential filed a motion asking the Court to enjoin any new Investor 
selection process until their claim for relief was addressed. The 
Presidential claim was finally settled and approved by the Court in 
March 1997.
    8. Negotiations with the Policyholder Committee continued and the 
Third Amended Plan for the Rehabilitation of The Fidelity Mutual Life 
Insurance Company (i.e., the Third Amended Plan of Rehabilitation) was 
filed with the Court on June 30, 1998. The Plan included several 
significant improvements for Contractholders due to the improved 
financial condition of FML.\15\ For example, under the Third Amended 
Plan of Rehabilitation, there are no moratorium charges after the 
Closing Date and Contractholders may immediately surrender their 
Contracts for the full cash surrender value. Consequently, no opt out 
period is necessary to allow the option of immediate surrender. 
Further, all creditor claims will be paid in full with 6 percent 
interest.
---------------------------------------------------------------------------

    \15\ In this regard, since its rehabilitation, FML has improved 
the investment quality of its assets and its financial strength. In 
addition, FML has stabilized its revenue and achieved levels of 
surplus in excess of minimum state regulatory requirements. Further, 
FML has continued to pay dividends to Contractholders under 
participating Contracts and excess interest credits under other 
Contracts (e.g., universal life and deferred annuity contracts).
    By an order of the Court dated April 30, 1996, FML increased 
policyholder dividends and declared interest crediting rates of 
certain Contracts beginning in 1996. In addition, FML petitioned the 
Court to pay an increased one-time policyholder dividend and 
declared interest credit beginning in 1999 because of its financial 
capacity to do so and in recognition of the fact that the 
policyholder dividends and declared interest credits paid on its 
Contracts had generally been lower during the period of 
rehabilitation than those for comparable policies of other insurers.
---------------------------------------------------------------------------

    Subject to the approval of the Court, the Rehabilitator is 
proposing that FML transfer, on the Closing Date,\16\ pursuant to 
assumption reinsurance and transfer agreements, its insurance 
operations to FLIC, which will continue as a wholly owned subsidiary of 
Group and a successor to FML. In addition, FML will modify the terms of 
the FML Contracts by endorsement prior to their transfer to and 
assumption by FLIC. Group Common Stock and Preferred Stock \17\ that 
has been denominated as Plan Stock will be allocated and then 
distributed to Mutual Members in exchange for their Membership 
Interests in FML rather than for the Impairment of their Contracts, 
except that Contractholders of certain tax-qualified retirement funding 
accounts (who have impediments to holding stock generally), will be 
entitled to have Plan Credits made to their Contracts in lieu of 
receiving Plan Stock.
---------------------------------------------------------------------------

    \16\ The Closing Date of the rehabilitation under the Third 
Amended Plan of Rehabilitation is expected to occur after December 
31, 2000.
    \17\ The Rehabilitator has been advised by outside securities 
and tax counsel that the Preferred Stock constitutes equity rather 
than debt. Additionally, the Rehabilitator has relied upon a private 
letter ruling issued by the Internal Revenue Service on July 14, 
1999 which treats the Preferred Stock and the Common Stock as equity 
rather than as debt.
---------------------------------------------------------------------------

    Therefore, FML requests an administrative exemption from the 
Department with respect to the receipt of Plan Stock or the receipt of 
Plan Credits by Mutual Members that are Plans. FML is not requesting, 
nor is the Department providing, exemptive relief with respect to the 
receipt of Plan Stock by the FML Plan because it believes such stock 
will constitute ``qualifying employer securities'' within the meaning 
of section 407(d)(5) of the Act. Therefore, FML represents that the 
acquisition of Plan Stock by the FML Plan will satisfy the requirements 
of section 408(e) of the Act.\18\
---------------------------------------------------------------------------

    \18\ However, the Department expresses no opinion herein on 
whether such distributions will satisfy the terms and conditions of 
section 408(e) of the Act.
---------------------------------------------------------------------------

    9. As with the other Plans of Rehabilitation, under the Third 
Amended Plan of Rehabilitation, an independent party (i.e., the 
Investor), approved by the Court, will be selected pursuant to bid 
procedures \19\ to purchase Common Stock from Group so that immediately 
after the Closing Date, the Investor will own more than 50 percent of 
such Common Stock. The Investor will acquire Preferred Stock only 
through the required purchase of Plan Credit Shares but not through the 
bid process.
---------------------------------------------------------------------------

    \19\ The bid procedures, which will strictly control the 
selection process for the Investor as well as the post-closing 
activities of the Investor, are designed to prevent any negotiation 
among potential Investors because the winning bid is to be 
determined solely on the basis of the bid price per share, the 
financial condition of the Investor and the statutory requirements 
of the Pennsylvania Rehabilitation Statute.
---------------------------------------------------------------------------

    Under the Third Amended Plan of Rehabilitation, the Investor may be 
a foreign or domestic entity such as a life/health insurer, a property/
casualty insurer, an investment company or other investment fund, a 
joint venture, general partnership or a limited partnership. In 
addition, the Investor may be required to satisfy certain ratings or 
capitalization criteria. For example, if the Investor is a property/
casualty insurer, it must have an A.M. Best rating of at least A-, a 
minimum Total Adjusted Capital of $500 million, and a ratio of Total 
Adjusted Capital to Authorized Control Level Risk Based Capital of 5:1 
or better. If the Investor is not a publicly-rated entity but is an 
investment company or other investment fund, it must have a net worth 
of at least $500 million and minimum available equity of $150 million. 
Further, the Investor must be either a Qualified Institutional Buyer 
within the meaning of Rule 144A under the Securities Exchange Act of 
1933 (the 1933 Act), an Institutional Accredited Investor within the 
meaning of Rule 501(a)(1), (2), (3) or (7) under the 1933 Act, or a 
sophisticated institutional investor not requiring the protections of 
the registration requirements of the 1933 Act.
    10. The rehabilitation strategy, which is aimed at maximizing the 
interests of FML's Contractholders and creditors, is to transfer FML's 
insurance operations into a stock life insurance company. The 
Contractholders and creditors will be provided benefits in accordance 
with the priorities for distribution to be determined under the 
Pennsylvania law applicable to insurance company rehabilitations.\20\
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    \20\ It is represented that the Rehabilitator has been advised 
by outside rehabilitation counsel and attorneys for the Pennsylvania 
Insurance Department that the Pennsylvania Insurance Company Mutual 
Stock Conversion Act (Conversion Act), which governs the 
demutualization of an insurer under Pennsylvania law, will not be 
applicable to FML's situation. It was determined that the Third 
Amended Plan of Rehabilitation did not contemplate a conversion 
transaction since the assets of FML would be transferred to a 
separate company (FLIC) by assumption reinsurance and FML would then 
be liquidated. Also, it was determined that the Conversion Act would 
not apply to a company in rehabilitation or liquidation because 
conflicts would exist with the applicable Pennsylvania 
rehabilitation/liquidation laws.
---------------------------------------------------------------------------

    Thus, the treatment of FML's Contracts and the Contractholder's 
interests thereunder is a significant aspect of the Third Amended Plan 
of Rehabilitation. These Contracts include, but are not limited to, 
traditional ordinary life insurance Contracts and universal life 
insurance Contracts.
    11. Section 2.01 of the Third Amended Plan of Rehabilitation 
specifies a classification of claims (the Claims) and interests and 
priorities governing the receipt of distributions. The rights provided 
the Contractholders under section 2.04 of the Third Amended Plan of 
Rehabilitation (for the Contracts to be modified by endorsement in FML 
and reinsured by FLIC) will have a Class 3 priority (along with certain 
other Claims under the Contracts), following certain secured and 
administrative claims which are classified as Class 1 and Class 2 
Claims. Classes 4 through 9 Claims provide for claims for governments, 
general creditors, employees, debt holders, etc. Class 10, the last and 
residual category,

[[Page 18363]]

provides for the Claims of the Membership Interests of FML's Mutual 
Members.
    Allowed Claims 1 through 9 will be paid in full in cash. Each 
Contractholder having a Contract in force on the Closing Date will have 
his or her Contract assumed and reinsured by FLIC as of the Closing 
Date. In addition, at Closing, Class 10 Claims will be satisfied by an 
allocation of Plan Stock in exchange for the Mutual Member's 
relinquishment of his or her membership interest in FML.\21\ No other 
class of Claims will be paid or satisfied either partially or totally 
by a distribution or allocation of Plan Stock or Plan Credits.\22\
---------------------------------------------------------------------------

    \21\ Even though Mutual Members are deemed ``Contractholders'' 
for purposes of claims distribution, they are not entitled to 
receive cash as are Class 3 Claimants. Instead, Mutual Members will 
be entitled to receive Plan Stock. Class 3 Claims include claims for 
losses under the insurance policy such as death proceeds, annuity 
proceeds or investment values. Class 10 Claims, which represent the 
claims of shareholders or other owners, are not deemed ``loss 
claims'' under a policy. Rather, such claims are deemed analogous to 
mutual membership interests.
    \22\ Article IV of the Third Amended Plan of Rehabilitation 
generally provides that the policyholder eligible to participate in 
the distribution of Plan Stock or Plan Credits resulting from such 
Plan is ``the Person specified in the Contract, or in a subsequent 
document, as the 'Contractholder' or 'owner' of such Contract, or 
any similar designation in the Contract, as shown on the books and 
records of FML.'' FML further represents that its insurance 
contracts that provide benefits under an employee benefit plan, 
typically designate the employer that sponsors the plan, or a 
trustee acting on behalf of the plan, as the Contractholder or owner 
of the policy. In regard to those Contracts that designate the 
employer or trustee as Contractholder or owner of the policy, FML 
represents that under Article IV of the Third Amended Plan of 
Rehabilitation, it will make distributions resulting from such Plan 
to the employer or trustee as Contractholder or owner of the 
Contract.
    In general, it is the Department's view that, if an insurance 
policy is purchased with assets of an employee benefit plan, 
including participant contributions, and if there exist any 
participants under the plan (as defined at 29 CFR 2510.3-3) at the 
time when FML incurs the obligation to distribute Plan Stock or Plan 
Credits, then such consideration would constitute an assets of such 
employee benefit 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.
---------------------------------------------------------------------------

    12. Under Section 4.05 of the Third Amended Plan of Rehabilitation, 
any Contract held in connection with a qualified retirement plan or an 
arrangement described in section 401(a), 403(a) or 408 of the Code, 
other than a Contract held by a trustee under a plan described in 
section 401(a) of the Code, (i.e., a Non-Trusteed Tax-Qualified 
Retirement Funding Contract) will be allocated Plan Credits in lieu of 
Plan Stock in exchange for the relinquishment of the Mutual Member's 
Membership Interest under such Contract. The Plan Credits allocated to 
such Mutual Member's Contract will be equal in value to the Plan Stock 
otherwise allocable to the Non-Trusteed Tax-Qualified Retirement 
Funding Contract.
    13. As noted above, the Plan Stock allocated to Mutual Members for 
Class 10 Claims will consist of Group Common Stock and Preferred Stock. 
Twenty percent of the Plan Stock will be allocated based on voting 
rights \23\ and 80 percent will be allocated based on a Contract's 
contribution to FML's surplus. If a Mutual Member has two or more 
Contracts, the Plan Stock allocated to such Mutual Member, based on 
voting rights, will be allocated in equal portions to each such 
Contract.
---------------------------------------------------------------------------

    \23\ Voting rights are set forth in the FML By-laws which 
provide: ``At all meetings, each member shall be entitled to one 
vote irrespective of the number of policies or amount of insurance 
held by a member.''
---------------------------------------------------------------------------

    14. Each Mutual Member which is a Class 10 Claimant will be 
allocated Group Common Stock and Preferred Stock, in the ratio of 3 
shares of Common Stock to 2.8 shares of Preferred Stock. At closing, 
the total value of the Plan Stock, immediately prior to the sale of 
Common Stock to the Investor, is projected at approximately $100 
million. Of this amount, 70 percent of the value of the Plan Stock will 
be represented by the Preferred Stock, which will have an estimated 
value of $70 million. The 30 percent remaining Plan Stock will consist 
of Common Stock and it will have a value of approximately $30 million. 
If desired, a Mutual Member may disclaim any interest in the Plan 
Stock. Although the Mutual Member will receive no consideration for any 
disclaimed Stock, such Mutual Member will continue to retain all 
benefits.
    The distribution of the Group Stock will occur at Closing when 
Group will issue and distribute Plan Stock on behalf of FML to Mutual 
Members. FML, simultaneously, will return all Group Stock to Group for 
cancellation. Disclaimed shares will not be issued or, if issued, will 
be canceled and returned to Group.
    15. There will be 40 million shares, par value $.01 per share, of 
Common Stock authorized and 6.1 million shares of such stock 
outstanding at the Closing Date. The Common Stock will have voting 
rights of one vote per share.
    Group will sell approximately 3.1 million shares of its Common 
Stock to the Investor in a private placement pursuant to bid procedures 
approved by the Court and utilize the majority of the sale proceeds to 
supplement the capital of FLIC. FML will designate a maximum of 3 
million shares of the remaining Common Stock as the ``Common Stock 
component'' of Plan Stock. Included in this amount will be between 
15,000 and 180,000 shares of Common Stock allocable to Mutual Members 
who will receive Plan Credits in lieu of Plan Stock.\24\
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    \24\ It should be noted that the value of the Plan Stock or Plan 
Credits that will be received by a Mutual Member will reflect the 
bid price paid by the Investor for Group Common Stock. Because the 
bid process does not allow the Investor to bid on or purchase 
Preferred Stock (except for the Plan Credit Shares), there is no 
means of establishing an immediate market value. Consequently, the 
$25 per share liquidation value as described herein is deemed to 
approximate the fair market value of such stock. The Investor will 
also be required to purchase Preferred Stock at that price as well.
---------------------------------------------------------------------------

    In addition, Group will sell to the Investor the shares of Common 
Stock and Preferred Stock equal to the Plan Credits \25\ and contribute 
to the capital of FLIC the sales proceeds of such sale. Consequently, 
the Investor will own, at the Closing Date, more than 50 percent of the 
total outstanding Group Common Stock, and such percentage will increase 
to the extent there are disclaimed shares and Plan Credits which 
require the Investor to purchase more Plan Stock.
---------------------------------------------------------------------------

    \25\ In other words, if a Mutual Member is eligible to receive 
Plan Credits, the Common Stock allocated to that Mutual Member will 
become part of the Plan Credit Shares that will be purchased by the 
Investor in order to fund the purchase of Plan Credits for the 
Mutual Member.
---------------------------------------------------------------------------

    At the Closing Date, Group will have authorized 10 million shares 
and will have outstanding 2.8 million shares of Preferred Stock, all of 
which will be allocated as Plan Stock. There will be no other class of 
Preferred Stock.
    The Preferred Stock will have a liquidation preference and 
redemption value of $25 per share. The holders of Preferred Stock will 
be entitled to cumulative annual dividends, payable quarterly, at the 
rate of 7 percent per annum of the liquidation preference, resulting in 
an annual dividend of $1.75 per share. Shares of Preferred Stock will 
be non-voting except (a) when four quarterly dividends on such class of 
stock are in arrears, (b) for certain matters pertaining to that class 
of stock, or (c) as otherwise required by law. Upon liquidation of 
Group, a share of Preferred Stock will be entitled to a distribution 
preference of $25 per share plus the amount of any accrued but unpaid 
dividends. Group, at its option, may redeem shares of Preferred Stock 
at any time after 20 years from the later of the issue date and the 
Closing Date, at a redemption price of $25 per share plus the amount of 
any accrued but unpaid dividends.

[[Page 18364]]

    A share of Preferred Stock is convertible into shares of Common 
Stock at any time at the option of the holder. The number of shares of 
Common Stock that will be received by a Mutual Member upon such a 
conversion will be determined by dividing $25 by the result of 
multiplying 1.20 times the price per share paid by the Investor for the 
Common Stock (which price will be determined by the competitive bidding 
process approved by the Court). The conversion rate for the Preferred 
Stock is also subject to various anti-dilution provisions.
    16. Under Section 4.10 of the Third Amended Plan of Rehabilitation, 
Policyholder Stock \26\ will be issued pursuant to the exemption from 
the registration requirements provided in section 3(a)(10) of the 1933 
Act. In addition, Policyholder Stock will be publicly-traded and listed 
on the NASDAQ National Market or the New York or American Stock 
Exchange, as determined by the Rehabilitator prior to Closing.
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    \26\ As noted in Section III(i) of the Definitions, 
``Policyholder Stock'' refers to those shares of Group Common or 
Group Preferred Stock that will be issued and distributed to Mutual 
Members. Thus, it consists of Plan Stock plus any shares of Group 
Stock (in excess of Plan Stock) that are issued for purposes of 
correcting errors in the allocation of Plan Stock, less Plan Credit 
Shares and any disclaimed shares.
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    Investor Stock will be issued in a private placement pursuant to 
the exemption from the registration requirements of the 1933 Act 
provided by section 4(2) thereof and the rules and regulations 
thereunder. Neither Policyholder Stock nor Investor Stock will be 
registered under the 1933 Act.
    Group Stock will be registered under section 12(g) of the 
Securities Exchange Act of 1934.
    17. Since the participation by all Mutual Members in the Third 
Amended Plan of Rehabilitation will be mandatory (although Mutual 
Members may disclaim Plan Stock), any determination by a Mutual Member 
which is a Plan to receive Plan Stock or Plan Credits will be made by 
one or more Plan fiduciaries which are independent of FML and its 
affiliates. As a result, neither FML nor any of its affiliates will 
exercise investment discretion nor render ``investment advice'' within 
the meaning of 29 CFR 2510.3-21(c) with respect to an independent Plan 
fiduciary's decision to elect to receive Plan Stock or Plan Credits.
    In addition, all Mutual Members that are Plans will participate in 
the transactions on the same basis as all other Mutual Members that are 
not Plans. Moreover, no Mutual Member will pay any brokerage 
commissions or fees in connection with the receipt of Plan Stock or 
Plan Credits. Finally, all of FML's Contractholder obligations will 
remain in force upon endorsement and transfer to FLIC and will 
essentially be unaffected by the Third Amended Plan of Rehabilitation.
    18. Mutual Members will not be restricted from selling or otherwise 
transferring the Plan Stock received, including converting the 
Preferred Stock to Common Stock, although Group, its affiliates and the 
Investor are subject to restrictions on purchasing or redeeming such 
Stock.\27\ In addition, Group will not be precluded from establishing a 
commission-free purchase or sales program after the Rehabilitation 
which would allow Mutual Members who receive a small number of shares 
of Plan Stock the opportunity to round-up those shares or sell such 
shares for a temporary period without the payment of any sales 
commissions.\28\ It is not contemplated that FLIC or any of its 
affiliates will be engaged in such transactions.
---------------------------------------------------------------------------

    \27\ Specifically, Section 5.08 of the Third Amended Plan of 
Rehabilitation provides that for one year after closing, the 
Investor may not purchase or enter into an agreement to purchase 
Group Stock from Group or the shareholders of Group, or take other 
action which would result in the Investor being affiliated with 
Group. In addition, Section 5.09 of the Third Amended Plan provides 
that for one year after closing, Group and any company controlled 
directly or indirectly by Group will not purchase or redeem nor 
enter into an agreement to purchase or redeem, Group Stock from 
Mutual Members that, when combined with the value of Plan Credit 
Shares, has an aggregate value that exceeds 50 percent of the value 
of the Plan Stock.
    \28\ FML has still not determined how many shares of Plan Stock 
will constitute the ``small number of shares'' required for a Mutual 
Member to participate in the commission-free purchase and sales 
program nor has it decided on the duration of such program.
---------------------------------------------------------------------------

    19. The Plan will be approved by and be under the continued 
jurisdiction of the Court. The Court's review will include, among other 
matters, (a) a determination, after hearings available to 
Contractholders, creditors and other interested parties, the procedural 
and substantive fairness of the terms and conditions of the allocation 
and distribution of the Plan Stock in exchange for Membership 
Interests, including a review of the methodology for allocating Plan 
Stock based on the basis of contribution to surplus and voting rights 
and (b) approval of the modification, by endorsement, of the terms and 
conditions of the Contract.
    FLIC and Group will be subject to the jurisdiction of the Court and 
the supervision of the Rehabilitator prior to and through the Closing 
Date. In addition, the Court will retain, after the Closing Date, 
exclusive jurisdiction over Group and FLIC to enforce the provisions of 
the Third Amended Plan of Rehabilitation to ensure that its intent and 
purposes are carried out and given effect.
    FML will discontinue its business operations, liquidate and 
dissolve shortly after completing all transfers. FLIC will continue the 
business of FML in a substantially unchanged manner after the transfer 
from FML by receiving premiums, paying claims and generally 
administering the assumed Endorsed Contracts.
    Further, for a period of 2 years following the Closing Date, the 
Investor will not be allowed to cause a change to the business plan for 
FLIC without the prior written approval of the Department if the change 
might reasonably result in the dissolution of FLIC or the operation of 
FLIC in a ``run off'' mode.
    20. In summary, it is represented that the proposed transactions 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) The Third Amended Plan of Rehabilitation will be implemented in 
accordance with procedural and substantive safeguards that are imposed 
under Pennsylvania law and by the Court and will be subject to review 
and supervision of the Court and/or the Rehabilitator.
    (b) The Court will review the terms of the Third Amended Plan of 
Rehabilitation and will approve such Plan following a determination and 
public hearing or hearings that the Plan is fair and equitable to all 
Mutual Members.
    (c) Each Mutual Member will have an opportunity to participate in 
any hearing or hearings before the Court regarding the approval of the 
Third Amended Plan of Rehabilitation.
    (d) Although participation by all Mutual Members in FML's Third 
Amended Plan of Rehabilitation will be mandatory (although Mutual 
Members may disclaim Plan Stock), the determination of whether a Mutual 
Member receives Plan Stock or Plan Credits will be made by one or more 
independent fiduciaries of such Plan and not by FML, Group or FLIC. As 
a result, FML nor any of its affiliates will exercise investment 
discretion nor render ``investment advice'' within the meaning of 29 
CFR 2510.3-21(c) with respect to the decision by the independent Plan 
fiduciary to elect Plan Stock or Plan Credits.
    (e) After each Mutual Member is allocated its share of Plan Stock 
based on voting rights, the remaining consideration will be allocated 
based

[[Page 18365]]

upon actuarial formulas that take into account each Mutual Member's 
contribution to the surplus of FML, which formulas have been approved 
by the Rehabilitator and the Court.
    (f) The value of Plan Stock or Plan Credits that will be received 
by a Mutual Member will reflect the prices paid by the Investor for 
Group Common Stock and for Plan Credit Shares.
    (g) All Plans will participate in the exemption transaction on the 
same basis as other Mutual Members that are not Plans.
    (h) No Plan will pay any brokerage commissions or fees in 
connection with receipt of Plan Stock or Plan Credits.
    (i) FML's Contractholder obligations will remain in force upon 
endorsement and transfer to FLIC.

Notice to Interested Persons

    FML will provide notice of the proposed exemption to Mutual Members 
which are Plans within 5 days of the publication of the notice of 
proposed exemption 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 as well as a supplemental statement, as required pursuant to 
20 CFR 2570.43(b)(2) which shall inform interested persons of their 
right to comment on the proposed exemption. Comments with respect to 
the notice of proposed exemption are due within 35 days after the date 
of publication of this pendency notice 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.)

McDonald Investments Inc. (McDonald) Located in Cleveland, Ohio

[Application No. D-10857]

Proposed Exemption

I. Transactions
    A. Effective January 4, 2000, the restrictions of sections 406(a) 
and 407(a) of the Act, and the taxes imposed by section 4975(a) and (b) 
of the Code by reason of section 4975(c)(1)(A) through (D) of the Code, 
shall not apply to the following transactions involving trusts and 
certificates evidencing interests therein:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and an employee benefit plan when the sponsor, 
servicer, trustee or insurer of a trust, the underwriter of the 
certificates representing an interest in the trust, or an obligor is a 
party in interest with respect to such plan;
    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates; 
and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.A.(1) or (2).
    Notwithstanding the foregoing, section I.A. does not provide an 
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and 
407 for the acquisition or holding of a certificate on behalf of an 
Excluded Plan by any person who has discretionary authority or renders 
investment advice with respect to the assets of that Excluded Plan.\29\
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    \29\ Section I.A. provides no relief from sections 406(a)(1)(E), 
406(a)(2) and 407 for any person rendering investment advice to an 
Excluded Plan within the meaning of section 3(21)(A)(ii) and 
regulation 29 CFR 2510.3-21(c).
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    B. Effective January 4, 2000, the restrictions of sections 
406(b)(1) and 406(b)(2) of the Act, and the taxes imposed by section 
4975(a) and (b) of the Code by reason of section 4975(c)(1)(E) of the 
Code, shall not apply to:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and a plan when the person who has discretionary 
authority or renders investment advice with respect to the investment 
of plan assets in the certificates is (a) an obligor with respect to 5 
percent or less of the fair market value of obligations or receivables 
contained in the trust, or (b) an affiliate of a person described in 
(a); if:
    (i) The plan is not an Excluded Plan;
    (ii) Solely in the case of an acquisition of certificates in 
connection with the initial issuance of the certificates, at least 50 
percent of each class of certificates in which plans have invested is 
acquired by persons independent of the members of the Restricted Group 
and at least 50 percent of the aggregate interest in the trust is 
acquired by persons independent of the Restricted Group;
    (iii) a plan's investment in each class of certificates does not 
exceed 25 percent of all of the certificates of that class outstanding 
at the time of the acquisition; and
    (iv) immediately after the acquisition of the certificates, no more 
than 25 percent of the assets of a plan with respect to which the 
person has discretionary authority or renders investment advice are 
invested in certificates representing an interest in a trust containing 
assets sold or serviced by the same entity.\30\ For purposes of this 
paragraph B.(1)(iv) only, an entity will not be considered to service 
assets contained in a trust if it is merely a subservicer of that 
trust;
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    \30\ For purposes of this proposed exemption, each plan 
participating in a commingled fund (such as a bank collective trust 
fund or insurance company pooled separate account) shall be 
considered to own the same proportionate undivided interest in each 
asset of the commingled fund as its proportionate interest in the 
total assets of the commingled fund as calculated on the most recent 
preceding valuation date of the fund.
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    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates, 
provided that the conditions set forth in paragraphs B.(1)(i), (iii) 
and (iv) are met; and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.B.(1) or (2).
    C. Effective January 4, 2000, the restrictions of sections 406(a), 
406(b) and 407(a) of the Act, and the taxes imposed by section 4975(a) 
and (b) of the Code by reason of section 4975(c) of the Code, shall not 
apply to transactions in connection with the servicing, management and 
operation of a trust, provided:
    (1) Such transactions are carried out in accordance with the terms 
of a binding pooling and servicing agreement; and
    (2) The pooling and servicing agreement is provided to, or 
described in all material respects in, the prospectus or private 
placement memorandum provided to investing plans before they purchase 
certificates issued by the trust.\31\
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    \31\ In the case of a private placement memorandum, such 
memorandum must contain substantially the same information that 
would be disclosed in a prospectus if the offering of the 
certificates were made in a registered public offering under the 
Securities Act of 1933. In the Department's view, the private 
placement memorandum must contain sufficient information to permit 
plan fiduciaries to make informed investment decisions. For purposes 
of this proposed exemption, references to ``prospectus'' include any 
related prospectus supplement thereto, pursuant to which 
certificates are offered to investors.
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    Notwithstanding the foregoing, section I.C. does not provide an 
exemption from the restrictions of section 406(b) of the Act, or from 
the taxes imposed by reason of section 4975(c) of the Code, for the 
receipt of a fee by a servicer of the trust from a person other than 
the trustee or sponsor, unless such fee constitutes a ``qualified 
administrative fee'' as defined in section III.S.
    D. Effective January 4, 2000, the restrictions of sections 406(a) 
and 407(a) of the Act, and the taxes imposed by sections 4975(a) and 
(b) of the Code by

[[Page 18366]]

reason of sections 4975(c)(1)(A) through (D) of the Code, shall not 
apply to any transactions to which those restrictions or taxes would 
otherwise apply merely because a person is deemed to be a party in 
interest or disqualified person (including a fiduciary) with respect to 
a plan by virtue of providing services to the plan (or by virtue of 
having a relationship to such service provider described in section 
3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H) 
or (I) of the Code), solely because of the plan's ownership of 
certificates.
II. General Conditions
    A. The relief provided under Part I is available only if the 
following conditions are met:
    (1) The acquisition of certificates by a plan is on terms 
(including the certificate price) that are at least as favorable to the 
plan as they would be in an arm's-length transaction with an unrelated 
party;
    (2) The rights and interests evidenced by the certificates are not 
subordinated to the rights and interests evidenced by other 
certificates of the same trust;
    (3) The certificates acquired by the plan have received a rating 
from a Rating Agency (as defined in section III.W.) at the time of such 
acquisition that is in one of the three highest generic rating 
categories;
    (4) The trustee is not an affiliate of any other member of the 
Restricted Group. However, the trustee shall not be considered to be an 
affiliate of a servicer solely because the trustee has succeeded to the 
rights and responsibilities of the servicer pursuant to the terms of a 
pooling and servicing agreement providing for such succession upon the 
occurrence of one or more events of default by the servicer;
    (5) The sum of all payments made to and retained by the 
underwriters in connection with the distribution or placement of 
certificates represents not more than reasonable compensation for 
underwriting or placing the certificates; the sum of all payments made 
to and retained by the sponsor pursuant to the assignment of 
obligations (or interests therein) to the trust represents not more 
than the fair market value of such obligations (or interests); and the 
sum of all payments made to and retained by the servicer represents not 
more than reasonable compensation for the servicer's services under the 
pooling and servicing agreement and reimbursement of the servicer's 
reasonable expenses in connection therewith;
    (6) The plan investing in such certificates is an ``accredited 
investor'' as defined in Rule 501(a)(1) of Regulation D of the 
Securities and Exchange Commission under the Securities Act of 1933; 
and
    (7) In the event that the obligations used to fund a trust have not 
all been transferred to the trust on the closing date, additional 
obligations as specified in subsection III.B.(1) may be transferred to 
the trust during the pre-funding period (as defined in section III.BB.) 
in exchange for amounts credited to the pre-funding account (as defined 
in section III.Z.), provided that:
    (a) The pre-funding limit (as defined in section III.AA.) is not 
exceeded;
    (b) All such additional obligations meet the same terms and 
conditions for eligibility as those of the original obligations used to 
create the trust corpus (as described in the prospectus or private 
placement memorandum and/or pooling and servicing agreement for such 
certificates), which terms and conditions have been approved by a 
Rating Agency. Notwithstanding the foregoing, the terms and conditions 
for determining the eligibility of an obligation may be changed if such 
changes receive prior approval either by a majority of the outstanding 
certificateholders or by a Rating Agency;
    (c) The transfer of such additional obligations to the trust during 
the pre-funding period does not result in the certificates receiving a 
lower credit rating from a rating agency upon termination of the pre-
funding period than the rating that was obtained at the time of the 
initial issuance of the certificates by the trust;
    (d) The weighted average annual percentage interest rate (the 
average interest rate) for all of the obligations in the trust at the 
end of the pre-funding period will not be more than 100 basis points 
lower than the average interest rate for the obligations which were 
transferred to the trust on the closing date;
    (e) In order to ensure that the characteristics of the receivables 
actually acquired during the pre-funding period are substantially 
similar to those which were acquired as of the closing date, the 
characteristics of the additional obligations will be either monitored 
by a credit support provider or other insurance provider which is 
independent of the sponsor, or an independent accountant retained by 
the sponsor will provide the sponsor with a letter (with copies 
provided to the Rating Agency, the underwriter and the trustees) 
stating whether or not the characteristics of the additional 
obligations conform to the characteristics of such obligations 
described in the prospectus, private placement memorandum and/or 
pooling and servicing agreement. In preparing such letter, the 
independent accountant will use the same type of procedures as were 
applicable to the obligations which were transferred as of the closing 
date;
    (f) The pre-funding period shall be described in the prospectus or 
private placement memorandum provided to investing plans; and
    (g) The trustee of the trust (or any agent with which the trustee 
contracts to provide trust services) will be a substantial financial 
institution or trust company experienced in trust activities and 
familiar with its duties, responsibilities and liabilities as a 
fiduciary under the Act. The trustee, as the legal owner of the 
obligations in the trust, will enforce all the rights created in favor 
of certificateholders of such trust, including employee benefit plans 
subject to the Act.
    B. Neither any underwriter, sponsor, trustee, servicer, insurer, 
nor any obligor, unless it or any of its affiliates has discretionary 
authority or renders investment advice with respect to the plan assets 
used by a plan to acquire certificates, shall be denied the relief 
provided under Part I, if the provision of subsection II.A.(6) above is 
not satisfied with respect to acquisition or holding by a plan of such 
certificates, provided that (1) such condition is disclosed in the 
prospectus or private placement memorandum; and (2) in the case of a 
private placement of certificates, the trustee obtains a representation 
from each initial purchaser which is a plan that it is in compliance 
with such condition, and obtains a covenant from each initial purchaser 
to the effect that, so long as such initial purchaser (or any 
transferee of such initial purchaser's certificates) is required to 
obtain from its transferee a representation regarding compliance with 
the Securities Act of 1933, any such transferees will be required to 
make a written representation regarding compliance with the condition 
set forth in subsection II.A.(6) above.
III. Definitions
    For purposes of this proposed exemption:
    A. ``Certificate'' means:
    (1) A certificate--
    (a) That represents a beneficial ownership interest in the assets 
of a trust; and
    (b) That entitles the holder to pass-through payments of principal, 
interest, and/or other payments made with respect to the assets of such 
trust; or
    (2) A certificate denominated as a debt instrument--

[[Page 18367]]

    (a) That represents an interest in a Real Estate Mortgage 
Investment Conduit (REMIC) or a Financial Asset Securitization 
Investment Trust (FASIT) within the meaning of section 860D(a) or 
section 860L, respectively, of the Code; and
    (b) That is issued by, and is an obligation of, a trust; with 
respect to certificates defined in (1) and (2) above for which McDonald 
or any of its affiliates is either (i) the sole underwriter or the 
manager or co-manager of the underwriting syndicate, or (ii) a selling 
or placement agent.
    For purposes of this proposed exemption, references to 
``certificates representing an interest in a trust'' include 
certificates denominated as debt which are issued by a trust.
    B. ``Trust'' means an investment pool, the corpus of which is held 
in trust and consists solely of:
    (1) (a) Secured consumer receivables that bear interest or are 
purchased at a discount (including, but not limited to, home equity 
loans and obligations secured by shares issued by a cooperative housing 
association); and/or
    (b) Secured credit instruments that bear interest or are purchased 
at a discount in transactions by or between business entities 
(including, but not limited to, qualified equipment notes secured by 
leases, as defined in section III.T); and/or
    (c) Obligations that bear interest or are purchased at a discount 
and which are secured by single-family residential, multi-family 
residential and commercial real property (including obligations secured 
by leasehold interests on commercial real property); and/or
    (d) Obligations that bear interest or are purchased at a discount 
and which are secured by motor vehicles or equipment, or qualified 
motor vehicle leases (as defined in section III.U); and/or
    (e) ``Guaranteed governmental mortgage pool certificates,'' as 
defined in 29 CFR 2510.3-101(i)(2); and/or
    (f) Fractional undivided interests in any of the obligations 
described in clauses (a)-(e) of this section B.(1);
    (2) property which had secured any of the obligations described in 
subsection B.(1);
    (3) (a) Undistributed cash or temporary investments made therewith 
maturing no later than the next date on which distributions are to be 
made to certificateholders; and/or
    (b) Cash or investments made therewith which are credited to an 
account to provide payments to certificateholders pursuant to any yield 
supplement agreement or similar yield maintenance arrangement to 
supplement the interest rates otherwise payable on obligations 
described in subsection III.B.(1) held in the trust, provided that such 
arrangements do not involve swap agreements or other notional principal 
contracts; and/or
    (c) Cash transferred to the trust on the closing date and permitted 
investments made therewith which:
    (i) Are credited to a pre-funding account established to purchase 
additional obligations with respect to which the conditions set forth 
in clauses (a)-(g) of subsection II.A.(7) are met and/or;
    (ii) Are credited to a capitalized interest account (as defined in 
section III.X.); and
    (iii) Are held in the trust for a period ending no later than the 
first distribution date to certificateholders occurring after the end 
of the pre-funding period.
    For purposes of this clause (c) of subsection III.B.(3), the term 
``permitted investments'' means investments which are either: (i) 
Direct obligations of, or obligations fully guaranteed as to timely 
payment of principal and interest by the United States, or any agency 
or instrumentality thereof, provided that such obligations are backed 
by the full faith and credit of the United States or (ii) have been 
rated (or the obligor has been rated) in one of the three highest 
generic rating categories by a rating agency; are described in the 
pooling and servicing agreement; and are permitted by the rating 
agency; and
    (4) Rights of the trustee under the pooling and servicing 
agreement, and rights under any insurance policies, third-party 
guarantees, contracts of suretyship, yield supplement agreements 
described in clause (b) of subsection III.B.(3) and other credit 
support arrangements with respect to any obligations described in 
subsection III.B.(1).
    Notwithstanding the foregoing, the term ``trust'' does not include 
any investment pool unless: (i) the investment pool consists only of 
assets of the type described in clauses (a) through (f) of subsection 
III.B.(1) which have been included in other investment pools, (ii) 
certificates evidencing interests in such other investment pools have 
been rated in one of the three highest generic rating categories by a 
Rating Agency for at least one year prior to the plan's acquisition of 
certificates pursuant to this proposed exemption, and (iii) 
certificates evidencing interests in such other investment pools have 
been purchased by investors other than plans for at least one year 
prior to the plan's acquisition of certificates pursuant to this 
proposed exemption.
    C. ``Underwriter'' means:
    (1) McDonald;
    (2) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
McDonald; or
    (3) Any member of an underwriting syndicate or selling group of 
which McDonald or a person described in (2) is a manager or co-manager 
with respect to the certificates.
    D. ``Sponsor'' means the entity that organizes a trust by 
depositing obligations therein in exchange for certificates.
    E. ``Master Servicer'' means the entity that is a party to the 
pooling and servicing agreement relating to trust assets and is fully 
responsible for servicing, directly or through subservicers, the assets 
of the trust.
    F. ``Subservicer'' means an entity which, under the supervision of 
and on behalf of the master servicer, services obligations contained in 
the trust, but is not a party to the pooling and servicing agreement.
    G. ``Servicer'' means any entity which services obligations 
contained in the trust, including the master servicer and any 
subservicer.
    H. ``Trustee'' means the trustee of the trust, and in the case of 
certificates which are denominated as debt instruments, also means the 
trustee of the indenture trust.
    I. ``Insurer'' means the insurer or guarantor of, or provider of 
other credit support for, a trust. Notwithstanding the foregoing, a 
person is not an insurer solely because it holds securities 
representing an interest in a trust which are of a class subordinated 
to certificates representing an interest in the same trust.
    J. ``Obligor'' means any person, other than the insurer, that is 
obligated to make payments with respect to any obligation or receivable 
included in the trust. Where a trust contains qualified motor vehicle 
leases or qualified equipment notes secured by leases, ``obligor'' 
shall also include any owner of property subject to any lease included 
in the trust, or subject to any lease securing an obligation included 
in the trust.
    K. ``Excluded Plan'' means any plan with respect to which any 
member of the Restricted Group is a ``plan sponsor'' within the meaning 
of section 3(16)(B) of the Act.
    L. ``Restricted Group'' with respect to a class of certificates 
means:
    (1) Each underwriter;
    (2) Each insurer;
    (3) The sponsor;
    (4) The trustee;
    (5) Each servicer;

[[Page 18368]]

    (6) Any obligor with respect to obligations or receivables included 
in the trust constituting more than 5 percent of the aggregate 
unamortized principal balance of the assets in the trust, determined on 
the date of the initial issuance of certificates by the trust; or
    (7) Any affiliate of a person described in (1)-(6) above.
    M. ``Affiliate'' of another person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (2) Any officer, director, partner, employee, relative (as defined 
in section 3(15) of the Act), a brother, a sister, or a spouse of a 
brother or sister of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner.
    N. ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    O. A person will be ``independent'' of another person only if:
    (1) Such person is not an affiliate of that other person; and
    (2) The other person, or an affiliate thereof, is not a fiduciary 
who has investment management authority or renders investment advice 
with respect to any assets of such person.
    P. ``Sale'' includes the entrance into a forward delivery 
commitment (as defined in section Q below), provided:
    (1) The terms of the forward delivery commitment (including any fee 
paid to the investing plan) are no less favorable to the plan than they 
would be in an arm's-length transaction with an unrelated party;
    (2) The prospectus or private placement memorandum is provided to 
an investing plan prior to the time the plan enters into the forward 
delivery commitment; and
    (3) At the time of the delivery, all conditions of this proposed 
exemption (if granted) applicable to sales are met.
    Q. ``Forward delivery commitment'' means a contract for the 
purchase or sale of one or more certificates to be delivered at an 
agreed future settlement date. The term includes both mandatory 
contracts (which contemplate obligatory delivery and acceptance of the 
certificates) and optional contracts (which give one party the right 
but not the obligation to deliver certificates to, or demand delivery 
of certificates from, the other party).
    R. ``Reasonable compensation'' has the same meaning as that term is 
defined in 29 CFR 2550.408c-2.
    S. ``Qualified Administrative Fee'' means a fee which meets the 
following criteria:
    (1) The fee is triggered by an act or failure to act by the obligor 
other than the normal timely payment of amounts owing in respect of the 
obligations;
    (2) The servicer may not charge the fee absent the act or failure 
to act referred to in (1);
    (3) The ability to charge the fee, the circumstances in which the 
fee may be charged, and an explanation of how the fee is calculated are 
set forth in the pooling and servicing agreement; and
    (4) The amount paid to investors in the trust will not be reduced 
by the amount of any such fee waived by the servicer.
    T. ``Qualified Equipment Note Secured By A Lease'' means an 
equipment note:
    (1) Which is secured by equipment which is leased;
    (2) Which is secured by the obligation of the lessee to pay rent 
under the equipment lease; and
    (3) With respect to which the trust's security interest in the 
equipment is at least as protective of the rights of the trust as would 
be the case if the equipment note were secured only by the equipment 
and not the lease.
    U. ``Qualified Motor Vehicle Lease'' means a lease of a motor 
vehicle where:
    (1) The trust owns or holds a security interest in the lease;
    (2) The trust owns or holds a security interest in the leased motor 
vehicle; and
    (3) The trust's security interest in the leased motor vehicle is at 
least as protective of the trust's rights as would be the case if the 
trust consisted of motor vehicle installment loan contracts.
    V. ``Pooling and Servicing Agreement'' means the agreement or 
agreements among a sponsor, a servicer and the trustee establishing a 
trust. In the case of certificates which are denominated as debt 
instruments, ``Pooling and Servicing Agreement'' also includes the 
indenture entered into by the trustee of the trust issuing such 
certificates and the indenture trustee.
    W. ``Rating Agency'' means Standard & Poor's Structured Rating 
Group (S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps 
Credit Rating Co. (D & P) or Fitch IBCA, Inc. (Fitch) or their 
successors;
    X. ``Capitalized Interest Account'' means a trust account: (i) 
which is established to compensate certificateholders for shortfalls, 
if any, between investment earnings on the pre-funding account and the 
pass-through rate payable under the certificates; and (ii) which meets 
the requirements of clause (c) of subsection III.B.(3).
    Y. ``Closing Date'' means the date the trust is formed, the 
certificates are first issued and the trust's assets (other than those 
additional obligations which are to be funded from the pre-funding 
account pursuant to subsection II.A.(7)) are transferred to the trust.
    Z. ``Pre-Funding Account'' means a trust account: (i) Which is 
established to purchase additional obligations, which obligations meet 
the conditions set forth in clauses (a)-(g) of subsection II.A.(7); and 
(ii) which meets the requirements of clause (c) of subsection 
III.B.(3).
    AA. ``Pre-Funding Limit'' means a percentage or ratio of the amount 
allocated to the pre-funding account, as compared to the total 
principal amount of the certificates being offered which is less than 
or equal to 25 percent.
    BB. ``Pre-Funding Period'' means the period commencing on the 
closing date and ending no later than the earliest to occur of: (i) The 
date the amount on deposit in the pre-funding account is less than the 
minimum dollar amount specified in the pooling and servicing agreement; 
(ii) the date on which an event of default occurs under the pooling and 
servicing agreement; or (iii) the date which is the later of three 
months or 90 days after the closing date.
    CC. ``McDonald'' means McDonald Investments Inc. and its 
affiliates.
    The Department notes that this proposed exemption is included 
within the meaning of the term ``Underwriter Exemption'' as it is 
defined in section V(h) of Prohibited Transaction Exemption 95-60 (60 
FR 35925, July 12, 1995), the Class Exemption for Certain Transactions 
Involving Insurance Company General Accounts at (see 60 FR 35932).

Summary of Facts and Representations

    1. McDonald is an indirect, wholly-owned, separately capitalized 
investment banking and registered broker-dealer subsidiary of KeyCorp 
(the Corporation). As of September 30, 1999, McDonald's capitalization 
was approximately $310 million. The Corporation is a diversified 
financial services company incorporated under the laws of Ohio and a 
multi-bank holding company registered under the Bank Holding Company 
Act of 1956, as amended. As of September 30, 1999, the Corporation's 
consolidated assets were approximately $81 billion. The principal 
executive offices of the Corporation are located in Cleveland, Ohio. As 
of September 30, 1999, the Corporation directly owned a subsidiary

[[Page 18369]]

bank with offices located in twelve states. In addition, indirectly-
held non-bank subsidiaries of the Corporation offer a wide range of 
insurance, securities brokerage, investment banking, venture capital 
investment, and consumer finance products and services.
    KeyBank, National Association (the Bank), a direct, wholly-owned 
subsidiary of the Corporation, is a national banking association 
engaged in banking and related activities and is the largest bank in 
the Corporation's banking group. As of September 30, 1997, the Bank had 
total assets of approximately $80 billion. The principal executive 
offices of the Bank are located in Cleveland, Ohio.
    McDonald was incorporated in 1983 as an Ohio corporation. McDonald 
maintains its principal place of business in Cleveland, Ohio and has 
branch offices in 24 states.
    McDonald is a member of the National Association of Securities 
Dealers and the Securities Investor Protection Corporation and 
underwrites and deals in corporate debt securities, commercial paper, 
municipal securities, high-yield securities and asset-backed 
securities, provides private placement and corporate finance advisory 
services, including merger and acquisition advisory services, publishes 
research on a wide range of securities and issuers, and engages in the 
syndication and arranging and trading of bank loans.

Trust Assets

    2. McDonald seeks exemptive relief to permit plans to invest in 
pass-through certificates representing undivided interests in the 
following categories of trusts: (1) Single and multi-family residential 
or commercial mortgage investment trusts; \32\ (2) motor vehicle 
receivable investment trusts; (3) consumer or commercial receivables 
investment trusts; and (4) guaranteed governmental mortgage pool 
certificate investment trusts.\33\
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    \32\ The Department notes that PTE 83-1 [48 FR 895, January 7, 
1983], a class exemption for mortgage pool investment trusts, would 
generally apply to trusts containing single-family residential 
mortgages, provided that the applicable conditions of PTE 83-1 are 
met. McDonald requests relief for single-family residential 
mortgages in this exemption because it would prefer one exemption 
for all trusts of similar structure. However, McDonald has stated 
that it may still avail itself of the exemptive relief provided by 
PTE 83-1.
    \33\ Guaranteed governmental mortgage pool certificates are 
mortgage-backed securities with respect to which interest and 
principal payable is guaranteed by the Government National Mortgage 
Association (GNMA), the Federal Home Loan Mortgage Corporation 
(FHLMC), or the Federal National Mortgage Association (FNMA). The 
Department's regulation relating to the definition of ``plan 
assets'' (29 CFR 2510.3-101(i)) provides that where a plan acquires 
a guaranteed governmental mortgage pool certificate, the plan's 
assets include the certificate and all of its rights with respect to 
such certificate under applicable law, but do not, solely by reason 
of the plan's holding of such certificate, include any of the 
mortgages underlying such certificate. The applicant is requesting 
exemptive relief for trusts containing guaranteed governmental 
mortgage pool certificates because the certificates in the trusts 
may be plan assets.
---------------------------------------------------------------------------

    3. Commercial mortgage investment trusts may include mortgages on 
ground leases of real property. Commercial mortgages are frequently 
secured by ground leases on the underlying property, rather than by fee 
simple interests. The separation of the fee simple interest and the 
ground lease interest is generally done for tax reasons. Properly 
structured, the pledge of the ground lease to secure a mortgage 
provides a lender with the same level of security as would be provided 
by a pledge of the related fee simple interest. The terms of the ground 
leases pledged to secure leasehold mortgages will in all cases be at 
least ten years longer than the term of such mortgages.\34\
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    \34\ Trust assets may also include obligations that are secured 
by leasehold interests on residential real property. See PTE 90-32 
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6, 
1990 at 23150).
---------------------------------------------------------------------------

Trust Structure

    4. Each trust is established under a pooling and servicing 
agreement between a sponsor, a servicer and a trustee.\35\ The sponsor 
or servicer of a trust selects assets to be included in the trust.\36\ 
These assets are receivables which may have been originated, in the 
ordinary course of business, by a sponsor or servicer of the trust, an 
affiliate of the sponsor or servicer, or by an unrelated lender and 
subsequently acquired by the trust sponsor or servicer.\37\
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    \35\ The Department is of the view that the term ``trust'' 
includes a trust: (a) the assets of which, although all specifically 
identified by the sponsor or the originator as of the closing date, 
are not all transferred to the trust on the closing date for 
administrative or other reasons but will be transferred to the trust 
shortly after the closing date, or (b) with respect to which 
certificates are not purchased by plans until after the end of the 
pre-funding period at which time all receivables are contained in 
the trust.
    \36\ It is the Department's view that the definition of 
``trust'' contained in section III.B. includes a two-tier structure 
under which certificates issued by the first trust, which contains a 
pool of receivables described above, are transferred to a second 
trust which issues securities that are sold to plans. However, the 
Department is of the further view that, since the exemption provides 
relief for the direct or indirect acquisition or disposition of 
certificates that are not subordinated, no relief would be available 
if the certificates held by the second trust were subordinated to 
the rights and interests evidenced by other certificates issued by 
the first trust.
    \37\ It is the view of the Department that section III.B.(4) 
includes within the definition of the term ``trust'' rights under 
any yield supplement or similar arrangement which obligates the 
sponsor or master servicer, or another party specified in the 
relevant pooling and servicing agreement, to supplement the interest 
rates otherwise payable on the obligations described in section 
III.B.(1), in accordance with the terms of a yield supplement 
arrangement described in the pooling and servicing agreement, 
provided that such arrangements do not involve swap agreements or 
other notional principal contracts.
---------------------------------------------------------------------------

    Typically, on or prior to the closing date, the sponsor acquires 
legal title to all assets selected for the trust, establishes the trust 
and designates an independent entity as trustee. On the closing date, 
the sponsor conveys to the trust legal title to the assets, and the 
trustee issues certificates representing fractional undivided interests 
in the trust assets. Typically, all receivables to be held in the trust 
are transferred as of the closing date, but in some transactions, as 
described more fully below, a limited percentage of the receivables to 
be held in the trust may be transferred during a limited period of time 
following the closing date, through the use of a pre-funding account.
    McDonald, alone or together with other broker-dealers, acts as 
underwriter or placement agent with respect to the sale of the 
certificates. All of the public offerings of certificates presently 
contemplated have been or are to be underwritten by McDonald on a firm 
commitment basis. In addition, McDonald anticipates that it may 
privately place certificates on both a firm commitment and an agency 
basis. McDonald may also act as the lead underwriter for a syndicate of 
securities underwriters.
    Certificateholders will be entitled to receive monthly, quarterly 
or semi-annual installments of principal and/or interest, or lease 
payments due on the receivables, adjusted, in the case of payments of 
interest, to a specified rate--the pass-through rate--which may be 
fixed or variable.
    When installments or payments are made on a semi-annual basis, 
funds are not permitted to be commingled with the servicer's assets for 
longer than would be permitted for a monthly-pay security. A segregated 
account is established in the name of the trustee (on behalf of 
certificateholders) to hold funds received between distribution dates. 
The account is under the sole control of the trustee, who invests the 
account's assets in short-term securities which have received a rating 
comparable to the rating assigned to the certificates. In some cases, 
the servicer may be permitted to make a single deposit into the account 
once a month. When the servicer makes such monthly deposits, payments 
received from

[[Page 18370]]

obligors by the servicer may be commingled with the servicer's assets 
during the month prior to deposit. Usually, the period of time between 
receipt of funds by the servicer and deposit of these funds in a 
segregated account does not exceed one month. Furthermore, in those 
cases where distributions are made semi-annually, the servicer will 
furnish a report on the operation of the trust to the trustee on a 
monthly basis. At or about the time this report is delivered to the 
trustee, it will be made available to certificateholders and delivered 
to or made available to each Rating Agency that has rated the 
certificates.
    5. Some of the certificates will be multi-class certificates. 
McDonald requests exemptive relief for two types of multi-class 
certificates: ``strip'' certificates and ``fast-pay/slow-pay'' 
certificates. Strip certificates are a type of security in which the 
stream of interest payments on receivables is split from the flow of 
principal payments and separate classes of certificates are 
established, each representing rights to disproportionate payments of 
principal and interest.\38\
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    \38\ It is the Department's understanding that where a plan 
invests in REMIC ``residual'' interest certificates to which this 
exemption applies, some of the income received by the plan as a 
result of such investment may be considered unrelated business 
taxable income to the plan, which is subject to income tax under the 
Code. The Department emphasizes that the prudence requirement of 
section 404(a)(l)(B) of the Act would require plan fiduciaries to 
carefully consider this and other tax consequences prior to causing 
plan assets to be invested in certificates pursuant to this proposed 
exemption.
---------------------------------------------------------------------------

    ``Fast-pay/slow-pay'' certificates involve the issuance of classes 
of certificates having different stated maturities or the same 
maturities with different payment schedules. Interest and/or principal 
payments received on the underlying receivables are distributed first 
to the class of certificates having the earliest stated maturity of 
principal, and/or earlier payment schedule, and only when that class of 
certificates has been paid in full (or has received a specified amount) 
will distributions be made with respect to the second class of 
certificates. Distributions on certificates having later stated 
maturities will proceed in like manner until all the certificateholders 
have been paid in full. The only difference between this multi-class 
pass-through arrangement and a single-class pass-through arrangement is 
the order in which distributions are made to certificateholders. In 
each case, certificateholders will have a beneficial ownership interest 
in the underlying assets. In neither case will the rights of a plan 
purchasing a certificate be subordinated to the rights of another 
certificateholder in the event of default on any of the underlying 
obligations. In particular, if the amount available for distribution to 
certificateholders is less than the amount required to be so 
distributed, all senior certificateholders then entitled to receive 
distributions will share in the amount distributed on a pro rata 
basis.\39\
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    \39\ If a trust issues subordinated certificates, holders of 
such subordinated certificates may not share in the amount 
distributed on a pro rata basis with the senior certificateholders. 
The Department notes that the proposed exemption does not provide 
relief for plan investment in such subordinated certificates.
---------------------------------------------------------------------------

    6. The trust will be maintained as an essentially passive entity. 
Therefore, both the sponsor's discretion and the servicer's discretion 
with respect to assets included in a trust are severely limited. 
Pooling and servicing agreements provide for the substitution of 
receivables by the sponsor only in the event of defects in 
documentation discovered within a short time after the issuance of 
trust certificates (within 120 days, except in the case of obligations 
having an original term of 30 years, in which case the period will not 
exceed two years). Any receivable so substituted is required to have 
characteristics substantially similar to the replaced receivable and 
will be at least as creditworthy as the replaced receivable.
    In some cases, the affected receivable would be repurchased, with 
the purchase price applied as a payment on the affected receivable and 
passed-through to certificateholders.
    In some cases the trust will be maintained as a Financial Asset 
Securitization Investment Trust (``FASIT''), a statutory entity created 
by the Small Business Job Protection Act of 1996, adding sections 860H, 
860J, 860K and 860L to the Code. In general, a FASIT is designed to 
facilitate the securitization of debt obligations, such as credit card 
receivables, home equity loans, and auto loans, and thus, allows 
certain features such as revolving pools of assets, trusts containing 
unsecured receivables and certain hedging types of investments. A FASIT 
is not a taxable entity and debt instruments issued by such trusts, 
which might otherwise be recharacterized as equity, will be treated as 
debt in the hands of the holder for tax purposes. However, a trust 
which is the subject of the proposed exemption will be maintained as a 
FASIT only where the assets held by the FASIT will be comprised of 
secured debt; revolving pools of assets or hedging investments will not 
be allowed unless specifically authorized by the exemption, if granted, 
so that a trust maintained as a FASIT will be maintained as an 
essentially passive entity.

Trust Structure With Pre-Funding Account

Pre-Funding Accounts
    7. As described briefly above, some transactions may be structured 
using a pre-funding account or a capitalized interest account. If pre-
funding is used, cash sufficient to purchase the receivables to be 
transferred after the closing date will be transferred to the trust by 
the sponsor or originator on the closing date. During the pre-funding 
period, such cash and temporary investments, if any, made therewith 
will be held in a pre-funding account and used to purchase the 
additional receivables, the characteristics of which will be 
substantially similar to the characteristics of the receivables 
transferred to the trust on the closing date. The pre-funding period 
for any trust will be defined as the period beginning on the closing 
date and ending on the earliest to occur of: (i) The date on which the 
amount on deposit in the pre-funding account is less than a specified 
dollar amount, (ii) the date on which an event of default occurs under 
the related pooling and servicing agreement, or (iii) the date which is 
the later of three months or ninety (90) days after the closing date. 
Certain specificity and monitoring requirements described below will be 
met and will be disclosed in the pooling and servicing agreement and/or 
the prospectus or private placement memorandum.
    For transactions involving a trust using pre-funding, on the 
closing date, a portion of the offering proceeds will be allocated to 
the pre-funding account generally in an amount equal to the excess of 
(i) the principal amount of certificates being issued over (ii) the 
principal balance of the receivables being transferred to the trust on 
such closing date. In certain transactions, the aggregate principal 
balance of the receivables intended to be transferred to the trust may 
be larger than the total principal balance of the certificates being 
issued. In these cases, the cash deposited in the pre-funding account 
will equal the excess of the principal balance of the total receivables 
intended to be transferred to the trust over the principal balance of 
the receivables being transferred on the closing date.
    On the closing date, the sponsor transfers the assets to the trust 
in exchange for the certificates. The certificates are then sold to 
McDonald

[[Page 18371]]

for cash or to the certificateholders directly if the certificates are 
sold through McDonald as a placement agent. The cash received by the 
sponsor from the certificateholders (or McDonald) for the sale of the 
certificates issued by the trust in excess of the purchase price for 
the receivables and certain other trust expenses, such as underwriting 
or placement agent fees and legal and accounting fees, constitutes the 
cash to be deposited in the pre-funding account. Such funds are either 
held in the trust and accounted for separately, or are held in a sub-
trust. In either event, these funds are not part of the assets of the 
sponsor.
    Generally, the receivables are transferred at par value, unless the 
interest rate payable on the receivables is not sufficient to service 
both the interest rates to be paid on the certificates and the 
transaction fees (i.e., servicing fees, trustee fees and fees to credit 
support providers). In such cases, the receivables are sold to the 
trust at a discount, based on an objective, written, mechanical formula 
which is set forth in the pooling and servicing agreement and agreed 
upon in advance between the sponsor, the Rating Agency and any credit 
support provider or other insurer. The proceeds payable to the sponsor 
from the sale of the receivables transferred to the trust may also be 
reduced to the extent they are used to pay transaction costs (which 
typically include underwriting or placement agent fees and legal and 
accounting fees). In addition, in certain cases, the sponsor may be 
required by the Rating Agencies or credit support providers to set up 
trust reserve accounts to protect the certificateholders against credit 
losses.
    The pre-funding account of any trust will be limited so that the 
percentage or ratio of the amount allocated to the pre-funding account, 
as compared to the total principal amount of the certificates being 
offered (the pre-funding limit) will not exceed 25%. The pre-funding 
limit (which may be expressed as a ratio or as a stated percentage or a 
combination thereof) will be specified in the prospectus or the private 
placement memorandum.
    Any amounts paid out of the pre-funding account are used solely to 
purchase receivables and to support the certificate pass-through rate 
(as explained below). Amounts used to support the pass-through rate are 
payable only from investment earnings and are not payable from 
principal. However, in the event that, after all of the requisite 
receivables have been transferred into the trust, any funds remain in 
the pre-funding account, such funds will be paid to the 
certificateholders as principal prepayments. Upon termination of the 
trust, if no receivables remain in the trust and all amounts payable to 
certificateholders have been distributed, any amounts remaining in the 
trust would be returned to the sponsor.
    A dramatic change in interest rates on the receivables held in a 
trust using a pre-funding account would be handled as follows. If the 
receivables (other than those with adjustable or variable rates) had 
already been originated prior to the closing date, no action would be 
required as the fluctuations in the market interest rates would not 
affect the receivables transferred to the trust after the closing date. 
In contrast, if interest rates fall after the closing date, loans 
originated after the closing date will tend to be originated at lower 
rates, with the possible result that the receivables will not support 
the certificate pass-through rate. In a situation where interest rates 
drop dramatically and the sponsor is unable to provide sufficient 
receivables at the requisite interest rates, the pool of receivables 
would be closed. In this latter event, under the terms of the pooling 
and servicing agreement, the certificateholders would receive a 
repayment of principal from the unused cash held in the pre-funding 
account. In transactions where the certificate pass-through rates are 
variable or adjustable, the effects of market interest rate 
fluctuations are mitigated. In no event will fluctuations in interest 
rates payable on the receivable affect the pass-through rate for fixed 
rate certificates.
    The cash deposited into the trust and allocated to the pre-funding 
account is invested in certain permitted investments (see below), which 
may be commingled with other accounts of the trust. The allocation of 
investment earnings to each trust account is made periodically as 
earned in proportion to each account's allocable share of the 
investment returns. As pre-funding account investment earnings are 
required to be used to support (to the extent authorized in the 
particular transaction) the pass-through amounts payable to the 
certificateholders with respect to a periodic distribution date, the 
trustee is necessarily required to make periodic, separate allocations 
of the trust's earning to each trust account, thus ensuring that all 
allocable commingled investment earnings are properly credited to the 
pre-funding account on a timely basis.
The Capitalized Interest Account
    8. In certain transactions where a pre-funding account is used, the 
sponsor and/or originator may also transfer to the trust additional 
cash on the closing date, which is deposited in a capitalized interest 
account and used during the pre-funding period to compensate the 
certificateholders for any shortfall between the investment earnings on 
the pre-funding account and the pass-through interest rate payable 
under the certificates.
    The capitalized interest account is needed in certain transactions 
since the certificates are supported by the receivables and the 
earnings on the pre-funding account, and it is unlikely that the 
investment earnings on the pre-funding account will equal the interest 
rates on the certificates (although such investment earnings will be 
available to pay interest on the certificates). The capitalized 
interest account funds are paid out periodically to the 
certificateholders as needed on distribution dates to support the pass-
through rate. In addition, a portion of such funds may be returned to 
the sponsor from time to time as the receivables are transferred into 
the trust and the need for the capitalized interest account diminishes. 
Any amounts held in the capitalized interest account generally will be 
returned to the sponsor and/or originator either at the end of the pre-
funding period or periodically as receivables are transferred and the 
proportionate amount of funds in the capitalized interest account can 
be reduced. Generally, the capitalized interest account terminates no 
later than the end of the pre-funding period. However, there may be 
some cases where the capitalized interest account remains open until 
the first date distributions are made to certificateholders following 
the end of the pre-funding period.
    In other transactions, a capitalized interest account is not 
necessary because the interest paid on the receivables exceeds the 
interest payable on the certificates at the applicable pass-through 
rate and the fees of the trust. Such excess is sufficient to make up 
any shortfall resulting from the pre-funding account earning less than 
the certificate pass-through rate. In certain of these transactions, 
this occurs because the aggregate principal amount of receivables 
exceeds the aggregate principal amount of certificates.

[[Page 18372]]

Pre-Funding Account and Capitalized Interest Account Payments and 
Investments
    9. Pending the acquisition of additional receivables during the 
pre-funding period, it is expected that amounts in the pre-funding 
account and the capitalized interest account will be invested in 
certain permitted investments or will be held uninvested. Pursuant to 
the pooling and servicing agreement, all permitted investments must 
mature prior to the date the actual funds are needed. The permitted 
types of investments in the pre-funding account and capitalized 
interest account are investments which are either: (i) Direct 
obligations of, or obligations fully guaranteed as to timely payment of 
principal and interest by, the United States or any agency or 
instrumentality thereof, provided that such obligations are backed by 
the full faith and credit of the United States, or (ii) have been rated 
(or the obligor has been rated) in one of the three highest generic 
rating categories by a rating agency, as set forth in the pooling and 
servicing agreement and as required by the Rating Agencies. The credit 
grade quality of the permitted investments is generally no lower than 
that of the certificates. The types of permitted investments will be 
described in the pooling and servicing agreement.
    The ordering of interest payments to be made from the pre-funding 
and capitalized interest accounts is pre-established and set forth in 
the pooling and servicing agreement. The only principal payments which 
will be made from the pre-funding account are those made to acquire the 
receivables during the pre-funding period and those distributed to the 
certificateholders in the event that the entire amount in the pre-
funding account is not used to acquire receivables. The only principal 
payments which will be made from the capitalized interest account are 
those made to certificateholders if necessary to support the 
certificate pass-through rate or those made to the sponsor either 
periodically as they are no longer needed or at the end of the pre-
funding period when the capitalized interest account is no longer 
necessary.
The Characteristics of the Receivables Transferred During the Pre-
Funding Period
    10. In order to ensure that there is sufficient specificity as to 
the representations and warranties of the sponsor regarding the 
characteristics of the receivables to be transferred after the closing 
date:
    (i) All such receivables will meet the same terms and conditions 
for eligibility as those of the original receivables used to create the 
trust corpus (as described in the prospectus or private placement 
memorandum and/or pooling and servicing agreement for such 
certificates), which terms and conditions have been approved by a 
Rating Agency. However, the terms and conditions for determining the 
eligibility of a receivable may be changed if such changes receive 
prior approval either by a majority vote of the outstanding 
certificateholders or by a Rating Agency;
    (ii) The transfer to the trust of the receivables acquired during 
the pre-funding period will not result in the certificates receiving a 
lower credit rating from the Rating Agency upon termination of the pre-
funding period than the rating that was obtained at the time of the 
initial issuance of the certificates by the trust;
    (iii) The weighted average annual percentage interest rate (the 
average interest rate) for all of the obligations in the trust at the 
end of the pre-funding period will not be more than 100 basis points 
lower than the average interest rate for the obligations which were 
transferred to the trust on the closing date;
    (iv) The trustee of the trust (or any agency with which the trustee 
contracts to provide trust services) will be a substantial financial 
institution or trust company experienced in trust activities and 
familiar with its duties, responsibilities, and liabilities as a 
fiduciary under the Act. The trustee, as the legal owner of the 
obligations in the trust, will enforce all the rights created in favor 
of certificateholders of such trust, including employee benefit plans 
subject to the Act.
    In order to ensure that the characteristics of the receivables 
actually acquired during the pre-funding period are substantially 
similar to receivables that were acquired as of the closing date, the 
characteristics of the additional obligations subsequently acquired 
will be either (i) monitored by a credit support provider or other 
insurance provider which is independent of the sponsor, or (ii) an 
independent accountant retained by the sponsor will provide the sponsor 
with a letter (with copies provided to the Rating Agency, McDonald and 
the trustee) stating whether or not the characteristics of the 
additional obligations acquired after the closing date conform to the 
characteristics of such obligations described in the prospectus, 
private placement memorandum and/or pooling and servicing agreement. In 
preparing such letter, the independent accountant will use the same 
type of procedures as were applicable to the obligations which were 
transferred as of the closing date.
    Each prospectus, private placement memorandum and/or pooling and 
servicing agreement will set forth the terms and conditions for 
eligibility of the receivables to be included in the trust as of the 
related closing date, as well as those to be acquired during the pre-
funding period, which terms and conditions will have been agreed to by 
the Rating Agencies which are rating the applicable certificates as of 
the closing date. Also included among these conditions is the 
requirement that the trustee be given prior notice of the receivables 
to be transferred, along with such information concerning those 
receivables as may be requested. Each prospectus or private placement 
memorandum will describe the amount to be deposited in, and the 
mechanics of, the pre-funding account and will describe the pre-funding 
period for the trust.

Parties to Transactions

    11. The originator of a receivable is the entity that initially 
lends money to a borrower (obligor), such as a home-owner or automobile 
purchaser, or leases property to a lessee. The originator may either 
retain a receivable in its portfolio or sell it to a purchaser, such as 
a trust sponsor.
    Originators of receivables included in the trusts will be entities 
that originate receivables in the ordinary course of their businesses, 
including finance companies for whom such origination constitutes the 
bulk of their operations, financial institutions for whom such 
origination constitutes a substantial part of their operations, and any 
kind of manufacturer, merchant, or service enterprise for whom such 
origination is an incidental part of its operations. Each trust may 
contain assets of one or more originators. The originator of the 
receivables may also function as the trust sponsor or servicer.
    12. The sponsor will be one of three entities: (i) a special-
purpose or other corporation unaffiliated with the servicer, (ii) a 
special-purpose or other corporation affiliated with the servicer, or 
(iii) the servicer itself. Where the sponsor is not also the servicer, 
the sponsor's role will generally be limited to acquiring the 
receivables to be included in the trust, establishing the trust, 
designating the trustee, and assigning the receivables to the trust.
    13. The trustee of a trust is the legal owner of the obligations in 
the trust. The trustee is also a party to or beneficiary of all the 
documents and instruments deposited in the trust, and

[[Page 18373]]

as such is responsible for enforcing all the rights created thereby in 
favor of certificateholders.
    The trustee will be an independent entity, and therefore will be 
unrelated to McDonald, the trust sponsor, the servicer or any other 
member of the Restricted Group (as defined in section III.L.). McDonald 
represents that the trustee will be a substantial financial institution 
or trust company experienced in trust activities. The trustee receives 
a fee for its services, which will be paid by the servicer or sponsor 
or out of the trust assets. The method of compensating the trustee will 
be specified in the pooling and servicing agreement and disclosed in 
the prospectus or private placement memorandum relating to the offering 
of the certificates.
    14. The servicer of a trust administers the receivables on behalf 
of the certificateholders. The servicer's functions typically involve, 
among other things, notifying borrowers of amounts due on receivables, 
maintaining records of payments received on receivables and instituting 
foreclosure or similar proceedings in the event of default. In cases 
where a pool of receivables has been purchased from a number of 
different originators and deposited in a trust, the receivables may be 
``subserviced'' by their respective originators and a single entity may 
``master service'' the pool of receivables on behalf of the owners of 
the related series of certificates. Where this arrangement is adopted, 
a receivable continues to be serviced from the perspective of the 
borrower by the local subservicer, while the investor's perspective is 
that the entire pool of receivables is serviced by a single, central 
master servicer who collects payments from the local subservicers and 
passes them through to certificateholders.
    Receivables of the type suitable for inclusion in a trust 
invariably are serviced with the assistance of a computer. After the 
sale, the servicer keeps the sold receivables on the computer system in 
order to continue monitoring the accounts. Although the records 
relating to sold receivables are kept in the same master file as 
receivables retained by the originator, the sold receivables are 
flagged as having been sold. To protect the investor's interest, the 
servicer ordinarily covenants that this ``sold flag'' will be included 
in all records relating to the sold receivables, including the master 
file, archives, tape extracts and printouts.
    The sold flags are invisible to the obligor and do not affect the 
manner in which the servicer performs the billing, posting and 
collection procedures related to the sold receivables. However, the 
servicer uses the sold flag to identify the receivables for the purpose 
of reporting all activity on those receivables after their sale to 
investors.
    Depending on the type of receivable and the details of the 
servicer's computer system, in some cases the servicer's internal 
reports can be adapted for investor reporting with little or no 
modification. In other cases, the servicer may have to perform special 
calculations to fulfill the investor reporting responsibilities. These 
calculations can be performed on the servicer's main computer, or on a 
small computer with data supplied by the main system. In all cases, the 
numbers produced for the investors are reconciled to the servicer's 
books and reviewed by public accountants.
    The underwriter (i.e., McDonald, its affiliate, or a member of an 
underwriting syndicate or selling group of which McDonald or its 
affiliate is a manager or co-manager) will be a registered broker-
dealer that acts as underwriter or placement agent with respect to the 
sale of the certificates. Public offerings of certificates are 
generally made on a firm commitment basis. Private placement of 
certificates may be made on a firm commitment or agency basis. It is 
anticipated that the lead and co-managing underwriters will make a 
market in certificates offered to the public.
    In some cases, the originator and servicer of receivables to be 
included in a trust and the sponsor of the trust (although they may 
themselves be related) will be unrelated to McDonald. In other cases, 
however, affiliates of McDonald may originate or service receivables 
included in a trust or may sponsor a trust.

Certificate Price, Pass-Through Rate and Fees

    15. In some cases, the sponsor will obtain the receivables from 
various originators pursuant to existing contracts with such 
originators under which the sponsor continually buys receivables. In 
other cases, the sponsor will purchase the receivables at fair market 
value from the originator or a third party pursuant to a purchase and 
sale agreement related to the specific offering of certificates. In 
other cases, the sponsor will originate the receivables itself.
    As compensation for the receivables transferred to the trust, the 
sponsor receives certificates representing the entire beneficial 
interest in the trust, or the cash proceeds of the sale of such 
certificates. If the sponsor receives certificates from the trust, the 
sponsor sells all or a portion of these certificates for cash to 
investors or securities underwriters.
    16. The price of the certificates, both in the initial offering and 
in the secondary market, is affected by market forces, including 
investor demand, the pass-through interest rate on the certificates in 
relation to the rate payable on investments of similar types and 
quality, expectations as to the effect on yield resulting from 
prepayment of underlying receivables, and expectations as to the 
likelihood of timely payment.
    The pass-through rate for certificates is equal to the interest 
rate on receivables included in the trust minus a specified servicing 
fee.\40\ This rate is generally determined by the same market forces 
that determine the price of a certificate. The price of a certificate 
and its pass-through, or coupon, rate together determine the yield to 
investors. If an investor purchases a certificate at less than par, 
that discount augments the stated pass-through rate; conversely, a 
certificate purchased at a premium yields less than the stated coupon.
---------------------------------------------------------------------------

    \40\ The pass-through rate on certificates representing 
interests in trusts holding leases is determined by breaking down 
lease payments into ``principal'' and ``interest'' components based 
on an implicit interest rate.
---------------------------------------------------------------------------

    17. As compensation for performing its servicing duties, the 
servicer (who may also be the sponsor or an affiliate thereof, and 
receive fees for acting in that capacity) will retain the difference 
between payments received on the receivables in the trust and payments 
payable (at the pass-through rate) to certificateholders, except that 
in some cases a portion of the payments on receivables may be paid to a 
third party, such as a fee paid to a provider of credit support. The 
servicer may receive additional compensation by having the use of the 
amounts paid on the receivables between the time they are received by 
the servicer and the time they are due to the trust (which time is set 
forth in the pooling and servicing agreement). The servicer typically 
will be required to pay the administrative expenses of servicing the 
trust, including in some cases the trustee's fee, out of its servicing 
compensation.
    The servicer is also compensated to the extent it may provide 
credit enhancement to the trust or otherwise arrange to obtain credit 
support from another party. This ``credit support fee'' may be 
aggregated with other servicing fees, and is either paid out of the 
interest income received on the

[[Page 18374]]

receivables in excess of the pass-through rate or paid in a lump sum at 
the time the trust is established.
    18. The servicer may be entitled to retain certain administrative 
fees paid by a third party, usually the obligor. These administrative 
fees fall into three categories: (a) prepayment fees; (b) late payment 
and payment extension fees; and (c) expenses, fees and charges 
associated with foreclosure or repossession, or other conversion of a 
secured position into cash proceeds, upon default of an obligation.
    Compensation payable to the servicer will be set forth or referred 
to in the pooling and servicing agreement and described in reasonable 
detail in the prospectus or private placement memorandum relating to 
the certificates.
    19. Payments on receivables may be made by obligors to the servicer 
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and 
servicing agreement may permit the servicer to place these payments in 
non-interest bearing accounts maintained with itself or to commingle 
such payments with its own funds prior to the distribution dates. In 
these cases, the servicer would be entitled to the benefit derived from 
the use of the funds between the date of payment on a receivable and 
the pass-through date. Commingled payments may not be protected from 
the creditors of the servicer in the event of the servicer's bankruptcy 
or receivership. In those instances when payments on receivables are 
held in non-interest bearing accounts or are commingled with the 
servicer's own funds, the servicer is required to deposit these 
payments by a date specified in the pooling and servicing agreement 
into an account from which the trustee makes payments to 
certificateholders.
    20. The underwriter will receive a fee in connection with the 
securities underwriting or private placement of certificates. In a firm 
commitment underwriting, this fee would consist of the difference 
between what the underwriter receives for the certificates that it 
distributes and what it pays the sponsor for those certificates. In a 
private placement, the fee normally takes the form of an agency 
commission paid by the sponsor. In a best efforts underwriting in which 
the underwriter would sell certificates in a public offering on an 
agency basis, the underwriter would receive an agency commission rather 
than a fee based on the difference between the price at which the 
certificates are sold to the public and what it pays the sponsor. In 
some private placements, the underwriter may buy certificates as 
principal, in which case its compensation would be the difference 
between what it receives for the certificates that it sells and what it 
pays the sponsor for these certificates.

Purchase of Receivables by the Servicer

    21. The applicant represents that as the principal amount of the 
receivables in a trust is reduced by payments, the cost of 
administering the trust generally increases, making the servicing of 
the trust prohibitively expensive at some point. Consequently, the 
pooling and servicing agreement generally provides that the servicer 
may purchase the receivables remaining in the trust when the aggregate 
unpaid balance payable on the receivables is reduced to a specified 
percentage (usually 5 to 10 percent) of the initial aggregate unpaid 
balance.
    The purchase price of a receivable is specified in the pooling and 
servicing agreement and will be at least equal to: (1) The unpaid 
principal balance on the receivable plus accrued interest, less any 
unreimbursed advances of principal made by the servicer; or (2) the 
greater of (a) the amount in (1) or (b) the fair market value of such 
obligations in the case of a REMIC, or the fair market value of the 
receivables in the case of a trust that is not a REMIC.

Certificate Ratings

    22. The certificates will have received one of the three highest 
ratings available from a Rating Agency. Insurance or other credit 
support (such as surety bonds, letters of credit, guarantees, or 
overcollateralization) will be obtained by the trust sponsor to the 
extent necessary for the certificates to attain the desired rating. The 
amount of this credit support is set by the Rating Agencies at a level 
that is a multiple of the worst historical net credit loss experience 
for the type of obligations included in the issuing trust.

Provision of Credit Support

    23. In some cases, the master servicer, or an affiliate of the 
master servicer, may provide credit support to the trust (i.e. act as 
an insurer). In these cases, the master servicer, in its capacity as 
servicer, will first advance funds to the full extent that it 
determines that such advances will be recoverable (a) out of late 
payments by the obligors, (b) from the credit support provider (which 
may be the master servicer or an affiliate thereof) or, (c) in the case 
of a trust that issues subordinated certificates, from amounts 
otherwise distributable to holders of subordinated certificates, and 
the master servicer will advance such funds in a timely manner. When 
the servicer is the provider of the credit support and provides its own 
funds to cover defaulted payments, it will do so either on the 
initiative of the trustee, or on its own initiative on behalf of the 
trustee, but in either event it will provide such funds to cover 
payments to the full extent of its obligations under the credit support 
mechanism. In some cases, however, the master servicer may not be 
obligated to advance funds but instead would be called upon to provide 
funds to cover defaulted payments to the full extent of its obligations 
as insurer. Moreover, a master servicer typically can recover advances 
either from the provider of credit support or from future payments on 
the affected assets.
    If the master servicer fails to advance funds, fails to call upon 
the credit support mechanism to provide funds to cover delinquent 
payments, or otherwise fails in its duties, the trustee would be 
required and would be able to enforce the certificateholders' rights, 
as both a party to the pooling and servicing agreement and the owner of 
the trust estate, including rights under the credit support mechanism. 
Therefore, the trustee, who is independent of the servicer, will have 
the ultimate right to enforce the credit support arrangement.
    When a master servicer advances funds, the amount so advanced is 
recoverable by the master servicer out of future payments on 
receivables held by the trust to the extent not covered by credit 
support. However, where the master servicer provides credit support to 
the trust, there are protections in place to guard against a delay in 
calling upon the credit support to take advantage of the fact that the 
credit support declines proportionally with the decrease in the 
principal amount of the obligations in the trust as payments on 
receivables are passed through to investors. These safeguards include:
    (a) There is often a disincentive to postponing credit losses 
because the sooner repossession or foreclosure activities are 
commenced, the more value that can be realized on the security for the 
obligation;
    (b) The master servicer has servicing guidelines which include a 
general policy as to the allowable delinquency period after which an 
obligation ordinarily will be deemed uncollectible. The pooling and 
servicing agreement will require the master servicer to follow its 
normal servicing guidelines and will set forth the master servicer's 
general policy as to the period of time after which delinquent 
obligations ordinarily will be considered uncollectible;

[[Page 18375]]

    (c) As frequently as payments are due on the receivables included 
in the trust (monthly, quarterly or semi-annually, as set forth in the 
pooling and servicing agreement), the master servicer is required to 
report to the independent trustee the amount of all past-due payments 
and the amount of all servicer advances, along with other current 
information as to collections on the receivables and draws upon the 
credit support. Further, the master servicer is required to deliver to 
the trustee annually a certificate of an executive officer of the 
master servicer stating that a review of the servicing activities has 
been made under such officer's supervision, and either stating that the 
master servicer has fulfilled all of its obligations under the pooling 
and servicing agreement or, if the master servicer has defaulted under 
any of its obligations, specifying any such default. The master 
servicer's reports are reviewed at least annually by independent 
accountants to ensure that the master servicer is following its normal 
servicing standards and that the master servicer's reports conform to 
the master servicer's internal accounting records. The results of the 
independent accountants' review are delivered to the trustee; and
    (d) The credit support has a ``floor'' dollar amount that protects 
investors against the possibility that a large number of credit losses 
might occur towards the end of the life of the trust, whether due to 
servicer advances or any other cause. Once the floor amount has been 
reached, the servicer lacks an incentive to postpone the recognition of 
credit losses because the credit support amount thereafter is subject 
to reduction only for actual draws. From the time that the floor amount 
is effective until the end of the life of the trust, there are no 
proportionate reductions in the credit support amount caused by 
reductions in the pool principal balance. Indeed, since the floor is a 
fixed dollar amount, the amount of credit support ordinarily increases 
as a percentage of the pool principal balance during the period that 
the floor is in effect.

Disclosure

    24. In connection with the original issuance of certificates, the 
prospectus or private placement memorandum will be furnished to 
investing plans. The prospectus or private placement memorandum will 
contain information material to a fiduciary's decision to invest in the 
certificates, including:
    (a) Information concerning the payment terms of the certificates, 
the rating of the certificates, any material risk factors with respect 
to the certificates, and the fact that principal amounts left in the 
pre-funding account at the end of the pre-funding period will be paid 
to certificateholders as a repayment of principal;
    (b) A description of the trust as a legal entity and a description 
of how the trust was formed by the seller/servicer or other sponsor of 
the transaction;
    (c) Identification of the independent trustee for the trust;
    (d) A description of the receivables contained in the trust, 
including the types of receivables, the diversification of the 
receivables, their principal terms, and their material legal aspects, 
and a description of any pre-funding account used or capitalized 
interest account used in connection with a pre-funding account;
    (e) A description of the sponsor and servicer;
    (f) A description of the pooling and servicing agreement, including 
a description of the seller's principal representations and warranties 
as to the trust assets, including the terms and conditions for 
eligibility of any receivables transferred during the pre-funding 
period and the trustee's remedy for any breach thereof; a description 
of the procedures for collection of payments on receivables and for 
making distributions to investors, and a description of the accounts 
into which such payments are deposited and from which such 
distributions are made; a description of permitted investments for any 
pre-funding account or capitalized interest account; identification of 
the servicing compensation and any fees for credit enhancement that are 
deducted from payments on receivables before distributions are made to 
investors; a description of periodic statements provided to the 
trustee, and provided to or made available to investors by the trustee; 
and a description of the events that constitute events of default under 
the pooling and servicing contract and a description of the trustee's 
and the investors' remedies incident thereto;
    (g) A description of the credit support;
    (h) A general discussion of the principal federal income tax 
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
    (i) A description of the underwriters' plan for distributing the 
pass-through securities to investors;
    (j) Information about the scope and nature of the secondary market, 
if any, for the certificates; and
    (k) A statement as to the duration of any pre-funding period and 
the pre-funding limit for the trust.
    25. Reports indicating the amount of payments of principal and 
interest are provided to certificateholders at least as frequently as 
distributions are made to certificateholders. Certificateholders will 
also be provided with periodic information statements setting forth 
material information concerning the underlying assets, including, where 
applicable, information as to the amount and number of delinquent and 
defaulted loans or receivables.
    26. In the case of a trust that offers and sells certificates in a 
registered public offering, the trustee, the servicer or the sponsor 
will file such periodic reports as may be required to be filed under 
the Securities Exchange Act of 1934. Although some trusts that offer 
certificates in a public offering will file quarterly reports on Form 
10-Q and Annual Reports on Form 10-K, many trusts obtain, by 
application to the Securities and Exchange Commission (SEC), a complete 
exemption from the requirement to file quarterly reports on Form 10-Q 
and a modification of the disclosure requirements for annual reports on 
Form 10-K. If such an exemption is obtained, these trusts normally 
would continue to have the obligation to file current reports on Form 
8-K to report material developments concerning the trust and the 
certificates and copies of the statements sent to certificateholders. 
While the SEC's interpretation of the periodic reporting requirements 
is subject to change, periodic reports concerning a trust will be filed 
to the extent required under the Securities Exchange Act of 1934.
    27. At or about the time distributions are made to 
certificateholders, a report will be delivered to the trustee as to the 
status of the trust and its assets, including underlying obligations. 
Such report will typically contain information regarding the trust's 
assets (including those purchased by the trust from any pre-funding 
account), payments received or collected by the servicer, the amount of 
prepayments, delinquencies, servicer advances, defaults and 
foreclosures, the amount of any payments made pursuant to any credit 
support, and the amount of compensation payable to the servicer. Such 
report also will be delivered to or made available to the rating agency 
or agencies that have rated the trust's certificates.
    In addition, promptly after each distribution date, 
certificateholders will receive a statement prepared by the servicer, 
paying agent or trustee summarizing information regarding the trust and 
its assets, including underlying receivables. Such statement

[[Page 18376]]

will typically contain information regarding payments and prepayments, 
delinquencies, the remaining amount of the guaranty or other credit 
support and a breakdown of payments between principal and interest.

Forward Delivery Commitments

    28. To date, no forward delivery commitments have been entered into 
by McDonald in connection with the offering of any certificates, but 
McDonald may contemplate entering into such commitments. The utility of 
forward delivery commitments has been recognized with respect to 
offering similar certificates backed by pools of residential mortgages, 
and McDonald may find it desirable in the future to enter into such 
commitments for the purchase of certificates.

Secondary Market Transactions

    29. It is McDonald's normal policy to attempt to make a market for 
securities for which it is lead or co-managing underwriter, and it is 
McDonald's intention to make a market for any certificates for which it 
is lead or co-managing underwriter, although it is under no obligation 
to do so. At times McDonald will facilitate sales by investors who 
purchase certificates if McDonald has acted as agent or principal in 
the original private placement of the certificates and if such 
investors request McDonald's assistance.

Retroactive Relief

    30. McDonald represents that it has not engaged in transactions 
related to mortgage-backed and asset-backed securities based on the 
assumption that retroactive relief would be granted prior to the date 
of their application. However, McDonald requests the exemptive relief 
granted to be retroactive to January 4, 1999, the date of their 
application, and would like to rely on such retroactive relief for 
transactions entered into prior to the date exemptive relief may be 
granted.

Summary

    31. In summary, the applicant represents that the transactions for 
which exemptive relief is requested satisfy the statutory criteria of 
section 408(a) of the Act due to the following:
    (a) The trusts contain ``fixed pools'' of assets. There is little 
discretion on the part of the trust sponsor to substitute receivables 
contained in the trust once the trust has been formed;
    (b) In the case where a pre-funding account is used, the 
characteristics of the receivables to be transferred to the trust 
during the pre-funding period will be substantially similar to the 
characteristics of those transferred to the trust on the closing date, 
thereby giving the sponsor and/or originator little discretion over the 
selection process, and compliance with this requirement will be assured 
by the specificity of the characteristics and the monitoring mechanisms 
contemplated under the proposed exemption. In addition, certain cash 
accounts will be established to support the certificate pass-through 
rate and such cash accounts will be invested in short-term, 
conservative investments; the pre-funding period will be of a 
reasonably short duration; a pre-funding limit will be imposed; and any 
Internal Revenue Service requirements with respect to pre-funding 
intended to preserve the passive income character of the trust will be 
met. The fiduciary of the plans making the decision to invest in 
certificates is thus fully apprised of the nature of the receivables 
which will be held in the trust and has sufficient information to make 
a prudent investment decision.
    (c) Certificates in which plans invest will have been rated in one 
of the three highest rating categories by a rating agency. Credit 
support will be obtained to the extent necessary to attain the desired 
rating;
    (d) All transactions for which McDonald seeks exemptive relief will 
be governed by the pooling and servicing agreement, which is made 
available to plan fiduciaries for their review prior to the plan's 
investment in certificates;
    (e) Exemptive relief from sections 406(b) and 407 for sales to 
plans is substantially limited; and
    (f) McDonald anticipates that it will make a secondary market in 
certificates (although it is under no obligation to do so).
    Notice to Interested Persons: The applicant represents that any 
securities offered in reliance upon the proposed exemption prior to the 
date the final exemption is published in the Federal Register shall 
disclose in the offering memorandum or prospectus: (a) The availability 
of the proposed exemption; (b) the right of potentially interested plan 
fiduciaries to comment on the proposed exemption; and (c) information 
on how an interested plan fiduciary can obtain a copy of the proposed 
exemption (once it is available) from McDonald.
    Once this proposed exemption is granted, a copy of the exemption 
published in the Federal Register shall be distributed to any current 
or prospective plan investor in a security offered in reliance upon the 
exemption upon request of such investor, and each offering memorandum 
or prospectus offering securities in reliance upon the exemption shall 
describe and disclose the availability of the exemption.
    Comments and requests for a hearing must be received by the 
Department not later than 45 days from the date of publication of this 
notice of proposed exemption in the Federal Register.
    For Further Information Contact: Gary Lefkowitz of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions 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.


[[Page 18377]]


    Signed at Washington, DC, this 30th day of March, 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 00-8448 Filed 4-6-00; 8:45 am]
BILLING CODE 4510-29-P