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Secretary of Labor Hilda L. Solis
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EBSA Notices

Proposed Exemptions; Merrill Lynch & Co., Inc. (ML&Co.)   [10/19/2000]
[PDF]
[Federal Register: October 19, 2000 (Volume 65, Number 203)]
[Notices]               
[Page 62756-62766]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19oc00-129]                         

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10651, et al.]

 
Proposed Exemptions; Merrill Lynch & Co., Inc. (ML&Co.)

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, N.W., Washington, D.C. 
20210. Attention: Application No. ____, stated in each Notice of 
Proposed Exemption. The applications for exemption and the comments 
received will be available for public inspection in the Public 
Documents Room of the Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-5638, 200 Constitution Avenue, N.W., 
Washington, D.C. 20210.

Notice to Interested Persons

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

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

Merrill Lynch & Co., Inc. (ML&Co.)

Located in New York, NY

[Application No. D-10651]

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 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). \1\
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    \1\ For purposes of this proposed exemption, references to 
provisions of Title I of the Act, unless otherwise noted herein, 
refer also to corresponding provisions of the Code.
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Section I. Covered Transactions
    If the exemption is granted, the restrictions of section 
406(a)(1)(A) through (D) 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 
purchase or sale by employee benefit plans (the Plans), other than 
Plans sponsored by ML&Co. or its affiliates (collectively, the 
Applicants), of Market Index Target-Term Securities (the MITTS), which 
are debt securities issued by the Applicants; and (2) the extension of 
credit by the Plans to the Applicants in connection with the holding of 
the MITTS.

[[Page 62757]]

    This proposed exemption is subject to the general conditions that 
are set forth below in Section II.
Section II. General Conditions
    (a) The MITTS are made available by the Applicants in the ordinary 
course of their business to Plans as well as to customers which are not 
Plans.
    (b) The decision to invest in the MITTS is made by a Plan fiduciary 
(the Independent Plan Fiduciary) or a participant in a Plan that 
provides for participant-directed investments (the Plan Participant), 
which is independent of the Applicants.
    (c) The Applicants do not have any discretionary authority or 
control or provide any investment advice, within the meaning of 29 CFR 
2510.3-21(c), with respect to the Plan assets involved in the 
transactions.
    (d) The Plans pay no fees or commissions to ML&Co. or its 
affiliates in connection with the transactions covered by the requested 
exemption, other than the mark-up for a principal transaction 
permissible under Part II of Prohibited Transaction Class Exemption 
(PTCE) 75-1 (40 FR 50845, October 31, 1975).\2\
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    \2\ The Department is providing no opinion herein as to whether 
any principal transactions involving debt securities would be 
covered by PTCE 75-1, or whether any particular mark-up by a broker-
dealer for such transaction would be permissible under Part II of 
PTCE 75-1.
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    (e) ML&Co. agrees to notify Plan investors in the prospectus (the 
Prospectus) for the MITTS that, at the time of acquisition, no more 
than 15 percent of a Plan's assets should be invested in any of the 
MITTS.
    (f) The MITTS do not have a duration which exceeds 9 years from the 
date of issuance.
    (g) Prior to a Plan's acquisition of any of the MITTS, the 
Applicants fully disclose, in the Prospectus, to the Independent Plan 
Fiduciary or Plan Participant, all of the terms and conditions of such 
MITTS, including, but not limited to, the following:
    (1) A statement to the effect that the return calculated for the 
MITTS will be denominated in U.S. dollars;
    (2) The specified index (the Index) or Indexes on which the rate of 
return on the MITTS is based;
    (3) A numerical example, capable of being understood by the average 
investor, which explains the calculation of the return on the MITTS at 
maturity and reflects, among other things, (i) a hypothetical initial 
value and closing value of the applicable Index, and (ii) the effect of 
any adjustment factor on the percentage change in the applicable Index;
    (4) The date on which the MITTS are issued;
    (5) The date on which the MITTS will mature and the conditions of 
such maturity;
    (6) The initial date on which the value of the Index is calculated;
    (7) Any adjustment factor or other numerical methodology that would 
affect the rate of return, if applicable;
    (8) The ending date on which interest is determined, calculated and 
paid;
    (9) Information relating to the calculation of payments of 
principal and interest, including a representation to the effect that, 
at maturity, the beneficial owner of the MITTS is entitled to receive 
the entire principal amount, plus an amount derived directly from the 
growth in the Index (but in no event less than zero);
    (10) All details regarding the methodology for measuring 
performance;
    (11) The terms under which the MITTS may be redeemed;
    (12) The exchange or market where the MITTS are traded or 
maintained; and
    (13) Copies of the proposed and final exemptions relating to the 
exemptive relief provided herein, upon request.
    (h) The terms of a Plan's investment in the MITTS are at least as 
favorable to the Plan as those available to an unrelated non-Plan 
investor in a comparable arm's length transaction at the time of such 
acquisition.
    (i) In the event the MITTS are delisted from either the American 
Stock Exchange (the AMEX), the New York Stock Exchange (the NYSE) or 
any other nationally-recognized securities exchange, Merrill Lynch, 
Pierce, Fenner & Smith Incorporated (MLPF&S) will apply for trading 
through the National Association of Securities Dealers Automated 
Quotations System (NASDAQ), which requires that there be independent 
market-makers establishing a market for such securities in addition to 
MLPF&S. If there are no independent market-makers, the exemption will 
no longer be considered effective.
    (j) The MITTS are rated in one of the three highest generic rating 
categories by at least one nationally-recognized statistical rating 
service at the time of their acquisition.
    (k) The rate of return for the MITTS is objectively determined and, 
following issuance, the Applicants retain no authority to affect the 
determination of the return for such security, other than in connection 
with a ``market disruption event'' (the Market Disruption Event) that 
is described in the Prospectus for the MITTS.
    (l) The MITTS are based on an Index that is--
    (1) Created and maintained \3\ by an entity that is unrelated to 
the Applicants and is a standardized and generally-accepted Index of 
securities; or
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    \3\ For purposes of this exemption, the term ``maintain'' means 
that all calculations relating to the securities in the Index, as 
well as the rate of return of the Index, are made by an entity that 
is unrelated to the Applicants or their affiliates.
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    (2) Created by the Applicants or an affiliate, but maintained by an 
entity that is unrelated to the Applicants,
    (i) Consists either of standardized and generally-accepted Indexes 
or an Index comprised of at least 10 publicly-traded securities that 
are not issued by the Applicants or their affiliates, are designated in 
advance and listed in the Prospectus for the MITTS, (Under either 
circumstance, neither the Applicants nor their affiliates may 
unilaterally modify the composition of the Index, including the 
methodology comprising the rate of return.),
    (ii) Meets the requirements for an Index in Rule 19b-4 (Rule 19b-4) 
under the Securities Exchange Act of 1934 (the 1934 Securities Act), 
and
    (iii) The index value (the Index Value) for the Index is publicly-
disseminated through an independent pricing service, such as Reuters 
Group, PLC (Reuters) or Bloomberg L.P. (Bloomberg), or through a 
national securities exchange, such as the AMEX.
    (m) The Applicants do not trade in any way intended to affect the 
value of the MITTS through holding or trading in the securities which 
comprise an Index.
    (n) The Applicants maintain, for a period of six years, the records 
necessary to enable the persons described in paragraph (o) of this 
section to determine whether the conditions of this proposed exemption 
have been met, except that--
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of the Applicants, 
the records are lost or destroyed prior to the end of the six year 
period; and
    (2) No party in interest other than the Applicants 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 (o) below.
    (o)(1) Except as provided in section (o)(2) of this paragraph and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (n) are 
unconditionally

[[Page 62758]]

available at their customary location during normal business hours by:
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and Exchange 
Commission (the SEC);
    (B) Any fiduciary of a participating Plan or any duly authorized 
representative of such fiduciary;
    (C) Any contributing employer to any participating Plan or any duly 
authorized employee representative of such employer; and
    (D) Any Plan Participant or beneficiary of any participating Plan, 
or any duly authorized representative of such Plan Participant or 
beneficiary.
    (o)(2) None of the persons described above in subparagraphs (B)-(D) 
of paragraph (o)(1) are authorized to examine the trade secrets of the 
Applicants or commercial or financial information which is privileged 
or confidential.

Summary of Facts and Representations

    1. The Applicants consist of ML&Co., MLPF&S and such other 
affiliates of MLPF&S that are broker-dealers registered under U.S. law. 
The Applicants can be further described as follows:
    (a) ML&Co. is a Delaware corporation headquartered in New York, New 
York. It is a holding company that, through its subsidiaries and 
affiliates, provides investment, financing, insurance, and related 
services on a global basis. As of December 1998, ML&Co. and its 
subsidiaries and affiliates had total consolidated assets of 
approximately $299.8 billion. ML&Co. constitutes a diversified global 
financial services group, maintaining the following key areas of client 
services:
     Corporate and Institutional Client, providing securities 
trading, investment banking, and advisory services to financial 
institutions, corporations, and governments worldwide. Additionally, 
this group provides merger and acquisition advisory services and raises 
capital through securities underwriting and loan syndications.
     U.S. Private Client, providing financial services and 
products, advice, and execution to individuals, small businesses, and 
Plans, including mortgage loans and commercial real estate financing.
     International Private Client, providing financial 
planning, private banking, and trust and investment services to 
individuals outside the United States through a network of private 
bankers and specialists abroad.
     Asset Management Client, providing investment advisory and 
portfolio management services.
    (b) MLPF&S, the principal subsidiary of ML&Co., is a registered 
broker-dealer under section 15 of the 1934 Act. MLPF&S is a broker in 
securities, options contracts, and commodity and financial futures 
contracts as well as a dealer in options and in corporate and municipal 
securities. In addition, MLPF&S is an investment banking firm that 
provides advice to, and raises capital for, corporations and other 
institutional clients, sovereigns, and municipalities. Further, MLPF&S 
is an underwriter of selected insurance policies.
    3. The Plans will consist of employee benefit plans that are 
covered under the provisions of Title I of the Act, as amended, and 
subject to section 4975 of the Code. For purposes of this proposed 
exemption, the Plans will not consist of Plans that are sponsored and 
maintained by the Applicants for their own employees. In the case of 
the Applicants' in-house Plans, ML&Co. represents that the acquisition 
and holding of the MITTS by such Plans would be covered under the 
statutory exemption that is provided under section 408(e) of the 
Act.\4\
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    \4\ The Department expresses no opinion herein on whether the 
acquisition and holding of the MITTS by the Applicants' in-house 
Plans is covered under the provisions of section 408(e) of the Act. 
In this regard, interested persons should refer to the conditions 
contained in section 408(e), as well as the definitions of the terms 
``qualifying employer security'' (see section 407(d)(5) of the Act) 
and ``marketable obligations'' (see section 407(e) of the Act).
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    4. The Applicants represent that their activities are subject to 
various levels of oversight and regulation by the SEC, the Commodities 
Futures Trading Commission, and other federal and state regulatory 
agencies. The Applicants also represent that their activities are 
subject to the oversight of self-regulatory organizations such as the 
NYSE and the AMEX. The Applicants further represent that MLPF&S, as a 
registered broker-dealer and member of the NYSE, is subject to the Net 
Capital Rule 15c3-1 of the 1934 Act, which specifies the minimum net 
capital requirement of a broker-dealer.
    5. The Applicants represent that broker-dealers routinely need 
additional capital in order to maintain inventories of securities for 
their market-making and other business activities. For these reasons, 
the Applicants state that they have a continuous need to borrow funds 
from various institutional and individual investors for use in their 
business operations. In response to this need, the Applicants issue 
various high-quality, publicly-offered debt securities generally rated 
in one of the three highest generic rating categories by nationally-
recognized rating firms, offering varying levels of risk and potential 
return. Among the debt securities offered by the Applicants are the 
MITTS which are publicly-offered, unsecured, SEC-registered debt 
securities, with terms that are no longer in duration than 9 years. The 
MITTS will be U.S. dollar-denominated so that no foreign currency 
conversions will be required in the calculation of the rate of return. 
Further, the MITTS will offer varying levels of risk and rates of 
return. The MITTS are currently listed on the AMEX or the NYSE and they 
are issued in denominations of $10 of principal per unit, with the 
minimum purchase being one unit.
    Thus, the MITTS may be offered on a variety of terms and formulas 
under which rates of return are objectively determined in accordance 
with certain Indexes by MLPF&S, the calculation agent. The Applicants 
represent that since small Plans will likely invest in the MITTS, the 
formulas used to calculate the rates of return will be capable of being 
understood by the average investor and clearly described in the ``plain 
English'' summary of the MITTS in the Applicants' Prospectus.
    6. Due to the affiliation between ML&Co., as an issuer of the MITTS 
described herein, and MLPF&S, as a service provider to the Plans, the 
Applicants represent that they are likely to be parties in interest, as 
defined in section 3(14)(B) or (H) of the Act, with regard to a high 
percentage of Plans that purchase, hold, or sell the MITTS, regardless 
of whether such securities are purchased directly from the 
Applicants.\5\ Thus, the Applicants represent that ML&Co. may be a 
party in interest to a Plan solely because of its affiliation with a 
service provider to the Plan, and as the counterparty to the Plan in a 
transaction where the Plan holds a MITTS issued by ML&Co. or an 
affiliate. Further, other affiliates of ML&Co. may be service providers 
to Plans on account of their roles as trustees, custodians, investment 
advisers, or broker-dealers for such Plans. These relationships would 
make ML&Co. a party in interest to those Plans and would create 
potential prohibited transactions in the event such Plans acquire and 
hold the MITTS.
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    \5\ In this regard, the Applicants represent that PTCE 75-1 does 
not directly address transactions where there is a continuing 
extension of credit as a result of a sale by a broker-dealer to a 
plan of debt securities issued by the broker-dealer's parent 
corporation.

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[[Page 62759]]

    The Applicants request an administrative exemption from the 
Department to enable Plans to invest in the MITTS under the terms and 
conditions described in this proposed exemption and to avoid liability 
for prohibited transactions resulting from such investments.
    7. The Applicants believe that while Part II of PTCE 75-1 provides 
relief for principal transactions between a broker-dealer and a Plan, 
and would cover a purchase of the broker-dealer parent's debt 
securities by such Plans (if the conditions required therein were met), 
it is questionable whether that class exemption would cover the 
continuing extension of credit related to the holding of any debt 
securities by a Plan, including the MITTS.\6\
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    \6\ See Footnote 2 above.
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    The Applicants note that some Independent Plan Fiduciaries have 
expressed concern regarding the application of PTCE 75-1 to broker-
dealer sales of broker-parent debt to Plans either as part of an 
original issue of the securities or in the secondary market. Moreover, 
the Applicants represent that PTCE 96-23 (61 FR 15975, April 10, 1996) 
\7\ is unavailable to participant-directed, defined contribution Plans 
and other small Plans because these Plans, due to their size, are 
unlikely to have INHAMs responsible for making investment decisions 
relating to the acquisition, holding and disposition of securities in 
which the Plans invest.
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    \7\ PTCE 96-23 permits various transactions involving employee 
benefit plans whose assets are managed by an in-house asset manager 
(the INHAM). An INHAM is an entity which is generally a subsidiary 
of the employer sponsoring the plan. The INHAM is also a registered 
investment adviser with management and control of total assets 
attributable to plans maintained by the employer and its affiliates 
which are in excess of $50 million.
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    Similarly, the Applicants note that while PTCE 84-14 \8\ minimizes 
the risk of inadvertent prohibited transactions for Plans whose assets 
are managed by a QPAM, they believe it is unlikely that participant-
directed, defined contribution Plans or small Plans would incur the 
expense of a QPAM for the purchase and continued holding of the MITTS. 
The Applicants also believe that the additional cost of a QPAM for a 
small Plan with a small investment would not be cost-effective. The 
Applicants further explain that this cost would be uneconomical here 
because the QPAM would be required to continue its services for the 
entire period during which the MITTS are held by the Plan since the 
potential prohibited transaction is not just a sale or exchange, under 
section 406(a)(1)(A) of the Act, but is also an extension of credit, 
under section 406(a)(1)(B) of the Act. Accordingly, the Applicants 
state that the cost of a QPAM would preclude small Plans from being 
able to purchase the MITTS without creating the risk of a prohibited 
transaction.
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    \8\ PTCE 84-14 provides a class exemption for transactions 
between a party in interest with respect to an employee benefit plan 
and an investment fund (including either a single customer or pooled 
separate account) in which the plan has an interest, and which is 
managed by a qualified professional asset manager (the QPAM), 
provided certain conditions are met. QPAMS (e.g., banks, insurance 
companies, registered investment advisers with total client assets 
under management in excess of $50 million) are considered to be 
experienced investment managers for plan investors that are aware of 
their fiduciary duties under the Act.
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    8. The Applicants propose to continue offering the MITTS to non-
Plan investors and maintain that these investors will continue to 
constitute a substantial market for such securities. However, for each 
Plan investor, the Applicants represent that the terms of the Plan's 
investment in the MITTS will be at least as favorable to the Plan as 
those available to an unrelated non-Plan investor in a comparable arm's 
length transaction at the time the MITTS are acquired by the Plan. 
Additionally, the Applicants represent that no Plan will pay the 
Applicants any fees or commissions in connection with transactions 
involving the MITTS, except for the mark-up for a principal transaction 
permitted under PTCE 75-1.
    In addition to the aforementioned requirements, the Applicants 
represent that a Plan's investment in the MITTS will be restricted to 
those Plans for which the Applicants have no discretionary authority 
and do not provide investment advice with respect to the investment in 
the MITTS. In this regard, the decision to invest in the MITTS will be 
made by an Independent Plan Fiduciary or a Plan Participant, which is 
independent of the Applicants. Moreover, the Applicants represent that 
the Prospectus for each of the MITTS that are offered to the Plans will 
contain a recommendation that no more than 15 percent of a Plan's 
assets should be invested in the MITTS at the time such security is 
acquired by a Plan.\9\
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    \9\ In this regard, the Applicants propose to include the 
following statement in the Prospectus for each of the MITTS, under a 
heading entitled ``Employer-Sponsored Plan Considerations'':
    These [MITTS] Securities are being sole to Employer-Sponsored 
Plans pursuant to an exemption issued by the Department of Labor. In 
accordance with the terms of this exemption, we are required to 
inform such Employer-Sponsored Plans that no more than 15 percent of 
plan (or individual participant) assets, at the time of acquisition, 
should be invested in MITTS. Please note, however, that it is the 
responsibility of the person making the investment decision to 
determine whether the purchase is a prudent investment for the plan 
(or participant-directed account).
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    9. The MITTS will be rated in one of the three highest generic 
rating categories by a nationally-recognized rating firm at the time of 
acquisition by a Plan. There will be no triggering events or early 
amortization events if the Applicants' credit rating drops below a 
certain level established by a rating agency. Throughout the term of 
any of the MITTS, the Plans will be able to access the latest bid and 
asked price quotations for all of the Applicants' MITTS by calling a 
broker or any electronic service with a recognized price quotation 
delivery system. If a Plan wishes to terminate a MITTS investment prior 
to maturity, such investor may do so by selling the debt security on 
the open market at the prevailing market price. However, ML&Co. may not 
unilaterally terminate the MITTS prior to maturity unless the MITTS are 
callable at a specific price which will be disclosed in the Prospectus. 
Assuming the MITTS are callable, ML&Co. represents that there will be 
no loss of principal.
    10. As noted above, the rate of return for the MITTS will be based 
upon an Index, which may be either (a) created and maintained by an 
entity that is unrelated to the Applicants or (b) created by the 
Applicants, but maintained by an unrelated entity.
    (a) Index Created and Maintained by an Entity Unrelated to the 
Applicants. This Index, which will be created by an entity that is 
unrelated to the Applicants, will consist of a standardized and 
generally-accepted index of securities, such as the Nikkei 225 Index 
Tokyo Stock Exchange or the Standard & Poor's 500 Index. In addition, 
this Index will be maintained by such unrelated entity. In other words, 
all calculations relating to the securities in the Index, as well as 
the rate of return of the Index, will be made by an entity other than 
the Applicants or their affiliates.
    (b) Index Created by the Applicants or an Affiliate, but Maintained 
by an Unrelated Entity. This Index will be created by the Applicants or 
an affiliate. However, it must be maintained by an entity that is 
unrelated to the Applicants, such as the AMEX. In addition, the Index 
will consist either of standardized and generally-accepted Indexes or 
it will be an Index comprised of at least 10 publicly-traded securities 
that are not issued by the Applicants or their affiliates, are 
designated in advance and listed in the Prospectus for the MITTS. Under 
either circumstance, neither the Applicants nor their affiliates will 
be permitted to make any modifications to the composition of the Index, 
including the methodology

[[Page 62760]]

comprising the rate of return, unilaterally.
    Further, the Index will meet the requirements for an Index in 
accordance with Rule 19b-4 of the 1934 Securities Act, which imposes 
regulatory standards on the entity maintaining the Index. Under Rule 
19b-4, a self-regulatory organization, such as a securities exchange, 
is required to adopt trading rules, procedures and listing standards 
for the product classes relating to any security that the exchange 
proposes to list. In addition, the self-regulatory organization must 
maintain a surveillance program for a class of securities. If the SEC 
has not approved the self-regulatory organization's rules, procedures 
and standards, the self-regulatory organization must make a filing with 
the SEC prior to listing the security. According to the Applicants, 
this procedure provides adequate safeguards so that any MITTS that are 
created by the Applicants or their affiliates will meet the listing and 
trading standards approved by the self-regulatory organization.
    Finally, the Index Value of the Index will be publicly-disseminated 
through an independent pricing service, such as Reuters or Bloomberg, 
or through a national securities exchange, such as the AMEX.
    11. Price quotations with respect to the MITTS will be available on 
a daily basis from market reporting services, such as Bloomberg or 
Reuters, and the daily financial press, such as The Wall Street 
Journal. In the event the MITTS are delisted from either the AMEX or 
the NYSE, MLPF&S will apply for trading through the NASDAQ, which 
requires that there be independent market-makers establishing a market 
for the securities in addition to MLPF&S. In the event there are no 
independent market-makers, the Applicants represent that the exemption 
will no longer be considered effective.
    12. The terms of each of the MITTS will be set forth with 
specificity. Therefore, in addition to the description of the formula 
for computing the rate of return, the Prospectus will include, but will 
not be limited to, the following information:
     A statement to the effect that the return calculated for 
the MITTS will be denominated in U.S. dollars;
     The specified Index or Indexes on which the rate of return 
on the MITTS is based;
     A numerical example, capable of being understood by the 
average investor, which explains the calculation of the return on the 
MITTS at maturity and reflects, among other things, (i) a hypothetical 
initial value and closing value of the applicable Index, and (ii) the 
effect of any adjustment factor on the percentage change in the 
applicable Index;
     The date on which the MITTS will be issued;
     The date on which the MITTS will mature and the conditions 
of such maturity;
     The initial date on which the value of the Index is 
calculated;
     Any adjustment factor or other numerical methodology that 
would affect the rate of return, if applicable;
     The ending date on which interest will be determined, 
calculated and paid;
     Information relating to the calculation of payments of 
principal and interest, including a representation to the effect that, 
at maturity, the beneficial owner of the MITTS will be entitled to 
receive the entire principal amount, plus an amount derived directly 
from the growth in the Index (but in no event less than zero);
     All details regarding the methodology for measuring 
performance;
     The terms under which the MITTS may be redeemed;
     The exchange or market where the MITTS are traded or 
maintained; and
     Copies of the proposed and final exemptions relating to 
the exemptive relief provided herein, upon request.
    Aside from the Prospectus, ML&Co. does not contemplate making any 
ongoing communications to the MITTS investors except to the extent 
required under applicable securities laws.
    13. The Applicants represent that the level of specificity and the 
descriptions of the terms of the MITTS are sufficient to ensure that, 
after the MITTS are issued and traded on an exchange, the Applicants 
cannot, with the exception of a Market Disruption Event, affect the 
rate of return. A Market Disruption Event may occur infrequently and is 
typically defined as either: (a) the suspension or material limitation, 
in each case, for more than two hours of trading in 10 percent or more 
of the securities included in the applicable Index; or (b) the 
suspension or material limitation for more than two hours of trading 
(whether by reason of movements in price otherwise exceeding levels 
permitted by the relevant exchange or otherwise) in: (i) futures 
contracts related to the Index which are traded on the Chicago 
Mercantile Exchange; or (ii) option contracts related to the applicable 
Index which are traded on the Chicago Board Options Exchange, Inc. The 
Applicants represent that ML&Co. does not have the discretion to 
determine whether a Market Disruption Event has occurred.\10\ Should 
the Applicants determine that a Market Disruption Event has occurred on 
a certain date, they indicate that the date will not be taken into 
consideration for calculating the rate of return of the Index.
---------------------------------------------------------------------------

    \10\ For purposes of the definition of the term ``Market 
Disruption Event,'' a limitation on the hours in a trading day and/
or number of days of trading will not constitute a Market Disruption 
Event if it results from an announced change in the regular business 
hours of the relevant exchange. Furthermore, for purposes of this 
definition, any limitations pursuant to NYSE Rule 80A (or any 
applicable rule or regulation enacted or promulgated by the NYSE, or 
any other self-regulatory organization, or the SEC, of similar scope 
as determined by MLPF&S, as the calculation agent) on trading during 
significant market fluctuations shall be considered ``material.''
---------------------------------------------------------------------------

    14. The Applicants represent that the principal amount of the MITTS 
that are the subject of this exemption will always be protected 
regardless of the performance of the applicable Index. Although the 
return may go up or down in the same direction as the performance of 
the applicable Index, the interest rate floor is set at zero. Thus, 
even where the value of the applicable Index decreases, there will be 
no invasion of principal if the MITTS are held until maturity.\11\ 
However, if a Plan must sell the MITTS on the open market prior to 
their maturity, the market price will reflect the market's perception 
of the potential yield on such securities based on the current yield 
and interest rates for other debt securities of the same duration. This 
market price may

[[Page 62761]]

result in a loss of principal value of the investment in the MITTS in 
the same fashion as would occur for other debt securities.
---------------------------------------------------------------------------

    \11\ The Applicants have provided the following example to 
illustrate this principle by describing the return at maturity on 
each $10 principal investment in the MITTS that are the subject of 
this proposed exemption:
     Where the value of the applicable Index increases by 50 
percent, the Plan is entitled to receive $15 at maturity ($10 
principal plus $5 interest) because the rate of return moves in the 
same direction as the growth in the applicable Index;
     Where the value of the applicable Index remains 
unchanged during the applicable period, the Plan is entitled to 
receive $10 at maturity ($10 principal plus $0 interest) because the 
rate of return moves in the same direction as the growth in the 
applicable Index; and
     Where the value of the applicable Index decreases by 50 
percent, the Plan is entitled to receive $10 at maturity ($10 
principal and $0 interest) because the rate of return moves in the 
same direction as the growth in the applicable Index but in no event 
drops below zero.
    While the foregoing examples, are simplistic, it should be noted 
that for some of the MITTs, such as those tied to the Standard & 
Poor's 500 Index, the interest payments shown above may be reduced 
on a daily basis by an adjustment factor (the Adjustment Factor), 
equal to 1.3 percent per year. On the maturity date of the MITTS, 
the annual application of the Adjustment Factor will result in a 
total reduction of the Standard & Poor's 500 Index of 8.78 percent. 
In effect, this reduction will reduce the Plan investor's overall 
interest payments. This information will be disclosed prominently in 
the Prospectus.
---------------------------------------------------------------------------

    15. The Applicants represent that they will exercise no discretion 
with respect to the Indexes. Further, the Applicants represent that 
they will not trade in any way intended to affect the value of the 
MITTS through holding or trading in the securities which comprise these 
Indexes. The Applicants will maintain written records of all of the 
MITTS transactions for a period of six years.
    16. The Applicants represent that the MITTS may be included among 
assets acquired by a Plan to comprise the underlying portfolio of a 
``synthetic'' guaranteed investment contract (Synthetic GIC), whereby 
the Plan's beneficial interest in one or more debt instruments is 
combined with a guarantee of future value. In this regard, the 
Applicants represent that they will not be the issuer, guarantor, or 
``wrapper'' provider in connection with a Synthetic GIC. The Applicants 
represent that they are not requesting any relief for extensions of 
credit to such Plans and the Plan Participants, other than extensions 
of credit resulting from such Plan's holding of the MITTS. Accordingly, 
the Applicants are not requesting specific exemptive relief with 
respect to any additional prohibited transactions that may relate to 
any Synthetic GICs.
    17. In summary, the Applicants represent that the proposed 
transactions will satisfy the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons:
    (a) The MITTS will be made available by the Applicants in the 
ordinary course of their business to customers which are not Plans.
    (b) The Applicants will not have any discretionary authority or 
control, or provide any ``investment advice,'' within the meaning of 29 
CFR 2510.3-21(c), with respect to the assets of Plans which are 
invested in the MITTS.
    (c) The Plans will pay no fees or commissions to the Applicants in 
connection with the transactions covered by the requested exemption, 
other than the mark-up for a principal transaction permissible under 
PTCE 75-1.
    (d) The decision to invest in the MITTS will be made by an 
Independent Plan Fiduciary or a Plan Participant, which is independent 
of the Applicants.
    (e) In connection with a Plan's acquisition of any of the MITTS, 
the Applicants will disclose to the Independent Plan Fiduciary, or, if 
applicable, the Plan Participant, in the Prospectus, all of the 
material terms and conditions concerning the MITTS.
    (f) A Plan will acquire the MITTS on terms that are at least as 
favorable to the Plan as those available to an unrelated non-Plan 
investor in a comparable arm's length transaction.
    (g) The MITTS will be rated in one of the three highest generic 
rating categories by at least one nationally-recognized statistical 
rating service at the time of such security's acquisition by the Plan.
    (h) The rate of return for the MITTS will be objectively determined 
and the Applicants will retain no authority to affect the determination 
of such return, other than in connection with a Market Disruption Event 
that is described in the Prospectus for the MITTS.
    (i) The Index will be: (1) created and maintained by an entity that 
is unrelated to the Applicants and consist of a standardized and 
generally-accepted Index; or (2) created by the Applicants or an 
affiliate, but maintained by an entity that is unrelated to the 
Applicants, and (i) will consist either of standardized and generally-
accepted Indexes or will be an Index comprised of at least 10 publicly-
traded securities that are not issued by the Applicants or their 
affiliates, are designated in advance, and listed in the Prospectus for 
the MITTS, (ii) will meet the requirements for an Index as set forth in 
Rule 19b-4, and (iii) the Index Value for such Index will be publicly-
disseminated through an independent pricing service or a national 
securities exchange.

Notice to Interested Persons

    The Applicants represent that because those potentially interested 
Plans proposing to engage in the covered transactions cannot all be 
identified, the only practical means of notifying Independent Plan 
Fiduciaries or Plan Participants of such affected Plans is by 
publication of the proposed exemption in the Federal Register. 
Therefore, any comments from interested persons must be received by the 
Department no later than 30 days from the publication of this notice of 
proposed exemption in the Federal Register.

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

General Motors Hourly-Rate Employees Pension Plan; General Motors 
Retirement Program for Salaried Employees; Saturn Individual 
Retirement Plan for Represented Team Members; Saturn Personal 
Choices Retirement Plan for Non-Represented Team Members; 
Employees' Retirement Plan for GMAC Mortgage Group; Delphi Hourly-
Rate Employees Pension Plan; and Delphi Retirement Program for 
Salaried Employees (collectively, the Plans) Located in New York, 
New York

[Application Nos. D-10713; D-10714; D-10715; D-10716; and D-10717]

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 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 past and continuing lease (the Lease) by the Plans to 
CB Richard Ellis, Inc. (CB Richard Ellis), a party in interest with 
respect to the Plans, of commercial space in a certain office building; 
and (2) the exercise, by CB Richard Ellis, of an option to renew the 
Lease for one additional term, provided that the following conditions 
are met:
    (a) All the terms and conditions of the Lease, including those 
providing CB Richard Ellis with an option to renew the Lease, are at 
least as favorable to the Plans as terms and conditions the Plans could 
have obtained in an arm's length transaction with an unrelated party;
    (b) The interests of the Plans for all purposes under the Lease, 
including any renewal thereof, are represented by a qualified, 
independent fiduciary;
    (c) The rent paid by CB Richard Ellis under the Lease, including 
any renewal thereof, is, at all times, no less than the fair market 
rental value of the leased space; and
    (d) The independent fiduciary monitors the Lease, and any renewal 
thereof, on behalf of the Plans, and takes whatever actions necessary 
to safeguard the interests of the Plans and their participants and 
beneficiaries.

EFFECTIVE DATE: This proposed exemption, if granted, will be effective 
as of December 17, 1998, the date on which CB Richard Ellis entered 
into the Lease.

[[Page 62762]]

Summary of the Facts and Representations

    1. The Plans are the General Motors Hourly-Rate Employees Pension 
Plan (GM Hourly Plan); General Motors Retirement Program for Salaried 
Employees (GM Salaried Plan); Saturn Individual Retirement Plan for 
Represented Team Members (Saturn Represented Team Plan); Saturn 
Personal Choices Retirement Plan for Non-Represented Team Members 
(Saturn Non-Represented Team Plan); Employees' Retirement Plan for GMAC 
Mortgage Group (GMAC Plan); Delphi Hourly-Rate Employees Pension Plan 
(Delphi Hourly Plan); and Delphi Retirement Program for Salaried 
Employees (Delphi Salaried Plan). The sponsors of the Plans are General 
Motors Corporation (GMC), Saturn Corporation, GMAC Mortgage Group, and 
Delphi Automotive Systems Corporation, respectively.
    The GM Hourly Plan and the GM Salaried Plan covered approximately 
514,120 and 200,183 participants, respectively, as of September 30, 
1999. The Saturn Represented Team Plan and the Saturn Non-Represented 
Team Plan covered approximately 7,507 and 2,122 participants, 
respectively, as of December 31, 1999. The GMAC Plan covered 
approximately 5,936 participants, as of December 31, 1999. The Delphi 
Hourly Plan and the Delphi Salaried Plan covered approximately 56,360 
and 20,821 participants, respectively, as of June 1, 2000.
    The Plans' assets are held in two trusts: (i) the General Motors 
Salaried Employees Pension Trust, which holds the assets of the GM 
Salaried Plan and the Delphi Salaried Plan; and (ii) the General Motors 
Hourly-Rate Employees Pension Trust, which holds the assets of all the 
other Plans (together, the Trusts). The Plans are the beneficial owners 
of all the assets held in their respective Trusts. The Plans had total 
assets of $85,009,953,138.64, as of April 30, 2000. The property, known 
as ``Pacific Corporate Towers'' (described in Item 2, below), had a 
fair market value of $241,400,000.00, as of December 31, 1999.
    2. Among the assets of the Plans, held through the Trusts, is a 
100% beneficial ownership interest in Pacific Corporate Towers LLC (the 
LLC).\12\ The LLC, a Delaware limited liability company, owns a 41-
story office building (i.e., Pacific Corporate Towers), which is 
located at 200 N. Sepulveda Boulevard, El Segundo, California, and has 
a total of 1,542,270 square feet of rentable space. CB Richard Ellis is 
the property manager and leasing agent for Pacific Corporate Towers 
and, thus, is a party in interest with respect to the Plans. CB Richard 
Ellis, headquartered in Los Angeles, California, is a large asset 
advisor for institutional real estate owners and, as of October 1, 
1998, employed 9,000 full-time employees.
---------------------------------------------------------------------------

    \12\ The applicant states that the assets of the LLC are deemed 
to be ``plan assets'' under the Department's regulations (see 29 CFR 
2510.3-101) because the Plans own a 100% beneficial ownership 
interest in the LLC. Thus, all transactions between the LLC and 
persons that are parties in interest with respect to the Plans 
invested therein would be subject to the prohibited transaction 
restrictions of the Act.
---------------------------------------------------------------------------

    3. On December 17, 1998, CB Richard Ellis entered into the Lease 
with the Plans for the rental of 13,687 square feet of office space on 
the third floor of Pacific Corporate Towers. The Lease is for a period 
of six years, ending on November 14, 2004. The Lease provides CB 
Richard Ellis with an option to renew the Lease for an additional five-
year period.
    Under the Lease terms, the monthly rent for the office space for 
the first 36 months is $32,985.67,\13\ and the monthly rent for the 
second 36 months is $35,723.07. The renewal option requires that CB 
Richard Ellis pay the then prevailing fair market rent at the time of 
renewal, but not less than the monthly rate in effect during the second 
36 months of the Lease. The Lease also provides for a one-time tenant 
improvement allowance of $34.78 per rentable square foot, during the 
first 36 months of the Lease. Finally, the Lease provides that CB 
Richard Ellis is responsible for its proportionate share of tax, 
operating, and insurance costs.\14\
---------------------------------------------------------------------------

    \13\ This rental amount per month would equal approximately 
$395,820 annually ($32,985  x  12 = $395,820). With 13,687 square 
feet of rental space, the annual rental amount per square foot would 
be approximately $28.92 during the first 36 months.
    \14\ It is represented that the cost of the one-time tenant 
improvement allowance and other expenses paid for by Pacific 
Corporate Towers were factored into the rental rate for the leased 
space.
    The Department expresses no opinion in this proposed exemption 
as to whether the expenses incurred by the Plans, through the 
Trusts, relating to the tenant improvements provided for CB Richard 
Ellis would violate any provision of Part 4 of Title I of the Act. 
In this regard, the Department notes that section 404(a) of the Act 
requires, among other things, that plan fiduciaries act prudently 
and solely in the interest of the plan's participants and 
beneficiaries when making investment decisions on behalf of a plan. 
In addition section 404(a) of the Act requires that plan fiduciaries 
act for the exclusive purpose of providing benefits to participants 
and beneficiaries and to defray reasonable expenses of administering 
the plan.
---------------------------------------------------------------------------

    4. Prior to entering into the Lease with CB Richard Ellis, the 
Plans, through the General Motors Investment Management Corporation, 
hired Pacific Green Advisors Ltd. (Pacific Green), to act as an 
independent fiduciary for the Plans with respect to the Lease, pursuant 
to an agreement dated August 24, 1998 (the Fiduciary Agreement). 
Pacific Green is a real estate investment advisory firm located in 
Torrance, California.
    It is represented that Pacific Green is qualified to act as an 
independent fiduciary for the Plans because it serves as an asset 
advisor for institutional real estate owners and provides advisory 
services relating to overall real estate asset planning. Specifically, 
Pacific Green provides property management services; engages and 
supervises managing agents on behalf of owners; provides long-term and 
short-term acquisition planning services; develops market studies with 
respect to potential acquisitions; negotiates, drafts, and executes 
leases; and purchases and sells targeted properties.
    In addition, Pacific Green states that it is independent of CB 
Richard Ellis, because: (i) Neither Pacific Green nor its affiliates 
have any ownership interest in CB Richard Ellis or its affiliates; (ii) 
neither CB Richard Ellis nor any of its affiliates have any ownership 
interest in Pacific Green or its affiliates; and (iii) Pacific Green 
and its affiliates receive no annual income from CB Richard Ellis.
    5. Pursuant to the Fiduciary Agreement, Pacific Green was retained 
to determine on behalf of the Plans whether the Lease would be in the 
best interests of the Plans and their participants and beneficiaries. 
In order to make this determination, Pacific Green specifically agreed 
to: (i) Perform such review and analysis as it deemed necessary to 
determine the fair market rental value of the leased space; (ii) 
determine whether the terms and conditions of the Lease, including 
basic rental and allowances, in the aggregate, were at least as 
favorable to the Plans as those available in an arm's length 
transaction with an unrelated party; (iii) determine whether the Lease, 
as proposed, would be in the best interests of the Plans; (iv) 
negotiate the terms of the Lease on behalf of the Plans; and (v) 
determine whether to grant approval of the Lease, or take any other 
action with respect to the Lease, on behalf of the Plans.
    6. Pacific Green represents that, in order to determine whether the 
terms and conditions of the Lease would be fair to the Plans and the 
rent to be paid thereunder would be fair market value, it inspected the 
subject office space, evaluated the competitive office space market in 
El Segundo, California, and reviewed recent rentals of office space in 
Pacific Corporate Towers, as well as recent rentals of competitive 
office space in the local area.

[[Page 62763]]

    Pacific Green represents that, after conducting this market survey, 
it completed negotiations on behalf of the Plans with respect to the 
Lease terms, including the renewal option. Then on November 16, 1998, 
John M. Williams, President of Pacific Green, rendered a report to the 
Plans. In his report, Mr. Williams stated that the Lease, as proposed, 
was fair to the Plans and that the proposed rental rate constituted the 
fair market rent for the office space. Mr. Williams further opined that 
the terms of the Lease, including the renewal option, were in the best 
interests of the Plans.
    7. Pursuant to the Fiduciary Agreement, Pacific Green also accepted 
the continuing duty to monitor compliance with the terms and conditions 
of the Lease and to enforce the rights of the Plans with respect to the 
Lease and any renewal thereof. Pacific Green represents that it 
understands and acknowledges its duties and responsibilities as a 
fiduciary to the Plans under the Act. Pacific Green also agreed to take 
any actions necessary to ensure that CB Richard Ellis' obligations as 
lessee are fully performed. If CB Richard Ellis exercises its option to 
extend the Lease for five more years, Pacific Green will negotiate the 
terms of the extended Lease and will continue to serve as the 
independent fiduciary for the Plans.\15\
---------------------------------------------------------------------------

    \15\ Should it become necessary in the future to appoint a 
successor independent fiduciary (the Successor) to replace Pacific 
Green, the applicant will notify the Department at least 30 days in 
advance of the appointment of the Successor. Any such Successor will 
be independent and have responsibilities and experience comparable 
to those of Pacific Green.
---------------------------------------------------------------------------

    8. Only after Pacific Green determined that the Lease was in the 
best interests of the Plans, the parties entered into the Lease 
agreement on December 17, 1998. The applicant represents that the Lease 
was, and is, in the best interests of the Plans because it contains 
arm's length terms and conditions and a fair market rental rate for the 
leased space. In addition, the Plans did not have to pay any leasing 
commissions in connection with the transaction. The Lease reduces the 
amount of vacant rentable office space in Pacific Corporate Towers, 
resulting in greater cash flow to Pacific Corporate Towers over the 
term of the Lease, which should have a favorable impact on the value of 
that investment for the Plans.
    9. In summary, the applicant represents that the subject 
transactions satisfy the statutory criteria of section 408(a) of the 
Act because: (a) All the terms and conditions of the Lease are at least 
as favorable to the Plans as those the Plans could have obtained in an 
arm's length transaction with an unrelated party; (b) the interests of 
the Plans for all purposes under the Lease are represented by Pacific 
Green, a qualified, independent fiduciary; (c) Pacific Green has 
determined that the rent paid by CB Richard Ellis under the Lease is 
the fair market rental value of the leased space and will ensure that 
such rent remains so, upon any renewal of the Lease; and (d) Pacific 
Green will continue to monitor the Lease on behalf of the Plans and 
take whatever actions necessary to safeguard the interests of the Plans 
and their participants and beneficiaries.

For Further Information Contact: Ms. Karin Weng of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Butler-Johnson Corporation; Profit Sharing Plan (the Plan); Located 
in San Jose, California;

[Application No. D-10780]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply, effective as of October 25, 1996, to:
    (1) the past sale on October 25, 1996, by the Plan of four 
residential mortgage notes (the Purchased Notes) to the Greater Bay 
Trust Company (the Trustee), the trustee of the Plan and, as such, a 
party in interest with respect to the Plan;
    (2) the past sale on October 25, 1996, by the Plan of a seventy-one 
percent (71%) interest (the Interest) in a certain parcel of real 
property located in Oakland, California (the Oakland Property) to the 
Trustee;
    (3) the ``makewhole'' payment made by the Trustee to the Plan on 
October 25, 1996 in connection with the Plan's investment losses with 
respect to certain other real property previously owned by the Plan 
which was sold to an unrelated party on June 28, 1996; and
    (4) the proposed payment to the Plan of the accrued but unpaid 
interest (the Accrued Interest Payment) that was due on the Purchased 
Notes at the time of the past sale to the Trustee, as well as two other 
mortgage notes that were in default while held by the Plan 
(collectively, the Notes) which resulted in foreclosures on the 
underlying properties, and the proposed payment to the Plan of an 
additional interest payment for the period from October 25, 1996, until 
the date that the Accrued Interest Payment is made to the Plan (the 
Additional Interest Payment), based on the total amount of the Accrued 
Interest Payment; provided the following conditions are met:
    (A) The sale of the Purchased Notes and the Interest by the Plan to 
the Trustee were one-time transactions for cash;
    (B) The Plan was not required to pay any fees or commissions in 
connection therewith;
    (C) The Plan received prices for the Purchased Notes constituting 
no less than the greater of either:
    (i) the outstanding principal balances for each Purchased Note, or
    (ii) the fair market value of each Purchased Note, as of the date 
of the sale transactions;
    (D) The Plan received a purchase price for the Interest 
constituting no less than seventy-one percent (71%) of the fair market 
value of the Oakland Property, as of the date of the sale transaction;
    (E) The Accrued Interest Payment to be paid by the Trustee to the 
Plan represents an amount equal to the total accrued but unpaid 
interest that was due on the Notes on October 25, 1996;
    (F) The Additional Interest Payment to be paid by the Trustee to 
the Plan represents a reasonable rate of interest on the amount of 
accrued but unpaid interest on the Notes that was due to the Plan on 
October 25, 1996 (i.e., the Accrued Interest Payment referred to in (E) 
above), as determined by an appropriate third party source (i.e., the 
U.S. Treasury rate for 3-month Treasury Bills);
    (G) The Trustee provides the Department with documentation, within 
thirty (30) days of the Accrued Interest Payment and Additional 
Interest Payment, which verifies that the total amount of such payments 
have been made to the Plan;
    (H) The Trustee, as the responsible fiduciary for the Plans, took 
appropriate actions necessary to safeguard the interests of the Plan 
and its participants and beneficiaries in connection with the past 
transactions, and will take whatever actions are necessary to continue 
to protect the Plan's interest with respect to the Accrued Interest 
Payment and the Additional Interest Payment;
    (I) The Plan received a reasonable rate of return on the Purchased 
Notes and

[[Page 62764]]

the Interest during the period of time that it held these assets; and
    (J) Upon any sale or other disposition of any of the Purchased 
Notes or the Interest by the Trustee, in the event the Trustee receives 
proceeds in excess of the amount which the Trustee paid the Plan for 
such assets, the additional proceeds shall be promptly forwarded to the 
Plan by the Trustee.

Summary of Facts and Representations

    1. The Plan is a defined contribution profit sharing plan which had 
approximately 103 participants and total assets of $2,949,910 as of 
December 31, 1996. The sponsor of the Plan is Butler-Johnson 
Corporation (the Employer), a California privately-held corporation. 
The trustee of the Plan is Greater Bay Trust Company (i.e., the 
Trustee), which is a division of Cupertino National Bank & Trust, 
having its principal place of business in Palo Alto, California. The 
Trustee has discretionary authority for the investment of Plan assets, 
subject to investment guidelines provided by a committee (the 
Committee) comprised of employees and officers of the Employer.
    2. In 1992, the Committee and the Trustee established guidelines 
for the purchase of real estate loans for the Plan. The guidelines 
provided that the Trustee was permitted to invest the Plan's assets in 
certain real estate loans secured by single family dwellings.
    The Trustee invested the Plan's assets in six mortgage notes (the 
Notes) evidencing real estate loans made to persons unrelated to the 
Employer. The Notes were originated between May 1992 and December 1994. 
The Plan acquired a one hundred percent (100%) ownership of each of the 
Notes except one, referred to as the Kakos Note, in which the Plan 
acquired a seventy-one percent (71%) ownership interest. The remaining 
twenty-nine percent (29%) interest in the Kakos Note was held by an 
unrelated investor whom the Trustee represents was neither a 
disqualified person under the Code nor a party in interest under the 
Act with respect to the Plan. The Trustee states that all obligors 
under the Notes were independent of the Plan and the Trustee. As of 
December 31, 1995, the Plan's total investment in the Notes represented 
approximately twenty-eight percent (28%) of the fair market value of 
the Plan's assets.
    3. All of the Notes resulted in default and two of the Notes 
resulted in foreclosure. On December 30, 1993, the Trustee, on behalf 
of the Plan, foreclosed on the Kakos Note. The Plan consequently 
acquired a seventy-one percent (71%) interest (i.e., the Interest) in 
the underlying real property in Oakland, California (i.e., the Oakland 
Property) which secured the Kakos Note. On January 20, 1995, the 
Trustee, on behalf of the Plan, foreclosed on another Note (referred to 
as the Bennett Note). The Plan consequently acquired the underlying 
real property in Grass Valley, California (the Grass Valley Property) 
which secured that Note. The Trustee represents that at the time of 
these foreclosures, the Oakland Property and the Grass Valley Property 
(together, the Properties) each had fair market values which were less 
than the outstanding principal balances of the Notes which they 
secured.
    4. The Trustee represents that due to the circumstances surrounding 
the default on four of the Notes and the foreclosure on the remaining 
two Notes, the Trustee determined that the Notes and the Properties did 
not constitute suitable investments for the Plan.\16\ The Trustee 
maintains that this determination included a finding by the Trustee 
that the Notes were not marketable to third parties. Based on the 
Trustee's belief that it shared responsibility in failing to meet 
certain due diligence obligations in investing in the Notes, the 
Trustee determined to take the steps necessary to make the Plan 
``whole'' with respect to its investments in the Notes and the 
Properties, as follows:
---------------------------------------------------------------------------

    \16\ The Department expresses no opinion in this proposed 
exemption as to whether the Plan's acquisition and holding of the 
Notes and the Properties violated any of the fiduciary 
responsibility provisions contained in Part 4 of Title I of the Act.
    However, the Department notes that an investigation regarding 
the subject investments made by the Plan and related transactions 
has been conducted by the Department's Regional Office in San 
Francisco. In this regard, the proposed exemption, if granted, will 
facilitate certain agreements made by the parties to restore assets 
to the Plan.
---------------------------------------------------------------------------

    (a) The Grass Valley Property was sold to an unrelated party on 
June 28, 1996 for $83,532.71, which was $56,041.80 less than the 
outstanding principal balance of the Note which the Grass Valley 
Property had secured. This investment loss was recovered by the Plan in 
a cash payment made to the Plan by the Trustee, as discussed below.
    (b) The Trustee placed the Interest (i.e., the Plan's interest in 
the Oakland Property) on the market for over two years. Finally, the 
Trustee purchased the Interest from the Plan on October 25, 1996 for 
$151,875.58. This amount was equal to the outstanding principal balance 
that had been due on the Kakos Note prior to default.
    (c) The Trustee purchased the remaining four Notes (i.e., the 
Purchased Notes) from the Plan on October 25, 1996 at prices 
constituting the outstanding principal balance of each Purchased Note 
as of the date of such purchase.
    On October 25, 1996, the Trustee paid the Plan a total of 
$618,391.05, representing (i) the aggregate outstanding principal 
balances on the Purchased Notes at the time of the transaction, plus 
(ii) the purchase price for the Interest (i.e., the Plan's 71% interest 
in the Oakland Property), plus (iii) $56.041.80 to reimburse the Plan 
for its loss on the sale of the Grass Valley Property to an unrelated 
party. The Trustee represents that the Plan paid no commissions or fees 
with respect to these transactions.
    In addition to the Trustees' repayment of the principal amount of 
the investment losses resulting to the Plan from the default of four 
Notes and foreclosure on the remaining two Notes, the Trustee now 
proposes to pay all of the accrued but unpaid interest (i.e., the 
Accrued Interest Payment) that was due to the Plan on the Notes as of 
October 25, 1996. The Trustee has also agreed to pay the Plan a 
reasonable rate of interest on the amount represented by the Accrued 
Interest Payment (i.e., the Additional Interest Payment) for the period 
from October 25, 1996, until the date the Accrued Interest Payment is 
paid to the Plan. The interest rate for the Additional Interest Payment 
will be determined by the U.S. Treasury rate for 3-month Treasury 
Bills, which the Trustee has determined is an appropriate third party 
rate and source for such amount.
    The applicant represents that the Accrued Interest Payment will be 
approximately $181,581. Further, the Additional Interest Payment would 
have been approximately $35,699, as of July 31, 2000. Thus, the total 
additional payments that the Trustee proposes to pay to the Plan was 
approximately $217,280, as of July 31, 2000.
    5. The Trustee represents that the past transactions were in the 
best interests of the Plan because they enabled the Plan to dispose of 
non-productive assets under terms which were better than the Plan could 
have obtained in arm's-length transactions with unrelated parties. The 
Trustee maintains that if it had not purchased the Interest and the 
Purchased Notes from the Plan, the Plan either would have continued to 
hold these non-productive assets or would have sold these assets to 
unrelated parties and incurred a substantial loss on the investments. 
The Trustee represents that the past transactions

[[Page 62765]]

were protective of the Plan because the Plan incurred no expenses 
related to the transactions. The Trustee states that prior to 
purchasing the Purchased Notes and the Interest from the Plan, it 
determined that these assets were unmarketable. In addition, with 
respect to the Interest, the Trustee represents that attempts were made 
over two years to sell the Oakland Property to an unrelated party 
without any success. Thus, the Trustee determined that any sale of the 
Purchased Notes and Interest (through a sale of the Oakland Property) 
to an unrelated party would have resulted in substantial losses to the 
Plan and its participants and beneficiaries.
    6. The Trustee represents that all measures taken with respect to 
the Plan's investments in the Notes were taken in order to reimburse 
the Plan for actual out-of-pocket losses on the Notes. The additional 
measures that the Trustee now proposes to take with respect to the 
Accrued Interest Payments and the Additional Interest Payments are 
meant to restore additional assets to the Plan which relate to the 
Notes, including the Purchased Notes and the Interest which were sold 
by the Plan to the Trustee. The Trustee, as the responsible fiduciary 
for the Plans, will take whatever actions are necessary to protect the 
Plan's interest with respect to the Accrued Interest Payment and the 
Additional Interest Payment. The Trustee will provide the Department 
with documentation, within thirty (30) days of the Accrued Interest 
Payment and Additional Interest Payment, which verifies that the total 
amount of such payments have been made to the Plan. The Trustee states 
that, upon any sale or other disposition of any of the Purchased Notes 
or the Interest, in the event the Trustee receives proceeds in excess 
of the amount which the Trustee paid the Plan for these assets, the 
additional proceeds shall be promptly forwarded to the Plan.
    7. In summary, the applicant represents that the transactions 
satisfied the criteria of section 408(a) of the Act for the following 
reasons:
    (a) The sale of the Purchased Notes and the Interest by the Plan to 
the Trustee were one-time transactions for cash;
    (b) The Plan received the full outstanding principal balances on 
the Purchased Notes, an amount which the Trustee determined to be in 
excess of the fair market value of such Notes at the time of the 
transaction;
    (c) The Plan received a price for the Interest (i.e., the Plan's 
71% interest in the Oakland Property) which was equal to the 
outstanding principal balance that had been due on the Kakos Note which 
had been secured by the Oakland Property, and the Trustee determined 
that this price represented an amount which exceeded the fair market 
value of the Interest at the time of the transaction;
    (d) The transactions enabled the Plan to dispose of non-income-
producing assets without incurring any losses on the investments or any 
expenses with respect to their disposition;
    (e) The Plan received a full ``makewhole'' payment from the Trustee 
on October 25, 1996, in connection with the Plan's investment losses on 
the Grass Valley Property which was sold to an unrelated party on June 
28, 1996;
    (f) The Accrued Interest Payment to be paid by the Trustee to the 
Plan will represent an amount equal to the total accrued but unpaid 
interest that was due on the Notes on October 25, 1996;
    (g) The Additional Interest Payment to be paid by the Trustee to 
the Plan will represent a reasonable rate of interest on the amount of 
the Accrued Interest Payment, as determined by the U.S. Treasury rate 
for 3-month Treasury Bills;
    (h) The Trustee will provide the Department with documentation, 
within thirty (30) days of the Accrued Interest Payment and Additional 
Interest Payment, which verifies that the total amount of such payments 
have been made to the Plan;
    (i) The Trustee, as the responsible fiduciary for the Plans, took 
appropriate actions necessary to safeguard the interests of the Plan 
and its participants and beneficiaries in connection with the past 
transactions, and will take whatever actions are necessary to continue 
to protect the Plan's interest with respect to the Accrued Interest 
Payment and the Additional Interest Payment; and
    (j) Any proceeds received by the Trustee upon sale or other 
disposition of the Purchased Notes or the Interest in excess of the 
amount paid to the Plan by the Trustee for such assets shall be 
promptly forwarded to the Plan.

Notice to Interested Persons

    The applicant will distribute (by first class mail, personal 
delivery or by posting in the applicant's places of business) a copy of 
the notice of pendency of this proposed exemption (the Notice) within 
fifteen (15) days of the date such Notice is published in the Federal 
Register. The Notice will be given to all interested persons, including 
all participants in the Plan and all employee organizations in which 
such participants are members.
    The distribution to interested persons shall include a copy of the 
Notice, as published in the Federal Register, and a supplemental 
statement, as required pursuant to 29 CFR 2570.43(b)(2), which shall 
inform interested persons of their right to comment on and/or request a 
hearing with respect to the proposed exemption.
    Comments and requests for a public hearing with respect to the 
proposed exemption are due within forty-five (45) days following the 
publication of the Notice in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Khalif I. Ford 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

[[Page 62766]]

application are true and complete, and that each application accurately 
describes all material terms of the transaction which is the subject of 
the exemption.

    Signed at Washington, DC, this 13th day of October, 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits, 
Administration, U.S. Department of Labor.
[FR Doc. 00-26789 Filed 10-18-00; 8:45 am]
BILLING CODE 4510-29-P