Book value employer shares in a profit sharing plan

P/OPINION 77-35
                                                 3(18)
                                                 404(a)(1)
                                                 404(c)
                                                 408(e)

                     April 22, 1977


Dear

This is in reply to your letter of July 21, 1976,
addressed to the Department of Labor and the Internal
Revenue Service regarding proposed transactions involving
the trust under the Employees’ Profit-Sharing Plan of
(named) Bank and Affiliates (the "Plan").

You have represented the facts of the proposed
transactions to be as follows:

The Plan is a qualified Plan under the Internal Revenue
Code of 1954, as amended (the "Code"), and the most recent
determination letter received from the Internal Revenue
Service was dated December 10, 1974.

Each participant in the Plan with three or more years of
service is presently entitled to elect to have his
deferred account invested by the trustee under the Plan
(the "Trustee") in one or more investment funds comprising
the trust fund, presently called Funds A, B, and C.
Fund A is invested in fixed-income securities, Fund B is
invested in (named) Common Stock, and Fund C is invested
in stock and convertible securities (other than stock or
convertible securities of (named).

A fourth fund is proposed, called Fund D, which will be
invested solely in "Book Value Shares" of (named) Common
Stock. The purpose of Fund D is to provide an investment
vehicle for the plan participants to invest in (named)
stock that will be less subject to market fluctuations
than an investment in Fund B. Fund D will be established,
be operated and be subject to the same rights and benefits
of the participants in the Plan as apply to Funds A, B and
C except in a few respects as outlined below. The
purchase price for each Book Value Share will be the
"Book Value Per Share" of a share of (named) Common Stock

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on the date of purchase. The term "Book Value Per Share"
means (i) the common stockholders' equity, as stated in
the consolidated financial statements of (named) at any
Fiscal Quarter Date, divided by (ii) the number of shares
of (named) Common Stock outstanding as of such Fiscal
Quarter Date (which calculation shall be made before
giving effect to any sale or repurchase of Book Value
Shares on such Fiscal Quarter Date).

Book Value Shares will have the same voting, dividend and
liquidation rights of unrestricted shares and differ only
in that the Book Value Shares are not transferable except
to (named) and are subject to the repurchase provisions
described below.

All purchases and sales of Book Value Shares by the
Trustee will be to and from (named) and will be made as of
Fiscal Quarter Dates (March 31, June 30, September 30 or
December 31, or such other dates as (named) may from time
to time elect) on which dates the Book Value Per Share
will be calculated. Thus, although the transfers will
take effect on a Fiscal Quarter Date, they may not be
computed and physically take place until a short time
after such dates.

Articles VI and VII of the Plan contain provisions that a
participant may be paid out from Funds A, B, and C at
certain specified times in cash or in kind. Those
Articles will be amended as appropriate to provide that,
when a participant is to receive a distribution from
Fund D, he may be paid, at the discretion of the
Committee, in cash or in unrestricted shares of (named)
Common Stock, and also to provide that any distributions
from Fund D shall only be made as of a Fiscal Quarter
Date.

In order to convert any Book Value Shares directly into
unrestricted shares of (named) Common Stock, the Trustee
will transfer to (named) Book Value Shares having a value,
determined in accordance with the Book Value Share
Agreement, equal to the fair market value of unrestricted
shares of (named) Common Stock received therefor, plus any
cash paid by (named) to effect Fund D distributions under
the Plan. Alternatively, the Committee may direct the

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P/OPINION 77-35


Trustee to transfer the Book Value Shares to (named) for
their equivalent fair market value in cash or for a
combination of cash and unrestricted shares of (named)
Common Stock, although, as noted below, the Board of
Directors of (named) will have the final judgment as to
whether payment for Book Value Shares will be in cash,
unrestricted shares of (named) Common Stock or both.

Since the fair market value of each Book Value Share will
be deemed to be the "Book Value Per Share" as above
described, the number of unrestricted shares of (named)
Common Stock received by the Trustee will ordinarily be
different from the number of Book Value Shares surrendered
therefor. In addition, the Book Value Per Share, for
purposes of (named)'s repurchase of the Book Value Shares
from the Trustee, may be adjusted to preserve the benefit
of the arrangement for the trust and its beneficiaries.
Thus, (named) will insulate Fund D from book value
fluctuations caused by extraordinary corporate events. An
adjustment in book value for extraordinary events will be
contained in the agreement between the Trustee and (named)
substantially in the form set forth as Exhibit E to your
letter.

The Trustee and (named) will also agree that (named)
will repurchase Book Value Shares within 90 days from the
earlier of (i) a request by the Board of Directors of
(named), or (ii) a request by the Trustee. As noted
above, the repurchase will be in cash, in unrestricted
shares of (named) Common Stock, or a combination of both.
The determination of the medium of payment will be made by
the Committee, as the administrator of the Plan, but
subject to the final judgment of the Board of Directors of
(named). If (named) pays unrestricted shares for Book
Value Shares, the Trustee may sell those shares in the
open market. If (named) pays cash for Book Value Shares,
the Trustee may purchase unrestricted shares of (named) in
the open market.

In the event that (named) shall determine to redeem all of
the Book Value Shares then held by Fund D, in accordance
with the terms of the agreement, then the Trustee shall
give notice of such repurchase to the Participants in
Fund D and shall transfer all proceeds received to such

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other Fund or Funds as the Participants shall direct.
Absent any such direction from a Participant, the Trustee
shall transfer such proceeds to Fund B, to be invested in
the same manner as other Fund B assets, i.e., in
unrestricted shares of (named) Common Stock, subject to
the rights of the participant to otherwise or subsequently
direct the investment of his account.

Based upon the above representations, you have requested
rulings that:

1.   The purchase and sale of Book Value Shares in the
proposed Fund D by the Trustee under the Plan and the
acquisition by the Trustee of unrestricted shares of
(named) Common Stock in exchange for Book Value Shares in
transactions involving (named) will not constitute
prohibited transactions under section 406(a) of the
Employee Retirement Income Security Act of 1974 (the
"Act") or under section 4975(c) of the Code because they
would meet the criteria of section 408(e) of the Act and
section 4975(d)(l3) of the Code.

2.   The provisions of the Plan with respect to the control
by each participant over the assets in his individual
account, and the investment thereof, including the right
to direct or change the investment in the proposed Fund D,
operate to relieve the Trustee and the Commitee from
fiduciary liability with respect to any loss resulting
from such exercise of control, pursuant to Section 404(c)
of the Act.

3.   The creation and operation of Fund D under the Plan
will not cause the Plan to be deemed not operated for the
exclusive benefit of the participants and their
beneficiaries under Section 40l(a) of the Code and Section
404(a)(1) of the Act.

Based upon the facts and representations set forth in your
letter, we have concluded:

With respect to the first requested ruling, that the
transaction would meet the criteria of section 408(e) of
the Act and section 4975(d)(13) of the Code, we agree with

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you that the Book Value Shares are "qualifying employer
securities", as defined in section 407(d)(5) of the Act
and that the plan is an "eligible individual account
plan", as defined in section 407(d)(3) of the Act.
Inasmuch as no commission is to be charged with respect to
such purchases and sales, the exemption for such purchases
and sales contained in section 408(e) of the Act and
Section 4975(d)(l3) of the Code would be available if the
purchases and sales are for "adequate consideration" as
defined in section 3(18) of the Act.

As your letter notes, the Act defines the term "adequate
consideration", in the case of an asset other than a
security for which there is a generally recognized market,
as the fair market value of the asset as determined in
good faith by the Trustee or named fiduciary pursuant to
the terms of the plan and in accordance with regulations
promulgated by the Department of Labor. The Department
has not as yet issued such regulations and, as stated in
section 5.02(a) of its ERISA Advisory Opinion Procedure
(ERISA Proc. 76-1, 41 Federal Register 36381, August 27,
1976) will not ordinarily make advance determinations as
to adequate consideration in the case of individual
purchases and sales of stocks. Such guidelines as will be
issued will be general guidelines in the form of
regulations under section 3(18) of the Act.

In view of the fact that no regulations have been issued
under section 3(18), the Trustee should make a good faith
determination with respect to the fair market value of the
Book Value Shares, utilizing recognized methods of
determining the value of such shares. The ruling received
by the Trustee from the Internal Revenue Service as to
whether the method of determining fair market value of the
Book Value Shares was a reasonable method of determining
fair market value for purposes of section l.421-7(e)(2) of
the Income Tax Regulations would be considered as evidence
that the Trustee's determination of fair market value was
made in good faith.

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The second requested ruling is that election by a
participant of the Plan to invest in Fund D constitutes
the exercise of control over assets in his individual
account so that section 404(c) of the Act operates to
relieve the Committee and the Trustee from any liability
with respect to any loss resulting from such exercise of
control.

Your letter notes that section 404(c) of the Act provides
that a participant's exercise of "control" over assets in
his account will not cause the participant to be treated
as a fiduciary by reason of such exercise, and provides
that no person who is otherwise a fiduciary (such as the
Trustee or the Committee in your case) shall be held
liable for any loss resulting from such exercise of
control by the participant. You further note that, in
sections 1 and 3 of Article VI of the Plan, as proposed to
be amended, any participant who is credited with three or
more years of service will be able to elect that his
deferred share of a profit sharing contribution for that
year be invested in Fund D, or any one or more other
Funds. In addition, such participant may withdraw sums
allocated to his account (including sums held in Fund D)
on the conditions provided in Sections 9 and 10 of
Article VI and also upoon the termination of his
employment as provided in Section 12 of Article VI. You
have stated that because the participant can, in effect,
direct the Trustee to invest his share of profit sharing
contributions in Book Value Shares by making the election
to participate in Fund D described above, and because such
participant has broad rights of withdrawal from Fund D, he
has "control" over the assets of his account in Fund D
within the meaning of Section 404(c) of the Act. This
means that neither the Trustee nor the Committee will be
liable for any losses in Fund D to the participants
therein and their beneficiaries.

As you are aware, however, section 404(c) contemplates the
issuance of regulations by the Secretary of Labor for
determining what constitutes the exercise of control by a
participant or beneficiary over the assets in his account.
Such regulations have not yet been issued. In the absence
of such regulations, the Department is unable to issue the

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ruling which you request. However, in the absence of
regulations, you may wish to consult the Conference Report
accompanying the Act (H.R. Rep. No. 93-1280, 93d Cong., 2d
Sess. (1974), at pages 305-306), which provides some
guidance for interpreting section 404(c) of the Act which
may be helpful to you.

Finally, the third ruling requested is that the creation
and operation of Fund D will not violate the requirement
of section 404{a)(1) of the Act that a fiduciary of a plan
must discharge his duties solely in the interest of the
participants and beneficiaries and the requirement of
section 401(a) of the Code that a qualified plan be
operated for the exclusive benefit of participants.

The Department has determined that it will not ordinarily
make rulings as to the application of section 404(a) to
particular conduct. See ERISA Proc. 76-1, section
5.02(0).

Because the first and third questions contained in your
letter also raise questions under the Code, we have
conferred with representatives of the Internal Revenue
Service and they have authorized us to inform you that
they concur in the views set forth above as they apply to
the first question contained in your letter. By letter
dated October 29, 1976, they responded to your request for
a ruling under section 401(a) of the Code.

Sincerely,