[Federal Register Volume 64, Number 122 (Friday, June 25, 1999)]
[Notices]
[Pages 34281-34293]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16215]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10694, et al.]
Proposed Exemptions; The Chase Manhattan Bank (CMB)
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
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing 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 Pension
and Welfare Benefits Administration, U.S. Department of Labor, Room N-
5507, 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 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
The Chase Manhattan Bank (CMB); Located in New York, NY
[Application No. D-10694]
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 1 and in accordance with the procedures set forth in 29
CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
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\1\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
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Section I. Covered Transactions
If the exemption is granted, the restrictions of sections
406(a)(1)(A) through (D) and 406(b)(1) and (2) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A) through (E) of the Code, shall not
apply to the lending of securities to affiliates of The Chase Manhattan
Corporation (CMC), which are engaged in CMC's capital markets line of
business (Global Capital Markets), by employee benefit plans (the
Client Plans), including commingled investment funds holding Client
Plan assets, for which CMC, through its Global Investor Services line
of Business, as operated through CMB and its affiliates (GIS), acts as
directed trustee or custodian, and for which CMC through its Global
Securities Lending Division or any other similar division of CMB or a
U.S. affiliate of CMC (collectively, GSL) acts as securities lending
agent or sub-agent and (2) to the receipt of compensation by GSL in
connection with the proposed transactions, provided the general
conditions set forth below in Section II are met.
Section II. General Conditions
(a) This exemption applies to loans of securities to Global Capital
Markets, as operated through CMB in the United States (Global Capital
Markets/U.S. or the U.S. Affiliated Borrower) and in the following
foreign countries: the United Kingdom (Global Capital Markets/U.K.),
Canada (Global Capital Markets/Canada), Australia (Global Capital
Markets/Australia), Japan (Global Capital Markets/Japan) (collectively,
the Foreign Affiliated Borrowers). Global Capital Markets will also
include other companies or their successors which are affiliated with
either CMB or CMC within these countries. 2
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\2\ Unless otherwise noted, Global Capital Markets will consist
collectively of the above referenced entities.
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(b) For each Client Plan, neither GIS, Global Capital Markets, GSL,
nor any other division or affiliate of CMC has or exercises
discretionary authority or control with respect to the investment of
the assets of Client Plans involved in the transaction (other than with
respect to the lending of securities designated by an independent
fiduciary of a Client Plan as being available to lend and the
investment of cash collateral after securities have been loaned and
[[Page 34282]]
collateral received), or renders investment advice (within the meaning
of 29 CFR 2510.3-21(c)) with respect to those assets, including
decisions concerning a Client Plan's acquisition and disposition of
securities available for loan.
(c) Before a Client Plan participates in a securities lending
program and before any loan of securities to Global Capital Markets is
effected, a Client Plan fiduciary which is independent of Global
Capital Markets must have--
(1) Authorized and approved a securities lending authorization
agreement (the Agency Agreement) with GSL, where GSL is acting as the
securities lending agent;
(2) Authorized and approved the primary securities lending
authorization agreement (the Primary Lending Agreement) with the
primary lending agent where GSL is lending securities under a sub-
agency agreement (the Sub-Agency Agreement) with the primary lending
agent; 3 and
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\3\ The Department, herein, is not providing exemptive relief
for securities lending transactions engaged in by primary lending
agents, other than GSL, beyond that provided pursuant to Exemption
(PTE) 81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR 18754,
May 19, 1987) and PTE 82-63 (47 FR 14804, April 6, 1982).
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(3) Approved the general terms of the securities loan agreement
(the Loan Agreement) between such Client Plan and Global Capital
Markets, the specific terms of which are negotiated and entered into by
GSL.
(d) Each loan of securities by a Client Plan to Global Capital
Markets is at market rates and terms which are at least as favorable to
such Client Plan as if made at the same time and under the same
circumstances to an unrelated party.
(e) The Client Plan may terminate the agency or sub-agency
arrangement at any time without penalty to such Client Plan on five
business days notice whereupon Global Capital Markets delivers
securities identical to the borrowed securities (or the equivalent in
the event of reorganization, recapitalization or merger of the issuer
of the borrowed securities) to the Client Plan within--
(1) The customary delivery period for such securities;
(2) Five business days; or
(3) The time negotiated for such delivery by the Client Plan and
Global Capital Markets, whichever is less.
(f) The Client Plan receives from Global Capital Markets (either by
physical delivery or by book entry in a securities depository located
in the United States, wire transfer or similar means) by the close of
business on or before the day the loaned securities are delivered to
Global Capital Markets, collateral consisting of cash, securities
issued or guaranteed by the United States Government or its agencies or
instrumentalities, or irrevocable United States bank letters of credit
issued by a U.S. bank, which is a person other than Global Capital
Markets or an affiliate thereof, or any combination thereof, or other
collateral permitted under PTE 81-6 (as amended from time to time or,
alternatively, any additional or superseding class exemption that may
be issued to cover securities lending by employee benefit plans),
having, as of the close of business on the preceding business day, a
market value (or, in the case of a letter of credit, a stated amount)
initially equal to at least 102 percent of the market value of the
loaned securities.
(g) If the market value of the collateral on the close of trading
on a business day is less than 100 percent of the market value of the
borrowed securities at the close of business on that day, Global
Capital Markets delivers additional collateral on the following day
such that the market value of the collateral again equals 102 percent.
(h) The Loan Agreement gives the Client Plan a continuing security
interest in, title to, or the rights of a secured creditor with respect
to the collateral and a lien on the collateral and GSL monitors the
level of the collateral daily.
(i) Before entering into a Loan Agreement, Global Capital Markets
furnishes GSL the most recently available audited and unaudited
statements of the financial condition of the applicable borrower within
Global Capital Markets. Such statements are, in turn, provided by GSL
to the Client Plan. At the time of the loan, Global Capital Markets
gives prompt notice to the Client Plan fiduciary of any material
adverse change in the borrower's financial condition since the date of
the most recent financial statement furnished to the Client Plan. In
the event of any such changes, GSL requests approval of the Client Plan
to continue lending to Global Capital Markets before making any such
additional loans. No new securities loans will be made until approval
is received and each loan constitutes a representation by Global
Capital Markets that there has been no such material adverse change.
(j) In return for lending securities, the Client Plan either--
(1) Receives a reasonable fee, which is related to the value of the
borrowed securities and the duration of the loan; or
(2) Has the opportunity to derive compensation through the
investment of cash collateral. (In the case of cash collateral, the
Client Plan may pay a loan rebate or similar fee to Global Capital
Markets if such fee is not greater than the fee the Client Plan would
pay an unrelated party in a comparable arm's length transaction.)
(k) All procedures regarding the securities lending activities
conform to the applicable provisions of PTEs 81-6 and PTE 82-63 (as
amended from time, or alternatively, any additional or superseding
class exemption that may be issued to cover securities lending by
employee benefit plans).
(l) If Global Capital Markets defaults on the securities loan or
enters bankruptcy, the collateral will not be available to Global
Capital Markets or its creditors, but will be used to make the Client
Plan whole. In this regard,
(1) In the event a Foreign Affiliated Borrower defaults on a loan,
CMB will liquidate the loan collateral to purchase identical securities
for the Client Plan. If the collateral is insufficient to accomplish
such purchase, CMB will indemnify the Client Plan for any shortfall in
the collateral plus interest on such amount and any transaction costs
incurred (including attorney's fees of the Client Plan for legal
actions arising out of the default on the loans or failure to indemnify
properly under this provision). Alternatively, if such identical
securities are not available on the market, the GSL will pay the Client
Plan cash equal to--
(i) The market value of the borrowed securities as of the date they
should have been returned to the Client Plan, plus
(ii) All the accrued financial benefits derived from the beneficial
ownership of such loaned securities as of such date, plus;
(iii) Interest from such date to the date of payment. The lending
Client Plans will be indemnified in the United States for any loans to
the Foreign Affiliated Borrowers.
(2) In the event the U.S. Affiliated Borrower defaults on a loan,
CMB will liquidate the loan collateral to purchase identical securities
for the Client Plan. If the collateral is insufficient to accomplish
such purchase, either CMB or the U.S. Affiliated Borrower will
indemnify the Client Plan for any shortfall in the collateral plus
interest on such amount and any transaction costs incurred (including
attorney's fees of the Client Plan for legal actions arising out of the
default on the loans or failure to indemnify property under this
provision).
[[Page 34283]]
(m) The Client Plan receives the equivalent of all distributions
made to holders of the borrowed securities during the term of the loan,
including all interest, dividends and distributions on the loaned
securities during the loan period.
(n) Prior to any Client Plan's approval of the lending of its
securities to Global Capital Markets, copies of the notice of proposed
exemption and the final exemption, if granted, are provided to the
Client Plan.
(o) Each Client Plan receives a monthly report with respect to its
securities lending transactions, including but not limited to the
information described in Representation 24 of the proposed exemption,
so that an independent fiduciary of the Client Plan may monitor the
securities lending transactions with Global Capital Markets.
(p) Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to
Global Capital Markets; provided, however, that--
(1) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization (the Related Client Plans), whose assets are commingled
for investment purposes in a single master trust or any other entity
the assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the
Plan Asset Regulation), which entity is engaged in securities lending
arrangements with Global Capital Markets, the foregoing $50 million
requirement shall be deemed satisfied if such trust or other entity has
aggregate assets which are in excess of $50 million; provided that 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, such fiduciary has total assets under its
management and control, exclusive of the $50 million threshold amount
attributable to plan investment in the commingled entity, which are in
excess of $100 million.
(2) In the case of two or more Client Plans which are not
maintained by the same employer, controlled group of corporations or
employee organization (the Unrelated Client Plans), whose assets are
commingled for investment purposes in a group trust or any other form
of entity the assets of which are ``plan assets'' under the Plan Asset
Regulation, which entity is engaged in securities lending arrangements
with Global Capital Markets, the foregoing $50 million requirement is
satisfied if such trust or other entity has aggregate assets which are
in excess of $50 million (excluding the assets of any Client Plan with
respect to which the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity or any member of
the controlled group of corporations including such fiduciary is the
employer maintaining such Plan or an employee organization whose
members are covered by such Plan). However, the fiduciary responsible
for making the investment decision on behalf of such group trust or
other entity--
(i) Has full investment responsibility with respect to plan assets
invested therein; and
(ii) Has total assets under its management and control, exclusive
of the $50 million threshold amount attributable to plan investment in
the commingled entity, which are in excess of $100 million.
(In addition, none of the entities described above are formed for
the sole purpose of making loans of securities.)
(q) With respect to each successive two week period, on average, at
least 50 percent or more of the outstanding dollar value of securities
loans negotiated on behalf of Client Plans by GSL, in the aggregate,
will be to unrelated borrowers.
(r) In addition to the above, all loans involving Foreign
Affiliated Borrowers within Global Capital Markets have the following
supplemental requirements:
(1) Such Foreign Affiliated Borrower is registered as a bank or
broker-dealer with--
(i) The Financial Services Authority or the Securities and Futures
Authority, in the case of Global Capital Markets/U.K.;
(ii) The Office of the Superintendent of Financial Institutions
(OSFI), or the Ontario Securities Commission and/or the Investment
Dealers Association, in the case of Global Capital Markets/Canada;
(iii) The Australian Prudential Regulation Authority (APRA), or the
Australian Securities & Investments Commission and/or the Australian
Stock Exchange Limited, in the case of Global Capital Markets/
Australia; and
(iv) The Ministry of Finance and/or the Tokyo Stock Exchange, in
the case of Global Capital Markets/Japan.
(2) Such broker-dealer or bank is in compliance with all applicable
provisions of Rule 15a-6 (17 CFR 240.15a-6) under the Securities
Exchange Act of 1934 (the 1934 Act) which provides for foreign broker-
dealers a limited exemption from United States registration
requirements;
(3) All collateral is maintained in United States dollars or
dollar-denominated securities or letters of credit of U.S. banks or any
combination thereof, or other collateral permitted under PTE 81-6 (as
amended from time to time, or alternatively, any additional or
superseding class exemption that may be issued to cover securities
lending by employee benefit plans);
(4) All collateral is held in the United States;
(5) The situs of the Loan Agreement is maintained in the United
States;
(6) The lending Client Plans are indemnified by CMB in the United
States for any transactions covered by this exemption with the Foreign
Affiliated Borrower so that the Client Plans do not have to litigate in
a foreign jurisdiction nor sue the Foreign Affiliated Borrower to
realize on the indemnification; and
(7) Prior to the transaction, each Foreign Affiliated Borrower
enters into a written agreement with GSL on behalf of the Client Plan
whereby the Foreign Affiliated Borrower consents to service of process
in the United States and to the jurisdiction of the courts of the
United States with respect to the transactions described herein.
(s) CMB or Chase Securities Inc. (CSI) maintains, or causes to be
maintained within the United States for a period of six years from the
date of such transaction, in a manner that is convenient and accessible
for audit and examination, such records as are necessary to enable the
persons described in paragraph (t)(1) 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 CMB or CSI, the
records are lost or destroyed prior to the end of the six year period;
and
(2) No party in interest other than CMB or CSI 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 below by paragraph (t)(1).
(t)(1) Except as provided in subparagraph (t)(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 (s) are
unconditionally available at their customary location during normal
business hours by:
(i) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission (the SEC);
[[Page 34284]]
(ii) Any fiduciary of a participating Client Plan or any duly
authorized representative of such fiduciary;
(iii) Any contributing employer to any participating Client Plan or
any duly authorized employee representative of such employer; and
(iv) Any participant or beneficiary of any participating Client
Plan, or any duly authorized representative of such participant or
beneficiary.
(t)(2) None of the persons described above in paragraphs
(t)(1)(ii)-(t)(1)(iv) of this paragraph (t)(1) are authorized to
examine the trade secrets of CMB, the U.S. Affiliated Borrowers, or the
Foreign Affiliated Borrowers or commercial or financial information
which is privileged or confidential.
III. Definitions
For purposes of this proposed exemption,
(a) The terms ``CMB'' and ``CMC'' as referred to herein in Sections
I and II, refer to The Chase Manhattan Bank and its parent, The Chase
Manhattan Corporation.
(b) The term ``affiliate'' means any entity now or in the future,
directly or indirectly, controlling, controlled by, or under common
control with CMC or its successors. (For purposes of this definition,
the term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.)
(c) The term ``U.S. Affiliated Borrower'' means an affiliate of CMC
that is a bank supervised by the United States or a State, or a broker-
dealer registered under the 1934 Act.
(d) The term ``Foreign Affiliated Borrower'' means an affiliate of
CMC that is a bank or a broker-dealer which is supervised by--
(1) The Financial Services Authority or the Securities and Futures
Authority in the United Kingdom;
(2) OSFI, or the Ontario Securities Commission and/or the
Investment Dealers Association in Canada;
(3) APRA, or the Australian Securities & Investments commission
and/or the Australian Stock Exchange in Australia; and
(4) The Ministry of Finance and/or the Tokyo Stock Exchange in
Japan.
Summary of Facts and Representations
1. CMB is a wholly owned subsidiary of CMC, a bank holding company
organized under the laws of the State of Delaware. As a New York bank
and a member of the Federal Reserve System, CMB is a ``bank'' as
defined in both section 202(a)(2) of the Investment Advisers Act of
1940 (the Advisers Act) and section 581 of the Code.4 As of
March 31, 1998, CMB's total assets were $299 billion, of which $93.5
billion (or 31 percent) represented investment securities and money
market assets and $125 billion (or 42 percent) represented loans.
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\4\ In relevant part, section 202(a)(2) of the Advisers Act and
section 581 of the Code state that a ``bank'' is a banking
institution, bank or trust company incorporated and doing business
under the laws of the United States.
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2. GIS, the investor services line of business of CMC, as operated
through CMB and certain of its affiliates, provides custodial services,
trustee and related services to its customers. In this regard, GIS had
more than $4.45 trillion of assets under custody and directed
trusteeship as of December 31, 1997. As directed trustee or custodian,
GIS services $412 billion of assets for U.S. pension plans, government
plans, endowments and foundations. In addition, GIS currently acts as
custodian for $751 billion of mutual fund assets.
3. GSL, which is comprised collectively of similar divisions of CMB
or U.S. affiliates of CMC, is the securities lending line of business
of CMC. It provides securities lending services to many of CMB's
institutional clients. In this regard, GSL, on behalf of CMB's
securities lending agents, negotiates the terms of loans with borrowers
pursuant to a client-approved form of loan agreement, the terms of
which may be modified from time to time with the approval of the
client, and otherwise acts as a liaison between the lender and the
borrower to facilitate the lending transaction. As securities lending
agent, GSL has responsibility for monitoring receipt of all required
collateral and for marking such collateral to market daily so that
adequate levels of collateral are maintained. Further, to the extent
agreed upon with the client, GSL is responsible for investing the cash
collateral after securities have been loaned and cash collateral
received. Finally, GSL monitors and evaluates, on a continuing basis,
the performance and creditworthiness of the borrowers of securities.
In addition, GSL may be retained from time to time by other primary
securities lending agents to provide securities lending services in a
sub-agency capacity with respect to portfolio securities of the clients
of such primary lending agents. As securities lending agent, GSL's role
in the lending transaction (i.e., negotiating the terms of loans with
borrowers pursuant to a client-approved form of loan agreement, the
terms of which may be modified from time to time with the approval of
the client, monitoring receipt of collateral, marking to market
required collateral, and investing cash collateral) parallels the role
under lending transactions in which GSL acts as primary lending agent
on behalf of its clients.5
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\5\ As noted previously, the Department is not providing
exemptive relief herein for securities lending transactions that are
engaged in by primary lending agents, other than GSL and its
affiliates beyond that provided by PTEs 81-6 and 82-63.
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The borrowers with whom GSL usually transacts business as agent for
the lender are typically U.S. broker-dealers who use borrowed
securities to satisfy their trading requirements or to ``re-lend''
securities to other broker-dealers and others who need a particular
security for various periods of time. All such borrowings by U.S.
broker-dealers are required to conform to the Federal Reserve Board's
Regulation T, to the extent applicable.
4. Global Capital Markets is one of the principal lines of business
of CMC and its affiliates. Global Capital Markets acts through CMB and
certain of its affiliates located in the United States as well as
through certain Foreign Affiliated Borrowers that are located abroad.
In other words, Global Capital Markets conducts its business through
these different legal entities depending upon the jurisdiction and the
specific product being sold. The entities currently comprising Global
Capital Markets are Global Capital Markets/U.S., Global Capital
Markets/U.K., Global Capital Markets/Canada, Global Capital Markets/
Australia and Global Capital Markets/Japan. A description of each of
these entities is presented below.
(a) Global Capital Markets/U.S. currently includes CMB and CSI, a
U.S. broker-dealer registered with the SEC and located in New York, New
York. However, in the future, it may include other broker-dealer
entities that Global Capital Markets has established or acquired in the
United States and operates as separate companies.
(b) Global Capital Markets/U.K. currently consists of Chase
Manhattan International Limited (CMIL) and CMB's London branch (CMB/
London). CMIL is a merchant bank based in London, England and it is
supervised by the Financial Services Authority. CMIL is also a member
of the Securities and Futures Authority and is subject to regulation by
this organization with respect to its broker-dealer activities.
CMB/London is an office of CMB which was authorized by the former
Bank of England to accept deposits in the United Kingdom. CMB/London is
a listed institution under Section 43 of the Financial Services Act,
the Money
[[Page 34285]]
Market Regulations. In addition, CMB/London is regulated by the
Securities and Futures Authority in the conduct of investment business
in the United Kingdom. In mid-1997, the Financial Services Authority
took over the supervision of banks in the United Kingdom including the
Money Market Regulations. CMB/London is also subject to annual
examination by bank examiners from the Federal Reserve Bank of New York
and the State of New York.
(c) Global Capital Markets/Canada currently consists of Chase
Securities Canada Inc. (CSCI), a broker-dealer located in Toronto. This
entity is subject to regulation by the Ontario Securities Commission
and the Investment Dealers Association.6 In the future,
Global Capital Markets Canada may be expanded to include CMB's banking
affiliates that are based in Canada. These entities are subject to
regulation in Canada by OSFI.
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\6\ CMB represents that Chase Securities Canada Inc., which is
currently inactive, is the likely Canadian vehicle to participate in
Global Capital Markets if it resumes business in Canada.
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(d) Global Capital Markets/Australia currently consists of Chase
Securities Australia, Limited (CSA), which is a broker-dealer located
in Sydney. CSA holds a dealers license and is regulated by the
Australian Securities & Investments Commission. In the future, Global
Capital Markets/Australia may be expanded to include CMB's banking
affiliates that are based in Australia. These entities will be subject
to regulation by APRA.
(e) Global Capital Markets/Japan currently consists of Chase
Securities Japan Limited (CSJL), a broker-dealer based in Tokyo, Japan.
CSJL is subject to regulation by Japan's Ministry of Finance and the
Tokyo Stock Exchange. In the future, Global Capital Markets/Japan may
be expanded to include CMB's banking affiliates that are based in
Japan. These entities will be subject to regulation by the Ministry of
Finance.
Global Capital Markets also is a borrower of securities and acts in
this capacity after full disclosure and consent with respect to many of
its institutional clients that included public pension plans which are
not covered by the Act. Global Capital Markets, as borrower, uses
borrowed securities to meet its obligations to deliver securities in
connection with its short sales, trade fails 7 or other
similar situations and to engage in repurchase transactions with third
parties. Acting as principal, Global Capital Markets actively engages
in the borrowing and lending of securities with an outstanding loan
volume of $48 billion as of May 31, 1998.
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\7\ According to CMB, a trade fail occurs when the seller of a
security is unable to deliver the security to the buyer on the
settlement date. Typically, this may occur when a security being
sold is on loan or held by another custodian at the time a sale is
executed and cannot be delivered to the seller before the settlement
date. Under these circumstances, it is common for the seller of the
security to borrow the security being sold in order to avoid a
breach of its obligation to deliver securities to the buyer on the
settlement date.
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GSL currently does not lend to Global Capital Markets the
securities of any of CMB's trust or custody clients covered under the
Act. Although as noted above, after full disclosure and consent, GSL
does lend securities to Global Capital Markets for certain of its
clients which are not covered by the Act. Global Capital Markets and
GSL have each developed an accounting system and safeguards to service
the needs of their respective client bases. Whenever trades are
effected between GSL, acting as securities lending agent, and Global
Capital Markets, as borrower, such trades are accomplished in the same
manner as between non-affiliated, independent third parties. In this
regard, such trades take place pursuant to an established protocol,
primarily over the telephone and through computer trading screens used
by all participants in the industry in accordance with established
protocol.8
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\8\ In this regard, CMB maintains a set of procedures and
policies designed to eliminate any sharing of client portfolio
information between the personnel in its commercial banking and
trust departments.
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5. GSL would like to offer employee benefit plans that are covered
under the provisions of the Act and for which GSL serves as securities
lending agent (i.e., the Client Plans) 9 the opportunity to
participate in a securities lending program including Global Capital
Markets as a potential borrower. In addition, CMB proposes that GSL and
Global Capital Markets receive compensation in connection with such
securities lending transactions. In this regard, CMB would like to
offer Client Plans the opportunity to add as potential borrowers Global
Capital Markets/U.S., Global Capital Markets/U.K., Global Capital
Markets/Canada, Global Capital Markets/Australia and Global Capital
Markets/Japan.
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\9\ For the sake of simplicity, future references to GSL's
performance of services as securities lending agent should be deemed
to include its activities as securities lending sub-agent and
references to Client Plans should be deemed to refer to plans for
which GSL is acting as sub-agent.
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For each Client Plan, neither CMB, Global Capital Markets, GSL nor
any other division or affiliate of CMB will have or exercise
discretionary authority or control with respect to the investment of
Client Plan assets in the transaction (other than with respect to the
investment of cash collateral after securities have been loaned and
collateral received) or render investment advice [within the meaning of
29 CFR 2510.3-12(c)] with respect to those assets, including decisions
concerning a Client Plan's acquisition or disposition of securities
available for loan. Accordingly, GSL will not be in a position to
influence the portfolio holdings of Client Plans in a manner that might
increase or decrease the securities available for lending to Global
Capital Markets (or any other borrower). Thus, GSL's discretion will be
limited to activities such as negotiating the terms of the securities
loans with Global Capital Markets and (to the extent granted by the
Client Plan fiduciary) investing any cash collateral received in
respect of the loans.
Because, under the proposed arrangement, GSL would have discretion
to lend Client Plan securities to Global Capital Markets, and because
both GSL and parts of Global Capital Markets are divisions of CMB, the
lending of securities to Global Capital Markets by a Client Plan for
which GSL serves as securities lending agent (or sub-agent) may be
outside the scope of relief provided by PTE 81-6 and PTE 82-
63.10 Further, loans to Foreign Affiliated Borrowers within
Global Capital Markets would be outside of the relief granted in PTE
81-6.
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\10\ PTE 81-6 provides an exemption under certain conditions
from section 406(a)(1)(A) through (D) of the Act and the
corresponding provisions of section 4975(c) of the Code for the
lending of securities that are assets of an employee benefit plan to
certain broker-dealers or banks which are parties in interest.
PTE 82-63 provides an exemption under specified conditions from
section 406(b)(1) of the Act and section 4975(c)(1)(E) of the Code
for the payment of compensation to a plan fiduciary for services
rendered in connection with loans of plan assets that are
securities.
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Therefore, several safeguards, described more fully below, are
incorporated in the application in order to ensure the protection of
the Client Plan assets involved in the transactions. In addition, the
applicants represent that the proposed lending program incorporates the
conditions contained in PTE 81-6 and PTE 82-63 and will be in
compliance with all applicable securities laws of the United States.
6. Although not registered with the United States SEC as broker-
dealers, the Foreign Affiliated Borrowers within Global Capital Markets
are subject to the rules, regulations and membership requirements of
their respective regulatory entities identified above. For example,
CMIL, the broker-dealer entity within Global Capital Markets/U.K. is
[[Page 34286]]
subject to the rules, regulations and membership requirements of the
Securities and Futures Authority. CSCI, the broker-dealer entity within
Global Capital Markets/Canada is governed by the rules, regulations and
membership requirements of the Ontario Securities Commission and the
Investment Dealers Association. CSA, the broker-dealer entity within
Global Capital Markets/Australia is governed by the licensing
requirements of the Australian Securities & Investments Commission.
CSJL, the broker-dealer entity within Global Capital Markets/Japan is
governed by the rules, regulations and membership requirements of the
Ministry of Finance and the Tokyo Stock Exchange.11
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\11\ The Securities and Futures Authority, the Ministry of
Finance, the Tokyo Stock Exchange, the Australian Securities &
Investments Commission, the Australian Stock Exchange Limited, the
Ontario Securities Commission and the Investment Dealers Association
are collectively referred to herein as the Foreign Broker-Dealer
Regulatory Entities.
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The Foreign Affiliated Borrowers within Global Capital Markets
which are broker-dealers are subject to rules relating to minimum
capitalization, reporting requirements, periodic examinations, client
money and safe custody rules and books and records requirements with
respect to client accounts. These rules and regulations set forth by
the Foreign Broker-Dealer Regulatory Entities and the SEC share a
common objective: The protection of the investor by the regulation of
the securities industry. The rules promulgated by the Foreign Broker-
Dealer Regulatory Entities require each firm which employs registered
representatives or registered traders to have a positive tangible net
worth and be able to meet its obligations as they may fall due. In
addition, the rules of the Foreign Broker-Dealer Regulatory Entities
set forth comprehensive financial resource and reporting/disclosure
rules regarding capital adequacy. Further, to demonstrate capital
adequacy, the rules of the Foreign Broker-Dealer Regulatory Entities
impose reporting/disclosure requirements on broker-dealers with respect
to risk management, internal controls, and transaction reporting and
recordkeeping requirements to the effect that required records must be
produced at the request of the Foreign Broker-Dealer Regulatory
Entities. Finally, the rules and regulations of the Foreign Broker-
Dealer Regulatory Entities impose potential fines and penalties on
broker-dealers which establish a comprehensive disciplinary system.
7. Similarly, Global Capital Markets/U.K. is also subject to
regulation in the United Kingdom by the Financial Services Authority,
the successor regulator to the Bank of England. The Financial Services
Authority issues licenses to banks in the United Kingdom, issues
directives to address violations by or irregularities involving such
banks, requires information from a bank or its auditor regarding
supervisory matters and revokes bank licenses. The Financial Services
Authority has established procedures for monitoring the activities of
CMB in the United Kingdom through various statutory and regulatory
standards. Among these standards are requirements for adequate internal
controls, oversight and administration. On a recurring basis, CMB will
be required to provide the Financial Services Authority with
information regarding its activities in the United Kingdom, profit and
loss, balance sheet, large exposures, foreign exchange exposures and
country risk exposure. The regulator responsible for CMB's capital
adequacy is the Board of Governors of the Federal Reserve System (the
Board).
In addition, banks which may comprise Global Capital Markets/Canada
will be subject to the rules of OSFI, an entity that licenses and
regulates banks established in Canada as deposit-taking subsidiaries.
OSFI licenses banks, issues directives to address violations by or
irregularities involving a bank, requires information from the bank or
its auditors regarding supervisory matters and revokes bank licenses.
Moreover, OSFI has established procedures for monitoring the
activities of Canadian banks through various statutory and regulatory
standards. Among those standards are requirements for capital adequacy,
adequate internal controls, oversight and administration. On a
recurring basis, a bank comprising Global Capital Markets/Canada will
be required to provide OSFI with information regarding its activities
in Canada, profit and loss, balance sheet, large exposures and foreign
exchange exposures.
Legislation is pending in Canada which would permit a foreign bank
to establish a branch in Canada. Under the proposed rule, the Minister
of Finance would authorize the establishment of the branch and OSFI
would license the bank branch to carry on business and may revoke the
license. The bank branch would be required to have a minimum amount of
unencumbered assets in Canada equal to a percentage of branch
liabilities and must satisfy capital adequacy rules. Branches accepting
deposits would be subject to a yearly audit by an external auditor and
examination by OSFI.
APRA, which has taken over the bank supervisory duties of the
Reserve Bank of Australia, will license and regulate banks comprising
Global Capital Markets/Australia. APRA has the power to issue and
revoke bank licenses. In addition, APRA may issue directives to address
violations by or irregularities involving banks and it requires
information from a bank or its auditors regarding supervisory matters.
APRA has established procedures for monitoring the activities of banks
that will comprise Global Capital Markets/Australia through various
statutory and regulatory standards. Among those standards are
requirements for capital adequacy, internal controls, oversight and
administration. On a recurring basis, banks comprising Global Capital
Markets/Australia will be required to provide APRA with information
regarding their activities in Australia, profit and loss, balance
sheets and large exposures.
APRA's licensing and supervision of Global Capital Markets/
Australia foreign bank branches is similar to that of locally-
incorporated banks. While APRA monitors credit risk concentrations of
foreign bank branches, endowed capital in Australia and capital-based
large risk exposure limits are the responsibility of the home
supervisor which is the Board.12
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\12\ For a description of the Ministry of Finance, which
regulates both banks and broker-dealers in Japan, see
Representations 3 and 4 of the Notice of Proposed Exemption for the
Union Bank of Switzerland and UBS Securities, LLC (63 FR 15452,
15455, March 31, 1998).
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8. Aside from the protections afforded by the Foreign Broker-Dealer
Regulatory Entities and in the case of Global Capital Markets/U.K., the
Financial Services Authority, CMB represents that the Foreign
Affiliated Borrowers will comply with all applicable provisions of Rule
15a-6 of the 1934 Act. Rule 15a-6 provides foreign broker-dealers with
a limited exemption from SEC registration requirements and, as
described below, offers additional protections.13
[[Page 34287]]
Specifically, Rule 15a-6 provides an exemption from U.S. broker-dealer
registration for a foreign broker-dealer that induces or attempts to
induce the purchase or sale of any security (including over-the-counter
equity and debt options) by a ``U.S. institutional investor'' or a
``major U.S. institutional investor,'' provided that the foreign
broker-dealer, among other things, enters into these transactions
through a U.S. registered broker-dealer intermediary. The term ``U.S.
institutional investor,'' as defined in Rule 15a-6(b)(7), includes an
employee benefit plan within the meaning of the Act if (a) the
investment decision is made by a plan fiduciary, as defined in section
3(21) of the Act, which is either a bank, savings and loan association,
insurance company or registered investment adviser, or (b) the employee
benefit plan has total assets in excess of $5 million, or (c) the
employee benefit plan is a self-directed plan with investment decisions
made solely by persons that are ``accredited investors'' as defined in
Rule 501(a)(1) of Regulation D of the Securities Exchange Act of 1933,
as amended. The term ``major U.S. institutional investor'' is defined
in Rule 15a-6(b)(4) as a person that is a U.S. institutional investor
that has total assets in excess of $100 million or an investment
adviser registered under Section 203 of the Investment Advisers Act of
1940 that has total assets under management in excess of $100
million.14
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\13\ According to the applicants, section 3(a)(4) of the 1934
Act defines ``broker'' to mean ``any person engaged in the business
of effecting transactions in securities for the account of others,
but it does not include a bank. Section 3(a)(5) of the 1934 Act
provides a similar exclusion for ``banks'' in the definition of the
term ``dealer.'' However, section 3(a)(6) of the 1934 Act defines
``bank'' to mean a banking institution organized under the laws of
the United States or a State of the United States. Further, Rule
15(a)(6)(b)(2) provides that the term ``foreign broker or dealer''
means ``any non-U.S. resident person * * * whose securities
activities, if conducted in the United States, would be described by
the definition of ``broker'' or ``dealer'' in sections 3(a)(4) or
3(a)(5) of the [1934] Act.'' Therefore, the test of whether an
entity is a ``foreign broker'' or ``dealer'' is based on the nature
of such foreign entity's activities and, with certain exceptions,
only banks that are regulated by either the United States or a State
of the United States are excluded from the definition of the term
``broker'' or ``dealer.'' Thus, for purposes of this exemption
request, the applicants are willing to represent that they will
comply with the applicable provisions and relevant SEC
interpretations and amendments of Rule 15a-6.
\14\ See also SEC No-Action Letter issued to Cleary, Gottlieb,
Steen & Hamilton on April 9, 1997 (hereinafter, the April 9, No-
Action Letter), expanding the definition of the term ``Major U.S.
Institutional Investor.''
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9. CMB represents that under Rule 15a-6, a foreign broker-dealer
that induces or attempts to induce the purchase or sale of any security
by a U.S. institutional or a major U.S. institutional investor must,
among other things--
(a) Consent to service of process for any civil action brought
by, or proceeding before, the SEC or any self-regulatory
organization;
(b) Provide the SEC (upon request or pursuant to agreements
reached between any foreign securities authority, including any
foreign government, and the SEC or the U.S. Government) with any
information or documents within the possession, custody or control
of the foreign broker-dealer, any testimony of any such foreign
associated persons, and any assistance in taking the evidence of
other persons, wherever located, that the SEC requests and that
relates to transactions effected pursuant to the Rule;
(c) Rely on the U.S. registered broker-dealer 15
through which the transactions with the U.S. institutional and major
U.S. institutional investors are effected to (among other things):
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\15\ The Foreign Affiliated Borrowers, in lieu of relying on a
U.S. broker-dealer and to the extent permitted by applicable U.S.
securities law, may rely on a U.S. bank or trust company, including
GSL, to perform this role.
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(1) Effect the transactions, other than negotiating their terms;
(2) Issue all required confirmations and statements;
(3) As between the foreign broker-dealer and the U.S. registered
broker-dealer, extend or arrange for the extension of credit in
connection with the transactions;
(4) Maintain required books and records relating to the
transactions, including those required by Rules 17a-3 (Records to be
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved
by Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
(5) Receive, deliver and safeguard funds and securities in
connection with the transactions on behalf of the U.S. institutional
investor or major U.S. institutional investor in compliance with
Rule 15c3-3 of the 1934 Act (Customer Protection--Reserves and
Custody of Securities); 16 and
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\16\ Under certain circumstances described in the April 9, 1997
No-Action Letter (e.g., clearance and settlement transactions),
there may be direct transfers of funds and securities between the
Client Plan and a Foreign Affiliated Borrower. CMB notes that in
such situations, the U.S. registered broker-dealer will not be
acting as a principal with respect to any duties it is required to
undertake pursuant to Rule 15a-6.
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(6) Participate in certain oral communications (e.g., telephone
calls) between the foreign associated person and the U.S.
institutional investor (not the major U.S. institutional investor),
and accompany the foreign associated person on certain visits with
both U.S. institutional and major U.S. institutional investors. By
virtue of this participation, the U.S. registered broker-dealer
would become responsible for the content of all these
communications. 17
\17\ Under certain circumstances, the foreign associated person
may have direct communications and contact with the U.S.
Institutional Investor. See April 9 SEC No-Action Letter.
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10. Where GSL is the direct securities lending agent, a fiduciary
of a Client Plan which is independent of CMB, GSL, Global Capital
Markets, and any other division or affiliate of CMB will sign a
securities lending authorization agreement with GSL (i.e., the Agency
Agreement) before that Client Plan participates in a securities lending
program. The Agency Agreement will, among other things, describe the
operation of the lending program, prescribe the form of securities Loan
Agreement to be entered into on behalf of the Client Plan with
borrowers, specify the securities which are available to be loaned and
prescribe that a borrower (including Global Capital Markets) is
required to deliver collateral having a value in excess of the value of
the loaned securities (i.e., not less than 102 percent or, in some
cases, a higher agreed-upon percentage). In addition, the Agency
Agreement will provide that the securities will be marked to market
daily and incorporate a list of permissible borrowers, including the
specified legal entities within Global Capital Markets.
The Agency Agreement will also set forth the basis and rate for
GSL's compensation from a Client Plan for the performance of securities
lending services. As set forth more fully below, in the case of loans
secured by cash collateral, the basis for GSL's compensation will be an
agreed-upon fixed percentage share of return, if any on cash collateral
plus an investment management fee for investing the cash collateral.
The actual income that will be divided between the Client Plan and GSL
will vary each day according to the investment performance from each
loan of securities. With respect to loans secured by non-cash
collateral, GSL's compensation will be an agreed-upon fixed percentage
share of the securities lending fee. GSL's share of the return on cash
collateral and the securities lending fees with respect to any Client
Plan will be negotiated with that Client Plan and thereafter set forth
in the Agency Agreement on the date such agreement is executed.
The Agency Agreement will contain provisions to the effect that if
Global Capital Markets is designated by a Client Plan as an approved
borrower (a) the Client Plan will acknowledge that certain segments of
Global Capital Markets, GSL and GIS are, or may be deemed to be, the
same legal entity, and (b) GSL will represent to the Client Plan that
each and every loan made to Global Capital Markets on behalf of such
Client Plan will be at market rates and will, in no event, be less
favorable to the Client Plan than a loan of such securities, made at
the same time and under the same circumstances, to an unaffiliated
borrower.
A Client Plan may terminate the Agency Agreement at any time,
without penalty to such plan, on five business days'
notice.18
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\18\ CMB represents that if investments of cash collateral must
be terminated or liquidated prematurely due to a Client Plan's
termination of the Agency Agreement, penalties might be chargeable
by issuers of the investments (or counterparties on the investments)
in accordance with the investment terms.
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[[Page 34288]]
11. When GSL is lending securities under a sub-agency arrangement,
the primary lending agent will enter into a Primary Lending Agreement
with a fiduciary of a Client Plan that is independent of such primary
lending agent, GSL or Global Capital Markets, before the Client Plan
participates in the securities lending program. Under the terms of the
sub-agency arrangement, it is the responsibility of the primary lending
agent to obtain the approval of the fiduciary of the Client Plan to
such Primary Lending Agreement. The primary lending agent will be
independent of GSL and Global Capital Markets. As CMB will not be a
party to the Primary Lending Agreement, the sub-agency arrangement
between GSL and the primary lending agent will obligate the primary
lending agent to provide assurance that the primary lending agent was
independent of the fiduciary of the Client Plan.
The Primary Lending Agreement will contain substantive provisions
akin to those in the Agency Agreement relating to the description of
the operation of the lending program, use of an approved form of Loan
Agreement, specification of securities which are available to be
loaned, prescription that a borrower is required to deliver collateral
having a specified value in excess of the value of the loaned
securities and a list of approved borrowers (including the various
legal entities comprising Global Capital Markets). The Primary Lending
Agreement will specifically authorize the primary lending agent to
appoint sub-agents, including GSL, to facilitate the performance of
securities lending agency functions. Where GSL is appointed to act as a
sub-agent, GSL will require that the primary lending agent represent to
GSL that the primary lending agent has received prior approval of, or
has the authority to make the decision to hire GSL.
The Primary Lending Agreement also will set forth the basis and the
method for the primary lending agent's compensation from the Client
Plan for the performance of securities lending services and will
authorize the primary lending agent to pay a portion of its fee, as the
primary lending agent determines in its sole discretion, to any sub-
agent(s) it retains pursuant to the authority granted under such
agreement. Each Primary Lending Agreement will be subject to a
termination provision similar to that contained in the Agency Agreement
if the primary lending agent is relying on PTE 81-6.
Pursuant to its authority to appoint sub-agents, the primary
lending agent will enter into a securities lending sub-agency agreement
(i.e., the Sub-Agency Agreement) with GSL under which the primary
lending agent will retain and authorize GSL, as sub-agent, to lend
securities of the primary lending agent's Client Plans, in a manner
consistent with the terms and conditions as specified in the Primary
Lending Agreement. The Primary Lending Agreement and the Sub-Agency
Agreement will not necessarily have identical terms because the
procedures that CMB uses in operating its lending program will be
spelled out in its form agreement and these may not be identical to how
the primary lending agent operates its own program. For example, CMB
may require that its Sub-Agency Agreement contain certain specific
provisions which the primary lending agent may not have requested from
the Client Plan. One such requirement is that the collateral initially
equal 102 percent of the value of the loaned securities, whereas the
primary lending agent may have been authorized to make loans of
securities at less than 102 percent collateral. CMB may also require
recordkeeping in addition to that specified in the Primary Lending
Agreement and may require different notice provisions.
Each Sub-Agency Agreement will contain provisions which are in
substance comparable to those described above, which would appear in an
Agency Agreement in situations where GSL is the primary lending agent.
In this regard, GSL will make the same representation in the Sub-Agency
Agreement, as described above, with respect to arm's length dealings
with Global Capital Markets. The Sub-Agency Agreement will also set
forth the basis and rate for GSL's compensation to be paid by the
primary lending agent.
12. GSL, on behalf of the Client Plans, will enter into a Loan
Agreement with each applicable entity within Global Capital Markets
that is in substantially similar form to the one used from time to time
with all other borrowers. The Loan Agreement will not be identical to
that used with an unrelated party, in part, because special disclosures
must be made to the Client Plans regarding the relationship between GSL
and certain parts of Global Capital Markets and GIS. However, the
economic terms and procedures required by the Loan Agreement will be
identical to those negotiated with unrelated borrowers.
The form of the Loan Agreement also will be the industry or the
market standard for loans to the borrowers in the country where the
borrower is domiciled. It will describe the lender's rights against the
borrower in the country of the borrower's domicile and represent that
these rights will be equivalent under U.S. law.19 The
independent fiduciary for each Client Plan will approve the terms of
the Loan Agreement through its authorization of the lending program and
such fiduciary will be provided a copy of the applicable Loan Agreement
from GSL upon request.
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\19\ For example, the form of Loan Agreement between GSL and a
Foreign Affiliated Borrower differs from the standard U.S. loan
agreement. Under the Global Capital Markets/U.K. Loan Agreement, the
Client Plan receives title to (rather than a pledge of or a security
interest in) the collateral.
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The Loan Agreement will specify, among other things, the right of
GSL, as lending agent on behalf of the Client Plan, to terminate a loan
at any time on not more than five business days' notice and the lending
agent's rights in the event of any default by the borrower. In
addition, the Loan Agreement will contain a requirement that Global
Capital Markets must pay all transfer fees and transfer taxes related
to loans of securities. Further, the Loan Agreement will describe the
basis for compensation to the Client Plan for lending securities to
Global Capital Markets under each category of collateral.
Before entering into the Loan Agreement, Global Capital Markets
will furnish GSL the most recently available audited and unaudited
statements of the financial condition of the applicable borrower within
Global Capital Markets. In turn, such statements will be provided by
GSL to the Client Plan before such plan is asked to approve the terms
of the Loan Agreement. The Loan Agreement will contain a requirement
that Global Capital Markets must provide to the Client Plan prompt
notice, at the time of a loan by such Client Plan, of any material
adverse changes in the borrower's financial condition since the date of
the most recently furnished financial statements.20 If any
such changes have
[[Page 34289]]
taken place, GSL will not make any further loans to Global Capital
Markets unless an independent fiduciary of that Client Plan has
approved the loan in view of the changed financial condition.
Conversely, if the borrower within Global Capital Markets fails to
provide notice of such a change in its financial condition, such
failure will trigger an event of default under the Loan Agreement.
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\20\ Like broker-dealers registered with the SEC, the broker-
dealer entities within Global Capital Markets/U.K., Global Capital
Markets/Japan and Global Capital Markets/Australia will be subject
to capital adequacy provisions of their respective regulatory
entities. It is represented that such rules require the Foreign
Affiliated Borrowers to maintain, at all times, financial resources
in excess of its financial resources requirement (the Financial
Resources Requirement). For this purpose, financial resources
include equity capital, approved subordinated debt and retained
earnings, less deductions for illiquid assets. The Financial
Resources Requirement includes capital requirements for market risk,
credit risk, foreign exchange risk and large exposures. The rules of
each applicable Foreign Broker-Dealer Regulatory Entity, require
that if a firm's financial resources fall below a certain percentage
(e.g., 120 percent with respect to the Securities and Futures
Authority and 140 percent with respect to the Ministry of Finance
and the Tokyo Stock Exchange) of its Financial Resources
Requirement, the Foreign Broker-Dealer Regulatory Entity must be
notified so that it can examine the terms of the firm's financial
position and require an infusion of more capital, if needed. In
addition, a breach of the requirement to maintain financial
resources in excess of the Financial Resources Requirement may lead
to sanctions by the applicable Foreign Broker-Dealer Regulatory
Entity. If the breach is not promptly resolved, such Foreign Broker-
Dealer Regulatory Entity may restrict the firm's activities.
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13. As noted above, the agreement by GSL to provide securities
lending services, as agent, to a Client Plan will be embodied in the
Agency Agreement. The Client Plan and GSL will, prior to the
commencement of any lending activity, agree to the arrangement, as
described above, under which GSL will be compensated for its services
as lending agent. The agreed-upon fee arrangement will be set forth in
the Agency Agreement and thereby will be subject to the prior written
approval of a fiduciary of the Client Plan which is independent of
Global Capital Markets and GSL.
Similarly, with respect to arrangements under which GSL is acting
as securities lending sub-agent, the agreed upon fee arrangement of the
primary lending agent will be set forth in the Primary Lending
Agreement, and such agreement will specifically authorize the primary
lending agent to pay a portion of such fee, as the primary lending
agent determines in its sole discretion, to any sub-agent, including
GSL, which is to provide securities lending services to the Client
Plans.21 A Client Plan will be provided with any reasonably
available information which is necessary for the Client Plan's
independent fiduciary to make a determination whether to enter into or
continue to participate under the Agency Agreement (or the Primary
Lending Agreement) and any other reasonably available information which
such fiduciary may reasonably request.
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\21\ The foregoing provisions describe arrangements comparable
to conditions (c) and (d) of PTE 82-63 which require that the
payment of compensation to a ``lending fiduciary'' is made under a
written instrument and is subject to prior written authorization of
an independent ``authorizing fiduciary.'' In the event that a
commingled investment fund will participate in the securities
lending program, the special rule applicable to such funds
concerning the authorization of the compensation arrangement set
forth in condition (f) of PTE 82-63 will be satisfied.
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14. Each time a Client Plan lends securities to Global Capital
Markets pursuant to the Loan Agreement, GSL will reflect in its
records, the material terms of the loan, including the securities to be
loaned, the required level of collateral and the fee receivable or
rebate payable. When a loan is collateralized with cash, the cash will
be invested for the benefit of and at the risk of the Client Plan, and
resulting earnings (net of a rebate to the borrower and the fee to the
lending agent) comprise the compensation to the Client Plan with
respect to such loan. Where collateral consists of obligations other
than cash, the borrower will pay a fee (loan premium) directly to the
lending Client Plan, which fee will be shared with GSL as agreed under
the Agency Agreement. The terms of each loan will be at least as
favorable to the Client Plan as those of a comparable arm's length
transaction between unrelated parties.
15. The Client Plan will receive the equivalent of all
distributions made to holders of the borrowed securities during the
term of any loan, including, but not limited to, cash dividends,
interest payments, shares of stock as a result of stock splits and
rights to purchase additional securities or other distributions. The
Loan Agreement will provide that the Client Plan may terminate any loan
at any time. Upon a termination, Global Capital Markets will be
contractually obligated to return the loaned securities to the Client
Plan within five business days of notification (or such longer period
of time permitted under PTE 81-6, as amended or superseded). If Global
Capital Markets fails to return the securities within the designated
time, the Client Plan will have the right under the Loan Agreement to
purchase securities identical to the borrowed securities and apply the
collateral to payment of the purchase price and any other expenses of
the Client Plan associated with the sale and/or purchase.
16. The Client Plan will receive collateral from Global Capital
Markets (by physical delivery, book entry in a U.S. securities
depository, wire transfer or similar means) by the close of business on
or before the day the loaned securities are delivered to Global Capital
Markets. The collateral will consist of cash, securities issued or
guaranteed by the U.S. Government or its agencies or irrevocable U.S.
bank letters of credit (issued by a person other than CMB or its
affiliates) or any combination thereof, of such other types of
collateral which might be permitted by the Department under PTE 81-6,
as amended or superseded, relating to securities lending activities.
The market value of the collateral on the close of business on the day
preceding the day of the loan will be at least 102 percent of the
market value of the loaned securities. The Loan Agreement will give the
Client Plan a continuing security interest in, title to, or the rights
of a secured creditor with respect to the collateral and a lien on the
collateral. GSL will monitor the level of the collateral daily. If the
market value of the collateral falls below 100 percent (or such greater
percentage as agreed to by the parties) of that of the loaned
securities, GSL will require Global Capital Markets to deliver by the
close of business the next day sufficient additional collateral to
bring the level back to at least 102 percent.
17. As securities lending agent for the Client Plans, GSL also
provides ancillary services such as investing the cash collateral
received with respect to such securities loans. Such investment
management services can be provided on a separate account basis or
through CMB's commingled funds. For these services, GSL is paid an
investment management fee by the Client Plans, either through a direct
charge to the Client Plan for individually-managed accounts and some
commingled funds, or, in the case of other commingled funds, through an
investment management fee charged against the commingled fund's assets.
Retaining GSL to provide such investment management services is
optional and within the total discretion of the Client Plan.
Alternatively, the independent fiduciary of the Client Plan may select
its own manager, an unrelated mutual or collective fund, or another
vehicle of his choice. The selected investment vehicle must be
acceptable to GSL. GSL neither selects the collateral investment
vehicle nor has any authority or responsibility to do so. To further
protect the Client Plans' assets in these transactions, GSL's
procedures for lending securities will comply with the applicable
conditions of PTE 81-6 and PTE 82-63 (including with respect to any
commingled funds that may participate in the securities lending
program).
18. GSL will establish each day separate written schedules of
lending fees and rebate rates to assure uniformity of treatment among
borrowing brokers and to limit the discretion that GSL would have in
negotiating securities loans to Global Capital Markets. Comparable
loans to all borrowers of a given security on that day will be made at
rates or lending fees
[[Page 34290]]
on the relevant daily schedules or at rates or lending fees which may
be more advantageous to the Client Plans. In no case will loans be made
to Global Capital Markets at rates or lending fees that are less
advantageous to the Client Plans than those on the schedule. The daily
schedule of rebate rates will be based on the current value of the
clients' reinvestment vehicles and on market conditions, as reflected
by demand for securities by borrowers other than Global Capital
Markets. As with rebate rates, the daily schedule of lending fees will
also be based on market conditions, as reflected by demand for
securities by borrowers other than Global Capital Markets, and will
generally track the rebate rates with respect to the same security or
class of security.
GSL will adopt maximum daily rebate rates for cash collateral
payable to Global Capital Markets on behalf of a lending Client Plan.
Separate maximum daily rebate rates will be established with respect to
securities loans of designated securities classes of securities such as
U.S. Government securities, U.S. equities and corporate bonds,
international fixed income securities and international equities. With
respect to each designated class of securities, the maximum rebate rate
will be the lower of (a) a rate based upon an agreed-upon interest rate
index (such as one month LIBOR for Fed funds) and (b) the client's
initial or expected reinvestment rate for the relevant cash collateral,
minus a stated percentage of such reinvestment rate, as pre-approved by
the independent fiduciary of the Client Plan. Thus, when cash is used
as collateral, at least initially, the daily rebate rate will always be
lower than the rate of return to the Client Plans from authorized
investments for cash collateral by such stated percentage as shall be
pre-approved by the independent fiduciary. GSL will submit the formula
for determining the maximum daily rebate rate to an independent
fiduciary of the Client Plan for approval before lending any securities
to Global Capital Markets on behalf of such plan.
GSL will also adopt minimum daily lending fees for non-cash
collateral payable by Global Capital Markets to GSL on behalf of the
Client Plan and GSL. Separate minimum daily gross lending fees will be
established with respect to loans of designated classes of securities
such as U.S. Government securities, U.S. equities and corporate bonds,
international fixed income securities and international equities. With
respect to each designated class of securities, the minimum lending fee
will be stated as a percentage of the principal value of the loaned
securities. GSL will submit such gross minimum daily lending fees to an
independent fiduciary of a Client Plan for approval before initially
lending any securities to Global Capital Markets on behalf of such
Client Plan.
19. For collateral other than cash, the lending fees charged the
previous day will be reviewed by GSL for competitiveness. Based on the
demand of the marketplace, this daily fee historically has remained
relatively constant although it may be subject to fluctuation due to
market conditions. 22 Because during any successive two week
period, on average, at least 50 percent or more of securities loans
negotiated on behalf of Client Plans, in the aggregate, will be to
unrelated brokers or dealers, the competitiveness of GSL's fee schedule
will be continuously tested in the marketplace. 23
Accordingly, loans to Global Capital Markets should result in
competitive rate income to the lending Client Plan.
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\22\ With respect to domestic securities and international debt
securities the daily lending fee is currently at least \1/20\th of
one percent of the principal value of the loaned securities. With
respect to international equity securities, the daily fee is
currently \1/5\th of one percent of the principal value of the
loaned securities.
\23\ This 50 percent requirement will apply regardless of the
type of collateral used to secure the loan.
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20. The method of determining the daily securities lending rates
(fees and rebates), the minimum lending fees payable by Global Capital
Markets and the maximum rebate payable to Global Capital Markets will
be specified in an exhibit attached to the Agency Agreement to be
executed between the independent fiduciary of the Client Plan and GSL
in cases where GSL is the direct securities lending agent.
21. Should GSL recognize prior to the end of a business day that,
with respect to new and/or existing loans, it must change the rebate
rate or lending fee formula in the best interest of the Client Plans,
it may do so with respect to Global Capital Markets. 24 If
GSL changes the lending fee formula or the rebate rate formula on any
outstanding loan to Global Capital Markets (except for any change
resulting from a change in the value of any third party independent
index with respect to which the fee or rebate is calculated, or if the
formula will always be beneficial to the Client Plan), GSL, by the
close of business on the date of such adjustment, will provide the
independent fiduciary of the Client Plan with notice that it has
changed such fee formula or rebate rate formula with respect to such
loan and that the Client Plan may terminate such loan at any time.
Allowing GSL to request a modification to the lending fee or the rebate
rate formula with respect to an existing loan to Global Capital Markets
when market conditions change will be beneficial to the Client Plans.
In the absence of the ability to make such modification, Global Capital
Markets may be forced by market conditions to terminate the loan and
seek better terms elsewhere. Such termination may then force the Client
Plan to seek new borrowers for its securities who, in light of the
changed market conditions, are likely to negotiate for the lending fee
or rebate rate which Global Capital Markets would have received or paid
had GSL had the written authority from the independent fiduciary of the
Client Plan to decrease the lending fee or increase the rebate rate.
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\24\ GSL will not initiate any modification in such rates or
fees which would be detrimental to Client Plans.
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22. Although GSL will normally lend securities to requesting
borrowers and include for these purposes Global Capital Markets on a
``first come, first served'' basis as a means of assuring uniformity of
treatment among borrowers, the applicants recognize that, in some
cases, it may not be possible to adhere to a ``first come, first
served'' allocation. This can occur, for instance where (a) the credit
limit established for such borrower by GSL and/or the Client Plan has
already been satisfied; (b) the ``first in line'' borrower is not
approved as a borrower by the particular Client Plan whose securities
are sought to be borrowed; and (c) the ``first in line'' borrower
cannot be ascertained, as an operational matter, because several
borrowers spoke to different GSL representatives at or about the same
time with respect to the same security. In situations (a) and (b),
loans would normally be effected with the ``second in line.'' In
situation (c), securities would be allocated equitably among all
eligible borrowers.
23. The Client Plans will be indemnified by CMB or CSI in the event
Global Capital Markets fails to return borrowed securities. In the
event a Foreign Affiliated Borrower within Global Capital Markets
defaults on a loan, CMB will liquidate the loan collateral to purchase
identical securities for the Client Plan. In the event the collateral
is insufficient to accomplish such purchase, CMB will indemnify the
Client Plan for any shortfall in the collateral plus interest on such
amount and any transaction costs incurred (including attorney's fees of
the Client Plan for legal actions arising out of the default on the
loans or failure to indemnify properly under this
[[Page 34291]]
provision). Alternatively, if such identical securities are not
available on the market, CMB will pay the Client Plan cash equal to the
market value of the borrowed securities as of the date they would have
been returned to the Client Plan plus all the accrued financial
benefits derived from the beneficial ownership of such loaned
securities. The lending Client Plans will be indemnified by CMB in the
United States for any loans to the Foreign Affiliated Borrower.
When the U.S. Affiliated Borrower is CSI, a U.S. registered broker-
dealer, either CMB or CSI will indemnify the Client Plan against
losses. CMB will liquidate the loan collateral to purchase identical
securities for the Client Plan. If the collateral is insufficient to
accomplish such purchase, either CMB or CSI will indemnify the Client
Plan for any shortfall in the collateral plus interest on such amount
and any transaction costs incurred (including attorney's fees of the
Client Plan for legal actions arising out of the default on the loans
or failure to indemnify properly under this provision.)
24. Each Client Plan participating in the lending program will be
sent a monthly transaction report which will provide a list of all
security loans outstanding and closed for a specified period. The
report will identify for each open loan position, the securities
involved, the value of the security for collateralization purposes, the
current value of the collateral, the rebate or loan premium (as the
case may be) at which the security is loaned, and the number of days
the security has been on loan. In order to provide the means for
monitoring lending activity, rates on loans to Global Capital Markets
compared with loans to other brokers and the level of collateral on the
loans, the monthly report will show, on a daily basis, the market value
of all outstanding securities loans to Global Capital Markets and to
other borrowers as compared to the total collateral held for both
categories of loans. In addition, the monthly report will state the
daily fees where collateral other than cash is utilized and will
specify the details used to establish the daily rebate payable to all
brokers where cash is used as collateral. Further, the monthly report
will state, on a daily basis, the rates at which securities are loaned
to Global Capital Markets as compared with those at which securities
are loaned to other brokers. This statement will give the Client Plan's
independent fiduciary information which can be compared to that
contained in the daily rebate schedule.
25. In all cases, GSL will maintain records sufficient to assure
compliance with its representation that all loans to Global Capital
Markets are effectively at arm's length terms. These records will be
provided to the appropriate independent fiduciary of a Client Plan in
the manner and format agreed to with such fiduciary and without charge
to that Client Plan. With respect to the proposed transactions, GSL
will make and retain for six months, tape recordings evidencing all
securities loan transactions with Global Capital Markets. Also, if
requested by the lending customer, GSL will provide daily confirmations
of securities lending transactions. Further, if requested by the
customer, GSL will provide weekly or daily reports setting forth for
each transaction made or outstanding during the relevant reporting
period the following information: The loaned securities, the related
collateral, the rebates and loan premiums and such other information in
such format as is agreed to by the parties. Finally, prior to a Client
Plan's approval of a securities lending program, GSL will provide a
Client Plan fiduciary with a copy of the proposed exemption and the
notice granting the exemption.
26. Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to
Global Capital Markets. In the case of two or more Client Plans which
are maintained by the same employer, controlled group of corporations
or employee organization (i.e., the Related Client Plans), whose assets
are commingled for investment purposes in a single master trust or any
other entity the assets of which are ``plan assets'' under the Plan
Asset Regulation), which entity is engaged in securities lending
arrangements with Global Capital Markets, the foregoing $50 million
requirement will be satisfied if such trust or other entity has
aggregate assets which are in excess of $50 million. However, 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, such fiduciary must have total assets under its
management and control, exclusive of the $50 million threshold amount
attributable to plan investment in the commingled entity, which are in
excess of $100 million.
In the case of two or more Client Plans which are not maintained by
the same employer, controlled group of corporations or employee
organization (i.e., the Unrelated Client Plans), whose assets are
commingled for investment purposes in a group trust or any other form
of entity the assets of which are ``plan assets'' under the Plan Asset
Regulation, which entity is engaged in securities lending arrangements
with Global Capital Markets, the foregoing $50 million requirement will
be satisfied if such trust or other entity has aggregate assets which
are in excess of $50 million (excluding the assets of any Client Plan
with respect to which the fiduciary responsible for making the
investment decision on behalf of such group trust or other entity or
any member of the controlled group of corporations including such
fiduciary is the employer maintaining such Client Plan or an employee
organization whose members are covered by such Client Plan). However,
the fiduciary responsible for making the investment decision on behalf
of such group trust or other entity (a) must have full investment
responsibility with respect to plan assets invested therein
25; and (b) must have total assets under its management and
control, exclusive of the $50 million threshold amount attributable to
plan investment in the commingled entity, which are in excess of $100
million.
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\25\ For purposes of this proposed exemption, the term ``full
investment responsibility'' means that the fudiciary responsible for
making investment decisions on behalf of the group trust or other
form of entity, has and exercises discretionary management authority
over all of the assets of the group trust or other plan assets
entity.
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In addition, none of the entities described above must be formed
for the sole purpose of making loans of securities.
27. With respect to loans involving the Foreign Affiliated
Borrowers within Global Capital Markets, the following additional
safeguards will be applicable: (a) All collateral will be maintained in
U.S. dollars, U.S. dollar-denominated securities or letters of credit
of U.S. banks; (b) all collateral will be held in the United States;
26 (c) the situs of the Loan Agreement will be maintained in
the United States; and (d) CMB will indemnify the lending Client Plan
in the United States for any loans to a Foreign Affiliated Borrower so
that the Client Plan will not have to litigate in a foreign
jurisdiction nor sue the Foreign Affiliated Borrower to realize on the
indemnification; (e) prior to the transaction, the Foreign Affiliated
Borrower will enter into a written agreement with GSL on behalf of the
Client Plan whereby the Foreign Affiliated Borrower consents to the
[[Page 34292]]
jurisdiction of the courts of the United States with respect to the
transactions described herein; and (f) each Foreign Affiliated Borrower
will be (1)(i) a deposit taking or merchant banking institution
supervised by the banking authorities of the jurisdiction in which it
is located; or (ii) a broker-dealer supervised by a regulatory
authority in the country in which it is located; and (2) in compliance
with all applicable provisions of Rule 15a-6 under the 1934 Act.
---------------------------------------------------------------------------
\26\ Under United Kingdom law, the securities lending agreement
between GSL and CMIL provides, among other things, that all title
and interest in the loaned securities passes to the borrower and all
rights, title and interest in the collateral passes to the lending
Client Plan.
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28. 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 form of the Loan Agreement pursuant to which any securities
loan is effected will be approved by a fiduciary of the Client Plan
which is independent of GSL before a Client Plan lends any securities
to Global Capital Markets.
(b) The lending arrangements (1) will permit the Client Plans to
lend to Global Capital Markets and (2) will enable the Client Plans to
diversify the list of eligible borrowers and earn additional income
from the loaned securities on a secured basis, while continuing to
receive any dividends, interest payments and other distributions due on
those securities.
(c) The Client Plans will receive sufficient information concerning
the financial condition of the borrowers within Global Capital Markets
before the Client Plan lends any securities to any of those entities.
(d) The collateral on each loan to Global Capital Markets initially
will be at least 102 percent of the market value of the loaned
securities, which is in excess of the 100 percent collateral required
under PTE 81-6, and will be monitored daily by GSL.
(e) The Client Plans will receive a monthly report which provides
an independent fiduciary of the Client Plans with information on loan
activity, fees, loan return/yield and the rates on loans to Global
Capital Markets as compared with loans to other brokers and the level
of collateral on the loans.
(f) Neither GSL, GIS, Global Capital Markets nor any other division
or affiliate of CMC will have discretionary authority or control over a
Client Plan's assets, including the acquisition or disposition of
securities available for loan.
(g) The terms of each loan will be at least as favorable to a
Client Plan as those of a comparable arm's length transaction with an
unrelated party.
(h) The fee payable by Global Capital Markets to the Client Plan
for the use of the securities (or the loan rebate fee payable by the
Client Plan to Global Capital Markets if the loan is collateralized
with cash) will be set forth in the applicable report provided to the
independent fiduciary of the Client Plan.
(i) The Client Plan will be able to terminate the lending
arrangement without penalty within five business days after providing
written notice of termination to GSL.
(j) All of the procedures under the transactions will conform to
the applicable provisions of PTE 81-6 and PTE 82-63 and also will be in
compliance with the applicable banking or securities laws of the United
States, the United Kingdom, Canada, Australia and Japan.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Henry H. Borland III and Pat Borland; Located in Downers Grove, IL
[Exemption Application No. D-10707]
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 certain
improved real property (the Property) by the H.H. Borland, Inc. Profit
Sharing Plan (the Plan) to the trustees of the Plan, Henry H. Borland
III (Mr. Borland) and Pat Borland (collectively, the Trustees),
disqualified persons with respect to the Plan, 27 provided
that the following conditions are met:
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\27\ Since Mr. Borland is the sole owner of the Plan sponsor and
the only participant in the Plan, there is no jurisdiction under
Title I of the Act pursuant to 29 CFR Sec. 2510.3(b). However, there
is jurisdiction under Title II of the Act pursuant to section 4975
of the Code.
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(a) The terms and conditions of the Sale are at least as favorable
to the Plan as those obtainable in an arm's length transaction with an
unrelated party;
(b) The Trustees will purchase the Property from the Plan for the
greater of $200,000 or the fair market value of the Property as of the
date of the transaction as determined by a qualified, independent
appraiser;
(c) The Sale will be a one-time transaction for cash; and
(d) The Plan will pay no fees or commissions in connection with the
Sale.
Summary of Facts and Representations
1. H.H. Borland, Inc. (H.H. Borland) is an Illinois corporation
engaged in the purchase and sale of real estate. H.H. Borland is the
sponsor of the Plan which is a defined contribution profit sharing plan
located in Downers Grove, Illinois. The Plan had one participant, Mr.
Borland, and approximately $1,100,000 in total assets as of November
21, 1998. The trustees of the Plan are Mr. Borland and Pat Borland
(collectively, the Trustees). Among the Plan's assets is the Property
which is a single family residence located at 1213 Red Silver Court,
Downers Grove, Illinois. The Property was acquired by the Plan from the
estate of Wilma L. Winterfield, a party unrelated to the Plan, for
$160,875 on January 30, 1991.
2. The applicants represent that, since its acquisition, the
Property has generated rental income (the Rental Income) for the Plan.
In this regard, the applicants represent that the Plan rented the
Property to unrelated third parties from January 30, 1991 until
November 30, 1998 and received rental income (the Rental Income)
totaling $132,404.25. The applicants represent that from November 30,
1998 to present, the Plan has not rented the Property and the Property
has not generated any income for the Plan. The applicants additionally
represent that at no time have the Trustees occupied or otherwise
benefitted from the Plan's ownership of the Property.
3. The applicants represent that the Plan has incurred certain
expenses (the Expenses) as a result of the Plan's ownership of the
Property. In this regard, the applicants represent that the Plan has
incurred a total of $47,648.72 in real estate taxes and insurance costs
associated with the Plan's ownership of the Property. The applicants
represent that, after deducting the Expenses from the Rental Income,
the Plan has received an annual yield of 6.6% relative to the
Property's acquisition price due to the Plan's ownership of the
Property.
3. The Property was appraised on January 25, 1999 by David M.
Benacke (Mr. Benacke) for Appraisal Resources, Ltd., an appraisal
company independent of the Plan and the Trustees. Mr. Benacke, an
Illinois certified real estate appraiser, used the sales comparison
approach to evaluate the fair market value of the Property. Mr. Benacke
represents that he compared the Property to three similar properties
which were the subject of recent sales. Based on these comparisons, Mr.
[[Page 34293]]
Benacke represents that the fair market value of the Property was
$200,000, as of January 25, 1999.
4. The applicants propose a sale of the Property (i.e., the Sale)
by the Plan to the Trustees for $200,000, the Property's current fair
market value. The applicants represent that the Sale is
administratively feasible in that it will be a one-time transaction for
cash in which the Plan will pay no fees or commissions. The applicants
also represent that the Sale is in the best interest of the Plan since
the Property is currently vacant and any future rental of the Property
to unrelated parties will require substantial Plan expenditures for
renovations. In addition, the applicants represent that the Sale is
protective of the Plan since the Plan will receive cash for the
Property which the Plan can invest in assets appropriate for the Plan's
sole participant.
5. In summary, the applicant represent that the proposed
transaction satisfies the criteria of section 408(a) of the Act
because:
(a) The terms and conditions of the Sale are at least as favorable
to the Plan as those obtainable in an arm's length transaction with an
unrelated party;
(b) The Trustees will purchase the Property from the Plan for the
greater of $200,000 or the fair market value of the Property as of the
date of the transaction as determined by a qualified, independent
appraiser;
(c) The Sale will be a one-time transaction for cash; and
(d) The Plan will pay no fees or commissions in connection with the
Sale.
For Further Information Contact: Christopher J. Motta of the
Department, telephone (202) 219-8883 (This is not a toll free number).
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 22nd day of June 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 99-16215 Filed 6-24-99; 8:45 am]
BILLING CODE 4510-29-P
