[Federal Register Volume 64, Number 108 (Monday, June 7, 1999)]
[Notices]
[Pages 30360-30367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14369]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10747]
Proposed Exemption; Bankers Trust Company, BT Alex Brown
Incorporated, and Deutsche Bank AG
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed exemption 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 Request
All interested persons are invited to submit written comments or
request for a hearing on the pending exemption, within 33 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. D-10747. The application 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, N.W., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
persons in the manner agreed upon by the applicant and the Department
within 3 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.
SUPPLEMENTARY INFORMATION: The proposed exemption was requested in an
application 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, this notice of proposed exemption
is issued solely by the Department.
The application contains representations with regard to the
proposed exemption which are summarized below. Interested persons are
referred to the application on file with the Department for a complete
statement of the facts and representations.
Bankers Trust Company, New York, New York; BT Alex. Brown
Incorporated; Deutsche Bank AG
[Application No. D-10747]
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975 of the Code and
in accordance with the procedures set forth in 29 CFR 2570, subpart B
(55 FR 32836, 32847, August 10, 1990).
Section I. Bankers Trust Company
If the exemption is granted, Bankers Trust Company shall not be
precluded from functioning as a ``qualified professional asset
manager'' pursuant to Prohibited Transaction Exemption 84-14 (49 FR
9494, March 13, 1984) (PTE 84-14) for the period beginning on the date
of sentencing with respect to the charges to which Bankers Trust
Company pled guilty on March 11, 1999 and ending five years
1 from the date of publication of the final exemption in the
Federal Register, solely because of a failure to satisfy section I(g)
of PTE 84-14 as a result of the conviction of Bankers Trust Company for
felonies described in the March 11, 1999 felony information (the
Information) entered in the U.S. District Court for the Southern
District of New York, provided that:
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\1\ If granted, this exemption will extend for a period of
approximately five years. However, Bankers Trust Company may, prior
to its expiration, apply for an extension of the exemption.
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(a) this exemption is not applicable if Bankers Trust Company
becomes affiliated with any person or entity convicted of any of the
crimes described in section I(g) of PTE 84-14; and
(b) this exemption is not applicable if Bankers Trust Company is
convicted of any of the crimes described in section I(g) of PTE 84-14,
other than those felonies discussed in the Information;
(c) the custody operations that were part of Bankers Trust Company
at the time of the March 11, 1999 information, and which have
subsequently been reorganized as part of Global Institutional Services
(GIS), are subject to an annual examination of its abandoned property
and escheatment policies, procedures and practices by an independent
public accounting firm. The examination required by this condition
shall determine whether the written procedures adopted by Bankers Trust
Company are properly designed to assure compliance with the
requirements of ERISA. The annual examination shall specifically
require a determination by the auditor as to whether the Bank has
developed and adopted internal policies and procedures that achieve
appropriate control objectives and shall include a test of a
representative sample of transactions, fifty percent of which must
involve ERISA covered plans, to determine operational compliance with
such policies and procedures. The auditor shall issue a written report
describing the steps performed by the auditor during the course of its
examination. The report shall include the auditor's specific findings
and recommendations. This requirement shall continue to be applicable
to the custody operations that were part of Bankers Trust Company as of
March 11, 1999, notwithstanding any subsequent reorganization of the
custody operation function during the term of the exemption.
(d) With respect to the independent audit report described in
section I(c) above:
(1) Bankers Trust Company shall provide notice to the Department of
any instances of the Bank's noncompliance with the written policies and
procedures reviewed by the auditor within 10 business days after such
noncompliance is determined by the auditor notwithstanding the fact
that the examination may not have been
[[Page 30361]]
completed as of that date. Upon request, the auditor shall provide the
Department with all of the relevant workpapers reflecting the instances
of noncompliance. The workpapers should identify whether and to what
extent the assets of ERISA plans were involved in the instances of
noncompliance, and
(2) Any information relating to the Bank's noncompliance with the
written policies and procedures that is required by Federal and/or
state banking authorities to be reported to the state and/or Federal
banking agencies shall also be reported by Bankers Trust Company to the
Department within the same time frames that such information is
otherwise required to be reported to those agencies.
(e) the annual examination described in section I(c) above will be
provided to the Department not later than 90 days following the 12
month period to which it relates, and will be unconditionally available
for examination by any duly authorized employee or representative of
the Department, Internal Revenue Service, Securities and Exchange
Commission or Department of Justice or other relevant regulators and
any fiduciary of a plan for which Bankers Trust Company performs
services.
Section II
If the exemption is granted, BT Alex. Brown Incorporated and its
subsidiaries and Deutsche Bank AG shall not be precluded from
functioning as a ``qualified professional asset manager'' pursuant to
PTE 84-14 for the period beginning on the date of sentencing with
respect to the charges to which Bankers Trust Company pled guilty on
March 11, 1999 and ending ten years from the date of publication of the
final exemption in the Federal Register, solely because of a failure to
satisfy section I(g) of PTE 84-14 as a result of an affiliation with
Bankers Trust Company, provided that:
(a) this exemption is not applicable if BT Alex. Brown
Incorporated, its subsidiaries or Deutsche Bank AG becomes affiliated
with any person or entity convicted of any of the crimes described in
section I(g) of PTE 84-14; and
(b) this exemption is not applicable if BT Alex. Brown
Incorporated, its subsidiaries or Deutsche Bank AG is convicted of any
of the crimes described in section I(g) of PTE 84-14.
Section III. Definitions
(a) For purposes of this exemption, the term ``Bankers Trust
Company'' includes Bankers Trust Company and any entity that was
affiliated with Bankers Trust Company prior to the date of the
acquisition of Bankers Trust Corporation by Deutsche Bank AG, other
than BT Alex. Brown Incorporated and its subsidiaries.
(b) For purposes of this exemption, ``Deutsche Bank AG'' includes
Deutsche Bank AG and any entity that was affiliated with Deutsche Bank
AG prior to the date of the acquisition of Bankers Trust Corporation by
Deutsche Bank AG, and any future affiliates, other than Bankers Trust
Company, as defined in subsection (a).
(c) The term ``affiliate'' of a person means--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any director of, relative of, or partner in, any such person,
(3) Any corporation, partnership, trust or unincorporated
enterprise of which such person is an officer, director, or a 5 percent
or more partner or owner, and,
(4) Any employee or officer of the person who--
(A) is a highly compensated employee (as defined in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person) or,
(B) has direct or indirect authority, responsibility or control
regarding the custody, management or disposition of plan assets.
(d) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
Summary of Facts and Representations
1. Bankers Trust Company is a New York banking corporation and a
commercial bank which provides a wide range of banking, fiduciary,
recordkeeping, custodial, brokerage and investment services to
corporations, institutions, governments, employee benefit plans,
governmental retirement plans and private investors worldwide. Bankers
Trust Company is wholly owned by Bankers Trust Corporation, a bank
holding company established in 1965 under the laws of the State of New
York. As of December 31, 1997, Bankers Trust Corporation and its
affiliates had consolidated assets of $140,102,000,000 and total
stockholders' equity of $5,708,000,000.
2. The corporate entity known as BT Alex. Brown Incorporated
resulted from the September 1, 1997 merger of Alex. Brown Incorporated
with a Bankers Trust Corporation subsidiary (the new entity was renamed
BT Alex. Brown Holdings Incorporated). Alex. Brown & Sons Incorporated,
a U.S. registered broker-dealer subsidiary of Alex. Brown Incorporated,
was merged into BT Securities Corporation (the new entity was renamed
BT Alex. Brown Incorporated). The merged broker-dealer, BT Alex. Brown
Incorporated, is a wholly-owned subsidiary of Bankers Trust
Corporation. Its predecessor, Alex. Brown & Sons Incorporated was not
affiliated with Bankers Trust Corporation when the conduct which
resulted in the Plea Agreement took place. BT Securities Corporation
has never been a subsidiary of Bankers Trust Company.
3. In the second quarter of 1999, Bankers Trust Company expects
that Bankers Trust Corporation will be acquired by Deutsche Bank AG, a
bank organized under the laws of Germany.
4. On March 11, 1999, the United States Attorney for the Southern
District of New York filed a three-count felony information (the
``Information'') in the United States District Court for the Southern
District of New York (the ``Court'') alleging violations of 18 U.S.C.
Sec. 1005. The Information charges Bankers Trust Company with making
false entries on its books and records as a result of the conduct of
certain employees in 1994-6 in Bankers Trust's processing services
businesses. The conduct involved the transfer to reserve accounts and
to income of aged credit items that should have been paid to customers
or other third parties, or paid to state abandoned property
authorities. Some of these aged credit items represented assets of
ERISA covered employee benefit plans. On the same day, Bankers Trust
Company entered a plea of guilty to the charges in the Information
pursuant to a written plea agreement (the ``Plea Agreement''). In the
Plea Agreement, Bankers Trust Company agreed to pay a fine of $60
million and placed that amount in escrow pending sentencing. The Plea
Agreement provides that sentencing will be postponed to a date on or
before June 21, 1999. Bankers Trust Company has cooperated with the
appropriate authorities in the investigation.
5. Bankers Trust Company represents that although none of the
unlawful conduct involved its (or its affiliates) investment management
activities, the criminal conduct described above would preclude each
component of Bankers Trust Company, BT Alex. Brown, Bankers Trust
Australia Funds Limited, and other affiliated investment managers from
serving as a ``qualified professional asset manager'' (QPAM) pursuant
to PTE 84-14. PTE 84-14 provides broad relief from the prohibited
transaction provisions of ERISA and the Code for transactions
[[Page 30362]]
between parties in interest with respect to a plan and an investment
fund in which the plan has an interest when such fund is managed by a
QPAM, the QPAM makes the decision to enter into the transaction, and
the other conditions of the exemption are met. Section I(g) of PTE 84-
14 precludes a person who otherwise qualifies as a QPAM from serving as
a QPAM if such person or an affiliate \2\ thereof has, within the ten
years immediately preceding the transaction been either convicted or
released from imprisonment, whichever is later, as a result of certain
specified criminal activity.
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\2\ For purposes of section I(g) of PTE 84-14, an ``affiliate''
of a person is defined, in relevant part, as ``any person directly
or indirectly, through one or more intermediaries, controlling,
controlled by, or under common control with the person . . .'' (PTE
84-14, section V(d)). Bankers Trust Corporation, Bankers Trust
Company, its sister companies, and its subsidiaries would be treated
as affiliates under this definition. Deutsche Bank AG, and its
affiliates, will be treated as affiliates under this definition as
of the effective date of its acquisition of Bankers Trust
Corporation, the parent of Bankers Trust Company.
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6. Bankers Trust Company represents that the clientele it serves
includes large employee benefit plans subject to the Act. They maintain
that, given the size and number of the plans which Bankers Trust
Company represents, the large number of financial service providers
engaged by such plans, the breadth of the definition of party in
interest under the Act, and the array of services offered by Bankers
Trust Company, it would not be uncommon for a plan for which Bankers
Trust Company currently serves as a QPAM to engage in a transaction
which may involve a party in interest.
7. Bankers Trust Company states that other statutory and class
exemptions exist which cover purchases and sales of securities from
U.S. banks or broker-dealers; securities lending to U.S. banks or
broker-dealers; mortgage pool investment trusts; investment in short-
term instruments such as repurchase agreements (with a bank supervised
by a State or by the United States or a broker-dealer registered under
the Securities Exchange Act of 1934 or a dealer in government
securities who reports daily to the Federal Reserve Bank of New York),
bankers' acceptances in banks supervised by a State or by the United
States, commercial paper or deposits of a bank supervised by a State or
by the United States. Bankers Trust notes, however, that without the
relief provided by PTE 84-14, a plan advised by Bankers Trust Company
or its affiliates would be unable to invest in real estate, mortgages,
or commodities, to engage in purchases and sales of securities from and
to foreign banks or broker-dealers, to lend securities to foreign banks
and broker-dealers, or to invest in deposits of foreign banks, if such
transactions involve a party in interest.
8. Bankers Trust Company requests an exemption to enable it and its
current and future affiliates, to function as QPAMs despite their
failure to satisfy section I(g) of PTE 84-14 as a result of the
judgment of conviction to be entered against Bankers Trust Company.\3\
The proposed exemption is requested on behalf of Bankers Trust Company
and its affiliates. The proposed exemption is also requested on behalf
of such entities that may become affiliated with Bankers Trust Company
or its corporate successor(s), including but not limited to Deutsche
Bank AG and its affiliates. The transactions covered by the proposed
exemption would include the full range of transactions that can be
executed by investment managers who qualify as QPAMs pursuant to PTE
84-14 and satisfy the conditions contained therein. Deutsche Bank AG
represents that, subsequent to the acquisition of Bankers Trust
Corporation, it will assume responsibility on behalf of Bankers Trust
Company for compliance with all of the conditions of the proposed
exemption and all of the commitments contained in the Bankers Trust
Company exemption application, notwithstanding any subsequent
reorganization of Bankers Trust Company or Bankers Trust Corporation.
Thus, for example, Deutsche Bank AG has agreed to ongoing
responsibility for the annual examination of the custody operations
that were part of Bankers Trust Company at the time of the March 11,
1999 information and for any reporting to the Department in connection
with that examination.
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\3\ Section I(g) provides that for purposes of that subsection,
``a person shall be deemed to have been `convicted' from the date of
the judgement of the trial court, regardless of whether that
judgement remains under appeal.'' Until an appealable order is
entered, there is no judgement of conviction under section I(g).
Bankers Trust represents that an appealable order will be entered at
sentencing, which is scheduled for June 21, 1999.
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9. According to Bankers Trust Company, the conduct relating to the
Plea Agreement was discovered by the Bank itself and brought to the
attention of the U.S. Attorney and the banking regulators. Bankers
Trust Company, on its own initiative, engaged Arthur Andersen & Co.,
one of the largest independent accounting firms in the world, with
substantial experience and expertise with banking and financial
institutions, to undertake a review of the Client Processing Services
unit, which has been now reorganized as part of Global Institutional
Services (``GIS''). Arthur Andersen spent over 100,000 hours on the
investigation. Arthur Andersen identified transactions which had been
recorded to income. These transactions have since been reversed.
Bankers Trust has substantially completed the process of compensating
any clients or third parties affected by these transactions or
escheating unidentified funds to the appropriate state as abandoned
property.
10. In addition, Bankers Trust Company represents that the law firm
of Sullivan & Cromwell was engaged to aid in the investigation. The
Senior Control Officer Group (SCOG) \4\ in consultation with Sullivan &
Cromwell determined the individuals that would be evaluated for
potential discipline. This determination was made as a result of a
review of hundreds of thousands of e-mail messages and transaction
records and interviews of dozens of Bankers Trust Company employees.
SCOG and Sullivan and Cromwell met to discuss the issues raised by the
interviews and documents for each employee and jointly reached a
recommendation regarding the appropriate discipline for each employee.
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\4\ Bankers Trust Company states that SCOG is comprised of
individuals who operate completely independent of any business line,
including CPS, and had no involvement with the transactions under
investigation.
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11. Bankers Trust Company represents that by the end of the
investigation, 13 employees who were in various ways related to the
events that were the subject of the Information had resigned and 27
other employees received other forms of disciplinary action. None of
the individuals responsible for the action upon which the Information
is based are currently employed by Bankers Trust Company. In addition
to asking employees to resign, the disciplinary actions taken were,
reassignment out of the fiduciary business, compensation penalties,
reprimand or mandatory retraining. Bankers Trust Company determined the
level of discipline that was appropriate based on the following
criteria: the employee's position during the relevant conduct; the
employee's relevant educational and professional background; the
employee's degree of involvement with the transaction, and the nature
of the transaction. Bankers Trust Company believes that it has
identified and considered all individuals who should have been
disciplined in this matter.
Bankers Trust Company represents that it has undertaken to
appropriately identify and discipline all individuals involved in the
conduct which gave rise
[[Page 30363]]
to the guilty plea by Bankers Trust Company, and similar conduct not
covered by the plea, all of which was investigated by Bankers Trust
Company in 1996 and 1997. This conduct was found by Bankers Trust
Company to involve taking unclaimed funds into income of Bankers Trust
Company without adequate documentation that such funds belonged to
Bankers Trust Company, as well as other accounting practices designed
to misstate revenue or expenses of Bankers Trust Company for a
particular time period. In addition to steps already taken, Bankers
Trust Company agrees that it will, upon request of the Pension and
Welfare Benefits Administration (PWBA), appoint and compensate a
Special Master acceptable to PWBA to review the behavior of those
individuals (and any discipline which has already been imposed on them)
who remain at the Bankers Trust Company (its successors or assigns),
when the proceeding by the Special Master commences who fall into any
of the following categories:
(1) Persons with respect to whom a presentation was made to a
disciplinary review committee of Bankers Trust Company based on any
allegation that an individual was, directly or indirectly, involved in
claiming funds for Bankers Trust Company without adequate documentation
that such funds belonged to Bankers Trust Company;
(2) Persons selected by PWBA who were involved, directly or
indirectly, in any of the above described misconduct, whether or not
specifically investigated by Bankers Trust Company;
(3) Persons selected by PWBA who were involved in conducting,
implementing, supervising, or overseeing the investigative and
disciplinary process on behalf of Bankers Trust Company designed: (a)
to assure that all improper accounting was appropriately corrected; and
(b) to discipline individuals involved in claiming funds for Bankers
Trust Company without adequate documentation that such funds belonged
to Bankers Trust Company or misstating income or expenses of Bankers
Trust Company; and
(4) Persons selected by PWBA who were involved in responding to
inquiries from any governmental agency regarding allegations that
Bankers Trust Company claimed funds without adequate documentation that
such funds belonged to Bankers Trust Company, failed to appropriately
escheat abandoned funds, or misstated income or expenses of Bankers
Trust Company.
If a Special Master is requested by PWBA, the Bankers Trust Company
will submit to PWBA for its approval a proposed engagement letter
relating to the scope of the review which shall include, at a minimum,
the following requirements:
(a) The Special Master shall determine conclusively on behalf of
Bankers Trust Company, what discipline for each such individual would
be appropriate, up to and including dismissal to assure that their
discipline was adequate to deter future misconduct by the individual
and others in similar positions, and to assure that no such individual,
found by the Special Master to be untrustworthy, would be involved,
directly or indirectly, in handling assets subject to the Employee
Retirement Income Security Act;
(b) The Special Master shall report to PWBA regarding any
information that comes to the attention of the Special Master, in the
course of performing his other duties, which suggests that the
continued presence of any person as an employee or contractor of
Bankers Trust Company might imperil the safekeeping or appropriate
investment of employee benefit plan assets covered by the Act, or any
other such information which the Special Master, in his discretion,
believes would be useful to PWBA in performing its mission;
(c) The Special Master shall, in addition, provide to PWBA, upon
request, any materials submitted by or on behalf of Bankers Trust
Company to the Special Master or by the Special Master to Bankers Trust
Company;
(d) To the extent permitted by law, Bankers Trust Company shall
provide the Special Master with all documents concerning the behavior
of such individuals as the Special Master, in his sole discretion,
shall deem relevant, and shall require all employees and contractors to
respond fully and completely to all inquiries by the Special Master as
a condition of their employment by Bankers Trust Company;
(e) Bankers Trust Company further will promptly impose any
discipline found appropriate by the Special Master; and
(f) The Special Master will use best efforts to complete his
assignment within a specified period of time, but his failure to do so
may not be grounds for dismissal or failure by Bankers Trust Company to
honor all terms of the engagement letter, unless PWBA agrees in writing
to such dismissal or failure to comply. Bankers Trust Company further
agrees that any individual who has resigned, been dismissed, or
transferred following involvement in claiming funds for Bankers Trust
Company without adequate documentation that such funds belonged to
Bankers Trust Company or misstating income or expenses of Bankers Trust
Company, so that they are not presently involved in the handling of
ERISA covered employee benefit plan assets on behalf of Bankers Trust
Company, will not in the future be permitted by Bankers Trust Company
to handle such assets on its behalf as an employee or contractor.
Similarly, Bankers Trust Company agrees that any individual who was
disciplined in connection with the conduct described above, but who was
not, at the time of their discipline, involved in handling employee
benefit plan assets subject to the Act, will not in the future be
permitted to handle such assets on behalf of Bankers Trust Company.
Notwithstanding the agreements in this paragraph, Bankers Trust Company
may, within 60 days of retaining the Special Master, with notice to
PWBA, request that the Special Master review the conduct of any
individual whose involvement with employee benefit plan assets is
proscribed by this paragraph. Upon request for such review, the Special
Master shall determine whether the limitations imposed by this
paragraph should be modified, using the same standards which he would
use in determining appropriate discipline for an individual described
in numbered paragraphs (1)-(4). In performing this duty, the Special
Master shall be given the same cooperation as he would receive in
reviewing the discipline of an individual described in numbered
paragraphs (1)-(4).
12. Bankers Trust Company further represents that substantial
training has been provided to 2000 employees thus far. The training is
in the process of being provided to the remainder of GIS employees and
will be given monthly thereafter for new employees. As part of its
enhanced process to establish and maintain a proper control
environment, Bankers Trust represents that it developed a training plan
to ensure that employees are aware of the important responsibilities
for the proper handling of client funds. The ``Business Practices''
course was developed with Arthur Andersen and taught jointly with them.
The full day's course presents the legal and regulatory issues and
responsible business practices for everyday operations, including
fiduciary requirements of ERISA and the appropriate method for dealing
with suspected misconduct.
13. Bankers Trust Company represents that various corrective
measures have been taken by it to help ensure that conduct such as that
[[Page 30364]]
involved in the Plea Agreement will not recur. New controls have been
implemented, and a risk management infrastructure has been developed
with risk managers assigned to each business area reporting directly to
the Corporate Controller.
14. Arthur Andersen provided recommendations to the Bank for its
consideration in augmenting the controls applicable to its processing
business. In the area of organization, Arthur Andersen recommended that
controllers for each product line in GIS report to a corporate
controller, who reports directly to the Chief Financial Officer of the
Bank. In Arthur Andersen's view, segregation of the accounting control
function from operations is paramount to a strong control environment.
Bankers Trust Company agreed, creating controllers for each business in
GIS, who report to the CFO.
15. Arthur Andersen also recommended that the Bank adopt a
centralized escheatment process. In response to this recommendation, a
separate unit of Arthur Andersen with expertise in abandoned property
was engaged to assist in assessing the existing control processes
affecting abandoned property and escheatment. Bankers Trust Company
represents that as a result of this assessment, controls over aged
credit items and escheatment procedures have been enhanced.
Specifically, Bankers Trust Company has created an Abandoned Property
Officer, who is responsible for the Bank's escheatment filings. The
Abandoned Property Officer coordinates with the Legal and Compliance
Department of the Bank to provide guidance to the business lines and to
provide clear guidelines for administering the escheatment process.
Arthur Andersen also recommended that each business unit assign an
individual to be responsible for the escheatment process in their
respective areas and detail their responsibilities and reporting lines
with formal procedures established for escheating aged items. Arthur
Andersen further recommended that enhanced standards be established for
documenting escheated items and that managers and operations employees
be trained on internal policy and procedures. Finally, in the area of
organization, Arthur Andersen recommended that procedures providing for
proper accounting and disposition of credits be established and that
training be provided in the accounting for those items. Bankers Trust
Company represents that it has created an entire manual on escheatment
policies and procedures, and all employees responsible for making
decisions on accounting and escheatment have been trained in these
procedures and will continue to be trained periodically in these areas.
16. In the area of internal audit, Arthur Andersen recommended that
audit procedures be revised to ensure that aged items will be formally
tracked and followed until any of the issues concerning the items are
resolved properly. Arthur Andersen recommended that internal audit
employees be formally trained regarding escheatment laws and
regulations and that internal audit personnel focus on the operational
controls and proper procedures relating to abandoned property. Bankers
Trust Company represents that it has created new audit procedures for
internal audit staff in these areas. Internal audit staff have received
Certified Trust Audit training from an outside organization and will be
trained in Bankers Trust Company's abandoned property procedures.
17. In the area of in-house legal services, Arthur Andersen
recommended that there be a corporate policy for the escheatment of
abandoned property which is approved by business operations, corporate
controllers and the Legal Department before adoption, with procedures
to provide clear guidance on referral of issues to the Legal Department
respecting proper treatment and escheatment of aged items. Since these
recommendations were made, an official ``Abandoned Property Policy''
has been adopted, and procedures have been developed on escheatment
which focus on proper referrals to the Legal Department.
18. Arthur Andersen also made recommendations regarding the
function of the controllers group, including the development of a
reporting mechanism for the aging of debits and credits; the prompt
return of property to the rightful owners, once identified; and the
development of more formal procedures for researching debits and
credits. Bankers Trust Company represents that management information
systems have been developed in response to these recommendations, which
allow both the controllers and the business line operations management
to track the research and identification of debits and credits and
evaluate the process in terms of age, size and other relevant factors.
Also in the controllers' area, Arthur Andersen recommended that the
level of suspense items be reduced and procedures developed to research
outstanding items. In this connection, Arthur Andersen recommended that
the Bank improve its tracking and promptness of reconciling items, with
better descriptions of such items and clear responsibility for
reconciling these items. In response to this recommendation, Bankers
Trust Company represents that it has significantly upgraded the level
and review of operational control indicators. Specifically, key control
indicators have been defined and developed across all business areas.
Monthly control management information systems (MIS) packages have been
developed in each business unit which are reviewed at a monthly control
meeting chaired by the GIS Business head and attended by business unit
heads, controllers, compliance and legal personnel and internal audit
staff.
19. With respect to ERISA plans, Arthur Andersen recommended that
procedures and policies be developed concerning checks paid to plan
participants that have not been cashed by the participant and that an
independent group, such as compliance, be established to monitor all
customer complaints on a centralized basis, with a follow-up audit to
determine whether various aspects of client agreements in connection
with billing, return of excess funds, etc. are being complied with.
Bankers Trust Company represents that it has instituted policies to
insure that assets belonging to employee benefit plans do not reach the
point of being treated as abandoned property to be escheated. In this
connection, Bankers Trust Company has promulgated policies and
procedures for the Retirement Services Group within GIS which, among
other things, require that plan sponsors receive a monthly list of
uncashed checks older than 45 days; that plan sponsors are reminded
that it is the plan sponsor's obligation and responsibility to find
missing participants, and that plan sponsors are specifically requested
to provide directions on amounts outstanding for more than one year.
Check ledgers and class action records are retained by the Bank for 15
years. Plans which terminate their relationship with Bankers Trust
Company will have any amounts still outstanding after six months
forwarded to their successor trustees. With respect to terminated
plans, Bankers Trust Company will forward any amounts still outstanding
after six months to the responsible plan fiduciary. In addition,
Bankers Trust Company represents that it has established policies which
require complaints to be brought to the attention of a supervisor
immediately and tracked in an MIS system so that
[[Page 30365]]
management can evaluate the aging and resolution of complaints. The
policies further require that, if not resolved promptly, the complaint
must be elevated to a more senior manager, or to Compliance and the
Legal Department if the issue is out of the ordinary course of daily
operations.
20. In the area of ownership and accountability of customer
accounts, Arthur Andersen recommended that each business area develop a
chart of accounts, identifying the responsible officer, the proof
schedule, approval levels for account openings, closings and changes,
with procedures for maintenance of proper documentation for customer
and beneficiary amounts and controls on unclaimed amounts. Bankers
Trust Company represents that it has undergone a comprehensive account
review. Over 25,000 general ledger accounts have been closed, and new
procedures and control reports were developed to identify inactive,
obsolete and erroneous accounts. In addition, a chart of accounts was
established through the use of a centralized account database. All
accounts have clear ownership, purpose, and account descriptions. With
respect to each account, an administrator is responsible for verifying
on a monthly basis that the account is being used according to its
official purpose, is being reconciled on a regular basis and is still
active. On a going-forward basis, senior management receives regular
MIS reports regarding account activity. In addition, Bankers Trust
Company represents that procedures are in place to close inactive or
dormant accounts on a regular basis.
21. Arthur Andersen recommended better procedures for handling
class actions and tax refunds, and Bankers Trust Company represents
that it is enhancing its current policies to establish additional
procedures for preservation of the names of beneficial holders of
securities that may result in class action payments, both for existing
plans and for terminated plan relationships. In addition, Bankers Trust
Company has revised its procedures to maintain canceled check reports
and ledgers for 15 years. Bankers Trust Company further represents that
escheatment records are kept indefinitely.
22. In addition to the review conducted by Arthur Anderson, Bankers
Trust Company engaged KPMG, an international accounting firm, who are
the Bank's auditors, to perform an independent risk assessment and
controls review across GIS. Bankers Trust Company represents that this
review had several objectives: (1) to provide an examination of the
various control enhancement initiatives that were underway (e.g.
account usage); (2) to provide an assessment of the risk identification
and control mechanisms across GIS business with, as necessary, control
improvement recommendations; and to evaluate the control environment
and risk management strategies including recommendations on risk
management, legal and compliance structure.
23. Following this review, several control improvements were
recommended throughout the various business units. Bankers Trust
Company represents that detailed plans were established to implement
the improvements with critical/mandatory improvements implemented by
year-end 1998. In addition, recommendations to establish a GIS risk
management function were implemented by the appointment of a GIS risk
manager. In order to provide for an ongoing self-assessment of the
control environment, Bankers Trust Company notes that a GIS-wide risk
database was created. This database houses all key GIS operational
processes and control points and is maintained and updated by the
business unit risk managers as operational processes and control points
are altered or changed.
24. KPMG has confirmed that based on its involvement over the past
two years with respect to the GIS business, Bankers Trust Company has
implemented policies and procedures to address the mandatory gaps
identified in the risk assessment review performed by KPMG, as well as
the recommendations made by Arthur Anderson at the conclusion of their
forensic investigation. KPMG also represents that Bankers Trust Company
continues to make substantial progress working toward a ``best
practices'' control environment and that progress regarding remaining
control enhancement initiatives continues to be closely monitored at
the monthly control review meetings conducted since October, 1997 which
all senior management in the GIS business.
25. Bankers Trust Company is subject to the continuing supervision
of both the New York State Banking Department and the Federal Reserve
Bank of New York. The Federal Reserve Bank of New York (FRBNY) and the
New York Banking Department conduct joint annual examinations of the
Bank, including its fiduciary operations. As part of its supervision,
the New York State Department of Banking entered into a settlement
agreement with Bankers Trust Company, pursuant to which Banker Trust
Company agreed to pay $3.5 million to the State of New York. It reached
this agreement based on the fact that Bankers Trust Company had
retained outside counsel and an independent accounting firm to assist
the Bank in performing a comprehensive forensic and diagnostic review
of the activities of its custody and processing businesses during the
relevant period and based on that review, had taken the following
remedial steps: (1) the Bank adopted improved policies and procedures
relating to accounting practices, risk assessment, compliance and
internal control procedures, and management information reporting; (2)
the Bank adopted new training programs for its personnel in this area
with respect to business practices and responsible decision making; (3)
the Bank replaced and supplemented personnel in this area, including
the replacement of the head of the business group and the head of the
areas specifically involved in the offending behavior; (4) the Bank
created an independent risk management and control function that
reports outside the business line to the senior management in charge of
corporate risk management and control; (5) the Bank enhanced its
internal audit functions including expansion of the audit scope and
increasing the size of the audit staff; (6) the annual external audit
of the business was extended to include a review of the improved
policies and procedures detailed in paragraph one above; and (7) the
Bank commenced and substantially completed appropriate restitution of
the amounts involved. In addition to the payment to the State of New
York, Bankers Trust Company committed to maintaining the new policies,
procedures and internal audit scope and frequency described above and
to make no material changes therein without the prior approval of the
New York State Banking Superintendent and to provide such periodic
reports to the Superintendent and to the Bank's Board of Directors as
they may request regarding compliance with the new policies and
procedures. The New York State Banking Department concluded, in a
letter dated March 11, 1999 to Frank Newman, Chairman of Board of
Bankers Trust Company, that based on the actions taken by the Bank to
date, ``Bankers Trust has put into place the appropriate controls with
respect to the management of the affected businesses''.
26. The Federal Reserve Bank of New York also provided information
in a written submission to assist the Department in its review of
Bankers Trust Company exemption application. The FRBNY has a statutory
obligation to
[[Page 30366]]
inspect the books and records of Bankers Trust Company and monitor its
internal controls to ensure that adequate policies and procedures are
in place with respect to fiduciary obligations. See 12 U.S.C. 248(a),
325 and 1831m. The FRBNY carries out its responsibility to examine
Bankers Trust Company pursuant to delegated authority from the Board,
and shall continue to do so. Under the Plea Agreement entered in the
matter of United States v. Bankers Trust Company, 99 Cr. 250 (S.D.N.Y
Mar 11, 1999), the Bank has submitted to the FRBNY for review and
approval ``the written internal compliance procedures which the Bank
has already implemented for the strengthening and maintenance of its
records, systems and internal audit and controls, in order to ensure
that such misconduct will not recur in the future.''
27. As a condition of the proposed exemption, Bankers Trust Company
has agreed to an annual examination of its custody operations as it
relates to abandoned property and escheatment matters. The examination
is to be undertaken by an independent public accounting firm
5 and will be designed to assist in determining whether the
written procedures adopted by the Bank are properly designed to assure
compliance with the requirements of ERISA. The examination will
specifically require a determination by the auditor as to whether or
not the Bank has developed adequate internal policies and procedures
relating to abandoned property and escheatment matters and would
include a test of a representative sample of transactions to determine
operational compliance with such policies and procedures, with a
written report describing the steps performed by the auditor during the
course of its examination and the auditor's specific findings and
recommendations. The auditor's report will be delivered to the
Department within 90 days of the close of the 12 month period to which
it relates and will be unconditionally available to other government
regulators and the plan fiduciaries upon request.6 KPMG, an
international accounting firm, who is the Banks auditor, or other
successor independent auditors, will perform this annual audit.
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\5\ In the Department's view, whether an auditor is independent
for purposes of the proposed exemption would depend on the
particular facts and circumstances of each case. However, the
Department would not view an auditor as independent under
circumstances where the auditor has a financial interest, including
an ownership interest, in Bankers Trust Company or Deutsche Bank, or
any affiliates thereof, or otherwise receives more than a de minimis
amount of its compensation from any of those persons.
\6\ Bankers Trust Company represents that because its future
affiliates will have had no affiliation with Bankers Trust Company
during the period that the conduct that was the subject of the Plea
Agreement took place, the audit will focus solely on the operations
that are currently part of the custody operations of Bankers Trust
Company. Similarly, Alex. Brown Incorporated was not affiliated with
Banker's Trust Corporation when the conduct identified in the Plea
Agreement occurred and thus will not be subject to the annual audit
examination.
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28. Bankers Trust Company asserts that failure to grant the
requested exemption will prohibit employee benefit plans for which
Bankers Trust Company affiliates act as investment managers from
engaging in transactions with parties in interest that would otherwise
be permitted under PTE 84-14, and will cause the plans to forego
attractive investment opportunities. Bankers Trust Company notes that
many of its current and future affiliates, as well as the Bank itself,
would be deprived of their abilities to offer and render the full
panoply of specialized investment advisory services demanded by
employee benefit plans covered by the Act. Bankers Trust Company
represents that the conduct referenced in the Plea Agreement did not
involve the investment management functions of the Bank or its
investment management affiliates. Bankers Trust Company further
represents that sufficient changes have been made in the Bank's custody
and processing business management, procedures and supervision to
prevent in the future the conduct which gave rise to the Plea
Agreement, supporting the inclusion of Bankers Trust Company as an
entity permitted to function as a QPAM.
29. In summary, Bankers Trust Company represents that the proposed
exemption satisfies the criteria of section 408(a) of the Act for the
following reasons: (A) Bankers Trust Company has undertaken substantial
reforms and adopted procedures designed to prevent any recurrence of
the criminal activity and escheatment of ERISA funds.; (B) an
independent audit requirement will further protect plans and help
assure plan participants that the conduct that was the subject of the
Plea Agreement will not recur; (C) instances of noncompliance
discovered during the audit will be reported by Bankers Trust
Corporation to the Department within ten days of determination by the
independent auditor; (D) the investment management units that oversee
the transactions covered by QPAM were not the subject of the Plea
Agreement; and (E) the other conditions of PTE 84-14, combined with the
procedures adopted by Bankers Trust Company, afford ample protection of
the interests of participants and beneficiaries of employee benefit
plans.
Section 411 Proceeding
The Department notes that, as a result of Bankers Trust Company's
conviction for violating 18 U.S.C. Sec. 1005, the Pension and Welfare
Benefits Administration's (PWBA) Office of Enforcement has undertaken
an inquiry to determine whether, pursuant to ERISA Sec. 411(a), 29
U.S.C. Sec. 1111(a), a judicial proceeding should be instituted to bar
Bankers Trust Company from acting as an administrator, fiduciary,
officer, trustee, custodian, counsel, agent, or employee of any
employee benefit plan or from acting as a consultant to any employee
benefit plan. Information obtained in this inquiry will not be used by
the Department in its consideration of Bankers Trust Company's
exemption request unless the Director of the Office of Enforcement
submits such information, or any portion thereof, in writing, to PWBA's
Office of Exemption Determinations for inclusion in the public record.
Neither the Department's consideration of Bankers Trust Company's
exemption request nor any final decision on such request shall
foreclose completion of the Department's ERISA Sec. 411 inquiry nor
preclude any proceeding which may result therefrom seeking to bar
Bankers Trust Company from acting as an administrator, fiduciary,
officer, trustee, custodian, counsel, agent, or employee of any
employee benefit plan or from acting as a consultant to any employee
benefit plan.
Notice to Interested Persons
With respect to notification of interested persons, the applicant
will distribute this notice of proposed exemption by first class mail
to an independent plan fiduciary for all ERISA pension plans for which
Bankers Trust Company and its subsidiaries provide fiduciary services,
including trustee services and/or the provision of investment advice
and the owner of all IRA accounts to which Bankers Trust Company and
its subsidiaries provide investment advisory services. The applicant
will distribute the notice to all participants in its own ERISA pension
plans, either by return receipt electronic mail or by first class mail.
All notification will be mailed or electronically mailed within three
business days after publication of the proposed exemption in the
Federal Register. The applicant will also use its best efforts to
notify an independent fiduciary for each former ERISA pension plan
client of Bankers Trust Company
[[Page 30367]]
and its subsidiaries that has received or may receive additional funds
stemming from either the CPS inquiry or the Bank's additional efforts
to find participants with uncashed benefit checks.
FOR FURTHER INFORMATION CONTACT: Ms. Allison Padams LaVigne or James S.
Frazier of the Department, telephone (202) 219-8194. (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 exemption, 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 exemption, if granted, will be subject to the
express condition that the material facts and representations contained
in the application are true and complete, and that the application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 2nd day of June, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 99-14369 Filed 6-4-99; 8:45 am]
BILLING CODE 4510-29-P
