[Federal Register Volume 64, Number 164 (Wednesday, August 25, 1999)]
[Notices]
[Pages 46419-46422]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22025]
[[Page 46419]]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 99-34; Exemption Application No. D-
10694, et al.]
Grant of Individual Exemptions; The Chase Manhattan Bank (CMB),
et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of individual exemptions.
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SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) 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).
Notices were published in the Federal Register of the pendency
before the Department of proposals to grant such exemptions. The
notices set forth a summary of facts and representations contained in
each application for exemption and referred interested persons to the
respective applications for a complete statement of the facts and
representations. The applications have been available for public
inspection at the Department in Washington, DC. The notices also
invited interested persons to submit comments on the requested
exemptions to the Department. In addition the notices stated that any
interested person might submit a written request that a public hearing
be held (where appropriate). The applicants have represented that they
have complied with the requirements of the notification to interested
persons. No public comments and no requests for a hearing, unless
otherwise stated, were received by the Department.
The notices of proposed exemption were issued and the exemptions
are being granted solely by the Department because, 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 proposed to the Secretary
of Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants
and beneficiaries; and
(c) They are protective of the rights of the participants and
beneficiaries of the plans.
The Chase Manhattan Bank (CMB); Located in New York, NY
[Prohibited Transaction Exemption 99-34; Exemption Application No. D-
10694]
Exemption
Section I. Covered Transactions
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.1
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\1\ 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
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 with GSL, where GSL is acting as the securities lending
agent;
(2) Authorized and approved the primary securities lending
authorization agreement with the primary lending agent where GSL is
lending securities under a sub-agency agreement with the primary
lending agent;2 and
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\2\ 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.
[[Page 46420]]
(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).
(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 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 (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 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 (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
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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;
(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 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.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption on June 25, 1999 at 64 FR 34281.
[[Page 46422]]
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
H.H. Borland, Inc. Profit Sharing Plan (the Plan); Located in
Downers Grove, IL
[Prohibited Transaction Exemption 99-35; Exemption Application No. D-
10707]
Exemption
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 Plan to Henry H. Borland III and Pat
Borland, the Plan trustees (the Trustees) and disqualified persons with
respect to the Plan,3 provided the following conditions are
met:
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\3\ 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 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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(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 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 is a one-time transaction for cash; and
(d) The Plan pays no fees or commissions in connection with the
Sale.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on June 25, 1999 at 64 FR
34292.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions to which the exemptions 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) These exemptions are supplemental to and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional 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
(3) The availability of these exemptions is 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 20th day of August, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 99-22025 Filed 8-24-99; 8:45 am]
BILLING CODE 4510-29-P
