[Federal Register Volume 63, Number 168 (Monday, August 31, 1998)]
[Notices]
[Pages 46241-46244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23284]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 98-40; Exemption Application No. D-
10429]
Grant of Individual Exemption to Amend and Replace Prohibited
Transaction Exemption (PTE) 96-14 Involving Morgan Stanley & Co.
Incorporated (MS&Co) and Morgan Stanley Trust Company (MSTC), Located
in New York, NY
AGENCY: Pension and Welfare Benefits Administration, U.S. Department of
Labor.
ACTION: Grant of individual exemption to modify and replace PTE 96-14.
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SUMMARY: This document contains a final exemption which amends and
replaces PTE 96-14 (61 FR 10032, March 12, 1996). PTE 96-14, as
clarified by a Notice of Technical Correction dated June 4, 1996 (61 FR
28243), permits the lending of securities to MS&Co and to any other
U.S. registered broker-dealers affiliated with MSTC (the Affiliated
Broker-Dealers; collectively, the MS Broker-Dealers) by employee
benefit plans with respect to which the MS Broker-Dealer who is
borrowing such securities is a party in interest or for which MSTC acts
as directed trustee or custodian and securities lending agent. In
addition, PTE 96-14 permits MSTC to receive compensation in connection
with securities lending transactions. These transactions are described
in a notice of pendency (the Old Notice) that was published in the
Federal Register on August 11, 1995 at 60 FR 41118.
The current exemption replaces PTE 96-14 but incorporates by
reference the facts, representations and virtually all of the
conditions that are contained in the Old Notice, the final exemption
with respect thereto and the technical correction, except where
modified.
EFFECTIVE DATE: This exemption is effective as of March 12, 1996 for
transactions that are covered by PTE 96-14.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S.
Department of Labor, telephone (202) 219-8881. (This is not a toll-free
number.)
SUPPLEMENTARY INFORMATION: On January 26, 1998, the Department of Labor
(the Department) published a notice of proposed exemption (the New
Notice) in the Federal Register (63 FR 3767) that would amend and
replace PTE 96-14. PTE 96-14 provides an exemption from certain
prohibited transaction restrictions of section 406 of the Employee
Retirement Income Security Act of 1974 (the Act) and from the sanctions
resulting from the application of section 4975 of the Internal Revenue
Code of 1986 (the Code), as amended, by reason of section 4975(c)(1) of
the Code. The proposed exemption was requested in an application filed
on behalf of MS&Co and MSTC (collectively, the Applicants) pursuant to
section 408(a) of the Act and section 4975(c)(2) of the Code, and in
accordance with the procedures (the Procedures) set forth in 29 CFR
Part 2570, Subpart B (55 FR 32836, 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. Accordingly, this replacement exemption is being issued
solely by the Department.
The New Notice gave interested persons an opportunity to comment on
the proposed exemption and to request a public hearing. The only
written comment submitted to the Department during the comment period
was provided by the Applicants.
[[Page 46242]]
In their comment, the Applicants state that they wish to modify the
operative language of the New Notice by adding MS&Co to the lending
agent entities. The Applicants also wish to clarify that the exemption
would cover situations where MSTC and MS&Co, as securities lending
agents, act in a custodial or non-custodial capacity with respect to
loaned securities. The Applicants believe the modification is necessary
because MSTC and MS&Co may both act, from time to time, as non-
custodial securities lending agents. As securities lending agents, the
Applicants note that both MSTC and MS&Co would be confronted with the
same issues under the prohibited transaction provisions of the Act and
the Code if they were to lend client-plan securities to an MS Broker-
Dealer, even though neither MSTC or MS&Co would have physical custody
of the collateral for the securities loan. Under such circumstances,
the Applicants explain that the collateral pledged by the MS Broker-
Dealer would be held in a short-term investment vehicle selected by the
client-plan's fiduciary which would be independent of MSTC, MS&Co and
the affiliated borrower. The Applicants also point out that in its
expanded scope, the exemption would still be subject to the same terms
and conditions as set forth in the New Notice.
The Department concurs with the changes requested by the Applicants
and has amended the operative language of the current exemption to read
as follows:
The restrictions of sections 406(a)(1)(A) through (D) and
406(b)(1) and (b)(2) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply, effective
March 12, 1996, to (1) the lending of securities to Morgan Stanley &
Co. Incorporated (MS&Co) and to any other U.S. registered broker-
dealers affiliated with Morgan Stanley Trust Company (MSTC) or MS&Co
(the Affiliated Broker-Dealer; collectively, the MS Broker-Dealers)
by employee benefit plans with respect to which the MS Broker-Dealer
who is borrowing such securities is a party in interest or for which
(a) MSTC acts as directed trustee, (b) MSTC or MS&Co acts as
custodian and securities lending agent, or (c) MSTC or MS&Co acts as
noncustodial securities lending agent; and (2) the receipt of
compensation by MSTC or MS&Co in connection with these transactions,
provided that the following conditions are met:
Similarly, the Department has revised the first sentence of
Representation 5 of the Old Notice as follows:
5. MSTC and MS&Co request an exemption for the lending of
securities owned by certain pension plans (client-plans) for which
(a) MSTC will serve as directed trustee, (b) MSTC or MS&Co will
serve as custodian and securities lending agent, or (c) MSTC or
MS&Co will serve as noncustodial securities lending agent to the MS
Broker-Dealers, 1 following disclosure of MSTC's and
MS&Co's affiliation with the MS Broker-Dealers, under either of the
two arrangements described as Plan A and Plan B, and for the receipt
of compensation by MSTC or MS&Co in connection with such
transactions.
\1\ The Old Notice refers to the MS Broker-Dealers as the ``MS
Group'' in Representation 5. Because the Applicants believed that
the use of the term ``MS Group'' would cause confusion since clients
and internal personnel often refer to Morgan Stanley Group, Inc.
(the parent entity of MS&Co and MSTC) as the ``MS Group,'' they
requested that all references to the MS Group be replaced with term
``MS Broker-Dealers.'' The Department did not object to this change
and made the requested modification in the final exemption.
In addition to the foregoing changes and to reflect the expanded
scope of the exemption, the Applicants have requested that the
Department include references to MS&Co in Footnote 2 as well as in
Conditions 3, 7 and 13 of the New Notice.
In response, the Department has decided to adopt the suggested
modifications.
The Applicants also comment that Condition 12(b) of the New Notice
unnecessarily restricts the ability of a client-plan to effect
securities loans under the Applicants' lending program, particularly
where the independent investment manager's in-house plan wishes to
invest in the commingled investment vehicle. After careful
consideration, the Department has decided to revise Condition (12)(b)
of the New Notice. As currently drafted, Condition (12)(b) provides
that--
In the case of two or more plans which are not maintained by the
same employer, controlled group of corporations or employee
organization (the Unrelated 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 MS
Broker-Dealers, 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 the fiduciary
responsible for making the investment decision on behalf of such
group trust or other entity--
(i) Is neither the sponsoring employer, a member of the
controlled group of corporations, the employee organization, nor an
affiliate;
(ii) Has full investment responsibility with respect to plan
assets invested therein; and
(iii) 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.
Accordingly, the Department has modified the Condition (12)(b) to read
as follows:
In the case of two or more plans which are not maintained by the
same employer, controlled group of corporations or employee
organization (the Unrelated 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 the
MS Broker-Dealers, 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 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.
The Department wishes to emphasize that although the independent
investment manager's own plan may participate in the commingled
investment vehicle, for purposes of determining whether the $50 million
aggregation requirement is met, the assets of such plan must not be
counted.
Therefore, after giving full consideration to the entire record,
including the written comment provided by the Applicants, the
Department has made the aforementioned changes to the New Notice and
has decided to grant the replacement exemption as modified herein.
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 section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and 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 require, among other things, a fiduciary to
discharge his or her duties respecting the plan solely in the interest
of the participants and beneficiaries of
[[Page 46243]]
the plan and in a prudent fashion in accordance with section
404(a)(1)(B) of the Act; nor does it affect the requirements of section
401(a) of the Code that the plan operate for the exclusive benefit of
the employees of the employer maintaining the plan and their
beneficiaries;
(2) The exemption will not extend to transactions prohibited under
section 406(b)(3) of the Act and section 4975(c)(1)(F) of the Code;
(3) In accordance with section 408(a) of the Act, section
4975(c)(2) of the Code, the Procedures cited above, and based upon the
entire record, the Department finds that the exemption is
administratively feasible, in the interest of the plan and its
participants and beneficiaries and protective of the rights of
participants and beneficiaries of the plan;
(4) This exemption will be supplemental to, and not in derogation
of, any other provisions of the Act and the Code, including statutory
or administrative exemptions. 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
(5) This exemption is subject to the express condition that the New
Notice, the Old Notice and the final exemption underlying PTE 96-14,
and the notice of technical correction to PTE 96-14, accurately
describe, where relevant, the material terms of the transactions to be
consummated pursuant to this exemption.
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 cited
above, the Department hereby replaces PTE 96-14 as follows.
Section I. Covered Transactions
The restrictions of sections 406(a)(1) (A) through (D) and
406(b)(1) and (b)(2) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1) (A) through (E) of the Code, shall not apply, effective
March 12, 1996, to (1) the lending of securities to Morgan Stanley &
Co. Incorporated (MS&Co) and to any other U.S. registered broker-
dealers affiliated with Morgan Stanley Trust Company (MSTC) or MS&Co
(the Affiliated Broker-Dealer; collectively, the MS Broker-Dealers) by
employee benefit plans with respect to which the MS Broker-Dealer who
is borrowing such securities is a party in interest or for which (a)
MSTC acts as directed trustee, (b) MSTC or MS&Co acts as custodian and
securities lending agent, or (c) MSTC or MS&Co acts as noncustodial
securities lending agent; and (2) the receipt of compensation by MSTC
or MS&Co in connection with these transactions, provided that the
following conditions are met:
(1) Neither MS&Co nor MSTC will have any discretionary authority or
control over a client-plan's assets involved in the transaction or
renders investment advice (within the meaning of 29 CFR 2510.3-21(c))
with respect to those assets;
(2) The terms of each loan of securities by a client-plan to the MS
Broker-Dealer will be at least as favorable to such plan as those of a
comparable arm's length transaction between unrelated parties;
(3) Any arrangement for MSTC or MS&Co to lend plan securities to
the MS Broker-Dealers will be approved in advance by a plan fiduciary
who is independent of MSTC, MS&Co and the MS Broker-Dealers;
2 (In this regard, the independent fiduciary also will
approve the general terms of the securities loan agreement between the
client-plan and the MS Broker-Dealer, the specific terms of which will
be negotiated and entered into by MSTC or MS&Co which will act as a
liaison between the lender and the borrower to facilitate the lending
transaction.)
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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 MSTC or MS&Co, beyond that provided pursuant to
Prohibited Transaction 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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(4) A client-plan may terminate the arrangement at any time without
penalty on five business days notice;
(5) The client-plans will receive collateral consisting of cash,
securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities, bank letters of credit or other collateral
permitted under PTE 81-6 or any successor, from the MS Broker-Dealers
by physical delivery, book entry in a securities depository, wire
transfer or similar means by the close of business on or before the day
the loaned securities are delivered to the MS Broker-Dealers;
(6) The market value of the collateral will initially equal at
least 102 percent of the market value of the loaned securities and, if
the market value of the collateral falls below 100 percent, the MS
Broker-Dealers will deliver additional collateral on the following day
such that the market value of the collateral will again equal 102
percent;
(7) Prior to entering into a loan agreement, the MS Broker-Dealer
will furnish its most recent publicly-available audited and unaudited
financial statements to MSTC or MS&Co, which, in turn, will provide the
statements to the client-plan before the plan is asked to approve the
terms of the loan agreement. The loan agreement will contain a
requirement that the MS Broker-Dealer must promptly notify lenders at
the time of a loan of any material adverse changes in its financial
condition since the date of the most recently furnished financial
statements. If any such changes have taken place, MSTC or MS&Co will
not make any further loans to the MS Broker-Dealer unless an
independent fiduciary of the client-plan approves the loan in view of
the changed financial condition;
(8) In return for lending securities, the client-plan either will--
(a) Receive a reasonable fee, which is related to the value of the
borrowed securities and the duration of the loan, or
(b) Have the opportunity to derive compensation through the
investment of cash collateral. (Under such circumstances, the client-
plan may pay a loan rebate or similar fee to the borrowing MS Broker-
Dealer, if such fee is not greater than the fee the Client Plan would
pay in a comparable arm's length transaction with an unrelated party.)
(9) All procedures regarding the securities lending activities
will, at a minimum, conform to the applicable provisions of PTE 81-6
and PTE 82-63;
(10) The MS Broker-Dealer will indemnify and hold harmless each
lending client-plan against any and all losses, damages, liabilities,
costs and expenses (including attorney's fees) incurred by such plan in
connection with the lending of securities to the MS Broker-Dealers;
(11) The client-plan will receive the equivalent of all
distributions made to holders of the borrowed securities during the
term of the 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;
(12) Only plans with total assets having an aggregate market value
of at least $50 million will be permitted to lend securities to the MS
Broker-Dealers; provided, however that--
(a) In the case of two or more plans which are maintained by the
same employer, controlled group of corporations or employee
organization (the Related Plans), whose assets are commingled for
investment purposes in
[[Page 46244]]
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 the MS
Broker-Dealers, 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, or
(b) In the case of two or more plans which are not maintained by
the same employer, controlled group of corporations or employee
organization (the Unrelated 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 the MS
Broker-Dealers, 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 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 must be formed
for the sole purpose of making loans of securities.)
(13) No loan of securities will be made by MSTC or MS&Co as
securities lending agent to any MS Broker-Dealer on any day on which
the market value of the securities proposed to be loaned, when added to
the market value of all client-plan securities subject to outstanding
loans to MS Broker-Dealers, exceeds 50 percent of the market value of
all client-plan securities subject to securities loans, including the
market value of securities proposed to be loaned to the MS Broker-
Dealer. (For purposes of this paragraph, market value shall be
determined in U.S. dollars, based on the last preceding business day's
closing prices of the securities and the last preceding business day's
closing foreign exchange rates, if applicable.);
(14) With regard to the ``exclusive borrowing'' agreement, the MS
Broker-Dealer will directly negotiate the agreement with a plan
fiduciary who is independent of the MS Broker-Dealers and MSTC, and
such agreement may be terminated by either party to the agreement at
any time;
(15) Prior to any plan's approval of the lending of its securities
to an MS Broker-Dealer, a copy of this exemption (and the notice of
pendency) will be provided to the client-plan;
(16) Each client-plan will receive monthly reports with respect to
securities lending transactions so that an independent fiduciary of a
client-plan may monitor such transactions with the MS Broker-Dealer;
Section II. General Conditions
(1) MS Broker-Dealers will maintain, or cause to be maintained, for
a period of six years from the date of such transactions, in a manner
that is convenient and accessible for audit and examination, such
records as are necessary to enable the persons described in paragraph
(2) to determine whether the conditions of this exemption have been
met, except that--
(a) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of the MS Broker-
Dealers, the records are lost or destroyed prior to the end of the six
year period, and
(b) No party in interest other than the MS Broker-Dealers 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 (2);
(2) Notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (1) 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),
(ii) Any fiduciary of a participating client-plan or any duly
authorized representative of such fiduciary, and
(iii) Any contributing employer to any participating client-plan or
any duly authorized employee representative of such employer;
(3) None of the persons described above in paragraphs (ii)-(iii) of
paragraph (2) are authorized to examine the trade secrets of MS&Co or
its affiliates or commercial or financial information which is
privileged or confidential.
Section III. Definitions
For purposes of this exemption,
(1) An ``affiliate'' of a person includes--
(a) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(b) Any officer, director, or partner, employee or relative (as
defined in section 3(15) of the Act) of such other person; and
(c) Any corporation or partnership of which such other person is an
officer, director or partner.
(2) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
EFFECTIVE DATE: This exemption is effective as of March 12, 1996.
The availability of this exemption is subject to the express
condition that the material facts and representations contained in the
application for exemption are true and complete and accurately describe
all material terms of the transactions. In the case of continuing
transactions, if any of the material facts or representations described
in the applications change, the exemption will cease to apply as of the
date of such change. In the event of any such change, an application
for a new exemption must be made to the Department.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the New Notice, the Old Notice and the final exemption underlying PTE
96-14, and the notice of technical correction to PTE 96-14, all of
which are cited above Signed at Washington, D.C., this 24th day of
August, 1998.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-23284 Filed 8-28-98; 8:45 am]
BILLING CODE 4510-29-P
