[Federal Register Volume 64, Number 185 (Friday, September 24, 1999)]
[Notices]
[Pages 51793-51803]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24940]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10688, et al.]
Proposed Exemptions; Bankers Trust Company (BTC)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the
[[Page 51794]]
prohibited transaction restrictions of the Employee Retirement Income
Security Act of 1974 (the Act) and/or the Internal Revenue Code of 1986
(the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. ________, stated in each Notice of
Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Bankers Trust Company (BTC), Located in New York, New York
[Application Nos. D-10688 through D-10691]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(a) 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 (D) of the Code, shall not
apply to the proposed execution by certain employee benefit plans (the
Plans) investing in Transwestern Office Partners II, L.P. (the LP) of a
partner agreement and estoppel (the Estoppel) under which the Plans
agree to honor capital calls made to the Plans by BTC as the
representative of certain lenders (the Lenders) that will fund a so-
called ``credit facility'' providing credit to the LP in connection
with the Plans'' capital commitments to the LP where the LP has granted
to BTC security interests in the capital commitments, and where the
Lenders are parties in interest with respect to the Plans; provided
that (a) the proposed grants and agreements are on terms no less
favorable to the Plans than those which the Plans could obtain in
arm's-length transactions with unrelated parties; (b) the decisions on
behalf of each Plan to invest in the LP and to execute such grants and
agreements in favor of BTC are made by a fiduciary which is not
included among, and is independent of and unaffiliated with, the
Lenders and BTC; (c) with respect to Plans that have invested or may
invest in the LP in the future, such Plans have or will have assets of
not less than $100 million and not more than 5% of the assets of any
such Plan are or will be invested in the LP. For purposes of this
condition (c), in the case of multiple plans maintained by a single
employer or single controlled group of employers, the assets of which
are invested on a commingled basis, (e.g., through a master trust),
this $100 million threshold will be applied to the aggregate assets of
all such plans; and d) the general partner of the LP must be
independent of BTC, the Lenders and the Plans.
Summary of Facts and Representations
1. The LP is a Delaware limited partnership, the sole general
partner of which is Transwestern Office GP II, L.L.C. (the General
Partner), a Delaware limited liability company. The General Partner is
a separate affiliate of Transwestern Investment Company, L.L.C. (TWIC),
a Delaware limited liability company. The General Partner is an entity
unrelated to BTC, the Lenders and the Plans. The LP shall exist for
five years from the end of its acquisition period (which is expected to
last up to 30 months), but may be extended for an additional three
years. The LP was formed by the General Partner (as sole General
Partner), with the intent of seeking capital commitments from a limited
number of prospective investors who would become limited partners (the
Partners) of the LP. There are 17 current and prospective Partners
having, in the aggregate, irrevocable, unconditional capital
commitments of at least $150,000,000.
2. The LP has been organized to establish an integrated, self-
administered and self-managed real estate operating company (see
paragraph 11, below) to acquire real property assets primarily used for
office purposes. The LP will make acquisitions and provide leasing and
property management services. As described in the Private Placement
Memorandum, the LP believes that significant opportunities exist to
achieve superior risk-adjusted returns on its investments in excess of
15% over a five-year period. The LP will identify and commit to all
investments within thirty months of closing (the Acquisition Period).
Strategies to maximize proceeds and create liquidity for the LP include
single asset sales, portfolio transactions, formation and exchange of
assets for equity and a public market offering.
3. The LP will distribute to the Partners any revenue that exceeds
current and anticipated cash needs as determined by the General
Partner. Proceeds from the sale or financing of properties will
generally be distributed in this manner. However, invested capital
returned from investments sold or financed by the LP within 30 months
[[Page 51795]]
of the final closing date will be subject to reinvestment, provided
that such amounts do not exceed a Partner's capital commitment (as
discussed below).
4. The agreement dated May 1, 1997, under which the LP is organized
(the Agreement) requires each Partner to execute a subscription
agreement that obligates the Partner to make contributions of capital
up to a specified maximum. The Agreement requires Partners to make
capital contributions to fulfill this obligation upon receipt of notice
from the General Partner. Under the Agreement, the General Partner may
make calls for cash contributions (Capital Calls) up to the total
amount of a Partner's capital commitment upon 10 business days' notice,
subject to certain limitations. The Partners' capital commitments are
structured as unconditional, binding commitments to contribute capital
when Capital Calls are made by the General Partner. In the event of a
default by a Partner, the LP may exercise any of a number of specific
remedies.
The Partners constituting over 90% of the equity interests and
their investments in the LP are:
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Capital
Name of partner commitment
(millions)
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The General Partner...................................... $7.175
The Northwestern Mutual Life Ins. Co..................... 10
ERI Trans Inc............................................ 15
Allstate Insurance Company............................... 30
State Street Bank and Trust as Master Trustee of the 20
Northrop Employees Benefit Plans Master Trust...........
Mayo Foundation.......................................... 5
Mayo Foundation Pension Fund............................. 5
Greenwood Properties, Inc................................ 7.5
New York Life Insurance Company.......................... 15
Pew Memorial Trusts...................................... 10.5
J.H. Pew Freedom Trust................................... 2.1
J.N. Pew, Jr. Trust...................................... 1.05
Mabel Pew Myrin Trust.................................... 1.35
Northwestern Memorial Hospital........................... 1.5
Northwestern Memorial Hospital Employees' Pension Plan 1.5
Trust...................................................
Fruit of the Loom Pension Trust, for the Benefit of Union 3
Underwear Pension Plan..................................
Northwestern University.................................. 15
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5. The applicant states that the LP will incur indebtedness in
connection with many of its investments. In addition to mortgage
indebtedness, the LP will incur short-term indebtedness for the
acquisition of particular investments. The indebtedness for the LP will
be no more than 75% of the acquisition cost of the investments and no
more than 70%, on a portfolio basis, of the aggregate book value of all
properties of the LP. This indebtedness will be non-recourse except in
connection with a Credit Facility, described in representation 6,
below, secured by, among other things, a pledge and assignment of each
Partner's capital commitment. This type of facility will allow the LP
to consummate investments quickly without having to finalize the debt/
equity structure for an investment or having to arrange for interim or
permanent financing prior to making an investment, and will have
additional advantages to the Partners and the LP. Under the Agreement,
the General Partner may encumber Partners' capital commitments,
including the right to call for capital contributions, to one or more
financial institutions as security for the Credit Facility. Each of the
Partners has appointed the General Partner as its attorney-in-fact to
execute all documents and instruments of transfer necessary to
implement the provisions of the Agreement. In connection with this
Credit Facility, each of the Partners is required to execute documents
customarily required in secured financings, including an agreement to
honor Capital Calls unconditionally.
6. BTC will become agent for a group of Lenders providing a
37 revolving Credit Facility to the LP. BTC will also be a
participating Lender. Some of the Lenders may be parties in interest
with respect to some of the Plans that invest in the LP by virtue of
such Lenders' (or their affiliates') provisions of fiduciary or other
services to such Plans with respect to assets other than the Plans'
interests in the LP. BTC is requesting an exemption to permit the Plans
to enter into security agreements with BTC, as the representative of
the Lenders, whereby such Plans' capital commitments to the LP will be
used as collateral for loans made under the Credit Facility to the LP,
when such loans are funded by Lenders who are parties in interest to
one or more of the Plans. However, BTC represents that neither it nor
any Lender will act in any fiduciary capacity for the decision made by
any of the Plans to invest in the LP (as discussed in Paragraph 13,
below).
The Credit Facility will be used to provide immediate funds for
real estate acquisitions made by the LP, as well as for the payment of
LP expenses. Repayments will be secured generally by the LP from the
Partners' capital contributions, and Capital Calls on the Partners'
capital commitments. The Credit Facility is intended to be available
until November 1, 1999. The LP can use its credit under the Credit
Facility either by direct or indirect borrowings or by requesting that
letters of credit be issued. All Lenders will participate on a pro rata
basis with respect to all cash loans and letters of credit up to the
maximum of the Lenders' respective commitments. All such loans and
letters of credit will be issued to the LP or an entity in which the LP
owns a direct or indirect interest (a Qualified Borrower), and not to
any individual Partner. All payments of principal and interest made by
the LP or a Qualified Borrower will be allocated pro rata among all
Lenders.
7. The Credit Facility will be a recourse obligation of the LP, the
repayment of which is secured primarily by the grant of a security
interest to BTC, as agent under the Credit Facility for the benefit of
the Lenders, from the LP, in both: (a) The Partners' capital
commitments and (b) a collateral account (the Borrower Collateral
Account) under which the LP must deposit all Partners' capital
contributions when paid. In addition, the LP and the General Partner
will grant BTC, as agent under the Credit Facility for the benefit of
the Lenders, a security interest in: (a) The right to call capital
under the Agreement; (b) Capital Call notices; and (c) the Partners'
capital commitments. The Borrower Collateral Account will be assigned
to BTC to secure repayment of the indebtedness incurred under the
Credit Facility. BTC has the right to apply any or all funds in the
Borrower Collateral Account toward payment of the indebtedness in any
manner it may elect. The capital commitments are fully recourse to all
the Partners and to the General Partner. In the event of default under
the Credit Facility, the agent (i.e., BTC) has the right to make
capital calls unilaterally on the Partners to pay their unfunded
capital commitments, and will apply cash received from such capital
calls to any outstanding debt.
8. Under the Credit Facility, each Partner that is a Plan will
execute an Estoppel pursuant to which it acknowledges that the LP and
the General Partner have pledged and assigned to BTC, for the benefit
of each Lender which may be a party in interest (as defined in Act
section 3(14)) of such Partner, all of their rights under the Agreement
relating to capital commitments and Capital Call notices. The Estoppel
will include an acknowledgment and covenant by the Plan that, if an
event of default exists, such Plan will unconditionally honor
[[Page 51796]]
any capital call made by BTC in accordance with the Agreement up to the
unfunded capital commitment of such Plan to the LP.
9. BTC is requesting an exemption to permit each trust to enter
into an Estoppel under the terms and conditions described herein. The
trusts which hold assets of the Plans (the Trusts) are Partners in the
LP and therefore own limited partnership interests. Some of the Lenders
are parties in interest with respect to some of the Plans in the Trusts
by virtue of such Lenders' (or their affiliates') provisions of
fiduciary (or other) services to such Plans. These services are
provided with respect to Trust assets other than the LP interests.
Thus, BTC states that there is an immediate need for each Trust to
enter into the Estoppel under the terms and conditions described
herein. The Trusts owning limited partnership interests in the LP and
the extent of their respective capital commitments to the LP are
described as follows:
(a) The Northrop Employee Benefit Plans Master Trust (the Northrop
Trust), Located in New York, New York; State Street Bank and Trust as
Master Trustee. This Trust holds the assets of nine defined benefit
plans sponsored by the Northrop Grumman Corporation and two defined
benefit plans sponsored by Northrop Grumman Norden Systems, Inc. (the
Northrop Plans), which own interests in the LP. The total number of
participants in the eleven Northrop Plans is approximately 122,976, and
the approximate fair market value of the total assets of the Northrop
Plans held in the Northrop Trust as of December 31, 1997 was $10.25
billion. The Northrop Trust has made a capital commitment of $20
million to the LP. The fiduciary responsible for reviewing and
authorizing the investment in the LP by the Northrop Trust is
Forstmann-Leff International, Inc. (FLI). FLI was organized in 1968 as
an investment counseling firm. It is a multi-asset class, global
investment management firm. FLI manages approximately $7 billion in
domestic and international equity, fixed income and private markets'
accounts.
(b) The Fruit of the Loom Pension Trust (the Fruit of the Loom
Trust), Located in Chicago, Illinois; The Northern Trust Company,
Trustee. This Trust holds the assets of one defined benefit plan (the
Union Underwear Plan), which owns interests in the LP. The total number
of participants in the Union Underwear Plan is approximately 20,935,
and the approximate fair market value of the total assets of the Union
Underwear Plan held in the Fruit of the Loom Trust as of December 31,
1997 is $161 million. The Fruit of the Loom Trust has made a capital
commitment of $3 million to the LP. The fiduciary responsible for
reviewing and authorizing the investment in the LP by the Fruit of the
Loom Trust is William Farley, Pension Investment Committee of the Fruit
of the Loom, Inc. Board of Directors.
(c) The Mayo Foundation Master Retirement Trust (the Mayo Trust),
Located in New York, New York; BTC, Trustee. This Trust holds the
assets of one defined benefit plan (the Mayo Plan), which owns
interests in the LP. The total number of participants in the Mayo Plan
is approximately 25,028, and the approximate fair market value of the
total assets of the Mayo Plan held in the Mayo Trust as of December 31,
1997 is $1.283 billion. The Mayo Trust has made a capital commitment of
$5 million to the LP. The fiduciary responsible for reviewing and
authorizing the investment in the LP by the Mayo Plan is John H.
Herrell, Vice President of the Mayo Foundation.
(d) The Northwestern Memorial Hospital Employees Pension Plan Trust
(The Memorial Hospital Trust) holds the assets of one defined benefit
plan, the Northwestern Memorial Hospital Employees Pension Plan (the
Memorial Hospital Plan), which owns interests in the LP. The total
number of participants in the Memorial Hospital Plan is approximately
7,804, and the approximate fair market value of the total assets of the
Memorial Hospital Plan held in the Memorial Hospital Trust as of
December 31, 1997 is $213 million. The Memorial Hospital Trust has made
a capital commitment of $1.5 million to the LP. The fiduciary
responsible for reviewing and authorizing the investment in the LP by
the Memorial Hospital Trust is Thomas M. Satkus, Jr., Assistant
Treasurer, Northwestern Memorial Hospital.
10. The applicant represents that the Northrop Plans, the Union
Underwear Plan, the Mayo Plan and the Memorial Hospital Plan are
currently the only employee benefit plans subject to the Act that are
Partners of the LP. However, the applicant states that it is possible
that one or more other Plans will become Partners of the LP in the
future. Thus, the applicant requests relief for any such Plan under
this proposed exemption, provided the Plan meets the standards and
conditions set forth herein. In this regard, such Plan must be
represented by a fiduciary independent of the General Partner, the
Lenders and BTC. Furthermore, the General Partner, who also must be
independent of the Lenders and BTC, must receive from the Plan one of
the following:
(1) A representation letter from the applicable fiduciary with
respect to such Plan substantially identical to the representation
letter submitted by the fiduciaries of the Northrop, Fruit of the Loom,
Mayo and Memorial Hospital Trusts, in which case this proposed
exemption, if granted, will apply to the investments made by such Plan
if the conditions required herein are met; or
(2) Evidence that such Plan and its responsible fiduciaries are
eligible for relief under Prohibited Transaction Exemption 96-23 (PTE
96-23, 61 FR 15975, April 10, 1996), the class exemption for
transactions by a plan with certain parties in interest where such
plan's assets are managed by an in-house asset manager (INHAM) that has
total assets under its management, attributable to plans maintained by
its affiliates, in excess of $50 million (see Part IV(a) of PTE 96-23);
or
(3) Evidence that an insurance company which is investing general
account funds is eligible for relief under Prohibited Transaction
Exemption 95-60 (PTE 95-60, 60 FR 35925, July 12, 1995), the class
exemption for insurance companies; or
(4) Evidence that such Plan is eligible for another class exemption
1 or has obtained an individual exemption from the
Department covering the potential prohibited transactions which are the
subject of this proposed exemption.
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\1\ For example, PTE 84-14 (49 FR 9497, March 13, 1984) permits,
under certain conditions, parties in interest to engage in various
transactions with plans whose assets are managed by a ``qualified
professional asset manager'' (QPAM) who is independent of the
parties in interest (with certain limited exceptions) and meets
specified financial standards.
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11. BTC represents that the LP will obtain an opinion of counsel
that the LP will constitute an ``operating company'' under the
Department's plan asset regulations [see 29 CFR 2510.3-101(c)] if the
LP is operated in accordance with the Agreement and the private
placement memorandum distributed in connection with the private
placement of the LP Partnership interests.2
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\2\ The Department notes that the term ``operating company'' as
used in the Department's plan asset regulation cited above includes
an entity that is considered a ``real estate operating company'' as
described therein (see 29 CFR 2510.3-101(e)). However, the
Department expresses no opinion in this proposed exemption regarding
whether the LP would be considered either an operating company or a
real estate operating company under such regulations. In this
regard, the Department notes that it is providing no relief for
either internal transactions involving the operation of the LP or
for transactions involving third parties other than the specific
relief proposed herein. In addition, the Department encourages
potential Plan investors and their independent fiduciaries to
carefully examine all aspects of the LP's proposed real estate
investment program in order to determine whether the requirements of
the Department's regulations will be met.
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[[Page 51797]]
12. BTC represents that the Estoppel constitutes a form of credit
security which is customary among financing arrangements for real
estate limited partnerships or limited liability companies, wherein the
financing institutions do not obtain security interests in the real
property assets of the partnership or limited liability companies. BTC
also represents that the obligatory execution of the Estoppel by the
Partners for the benefit of the Lenders was fully disclosed in the
Private Placement Memorandum as a requisite condition of investment in
the LP during the private placement of the Partnership interests. BTC
represents that the only direct relationship with respect to the LP
between any of the Partners and any of the Lenders is the execution of
the Estoppel. All other aspects of the transaction, including the
negotiation of all terms of the Credit Facility, are exclusively
between the Lenders and the LP. BTC represents that the proposed
execution of the Estoppel will not affect the abilities of the Trusts
to withdraw from investment and participation in the LP.3
The only Plan assets to be affected by the proposed transactions are
any funds which must be contributed to the LP in accordance with
requirements under the Agreement to make Capital Calls to honor a
Partner's capital commitments.
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\3\ In this regard, the Department cautions Plan fiduciaries to
fully understand all aspects of the Agreement, including the terms
of the Estoppel, prior to making any capital commitments to the LP.
The Department notes that section 404(a) of the Act requires, among
other things, that a fiduciary of a plan act prudently when making
investment decisions for the plan.
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13. BTC represents that neither it nor any Lender acts or has acted
in any fiduciary capacity with respect to any of the Trusts'
investments in the LP and that BTC is independent of and unrelated to
those fiduciaries (the Fiduciaries) responsible for authorizing and
overseeing the Trusts' investments in the LP. Each of the Fiduciaries
represents independently that its authorization of Trust investments in
the LP was free of any influence, authority or control by the Lenders,
including BTC. Each of the Fiduciaries represents that the Trust's
investments in and capital commitments to the LP were made with the
knowledge that each Partner would be required subsequently to grant a
security interest in Capital Calls and capital commitments to the
Lenders and to honor requests for cash contributions, also known as
``drawdowns'', made on behalf of the Lenders without recourse to any
defenses against the General Partner. Each of the Trust Fiduciaries
individually represents that it is independent of and unrelated to BTC
and the Lenders and that the investment by the Trust for which that
Fiduciary is responsible continues to constitute a favorable investment
for the Plan(s) participating in that Trust and that the execution of
the Estoppel is in the best interests and protective of the
participants and beneficiaries of such Plan(s). In the event another
Plan proposes to become a Partner, the applicant represents that it
will require similar representations to be made by such Plan's
independent fiduciary. Any Plan proposing to become a Partner in the
future and needing to avail itself of the exemption proposed herein
will have assets of not less than $100 million 4, and not
more than 5% of the assets of such Plan will be invested in the LP. As
noted in paragraph 9 above, the Northrop Plans, the Union Underwear
Plan, the Mayo Plan and the Memorial Hospital Plan all have total
assets which exceed $100 million and have committed amounts to the LP
which are less than 5% of their total assets.
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\4\ In the case of multiple plans maintained by a single
employer or single controlled group of employers, the assets of
which are invested on a commingled basis, (e.g., through a master
trust), this $100 million threshold will be applied to the aggregate
assets of all such plans.
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14. In summary, the applicant represents that the proposed
transactions satisfy the criteria of section 408(a) of the Act for the
following reasons: (1) The Plans' investments in the LP were authorized
and are overseen by the Fiduciaries, which are independent of the
Lenders and BTC, and other Plan investments in the LP from other
employee benefit plans subject to the Act will be authorized and
monitored by independent Plan fiduciaries; (2) None of the Lenders
(including BTC) has any influence, authority or control with respect to
any of the Trusts' investment in the LP or the Trusts' execution of the
Estoppel; (3) Each Fiduciary invested in the LP on behalf of a Plan
with the knowledge that the Estoppel is required of all Partners
investing in the LP, and all other Plan fiduciaries that invest their
Plan's assets in the LP will be treated the same as other Partners are
currently treated with regard to the Estoppel; (4) Any Plan which has
invested or may invest in the LP in the future, which needs to avail
itself of the exemption proposed herein, has or will have assets of not
less than $100 million,5 and not more than 5% of the assets
of any such Plan are or will be invested in the LP; and (5) the General
Partner of the LP is independent of BTC, the Lenders and the Plans.
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\5\ See footnote 4, ibid.
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For Further Information Contact: Gary H. Lefkowitz of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
Donaldson, Lufkin & Jenrette Securities Corporation (DLJ), Located
in New York, NY
[Exemption Application No. D-10772]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).6
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\6\ For purposes of this proposed exemption, reference to
provisions of Title I of the Act, unless otherwise specified, refer
also to corresponding provisions of the Code.
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Section I. Covered Transactions
A. The restrictions of section 406(a)(1))(A) through (D) 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 (D) of the Code, shall
not apply to any purchase or sale of a security between certain
affiliates of DLJ which are foreign broker-dealers (the Foreign
Affiliates, as defined below) and employee benefit plans (the Plans)
with respect to which the Foreign Affiliates are parties in interest,
including options written by a Plan, DLJ or a Foreign Affiliate
provided that the following conditions and the General Conditions of
Section II, are satisfied:
(1) The Foreign Affiliate customarily purchases and sells
securities for its own account in the ordinary course of its business
as a broker-dealer;
(2) The terms of any transaction are at least as favorable to the
Plan as those which the Plan could obtain in a comparable arm's length
transaction with an unrelated party; and
(3) Neither the Foreign Affiliate nor an affiliate thereof has
discretionary authority or control with respect to the investment of
the Plan assets involved in the transaction, or renders investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets, and the Foreign Affiliate is a party in interest or
disqualified person with respect to the Plan assets involved in the
transaction solely by reason of section 3(14)(B) of the Act or section
4975(e)(2)(B) of the Code, or by reason
[[Page 51798]]
of a relationship to a person described in such sections. For purposes
of this paragraph, the Foreign Affiliate shall not be deemed to be a
fiduciary with respect to Plan assets solely by reason of providing
securities custodial services for a Plan.
B. The restrictions of sections 406(a)(1)(A) through (D) and
406(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
(D) of the Code, shall not apply to any extension of credit to the
Plans by the Foreign Affiliates to permit the settlement of securities
transactions, regardless of whether they are effected on an agency or a
principal basis, or in connection with the writing of options
contracts, provided that the following conditions and the General
Conditions of Section II are satisfied:
(1) The Foreign Affiliate is not a fiduciary with respect to any
Plan assets involved in the transaction, unless no interest or other
consideration is received by the Foreign Affiliate or an affiliate
thereof, in connection with such extension of credit; and
(2) Any extension of credit would be lawful under the Securities
Exchange Act of 1934 (the 1934 Act) and any rules or regulations
thereunder if such Act, rules or regulations were applicable.
C. The restrictions of section 406(a)(1)(A) through (D) 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 (D) of the Code, shall
not apply to the lending of securities to the Foreign Affiliates by the
Plans, provided that the following conditions and the General
Conditions of Section II are satisfied:
(1) Neither the Foreign Affiliate nor an affiliate thereof has
discretionary authority or control with respect to the investment of
Plan 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 Plan receives from the Foreign Affiliate (by physical
delivery or by book entry in a securities depository, wire transfer, or
similar means) by the close of business on the day on which the loaned
securities are delivered to the Foreign Affiliate, collateral
consisting of cash, securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, or irrevocable U.S.
bank letters of credit issued by persons other than the Foreign
Affiliate or an affiliate of the Foreign Affiliate, or any combination
thereof. All collateral shall be in U.S. dollars, or dollar-denominated
securities or bank letters of credit, and shall be held in the United
States;
(3) The collateral has, as of the close of business on the
preceding business day, a market value equal to at least 100 percent of
the then market value of the loaned securities (or, in the case of
letters of credit, a stated amount equal to same);
(4) The loan is made pursuant to a written loan agreement (the Loan
Agreement), which may be in the form of a master agreement covering a
series of securities lending transactions, and which contains terms at
least as favorable to the Plan as those the Plan could obtain in an
arm's length transaction with an unrelated party;
(5) In return for lending securities, the Plan either (a) receives
a reasonable fee, which is related to the value of the borrowed
securities and the duration of the loan, or (b) has the opportunity to
derive compensation through the investment of cash collateral. In the
latter case, the Plan may pay a loan rebate or similar fee to the
Foreign Affiliate, if such fee is not greater than the Plan would pay
an unrelated party in a comparable arm's length transaction with an
unrelated party;
(6) The Plan receives at least the equivalent of all distributions
on the borrowed securities made 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 that the Plan would have received (net of tax withholdings)
7 had it remained the record owner of such securities.
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\7\ The Department notes the applicant's representation that
dividends and other distributions on foreign securities payable to a
lending Plan may be subject to foreign tax withholdings and that the
Foreign Affiliate will always put the Plan back in at least as good
a position as it would have been in had it not lent the securities.
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(7) If the market value of the collateral as of the close of
trading on a business day falls below 100 percent of the market value
of the borrowed securities as of the close of trading on that day, the
Foreign Affiliate delivers additional collateral, by the close of the
Plan's business on the following business day, to bring the level of
the collateral back to at least 100 percent. However, if the market
value of the collateral exceeds 100 percent of the market value of the
borrowed securities, the Foreign Affiliate may require the Plan to
return part of the collateral to reduce the level of the collateral to
100 percent;
(8) Before entering into a Loan Agreement, the Foreign Affiliate
furnishes to the independent Plan fiduciary (a) the most recent
available audited statement of the Foreign Affiliate's financial
condition, (b) the most recent available unaudited statement of its
financial condition (if more recent than the audited statement), and
(c) a representation that, at the time the loan is negotiated, there
has been no material adverse change in its financial condition that has
not been disclosed since the date of the most recent financial
statement furnished to the independent Plan fiduciary. Such
representation may be made by the Foreign Affiliate's agreeing that
each loan of securities shall constitute a representation that there
has been no such material adverse change;
(9) The Loan Agreement and/or any securities loan outstanding may
be terminated by the Plan at any time, whereupon the Foreign Affiliate
shall deliver certificates for securities identical to the borrowed
securities (or the equivalent thereof in the event of reorganization,
recapitalization or merger of the issuer of the borrowed securities) to
the Plan within (a) the customary delivery period for such securities,
(b) five business days, or (c) the time negotiated for such delivery by
the Plan and the Foreign Affiliate, whichever is least, or,
alternatively such period as permitted by Prohibited Transaction Class
Exemption (PTCE) 81-6 (46 FR 7527, January 23, 1981, as amended at 52
FR 18754, May 19, 1987), as it may be amended or superseded.\8\
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\8\ PTCE 81-6 provides an exemption under certain conditions
from section 406(a)(1)(A) through (D) of the Act and the
corresponding provisions of section 4975(c) of the Code for the
lending of securities that are assets of an employee benefit plan to
a U.S. broker-dealer registered under the 1934 Act (or exempted from
registration under the 1934 Act as a dealer in exempt Government
securities, as defined therein).
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(10) In the event that the loan is terminated and the Foreign
Affiliate fails to return the borrowed securities or the equivalent
thereof within the time described in paragraph (9), the Plan may
purchase securities identical to the borrowed securities (or their
equivalent as described above) and may apply the collateral to the
payment of the purchase price, any other obligations of the Foreign
Affiliate under the Loan Agreement, and any expenses associated with
the sale and/or purchase. The Foreign Affiliate is obligated to pay,
under the terms of the Loan Agreement, and does pay, to the Plan, the
amount of any remaining obligations and expenses not covered by the
collateral, plus interest at a reasonable rate. Notwithstanding the
foregoing, the Foreign Affiliate may, in the event it fails to return
borrowed securities as
[[Page 51799]]
described above, replace non-cash collateral with an amount of cash not
less than the then current market value of the collateral, provided
that such replacement is approved by the independent Plan fiduciary;
and
(11) The independent Plan fiduciary maintains the situs of the Loan
Agreement in accordance with the indicia of ownership requirements
under section 404(b) of the Act and the regulations promulgated under
29 CFR 2550.404b-1. However, in the event that the independent Plan
fiduciary does not maintain the situs of the Loan Agreement in
accordance with the indicia of ownership requirements of section 404(b)
of the Act, the Foreign Affiliate shall not be subject to the civil
penalty which may be assessed under section 502(i) of the Act, or the
taxes imposed by section 4975(a) and (b) of the Code.
If the Foreign Affiliate fails to comply with any condition of this
exemption in the course of engaging in a securities lending
transaction, the Plan fiduciary which caused the Plan to engage in such
transaction shall not be deemed to have caused the Plan to engage in a
transaction prohibited by section 406(a)(1)(A) through (D) of the Act
solely by reason of the Foreign Affiliate's failure to comply with the
conditions of the exemption.
Section II. General Conditions
A. The Foreign Affiliate is a registered broker-dealer subject to
regulation by a governmental agency, as described in Section III. B.,
and is in compliance with all applicable rules and regulations thereof
in connection with any transactions covered by this exemption;
B. The Foreign Affiliate, in connection with any transactions
covered by this exemption, is in compliance with the requirements of
Rule 15a-6 (17 CFR 240.15a-6) of the 1934 Act, and Securities and
Exchange Commission (the SEC) interpretations thereof, providing for
foreign affiliates a limited exemption from U.S. broker-dealer
registration requirements.
C. Prior to the transaction, the Foreign Affiliate enters into a
written agreement with the Plan in which the Foreign Affiliate consents
to the jurisdiction of the courts of the United States for any civil
action or proceeding brought in respect of the subject transactions.
D. The Foreign Affiliate maintains, or causes to be maintained,
within the United States for a period of six years from the date of any
transaction such records as are necessary to enable the persons
described in paragraph E to determine whether the conditions of this
exemption have been met except that--
(1) A party in interest with respect to a Plan, other than the
Foreign Affiliate, shall not be subject to a civil penalty under
section 502(i) of the Act or the taxes imposed by section 4975(a) or
(b) of the Code, if such records are not maintained, or are not
available for examination, as required by paragraph E.; and
(2) A prohibited transaction shall not be deemed to have occurred
if, due to circumstances beyond the control of the Foreign Affiliate,
such records are lost or destroyed prior to the end of such six year
period;
E. Notwithstanding the provisions of subsections (a)(2) and (b) of
section 504 of the Act, the Foreign Affiliate makes the records
referred to above in paragraph D., unconditionally available for
examination during normal business hours at their customary location to
the following persons or an authorized representative thereof:
(1) The Department, the Internal Revenue Service or the SEC;
(2) Any fiduciary of a Plan;
(3) Any contributing employer to a Plan;
(4) Any employee organization any of whose members are covered by a
Plan; and
(5) Any participant or beneficiary of a Plan. However, none of the
persons described above in paragraphs (2)-(5) of this paragraph E.
shall be authorized to examine trade secrets of the Foreign Affiliate,
or any commercial or financial information which is privileged or
confidential.
F. Prior to any Plan's approval of any transaction with a Foreign
Affiliate, the Plan is provided copies of the proposed and final
exemption with respect to the exemptive relief granted herein.
Section III. Definitions
For purposes of this proposed exemption,
A. The term ``DLJ'' as referred to in Parts A., B., and C. of
Section I., means Donaldson, Lufkin & Jenrette Securities Corporation.
B. The term ``affiliate'' of another person shall include:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, or partner, employee or relative (as
defined in section 3(15) of the Act) of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner. (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 ``Foreign Affiliate,'' shall mean a current or future
affiliate of DLJ that is subject to regulation as a broker-dealer by--
(1) The Securities and Futures Authority (the SFA), in the United
Kingdom; or
(2) The Australian Securities & Investments Commission (ASIC) in
Australia.
C. The term ``security'' shall include equities, fixed income
securities, options on equity and on fixed income securities,
government obligations, and any other instrument that constitutes a
security under U.S. securities laws. The term ``security'' does not
include swap agreements or other notional principal contracts.
Summary of Facts and Representations
1. DLJ is a broker-dealer registered with the SEC, a full-line
investment services firm which is a member of the New York Stock
Exchange and other principal securities exchanges in the United States,
and a member of the National Association of Securities Dealers. DLJ is
one of the largest investment services firms in the United States. DLJ
is the principal operating subsidiary of Donaldson, Lufkin & Jenrette,
Inc. (DLJ, Inc.) which is currently owned by The Equitable Companies
Incorporated as well as public shareholders. As of March 31, 1999, DLJ,
Inc. had total assets of $90,254,264,000 and $3,069,124,000 in
stockholders' equity.
DLJ has several foreign affiliates that are broker-dealers or
banks. The proposed exemption would cover the Foreign Affiliates listed
below, any current or future affiliates that meet the requirements of
the exemption and their respective regulating entities as follows:
(a) London Global Securities, located in London, England, is
subject to regulation in the United Kingdom by the SFA; and
(b) DLJ Australia Pty. Ltd., located in Melbourne, Victoria,
Australia will be subject to regulation by ASIC.
DLJ requests an individual exemption to permit the Foreign
Affiliates identified above, as well as those others which, in the
future, may be subject to governmental regulation in the United Kingdom
and Australia,\9\ to engage in
[[Page 51800]]
the securities transactions described below with Plans. The proposed
exemption is necessary because the Foreign Affiliates may be parties in
interest with respect to the Plans under the Act, by virtue of being a
fiduciary (for assets of the Plans other than those involved in the
transactions) or a service provider to such Plans, or by virtue of a
relationship to such fiduciary or service provider.
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\9\ For a description of the SFA, see Representations 5 and 6 of
the Notice of Proposed Exemption for Barclays Bank PLC (63 FR 53714,
53717, October 6, 1998). Similarly, for a description of ASIC, see
Representation 2 of the Notice of Proposed Exemption for Citibank,
N.A. and Salomon Smith Barney, Inc. (64 FR 10493, 10496, March 4,
1999).
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2. DLJ represents that the Foreign Affiliates are subject to
regulation by a governmental agency in the foreign country. DLJ further
represents that registration of a foreign broker-dealer with the
governmental agency in these cases addresses regulatory concerns
similar to those concerns addressed by registration of a broker-dealer
with the SEC under the 1934 Act. The rules and regulations set forth by
the above-referenced agencies and the SEC share a common objective: the
protection of the investor by the regulation of the securities market.
The United Kingdom and Australia both have comprehensive financial
resource and reporting/disclosure rules concerning broker-dealers.
Broker-dealers are required to demonstrate their capital adequacy. The
reporting/disclosure rules impose requirements on broker-dealers with
respect to risk management, internal controls and records relating to
counterparties. All such records must be produced at the request of the
agency at any time. The agencies' registration requirements for broker-
dealers are enforced by fines and penalties and thus constitute a
comprehensive disciplinary system for the violation of such rules.
DLJ represents that in connection with the transactions covered by
this proposed exemption, the Foreign Affiliates' compliance with any
applicable requirements of Rule 15a-6 (17 CFR 240.15a-6) of the 1934
Act (as discussed further in Representation 6, below), and SEC
interpretations thereof, providing for foreign affiliates a limited
exemption from U.S. registration requirements, will offer additional
protections to the Plans.
Principal Transactions
3. DLJ represents that the Foreign Affiliates operate as traders in
dealers' markets wherein they customarily purchase and sell securities
for their own account in the ordinary course of their business as
broker-dealers and engage in purchases and sales of securities,
including options on securities, with their clients. Such trades are
referred to as principal transactions. DLJ represents that the role of
a broker-dealer in a principal transaction in the subject foreign
countries is virtually identical to that of a broker-dealer in a
principal transaction in the United States.
DLJ requests an individual exemption to permit the Foreign
Affiliates to engage in principal transactions with the Plans under
terms and conditions equivalent to those required in PTCE 75-1 (40 FR
50845, October 31, 1975), Part II.\10\ DLJ states that because PTCE 75-
1 provides an exemption only for U.S. registered broker-dealers, the
principal transactions at issue would fall outside the scope of relief
provided by PTCE 75-1.\11\
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\10\ PTCE 75-1, Part II, provides an exemption, under certain
conditions, from section 406(a) of the Act and section 4975(c)(1)(A)
through (D) of the Code, for principal transactions between employee
benefit plans and U.S. registered broker-dealers or U.S. banks that
are parties in interest with respect to such plans.
\11\ The Department notes that the proposed principal
transactions are subject to the general fiduciary responsibility
provisions of Part 4 of Title I of the Act. Section 404(a) of the
Act requires, among other things, that a fiduciary of a plan act
prudently and solely in the interest of the plan and its
participants and beneficiaries, when making investment decisions on
behalf of the plan.
---------------------------------------------------------------------------
4. DLJ represents that like the U.S. dealer markets, international
equity and debt markets, including the options markets, are not less
dependent on a willingness of dealers to trade as principals. Over the
past decade, Plans have increasingly invested in foreign equity and
debt securities, including debt securities issued by foreign
governments. Thus, Plans seeking to enter into such investments may
wish to increase the number of trading partners available to them by
trading with the Foreign Affiliates.
5. Under the conditions of this proposed exemption, as in PTCE 75-
1, Part II, the Foreign Affiliate must customarily purchase and sell
securities for its own account in the ordinary course of its business
as a broker-dealer. The terms of any principal transaction will be at
least as favorable to the Plan as those the Plan could obtain in a
comparable arm' length transaction with an unrelated party. Neither the
Foreign Affiliate nor an affiliate thereof will have discretionary
authority or control with respect to the investment of the Plan assets
involved in the principal transaction or render investment advice
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those
assets. In addition, the Foreign Affiliate will be a party in interest
or disqualified person with respect to the Plan assets involved in a
principal transaction solely by reason of section 3(14)(B) of the Act
or section 4975(e)(2)(B) of the Code (i.e., a service provider to the
Plan), or by reason of a relationship to such a person as described in
such sections.
6. DLJ represents that Rule 15a-6 of the 1934 Act provides an
exemption from U.S. registration requirements for a foreign broker-
dealer that induces or attempts to induce the purchase or sale of any
security (including over-the-counter equity and debt options) by a
``U.S. institutional investor'' or a ``major U.S. institutional
investor,'' provided that the foreign broker dealer, among other
things, enters into these transactions through a U.S. registered broker
or dealer intermediary.
The term ``U.S. institutional investor,'' as defined in Rule 15a-
6(b)(7), includes an employee benefit plan within the meaning of the
Act if:
(a) The investment decision is made by a plan fiduciary, as defined
in section 3(21) of the Act, which is either a bank, savings and loan
association, insurance company or registered investment adviser, or
(b) The employee benefit plan has total assets in excess of $5
million, or
(c) The employee benefit plan is a self-directed plan with
investment decisions made solely by persons that are ``accredited
investors'' as defined in Rule 501(a)(1) of Regulation D of the
Securities Act of 1933, as amended.
The term ``major U.S. institutional investor,'' as defined in Rule
15a-6(b)(4), includes a U.S. institutional investor that has total
assets in excess of $100 million.\12\ DLJ represents that the
intermediation of the U.S. registered broker-dealer imposes upon the
foreign broker-dealer the requirement that the securities transaction
be effected in accordance with a number of U.S. securities laws and
regulations applicable to U.S. registered broker-dealers.
---------------------------------------------------------------------------
\12\ Note that a SEC No-Action Letter has expanded the
categories of entities that qualify as ``major U.S. institutional
investors.'' See SEC No-Action letter issued to Cleary, Gottlieb,
Steen & Hamilton on April 9, 1997 (the April 9, 1997 No-Action
Letter).
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DLJ represents that under Rule 15a-6, a foreign broker-dealer that
induces or attempts to induce the purchase or sale of any security by a
U.S. institutional or major institutional investor in accordance with
Rule 15a-6 must, among other things:
(a) Provide written consent to service of process for any civil
action brought by or proceeding before the SEC or a self-regulatory
organization;
(b) Provide the SEC with any information or documents within its
possession, custody
[[Page 51801]]
or control, any testimony of any such foreign associated persons,
and any assistance in taking the evidence of other persons, wherever
located, that the SEC requests and that relates to transactions
effected pursuant to the Rule;
(c) Rely on the U.S. registered broker or dealer through which
the principal transactions with the U.S. institutional and major
U.S. institutional investors are effected to (among other things):
(1) Effecting the transactions, other than negotiating their
terms;
(2) Issuing all required confirmations and statements;
(3) As between the foreign broker-dealer and the U.S. registered
broker-dealer, extending or arranging for the extension of credit in
connection with the transactions;
(4) Maintaining required books and records relating to the
transactions, including those required by Rules 17a-3 (Records to be
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved
by Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
13
---------------------------------------------------------------------------
\13\ DLJ represents that all such requirements relating to
recordkeeping of principal transactions would be applicable to any
Foreign Affiliate in a transaction that would be covered by this
proposed exemption.
---------------------------------------------------------------------------
(5) Receiving, delivering, and safeguarding funds and securities
in connection with the transactions on behalf of the U.S.
institutional investor or the major U.S. institutional investor in
compliance with Rule 15c3-3 of the 1934 Act (Customer Protection--
Reserves and Custody of Securities); 14 and
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\14\ Under certain circumstances described in the April 9, 1997
No-Action Letter (e.g., clearance and settlement transactions),
there may be direct transfers of funds and securities between a Plan
and a Foreign Affiliate. Please note that in such situations (as in
other situations covered by Rule 15a-6), the U.S. registered broker-
dealer will not be acting as a principal with respect to any duties
it is required to undertake pursuant to Rule 15a-6.
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(6) Participating in certain oral communications (e.g.,
telephone calls) between the foreign associated person and the U.S.
institutional investor (not the major U.S. institutional investor)
and accompanying the foreign associated person on certain visits
with both U.S. institutional and major U.S. institutional investors.
Under certain circumstances, the foreign associated person may have
direct communications and contact with the U.S. institutional
investor. (See the April 9, 1997 No-Action Letter).15
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\15\ Under certain circumstances described in the April 9, 1997
No-Action Letter (e.g., clearance and settlement transactions),
there may be direct transfers of funds and securities between a Plan
and a Foreign Affiliate. Please note that in such situations (as in
other situations covered by Rule 15a-6), the U.S. broker-dealer will
not be acting as a principal with respect to any duties it is
required to undertake pursuant to Rule 15a-6.
---------------------------------------------------------------------------
Extensions of Credit
7. DLJ represents that a normal part of the execution of securities
transactions by broker-dealers on behalf of clients, including Plans,
is the extension of credit to clients so as to permit the settlement of
transactions in the customary settlement period. Such extensions of
credit are customary in connection with the buying and writing of
option contracts.
DLJ requests that the proposed exemption include relief for
extensions of credit to the Plans by the Foreign Affiliates in the
ordinary course of their purchases or sales of securities, regardless
of whether they are effected on an agency or a principal basis, or in
connection with the writing of options contracts. In this regard, an
exemption for such extensions of credit is provided under PTCE 75-1,
Part V, only for transactions between Plans and U.S. registered broker-
dealers and banks.16
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\16\ PTCE 75-1, Part V, provides an exemption, under certain
conditions, from section 406 of the Act and section 4975(c)(1) of
the Code, for extensions of credit, in connection with the purchase
or sale of securities, between employee benefit plans and U.S.
registered broker-dealers that are parties in interest with respect
to such plans.
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8. Under the conditions of this proposed exemption, as in PTCE 75-
1, Part V, the Foreign Affiliate may not be a fiduciary with respect to
Plan assets involved in the transaction. However, an exception to such
condition would be provided herein, as in PTCE 75-1, if no interest or
other consideration were received by the Foreign Affiliate or an
affiliate thereof, in connection with any such extension of credit. In
addition, the extension of credit must be lawful under the 1934 Act and
any rules or regulations thereunder, if the 1934 Act rules or
regulations were applicable. If the 1934 Act would not be applicable,
the extension of credit must still be lawful under applicable foreign
law, in the country where the particular Foreign Affiliate is
domiciled.
Securities Lending
9. The Foreign Affiliates, acting as principals, actively engage in
the borrowing and lending of securities, typically foreign securities,
from various institutional investors, including employee benefit plans.
DLJ requests an exemption for securities lending transactions
between the Foreign Affiliates and the Plans under terms and conditions
equivalent to those required in PTCE 81-6 (46 FR 7527, January 23,
1981, as amended at 52 FR 18754, May 19, 1987).17 Because
PTCE 81-6 provides an exemption only for U.S. registered broker-dealers
and U.S. banks, the securities lending transactions at issue would fall
outside the scope of relief provided by PTCE 81-6.
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\17\ PTCE 81-6 provides an exemption under certain conditions
from section 406(a)(1)(A) through (D) of the Act and the
corresponding provisions of section 4975(c) of the Code for the
lending of securities that are assets of an employee benefit plan to
U.S. registered broker-dealers that are parties in interest with
respect to such plans.
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10. The Foreign Affiliates utilize borrowed securities either to
satisfy their own trading requirements or to re-lend to other broker-
dealers and entities that need a particular security for a certain
period of time. As described in the Federal Reserve Board's Regulation
T, borrowed securities are often used to meet delivery obligations in
the case of short sales or the failure to receive securities that a
broker-dealer is required to deliver. DLJ represents that foreign
broker-dealers are those broker-dealers most likely to seek to borrow
foreign securities. Thus, the requested exemption will increase the
lending demand for such securities, providing the Plans with increased
securities lending opportunities, which will earn such Plans additional
rates of return on the borrowed securities (as discussed below).
11. An institutional investor, such as a pension plan, lends
securities in its portfolio to a broker-dealer in order to earn a fee
while continuing to enjoy the benefits of owning securities (e.g., from
the receipt of any interest, dividends or other distributions due on
those securities and from any appreciation in the value of the
securities). The lender generally requires that the securities loan be
fully collateralized, and the collateral usually is in the form of
cash, irrevocable U.S. bank letters of credit issued by a bank other
than a Foreign Affiliate, or high quality liquid securities such as
U.S. Government or Federal Agency obligations.
12. With respect to the subject securities lending transactions,
neither the Foreign Affiliate nor an affiliate of the Foreign Affiliate
will have discretionary authority or control with respect to the
investment of Plan assets involved in the transaction, or render
investment advice, within the meaning of 29 CFR 2510.3-21(c) with
respect to those assets.
13. By the close of business on the day the loaned securities are
delivered, the Plan will receive from the Foreign Affiliate (by
physical delivery, book entry in a U.S. securities depository, wire
transfer or similar means) collateral consisting of cash, securities
issued or guaranteed by the U.S. Government or its agencies,
irrevocable U.S. bank letters of credit issued by persons other than
the Foreign Affiliate or an affiliate of the Foreign Affiliate, or any
combination thereof. All collateral will be in U.S. dollars, or dollar-
denominated securities or bank letters of credit, and will be held in
the United States. The collateral will have, as of the close of
business on the business day
[[Page 51802]]
preceding the day it is posted by the Foreign Affiliate, a market value
equal to at least 100 percent of the then market value of the loaned
securities (or, in the case of letters of credit, a stated amount equal
to same).
14. The loan will be made pursuant to a written Loan Agreement,
which may be in the form of a master agreement covering a series of
securities lending transactions between the Plan and the Foreign
Affiliate. The terms of the Loan Agreement will be at least as
favorable to the Plan as those the Plan could obtain in a comparable
arm's length transaction with an unrelated party. The Loan Agreement
will also contain a requirement that the Foreign Affiliate pay all
transfer fees and transfer taxes relating to the securities loans.
15. In return for lending securities, the Plan will either (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. In the
latter case, the Plan may pay a loan rebate or similar fee to the
Foreign Affiliate if such fee is not greater than what the Plan would
pay in a comparable arm's length transaction with an unrelated party.
Earnings generated by non-cash collateral will be returned to the
Foreign Affiliate. The Plan will be entitled to at least the equivalent
of all distributions on the borrowed securities made during the term of
the loan. Such distributions will include cash dividends, interest
payments, shares of stock as a result of stock splits, and rights to
purchase additional securities, that the Plan would have received (net
of tax withholdings) had it remained the record owner of such
securities.
16. If the market value of the collateral as of the close of
trading on a business day falls below 100 percent of the market value
of the borrowed securities as of the close of trading on that day, the
Foreign Affiliate will deliver additional collateral, by the close of
business on the following business day, to bring the level of the
collateral back to at least 100 percent. However, if the market value
of the collateral exceeds 100 percent of the market value of the
borrowed securities, the Foreign Affiliate may require the Plan to
return part of the collateral to reduce the level of the collateral to
100 percent.
17. Before entering a Loan Agreement, the Foreign Affiliate will
furnish to the independent Plan fiduciary (a) the most recent available
audited statement of the Foreign Affiliate's financial condition, (b)
the most recent available unaudited statement of its financial
condition (if more recent than the audited statement), and (c) a
representation that, at the time the loan is negotiated, there has been
no material adverse change in its financial condition since the date of
the most recent financial statement furnished to the independent Plan
fiduciary. Such representation may be made by the Foreign Affiliate's
agreeing that each loan of securities shall constitute a representation
that there has been no such material adverse change.
18. The Loan Agreement and/or any securities loan outstanding may
be terminated by the Plan at any time, whereupon the Foreign Affiliate
will deliver certificates for securities identical to the borrowed
securities (or the equivalent thereof in the event of a reorganization,
recapitalization or merger of the issuer of the borrowed securities) to
the Plan within (a) the customary delivery period for such securities,
(b) five business days, or (c) the time negotiated for such delivery by
the Plan and the Foreign Affiliate, whichever is least, or
alternatively, such period as permitted by PTCE 81-6, as it may be
amended or superseded. In the event the Foreign Affiliate fails to
return the borrowed securities, or the equivalent thereof, within the
designated time, the Plan will have certain rights under the Loan
Agreement to realize upon the collateral. The Plan may purchase
securities identical to the borrowed securities, or the equivalent
thereof, and may apply the collateral to the payment of the purchase
price, any other obligations of the Foreign Affiliate under the Loan
Agreement, and any expenses associated with replacing the borrowed
securities. The Foreign Affiliate is obligated to pay to the Plan the
amount of any remaining obligations and expenses not covered by the
collateral, plus interest at a reasonable rate as determined in
accordance with an independent market source. Notwithstanding the
foregoing, the Foreign Affiliate may, in the event it fails to return
borrowed securities as described above, replace non-cash collateral
with an amount of cash not less than the then current market value of
the collateral, provided that such replacement is approved by the
independent Plan fiduciary.
19. The independent Plan fiduciary will maintain the situs of the
Loan Agreement in accordance with the indicia of ownership requirements
of section 404(b) of the Act and the regulations promulgated under 29
CFR 2550.404b-1.18.
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\18\ Section 404(b) of the Act states that no fiduciary may
maintain the indicia of ownership of any assets of a plan outside
the jurisdiction of the district courts of the United States, except
as authorized by regulation by the Secretary of Labor.
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20. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act for the following reasons:
(a) With respect to principal transactions effected by the Foreign
Affiliates, the proposed exemption will enable Plans to realize the
same benefits of efficiency and convenience which such Plans could
derive from principal transactions with U.S. registered broker-dealers
pursuant to PTCE 75-1, Part II;
(b) With respect to extensions of credit in connection with
purchases or sales of securities, the proposed exemption will enable
the Foreign Affiliates and the Plans to extend credit in the ordinary
course of the Foreign Affiliate's business to effect agency or
principal transactions within the customary settlement period, or in
connection with the writing of options contracts, for transactions
between plans and broker-dealers, as is possible for U.S. registered
broker-dealers pursuant to PTCE 75-1, Part V;
(c) With respect to securities lending transactions effected by the
Foreign Affiliates, the proposed exemption will enable the Plans to
realize a low-risk return on securities that otherwise would remain
idle, as in securities lending transactions executed by Plans and U.S.
registered broker-dealers or U.S. banks, pursuant to PTCE 81-6; and
(d) The proposed exemption will provide Plans with virtually the
same protections and benefits as those provided by PTCE 75-1 and PTCE
81-6.
Notice to Interested Persons
The applicant represents that because those Plans that will be
potentially interested in the transactions cannot be identified at this
time, the only practical means of notifying Plan fiduciaries is by the
publication of the notice of proposed exemption in the Federal
Register. Therefore, comments and requests for a hearing must be
received by the Department not later than 30 days from the date of the
publication of this proposed exemption in the Federal Register.
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
[[Page 51803]]
408(a) of the Act and/or section 4975(c)(2) of the Code does not
relieve a fiduciary or other party in interest of disqualified person
from certain other provisions of the Act and/or the Code, including any
prohibited transaction provisions to which the exemption does not apply
and the general fiduciary responsibility provisions of section 404 of
the Act, which among other things require a fiduciary to discharge his
duties respecting the plan solely in the interest of the participants
and beneficiaries of the plan and in a prudent fashion in accordance
with section 404(a)(1)(b) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 21st day of September 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 99-24940 Filed 9-23-99; 8:45 am]
BILLING CODE 4510-29-P
