[Federal Register Volume 62, Number 172 (Friday, September 5, 1997)]
[Notices]
[Pages 47060-47065]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23642]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10464 et al.]
Proposed Exemptions; NatWest Securities Corporations
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and requests for
a hearing should state: (1) The name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, NW., Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
NatWest Securities Corporation, NatWest Securities Limited, Located in
New York, New York
[Application Nos. D-10464, D-10465]
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).
Section I--Transactions
A. Effective May 22, 1997, the restrictions of section 406(a)(1)
(A) through (D) of the Employee Retirement Income Security Act of 1974
(the Act) and the taxes imposed by section 4975 (a) and (b) of the
Internal Revenue Code of 1986 (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 an employee benefit plan and a broker-dealer
affiliated with NatWest Securities Corporation and subject to British
law (NatWest/UK Affiliate), if the following conditions, and the
conditions of Section II, are satisfied:
(1) The NatWest/UK Affiliate customarily purchases and sells
securities for its own account in the ordinary course of its business
as a broker-dealer.
(2) Such transaction is on terms at least as favorable to the plan
as those which the plan could obtain in an arm's length transaction
with an unrelated party.
(3) Neither the NatWest/UK 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 NatWest/UK 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 of a relationship to a person
described in such sections. For purposes of this paragraph, the
NatWest/UK Affiliate shall not be deemed to be a fiduciary with respect
to a plan solely by reason of providing securities custodial services
for a plan.
B. Effective May 22, 1997, the restrictions of section 406(a)(1)
(A) through (D) of the Act and the taxes imposed by section 4975 (a)
and (b) of the Code, by reason of section 4975(c)(1) (A) through (D) of
the Code, shall not apply to the lending of securities that are assets
of an employee benefit plan to an NatWest/UK Affiliate if the following
conditions, and the conditions of Section II, are satisfied:
(1) Neither the NatWest/UK Affiliate (the Borrower) nor an
affiliate of the Borrower 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
[[Page 47061]]
2510.3-21(c)) with respect to those assets;
(2) The plan receives from the Borrower, either by physical
delivery or by book entry in a securities depository located in the
United States, by the close of business on the day on which the
securities lent are delivered to the Borrower, collateral consisting of
U.S. currency, securities issued or guaranteed by the United States
Government or its agencies or instrumentalities, or irrevocable United
States bank letters of credit issued by a person other than the
Borrower or an affiliate thereof, or any combination thereof, having,
as of the close of business on the preceding business day, a market
value (or, in the case of letters of credit, a stated amount) equal to
not less than 100 percent of the then market value of the securities
lent. The collateral referred to in this Section I(B)(2) must be held
in the United States;
(3) Prior to the making of any such loan, the Borrower shall have
furnished the following items to the fiduciary for the plan who is
making decisions on behalf of the plan with respect to the lending of
securities (the Lending Fiduciary): (1) The most recent available
audited statement of the Borrower's financial condition, (2) the most
recent available unaudited statement of the Borrower's financial
condition (if more recent than such audited stated), and (3) a
representation that, at the time the loan is negotiated, there has been
no material adverse change in the Borrower's financial condition since
the date of the most recent financial statement furnished to the plan
that has not been disclosed to the Lending Fiduciary. Such
representation may be made by the Borrower's agreement that each such
loan shall constitute a representation by the Borrower that there has
been no such material adverse change;
(4) The loan is made pursuant to a written loan agreement, the
terms of which are at least as favorable to the plan as those which the
plan could obtain in an arm's-length transaction with an unrelated
party. Such agreement may be in the form of a master agreement covering
a series of securities-lending transactions;
(5) The plan (1) receives a reasonable fee that is related to the
value of the borrowed securities and the duration of the loan, or (2)
has the opportunity to derive compensation through the investment of
cash collateral. Where the plan has that opportunity, the plan may pay
a loan rebate or similar fee to the Borrower, if such fee is not
greater than the plan would pay an unrelated party in an arm's-length
transaction;
(6) The plan receives 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;
(7) If the market value of the collateral on the close of trading
on a business day is less than 100 percent of the market value of the
borrowed securities at the close of trading on that day, the Borrower
shall deliver, by the close of business on the following business day,
an additional amount of collateral (as described in paragraph (2)) the
market value of which, together with the market value of all previously
delivered collateral, equals at least 100 percent of the market value
of all the borrowed securities as of such preceding day.
Notwithstanding the foregoing, part of the collateral may be returned
to the Borrower if the market value of the collateral exceeds 100
percent of the market value of the borrowed securities, as long as the
market value of the remaining collateral equals at least 100 percent of
the market value of the borrowed securities;
(8) The loan may be terminated by the plan at any time, whereupon
the Borrower 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 (1) the customary delivery
period for such securities, (2) three business days, or (3) the time
negotiated for such delivery by the plan and the Borrower, whichever is
lesser; and
(9) In the event the loan is terminated and the Borrower fails to
return the borrowed securities or the equivalent thereof within the
time described in paragraph (8) above, then (i) the plan may, under the
terms of the loan agreement, 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 Borrower under the agreement, and any expenses
associated with the sale and/or purchase, and (ii) the Borrower is
obligated, under the terms of the loan agreement, to pay, 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 Borrower may, in the event the
Borrower 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 such replacement
is approved by the Lending Fiduciary.
(10) If the Borrower fails to comply with any condition of this
exemption, in the course of engaging in a securities-lending
transactions, the plan fiduciary who 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 Borrower's failure to comply with the
conditions of the exemption.
C. Effective May 22, 1997, the restrictions of sections 406(a)(1)
(A) through (D) and 406(b)(2) of the Act and the taxes imposed by
section 4975 (a) and (b) of the Code shall not apply to any extension
of credit to an employee benefit plan by an NatWest/UK Affiliate to
permit the settlement of securities transactions or in connection with
the writing of options contracts provided that the following conditions
are met:
(a) The NatWest/UK Affiliate is not a fiduciary with respect to any
assets of such plan, unless no interest or other consideration is
received by such fiduciary or any affiliate thereof in connection with
such extension of credit; and
(b) Such extension of credit would be lawful under the Securities
Exchange Act of 1934 and any rules or regulations thereunder if such
act, rules or regulations were applicable.
Section II--General Conditions
A. The NatWest/UK Affiliate is registered as a broker-dealer with
the Securities and Futures Authority of the United Kingdom (the S.F.A.)
B. The NatWest/UK Affiliate is in compliance with all requirements
of Rule 15a-6 (17 CFR 240.15a-6) under the Securities and Exchange Act
of 1934, which provides for foreign broker-dealers a limited exemption
from U.S. registration requirements;
C. Prior to the transaction, the NatWest/UK Affiliate enters into a
written agreement with the plan in which the NatWest/UK Affiliate
consents to the jurisdiction of the courts of the United States with
respect to the transactions covered by this exemption;
D. (1) The NatWest/UK Affiliate maintains or causes to be
maintained within the United States for a period of six years from the
date of such transaction such records as are necessary to enable the
persons described in this section to determine whether the conditions
of this exemption have been met; except that a
[[Page 47062]]
party in interest with respect to an employee benefit plan, other than
the NatWest/UK 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 this section, and a prohibited
transaction will not be deemed to have occurred if, due to
circumstances beyond the control of the NatWest/UK Affiliate, such
records are lost or destroyed prior to the end of such six year period;
(2) The records referred to in subsection (1) above are
unconditionally available for examination during normal business hours
by duly authorized employees of (a) the Department of Labor, (b) the
Internal Revenue Service, (c) plan participants and beneficiaries, (d)
any employer of plan participants and beneficiaries, and (e) any
employee organization any of whose members are covered by such plan;
except that none of the persons described in (c) through (e) of this
subsection shall be authorized to examine trade secrets of NatWest
Securities Corporation or the NatWest/UK Affiliate or any commercial or
financial information which is privileged or confidential.
III--Definitions
Affiliate of a person shall include: (i) Any person directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with such other person; (ii) any officer,
director, or partner, employee or relative (as defined in section 3(15)
of the Act) of such other person; and (iii) 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.
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. NatWest Securities Corporation (NatWest) is a securities firm
operating primarily in the United States, with additional activities in
the major markets worldwide. It engages primarily in securities
brokerage activities on an agency basis. Clients include major
corporations, pension funds, investment funds including mutual funds,
and financial institutions.
2. NatWest has foreign affiliates world wide who are in the
business of trading securities, including a broker-dealer affiliate in
London, England (the NatWest/UK Affiliate), currently NatWest
Securities Limited. NatWest represents that in the ordinary course of
their business as broker-dealers, these foreign affiliates customarily
operate as traders in dealers markets wherein the broker-dealer
purchases and sells securities for its own account and engages in
purchases and sales of securities with its clients, and that such
trades are referred to as principal transactions. NatWest states that
in issuing Prohibited Transaction Class Exemption 75-1 (PTCE 75-1, 40
FR 50845, October 31, 1975) the Department has recognized the functions
of registered broker-dealers in principal transactions on behalf of
clients which are employee benefit plans covered by the Act. Part II of
PTCE 75-1 provides exemptive relief from section 406(a) of the Act for
principal transactions between plans and broker-dealers which are
registered under the Securities Exchange Act of 1934, provided all
requirements stated in Part II are satisfied. NatWest represents that,
like the U.S. dealer markets, international equity and debt markets,
including the options markets, are no less dependent on a willingness
of dealers to trade as principals. In the absence of an exemption for
principal transactions, such as PTCE 75-1, those responsible for
trading activities on behalf of plan investors would be prevented from
engaging in transactions with those broker-dealers and banks that
provide the markets for the securities and are most capable of handling
such transactions.
3. NatWest represents that over the past decade, plans have
increasingly invested in foreign equity and debt securities, including
foreign government securities. NatWest states that plans seeking to
enter into such investments may wish to increase the number of trading
partners available to them by trading with foreign broker-dealers such
as the NatWest/UK Affiliate. However, where NatWest provides services
to such plans which are covered by the Act, principal transactions with
the NatWest/UK Affiliate would be prohibited by the Act. The exemptive
relief afforded U.S. broker-dealers by PTCE 75-1 would not be available
with respect to the NatWest/UK Affiliate because that class exemption
is limited to broker-dealers registered with the U.S. Securities and
Exchange Commission (S.E.C.) under the Securities Exchange Act of 1934
(the 1934 Act). NatWest represents that its NatWest/UK Affiliate is not
so registered but, instead, is governed by the rules, regulations and
registration requirements of the Securities and Futures Authority of
the United Kingdom (the S.F.A.). Furthermore, NatWest represents that
Rule 15(a)-6 of the 1934 Act offers foreign broker-dealers limited
exemption from the S.E.C. registration requirements pursuant to
provisions with which the NatWest/UK Affiliate is able to comply.
However, NatWest states that because of the S.E.C. registration
requirement of PTCE 75-1, the NatWest/UK Affiliate is prevented from
engaging in principal transactions with plans with respect to which
NatWest is a party in interest, even though such affiliate is
registered with the S.F.A., experienced in the markets, and able to
satisfy the Rule 15(a)-6 requirements for S.E.C. registration
exemption. Accordingly, NatWest is requesting an individual exemption
to permit its NatWest/UK Affiliate to engage in principal transactions
with plans under the terms and conditions set forth herein, which
NatWest represents are equivalent to those set forth in PTCE 75-1, Part
II. \1\
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\1\ The Department notes that the proposed principal
transactions are subject to the fiduciary responsibility
requirements of part 4, subtitle B, title I of the Act. Section
404(a) of the Act requires, among other things, that a fiduciary of
a plan act prudently, solely in the interest of the plan's
participants and beneficiaries, and for the exclusive purpose of
providing benefits to participants and beneficiaries when making
investment decisions on behalf of a plan.
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4. The proposed exemption will be applicable only to transactions
affected by an NatWest/UK Affiliate which is registered as a broker-
dealer with the S.F.A. and in compliance with Rule 15(a)-6. NatWest
represents that the role of a broker-dealer in a principal transaction
in the United Kingdom is substantially identical to that of a broker-
dealer in a principal transaction in the United States. NatWest further
represents that registration of a broker-dealer with the S.F.A. is
equivalent to registration of a broker-dealer with the S.E.C. under the
1934 Act. NatWest maintains that the S.F.A. has promulgated rules for
broker-dealers which are equivalent to S.E.C. rules, relating to
registration requirements, minimum capitalization, reporting
requirements, periodic examinations, fund segregation, client
protection, and enforcement. NatWest represents that the rules and
regulations set forth by the S.F.A. and the S.E.C. share a common
objective: The protection of the investor by the regulation of
securities markets.
[[Page 47063]]
NatWest explains that under S.F.A. rules, persons who manage
investments or give advice with respect to investments must be
registered as a ``registered representative''. If a person is not a
registered representative and, as part of his duties, makes commitments
in market dealings or transactions, that persons must be registered as
a ``registered trader''. NatWest represents that the S.F.A. rules
require each firm which employs registered representatives or
registered traders to have positive tangible net worth and be able to
meet its obligations as they fall due, and that the S.F.A. rules set
forth comprehensive financial resource and reporting/disclosure rules
regarding capital adequacy. In addition to demonstration of capital
adequacy, NatWest states that the S.F.A. rules impose reporting/
disclosure requirements on broker-dealers with respect to risk
management, internal controls, and all records relating to a
counterparty, and that all records must be produced at the request of
the S.F.A. at any time. NatWest states that S.F.A.'s registration
requirements for broker-dealers are backed up by potential fines and
penalties, and rules which establish a comprehensive disciplinary
system.
5. NatWest represents that in addition to the protections which are
afforded by registration with S.F.A., compliance with the requirements
of Rule 15a-6 (17 CFR 240.15a-6) under the 1934 Act will offer
additional protections in lieu of registration with the S.E.C. NatWest
states that Rule 15a-6 provides an exemption from U.S. broker-dealer
registration for a foreign broker-dealer that induces or attempts to
induce the purchase or sale of any security (including over-the-counter
equity and debt options) by a ``U.S. institutional investor'' or a
``U.S. major institutional investor'', provided that the foreign broker
dealer, among other things, enters into these transactions through a
U.S. registered broker-dealer intermediary. The term ``U.S.
institutional investor'', as defined in Rule 15a-6(b)(7), includes an
employee benefit plan within the meaning of the Employee Retirement
Income Security Act of 1974 (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 advisor, 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 U.S.
major institutional investor is defined as a person that is a U.S.
institutional investor that has total assets in excess of $100 million.
NatWest 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.
NatWest 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) Consent to service of process for any civil action brought by,
or proceeding before, the S.E.C. or any self-regulatory organization
(b) Provide the S.E.C. with any information or documents within its
possession, custody or control, any testimony of any such foreign
associated persons, and any assistance in taking the evidence of other
persons, wherever located, that the S.E.C. requests and that relates to
transactions effected pursuant to the Rule
(c) Rely on the U.S. registered broker-dealer through which the
transactions with the U.S. institutional and major institutional
investors are effected to (among other things):
(1) Effect the transactions, other than negotiating their terms
(2) Issue all required confirmations and statements
(3) As between the foreign broker-dealer and the U.S. registered
broker-dealer, extend or arrange for the extension of credit in
connection with the transactions
(4) Maintain required books and records relating to the
transactions, including those required by Rules 17a-3 (Records to be
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved by
Certain Exchange Members, Brokers and Dealers) of the 1934 Act
(5) Receive, deliver, and safeguard funds and securities in
connection with the transactions on behalf of the U.S. institutional
investor or U.S. major institutional investor in compliance with Rule
15c3-3 of the 1934 Act (Customer Protection--Reserves and Custody of
Securities); and
(6) Participate in all oral communications (e.g., telephone calls)
between the foreign associated person and the U.S. institutional
investor (not the U.S. major institutional investor), and accompany the
foreign associated person on all visits with both U.S. institutional
and major institutional investors. By virtue of this participation, the
U.S. registered broker-dealer would become responsible for the content
of all these communications.
6. NatWest represents that a normal part of the execution of
securities transactions by broker-dealers on behalf of customers,
including employee benefit plans, is the extension of credit to
customers to permit the settlement of transactions in the customary
settlement period, and that such extensions of credit are also
customary activities of broker-dealers in connection with the writing
of option contracts. NatWest notes that exemptive relief for such
transactions is provided under Part V of PTCE 75-1. However, the
exemptive relief under Part V of PTCE 75-1, like that under Part II, is
available only with respect to broker-dealers which are registered with
the S.E.C. under the 1934 Act. Accordingly, NatWest requests that the
exemption include relief for extensions of credit by the NatWest/UK
affiliate in the ordinary course of the purchase or sale of securities,
regardless of whether they are effected on an agency or a principal
basis. The proposed exemption provides relief for extensions of credit
by the NatWest/UK Affiliate to a plan to permit the settlement of
securities transactions or in connection with the writing of options
contracts, provided that the NatWest/UK Affiliate is not a fiduciary
with respect to any assets of the plan, unless no interest or other
consideration is received by the NatWest/UK Affiliate in connection
with such extension of credit. The proposed exemption also requires
that the extension of credit would be lawful under the 1934 Act and any
rules or regulations thereunder if such act, rules, or regulations were
applicable.
7. In addition to exemptive relief for principal transactions and
extensions of credit in connection with the purchase or sale of
securities, NatWest is also requesting exemptive relief for the lending
of securities, equivalent to that provided under the terms and
conditions of Prohibited Transaction Class Exemption 81-6 (PTCE 81-6,
46 FR 7527, January 23, 1981, amended at 52 FR 18754, May 19, 1987), a
class exemption to permit certain loans of securities by employee
benefit plans. NatWest represents that in PTCE 81-6 the Department has
recognized that securities lending represents a low-risk means of
enhancing the investment return of plans with respect to securities
that would otherwise be idle. NatWest
[[Page 47064]]
represents that the conditions of Section I(B) of the proposed
exemption will subject the NatWest/UK Affiliate to all of the
conditions imposed on broker-dealers under PTCE 81-6, other than
registration under the 1934 Act. NatWest notes that such conditions
include requirements relating to daily marking to market, setting
collateral at 100 percent of the market value of the securities, the
rules for termination of the loan, and return of the borrowed
securities. In addition, NatWest notes that the collateral will be in
U.S. dollars and will be held in the United States.
8. In summary, the applicant represents that the proposed
transactions satisfy the criteria of section 408(a) of the Act for the
following reasons: (1) With respect to principal transactions affected
by the NatWest/UK Affiliate , the exemption will enable plans to
realize the same benefits of efficiency and convenience which derive
from principal transactions executed pursuant to Part II of PTCE 75-1
by broker-dealers registered in the United States; (2) With respect to
extensions of credit by the NatWest/UK Affiliate in connection with
purchases or sales of securities, the exemption will enable the
NatWest/UK to extend credit in the ordinary course of business to
affect the transactions within the customary settlement period or in
connection with the writing of options contracts; (3) With respect to
securities lending transactions affected by the NatWest/UK Affiliate,
the exemption will enable plans to realize a low-risk return on
securities that otherwise would remain idle, as in securities lending
transactions executed pursuant to PTCE 81-6 by broker-dealers
registered in the United States; and (4) The proposed exemption
generally imposes terms and conditions upon the transactions executed
by the NatWest/UK Affiliate which are the same as those imposed on U.S.
broker-dealers under PTCE 75-1 and PTCE 81-6.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Carl M. Callaway Individual Retirement Account (IRA) Located in
Huntington, West Virginia
[Application No. D-10469]
Proposed Exemption
The Department is considering granting an exemption under the
authority of 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 sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (A) through (E) of the Code, shall not apply to
the proposed transaction involving a sale or exchange of certain
securities (the Sale) by the IRA to Carl M. Callaway and his wife,
Marianna F. Callaway, both disqualified persons with respect to the
IRA; provided the following conditions are satisfied: (a) The sale or
exchange is a one-time transaction constituting an exchange of
securities approximately equal in value and any difference in value
occurring is immediately eradicated with cash payments by either the
Callaways or the IRA, in order to equalize the value of the exchanged
assets, (b) the IRA incurs no commissions or other expenses in
connection with the transaction, (c) the transaction involves only
securities that have a fair market value on the date of the exchange
which is objectively determinable through independently and regularly
published market prices and quotations, and (d) the IRA tenders as
consideration stock valued at an amount equal to the reported closing
price of the stock on the date of the Sale and the IRA receives U.S.
Treasury notes valued at the reported closing bid on the date of the
Sale, plus the accrued interest the notes earned to the date of the
Sale.
Summary of Facts and Representations
1. The IRA is an individual retirement account as described under
408(a) of the Code. The IRA was established by Carl M. Callaway who is
the sole participant. The custodian of the assets of the IRA is
Hilliard-Lyons Inc., a registered broker/dealer headquartered in
Louisville, KY, which has an office in Huntington, WV serving the IRA.
As of June 27, 1997, the total assets of the IRA were $1,213,813, of
which 2.65 percent consists of U.S. Treasury notes and 6.14 percent are
corporate notes. There are 53.37 percent of the total assets invested
in common stocks and 19.09 percent in mutual funds and 18.66 percent of
the total assets is held in cash.
2. Mr. Callaway is semi-retired and presently taking distributions
from the IRA. Mr. Callaway desires to reduce the amount of common stock
in the IRA and increase its investments in quality corporate bonds and
U.S. Treasury securities. Mr. Callaway is concerned that the
distributions he is receiving will be adversely affected because, in
his opinion, the current holdings of the IRA lack diversification and
expose the IRA to the risk inherent in holding thinly traded stocks and
other investments that are subject to fluctuations in the stock
markets.
Mr. Callaway represents that in order to alleviate this concern,
the IRA needs to acquire fixed income investments that are recognizably
sound and publicly traded and will generate sufficient cash flows which
are able to make the distributions in a timely fashion. To accomplish
this portfolio change without the IRA incurring extensive commissions
or possible losses from the bid-ask spreads on the securities markets,
Mr. Callaway proposes the sale or exchange of certain stocks in the IRA
for U.S. Treasury notes owned individually by himself and his wife. Mr.
Callaway further represents that the proposed exchange will involve
only securities approximately equal in value and the parties to the
exchange will provide for cash payments to equalize the value of the
securities exchanged. Also Mr. Callaway represents that the value of
all investments in this transaction are determinable through regularly
published, objective, and independent market prices and quotations.
3. Mr. Callaway proposes that the IRA will exchange with Mrs.
Callaway the following shares of stock and receive the following U.S.
Treasury notes at closing market values reported on the date of the
Sale:
------------------------------------------------------------------------
Company Ticker symbol & exchange
------------------------------------------------------------------------
(a) 850 shares, Hewlett Packard......... HWP (NYSE)
(b) 4,970 shares, Horizon Bancorp....... HZWV (NASDAQ)
(c) 500 shares, IBM..................... IBM (NYSE)
(d) 575 shares, Motorola................ MOT (NYSE)
(e) 650 shares, Nokia................... NOKA (NYSE)
------------------------------------------------------------------------
U.S. Treasury Notes
(a) $25,000 U.S. Treasury note, 7\1/8\%--due 10/15/98
(b) $215,000 U.S. Treasury note, 7\1/4\%--due 08/15/04
(c) $50,000 U.S. Treasury note, 7\7/8\%--due 11/15/04
In addition Mr. Callaway proposes that the IRA will exchange with
himself the following shares of stock for the following U.S. Treasury
note:
(a) 2,000 shares, Horizon Bancorp--HZWV (NASDAQ)
(b) $50,000 U.S. Treasury note, 7\3/4\%--due 2/15/01
4. Mr. Callaway represents that the Sale would permit the custodian
of the IRA to make the proposed exchanges with the Callaways and
promptly document the transaction and publish it in the monthly
statement for the IRA. Furthermore it is represented that the
[[Page 47065]]
Sale enables the IRA diversify its portfolio. Mr. Callaway represents
that Sale will occur only with the utilization of the fair market
values of the involved securities based on the closing prices on the
date of the Sale for the stock and the bid prices for the U.S. Treasury
notes.
5. In summary, the applicant represents that the proposed
transaction satisfies the criteria contained in section 4975(c)(2) of
the Code because (a) the sale and exchange will be a one-time
transaction involving securities for which market values are readily
ascertainable; (b) the IRA will incur no commissions or other expenses
from the Sale; (c) the IRA will receive not less than the fair market
value of its securities involved in the Sale; and (d) the participant
of the IRA has determined that the proposed transaction is appropriate
for and in the best interest of his IRA and he desires that the
transaction be consummated.
Notice to Interested Persons
Because Mr. Callaway is the only participant in his IRA, it has
been determined that there is no need to distribute the notice of
proposed exemption to interested persons. Comments and requests for a
hearing are due 30 days after publication of this notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Mr. C.E. Beaver of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 2nd day of September, 1997.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 97-23642 Filed 9-4-97; 8:45 am]
BILLING CODE 4510-29-P
