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Secretary of Labor Thomas E. Perez
Morgan Guaranty Trust Company of New York, et al. [Notices] [02/08/2000]

EBSA (Formerly PWBA) Federal Register Notice

Morgan Guaranty Trust Company of New York, et al. [02/08/2000]

[PDF Version]

Volume 65, Number 26, Page 6229-6240


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application Nos. D-10119 and D-10120, et al.]

 
Morgan Guaranty Trust Company of New York, et al.

AGENCY:  Pension and Welfare Benefits Administration, Department of 
Labor.

ACTION:  Notice of proposed exemptions.\1\

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    \1\ The term ``Proposed Exemptions'' refers to the following 
individual exemption applications: Application Nos. D-10119 and D-
10120, Morgan Guaranty Trust Company of New York and J.P. Morgan 
Investment Management Inc.; Application No. D-10587, Goldman, Sachs 
& Co.; Application No. D-10779, The Chase Manhattan Bank; 
Application No. D-10820, Citigroup Inc; and Application No. D-10832, 
Morgan Stanley Dean Witter & Co.
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SUMMARY:  This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from the 
prohibited transaction restrictions of the Employee Retirement Income 
Security Act of 1974 (the Act) and from the taxes imposed by the 
Internal Revenue Code of 1986 (the Code).
    The exemptions, if granted, would permit purchases of securities by 
the applicants' asset management affiliate on behalf of employee 
benefit plans for which such asset management affiliate is a fiduciary, 
from underwriting or selling syndicates where the applicants' broker-
dealer affiliate participates as a manager or syndicate member. The 
exemptions, if granted, would affect participants and beneficiaries of 
the plans investing in such securities.

EFFECTIVE DATE:  The exemptions, if granted, would be effective as of 
the date of publication of this notice in the Federal Register.

DATES:  Written comments and/or requests for a public hearing must be 
received by the Department by March 24, 2000.

ADDRESSES:  All written comments and/or requests for a public hearing 
(preferably, three copies) should be sent to the Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, U.S. Department of Labor, 200 Constitution Avenue, N.W., 
Washington, D.C. 20210, Attention: Application Nos. D-10119 and D-
10120, et al. The applications pertaining to the proposed exemptions 
and the comments received will be available for public inspection in 
the Public Documents Room of the Pension and Welfare Benefits 
Administration, U.S. Department of Labor, Room N-5638, 200 Constitution 
Avenue, N.W., Washington, D.C. 20210.

FOR FURTHER INFORMATION CONTACT:  Andrea W. Selvaggio, Janet L. 
Schmidt, or Karin Weng of the Department, telephone (202) 219-8194. 
(This is not a toll-free number.)

SUPPLEMENTARY INFORMATION:  Notice is hereby given of the pendency 
before the Department of five applications for exemption from the 
restrictions of section 406 of the Act and the sanctions resulting from 
the application of section 4975 of the Code, by reason of section 
4975(c)(1) of the Code. The exemptions were requested in separate 
applications filed pursuant to 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, August 10, 1990), by the 
following entities: Morgan Guaranty Trust Company of New York and J.P. 
Morgan Investment Management Inc., Goldman, Sachs & Co., The Chase 
Manhattan Bank, Citigroup Inc., and Morgan Stanley Dean Witter & Co. 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), generally transferred the authority of 
the Secretary of the Treasury to issue exemptions of the type requested 
to the Secretary of Labor. Accordingly, this notice of pendency is 
being issued solely by the Department.\2\
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    \2\ All references in the remainder of the preamble to specific 
provisions of Title I of the Act shall refer also to the 
corresponding provisions of the Code (if any).
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Summary of Facts and Representations

    The facts and representations contained in the applications are 
summarized below. Interested persons are referred to the applications 
on file with the Department for the complete representations of the 
applicants.

The Applicants

    The five applicants, diversified financial services firms, have 
requested similar exemptive relief. It is represented that the 
applicants and their various affiliates are all regulated by other 
federal government agencies such as the Securities and Exchange 
Commission (the SEC), as well as state government agencies, and 
securities regulatory organizations. For convenience, following the 
initial description of each of the applicants, below, the applicants 
and their affiliates shall be referred to in the remainder of the 
notice in generic terms that denote certain roles, namely, ``the 
Applicant,'' ``the Asset Manager, ``\3\ or ``the Affiliated Broker-
Dealer.'' \4\
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    \3\ To the extent that the Applicant has more than one asset 
management affiliate, all references to the Asset Manager herein 
shall refer also to the other asset management entity or entities.
    \4\ To the extent that the Applicant has more than one 
registered broker-dealer affiliate that participates in underwriting 
or selling syndicates, all references to the Affiliated Broker-
Dealer herein shall refer also to the other broker-dealer entity or 
entities.
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    1. Morgan Guaranty Trust Company of New York (MGT) is a New York 
Trust Company. J.P. Morgan Investment Management Inc. (JPMIM), is a 
registered investment adviser. Both MGT and JPMIM are wholly owned 
subsidiaries of J.P. Morgan & Co. (JPM), a Delaware corporation. MGT 
and JPMIM (together, the Applicant) provide investment management and 
investment advisory services. Hereinafter, the Applicant shall be 
referred to as ``the Asset Manager'' when discussing the Applicant's 
activities relating to investment management or investment advisory 
services. J.P. Morgan Securities Inc., a wholly owned indirect 
subsidiary of JPM, is a registered broker-dealer (hereinafter, the 
Affiliated Broker-Dealer). It is represented that, as of December 31, 
1998, the last day of the

[[Page 6230]]

most recent fiscal year for which information is available, JPMIM and 
MGT had $316 billion in total client assets under management. As of 
that date, approximately 40 percent of client assets under management 
were attributable to employee benefit plans (Client Plans) subject to 
the fiduciary responsibility provisions of the Act, including Client 
Plans investing in a pooled fund (Pooled Fund).
    2. Goldman, Sachs & Co. (Goldman), a New York limited partnership, 
is a wholly owned subsidiary and the principal operating subsidiary of 
The Goldman Sachs Group, Inc. Goldman is a registered broker-dealer and 
investment adviser. Hereinafter, Goldman shall be referred to, 
generally, as ``the Applicant'' and, specifically, as ``the Affiliated 
Broker-Dealer'' when discussing Goldman's activities as an underwriter. 
Goldman, Sachs Asset Management (hereinafter, the Asset Manager) is a 
separate operating division of the Applicant and is engaged in the 
investment management and investment advisory business. It is 
represented that, as of November 26, 1999, the last day of the 
Applicant's most recent fiscal year, the Asset Manager had total client 
assets under management of $241.4 billion. As of that date, 
approximately 12.7 percent of client assets under management were 
attributable to Client Plans, including those investing in a Pooled 
Fund.
    3. The Chase Manhattan Bank (CMB), a New York State bank, is a 
subsidiary of The Chase Manhattan Corporation (CMC). Chase Asset 
Management (CAM), a registered investment adviser, is a subsidiary of 
CMB. CMB and CAM (together, the Applicant) provide investment 
management and investment advisory services. Hereinafter, the Applicant 
shall be referred to as ``the Asset Manager'' when discussing the 
Applicant's activities relating to investment management or investment 
advisory services. Chase Securities Inc., a subsidiary of CMC, is a 
registered broker-dealer (hereinafter, the Affiliated Broker-Dealer). 
It is represented that, as of December 31, 1998, the last day of its 
most recent fiscal year for which information is available, CMB had 
total client assets under management of approximately $31 billion. As 
of that date, CAM had total client assets under management of 
approximately $48 billion. As of December 31, 1998, approximately 1.0 
percent of client assets of CMB, and approximately 9.6 percent of 
client assets of CAM, were attributable to Client Plans, including 
those investing in a Pooled Fund.
    4. Citigroup, Inc. (Citigroup or the Applicant) is a Delaware 
corporation and a diversified holding company. Salomon Smith Barney 
Inc. (SSB or the Applicant), a New York corporation, is an indirect 
subsidiary of Citigroup. SSB is a registered broker-dealer and 
investment adviser. Hereinafter, SSB shall be referred to, generally, 
as the ``the Applicant'' and, specifically, as ``the Affiliated Broker-
Dealer'' when discussing SSB's activities as an underwriter. Salomon 
Smith Barney Asset Management (hereinafter, the Asset Manager) is a 
separate operating division of SSB and is engaged in the investment 
management and investment advisory business. It is represented that, as 
of September 30, 1999, the last day of its most recent fiscal year, all 
of Citigroup's asset management affiliates had, in the aggregate, 
client assets under management of approximately $351 billion. As of 
that date, approximately 3.7 percent of client asset under management 
were attributable to Client Plans, including those investing in a 
Pooled Fund.
    5. Morgan Stanley Dean Witter & Co. (hereinafter, the Applicant) is 
a publicly traded Delaware corporation. The Applicant is a registered 
investment adviser. Morgan Stanley Dean Witter Investment Management 
Inc. (hereinafter, the Asset Manager) is a wholly owned subsidiary of 
the Applicant. The Asset Manager is a registered investment adviser. 
Morgan Stanley & Co. Incorporated (hereinafter, the Affiliated Broker-
Dealer) is another wholly owned subsidiary of the Applicant. The 
Affiliated Broker-Dealer is a registered investment adviser and broker-
dealer. It is represented that all of the Applicant's asset management 
affiliates had, in the aggregate, client assets under management of 
approximately $425 billion, as of November 30, 1999, the last day of 
their most recent fiscal year. As of that date, approximately 20 
percent of client assets under management were attributable to Client 
Plans, including those investing in a Pooled Fund.

Requested Exemption

    6. Each Applicant requests exemptive relief permitting purchases of 
securities by the Asset Manager, for the Asset Manager's Client Plans, 
including Pooled Funds, from underwriting or selling syndicates in 
which the Affiliated Broker-Dealer participates as a manager or member. 
Each Applicant states that such purchases would be made from an 
underwriter or broker-dealer other than the Affiliated Broker-Dealer 
and that the Affiliated Broker-Dealer would not receive any selling 
concessions with respect to the securities sold to Client Plans.
    7. Each Applicant represents that where the Affiliated Broker-
Dealer is a member of an underwriting or selling syndicate, the Asset 
Manager makes purchases of securities for its Client Plans in 
compliance with Prohibited Transaction Exemption (PTE) 75-1 (40 FR 
50845, October 31, 1975), Part III. PTE 75-1, Part III, provides a 
class exemption, under certain conditions, for a plan fiduciary to 
purchase securities from an underwriting or selling syndicate of which 
the fiduciary or an affiliate is a member. However, relief under PTE 
75-1 is unavailable if the fiduciary or its affiliate is a manager of 
the underwriting or selling syndicate.
    8. Regardless of whether the fiduciary or its affiliate is a 
manager or member of the underwriting or selling syndicate, PTE 75-1 is 
also unavailable for the purchase of unregistered securities, including 
securities that have been purchased by an underwriter for resale to 
``qualified institutional buyers'' (QIBs), pursuant to SEC Rule 144A 
(17 CFR 230.144A) under the Securities Act of 1933 (the 1933 Act)(Rule 
144A Securities). Rule 144A is frequently used for sales of securities 
of foreign issuers to U.S. investors who are QIBs. Each Applicant 
states that syndicates selling securities pursuant to Rule 144A are 
functionally equivalent to syndicates selling securities in registered 
offerings.
    9. Each Applicant represents that the Affiliated Broker-Dealer is 
frequently involved in securities offerings as a manager of 
underwriting or selling syndicates, or as a manager or member of a 
syndicate selling Rule 144A Securities. Each Applicant further asserts 
that the inability of the Asset Manager to purchase securities for its 
Client Plans from such syndicates can be detrimental to those accounts 
because the accounts can lose important investment opportunities.
    10. According to each Applicant, there has been considerable 
consolidation in the nation's financial services industry since 1975, 
resulting in more situations where a plan fiduciary may be affiliated 
with the manager of an underwriting syndicate.\5\

[[Page 6231]]

In addition, many plans have expanded their investment portfolios in 
recent years to include foreign securities. As a result, the exemption 
provided in PTE 75-1, Part III, is often unavailable for purchases of 
certain securities that may be appropriate plan investments.\6\
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    \5\ For further background, see ``The Costs Imposed on Pension 
Plans by ERISA's Prohibited Transactions Provisions,'' December 
1998, Anthony Saunders and Ingo Walter. This study, by Professors 
Saunders and Walter of the Stern School of Business of New York 
University, discusses the consolidation of the financial services 
industry. It was privately commissioned by J.P. Morgan (see 
Application Nos. D-10119 and D-10120). The study estimates the 
economic loss to plans resulting from their investment managers' 
inability to purchase securities from affiliated underwritings by 
examining the one-day, one-week, and one-month investment returns on 
various initial public offerings (IPOs) during the years 1991 
through 1996. In response to the Department's request for additional 
information, Professor Walter explained, in a letter dated August 
20, 1999, why short periods were selected for calculating the 
hypothetical returns:``The fact that IPOs do not have significant 
excess performance over the long run is well documented in finance 
and is known to all mutual and pension fund managers. Indeed, long-
term relative performance of IPOs (i.e., those held for a period 
over 3 years) is significantly below market performance as measured 
by standard indices such as the S&P 500 . . .''
    \6\ Under the Gramm-Leach-Bliley Act, signed into law by the 
President on November 12, 1999, certain provisions of the Glass-
Steagall Act and the Bank Holding Company Act of 1956, as amended, 
are repealed. The Department notes that the effect of such law will 
likely be further consolidation of the financial services industry. 
The new law will facilitate cross-ownership and control among bank 
holding companies and securities firms through the creation of 
``financial holding companies'' that will be permitted to engage in 
a broad range of financial and related activities, including 
underwriting and dealing activities.
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Investments in Offered Securities

    11. Each Applicant represents that the Asset Manager makes 
investment decisions on behalf of, or renders investment advice to, its 
Client Plans in accordance with the governing document of the 
particular Client Plan or Pooled Fund and the guidelines and objectives 
established in the investment management or advisory agreement. Since 
the Client Plans are covered by Title I of the Act, such investment 
decisions are also subject to the fiduciary responsibility provisions 
of the Act.
    12. Each Applicant states, therefore, that a decision to invest in 
particular securities is made on the basis of price, value, and a 
Client Plan's investment criteria, not on whether the securities are 
currently being sold through an underwriting or selling syndicate. Each 
Applicant further asserts that the Asset Manager has little incentive 
to make purchases from offerings for which the Affiliated Broker-Dealer 
is an underwriter that are not in the interests of the Client Plans 
because the Asset Manager's compensation for its services is generally 
based upon assets under management. If the assets under its management 
do not perform well, the Asset Manager will receive less compensation 
and could lose clients.
    13. Each Applicant states that the Asset Manager generally 
purchases securities in large blocks because the same investments will 
be made across several of its accounts. If there is a new offering of 
an equity or fixed income security that the Asset Manager had otherwise 
intended to purchase, it may be able to purchase the security through 
the offering syndicate at a lower price than it would pay in the open 
market, without transaction costs and with a reduced market impact if 
it is buying a relatively large quantity. This is because a large 
purchase in the open market can cause an increase in the market price 
and, consequently, in the cost of the securities. Purchasing from an 
offering syndicate can thus reduce the costs to the Asset Manager's 
Client Plans.
    14. However, absent an individual exemption, if the Affiliated 
Broker-Dealer is a manager of the syndicate underwriting the offering, 
the Asset Manager is currently foreclosed from purchasing any 
securities from that underwriting syndicate. If the Asset Manager then 
purchases the same securities in the secondary market, the Client Plans 
may incur greater costs because the market price is often higher than 
the offering price, and because of transaction and market impact costs. 
Alternatively, the Asset Manager may have foregone other investment 
opportunities because of its decision to purchase in the offering, and 
these opportunities, if still available, may have become more 
expensive.

Underwriting of Securities Offerings

    15. Each Applicant represents that the Affiliated Broker-Dealer 
manages and participates in firm commitment underwriting syndicates for 
registered offerings of both equity and debt securities. While equity 
and debt underwritings may operate differently with regard to the 
actual sales process, the basic structures are the same. In a firm 
commitment underwriting, the underwriting syndicate acquires the 
securities from the issuer and then sells the securities to investors.
    16. Each Applicant represents that while, as a legal matter, the 
syndicate assumes the risk that the securities might not be 
distributable, as a practical matter, this risk is reduced, in marketed 
deals, through ``building a book'' (i.e., taking indications of 
interest) prior to pricing the securities. Each Applicant asserts that, 
consequently, there is little incentive for the underwriters to use 
their discretionary accounts (or the discretionary accounts of their 
affiliates) to buy up the securities as a way to avoid underwriting 
liabilities.
    17. Each syndicate has a lead manager, who is the principal contact 
between the syndicate and the issuer and who is responsible for 
organizing and coordinating the syndicate. The syndicate may also have 
co-managers, who generally assist the lead manager in working with the 
issuer to prepare the registration statement to be filed with the SEC 
and in distributing the underwritten securities. While equity 
syndicates typically include additional members that are not managers, 
more recently, membership in many debt syndicates has been limited to 
lead and co-managers.
    18. Where more than one underwriter is involved, the lead manager, 
who has been selected by the issuer, contacts other underwriters, and 
the underwriters enter into an Agreement Among Underwriters. Most lead 
managers have a form of agreement. This document is then supplemented 
for the particular deal by sending an ``invitation telex'' setting 
forth particular terms to the other underwriters.
    19. The arrangement between the syndicate and the issuer is 
embodied in an underwriting agreement, which is signed on behalf of the 
underwriters by one or more of the managers. The underwriting agreement 
provides, subject to certain closing conditions, that the underwriters 
are obligated to purchase the underwritten securities from the issuer 
in accordance with their respective commitments. This obligation is met 
by using the proceeds received from the buyers of the securities in the 
offering, although there is a risk that the underwriters will have to 
pay for a portion of the securities, in the event that not all of the 
securities are sold.
    20. However, each Applicant represents that, generally, the risk 
that the securities will not be sold is small because the underwriting 
agreement is not executed until after the underwriters have obtained 
indications of interest in purchasing the securities from a sufficient 
number of investors to acquire all the securities being offered. Once 
the underwriting agreement is executed, the underwriters immediately 
begin contacting the investors to confirm the sales, first orally and 
then by written confirmation, and sales are finalized within hours and 
sometimes minutes. The underwriters are anxious to complete the sales 
as soon as possible because until they ``break syndicate,'' they cannot 
enter the market. In many cases, the underwriters will act as market-
markers for the security. A market-maker holds itself out as willing to 
buy or sell the security for its own account on a regular basis.
    21. Each Applicant represents that the process of ``building a 
book'' or soliciting interest occurs as follows. In an equity offering, 
after a registration statement is filed with the SEC and while it is 
under review by the SEC

[[Page 6232]]

staff, representatives of the issuer and the managers conduct meetings 
with potential investors, who learn about the company and the 
securities and receive a preliminary prospectus. The underwriters 
cannot make any firm sales until the registration statement is declared 
effective by the SEC. Prior to the effective date, while the investors 
thus cannot become legally obligated to make a purchase, they indicate 
whether they have an interest in buying, and the managers compile a 
``book'' of investors who are willing to ``circle'' a particular 
portion of the issue. These indications of interest are sometimes 
referred to as a ``soft circle'' because investors cannot be legally 
bound to buy the securities until the registration statement is 
effective. However, each Applicant represents that investors generally 
follow through on their indications of interest, and would be expected 
to do so, barring any sudden adverse developments (in which case it is 
likely that the offering would be withdrawn), because if they do not 
follow through, the underwriters will be reluctant to sell to them in 
future offerings.
    22. Assuming that the meetings have produced sufficient indications 
of interest, each Applicant represents that the issuer and the managers 
together will set the price of the securities and ask the SEC to 
declare the registration effective. After the registration statement 
becomes effective and the underwriting agreement is executed, the 
underwriters contact those investors who have indicated an interest in 
purchasing securities in the offering to execute the sales. Each 
Applicant represents that offerings are often oversubscribed, and many 
have an over-allotment option that the underwriters can exercise to 
acquire additional shares from the issuer. Where an offering is 
oversubscribed, the underwriters decide how to allocate the securities 
among the potential purchasers. However, if an issue is a ``hot 
issue,'' i.e., it is selling in the market at a premium above its 
offering price, the underwriters may not hold this hot issue in their 
own accounts, nor sell it to their officers and directors. A hot issue 
may also not be sold to the personal accounts of those responsible for 
investing for others, such as officers of banks, insurance companies, 
mutual funds, and investment advisers. (NASD Manual & Notices to 
Members, IM-2110-1)
    23. Each Applicant represents that debt offerings may be 
``negotiated'' offerings, ``competitive bid'' offerings, or ``bought 
deals.'' ``Negotiated'' offerings, which often involve non-investment 
grade securities, are conducted in the same manner as an equity 
offering with regard to when the underwriting agreement is executed and 
how the securities are offered. ``Competitive bid'' offerings, in which 
the issuer determines the price for the securities through competitive 
bidding rather than negotiating the price with the underwriting 
syndicate, are performed under ``shelf'' registration statements 
pursuant to SEC Rule 415 under the 1933 Act (17 CFR 230.415).\7\
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    \7\ Rule 415 permits an issuer to sell debt as well as equity 
securities under an effective registration statement previously 
filed with the SEC by filing a post-effective amendment or 
supplemental prospectus.
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    24. In a competitive bid offering, prospective lead underwriters 
will bid against one another to purchase debt securities, based upon 
their determinations of the degree of investor interest in the 
securities. Depending on the level of investor interest and the size of 
the offering, a bidding lead underwriter may bring in co-managers to 
assist in the sales process. Most of the securities are frequently sold 
within hours, or sometimes even less than an hour, after the securities 
are made available for purchase.
    25. Because of market forces and the requirements of Rule 415, the 
competitive bid process is generally available only to issuers of 
investment-grade securities who have been subject to the reporting 
requirements of the Securities Exchange Act of 1934 (the 1934 Act) for 
at least one year.
    26. Occasionally, in highly-rated debt issues, underwriters ``buy'' 
the entire deal off of a ``shelf registration'' before obtaining 
indications of interest. These ``bought'' deals involve issuers whose 
securities enjoy a deep and liquid secondary market, such that an 
underwriter has confidence without pre-marketing that it can identify 
purchasers for the bonds.

Structure of Diversified Financial Services Firms

    27. Each Applicant represents that there are internal policies in 
place that restrict contact and the flow of information between 
investment management personnel and non-investment management 
personnel. These policies are designed to protect against ``insider 
trading,'' i.e., trading on information not available to the general 
public that may affect the market price of the securities. Diversified 
financial services firms must be concerned about insider trading 
problems because one part of the firm--e.g., the mergers and 
acquisitions group--could come into possession of non-public 
information regarding an upcoming transaction involving a particular 
issuer, while another part of the firm--e.g., the investment management 
group--could be trading in the securities of that issuer for its 
clients.\8\
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    \8\ The Insider Trading and Securities Fraud Enforcement Act of 
1988 required brokers and dealers to maintain and enforce written 
policies and procedures that are ``reasonably designed . . . to 
prevent the misuse in violation of [the federal securities laws] . . 
. of material, nonpublic information by such broker or dealer or any 
person associated with such broker or dealer.'' (Section 15(f) of 
the 1934 Act (15 U.S.C. 780(f)); see also Rules 342 and 351 of the 
NYSE and SEC Regulation M (17 CFR 242.100(a)(3)).
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    28. Each Applicant states that its business separation policies and 
procedures are also designed to restrict the flow of any information to 
or from the Asset Manager that could limit its flexibility in managing 
client assets, and of information obtained or developed by the Asset 
Manager that could be used by other parts of the organization, to the 
detriment of the Asset Manager's clients.
    29. Each Applicant states that major clients of the Affiliated 
Broker-Dealer include investment management firms that are competitors 
of the Asset Manager. Similarly, the Asset Manager deals on a regular 
basis with broker-dealers that compete with the Affiliated Broker-
Dealer. If special consideration were shown to an affiliate, such 
conduct would likely adversely affect the relationships of the 
Affiliated Broker-Dealer and of the Asset Manager with firms that 
compete with that affiliate. Therefore, a goal of each Applicant's 
business separation policy is to avoid any possible perception of 
improper flows of information between the Affiliated Broker-Dealer and 
the Asset Manager, in order to prevent any adverse impact on client and 
business relationships.

Underwriting Compensation

    30. Each Applicant represents that the underwriters are compensated 
through the ``spread,'' or difference, between the price at which the 
underwriters buy the securities from the issuer and the price at which 
the securities are sold to the public. The spread is divided into three 
components.
    31. The first component includes the management fee, which 
generally represents an agreed upon percentage of the overall spread 
and is allocated among the lead manager and co-managers. Where there is 
more than one managing underwriter, the way the management fee will be 
allocated among the managers is generally agreed upon prior to 
soliciting indications of interest (the process of ``building a 
book''). Thus, according to each Applicant, such management fee 
allocations are not

[[Page 6233]]

reflective of the amount of securities that particular managers sell in 
an offering.
    32. The second component is the underwriting fee, which represents 
compensation to the underwriters (including the non-managers, if any) 
for the risks they assume in connection with the offering and for the 
use of their capital. This component of the spread is also used to 
cover the expenses of the underwriting that are not otherwise 
reimbursed by the issuer.
    33. The first and second components are received without regard to 
how the underwritten securities are allocated for sales purposes or to 
whom the securities are sold. The third component of the spread is the 
selling concession, which generally constitutes 60 percent or more of 
the spread. The selling concession compensates the underwriters for 
their actual selling efforts. The allocation of selling concessions 
among the underwriters follows the allocation of the securities for 
sales purposes, except to the extent that buyers designate other 
broker-dealers (who may be other underwriters as well as broker-dealers 
outside the syndicate) to receive the selling concessions from the 
securities they purchase.
    34. Securities are allocated for sales purposes into two 
categories. The first and larger category is the ``institutional pot,'' 
which is the pool of securities from which sales are made to 
institutional investors. Selling concessions for securities sold from 
the institutional pot are generally designated by the purchaser to go 
to particular underwriters or broker-dealers. When securities are sold 
from the institutional pot, the managers sometimes receive a portion of 
the selling concessions, referred to as a ``fixed designation,'' \9\ 
attributable to securities sold in this category, without regard to who 
sold the securities or to whom they were sold. For securities covered 
by this proposed exemption, however, the Affiliated Broker-Dealer may 
not receive, either directly or indirectly, any compensation that is 
attributable to the fixed designation generated by purchases of 
securities by the Asset Manager on behalf of its Client Plans.
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    \9\ A fixed designation is sometimes referred to as an ``auto 
pot split.''
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    35. The second category of allocated securities is ``retail,'' 
which are the securities retained by the underwriters for sale to their 
retail customers. The underwriters receive the selling concessions from 
their respective retail retention allocations. Securities may be 
shifted between the two categories based upon whether either category 
is oversold or undersold during the course of the offering.
    36. Each Applicant asserts that the Affiliated Broker-Dealer's 
inability to receive any selling concessions, or any compensation 
attributable to the fixed designations generated by purchases of 
securities by the Asset Manager's Client Plans, removes the primary 
economic incentive for the Asset Manager to make purchases that are not 
in the interests of its Client Plans from offerings for which the 
Affiliated Broker-Dealer is an underwriter. The reason is that the 
Affiliated Broker-Dealer will not receive any additional fees as a 
result of such purchases by the Asset Manager.

Rule 144A Securities

    37. Each Applicant represents that a number of the offerings of 
Rule 144A Securities in which the Affiliated Broker-Dealer participates 
represent good investment opportunities for the Asset Manager's Client 
Plans. Particularly with respect to foreign securities, a Rule 144A 
offering may provide the least expensive and most accessible means for 
obtaining the securities. However, PTE 75-1, Part III, does not include 
a category for Rule 144A Securities, regardless of whether the 
Affiliated Broker-Dealer is a manager or member of the underwriting or 
selling syndicate. Therefore, absent an individual exemption, the Asset 
Manager is foreclosed from purchasing such securities for its Client 
Plans in offerings in which the Affiliated Broker-Dealer participates.
    38. Each Applicant states that Rule 144A, which was adopted in 
1990, acts as a ``safe harbor'' exemption from the registration 
provisions of the 1933 Act for sales of certain types of securities to 
QIBs. QIBs include several types of institutional entities, such as 
employee benefit plans and commingled trust funds holding assets of 
such plans, which own and invest on a discretionary basis at least $100 
million in securities of unaffiliated issuers.
    39. Any securities may be sold pursuant to Rule 144A except for 
those of the same class or similar to a class that is publicly traded 
in the United States, or certain types of investment company 
securities. This limitation is designed to prevent side-by-side public 
and private markets developing for the same class of securities.
    40. Buyers of Rule 144A Securities must be able to obtain, upon 
request, basic information concerning the business of the issuer and 
the issuer's financial statements, much of the same information as 
would be furnished if the offering were registered. This condition does 
not apply, however, to an issuer filing reports with the SEC under the 
1934 Act, for which reports are publicly available. The condition also 
does not apply to a ``foreign private issuer'' for whom reports are 
furnished to the SEC under Rule 12g3-2(b) of the 1934 Act (17 CFR 
240.12g3-2(b)), or to issuers who are foreign governments or political 
subdivisions thereof and are eligible to use Schedule B under the 1933 
Act (which describes the information and documents required to be 
contained in a registration statement filed by such issuers).
    41. Sales under Rule 144A, like sales in a registered offering, 
remain subject to the protections of the anti-fraud rules of federal 
and state securities laws. These rules include Section 10(b) of the 
1934 Act and Rule 10b-5 thereunder (17 CFR 240.10b-5) and Section 17(a) 
of the 1933 Act (15 U.S.C. 77a). Through these and other provisions, 
the SEC may use its full range of enforcement powers to exercise its 
regulatory authority over the market for Rule 144A Securities, in the 
event that it detects improper practices.
    42. Each Applicant asserts that this potential liability for fraud 
provides a considerable incentive to the issuer and offering syndicate 
to insure that the information contained in a Rule 144A offering 
memorandum is complete and accurate in all material respects. Among 
other things, the lead manager typically obtains an opinion from a law 
firm, commonly referred to as a ``10b-5'' opinion, stating that the law 
firm has no reason to believe that the offering memorandum contains any 
untrue statement of material fact or omits to state a material fact 
necessary in order to make the statements made, in light of the 
circumstances under which they were made, are not misleading.
    43. Each Applicant represents that Rule 144A offerings generally 
are structured in the same manner as underwritten registered offerings. 
The major difference is that a Rule 144A offering uses an offering 
memorandum rather than a prospectus that is filed with the SEC. The 
marketing process is the same in most respects, except that the selling 
efforts are generally limited to contacting QIBs and that there are no 
general solicitations for buyers (e.g., no general advertising). In 
addition, the Affiliated Broker-Dealer's role in these offerings has 
been as a lead or co-manager. While, generally, there are no non-
manager members in the syndicate, each Applicant also requests relief 
for situations where the Affiliated Broker-Dealer acts only as a 
syndicate member, not as a manager.
    44. According to each Applicant, one of the policy objectives of 
Rule 144A

[[Page 6234]]

was to attract more foreign issuers to the United States, and Rule 144A 
has been achieving this objective--from April 1990 through December 
1993, the first three years of Rule 144A, over $25.6 billion in foreign 
securities was sold under Rule 144A, representing more than one-fourth 
of Rule 144A placements. See SEC Staff Report on Rule 144A (August 18, 
1994), [1994-95 Transfer Binder] Fed. Sec. L. Rep. para. 85,428 
(Question 1). This figure continued to hold in 1998, at 30.4 percent, 
so that foreign issuer Rule 144A offerings have kept pace with the 
rapid growth of Rule 144A offerings overall. (Securities Data Company, 
Inc.)

Summary

    In summary, the proposed transactions will satisfy the statutory 
criteria for an exemption under section 408(a) of the Act because: (a) 
The Client Plans will gain access to desirable investment 
opportunities; (b) in each offering, the Asset Manager will purchase 
the securities for its Client Plans from an underwriter or broker-
dealer other than the Affiliated Broker-Dealer; (c) conditions similar 
to those of PTE 75-1, Part III, will restrict the types of securities 
that may be purchased, the types of underwriting or selling syndicates 
and issuers involved, and the price and timing of the purchases; (d) 
the amount of securities that the Asset Manager may purchase on behalf 
of Client Plans will be subject to percentage limitations; (e) the 
Affiliated Broker-Dealer will not be permitted to receive, either 
directly, indirectly, or through designation, any selling concessions 
with respect to the securities sold to the Asset Manager; (f) prior to 
any purchase of securities, the Asset Manager will make the required 
disclosures to an independent fiduciary (Independent Fiduciary) of each 
Client Plan and obtain written authorization; (g) the Asset Manager 
will provide regular reporting to an Independent Fiduciary of each 
Client Plan with respect to all securities purchased pursuant to the 
exemption, if granted; (h) each Client Plan will be subject to a 
minimum size requirement of at least $50 million ($100 million for 
``Eligible Rule 144A Offerings''),\10\ with certain exceptions for 
Pooled Funds; and (i) the Asset Manager must have total assets under 
management in excess of $5 billion and shareholders' or partners' 
equity in excess of $1 million.
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    \10\ SEC Rule 10f-3(a)(4) (17 CFR 270.10f-3(a)(4)) states that 
the term ``Eligible Rule 144A Offering'' means an offering of 
securities that meets the following conditions:
    (i) The securities are offered or sold in transactions exempt 
from registration under section 4(2) of the Securities Act of 1933 
[15 U.S.C. 77d(2)], rule 144A thereunder [Sec. 230.144A of this 
chapter], or rules 501-508 thereunder [Secs. 230.501-230.508 of this 
chapter];
    (ii) The securities are sold to persons that the seller and any 
person acting on behalf of the seller reasonably believe to include 
qualified institutional buyers, as defined in Sec. 230.144A(a)(1) of 
this chapter; and
    (iii) The seller and any person acting on behalf of the seller 
reasonably believe that the securities are eligible for resale to 
other qualified institutional buyers pursuant to Sec. 230.144A of 
this chapter.
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Discussion of Proposed Exemption

    1. The exemptive relief for underwritings proposed herein is 
similar to that provided in PTE 75-1, Part III. Under PTE 75-1, 
exemptive relief is subject to a number of conditions and limitations, 
including the following: (1) The plan fiduciary or its affiliate may 
not be a manager of the underwriting or selling syndicate; (2) the 
purchase must be from a person other than the plan fiduciary or its 
affiliate; (3) the types of securities that may be purchased and the 
price and timing of the purchases are circumscribed; (4) the amount of 
securities purchased on behalf of each plan may not exceed three 
percent of the offering; and (5) the consideration paid may not exceed 
three percent of the plan's total net assets (one percent, if the 
consideration involved exceeds $1 million).
    2. The exemptive relief proposed herein differs from that provided 
by PTE 75-1 in the following respects: (1) The proposed exemption 
covers transactions where the plan fiduciary is affiliated with a 
manager, as well as a member, of the underwriting or selling syndicate; 
\11\ (2) the proposed exemption covers purchases of Rule 144A 
Securities; \12\ (3) percentage limitations on the amount of securities 
that may be purchased have been modified to provide an aggregate 
limitation on a fiduciary's purchases for all Client Plans from a 
particular offering; and (4) the proposed exemption provides additional 
conditions, including: (a) The transaction is not part of an agreement, 
arrangement, or understanding designed to benefit the plan fiduciary or 
its affiliate; (b) neither a manager nor a member of the underwriting 
or selling syndicate may receive any selling concessions with respect 
to the securities purchased for Client Plans by its affiliate; (c) 
prior to any purchase of securities on behalf of a Client Plan, certain 
disclosures are provided to an Independent Fiduciary of each such 
Client Plan and written authorization is obtained; (d) periodic 
reporting regarding the covered transactions is provided to an 
Independent Fiduciary of each Client Plan; and (e) investing plans and 
their investment managers must meet certain minimum size requirements.
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    \11\ In restricting the scope of PTE 75-1, Part III, to exclude 
transactions where the plan fiduciary is affiliated with the 
syndicate manager, the Department was concerned that the syndicate 
manager, as distinguished from a mere member of a syndicate, has a 
greater interest in the success of the sale of the new securities. 
If an affiliate of the managing underwriter is an investment manager 
for plans, those plans could provide a potential market for the less 
attractive offerings of underwritten securities. This proposed 
exemption contains certain safeguards and conditions that are 
designed to address these potential conflict of interest situations.
    \12\ The Department notes that the provisions of the Act do not 
preclude plans from investing in any securities sold by an 
underwriting or offering syndicate, including those securities sold 
pursuant to Rule 144A. The exemptive relief provided by PTE 75-1, 
Part III, and the additional relief sought here are required because 
of the affiliation between the plan fiduciary and a member of the 
underwriting or selling syndicate.
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Types of Securities and Offerings

    3. Paragraphs (a) and (b) of the proposed exemption are derived 
from PTE 75-1, Part III, and provide the following: (1) The securities 
\13\ are part of an issue registered under the 1933 Act, or if exempt 
from registration under such Act, fall within specified categories: 
issued or guaranteed by the United States; issued by a bank; exempt 
from registration under a federal statute other than the 1933 Act; 
registered under the 1934 Act; or are part of an Eligible Rule 144A 
Offering--a change from PTE 75-1, Part III, as noted

[[Page 6235]]

above; \14\ (2) the securities are purchased for not more than the 
offering price within a specific time period,\15\ subject to certain 
specified exceptions for rights offerings and debt offerings; \16\ (3) 
the securities are sold pursuant to a firm-commitment offering, in 
which the syndicate members are committed to purchasing all the 
securities being offered, subject to certain exceptions for rights 
offerings and over-allotment options; and (4) the issuer of the 
securities has been in continuous operation for not less than three 
years, with certain exceptions.
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    \13\ With respect to any purchase of asset-backed securities by 
a Client Plan, the Department notes that this proposed exemption 
provides relief only for the transactions described herein and does 
not cover any additional prohibited transactions that may occur as a 
result of a purchase of such securities. For example, additional 
prohibited transactions may occur by operation of the ``look-through 
rule'' contained in the Department's regulation defining ``plan 
assets'' for purposes of plan investments (see 29 CFR 2510.3-101). 
Such additional prohibited transactions may be covered by one of the 
Department's existing individual exemptions for asset-backed 
securities. A listing of such exemptions is provided in the text of 
the operative language of PTE 97-34 (62 FR 39021, July 21, 1997), 
which granted an amendment to these exemptions.
    Further, the Department notes that, under the Department's plan 
asset regulation, if a plan invests in a publicly-offered security, 
the plan's assets will not include, solely by reason of such 
investment, any of the underlying assets of the entity issuing the 
security (i.e., the ``look-through rule'' will not apply and the 
operations of the entity will not be subject to scrutiny under the 
prohibited transaction provisions of the Act). The regulation 
defines a ``publicly-offered'' security as one that is freely 
transferable, widely-held, and registered under the federal 
securities laws. For this purpose, a class of securities is 
considered ``widely held'' if it is owned by 100 or more investors 
who are independent of the issuer and of one another (see 29 CFR 
2510.3-101(b)(3)).
    \14\ Paragraph (a)(1)(ii) of the proposed exemption requires 
that if the securities are equity securities in an Eligible Rule 
144A Offering, the offering syndicate shall obtain a legal opinion 
regarding the adequacy of the disclosure in the offering memorandum. 
This condition may be satisfied by the type of ``10b-5'' opinion 
customarily obtained in connection with such offerings. The 
Department believes that requiring such review by a law firm will 
help insure that the offering memorandum meets federal securities 
law standards. The Department notes that paragraph (c) of the 
proposed exemption requires debt securities to be rated by at least 
one independent nationally recognized statistical rating 
organization, thus insuring that sufficient information about those 
securities and their issuer will be available to investors.
    \15\ The language regarding the timing of the purchase differs 
slightly from PTE 75-1, Part III. This language is based upon Rule 
10f-3, as amended in 1997 (17 CFR 270.10f-3; 62 FR 42401, August 7, 
1997).
    \16\ Paragraph (a)(2)(ii) of the proposed exemption permits 
certain purchases of debt after the first day of the offering. 
Should the debt be downgraded after the offering commences and prior 
to being purchased for a Client Plan, the Department expects that 
the Asset Manager would consider whether, prior to purchase, the 
price was adjusted to reflect the downgrade.
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Percentage Limitations on the Amount of Purchased Securities

    4. Paragraphs (c) and (d) of the proposed exemption contain 
percentage limitations applicable to the amount of purchased 
securities. The first percentage test in paragraph (c) provides that 
the amount of securities to be purchased by the Asset Manager on behalf 
of a particular Client Plan or Pooled Fund may not exceed three percent 
of the total amount of securities being offered. Paragraph (c) further 
provides percentage limitations on the aggregate amount of securities 
that the Asset Manager may purchase for all its Client Plans, including 
Pooled Funds, from the total amount of securities being offered: 10 
percent for equity securities; 35 percent for debt securities rated in 
one of the four highest rating categories by at least one nationally 
recognized statistical rating organization, i.e., Standard & Poor's 
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit 
Rating Co., or Fitch IBCA, Inc., or their successors (collectively, the 
Rating Organizations); and 25 percent for debt securities rated in the 
fifth or sixth highest rating categories by at least one of the Rating 
Organizations.\17\
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    \17\ Paragraph (c)(4) of the proposed exemption requires that 
when calculating the percentages of securities purchased in an 
Eligible Rule 144A Offering, one must consider any concurrent public 
offering. The Department notes that any concurrent offering will 
necessarily be in a foreign securities market, since Rule 144A is 
unavailable where there is a concurrent domestic offering.
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    5. Paragraph (d) provides that the consideration to be paid by the 
Client Plan or Pooled Fund in purchasing the offered securities may not 
exceed three percent of the fair market value of such Client Plan's or 
Pooled Fund's total net assets. However, paragraph (d) eliminates the 
requirement contained in PTE 75-1, Part III, that, if the consideration 
involved exceeds $1 million, it may not exceed one percent of the fair 
market value of the plan's total assets. This modification by the 
Department parallels the amendment in 1997 of SEC Rule 10f-3.

Underwriting Compensation

    6. The proposed exemption requires in paragraph (e) that any 
purchase of securities by the Asset Manager pursuant to the exemption 
may not be part of an agreement, arrangement, or understanding designed 
to benefit the Asset Manager or an affiliate.\18\ Paragraph (f) further 
provides that the Affiliated Broker-Dealer may not receive, either 
directly, indirectly, or through designation, any selling concession, 
or other consideration that is based upon the amount of securities 
purchased by the Asset Manager's Client Plans pursuant to the 
exemption. Those selling concessions would be allocated to members of 
the syndicate who are not affiliated with the Asset Manager. The 
Affiliated Broker-Dealer may also not receive, either directly or 
indirectly, that portion of the fixed designation that is attributable 
to securities purchased pursuant to the exemption. The Affiliated 
Broker-Dealer is not precluded from receiving management fees, 
underwriting fees, or other consideration that is not based upon the 
amount of securities actually sold to the Asset Manager's Client Plans.
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    \18\ The Department notes that the intent of the condition in 
paragraph (e) of the proposed exemption was not to deny direct 
benefits to other parties to a transaction but, rather, to exclude 
relief for transactions that are part of a broader overall 
agreement, arrangement, or understanding designed to benefit parties 
in interest.
---------------------------------------------------------------------------

    7. Paragraph (g) provides that the amount the Affiliated Broker-
Dealer receives in management fees, underwriting fees, or other 
consideration may not be increased for the purpose of offsetting the 
reduction of the Affiliated Broker-Dealer's compensation from selling 
concessions. Further, the Affiliated Broker-Dealer must provide the 
Asset Manager with a written certification that the Affiliated Broker-
Dealer complied with the underwriting compensation requirements found 
in paragraphs (e), (f), and (g) of the proposed exemption, in any 
offering where the Asset Manager purchased securities for its Client 
Plans. This certification will also be part of the quarterly report 
which the Asset Manager provides to the Independent Fiduciaries of the 
Client Plans.\19\
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    \19\ The certification required in paragraph (g)(2) of the 
proposed exemption is necessary because the Asset Manager and its 
Client Plans must monitor compliance with all the conditions of the 
exemption, if granted. However, the Asset Manager would not normally 
have access to the Affiliated Broker-Dealer's records detailing each 
underwriter's share of the compensation from a particular 
underwriting, as those records are considered confidential. Such 
records are required to be maintained pursuant to SEC and NASD rules 
and would, of course, be made available to the Department pursuant 
to the terms of the exemption, if granted.
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Disclosures

    8. The proposed exemption requires in paragraphs (h) and (l) that 
the Asset Manager obtain written authorization from an Independent 
Fiduciary of each Client Plan, including each fiduciary of a plan that 
invests in a Pooled Fund, before engaging in the covered 
transactions.\20\ Prior to, and subsequent

[[Page 6236]]

to, execution of the written authorization, the Asset Manager must 
provide certain disclosures described in paragraphs (i), (j), (k), and 
(m) to an Independent Fiduciary of each Client Plan. In addition, the 
Asset Manager must provide a termination form, at least annually, that 
enables the Independent Fiduciary to terminate the authorization 
without penalty.
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    \20\ In this regard, the Department notes that the fiduciary 
responsibility provisions of the Act apply to the decision of an 
Independent Fiduciary to authorize the Asset Manager to invest in 
securities covered by this proposed exemption (Covered Securities) 
and to the decision to continue such authorization. Section 
404(a)(1) of the Act requires, among other things, that a fiduciary 
of a plan must 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. Accordingly, 
the Independent Fiduciary must act ``prudently'' with respect to the 
decision to authorize investment in these Covered Securities and the 
decision to continue such authorization.
    The Department wishes to emphasize that it expects that the 
Independent Fiduciary, prior to authorizing investment in these 
Covered Securities, will fully understand the potential risks and 
rewards associated with investing in the initial offering of a 
security, following disclosure by the Asset Manager of all relevant 
information pertaining to the proposed transactions. Such 
consideration must necessarily include the fact that the Asset 
Manager's affiliate may be the managing underwriter. In addition, 
the Independent Fiduciary must be capable of periodically monitoring 
the actions taken by the Asset Manager in the performance of its 
duties. Thus, in considering whether to enter into transactions of 
the kind described herein, the Independent Fiduciary should take 
into account its ability to provide adequate oversight of the Asset 
Manager.
    The Department further notes that, under section 405(a) of the 
Act, any plan fiduciary (including an investment manager) will have 
co-fiduciary liability for any breach of fiduciary responsibility of 
another plan fiduciary: (1) if he knowingly participates in or 
conceals such breach; (2) if, by his failure to comply with section 
404(a)(1) of the Act, he enables another fiduciary to commit such a 
breach; or (3) if he has knowledge of the breach of another 
fiduciary and he fails to make a reasonable effort, under the 
circumstances, to remedy the breach.
    Finally, the granting of the exemption proposed herein should 
not be viewed as an endorsement by the Department of any plans' 
participation in the covered transactions.
---------------------------------------------------------------------------

Periodic Reporting

    9. Paragraph (n) of the proposed exemption requires that at least 
once every three months, the Asset Manager provide a report to an 
Independent Fiduciary of each Client Plan containing information about 
the Covered Securities purchased during the previous quarter. The 
Department modeled paragraph (n), in part, on the reporting provisions 
of Rule 10f-3 (17 CFR 270.10f-3).\21\ The preamble to the 1997 
amendments to Rule 10f-3 states that this rule ``permits an investment 
company that is related to certain participants in an underwriting to 
purchase securities during an offering, if certain conditions are 
met.'' \22\ The SEC explained the origin of its rule as follows:

    \21\ PTE 75-1, Part III, was based, in part, on a prior version 
of Rule 10f-3.
    \22\ 62 FR 42401, Aug. 7, 1997.
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    Section 10(f) of the Investment Company Act was designed to 
address one of the major abuses noted in the period before enactment 
of the Investment Company Act--the use of funds by underwriters that 
controlled these funds as a ``dumping ground'' for unmarketable 
securities. \23\

    \23\ Id.
---------------------------------------------------------------------------

    Under Rule 10f-3, the Board of Directors of the investment company 
(including the directors who are not ``interested persons'' of the 
investment company) is responsible for monitoring compliance.\24\
---------------------------------------------------------------------------

    \24\ The information that the Board of Directors uses to monitor 
compliance must be included as an exhibit to the fund's semi-annual 
publicly available reports to the SEC, known as the Form N-SAR.
---------------------------------------------------------------------------

    10. Because the transactions covered by this proposed exemption are 
similar in nature to those covered by Rule 10f-3, the Department has 
determined that it is appropriate to adopt similar reporting 
requirements as in that rule. In addition to the items required to be 
reported by investment companies under Rule 10f-3, the proposed 
exemption requires that the Asset Manager report to the Independent 
Fiduciary the price at which any securities purchased during the 
reporting period were sold and the market value at the end of the 
reporting period of each security purchased during such period.\25\
---------------------------------------------------------------------------

    \25\ See paragraph (n) of the proposed exemption.
---------------------------------------------------------------------------

    11. The additional information should help the Independent 
Fiduciary monitor compliance with the exemption, if granted. The 
Independent Fiduciaries of the Client Plans would play a similar role 
to that of the Board of Directors of an investment company, i.e., they 
have a fiduciary duty to monitor the activities of the Asset 
Manager.\26\ In monitoring compliance, the Independent Fiduciary should 
bear in mind that the Asset Manager's subsequent decision to hold or 
sell a security purchased pursuant to the exemption, would not be 
covered by the exemption, if granted.\27\
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    \26\ With respect to the directors' duty, the SEC stated in the 
preamble to Rule 10f-3:
    A fund's board should be vigilant in reviewing the procedures 
and transactions required by 10f-3 as well as in conducting any 
additional reviews that it determines are needed to protect the 
interests of investors, particularly if the fund purchases 
significant amounts of securities in reliance on 10f-3. For example, 
the board should consider monitoring how the performance of 
securities purchased in reliance on rule 10f-3 compares to 
securities not purchased in reliance on the rule, or to a benchmark 
such as a comparable market index. Such monitoring would enable the 
board to determine not only whether existing procedures are being 
followed, but whether the procedures are effective in fulfilling the 
policies underlying section 10(f).(62 FR at 42406) (See also 
footnote 52, 62 FR at 42406.)
    \27\ The Department notes that this proposed exemption would 
provide relief from the self-dealing and conflict of interest 
provisions of Part 4 of Title I of the Act for purchases of 
securities by the Asset Manager from an underwriting or selling 
syndicate in which an affiliate of the Asset Manager participates as 
a manager or member of such syndicate. It would not provide relief 
from any acts of self-dealing not directly arising from a purchase 
of the Covered Securities. Thus, no relief would be available for 
any violation of section 406(b) of the Act that may arise after the 
purchase. For example, because it is well-documented that securities 
purchased in IPOs may not perform well in the long term (see 
footnote 4), a violation of the Act could occur if the Asset 
Manager's decision regarding the holding or sale of the Covered 
Securities by the Client Plan was influenced by the interests of the 
Affiliated Broker-Dealer.
    The Affiliated Broker-Dealer's interest in the security may 
extend beyond the sale of the security. As the SEC noted in its 
preamble to Regulation M, addressing Regulation M's protections 
against price manipulation: ``[I]mmediately following an offering * 
* * underwriters now engage in substantial syndicate-related market 
activity, and enforce penalty bids in order to reduce volatility in 
the market for the offering security.'' 62 FR 519, 521 (January 3, 
1997). The SEC defines penalty bid as ``an arrangement that permits 
the managing underwriter to reclaim a selling concession from a 
syndicate member in connection with an offering when the securities 
originally sold by the syndicate member are purchased in syndicate 
covering transactions.'' SEC Regulation M (17 CFR 242.100(b)). For 
further background on the role of underwriters, see ``Corporate 
Finance and the Securities Laws, (2d ed. 1997),'' Charles J. 
Johnson, Jr. and Joseph McLaughlin, Aspen Publishers; ``Securities 
Industry Association: Capital Markets Handbook,'' edited by Bruce S. 
Foester, Aspen Publishers (1999). Recent Developments in 
Underwriting of IPO's: Spinning and Penalty Bids, Meredith B. Cross 
and Christine Sarudy Roberts, 1084 PLI/Corp 595 (Nov. 1998).
---------------------------------------------------------------------------

    12. Further, the Asset Manager must report any instance during the 
past quarter where the Asset Manager was precluded from trading in any 
security purchased under the exemption for any period of time because 
of its status as an affiliate of the Affiliated Broker-Dealer. For 
example, the security could be placed on a watch or restricted list due 
to activities of the Affiliated Broker-Dealer, and these restrictions 
could prevent the Asset Manager from trading the security. Such a 
situation could arise where a security was purchased by the Asset 
Manager pursuant to this proposed exemption on the first day of the 
offering and the rest of the offering was not selling well. In this 
situation, SEC Regulation M, \28\ or the general anti-fraud or anti-
manipulation provisions of the securities laws, \29\ may limit the 
Asset Manager's ability to subsequently trade in that security, 
although these restrictions will generally not apply to the Asset 
Manager if the proper business separations are in place between the 
Affiliated Broker-Dealer and the Asset Manager (see, e.g., Regulation 
M, 17 CFR 242.100(b)(3)). Should the Asset Manager's ability to trade a 
security purchased on behalf of a Client Plan be restricted, this 
information may be relevant to the decision whether or not to continue 
to permit purchases under the exemption.
---------------------------------------------------------------------------

    \28\ A security might be put on a restricted list, for example, 
if the offering was not completely sold before the security began 
trading in the market. In this instance, the restricted period for 
purposes of Regulation M (17 CFR 242.101(a)) continues until all 
securities are sold. See, generally, ``Corporate Finance and the 
Securities Laws, (2d ed. 1997),'' Charles J. Johnson, Jr. and Joseph 
McLaughlin, Aspen Publishers; ``Securities Industry Association: 
Capital Markets Handbook,'' edited by Bruce S. Foester, Aspen 
Publishers (1999).
    \29\ These rules include Section 17(a) of the 1933 Act (15 
U.S.C. 77q(a)) and Sections 9, 10(b), and 15(c) of the 1934 Act (15 
U.S.C. 78i, 78j(b) and 78o(c)).
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Minimum Size Requirements

    13. The proposed exemption applies only to Client Plans with total 
net assets of at least $50 million, as provided in paragraph (o). In 
the case of a Pooled Fund, however, the $50 million requirement will be 
met if 50 percent or more of the units of beneficial interest in such 
Pooled Fund are held by plans having total net assets of at least $50

[[Page 6237]]

million. In the case of an Eligible Rule 144A Offering, each Client 
Plan must have at least $100 million in securities. For a Pooled Fund, 
the $100 million requirement will be met if 50 percent or more of the 
units of beneficial interest in such Pooled Fund are held by plans 
having at least $100 million in assets and the Pooled Fund itself 
qualifies as a QIB, as determined pursuant to Rule 144A (17 CFR 
230.144A(a)(F)). The Department believes that these minimum size 
requirements will help insure that the Client Plans have the resources 
and investment sophistication needed in order to monitor the Asset 
Manager's investment performance with respect to the covered 
transactions.
    14. Further, the proposed exemption applies only if the Asset 
Manager is a ``qualified professional asset manager'' (QPAM), as 
defined under Part V(a) of PTE 84-14, (49 FR 9494, 9506, March 13, 
1984),\30\ subject to the following modifications: The Asset Manager 
has as of the last day of its most recent fiscal year, total client 
assets under its management and control in excess of $5 billion and 
shareholders' or partners' equity in excess of $1 million.
---------------------------------------------------------------------------

    \30\ PTE 84-14 provides a class exemption, under certain 
conditions, for transactions between a party in interest with 
respect to an employee benefit plan and an investment fund 
(including a single customer or pooled separate account) in which 
the plan has an interest and which is managed by a QPAM.
---------------------------------------------------------------------------

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which require, among other things, that a fiduciary 
discharge his or her duties respecting a plan solely in the interest of 
the participants and beneficiaries of such plan and in a prudent manner 
in accordance with section 404(a)(1)(B) of the Act; nor does it affect 
the requirements of section 401(a) of the Code that the plan operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interests of the 
affected plans and their participants and beneficiaries, and protective 
of the rights of those participants and beneficiaries; and
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and the Code, 
including statutory or administrative exemptions. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is, in fact, a 
prohibited transaction.
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in the applications accurately describe all material terms of the 
transactions that are the subject of the exemptions.

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Employee Retirement Income Security 
Act of 1974 (the Act) and section 4975(c)(2) of the Internal Revenue 
Code of 1986 (the Code) and in accordance with the procedures set forth 
in 29 CFR Part 2570, Subpart B (55 FR 32836, August 10, 1990).

Section I--Transactions

    If the exemption is granted, the restrictions of section 406 of the 
Act and the sanctions resulting from the application of section 4975 of 
the Code, by reason of section 4975(c)(1) of the Code, shall not apply 
to the purchase of any securities by the Asset Manager on behalf of 
employee benefit plans (Client Plans), including Client Plans investing 
in a pooled fund (Pooled Fund), for which the Asset Manager acts as a 
fiduciary, from any person other than the Asset Manager or an affiliate 
thereof, during the existence of an underwriting or selling syndicate 
with respect to such securities, where the Affiliated Broker-Dealer is 
a manager or member of such syndicate, provided that the following 
conditions are satisfied:
    (a) The securities to be purchased are--
    (1) either:
    (i) part of an issue registered under the Securities Act of 1933 
(the 1933 Act) (15 U.S.C. 77a et. seq.) or, if exempt from such 
registration requirement, are (A) issued or guaranteed by the United 
States or by any person controlled or supervised by and acting as an 
instrumentality of the United States pursuant to authority granted by 
the Congress of the United States, (B) issued by a bank, (C) exempt 
from such registration requirement pursuant to a federal statute other 
than the 1933 Act, or (D) are the subject of a distribution and are of 
a class which is required to be registered under section 12 of the 
Securities Exchange Act of 1934 (the 1934 Act) (15 U.S.C. 781), and the 
issuer of which has been subject to the reporting requirements of 
section 13 of that Act (15 U.S.C. 78m) for a period of at least 90 days 
immediately preceding the sale of securities and has filed all reports 
required to be filed thereunder with the Securities and Exchange 
Commission (SEC) during the preceding 12 months; or
    (ii) part of an issue that is an ``Eligible Rule 144A Offering,'' 
as defined in SEC Rule 10f-3 (17 CFR 270.10f-3(a)(4)). Where the 
Eligible Rule 144A Offering is of equity securities, the offering 
syndicate shall obtain a legal opinion regarding the adequacy of the 
disclosure in the offering memorandum;
    (2) purchased prior to the end of the first day on which any sales 
are made, at a price that is not more than the price paid by each other 
purchaser of securities in that offering or in any concurrent offering 
of the securities, except that--
    (i) if such securities are offered for subscription upon exercise 
of rights, they may be purchased on or before the fourth day preceding 
the day on which the rights offering terminates; or
    (ii) if such securities are debt securities, they may be purchased 
at a price that is not more than the price paid by each other purchaser 
of securities in that offering or in any concurrent offering of the 
securities and may be purchased on a day subsequent to the end of the 
first day on which any sales are made, provided that the interest rates 
on comparable debt securities offered to the public subsequent to the 
first day and prior to the purchase are less than the interest rate of 
the debt securities being purchased; and
    (3) offered pursuant to an underwriting or selling agreement under 
which the members of the syndicate are committed to purchase all of the 
securities being offered, except if--
    (i) such securities are purchased by others pursuant to a rights 
offering; or
    (ii) such securities are offered pursuant to an over-allotment 
option.
    (b) The issuer of such securities has been in continuous operation 
for not less than three years, including the operation of any 
predecessors, unless--
    (1) such securities are non-convertible debt securities rated in 
one of the four highest rating categories by at least one nationally 
recognized statistical rating organization, i.e., Standard & Poor's

[[Page 6238]]

Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit 
Rating Co., or Fitch IBCA, Inc., or their successors (collectively, the 
Rating Organizations); or
    (2) such securities are issued or fully guaranteed by a person 
described in paragraph (a)(1)(i)(A) of this exemption; or
    (3) such securities are fully guaranteed by a person who has issued 
securities described in (a)(1)(i)(B), (C), or (D) and this paragraph 
(b).
    (c) The amount of such securities to be purchased by the Asset 
Manager on behalf of any single Client Plan or any Pooled Fund, does 
not exceed three percent of the total amount of the securities being 
offered. Notwithstanding the foregoing, the aggregate amount of any 
securities purchased with assets of all Client Plans (including Pooled 
Funds) managed by the Asset Manager (or with respect to which the Asset 
Manager renders investment advice within the meaning of 29 CFR 2510.3-
21(c)) does not exceed:
    (1) 10 percent of the total amount of any equity securities being 
offered;
    (2) 35 percent of the total amount of any debt securities being 
offered that are rated in one of the four highest rating categories by 
at least one of the Rating Organizations; or
    (3) 25 percent of the total amount of any debt securities being 
offered that are rated in the fifth or sixth highest rating categories 
by at least one of the Rating Organizations; and
    (4) if purchased in an Eligible Rule 144A Offering, the total 
amount of the securities being offered for purposes of determining the 
percentages for (1)-(3) above is the total of:
    (i) the principal amount of the offering of such class sold by 
underwriters or members of the selling syndicate to ``qualified 
institutional buyers'' (QIBs), as defined in SEC Rule 144A (17 CFR 
230.144A(a)(1)); plus
    (ii) the principal amount of the offering of such class in any 
concurrent public offering.
    (d) The consideration to be paid by the Client Plan or Pooled Fund 
in purchasing such securities does not exceed three percent of the fair 
market value of the total net assets of the Client Plan or Pooled Fund, 
as of the last day of the most recent fiscal quarter of the Client Plan 
prior to such transaction.
    (e) The transaction is not part of an agreement, arrangement, or 
understanding designed to benefit the Asset Manager or an affiliate.
    (f) The Affiliated Broker-Dealer does not receive, either directly, 
indirectly, or through designation, any selling concession or other 
consideration that is based upon the amount of securities purchased by 
Client Plans pursuant to this exemption. In this regard, the Affiliated 
Broker-Dealer may not receive, either directly or indirectly, any 
compensation that is attributable to the fixed designations generated 
by purchases of securities by the Asset Manager on behalf of its Client 
Plans.
    (g)(1) The amount the Affiliated Broker-Dealer receives in 
management, underwriting or other compensation is not increased through 
an agreement, arrangement, or understanding for the purpose of 
compensating the Affiliated Broker-Dealer for foregoing any selling 
concessions for those securities sold pursuant to this exemption. 
Except as described above, nothing in this paragraph shall be construed 
as precluding the Affiliated Broker-Dealer from receiving management 
fees for serving as manager of the underwriting or selling syndicate, 
underwriting fees for assuming the responsibilities of an underwriter 
in the underwriting or selling syndicate, or other consideration that 
is not based upon the amount of securities purchased by the Asset 
Manager on behalf of Client Plans pursuant to this exemption; and
    (2) The Affiliated Broker-Dealer shall provide to the Asset Manager 
a written certification, signed by an officer of the Affiliated Broker-
Dealer, stating the amount that the Affiliated Broker-Dealer received 
in compensation during the past quarter, in connection with any 
offerings covered by this exemption, was not adjusted in a manner 
inconsistent with Section I, paragraphs (e), (f), or (g), of this 
exemption.
    (h) In the case of a single Client Plan, the covered transaction is 
performed under a written authorization executed in advance by an 
independent fiduciary (Independent Fiduciary) of the Client Plan.
    (i) Prior to the execution of the written authorization described 
in paragraph (h) above, the following information and materials must be 
provided by the Asset Manager to the Independent Fiduciary of each 
single Client Plan:
    (1) a copy of this notice of proposed exemption and of the final 
exemption, if granted, as published in the Federal Register;
    (2) any other reasonably available information regarding the 
covered transactions that the Independent Fiduciary requests; and
    (3) a termination form, with instructions specifying how to use the 
form, expressly providing that the authorization described in paragraph 
(h) may be terminated without penalty by the Independent Fiduciary on 
no more than five days' notice.
    (j) Subsequent to an Independent Fiduciary's initial authorization 
permitting the Asset Manager to engage in the covered transactions on 
behalf of a single Client Plan, the Asset Manager will, at least 
annually, provide the Independent Fiduciary with another termination 
form and the information specified in subparagraph (i)(2) and (3) 
above.
    (k) In the case of existing plan investors in a Pooled Fund, such 
Pooled Fund may not engage in any covered transactions pursuant to this 
exemption, unless the Asset Manager has provided the written 
information described below to the Independent Fiduciary of each plan 
participating in the Pooled Fund. The following information and 
materials shall be provided not less than 45 days prior to the Asset 
Manager's engaging in the covered transactions on behalf of the Pooled 
Fund pursuant to the exemption:
    (1) a notice of the Pooled Fund's intent to purchase securities 
pursuant to this exemption and a copy of this notice of proposed 
exemption and of the final exemption, if granted, as published in the 
Federal Register;
    (2) any other reasonably available information regarding the 
covered transactions that the Independent Fiduciary requests; and
    (3) a termination form expressly providing an election for the 
Independent Fiduciary to terminate the plan's investment in the Pooled 
Fund without penalty to the plan. Such form shall include instructions 
specifying how to use the form. Specifically, the instructions will 
explain that the plan has an opportunity to withdraw its assets from 
the Pooled Fund for a period at least 30 days after the plan's receipt 
of the initial notice described in subparagraph (1) above and that the 
failure of the Independent Fiduciary to return the termination form by 
the specified date shall be deemed to be an approval by the plan of its 
continued participation in covered transactions as a Pooled Fund 
investor.
    For purposes of this paragraph, the requirement that the 
authorizing fiduciary be independent of the Asset Manager shall not 
apply in the case of an in-house plan sponsored by the Applicant or an 
affiliate thereof.
    (l) In the case of a plan whose assets are proposed to be invested 
in a Pooled Fund subsequent to implementation of the procedures to 
engage in the covered transactions, the plan's investment in the Pooled 
Fund is subject to the prior written authorization of an Independent 
Fiduciary, following the receipt by the Independent Fiduciary of the 
materials

[[Page 6239]]

described in subsections (1), (2), and (3) of paragraph (k) and an 
explanation of the plan's ability to terminate its investment in the 
Pooled Fund. For purposes of this paragraph, the requirement that the 
authorizing fiduciary be independent of the Asset Manager shall not 
apply in the case of an in-house plan sponsored by the Applicant or an 
affiliate thereof.
    (m) Subsequent to an Independent Fiduciary's initial authorization 
of a plan's investment in a Pooled Fund that engages in the covered 
transactions, the Asset Manager will, at least annually, provide the 
Independent Fiduciary with a termination form and the information 
specified in subparagraph (k)(3) above.
    (n) At least once every three months, and not later than 45 days 
following the period to which such information relates, the Asset 
Manager shall:
    (1) furnish the Independent Fiduciary of each single Client Plan, 
and of each plan investing in a Pooled Fund, with a report (which may 
be provided electronically) disclosing all securities purchased on 
behalf of that Client Plan or Pooled Fund pursuant to the exemption 
during the period to which such report relates, and the terms of the 
transactions, including:
    (i) the type of security (including the rating of any debt 
security);
    (ii) the price at which the securities were purchased;
    (iii) the first day on which any sale was made during this 
offering;
    (iv) the size of the issue;
    (v) the number of securities purchased by the Asset Manager for the 
specific Client Plan or Pooled Fund;
    (vi) the identity of the underwriter from whom the securities were 
purchased;
    (vii) the spread on the underwriting;
    (ix) the price at which any securities purchased during the period 
were sold; and
    (x) the market value at the end of such period of each security 
purchased during the period and not sold;
    (2) provide to the Independent Fiduciary written certifications 
signed by an officer of the Affiliated Broker-Dealer, as described in 
paragraph (g)(2), affirming that, as to each offering covered by this 
exemption during the past quarter, the Affiliated Broker-Dealer acted 
in compliance with Section I, paragraphs (e), (f), and (g) of this 
exemption;
    (3) disclose to the Independent Fiduciary that, upon request, any 
other reasonably available information regarding the covered 
transactions that the Independent Fiduciary requests will be provided, 
including, but not limited to:
    (i) the date on which the securities were purchased on behalf of 
the plan;
    (ii) the percentage of the offering purchased on behalf of all 
Client Plans and Pooled Funds; and
    (iii) the identity of all members of the underwriting syndicate; 
and
    (4) disclose to the Independent Fiduciary in the next quarterly 
report, whether at any time during the preceding quarter, the Asset 
Manager was precluded from trading in a security purchased under this 
exemption for any period of time because of its status as an affiliate 
of the Affiliated Broker-Dealer and the reason for this restriction.
    (o) Each single Client Plan shall have total net assets with a 
value of at least $50 million. In addition, in the case of a 
transaction involving an Eligible Rule 144A Offering on behalf of a 
single Client Plan, each such Client Plan shall have at least $100 
million in securities, as determined pursuant to SEC Rule 144A (17 CFR 
230.144A). In the case of a Pooled Fund, the $50 million requirement 
will be met if 50 percent or more of the units of beneficial interest 
in such Pooled Fund are held by plans having total net assets with a 
value of at least $50 million. For purchases involving an Eligible Rule 
144A Offering on behalf of a Pooled Fund, the $100 million requirement 
will be met if 50 percent or more of the units of beneficial interest 
in such Pooled Fund are held by plans having at least $100 million in 
assets and the Pooled Fund itself qualifies as a QIB, as determined 
pursuant to SEC Rule 144A (17 CFR 230.144A(a)(F)).
    For purposes of the net asset tests described above, where a group 
of Client Plans is maintained by a single employer or controlled group 
of employers, as defined in section 407(d)(7) of the Act, the $50 
million net asset requirement or the $100 million net asset requirement 
may be met by aggregating the assets of such Client Plans, if the 
assets are pooled for investment purposes in a single master trust.
    (p) The Asset Manager qualifies as a ``qualified professional asset 
manager'' (QPAM), as that term is defined under Part V(a) of Prohibited 
Transaction Exemption 84-14 (49 FR 9494, 9506, March 13, 1984) and, in 
addition, has, as of the last day of its most recent fiscal year, total 
client assets under its management and control in excess of $5 billion 
and shareholders' or partners' equity in excess of $1 million.
    (q) No more than 10 percent of the assets of a Pooled Fund, at the 
time of a covered transaction, are comprised of assets of employee 
benefit plans maintained by the Asset Manager, the Affiliated Broker-
Dealer, or an affiliate for their own employees, for which the Asset 
Manager, the Affiliated Broker-Dealer, or an affiliate exercises 
investment discretion.
    (r) The Asset Manager and the Affiliated Broker-Dealer maintain, or 
cause to be maintained, for a period of six years from the date of any 
covered transaction such records as are necessary to enable the persons 
described in paragraph (s) of this exemption to determine whether the 
conditions of this exemption have been met, except that--
    (1) no party in interest with respect to a Client Plan, other than 
the Asset Manager and the Affiliated Broker-Dealer, shall be subject to 
a civil penalty under section 502(i) of the Act or the taxes imposed by 
section 4975(a) and (b) of the Code, if such records are not 
maintained, or not available for examination, as required by paragraph 
(s); and
    (2) a prohibited transaction shall not be considered to have 
occurred if, due to circumstances beyond the control of the Asset 
Manager or the Affiliated Broker-Dealer, such records are lost or 
destroyed prior to the end of the six-year period.
    (s)(1) Except as provided in subparagraph (2) of this paragraph (s) 
and notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the records referred to in paragraph (r) are 
unconditionally available at their customary location for examination 
during normal business hours by--
    (i) any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the SEC; or
    (ii) any fiduciary of a Client Plan, or any duly authorized 
employee or representative of such fiduciary; or
    (iii) any employer of participants and beneficiaries and any 
employee organization whose members are covered by a Client Plan, or 
any authorized employee or representative of these entities; or
    (iv) any participant or beneficiary of a Client Plan, or duly 
authorized employee or representative of such participant or 
beneficiary;
    (2) none of the persons described in paragraphs (s)(1)(ii)-(iv) 
shall be authorized to examine trade secrets of the Asset Manager or 
the Affiliated Broker-Dealer, or commercial or financial information 
which is privileged or confidential; and
    (3) should the Asset Manager or the Affiliated Broker-Dealer refuse 
to disclose information on the basis that such information is exempt 
from disclosure pursuant to paragraph (s)(2)

[[Page 6240]]

above, the Asset Manager shall, by the close of the thirtieth (30th) 
day following the request, provide a written notice advising that 
person of the reasons for the refusal and that the Department may 
request such information.

Section II--Definitions

    (a) The term ``the Affiliated Broker-Dealer'' means any broker-
dealer affiliate of the Applicant (as ``affiliate'' is defined in 
paragraph (c)) that meets the requirements of this exemption.
    (b) The term ``the Asset Manager'' means any asset management 
affiliate of the Applicant (as ``affiliate'' is defined in paragraph 
(c)) that meets the requirements of this exemption.
    (c) The term ``affiliate'' of a person includes:
    (1) any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with such person;
    (2) any officer, director, partner, employee, or relative (as 
defined in section 3(15) of the Act) of such person; and
    (3) any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (d) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (e) The term ``Client Plan'' means an employee benefit plan that is 
subject to the fiduciary responsibility provisions of the Act and whose 
assets are under the management of the Asset Manager, including a plan 
investing in a Pooled Fund (as ``Pooled Fund'' is defined in paragraph 
(f) below).
    (f) The term ``Pooled Fund'' means a common or collective trust 
fund or pooled investment fund maintained by the Asset Manager.
    (g) The term ``Independent Fiduciary'' means a fiduciary of a 
Client Plan who is unrelated to, and independent of, the Asset Manager. 
For purposes of this exemption, a Client Plan fiduciary will not be 
deemed to be unrelated to, and independent of, the Asset Manager if:
    (1) such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with the Asset Manager;
    (2) such fiduciary, or any officer, director, partner, employee, or 
relative of such fiduciary is an officer, director, partner, or 
employee of the Asset Manager (or is a relative of such persons); or
    (3) such fiduciary directly or indirectly receives any compensation 
or other consideration from the Asset Manager for his or her own 
personal account in connection with any transaction described in this 
exemption.
    If an officer, director, partner, or employee of the Asset Manager 
(or a relative of such persons), is a director of such Independent 
Fiduciary, and if he or she abstains from participation in (A) the 
choice of the Plan's investment manager/adviser and (B) the decision to 
authorize or terminate authorization for transactions described in 
Section I, then paragraph (g)(2) of this Section II, shall not apply.
    (h) The term ``security'' shall have the same meaning as defined in 
section 2(36) of the Investment Company Act of 1940 (the 1940 Act), as 
amended (15 U.S.C. 80a-2(36)(1996)).
    (i) The term ``Eligible Rule 144A Offering'' shall have the same 
meaning as defined in SEC Rule 10f-3(a)(4) (17 CFR 270.10f-3(a)(4)) 
under the 1940 Act.
    (j) The term ``qualified institutional buyer'' or ``QIB'' shall 
have the same meaning as defined in SEC Rule 144A (17 CFR 
230.144A(a)(1)) under the 1933 Act.
    (k) The term ``Rating Organizations'' means Standard & Poor's 
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit 
Rating Co., or Fitch IBCA, Inc., or their successors.

    Signed at Washington, D.C., this 3rd day of February, 2000.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare 
BenefitsAdministration, U.S. Department of Labor.
[FR Doc. 00-2856 Filed 2-7-00; 8:45 am]
BILLING CODE 4510-29-P