Proposed Exemptions; Barclays Bank PLC and its Affiliates
(Collectively, Barclays) [Notices] [03/14/2000]
Proposed Exemptions; Barclays Bank PLC and its Affiliates
(Collectively, Barclays) [03/14/2000]
Volume 65, Number 50, Page 13835-13859
[[Page 13835]]
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Part II
Department of Labor
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Pension and Welfare Benefits Administration
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Proposed Exemptions; Barclays Bank PLC and its Affiliates
(Collectively, Barclays); Notice
[[Page 13836]]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10188, et al.]
Proposed Exemptions; Barclays Bank PLC and its Affiliates
(Collectively, Barclays)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
Attention: Application No. ____, stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
the Pension and Welfare Benefits Administration, U.S. Department of
Labor, Room N-5638, 200 Constitution Avenue, NW, Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Barclays Bank PLC and its Affiliates (collectively, Barclays)
Located in London, England
[Application No. D-10188]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act, section 4975(c)(2) of the Code,
and section 8477(c)(3) of FERSA, in accordance with the procedures set
forth in 29 CFR part 2570, Subpart B (55 FR 32836, 32847, August 10,
1990).
Section I--Retroactive Exemption for thE Acquisition, Holding and
Disposition of Barclays PLC Stock
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(D), 406(b)(1) and 406(b)(2) of the Act, and the sanctions
resulting from the application of section 4975 of the Code by reason of
section 4975(c)(1)(D) and (E) of the Code, shall not apply, as of
December 31, 1995 until the date this proposed exemption is granted, to
the acquisition, holding and disposition of the common stock of
Barclays PLC (the Barclays PLC Stock) by Index and Model-Driven Funds
managed by Barclays, provided that the following conditions and the
general conditions in Section III are met:
(a) The acquisition or disposition of the Barclays PLC Stock is for
the sole purpose of maintaining strict quantitative conformity with the
relevant index upon which the Index or Model-Driven Fund is based, and
does not involve any agreement, arrangement or understanding regarding
the design or operation of the Fund acquiring the Barclays PLC Stock
which is intended to benefit Barclays or any party in which Barclays
may have an interest.
(b) All aggregate daily purchases of Barclays PLC Stock by the
Funds do not exceed on any particular day the greater of:
(1) 15 percent of the average daily trading volume for the Barclays
PLC Stock occurring on the applicable exchange or automated trading
system (as described in paragraph (c) below) for the previous five (5)
business days, or
(2) 15 percent of the trading volume for Barclays PLC Stock
occurring on the applicable exchange or automated trading system on the
date of the transaction, as determined by the best available
information for the trades occurring on that date.
(c) All purchases and sales of Barclays PLC Stock occur either (i)
on the London Stock Exchange, a recognized securities exchange as
defined in Section IV(k) below, (ii) through an automated trading
system (as defined in Section IV(j) below) operated by a broker-dealer
independent of Barclays that is subject to regulation and supervision
by the Securities and Futures Authority of the United Kingdom (pursuant
to the applicable securities laws) that provides a mechanism for
customer orders to be matched on an anonymous basis without the
participation of a broker-dealer, or (iii) in a direct, arms-length
transaction entered into on a principal basis with a broker-dealer, in
the ordinary course of its business, where such broker-dealer is
independent of Barclays and is either registered under the Securities
Exchange Act of 1934 (the `34 Act), and thereby subject to regulation
by the U.S. Securities and Exchange Commission (SEC), or subject to
regulation and supervision by the Securities and Futures Authority of
the United Kingdom (UK).
(d) No transactions by a Fund involve purchases from, or sales to,
Barclays (including officers, directors, or employees thereof), or any
party in interest that is a fiduciary with discretion to invest plan
assets into the Fund.
(e) No more than five (5) percent of the total amount of Barclays
PLC Stock issued and outstanding at any time is held in the aggregate
by Index and Model-Driven Funds managed by Barclays.
[[Page 13837]]
(f) Barclays PLC Stock constitutes no more than three (3) percent
of any independent third party index on which the investments of an
Index or Model-Driven Fund are based.
(g) A plan fiduciary independent of Barclays authorizes the
investment of such plan's assets in an Index or Model-Driven Fund which
purchases and/or holds Barclays PLC Stock, pursuant to the procedures
described herein (see Paragraph 11 of the Summary of Facts and
Representations below regarding portfolio management services provided
for particular plans).
(h) A fiduciary independent of Barclays directs the voting of the
Barclays PLC Stock held by an Index or Model-Driven Fund on any matter
in which shareholders of Barclays PLC Stock are required or permitted
to vote.
Section II--Prospective Exemption for the Acquisition, Holding and
Disposition of Barclays Stock
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(D), 406(b)(1) and 406(b)(2) of the Act, section 8477(c)(2)(A)
and (B) of FERSA, and the sanctions resulting from the application of
section 4975 of the Code by reason of section 4975(c)(1)(D) and (E) of
the Code, shall not apply to the acquisition, holding and disposition
of Barclays PLC Stock or the common stock of an Affiliate of Barclays
PLC (Barclays PLC Affiliate Stock) by Index and Model-Driven Funds
managed by Barclays, provided that the following conditions and the
general conditions in Section III are met:
(a) The acquisition or disposition of Barclays PLC Stock or
Barclays PLC Affiliate Stock (collectively, Barclays Stock) is for the
sole purpose of maintaining strict quantitative conformity with the
relevant index upon which the Index or Model-Driven Fund is based, and
does not involve any agreement, arrangement or understanding regarding
the design or operation of the Fund acquiring the Barclays Stock which
is intended to benefit Barclays or any party in which Barclays may have
an interest.
(b) Whenever Barclays Stock is initially added to an index on which
an Index or Model-Driven Fund is based, or initially added to the
portfolio of an Index or Model-Driven Fund, all acquisitions of
Barclays Stock necessary to bring the Fund's holdings of such Stock
either to its capitalization-weighted or other specified composition in
the relevant index, as determined by the independent organization
maintaining such index, or to its correct weighting as determined by
the model which has been used to transform the index, occur in the
following manner:
(1) Purchases are from, or through, only one broker or dealer on a
single trading day;
(2) Based on the best available information, purchases are not the
opening transaction for the trading day;
(3) Purchases are not effected in the last half hour before the
scheduled close of the trading day;
(4) Purchases are at a price that is not higher than the lowest
current independent offer quotation, determined on the basis of
reasonable inquiry from non-affiliated brokers;
(5) Aggregate daily purchases do not exceed 15 percent of the
average daily trading volume for the security, as determined by the
greater of either (i) the trading volume for the security occurring on
the applicable exchange or automated trading system on the date of the
transaction, or (ii) an aggregate average daily trading volume for the
security occurring on the applicable exchange or automated trading
system for the previous five (5) business days, both based on the best
information reasonably available at the time of the transaction;
(6) All purchases and sales of Barclays Stock occur either (i) on a
recognized securities exchange (as defined in Section IV(k) below),
(ii) through an automated trading system (as defined in Section IV(j)
below) operated by a broker-dealer independent of Barclays that is
either registered under the ''34 Act, and thereby subject to regulation
by the SEC, or subject to regulation and supervision by the Securities
and Futures Authority of the UK, which provides a mechanism for
customer orders to be matched on an anonymous basis without the
participation of a broker-dealer, or (iii) through an automated trading
system (as defined in Section IV(j) below) that is operated by a
recognized securities exchange (as defined in Section IV(k) below),
pursuant to the applicable securities laws, and provides a mechanism
for customer orders to be matched on an anonymous basis without the
participation of a broker-dealer; and
(7) If the necessary number of shares of Barclays Stock cannot be
acquired within 10 business days from the date of the event which
causes the particular Fund to require Barclays Stock, Barclays appoints
a fiduciary which is independent of Barclays to design acquisition
procedures and monitor Barclays' compliance with such procedures.
(c) Subsequent to acquisitions necessary to bring a Fund's holdings
of Barclays Stock to its specified weighting in the index or model
pursuant to the restrictions described in paragraph (b) above, all
aggregate daily purchases of Barclays Stock by the Funds do not exceed
on any particular day the greater of:
(1) 15 percent of the average daily trading volume for the Barclays
Stock occurring on the applicable exchange or automated trading system
(as defined below) for the previous five (5) business days, or
(2) 15 percent of the trading volume for Barclays Stock occurring
on the applicable exchange or automated trading system (as defined
below) on the date of the transaction, as determined by the best
available information for the trades that occurred on such date.
(d) All transactions in Barclays Stock not otherwise described in
paragraph (b) above are either: (i) Entered into on a principal basis
in a direct, arms-length transaction with a broker-dealer, in the
ordinary course of its business, where such broker-dealer is
independent of Barclays and is either registered under the `34 Act, and
thereby subject to regulation by the SEC, or subject to regulation and
supervision by the Securities and Futures Authority of the UK (SFA-UK),
(ii) effected on an automated trading system (as defined in Section
IV(j) below) operated by a broker-dealer independent of Barclays that
is subject to regulation by either the SEC or SFA-UK, or an automated
trading system operated by a recognized securities exchange (as defined
in Section IV(k) below) which, in either case, provides a mechanism for
customer orders to be matched on an anonymous basis without the
participation of a broker-dealer, or (iii) effected through a
recognized securities exchange (as defined in Section IV(k) below) so
long as the broker is acting on an agency basis.
(e) No transactions by a Fund involve purchases from, or sales to,
Barclays (including officers, directors, or employees thereof), or any
party in interest that is a fiduciary with discretion to invest plan
assets into the Fund.
(f) No more than five (5) percent of the total amount of either
Barclays PLC Stock or any Barclays PLC Affiliate Stock, that is issued
and outstanding at any time, is held in the aggregate by Index and
Model-Driven Funds managed by Barclays.
(g) Barclays Stock constitutes no more than five (5) percent of any
independent third party index on which the investments of an Index or
Model-Driven Fund are based.
(h) A plan fiduciary independent of Barclays authorizes the
investment of
[[Page 13838]]
such plan's assets in an Index or Model-Driven Fund which purchases
and/or holds Barclays Stock, pursuant to the procedures described
herein (see Paragraph 11 of the Summary of Facts and Representations
below regarding portfolio management services provided for particular
plans).
(i) A fiduciary independent of Barclays directs the voting of the
Barclays Stock held by an Index or Model-Driven Fund on any matter in
which shareholders of Barclays Stock are required or permitted to vote.
Section III--General Conditions
(a) Barclays maintains or causes to be maintained for a period of
six years from the date of the transaction the records necessary to
enable the persons described in paragraph (b) of this Section to
determine whether the conditions of this exemption have been met,
except that (1) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Barclays, the
records are lost or destroyed prior to the end of the six-year period,
and (2) no party in interest other than Barclays shall be subject to
the civil penalty that may be assessed under section 502(i) of the Act
or to the taxes imposed by section 4975(a) and (b) of the Code if the
records are not maintained or are not available for examination as
required by paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (a) of this Section are unconditionally
available at their customary location for examination during normal
business hours by--
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(B) Any fiduciary of a plan participating in an Index or Model-
Driven Fund who has authority to acquire or dispose of the interests of
the plan, or any duly authorized employee or representative of such
fiduciary,
(C) Any contributing employer to any plan participating in an Index
or Model-Driven Fund or any duly authorized employee or representative
of such employer, and
(D) Any participant or beneficiary of any plan participating in an
Index or Model-Driven Fund, or a representative of such participant or
beneficiary.
(2) None of the persons described in subparagraphs (B) through (D)
of this paragraph (b) shall be authorized to examine trade secrets of
Barclays or commercial or financial information which is considered
confidential.
Section IV--Definitions
(a) The term ``Index Fund'' means any investment fund, account or
portfolio sponsored, maintained, trusteed, or managed by Barclays, in
which one or more investors invest, and--
(1) which is designed to track the rate of return, risk profile and
other characteristics of an independently maintained securities Index,
as described in Section IV(c) below, by either (i) replicating the same
combination of securities which compose such Index or (ii) sampling the
securities which compose such Index based on objective criteria and
data;
(2) for which Barclays does not use its discretion, or data within
its control, to affect the identity or amount of securities to be
purchased or sold;
(3) that contains ``plan assets'' subject to the Act, pursuant to
the Department's regulations (see 29 CFR 2510.3-101, Definition of
``plan assets''--plan investments); and,
(4) that involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund which is intended to
benefit Barclays or any party in which Barclays may have an interest.
(b) The term ``Model-Driven Fund'' means any investment fund,
account or portfolio sponsored, maintained, trusteed, or managed by
Barclays, in which one or more investors invest, and--
(1) which is composed of securities the identity of which and the
amount of which are selected by a computer model that is based on
prescribed objective criteria using independent third party data, not
within the control of Barclays, to transform an independently
maintained Index, as described in Section IV(c) below;
(2) which contains ``plan assets'' subject to the Act, pursuant to
the Department's regulations (see 29 CFR 2510.3-101, Definition of
``plan assets''--plan investments); and
(3) that involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund or the utilization of any
specific objective criteria which is intended to benefit Barclays or
any party in which Barclays may have an interest.
(c) The term Index means a securities index that represents the
investment performance of a specific segment of the public market for
equity or debt securities in the United States and/or foreign
countries, but only if--
(1) the organization creating and maintaining the index is--
(A) engaged in the business of providing financial information,
evaluation, advice or securities brokerage services to institutional
clients,
(B) a publisher of financial news or information, or
(C) a public stock exchange or association of securities dealers;
and,
(2) the index is created and maintained by an organization
independent of Barclays; and,
(3) the index is a generally accepted standardized index of
securities which is not specifically tailored for the use of Barclays.
(d) The term opening date means the date on which investments in or
withdrawals from an Index or Model-Driven Fund may be made.
(e) The term Buy-up means an acquisition of Barclays Stock by an
Index or Model-Driven Fund in connection with the initial addition of
such Stock to an independently maintained index upon which the Fund is
based or the initial investment of a Fund in such Stock.
(f) The term Barclays refers to Barclays PLC and its Affiliates, as
defined below in paragraph (g), including BZW Barclays Global
Investors, N.A., BZW Barclays Global Fund Advisors, BZW Barclays Global
Investors Services, BZW Investment Management, Inc., Barclays Bank PLC
(London), Barclays Bank of Canada, Barclays Bank Zimbabwe, Barclays
Bank of Kenya, and Barclays Bank of Botswana, Ltd.
(g) The term Affiliate means, with respect to Barclays PLC, an
entity which, directly or indirectly, through one or more
intermediaries, is controlled by Barclays PLC;
(h) An affiliate of Barclays includes:
(1) Any person, directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
the person;
(2) Any officer, director, employee or relative of such person, or
partner of any such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(i) The term control means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(j) The term automated trading system means an electronic trading
system that functions in a manner intended to simulate a securities
exchange by electronically matching orders on an agency basis from
multiple buyers and sellers, such as an ``alternative trading system''
within the meaning of the SEC's Reg. ATS [17 CFR part 242.300], as such
definition may be amended from time to time, or an ``automated
[[Page 13839]]
quotation system'' as described in Section 3(a)(51)(A)(ii) of the '34
Act [15 U.S.C. 78c(a)(51)(A)(ii)].
(k) The term recognized securities exchange means a U.S. securities
exchange that is registered as a ``national securities exchange'' under
Section 6 of the '34 Act (15 U.S.C. 78f), or a designated offshore
securities market, as defined in Regulation S of the SEC [17 CFR part
230.902(b)], as such definition may be amended from time to time, which
performs with respect to securities the functions commonly performed by
a stock exchange within the meaning of definitions under the applicable
securities laws (e.g., 17 CFR part 240.3b-16).
EFFECTIVE DATE: The proposed exemption, if granted, will be effective
as of December 31, 1995, for those transactions described in Section I
above, and as of the date the final grant is published in the Federal
Register for those transactions described in Section II above.
Summary of Facts And Representations
1. Barclays Global Investors, N.A. (``BGI'') is a national banking
association which provides investment advisory, trust and related
services to employee benefit plans and other fiduciary clients. BGI is
an indirect subsidiary of Barclays PLC, a bank holding company
incorporated under the laws of England and Wales, and Barclays Bank PLC
(Barclays Bank), a bank incorporated under the laws of England and
Wales and a subsidiary of Barclays PLC. BGI currently has two
subsidiaries, both of which are California corporations and investment
advisers registered under the Investment Advisers Act of 1940 (the
``Advisers Act''). The first subsidiary, BZW Barclays Global Fund
Advisers, provides investment advice to accounts and funds, including
as an investment adviser or sub-adviser to certain mutual funds. The
second subsidiary, BZW Barclays Global Investors Services, is
registered as a broker-dealer and provides services to BGI and certain
of its affiliates. In addition to BGI and its subsidiaries, Barclays
Bank and certain of its affiliates may act as fiduciaries to ERISA-
covered accounts and funds. BZW Investment Management, Inc., a Delaware
corporation, is an investment adviser under the Advisers Act. BZW Asset
Risk Management Limited, a corporation organized under the laws of
England and Wales, is also registered as an investment adviser under
the Advisers Act. The ``Applicants'' are BGI and those other Affiliates
of Barclays PLC that act or may act in the future as fiduciaries to
ERISA-covered plans.
2. On December 31, 1995, Barclays Bank and certain of its
affiliates acquired Wells Fargo Nikko Investment Advisors (WFNIA) and
Wells Fargo Institutional Trust Company, N.A. (WFITC). WFITC became BZW
Barclays Global Investors, N.A. (i.e. BGI) and WFNIA became BZW
Barclays Global Fund Advisors (BZW Advisors).
Prior to January 1, 1996, WFITC and WFNIA maintained and managed
Index and Model-Driven Funds which held assets of ERISA-covered
employee benefit plans. Cross-trades of securities occurred among these
Funds, as well as between the Funds and certain large pension plans,
pursuant to Prohibited Transaction Exemption (PTE) 92-11 (56 FR 7800,
March 4, 1992), an exemption issued to Wells Fargo Bank, N.A. and its
affiliates (including at such time WFNIA and WFITC).\1\ Part II of PTE
92-11 permitted Index and Model-Driven Funds maintained by Wells Fargo
to acquire, hold and dispose of the common stock of Wells Fargo & Co.
(WFC Stock).
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\1\ PTE 92-11 superseded PTE 87-51 (52 FR 22558, June 12, 1987).
Currently, Wells Fargo has an exemption application before the
Department which seeks to amend PTE 92-11 (see Exemption Application
No. D-9584).
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The Applicants represent that as a result of the sale of WFNIA and
WFITC to Barclays Bank, an individual exemption similar to that granted
to Wells Fargo (i.e., Part II of PTE 92-11) for the acquisition,
holding and disposition of WFC Stock is necessary, after December 31,
1995, to enable certain Index and Model-Driven Funds maintained by
Barclays Bank and its Affiliates to acquire, hold and dispose of the
common stock of Barclays PLC (i.e., Barclays PLC Stock). In this
regard, there have been seven (7) Funds that, since December 31, 1995,
have acquired, held and/or disposed of Barclays PLC Stock.\2\ The
Applicants request a retroactive exemption, effective as of December
31, 1995, to the date this proposed exemption is granted to permit such
transactions by these Funds. The Applicants are not requesting any
retroactive relief for the acquisition, holding or disposition of the
common stock of any Affiliates of Barclays PLC (i.e., Barclays PLC
Affiliate Stock). The Applicants represent that no Index or Model-
Driven Funds containing ``plan assets'' covered by the Act \3\ have
held such Stock. The Applicants also request that any further exemptive
relief for cross-trades of securities by Index and Model-Driven Funds
maintained by Barclays be considered separately.\4\
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\2\ The Applicants state that acquisitions of Barclays PLC Stock
have been made only by Funds that already held such Stock in their
portfolios as of December 31, 1995. Thus, there have been no new
acquisitions of Barclays PLC Stock by any Funds as a result of an
initial addition of such Stock to their portfolios since that time.
Such initial additions of Barclays PLC Stock will only be made by a
Fund once this proposed exemption is granted, under the conditions
required herein for a ``buy-up'' period (see Section II(b) above).
\3\ See 29 CFR 2510.3-101; Definition of ``plan assets''--plan
investments.
\4\ In this regard, the Department directs interested persons to
the Proposed Class Exemption for Cross-Trades of Securities by Index
and Model-Driven Funds (the Cross-Trading Proposal) which was
published in the Federal Register on December 15, 1999 (64 FR
70057). The Department notes that Section II(h) of the Cross-Trading
Proposal states that the cross-trading of securities by an Index or
Model-Driven Fund may not involve any security issued by the
investment manager for the Fund unless such manager has obtained a
separate prohibited transaction exemption for the acquisition of
such security. Thus, the Cross-Trading Proposal would, if granted,
permit Index and Model-Driven Funds maintained by Barclays to cross-
trade Barclays Stock, pursuant to the conditions to be contained
therein, if this proposed exemption is granted. The Applicants
represent that currently cross-trades of Barclays PLC Stock by the
Funds which hold such Stock are covered by PTE 92-11. However, the
Department is providing no opinion in this proposed exemption as to
whether any cross-trades of stocks, including Barclays PLC Stock, by
such Funds meet the conditions necessary for relief under PTE 92-11.
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3. The Applicants represent that they provide investment advisory
and management services to ERISA-covered plans through separately
managed accounts and through collective investment vehicles. The
Applicants' investment management services include indexed,
quantitative, and structured investment strategies. In addition to
ERISA-covered plans, the Applicants' clients include retirement plans
with non-U.S. participants, governmental entities, governmental plans,
church plans, mutual funds, and other institutional investors.
One of BGI's clients is the Federal Employees' Thrift Savings Plan
(the Federal Thrift Plan) established pursuant to the provisions of the
Federal Employees Retirement System Act of 1986 (FERSA) with respect to
which BGI manages the assets of the Common Stock Index Investment Fund
(the C Fund) and Fixed Income Investment Fund (the F Fund) through
investing such assets in collective investment funds maintained by BGI.
The Applicants state that the Federal Retirement Thrift Investment
Board is planning to begin investing the Federal Thrift Plan in an
Index Fund consisting of international equity securities, and such Fund
is anticipated to include Barclays PLC Stock. Thus, the Applicants
request that this proposed exemption provide prospective relief
[[Page 13840]]
under FERSA to acquire, hold and dispose of Barclays Stock.
4. In their capacity as fiduciary of an employee benefit plan, the
Applicants may be directed by an independent plan fiduciary or a plan
participant that has the ability to direct investments for his/her plan
account under the plan document. Alternatively, in those cases in which
the Applicants manage investments made for the plan, the Applicants
represent that their discretionary authority over whether the plan
invests in particular Funds is restricted by an independent plan
fiduciary, unless the plan subscribes to Applicants' Portfolio
Management in Funds (PMF) services (as discussed below).
5. The Applicants request that Index and Model-Driven Funds be
permitted to invest in Barclays Stock if such Stock is included among
the securities listed in the index utilized by the Fund. The Applicants
have identified over twenty (20) indices that currently include either
Barclays PLC Stock or Barclays PLC Affiliate Stock. Indexes which
include Barclays PLC Stock are the FT-SE All Share Index, the MSCI UK
Index, the FT-SE 100 Index, the FTSE Eurotop 100 Index, the FTSE
Eurotop 300 Index, the FTSE E300 Financial Index, and the Bloomberg
Europe Index. These indexes are compiled by financial information
agencies, such as Standard & Poor's, Financial Times Ltd., and Morgan
Stanley & Company International. These agencies are engaged in the
provision of financial information or securities brokerage services to
institutional investors and/or are publishers of financial information.
In each instance, the indexes are compiled by organizations that are
independent of Barclays and are generally accepted standardized indices
of securities that are not tailored for the use of Barclays. While many
of these indexes are not currently utilized by BGI for its Index and
Model-Driven Funds, there is a possibility that Funds holding assets of
ERISA-covered plans will be established in the future that are based on
these indexes.
The Applicants represent that there were at least seven (7)
different Index Funds maintained by BGI that included Barclays PLC
Stock in their portfolios as of December 31, 1995. These Funds were the
BGI MSCI Equity Index Fund--UK; the BGI MSCI Equity Index Fund B--UK;
the BGI EAFE Equity Index Fund P; the BGI Exxon UK Alpha Tilts Fund;
the BGI UK Equity Index Fund; the BGI UK Alpha Tilts Fund; and the BGI
UK Alpha Tilts Fund B.
However, since December 31, 1995, BGI has excluded Barclays Stock
from the portfolios of any new Index and Model-Driven Funds even though
such Stock is included in independently maintained indexes upon which
such Funds are based. For those Index Funds whose goal is to replicate
the rate of return of the index by tracking the capitalization-weighted
composition of securities listed in the index, such exclusions of
Barclays Stock create tracking errors which must be accounted for by
re-weighting other securities in the index. For Model-Driven Funds that
transform an index in a model-prescribed way, such exclusions of
Barclays Stock create operational inefficiencies and strategic
uncertainties that affect the criteria and data necessary to achieve
the desired rates of return.
6. The Applicants state that the proposed exemption is necessary to
allow Funds holding ``plan assets'' to purchase and hold Barclays Stock
in order to replicate the capitalization-weighted or other specified
composition of Barclays Stock in an independently maintained third
party index used by an Index Fund or to achieve the desired
transformation of an index used to create a portfolio for a Model-
Driven Fund.\5\
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\ 5\ The Applicants are not requesting any relief from sections
406 or 407(a) of the Act in connection with the acquisition and
holding of Barclays Stock by any employee benefit plans established
and maintained by Barclays for its own employees (the Barclays
Plans) which invest in the Applicants' Index Funds. In this regard,
such transactions may be covered by the statutory exemption under
section 408(e) of the Act, if the conditions of that exemption are
met. However, the Department is not providing an opinion in this
proposed exemption as to whether the conditions of section 408(e) of
the Act are met.
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In addition, the Applicants represent that there will be instances,
once this proposed exemption is granted, when Barclays Stock will be
added to an index on which a Fund is based or will be added to the
portfolio of a Fund which seeks to track an index that includes such
Stock. These instances will be referred to hereafter as a ``Buy-
up''.\6\ In such instances, acquisitions of Barclays Stock will be
necessary to bring the Fund's holdings of such Stock either to its
capitalization-weighted or other specified composition in the index, as
determined by the independent organization maintaining such index, or
to the correct weighting for such Stock as determined by the computer
model which has been used to transform the index. If the Index or
Model-Driven Fund holds ``plan assets,'' the Applicants represent that
all acquisitions of Barclays Stock by such Fund will comply with the
``Buy-up'' conditions of this proposed exemption. These conditions are
as follows:
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\ 6\ The Applicants anticipate that generally acquisitions of
Barclays Stock by an Index or Model-Driven Fund in a ``Buy-up'' will
occur within 10 business days from the date of the event which
causes the particular Fund to require Barclays Stock. Barclays does
not anticipate that the amounts of Barclays Stock acquired by any
Fund in a ``Buy-up'' will be significant. In this regard, the
Department notes that the conditions required herein are designed to
minimize the market impact of purchases made by the Funds in any
``Buy-up'' of Barclays Stock.
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(A) Purchases will be from or through only one broker or dealer on
a single trading day;
(B) Based on the best available information, purchases will not be
the opening transaction for the trading day;
(C) Purchases will not be effected in the last half hour before the
scheduled close of the trading day;
(D) Purchases will be at a price that is not higher than the lowest
current independent offer quotation, determined on the basis of
reasonable inquiry from non-affiliated brokers;
(E) Purchases will not exceed 15 percent of the daily trading
volume for the security, as determined by the greater of either (i) the
trading volume for the security occurring on the applicable exchange or
automated trading system on the date of the transaction, or (ii) an
aggregate average daily trading volume for the security occurring on
the applicable exchange or automated trading system for the previous
five (5) business days, both based on the best information reasonably
available at the time of the transaction;
(F) All purchases and sales of Barclays Stock will occur either (i)
on a recognized securities exchange (as defined in Section IV(k)), (ii)
through an automated trading system (as defined in Section IV(j))
operated by a broker-dealer that is either registered under the
Securities Exchange Act of 1934 (the '34 Act) and thereby subject to
regulation by the SEC, or subject to regulation and supervision by the
SFA-UK, which provides a mechanism for customer orders to be matched on
an anonymous basis without the participation of a broker-dealer, or
(iii) through an automated trading system (as defined in Section IV(j)
above) that is operated by a recognized securities exchange (as defined
in Section IV(k)), pursuant to the applicable securities laws which
provide a mechanism for customer orders to be matched on an anonymous
basis without the participation of a broker-dealer; and
(G) If the necessary number of shares of Barclays Stock cannot be
acquired within 10 business days from the date of the event which
causes the particular Fund to require Barclays Stock, Barclays
[[Page 13841]]
will appoint a fiduciary which is independent of Barclays to design
acquisition procedures and monitor Barclays' compliance with such
procedures.\7\
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\7\ In this regard, all Funds holding Barclays Stock as of
December 31, 1995, which have continued to acquire, hold and dispose
of Barclays Stock in order to track indexes including Barclays Stock
will not need to have daily transactions involving such Stock
directed by an independent fiduciary. Barclays states that the
amount of Barclays Stock involved in such transactions has been and
continues to be determined by the independent organization which
created and maintains the relevant index, and all other conditions
required under this proposed exemption have been met.
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The independent fiduciary and its principals will be completely
independent from the Applicants. The independent fiduciary will also be
experienced in developing and operating investment strategies for
individual and collective investment vehicles that track third-party
indices. Furthermore, the independent fiduciary will not act as the
broker for any purchases or sales of Barclays Stock and will not
receive any commissions as a result of this initial acquisition
program.
The independent fiduciary will have as its primary goal the
development of trading procedures that minimize the market impact of
purchases made pursuant to the initial acquisition program by the
Funds. The Applicants would expect that, under the trading procedures
established by the independent fiduciary, the trading activities will
be conducted in a low-profile, mechanical, non-discretionary manner and
would involve a number of small purchases over the course of each day,
randomly timed. The Applicants further expect that such a program will
allow the Applicants to acquire the necessary shares of Barclays Stock
for the Funds with minimum impact on the market and in a manner that
will be in the best interests of any employee benefit plans that
participate in such Funds.
The independent fiduciary will also be required to monitor the
Applicants' compliance with the trading program and procedures
developed for the initial acquisition of Barclays Stock. During the
course of any initial acquisition program, the independent fiduciary
will be required to review the activities weekly to determine
compliance with the trading procedures and notify the Applicants should
any non-compliance be detected. Should the trading procedures need
modifications due to unforeseen events or consequences, the independent
fiduciary will be required to consult with the Applicants and must
approve in advance any alteration of the trading procedures.
7. Subsequent to initial acquisitions necessary to bring a Fund's
holdings of Barclays Stock to its specified weighting in the index or
model pursuant to the restrictions described above, all aggregate daily
purchases of Barclays Stock by the Funds will not exceed on any
particular day the greater of:
(i) 15 percent of the average daily trading volume for the Barclays
Stock occurring on the applicable exchange or automated trading system
(as described herein) for the previous five (5) business days, or
(ii) 15 percent of the trading volume for Barclays Stock occurring
on the applicable exchange or automated trading system (as described
herein) on the date of the transaction, as determined by the best
available information for the trades that occurred on such date.
The Applicants state that recent changes in the London Stock
Exchange (LSE) have made that exchange more transparent for trading in
Barclays PLC Stock by the Index and Model-Driven Funds. In late 1997,
the LSE adopted the Stock Exchange Electronic Trading Service (SETS)
for all stocks listed in the FTSE Indexes, which include Barclays PLC
Stock. SETS is an order-driven system on which members post bids and
offers, permitting trading on an agency basis. Prior to the use of
SETS, trading on the LSE was a quote-driven principal market.
The Applicants state further that the advent of SETS has improved
the availability of volume information about stocks traded on the LSE.
Currently, all trades in stocks included in the SETS (whether executed
through SETS or not) are reported to SETS within minutes of the trade
and this data is available through various data providers, such as
Reuters. Thus, the Applicants represent that the volume limitations
imposed under this proposed exemption for transactions by the Funds
involving Barclays PLC Stock will be effectively monitored by Barclays.
8. Barclays represents that as of December 31, 1995 until the date
this proposed exemption is granted, all purchases and sales of Barclays
PLC Stock by the Funds have occurred and will continue to occur in one
of the following ways: (i) Through the London Stock Exchange, a
recognized securities exchange as defined in Section IV(k) above; (ii)
through an automated trading system (as defined in Section IV(j) above)
operated by a broker-dealer that is subject to regulation by the SFA-UK
(pursuant to the applicable securities laws), that provides a mechanism
for customer orders to be matched on an anonymous basis without the
participation of a broker-dealer; or (iii) through a direct, arms-
length transaction entered into on a principal basis with a broker-
dealer \8\ that is either registered under the ``34 Act, and thereby
subject to regulation by the SEC, or subject to regulation and
supervision by the SFA-UK. In addition, Barclays states that as of the
date this proposed exemption is granted, all future transactions by the
Funds involving Barclays Stock which do not occur in connection with a
Buy-up of such Stock by a Fund, as described above, will be either: (i)
Entered into on a principal basis with a broker-dealer that is either
registered under the '34 Act, and thereby subject to regulation by the
SEC, or subject to regulation and supervision by the SFA-UK; (ii)
effected on an automated trading system (as defined in Section IV(j)
above) operated by a broker-dealer subject to regulation by either the
SEC or SFA-UK, or on an automated trading system operated by a
recognized securities exchange (as defined in Section IV(k) above)
which, in either case, provides a mechanism for customer orders to be
matched on an anonymous basis without the participation of a broker-
dealer; or (iii) effected through a recognized securities exchange (as
defined in Section IV(k) above) so long as the broker is acting on an
agency basis.
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\ 8\ The Department notes that no relief is being provided
herein for purchases and sales of securities between a Fund and a
broker-dealer, acting as a principal, which may be considered
prohibited transactions as a result of such broker-dealer being a
party in interest, under section 3(14) of the Act, with respect to
any plans that are investors in the Fund. However, such transactions
may be covered by one or more of the Department's existing class
exemptions. For example, PTE 84-14 (49 FR 9497, March 13, 1984)
permits, under certain conditions, parties in interest to engage in
various transactions with plans whose assets are invested in an
investment fund managed by a ``qualified professional asset
manager'' (QPAM) who is independent of the parties in interest (with
certain limited exceptions) and meets specified financial standards.
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9. With respect to all acquisitions and dispositions of Barclays
PLC Stock by the Funds since December 31, 1995, the Applicants state
that no such transactions have involved purchases from or sales to
Barclays (including officers, directors, or employees thereof), or any
party in interest that is a fiduciary with discretion to invest plan
assets into the Fund. The Applicants represent that all future
acquisitions and dispositions of Barclays Stock by any Index or Model-
Driven Funds maintained by Barclays will also not involve any purchases
from or sales to Barclays (including officers, directors, or employees
thereof), or any party in interest that is
[[Page 13842]]
a fiduciary with discretion to invest plan assets into the Fund.
10. The Applicants state that no more than five (5) percent of the
total amount of either Barclays PLC Stock or Barclays PLC Affiliate
Stock, that is issued and outstanding at any time, will be held in the
aggregate by Index and Model-Driven Funds managed by Barclays.
For purposes of the acquisition and holding of Barclays PLC Stock
by Funds from December 31, 1995 until the date this proposed exemption
is granted, such Stock will constitute no more than three (3) percent
of any independent third party index on which the investments of an
Index or Model-Driven Fund are based. For example, Barclays PLC Stock
currently represents only 2.03% of the MSCI UK Index and 1.86% of the
FTSE 100 Index. Although some indexes include Barclays PLC Stock in
percentages that exceed three (3) percent of the index, Barclays does
not currently utilize such indices for its Index and Model-Driven Funds
with ``plan assets'' subject to the Act.
For purposes of future acquisitions and holdings of Barclays Stock
by such Funds once this proposed exemption is granted, neither the
Barclays PLC Stock nor the Barclays PLC Affiliate Stock will constitute
no more than five (5) percent of any independent third party index on
which the investments of an Index or Model-Driven Fund are based. In
this regard, the Applicants have identified at least seven (7) indexes
which include Barclays Stock where the current approximate
capitalization weight of the index represented by Barclays Stock
exceeds three (3) percent. The Applicants request that the proposed
exemption allow Barclays to design a passive investment strategy for an
Index or Model-Driven Fund which seeks to track an index that contains
Barclays Stock, or which transforms such an index in a model-prescribed
way, as long as the Barclays Stock does not constitute more than five
(5) percent of the index.\9\
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\ 9\ The Applicants have identified certain independent third
party indexes where the current approximate capitalization weight of
the index represented by Barclays Stock exceeds five (5) percent.
However, the Applicants have agreed to limit the prospective relief
that would be provided by this proposed exemption to Index and
Model-Driven Funds which track indexes where the specified
composition of Barclays Stock in the index does not exceed five (5)
percent of such index.
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With respect to an index's specified composition of particular
stocks in its portfolio, the Applicants state that future Funds may
track an index where the appropriate weighting for stocks listed in the
index is not capitalization-weighted. In this regard, the Applicants
note that the exemption received by WFITC and WFNIA (now BGI and BZW
Advisors, respectively) from the Department in 1992 (i.e. PTE 92-11)
covered transactions by index and model-driven funds that were designed
to replicate the capitalization-weighted composition of an
independently maintained stock index. However, the Applicants state
that Funds maintained by BGI and other Affiliates of Barclays PLC may
track indexes where the selection of a particular stock by the index,
and the amount of stock to be included in the index, is not established
based on the market capitalization of the corporation issuing such
stock. Therefore, since an independent organization may choose to
create an index where there are other index weightings for stocks
composing the index, the Applicants request that the proposed exemption
allow for Barclays Stock to be acquired by a Fund in the amounts which
are specified by the particular index, subject to the other
restrictions imposed under this proposed exemption. The Applicants
represent that, in all instances, acquisitions or dispositions of
Barclays Stock by a Fund will be for the sole purpose of maintaining
strict quantitative conformity with the relevant index upon which the
Fund is based or, in the case of a Model-Driven Fund, a modified
version of such an index as created by a computer model based on
prescribed objective criteria and third-party data.
11. The Applicants state that plan fiduciaries independent of
Barclays have authorized and will continue to authorize the investment
of any plan's assets in an Index or Model-Driven Fund which purchases
and/or holds Barclays Stock.
With respect to transactions involving Barclays Stock, the
Applicants state that they may provide portfolio management services
(i.e., PMF services) to a particular plan (a PMF Plan). In this regard,
the Applicants may exercise some discretion in allocating and
reallocating the plan's assets among various collective investment
funds, including Funds which may hold Barclays Stock. These allocations
are based on a plan's investment objectives, risk profile and market
conditions. However, the Applicants make the following representations
with respect to the purchase, directly or indirectly, of Barclays Stock
by such plans:
(a) The Applicants represent that any prohibited transactions which
might occur as a result of the discretionary allocation and
reallocation of plan assets among collective investment funds will be
exempt from the prohibitions of section 406 of the Act by reason of
section 408(b)(8).\10\
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\ 10\ The Department is expressing no opinion in this proposed
exemption as to whether Applicants' discretionary allocation and
reallocation services for any collective investment funds maintained
by the Applicants satisfy the requirements of section 408(b)(8) of
the Act and is not proposing any exemptive relief beyond that
offered by section 408(b)(8).
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(b) Before Barclays Stock is purchased by a Fund, the appropriate
independent fiduciary for each PMF Plan which is currently invested or
could be invested in such Fund will be furnished an explanation and a
simple form to return to Barclays for the purpose of indicating either
approval or disapproval of investments in the Fund including Barclays
Stock, together with a postage-paid return envelope. If the form is not
returned to the Applicants, the Applicants may obtain a verbal response
by telephone. If a verbal response is obtained by telephone, the
Applicants will confirm the fiduciary's decision in writing within five
(5) business days. In the event no response is obtained from a plan
fiduciary, the assets of the plan will not be invested in any Fund
which invests in Barclays Stock and any plan assets currently invested
in such Fund at that time would be withdrawn.
(c) Each new management agreement with such a plan will contain
language specifically approving or disapproving the investment in any
Fund which holds or might hold Barclays Stock. The fiduciary for each
such plan will be informed that the existing management agreement could
be modified in the same way. However, if the fiduciary does not
specifically approve language in the agreement allowing the investment
of plan assets in Funds which hold or might hold Barclays Stock, then
no such investment will be made by the Applicants.
(d) Each such plan will be informed on a quarterly basis of any
investment in, or withdrawal from, any Fund holding Barclays Stock. The
plan would be granted the election to override the Applicants
discretionary decision to invest in, or withdraw from, such Funds. If
the plan overrides the Applicants' decision to invest in, or withdraw
from, the Funds, then the Applicants will carry out the plan's election
as soon as possible after being notified of such election.
12. The Applicants will appoint an independent fiduciary which will
direct the voting of Barclays Stock held by the Funds. Currently, the
independent fiduciary that directs the voting of Barclays PLC Stock
held by the Funds is Institutional Shareholders Services, Inc.
[[Page 13843]]
Barclays states that in all instances the independent fiduciary
chosen to vote Barclays Stock for the Funds will be a consulting firm
specializing in corporate governance issues and proxy voting on behalf
of institutional investors with large equity portfolios. The fiduciary
will develop and follow standard guidelines and procedures for the
voting of proxies by institutional fiduciaries. The Applicants will
provide the independent fiduciary with all necessary information
regarding the Funds that hold Barclays Stock, the amount of Barclays
Stock held by the Funds on the record date for shareholder meetings of
the Applicants, and all proxy and consent materials with respect to
Barclays Stock. The independent fiduciary will maintain records with
respect to its activities as an independent fiduciary on behalf of the
Funds, including the number of shares of Barclays Stock voted, the
manner in which they were voted, and the rationale for the vote if the
vote was not consistent with the independent fiduciary's procedures and
current voting guidelines in effect at the time of the vote. The
independent fiduciary will supply the Applicants with such information
after each shareholder meeting. The independent fiduciary will be
required to acknowledge that it will be acting as a fiduciary with
respect to the plans which invest in the Funds which own Barclays
Stock, when voting such stock.
16. In summary, with respect to all acquisitions, holdings, and
dispositions of Barclays PLC Stock by the Funds since December 31,
1995, the Applicants represent that such transactions meet the criteria
of section 408(a) of the Act for the following reasons:
(a) Each Index or Model-Driven Fund involved is based on an Index,
as defined in Section IV(c) above;
(b) The acquisition, holding and disposition of the Barclays PLC
Stock by the Index or Model-Driven Fund is for the sole purpose of
maintaining strict quantitative conformity with the relevant index upon
which the Fund is based, and does not involve any agreement,
arrangement or understanding regarding the design or operation of the
Fund acquiring the Barclays PLC Stock which is intended to benefit
Barclays or any party in which Barclays may have an interest;
(c) All aggregate daily purchases of Barclays PLC Stock by the
Funds do not exceed, on any particular day, 15 percent of the average
daily trading volume for such Stock occurring on the applicable
exchange or automated trading system, as determined by the best
available information for the trades occurring on that date;
(d) All purchases and sales of Barclays PLC Stock occur either (i)
on the London Stock Exchange, a recognized securities exchange as
defined herein, (ii) through an automated trading system (as defined
herein) operated by a broker-dealer that is subject to regulation by
the SFA-UK (pursuant to the applicable securities laws) that provides a
mechanism for customer orders to be matched on an anonymous basis
without the participation of a broker-dealer, or (iii) in a direct,
arms-length transaction entered into on a principal basis with a
broker-dealer, in the ordinary course of its business, where such
broker-dealer is independent of Barclays and is either registered under
the '34 Act, and thereby subject to regulation by the SEC, or subject
to regulation and supervision by the SFA-UK;
(e) No transactions by a Fund involve purchases from or sales to
Barclays (including officers, directors, or employees thereof), or any
party in interest that is a fiduciary with discretion to invest plan
assets into the Fund;
(f) No more than five (5) percent of the total amount of Barclays
PLC Stock issued and outstanding at any time is held in the aggregate
by Index and Model-Driven Funds managed by Barclays;
(g) Barclays PLC Stock constitutes no more than three (3) percent
of any independent third party index on which the investments of an
Index or Model-Driven Fund are based;
(h) A plan fiduciary independent of Barclays authorizes the
investment of such plan's assets in an Index or Model-Driven Fund which
purchases and/or holds Barclays PLC Stock; and
(i) A fiduciary independent of Barclays (i.e. Institutional
Shareholders Services, Inc.) directs the voting of the Barclays PLC
Stock held by an Index or Model-Driven Fund on any matter in which
shareholders of Barclays PLC Stock are required or permitted to vote.
With respect to all acquisitions, holdings, and dispositions of
Barclays PLC Stock or Barclays PLC Affiliate Stock by the Funds after
this proposed exemption is granted, the Applicants represent that such
transactions will meet the criteria of section 408(a) of the Act for
the following reasons:
(a) Each Index or Model-Driven Fund involved will be based on an
Index, as defined in Section IV(c) above;
(b) The acquisition or disposition of Barclays Stock will be for
the sole purpose of maintaining strict quantitative conformity with the
relevant Index upon which the Index or Model-Driven Fund is based, and
will not involve any agreement, arrangement or understanding regarding
the design or operation of the Fund acquiring the Barclays Stock which
is intended to benefit Barclays or any party in which Barclays may have
an interest;
(c) Whenever Barclays Stock is initially added to an index on which
a Fund is based, or initially added to the portfolio of a Fund (i.e., a
Buy-up), all acquisitions of Barclays Stock necessary to bring the
Fund's holdings of such Stock either to its capitalization-weighted or
other specified composition in the relevant index, as determined by the
independent organization maintaining such index, or to its correct
weighting as determined by the computer model which has been used to
transform the index, will be restricted by conditions which are
designed to prevent possible market price manipulations;
(d) Subsequent to acquisitions necessary to bring a Fund's holdings
of Barclays Stock to its specified weighting in the index or model,
pursuant to the restrictions noted in paragraph (c) above, all
aggregate daily purchases of Barclays Stock by the Funds will not
exceed, on any particular day, 15 percent of the average daily trading
volume for such Stock occurring on the applicable exchange or automated
trading system, as determined by the best available information for the
trades that occurred on such date;
(e) All transactions in Barclays Stock, other than acquisitions of
such Stock in a Buy-up described in paragraph (c) above, will be
either: (i) Entered into on a principal basis with a broker-dealer, in
the ordinary course of its business, where such broker-dealer is
independent of Barclays and is either registered under the '34 Act, and
thereby subject to regulation by the SEC, or subject to regulation and
supervision by the SFA-UK, (ii) effected on an automated trading system
operated by a broker-dealer subject to regulation by either the SEC or
SFA-UK, or by a recognized securities exchange which, in either case,
provides a mechanism for customer orders to be matched on an anonymous
basis without the participation of a broker-dealer, or (iii) effected
through a recognized securities exchange (as defined herein) so long as
the broker is acting on an agency basis.
(f) No transactions by a Fund will involve purchases from or sales
to Barclays (including officers, directors, or employees thereof), or
any party in interest that is a fiduciary with discretion to invest
plan assets into the Fund;
[[Page 13844]]
(g) No more than five (5) percent of the total amount of either
Barclays PLC Stock or Barclays PLC Affiliate Stock, that is issued and
outstanding at any time, will be held in the aggregate by Index and
Model-Driven Funds managed by Barclays;
(h) Barclays Stock will constitute no more than five (5) percent of
any independent third party index on which the investments of an Index
or Model-Driven Fund are based;
(i) A plan fiduciary independent of Barclays will authorize the
investment of such plan's assets in an Index or Model-Driven Fund which
purchases and/or holds Barclays Stock pursuant to the procedures
described herein, including those which relate to portfolio management
services provided to certain plans (see Paragraph 11 of the Summary of
Facts and Representations above); and
(k) A fiduciary independent of Barclays will direct the voting of
the Barclays Stock held by an Index or Model-Driven Fund on any matter
in which shareholders of Barclays Stock are required or permitted to
vote.
NOTICE TO INTERESTED PERSONS: Notice of the proposed exemption should
be mailed by first class mail to interested persons, including the
appropriate fiduciaries for employee benefit plans currently invested
in the Index and/or Model-Driven Funds that acquire and hold Barclays
Stock. The notice should contain a copy of the proposed exemption as
published in the Federal Register and an explanation of the rights of
interested parties to comment on or request a hearing regarding the
proposed exemption. All notices should be sent to interested persons
within 15 days of the publication of this proposed exemption in the
Federal Register. Any written comments and/or requests for a hearing
must be received by the Department from interested persons within 45
days of the publication of this proposed exemption in the Federal
Register.
In addition, Barclays shall provide a copy of the proposed
exemption and, if granted, a copy of the final exemption upon request
to all ERISA-covered plans that invest in any Index or Model-Driven
Fund that will include Barclays PLC Stock or Barclays PLC Affiliate
Stock in its portfolio after the date the final exemption is published
in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
BOSC, Inc. (BOSC)
Located in Tulsa, Oklahoma
[Application No. D-10834]
Proposed Exemption
I. Transactions
A. The restrictions of sections 406(a) and 407(a) of the Act and
the taxes imposed by section 4975(a) and (b) of the Code by reason of
section 4975(c)(1)(A) through (D) of the Code shall not apply to the
following transactions involving trusts and certificates evidencing
interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and an employee benefit plan when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.A.(1) or (2).
Notwithstanding the foregoing, section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan by any person who has discretionary authority or renders
investment advice with respect to the assets of that Excluded Plan.\11\
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\11\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. The restrictions of sections 406(b)(1) and 406(b)(2) of the Act,
and the taxes imposed by section 4975(a) and (b) of the Code by reason
of section 4975(c)(1)(E) of the Code, shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or receivables
contained in the trust, or (b) an affiliate of a person described in
(a); if:
(i) The plan is not an Excluded Plan;
(ii) solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group
and at least 50 percent of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group;
(iii) a plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity.\12\ For purposes of this
paragraph B.(1)(iv) only, an entity will not be considered to service
assets contained in a trust if it is merely a subservicer of that
trust;
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\12\ For purposes of this proposed exemption, each plan
participating in a commingled fund (such as a bank collective trust
fund or insurance company pooled separate account) shall be
considered to own the same proportionate undivided interest in each
asset of the commingled fund as its proportionate interest in the
total assets of the commingled fund as calculated on the most recent
preceding valuation date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1)(i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B.(1) or (2).
C. The restrictions of sections 406(a), 406(b) and 407(a) of the
Act, and the taxes imposed by section 4975(a) and (b) of the Code by
reason of section 4975(c) of the Code, shall not apply to transactions
in connection with the servicing, management and operation of a trust,
provided:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing arrangement; and
(2) The pooling and servicing agreement is provided to, or
described in all material respects in, the prospectus or private
placement memorandum provided to investing plans before they purchase
certificates issued by the trust.\13\
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\13\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
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[[Page 13845]]
Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act, or from
the taxes imposed by reason of section 4975(c) of the Code, for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in section III.S.
D. The restrictions of sections 406(a) and 407(a) of the Act, and
the taxes imposed by sections 4975(a) and (b) of the Code by reason of
sections 4975(c)(1)(A) through (D) of the Code, shall not apply to any
transactions to which those restrictions or taxes would otherwise apply
merely because a person is deemed to be a party in interest or
disqualified person (including a fiduciary) with respect to a plan by
virtue of providing services to the plan (or by virtue of having a
relationship to such service provider described in section 3(14)(F),
(G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H) or (I) of
the Code), solely because of the plan's ownership of certificates.
II. General Conditions
A. The relief provided under Part I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating
from a rating agency (as defined in section III.W.) at the time of such
acquisition that is in one of the three highest generic rating
categories;
(4) The trustee is not an affiliate of any other member of the
Restricted Group. However, the trustee shall not be considered to be an
affiliate of a servicer solely because the trustee has succeeded to the
rights and responsibilities of the servicer pursuant to the terms of a
pooling and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by the sponsor pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith;
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933;
and
(7) In the event that the obligations used to fund a trust have not
all been transferred to the trust on the closing date, additional
obligations as specified in subsection III.B.(1) may be transferred to
the trust during the pre-funding period (as defined in section III.BB.)
in exchange for amounts credited to the pre-funding account (as defined
in section III.Z.), provided that:
(a) The pre-funding limit (as defined in section III.AA.) is not
exceeded;
(b) All such additional obligations meet the same terms and
conditions for eligibility as those of the original obligations used to
create the trust corpus (as described in the prospectus or private
placement memorandum and/or pooling and servicing agreement for such
certificates), which terms and conditions have been approved by a
rating agency.
Notwithstanding the foregoing, the terms and conditions for
determining the eligibility of an obligation may be changed if such
changes receive prior approval either by a majority of the outstanding
certificateholders or by a rating agency;
(c) The transfer of such additional obligations to the trust during
the pre-funding period does not result in the certificates receiving a
lower credit rating from a rating agency upon termination of the pre-
funding period than the rating that was obtained at the time of the
initial issuance of the certificates by the trust;
(d) The weighted average annual percentage interest rate (the
average interest rate) for all of the obligations in the trust at the
end of the pre-funding period will not be more than 100 basis points
lower than the average interest rate for the obligations which were
transferred to the trust on the closing date;
(e) In order to ensure that the characteristics of the receivables
actually acquired during the pre-funding period are substantially
similar to those which were acquired as of the closing date, the
characteristics of the additional obligations will be either monitored
by a credit support provider or other insurance provider which is
independent of the sponsor, or an independent accountant retained by
the sponsor will provide the sponsor with a letter (with copies
provided to the rating agency, the underwriter and the trustees)
stating whether or not the characteristics of the additional
obligations conform to the characteristics of such obligations
described in the prospectus, private placement memorandum and/or
pooling and servicing agreement. In preparing such letter, the
independent accountant will use the same type of procedures as were
applicable to the obligations which were transferred as of the closing
date;
(f) The pre-funding period shall be described in the prospectus or
private placement memorandum provided to investing plans; and
(g) The trustee of the trust (or any agent with which the trustee
contracts to provide trust services) will be a substantial financial
institution or trust company experienced in trust activities and
familiar with its duties, responsibilities and liabilities as a
fiduciary under the Act. The trustee, as the legal owner of the
obligations in the trust, will enforce all the rights created in favor
of certificateholders of such trust, including employee benefit plans
subject to the Act.
B. Neither any underwriter, sponsor, trustee, servicer, insurer,
nor any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Part I, if the provision of subsection II.A.(6) above is
not satisfied with respect to acquisition or holding by a plan of such
certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance
[[Page 13846]]
with the Securities Act of 1933, any such transferees will be required
to make a written representation regarding compliance with the
condition set forth in subsection II.A.(6) above.
III. Definitions
For purposes of this proposed exemption:
A. Certificate means:
(1) A certificate--
(a) That represents a beneficial ownership interest in the assets
of a trust; and
(b) That entitles the holder to pass-through payments of principal,
interest, and/or other payments made with respect to the assets of such
trust; or
(2) A certificate denominated as a debt instrument--
(a) That represents an interest in a Real Estate Mortgage
Investment Conduit (REMIC) or a Financial Asset Securitization
Investment Trust (FASIT) within the meaning of section 860D(a) or
section 860L, respectively, of the Internal Revenue Code of 1986; and
(b) That is issued by, and is an obligation of, a trust; with
respect to certificates defined in (1) and (2) above for which BOSC or
any of its affiliates is either (i) the sole underwriter or the manager
or co-manager of the underwriting syndicate, or (ii) a selling or
placement agent.
For purposes of this proposed exemption, references to
``certificates representing an interest in a trust'' include
certificates denominated as debt which are issued by a trust.
B. Trust means an investment pool, the corpus of which is held in
trust and consists solely of:
(1) (a) Secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association); and/or
(b) Secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, qualified equipment notes secured by
leases, as defined in section III.T); and/or
(c) Obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family
residential and commercial real property (including obligations secured
by leasehold interests on commercial real property); and/or
(d) Obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or qualified
motor vehicle leases (as defined in section III.U); and/or
(e) ``Guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR 2510.3-101(i)(2); and/or
(f) Fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this section B.(1);
(2) Property which had secured any of the obligations described in
subsection B.(1);
(3) (a) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to made
to certificateholders; and/or
(b) Cash or investments made therewith which are credited to an
account to provide payments to certificateholders pursuant to any yield
supplement agreement or similar yield maintenance arrangement to
supplement the interest rates otherwise payable on obligations
described in subsection III.B.(1) held in the trust, provided that such
arrangements do not involve swap agreements or other notional principal
contracts; and/or
(c) Cash transferred to the trust on the closing date and permitted
investments made therewith which:
(i) Are credited to a pre-funding account established to purchase
additional obligations with respect to which the conditions set forth
in clauses (a)-(g) of subsection II.A.(7) are met and/or;
(ii) Are credited to a capitalized interest account (as defined in
section III.X.); and
(iii) Are held in the trust for a period ending no later than the
first distribution date to certificateholders occurring after the end
of the pre-funding period.
For purposes of this clause (c) of subsection III.B.(3), the term
``permitted investments'' means investments which are either: (i)
Direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by the United States, or any agency
or instrumentality thereof, provided that such obligations are backed
by the full faith and credit of the United States or (ii) have been
rated (or the obligor has been rated) in one of the three highest
generic rating categories by a rating agency; are described in the
pooling and servicing agreement; and are permitted by the rating
agency; and
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship, yield supplement agreements
described in clause (b) of subsection III.B.(3) and other credit
support arrangements with respect to any obligations described in
subsection III.B.(1).
Notwithstanding the foregoing, the term ``trust'' does not include
any investment pool unless: (i) The investment pool consists only of
assets of the type described in clauses (a) through (f) of subsection
III.B.(1) which have been included in other investment pools, (ii)
certificates evidencing interests in such other investment pools have
been rated in one of the three highest generic rating categories by a
rating agency for at least one year prior to the plan's acquisition of
certificates pursuant to this proposed exemption, and (iii)
certificates evidencing interests in such other investment pools have
been purchased by investors other than plans for at least one year
prior to the plan's acquisition of certificates pursuant to this
proposed exemption.
C. Underwriter means:
(1) BOSC;
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
BOSC; or
(3) Any member of an underwriting syndicate or selling group of
which BOSC or a person described in (2) is a manager or co-manager with
respect to the certificates.
D. Sponsor means the entity that organizes a trust by depositing
obligations therein in exchange for certificates.
E. Master Servicer means the entity that is a party to the pooling
and servicing agreement relating to trust assets and is fully
responsible for servicing, directly or through subservicers, the assets
of the trust.
F. Subservicer means an entity which, under the supervision of and
on behalf of the master servicer, services obligations contained in the
trust, but is not a party to the pooling and servicing agreement.
G. Servicer means any entity which services obligations contained
in the trust, including the master servicer and any subservicer.
H. Trustee means the trustee of the trust, and in the case of
certificates which are denominated as debt instruments, also means the
trustee of the indenture trust.
I. Insurer means the insurer or guarantor of, or provider of other
credit support for, a trust. Notwithstanding the foregoing, a person is
not an insurer solely because it holds securities representing an
interest in a trust which are of a class subordinated to certificates
representing an interest in the same trust.
J. Obligor means any person, other than the insurer, that is
obligated to make payments with respect to any obligation or receivable
included in the
[[Page 13847]]
trust. Where a trust contains qualified motor vehicle leases or
qualified equipment notes secured by leases, ``obligor'' shall also
include any owner of property subject to any lease included in the
trust, or subject to any lease securing an obligation included in the
trust.
K. Excluded Plan means any plan with respect to which any member of
the Restricted Group is a ``plan sponsor'' within the meaning of
section 3(16)(B) of the Act.
L. Restricted Group with respect to a class of certificates means:
(1) each underwriter;
(2) each insurer;
(3) the sponsor;
(4) the trustee;
(5) each servicer;
(6) any obligor with respect to obligations or receivables included
in the trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of the initial issuance of certificates by the trust; or
(7) any affiliate of a person described in (1)-(6) above.
M. Affiliate of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. Control means the power to exercise a controlling influence over
the management or policies of a person other than an individual.
O. A person will be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. Sale includes the entrance into a forward delivery commitment
(as defined in section Q below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's-length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this proposed
exemption (if granted) applicable to sales are met.
Q. Forward delivery commitment means a contract for the purchase or
sale of one or more certificates to be delivered at an agreed future
settlement date. The term includes both mandatory contracts (which
contemplate obligatory delivery and acceptance of the certificates) and
optional contracts (which give one party the right but not the
obligation to deliver certificates to, or demand delivery of
certificates from, the other party).
R. Reasonable compensation has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
S. Qualified Administrative Fee means a fee which meets the
following criteria:
(1) the fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing in respect of the
obligations;
(2) the servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) the ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement; and
(4) the amount paid to investors in the trust will not be reduced
by the amount of any such fee waived by the servicer
T. Qualified Equipment Note Secured by a Lease means an equipment
note:
(1) which is secured by equipment which is leased;
(2) which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
(3) with respect to which the trust's security interest in the
equipment is at least as protective of the rights of the trust as would
be the case if the equipment note were secured only by the equipment
and not the lease.
U. Qualified Motor Vehicle Lease means a lease of a motor vehicle
where:
(1) the trust owns or holds a security interest in the lease;
(2) the trust owns or holds a security interest in the leased motor
vehicle; and
(3) the trust's security interest in the leased motor vehicle is at
least as protective of the trust's rights as would be the case if the
trust consisted of motor vehicle installment loan contracts.
V. Pooling and Servicing Agreement means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust. In the case of certificates which are denominated as debt
instruments, ``Pooling and Servicing Agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
W. Rating Agency means Standard & Poor's Structured Rating Group
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps
Credit Rating Co. (D & P) or Fitch IBCA, Inc. (Fitch), or their
successors.
X. Capitalized Interest Account means a trust account: (i) which is
established to compensate certificateholders for shortfalls, if any,
between investment earnings on the pre-funding account and the pass-
through rate payable under the certificates; and (ii) which meets the
requirements of clause (c) of subsection III.B.(3).
Y. Closing Date means the date the trust is formed, the
certificates are first issued and the trust's assets (other than those
additional obligations which are to be funded from the pre-funding
account pursuant to subsection II.A.(7)) are transferred to the trust.
Z. Pre-Funding Account means a trust account: (i) Which is
established to purchase additional obligations, which obligations meet
the conditions set forth in clauses (a)-(g) of subsection II.A.(7); and
(ii) which meets the requirements of clause (c) of subsection
III.B.(3).
AA. Pre-Funding Limit means a percentage or ratio of the amount
allocated to the pre-funding account, as compared to the total
principal amount of the certificates being offered which is less than
or equal to 25 percent.
BB. Pre-Funding Period means the period commencing on the closing
date and ending no later than the earliest to occur of: (i) the date
the amount on deposit in the pre-funding account is less than the
minimum dollar amount specified in the pooling and servicing agreement;
(ii) the date on which an event of default occurs under the pooling and
servicing agreement; or (iii) the date which is the later of three
months or 90 days after the closing date.
CC. BOSC means BOSC, Inc. an Oklahoma corporation, and its
affiliates.
The Department notes that this proposed exemption is included
within the meaning of the term ``Underwriter Exemption'' as it is
defined in section V(h) of Prohibited Transaction Exemption 95-60 (60
FR 35925, July 12, 1995), the Class Exemption for Certain Transactions
Involving Insurance Company General Accounts (see 60 FR at 35932).
Summary Of Facts and Representations
1. BOSC is a broker-dealer registered with the Securities and
Exchange Commission (SEC) and is a member of
[[Page 13848]]
the National Association of Securities Dealers, Inc. As of June 30,
1999, it had total assets of $15.1 million.
BOSC is a wholly-owned subsidiary of BOK Financial Corporation (BOK
Financial), a bank holding with its principal offices located in Tulsa,
Oklahoma. BOSC was established as a broker-dealer subsidiary of BOK
Financial pursuant to an order of the Board of Governors of the U.S.
Federal Reserve System (the Federal Reserve Board) effective April 29,
1997 (the Tier 1 Order). The Federal Reserve Board regulates BOK
Financial as a bank holding company and restricts activities of BOSC
and its affiliates under the Glass-Steagall Act.
Under the Tier 1 Order, BOSC is authorized to engage, subject to
certain prudential limitations established by the Federal Reserve
Board, in underwriting and dealing in certain mortgage-related
securities, municipal revenue bonds, commercial paper and consumer
receivables-related securities (Tier 1 Activities). In addition, BOSC
is authorized to act as agent in the private placement of all types of
securities, including providing related advisory services, and to buy
and sell securities on the order of investors. The Tier 1 Order is
subject to the condition that BOSC does not derive more than a limited
percentage of its total gross revenues over any two-year period from
underwriting and dealing in certain categories of securities, including
asset-backed securities of the type described herein.
BOSC has also been authorized by the Federal Reserve Board to
engage, subject to certain prudential limitations established by the
Federal Reserve Board dated December 2, 1998, in certain additional
securities activities, including underwriting and dealing in corporate
debt and equity securities (Tier 2 Activities).
BOSC has been involved in the structuring and placement of asset-
backed securities transactions since July 1998. In March, 1999, BOSC
has served as lead underwriter in public offerings of trust
certificates of the BOK Auto Grantor Trust 1999-A. BOSC is developing
additional offerings of asset backed securities.
BOK Financial, the parent of BOSC, is the largest financial
institution headquatertered in Oklahoma, with total assets of
approximately $8.2 billion as of June 30, 1999 and approximately $15.5
billion in assets under management and administration. BOK Financial's
subsidiaries include Bank of Oklahoma, National Association (the
largest national bank headquartered in Oklahoma), Bank of Texas,
National Association (headquartered in the Dallas-Ft. Worth
Metropolitan Area), Bank of Arkansas, National Association
(headquartered in Fayetteville, Arkansas), and Bank of Albuquerque,
National Association (headquartered in Albuquerque, New Mexico). BOK
Financial, through its subsidiary banks, provides a full range of
consumer and commercial banking services, trust services, mortgage
origination and servicing, and investment advisory services. The Bank
of Oklahoma Trust Division serves as the investment advisor for the
American Performance Funds Group of Mutual Funds.
Trust Assets
2. BOSC seeks exemptive relief to permit plans to invest in pass-
through certificates representing undivided interests in the following
categories of trusts: (1) Single and multi-family residential or
commercial mortgage investment trusts; \14\ (2) motor vehicle
receivable investment trusts; (3) consumer or commercial receivables
investment trusts; and (4) guaranteed governmental mortgage pool
certificate investment trusts.\15\
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\14\ The Department notes that PTE 83-1 [48 FR 895, January 7,
1983], a class exemption for mortgage pool investment trusts, would
generally apply to trusts containing single-family residential
mortgages, provided that the applicable conditions of PTE 83-l are
met. BOSC requests relief for single-family residential mortgages in
this exemption because it would prefer one exemption for all trusts
of similar structure. However, BOSC has stated that it may still
avail itself of the exemptive relief provided by PTE 83-1.
\15\ Guaranteed governmental mortgage pool certificates are
mortgage-backed securities with respect to which interest and
principal payable is guaranteed by the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage Corporation
(FHLMC), or the Federal National Mortgage Association (FNMA). The
Department's regulation relating to the definition of ``plan
assets'' (29 CFR 2510.3-101(i)) provides that where a plan acquires
a guaranteed governmental mortgage pool certificate, the plan's
assets include the certificate and all of its rights with respect to
such certificate under applicable law, but do not, solely by reason
of the plan's holding of such certificate, include any of the
mortgages underlying such certificate. The applicant is requesting
exemptive relief for trusts containing guaranteed governmental
mortgage pool certificates because the certificates in the trusts
may be plan assets.
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3. Commercial mortgage investment trusts may include mortgages on
ground leases of real property. Commercial mort gages are frequently
secured by ground leases on the underlying property, rather than by fee
simple interests. The separation of the fee simple interest and the
ground lease interest is generally done for tax reasons. Properly
structured, the pledge of the ground lease to secure a mortgage
provides a lender with the same level of security as would be provided
by a pledge of the related fee simple interest. The terms of the ground
leases pledged to secure leasehold mortgages will in all cases be at
least ten years longer than the term of such mortgages.\16\
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\16\ Trust assets may also include obligations that are secured
by leasehold interests on residential real property. See PTE 90-32
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,
1990 at 23150).
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Trust Structure
4. Each trust is established under a pooling and servicing
agreement between a sponsor, a servicer and a trustee.\17\ The sponsor
or servicer of a trust selects assets to be included in the trust. \18\
These assets are receivables which may have been originated by a
sponsor or servicer of the trust, an affiliate of the sponsor or
servicer, or by an unrelated lender and subsequently acquired by the
trust sponsor or servicer.\19\
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\17\ The Department is of the view that the term ``trust''
includes a trust: (a) The assets of which, although all specifically
identified by the sponsor or the originator as of the closing date,
are not all transferred to the trust on the closing date for
administrative or other reasons but will be transferred to the trust
shortly after the closing date, or (b) with respect to which
certificates are not purchased by plans until after the end of the
pre-funding period at which time all receivables are contained in
the trust.
\18\ It is the Department's view that the definition of
``trust'' contained in section III.B. includes a two-tier structure
under which certificates issued by the first trust, which contains a
pool of receivables described above, are transferred to a second
trust which issues securities that are sold to plans. However, the
Department is of the further view that, since the exemption provides
relief for the direct or indirect acquisition or disposition of
certificates that are not subordinated, no relief would be available
if the certificates held by the second trust were subordinated to
the rights and interests evidenced by other certificates issued by
the first trust.
\19\ It is the view of the Department that section III.B.(4)
includes within the definition of the term ``trust'' rights under
any yield supplement or similar arrangement which obligates the
sponsor or master servicer, or another party specified in the
relevant pooling and servicing agreement, to supplement the interest
rates otherwise payable on the obligations described in section
III.B.(1), in accordance with the terms of a yield supplement
arrangement described in the pooling and servicing agreement,
provided that such arrangements do not involve swap agreements or
other notional principal contracts.
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Typically, on or prior to the closing date, the sponsor acquires
legal title to all assets selected for the trust, establishes the trust
and designates an independent entity as trustee. On the closing date,
the sponsor conveys to the trust legal title to the assets, and the
trustee issues certificates representing fractional undivided interests
in the trust assets. Typically, all receivables to be held in the trust
are transferred as of the closing date, but in some transactions, as
described more fully below, a limited percentage of the receivables to
be held in the trust may
[[Page 13849]]
be transferred during a limited period of time following the closing
date, through the use of a pre-funding account.
BOSC, alone or together with other broker-dealers, acts as
underwriter or placement agent with respect to the sale of the
certificates. All of the public offerings of certificates presently
contemplated are to be underwritten by BOSC on a firm commitment basis.
In addition, BOSC anticipates that it may privately place certificates
on both a firm commitment and an agency basis. BOSC may also act as the
lead underwriter for a syndicate of securities underwriters.
Certificateholders will be entitled to receive distributions of
principal and/or interest, or lease payments due on the receivables,
adjusted, in the case of payments of interest, to a specified rate--the
pass-through rate--which may be fixed or variable. These distributions
will be made monthly, quarterly, semi-annually, or at such other
intervals and dates as specified in the related prospectus or private
placement memorandum.
When installments or payments are made on a semi-annual basis,
funds are not permitted to be commingled with the servicer's assets for
longer than would be permitted for a monthly-pay security. A segregated
account is established in the name of the trustee (on behalf of
certificateholders) to hold funds received between distribution dates.
The account is under the sole control of the trustee, who invests the
account's assets in short-term securities which have received a rating
comparable to the rating assigned to the certificates. In some cases,
the servicer may be permitted to make a single deposit into the account
once a month. When the servicer makes such monthly deposits, payments
received from obligors by the servicer may be commingled with the
servicer's assets during the month prior to deposit. Usually, the
period of time between receipt of funds by the servicer and deposit of
these funds in a segregated account does not exceed one month.
Furthermore, in those cases where distributions are made semi-annually,
the servicer will furnish a report on the operation of the trust to the
trustee on a monthly basis. At or about the time this report is
delivered to the trustee, it will be made available to
certificateholders and delivered to or made available to each rating
agency that has rated the certificates.
5. Some of the certificates will be multi-class certificates. BOSC
requests exemptive relief for two types of multi-class certificates:
``strip'' certificates and ``fast-pay/slow-pay'' certificates. Strip
certificates are a type of security in which the stream of interest
payments on receivables is split from the flow of principal payments
and separate classes of certificates are established, each representing
rights to disproportionate payments of principal and interest.\20\
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\20\ It is the Department's understanding that where a plan
invests in REMIC ``residual'' interest certificates to which this
exemption applies, some of the income received by the plan as a
result of such investment may be considered unrelated business
taxable income to the plan, which is subject to income tax under the
Code. The Department emphasizes that the prudence requirement of
section 404(a)(l)(B) of the Act would require plan fiduciaries to
carefully consider this and other tax consequences prior to causing
plan assets to be invested in certificates pursuant to this proposed
exemption.
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``Fast-pay/slow-pay'' certificates involve the issuance of classes
of certificates having different stated maturities or the same
maturities with different payment schedules. Interest and/or principal
payments received on the underlying receivables are distributed first
to the class of certificates having the earliest stated maturity of
principal, and/or earlier payment schedule, and only when that class of
certificates has been paid in full (or has received a specified amount)
will distributions be made with respect to the second class of
certificates. Distributions on certificates having later stated
maturities will proceed in like manner until all the certificateholders
have been paid in full. The only difference between this multi-class
pass-through arrangement and a single-class pass-through arrangement is
the order in which distributions are made to certificateholders. In
each case, certificateholders will have a beneficial ownership interest
in the underlying assets. In neither case will the rights of a plan
purchasing a certificate be subordinated to the rights of another
certificateholder in the event of default on any of the underlying
obligations. In particular, if the amount available for distribution to
certificateholders is less than the amount required to be so
distributed, all senior certificateholders then entitled to receive
distributions will share in the amount distributed on a pro rata
basis.\21\
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\21\ If a trust issues subordinated certificates, holders of
such subordinated certificates may not share in the amount
distributed on a pro rata basis with the senior certificateholders.
The Department notes that the proposed exemption does not provide
relief for plan investment in such subordinated certificates.
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6. The trust will be maintained as an essentially passive entity.
Therefore, both the sponsor's discretion and the servicer's discretion
with respect to assets included in a trust are severely limited.
Pooling and servicing agreements provide for the substitution of
receivables by the sponsor only in the event of defects in
documentation discovered within a short time after the issuance of
trust certificates (within 120 days, except in the case of obligations
having an original term of 30 years, in which case the period will not
exceed two years). Any receivable so substituted is required to have
characteristics substantially similar to the replaced receivable and
will be at least as creditworthy as the replaced receivable.
In some cases, the affected receivable would be repurchased, with
the purchase price applied as a payment on the affected receivable and
passed through to certificateholders.
In some cases the trust will be maintained as a Financial Asset
Securitization Investment Trust (``FASIT''), a statutory entity created
by the Small Business Job Protection Act of 1996, adding sections 860H,
860J, 860K and 860L to the Code. In general, a FASIT is designed to
facilitate the securitization of debt obligations, such as credit card
receivables, home equity loans, and auto loans, and thus, allows
certain features such as revolving pools of assets, trusts containing
unsecured receivables and certain hedging types of investments. A FASIT
is not a taxable entity and debt instruments issued by such trusts,
which might otherwise be recharacterized as equity, will be treated as
debt in the hands of the holder for tax purposes. However, a trust
which is the subject of the proposed exemption will be maintained as a
FASIT only where the assets held by the FASIT will be comprised of
secured debt; revolving pools of assets or hedging investments will not
be allowed unless specifically authorized by the exemption, if granted,
so that a trust maintained as a FASIT will be maintained as an
essentially passive entity.
Trust Structure With Pre-Funding Account
Pre-Funding Accounts
7. As described briefly above, some transactions may be structured
using a pre-funding account or a capitalized interest account. If pre-
funding is used, cash sufficient to purchase the receivables to be
transferred after the closing date will be transferred to the trust by
the sponsor or originator on the closing date. During the pre-funding
period, such cash and temporary investments, if any, made therewith
will be held in a pre-funding account and used to purchase the
additional receivables, the characteristics of which will be
substantially similar to the
[[Page 13850]]
characteristics of the receivables transferred to the trust on the
closing date. The pre-funding period for any trust will be defined as
the period beginning on the closing date and ending on the earliest to
occur of (i) the date on which the amount on deposit in the pre-funding
account is less than a specified dollar amount, (ii) the date on which
an event of default occurs under the related pooling and servicing
agreement or (iii) the date which is the later of three months or
ninety (90) days after the closing date. Certain specificity and
monitoring requirements described below will be met and will be
disclosed in the pooling and servicing agreement and/or the prospectus
or private placement memorandum.
For transactions involving a trust using pre-funding, on the
closing date, a portion of the offering proceeds will be allocated to
the pre-funding account generally in an amount equal to the excess of
(i) the principal amount of certificates being issued over (ii) the
principal balance of the receivables being transferred to the trust on
such closing date. In certain transactions, the aggregate principal
balance of the receivables intended to be transferred to the trust may
be larger than the total principal balance of the certificates being
issued. In these cases, the cash deposited in the pre-funding account
will equal the excess of the principal balance of the total receivables
intended to be transferred to the trust over the principal balance of
the receivables being transferred on the closing date.
On the closing date, the sponsor transfers the assets to the trust
in exchange for the certificates. The certificates are then sold to an
underwriter for cash or to the certificateholders directly if the
certificates are sold through a placement agent. The cash received by
the sponsor from the certificateholders (or the underwriter) from the
sale of the certificates issued by the trust in excess of the purchase
price for the receivables and certain other trust expenses, such as
underwriting or placement agent fees and legal and accounting fees,
constitutes the cash to be deposited in the pre-funding account. Such
funds are either held in the trust and accounted for separately, or are
held in a sub-trust. In either event, these funds are not part of
assets of the sponsor.
Generally, the receivables are transferred at par value, unless the
interest rate payable on the receivables is not sufficient to service
both the interest rates to be paid on the certificates and the
transaction fees (i.e., servicing fees, trustee fees and fees to credit
support providers). In such cases, the receivables are sold to the
trust at a discount, based on an objective, written, mechanical formula
which is set forth in the pooling and servicing agreement and agreed
upon in advance between the sponsor, the rating agency and any credit
support provider or other insurer. The proceeds payable to the sponsor
from the sale of the receivables transferred to the trust may also be
reduced to the extent they are used to pay transaction costs (which
typically include underwriting or placement agent fees and legal and
accounting fees). In addition, in certain cases, the sponsor may be
required by the rating agencies or credit support providers to set up
trust reserve accounts to protect the certificateholders against credit
losses.
The pre-funding account of any trust will be limited so that the
percentage or ratio of the amount allocated to the pre-funding account,
as compared to the total principal amount of the certificates being
offered (the pre-funding limit) will not exceed 25%. The pre-funding
limit (which may be expressed as a ratio or as a stated percentage or a
combination thereof) will be specified in the prospectus or the private
placement memorandum.
Any amounts paid out of the pre-funding account are used solely to
purchase receivables and to support the certificate pass-through rate
(as explained below). Amounts used to support the pass-through rate are
payable only from investment earnings and are not payable from
principal. However, in the event that, after all of the requisite
receivables have been transferred into the trust, any funds remain in
the pre-funding account, such funds will be paid to the
certificateholders as principal prepayments. Upon termination of the
trust, if no receivables remain in the trust and all amounts payable to
certificateholders have been distributed, any amounts remaining in the
trust would be returned to the sponsor.
A dramatic change in interest rates on the receivables held in a
trust using a pre-funding account would be handled as follows. If the
receivables (other than those with adjustable or variable rates) had
already been originated prior to the closing date, no action would be
required as the fluctuations in the market interest rates would not
affect the receivables transferred to the trust after the closing date.
In contrast, if interest rates fall after the closing date, loans
originated after the closing date will tend to be originated at lower
rates, with the possible result that the receivables will not support
the certificate pass-through rate. In such situations, the sponsor
could sell the receivables into the trust at a discount, and more
receivables would be used to fund the trust in order to support the
pass-through rate. In a situation where interest rates drop
dramatically and the sponsor is unable to provide sufficient
receivables at the requisite interest rates, the pool of receivables
would be closed. In this latter event, under the terms of the pooling
and servicing agreement, the certificateholders would receive a
repayment of principal from the unused cash held in the pre-funding
account. In transactions where the certificate pass-through rates are
variable or adjustable, the effects of market interest rate
fluctuations are mitigated. In no event will fluctuations in interest
rates payable on the receivable affect the pass-through rate for fixed
rate certificates.
The cash deposited into the trust and allocated to the pre-funding
account is invested in certain permitted investments (see below), which
may be commingled with other accounts of the trust. The allocation of
investment earnings to each trust account is made periodically as
earned in proportion to each account's allocable share of the
investment returns. As pre-funding account investment earnings are
required to be used to support (to the extent authorized in the
particular transaction) the pass-through amounts payable to the
certificateholders with respect to a periodic distribution date, the
trustee is necessarily required to make periodic, separate allocations
of the trust's earning to each trust account, thus ensuring that all
allocable commingled investment earnings are properly credited to the
pre-funding account on a timely basis.
The Capitalized Interest Account
8. In certain transactions where a pre-funding account is used, the
sponsor and/or originator may also transfer to the trust additional
cash on the closing date, which is deposited in a capitalized interest
account and used during the pre-funding period to compensate the
certificateholders for any shortfall between the investment earnings on
the pre-funding account and the pass-through interest rate payable
under the certificates.
The capitalized interest account is needed in certain transactions
since the certificates are supported by the receivables and the
earnings on the pre-funding account, and it is unlikely that the
investment earnings on the pre-funding account will equal the interest
rates on the certificates (although such investment earnings will be
available to pay interest on the certificates). The
[[Page 13851]]
capitalized interest account funds are paid out periodically to the
certificateholders as needed on distribution dates to support the pass-
through rate. In addition, a portion of such funds may be returned to
the sponsor from time to time as the receivables are transferred into
the trust and the need for the capitalized interest account diminishes.
Any amounts held in the capitalized interest account generally will be
returned to the sponsor and/or originator either at the end of the pre-
funding period or periodically as receivables are transferred and the
proportionate amount of funds in the capitalized interest account can
be reduced. Generally, the capitalized interest account terminates no
later than the end of the pre-funding period. However, there may be
some cases where the capitalized interest account remains open until
the first date distributions are made to certificateholders following
the end of the pre-funding period.
In other transactions, a capitalized interest account is not
necessary because the interest paid on the receivables exceeds the
interest payable on the certificates at the applicable pass-through
rate and the fees of the trust. Such excess is sufficient to make up
any shortfall resulting from the pre-funding account earning less than
the certificate pass-through rate. In certain of these transactions,
this occurs because the aggregate principal amount of receivables
exceeds the aggregate principal amount of certificates.
Pre-Funding Account and Capitalized Interest Account Payments and
Investments
9. Pending the acquisition of additional receivables during the
pre-funding period, it is expected that amounts in the pre-funding
account and the capitalized interest account will be invested in
certain permitted investments or will be held uninvested. Pursuant to
the pooling and servicing agreement, all permitted investments must
mature prior to the date the actual funds are needed. The permitted
types of investments in the pre-funding account and capitalized
interest account are investments which are either: (i) Direct
obligations of, or obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency or
instrumentality thereof, provided that such obligations are backed by
the full faith and credit of the United States or (ii) have been rated
(or the obligor has been rated) in one of the three highest generic
rating categories by a rating agency, as set forth in the pooling and
servicing agreement and as required by the rating agencies. The credit
grade quality of the permitted investments is generally no lower than
that of the certificates. The types of permitted investments will be
described in the pooling and servicing agreement.
The ordering of interest payments to be made from the pre-funding
and capitalized interest accounts is pre-established and set forth in
the pooling and servicing agreement. The only principal payments which
will be made from the pre-funding account are those made to acquire the
receivables during the pre-funding period and those distributed to the
certificateholders in the event that the entire amount in the pre-
funding account is not used to acquire receivables. The only principal
payments which will be made from the capitalized interest account are
those made to certificateholders if necessary to support the
certificate pass-through rate or those made to the sponsor either
periodically as they are no longer needed or at the end of the pre-
funding period when the capitalized interest account is |
