Morgan Guaranty Trust Company of New York, et al. [Notices] [06/01/2000]
Morgan Guaranty Trust Company of New York, et al. [06/01/2000]
Volume 65, Number 106, Page 35129-35138
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemptions 2000-25, et al.; Application Nos. D-
10119 and D-10120, et al.]
Morgan Guaranty Trust Company of New York, et al.
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Grant of Individual Exemptions.\1\
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\1\ The term ``Individual Exemptions'' refers to the following
Prohibited Transaction Exemptions (PTEs): PTE 2000-25 (Application
Nos. D-10119 and D-10120, Morgan Guaranty Trust Company of New York
and J.P. Morgan Investment Management Inc.); PTE 2000-26
(Application No. D-10587, Goldman, Sachs & Co.); PTE 2000-27
(Application No. D-10779, The Chase Manhattan Bank); PTE 2000-28
(Application No. D-10820, Citigroup Inc); and PTE 2000-29
(Application No. D-10832, Morgan Stanley Dean Witter & Co.).
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SUMMARY: This document contains individual exemptions issued by the
Department of Labor (the Department) from the prohibited transaction
restrictions of the Employee Retirement Income Security Act of 1974
(the Act) and from the taxes imposed by the Internal Revenue Code of
1986 (the Code). The exemptions permit purchases of securities by the
applicants' asset management affiliate, on behalf of employee benefit
plans for which such asset management affiliate is a fiduciary, from
underwriting or selling syndicates where the applicants' broker-dealer
affiliate participates as a manager or syndicate member. The exemptions
affect participants and beneficiaries of the plans investing in such
securities.
EFFECTIVE DATE: The exemptions are effective as of February 8, 2000.
FOR FURTHER INFORMATION CONTACT: Ms. Andrea W. Selvaggio or Ms. Karin
Weng of the Department, telephone (202) 219-8881. (This is not a toll-
free number.)
SUPPLEMENTARY INFORMATION: On February 8, 2000, the Department
published a notice of pendency in the Federal Register (65 FR 6229) of
the proposed exemptions from the restrictions of section 406 of the Act
and the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1) of the Code. The exemptions were
requested in separate applications filed pursuant to section 408(a) of
the Act and section 4975(c)(2) of the Code, and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
August 10, 1990), by the following entities: Morgan Guaranty Trust
Company of New York and J.P. Morgan Investment Management Inc.
(together, J.P. Morgan) Goldman, Sachs & Co. (Goldman), The Chase
Manhattan Bank (Chase), Citigroup Inc. (Citigroup), and Morgan Stanley
Dean Witter & Co. (Morgan Stanley).
Effective December 31, 1978, section 102 of Reorganization Plan No.
4 of 1978, 5 U.S.C. App. 1 (1996), generally transferred the authority
of the Secretary of the Treasury to issue exemptions of the type
requested to the Secretary of Labor. Accordingly, these exemptions are
being issued solely by the Department. \2\ For convenience, each
applicant and its affiliates shall be referred to in the exemption in
generic terms that denote certain roles, namely, ``the Applicant,''
``the Asset Manager,'' \3\ or ``the Affiliated Broker-Dealer.'' \4\
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\2\ All references to specific provisions of Title I of the Act
herein shall refer also to the corresponding provisions of the Code
(if any).
\3\ To the extent that the Applicant has more than one asset
management affiliate, all references to the Asset Manager herein
shall refer also to the other asset management entity or entities.
\4\ To the extent that the Applicant has more than one
registered broker-dealer affiliate that participates in underwriting
or selling syndicates, all references to the Affiliated Broker-
Dealer herein shall refer also to the other broker-dealer entity or
entities.
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The notice of pendency invited all interested persons to submit
written comments or request a public hearing concerning the proposed
exemptions by March 24, 2000. The Department received six written
comments and no requests for a hearing in response to the notice. Each
of the five Applicants
[[Page 35130]]
submitted a comment. In addition, a law firm, located in Hartford,
Connecticut, representing an unidentified financial institution,
submitted a comment. Based upon the information contained in the entire
record, the Department has determined to grant the proposed exemptions,
subject to certain modifications. The comments and modifications are
discussed below.
Discussion of the Comments
1. Three of the Applicants, Goldman, Chase, and Citigroup, wished
to correct or clarify certain representations made in the Summary of
Facts and Representations (the Summary) contained in the notice of
proposed exemption (the Notice) (see 65 FR 6229).
a. Goldman stated that the fourth sentence in Item 2 of the Summary
(65 FR at 6230) should be revised to read,
The Investment Management Division of the Applicant
(hereinafter, the Asset Manager) includes Goldman Sachs Asset
Management and is a separate operating division of the Applicant * *
*
b. Chase stated that, as a technical matter, the precise name of
its registered investment adviser subsidiary is ``Chase Asset
Management, Inc.,'' not ``Chase Asset Management,'' as appears in the
second sentence of Item 3 of the Summary (65 FR at 6230).
c. Citigroup stated that the last two sentences in Item 4 of the
Summary (65 FR at 6230) should be revised to read,
It is represented that, as of December 31, 1999, the last day of
its most recent fiscal year, all of Citigroup's asset management
affiliates had, in the aggregate, client assets under management of
approximately $364.4 billion. As of that date, approximately 3.9% of
client assets under management were attributable to Client Plans,
including those investing in a Pooled Fund.
d. In addition, Citigroup requested that, in clause (e) of the last
``Summary'' paragraph (65 FR at 6234) of the Summary, the phrase ``* *
* for the account of a Client Plan'' be added at the end of the clause
after ``Asset Manager.''
The Department acknowledges the Applicants' corrections to the
Summary and concurs in the clarifying revision to clause (e) on page
6234 of the Summary.
The remainder of the comments requested certain modifications to
the proposed operative language in this final exemption.
2. Section I(b)--Issuer Requirements and Exceptions
Three of the Applicants, J.P. Morgan, Goldman, and Morgan Stanley,
requested clarification of Section I(b) of the Notice (65 FR at 6237),
which requires the issuer of the securities to have been in continuous
operation for not less than three years, with certain exceptions.
Specifically, Section I(b)(3) provides an exception where the
securities are fully guaranteed by a person who has issued securities
described in certain other provisions of the exemption ``* * * and this
paragraph (b).'' The Applicants stated that this language is circular
because it is not clear which part of Section I(b) is being referred
to.
The Department concurs in the Applicants' request for
clarification, and the language of Section I(b) has been revised in the
final exemption so that Section I(b)(3) refers explicitly to a
guarantee by a person who ``has been in continuous operation for not
less than three years, including the operation of any predecessors,''
as described in the lead-in language of paragraph (b).
3. Section I(c) & (d)--Three Percent Limitations and Pooled Funds
The five Applicants requested the deletion of references to
``Pooled Funds'' in connection with the three percent limitations in
Section I(c) and (d) of the Notice. Section I(c) requires that the
amount of securities purchased by the Asset Manager on behalf of a
particular Client Plan or Pooled Fund may not exceed three percent of
the total amount of securities being offered, subject to certain
aggregate percentage limitations. Section I(d) requires that the
consideration paid by the Client Plan or Pooled Fund for such
securities may not exceed three percent of the fair market value of
such Client Plan's or Pooled Fund's total net assets.
The Applicants noted that imposing the three percent limitations
contained in both Section I(c) and (d) of the Notice on a Pooled Fund
as a whole would result in a Client Plan's being treated differently,
depending on whether it invests in a Pooled Fund or whether its assets
are managed by the Asset Manager directly. They argued that there was
no basis for the different treatment, given that Pooled Funds are
``look-through'' vehicles under the Department's ``plan assets''
regulation (29 CFR 2510.3-101). Therefore, the Applicants believe that
the three percent limitations should be applied on a plan-by-plan
basis.
For example, J.P. Morgan noted that a Pooled Fund is a commingled
investment pool with multiple Client Plan investors, which, by its
nature, spreads risks among those investors. A single Client Plan's
risk would be limited to its proportionate share of any assets of the
Pooled Fund. Thus, for a Client Plan with a five percent interest in a
Pooled Fund, even if the Pooled Fund were to purchase 10 percent of an
offering, such Client Plan's exposure to the offering would be only
one-half of one percent. As another example, Chase stated that, if six
Client Plans are in a Pooled Fund, the Pooled Fund should be permitted
to purchase 18 percent of an offering, subject to the aggregate
percentage limitations in Section I(c).
The Applicants stated that the same rationale supports the
elimination of the three percent limitation on the consideration paid
by a Pooled Fund for such securities in Section I(d) of the Notice.
Therefore, in their view, the three percent limitation should apply
only to the net assets of each Client Plan in the Pooled Fund.
The Department concurs in the Applicants' request to modify Section
I(c) and (d) of the Notice so that both provisions impose a three
percent limitation on each Client Plan investing in a Pooled Fund,
rather than on the Pooled Fund as a whole. Accordingly, the Department
has deleted the references to ``Pooled Funds'' in connection with the
three percent limitations in Section I(c) and (d) of the final
exemption. However, the Department notes that a Pooled Fund would
remain subject to the percentage limitations described in Section I(c)
of the exemption on the aggregate amount of securities that may be
purchased in an offering by the Asset Manager for all its Client Plans.
4. Section I(a)(1)(ii) & (a)(2), (b), and (c)--
Characterization of Asset-Backed Securities
Among the securities that may be purchased under the exemption are
pass-through certificates representing interests in asset pools. Such
certificates are often referred to as ``mortgage-backed'' securities or
``asset-backed'' securities and may have characteristics of both equity
and debt. The five Applicants requested clarification that asset-backed
securities will be treated as ``debt'' for purposes of the exemption.
For example, Section I(c) of the Notice imposes certain aggregate
percentage limitations on the amount of securities that may be
purchased in an offering by the Asset Manager for all its managed
Client Plans. These percentage limitations differ, depending on whether
the securities involved are equity securities, debt securities rated in
one of the four highest rating categories, or debt securities rated in
the fifth or sixth highest rating categories.
The Applicants noted that asset-backed securities, which entitle
the holder to pass-through payments of principal and interest relating
to assets
[[Page 35131]]
held in the underlying pool, are normally rated by nationally
recognized statistical rating organizations and are regarded in the
market as debt securities. The Applicants argued, therefore, that
asset-backed securities should be categorized as debt for purposes of
the exemption.
Other relevant provisions, in addition to Section I(c), are as
follows: Section I(a)(1)(ii), which requires that, in the case of
equity securities in an Eligible Rule 144A Offering, the offering
syndicate must obtain a legal opinion regarding the adequacy of the
disclosure in the offering memorandum; Section I(a)(2), which provides
an exception for debt securities from the general requirement that the
securities are purchased prior to the end of the first day on which any
sales are made, at a price that is not more than the price paid by each
other purchaser of securities in that offering; and Section I(b), which
provides an exception for certain debt securities from the general
requirement that the issuer of the securities must have been in
continuous operation for not less than three years.
The Department concurs in the Applicants' suggestion that, solely
for purposes of the exemption, appropriately rated mortgage-backed or
other asset-backed securities should be treated as debt securities.
Accordingly, this clarification has been added to the definition of
``security'' in Section II of the final exemption.
The Department is persuaded to take this position within the
limited context of this exemption in recognition of the fact that most
purchasers view asset-backed securities as debt securities. However,
the Department is providing no opinion herein as to whether asset-
backed securities should be considered either equity or debt securities
for any other purposes outside the scope of this exemption.\5\
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\5\ The Department notes that under Title I of the Act, and the
``plan assets'' regulation, ``a beneficial interest in a trust [is]
an equity interest,'' 29 CFR 2510.3-101(b)(1). As noted in the
proposed exemption, footnote 13 (FR 65 at 6234), certain purchases
of asset-backed securities may result in other prohibited
transactions requiring additional exemptive relief because these
securities are not publicly offered and the ``significant
participation'' exception to the ``look-through rule'' of the ``plan
assets'' regulation (29 CFR 2510.3-101(b)(3)) would not apply. A
list of individual exemptions then existing for asset-backed
securities may be found in PTE 97-34 (62 FR 39021, July 21, 1997),
which granted an amendment to these exemptions.
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5. Section I(i)(1) and (k)(1)--Notice of Proposed Exemption
Two of the Applicants, Goldman and Morgan Stanley, requested the
deletion of the requirement in Section I(i)(1) and (k)(1) of the Notice
(65 FR at 6238) that a copy of such Notice, as published in the Federal
Register on February 8, 2000, in addition to a copy of the final
exemption, be provided to the Independent Fiduciaries of the Client
Plans. They argued that providing both documents is unnecessary and
that most of the Client Plans will already have received a copy of the
Notice in connection with the Department's procedural requirements
regarding notice to interested persons.
In response to the comments, the Department notes that new Client
Plans will not have received a copy of the Notice. The Department
believes that the proposed exemption provides useful information about
the underwriting business that may be helpful to the Independent
Fiduciaries monitoring covered transactions. Accordingly, the
Department has retained the disclosure requirements pertaining to the
Notice in the final exemption.
6. Section I(n)(1)--Quarterly Report Information
The five Applicants requested the deletion in Section I(n)(1) of
the Notice (65 FR 6239) of various items of information about the
purchased securities required to be provided on a quarterly basis to
the Independent Fiduciaries. According to the Applicants, this
information is unnecessary and should be disclosed to the Independent
Fiduciaries only upon request, as required in Section I(n)(3) of the
Notice (65 FR at 6239).
The items in Section I(n)(1) of the Notice that the Applicants do
not wish to specifically disclose in the quarterly reports to the
Client Plans are as follows.
a. The first day on which any sale was made during the offering
(iii).
b. The size of the issue (iv).
c. The identity of the underwriter from whom the securities were
purchased (vi)--this deletion was requested only by J.P. Morgan and
Citigroup.
d. The spread on the underwriting (vii)--this deletion was
requested only by J.P. Morgan and Citigroup.
e. In addition, Citigroup requested that item (ix) be revised to
read, `` * * * the price at which any such securities purchased during
the period were sold'' [added word underlined], in order to clarify
that the securities referred to are those purchased for a Client Plan
under the exemption.
In this regard, the Department concurs in the revision to item (ix)
of Section I(n)(1) of the Notice, as requested by Citigroup. However,
the Department believes that the information required to be reported in
items (iii), (iv), (vi), and (vii) of Section I(n)(1) of the Notice are
relevant for purposes of monitoring covered transactions by the
Independent Fiduciaries. As explained in the proposed exemption, the
items listed in Section I(n)(1) are virtually identical to the
information already required by Securities and Exchange Commission
(SEC) Rule 10f-3 under the Investment Company Act of 1940 (the 1940
Act), which the Applicants encouraged the Department to use as a model
for this exemption. Under Rule 10f-3, the independent directors of
mutual funds are charged with reviewing transactions where a mutual
fund buys securities from a syndicate in which the fund's affiliate is
a ``principal underwriter,'' as defined in Section 2(a)(29) of the 1940
Act.\6\
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\6\ The Department understands that the Applicants, or their
affiliates, are covered by Rule 10f-3 and, hence, are familiar with
quarterly reporting of certain underwriting transactions. As a point
of clarification, the Department notes that under the SEC's
definition of ``principal underwriter,'' underwriters, whether
managers or members, have the same reporting requirements pursuant
to Rule 10f-3. PTE 75-1, Part III, on the other hand, distinguishes
between managers and members, defining a manager as an underwriter
``* * * authorized to act on behalf of all members * * * or who
receives compensation from the members of the syndicate for its
services as a manager * * *'' In situations where an Applicant is a
member, not a manager, the Applicant may continue to rely on PTE 75-
1, Part III, to purchase securities covered by that exemption. These
individual exemptions also permit the purchase of Eligible Rule 144A
Securities. Where an Applicant wishes to obtain the additional
relief granted in these exemptions, the same conditions apply to
both managers and members. To further clarify, the Department has
added the definition of ``manager,'' as defined in PTE 75-1, Part
III, to the definition of ``Affiliated Broker-Dealer'' in Section II
of the final exemption.
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The Department continues to believe that the quarterly report,
which summarizes all the key elements of the subject transactions, will
provide the Independent Fiduciaries with a convenient way to regularly
monitor compliance with the exemption. Accordingly, the Department has
retained the requirement in the final exemption to report the
information listed in items (iii), (iv), (vi), and (vii) on a quarterly
basis to the Independent Fiduciaries.
7. Section I(n)(2)--Quarterly Affiliated Broker-Dealer Certification
Four of the Applicants, J.P. Morgan, Goldman, Chase, and Morgan
Stanley, commented on Section I(n)(2) of the Notice (65 FR at 6239),
which requires that the written certification from the Affiliated
Broker-Dealer mandated by Section I(g)(2) of the Notice be made part of
the quarterly reports to the Independent Fiduciaries.
[[Page 35132]]
a. Chase requested that Section I(n)(2) of the Notice be modified
so that the time frame for providing the certification would be no
later than the report covering the second calendar quarter after the
quarter in which an underwriting occurred. In addition, Chase requested
clarification regarding any difference in meaning behind the different
terminology used to denote time periods in Section I(n)(4) and (n)(2)
of the Notice--``next quarterly report'' and ``preceding quarter''
versus ``past quarter.''
b. J.P. Morgan, Goldman, and Morgan Stanley argued that it is
unnecessary to provide the actual certification, which will likely look
the same from quarter to quarter and which will be maintained pursuant
to the exemption's recordkeeping conditions. Therefore, the Applicants
requested that the Asset Manager be required instead to merely state in
its quarterly reports that it has received such certification from the
Affiliated Broker-Dealer, and that a copy of such certification will be
provided to the Independent Fiduciaries upon request.
With respect to the modification to Section I(n)(2) of the Notice
requested by Chase regarding an extension of time for providing the
certification to the Independent Fiduciaries, the Department believes
that 45 days following the period in which an underwriting occurred is
a sufficient time to provide the certification. In addition, the
Department wishes to clarify that no difference in meaning was intended
by the different terminology used to denote time periods in Section
I(n)(4) and (n)(2) of the Notice. Therefore, the language of Section
I(n)(4) has been revised in the final exemption to eliminate any
appearance of inconsistency. Specifically, the phrase ``next quarterly
report'' has been changed to ``quarterly report,'' and the phrase
``preceding quarter'' to ``past quarter.''
With respect to the modification to Section I(n)(2) of the Notice
requested by J.P. Morgan, Goldman, and Morgan Stanley, the Department
concurs in the Applicants' suggestion that a representation regarding
the certification in the quarterly reports may be made in lieu of
providing the actual certification to the Independent Fiduciaries. The
representation in the quarterly reports must state that the
certification relates to each covered transaction during the past
quarter. Accordingly, the Department has modified Section I(n)(2) in
the final exemption.
8. Section I(n)(4)--Quarterly Reporting on Trading Restrictions
The five Applicants raised concerns that the language in Section
I(n)(4) of the Notice (65 FR at 6239), which requires the disclosure in
the quarterly reports of restrictions on trading in the covered
securities, may be broader than necessary.
The Department notes that, according to the Applicants, their
business separation policies are designed, among other things, to limit
the flow of information that could restrict the Asset Manager's
flexibility in managing client assets (65 FR at 6232). In deciding to
propose the exemptions, the Department was reassured by those
representations. Should this flexibility be limited, for example, by a
restriction that precluded the Asset Manager's sale of the securities
purchased in the underwriting, the Department believes that any such
restriction should be disclosed to the Independent Fiduciaries. After
consideration of the issue, the Department has determined to narrow the
language in Section I(n)(4) in the final exemption by substituting the
term ``selling'' in place of the term ``trading in.'' In addition, the
Department has revised the condition so that it refers explicitly to
covered securities purchased during the past quarter.
9. Section I(i)(3), (j) & (k)(3), (l) and (m)--Termination Form
Four of the Applicants, J.P. Morgan, Goldman, Morgan Stanley, and
Citigroup, requested deletion of the requirement that a ``termination
form'' be provided annually that enables the Independent Fiduciaries to
terminate authorization, without penalty, for the Asset Manager to
engage in transactions pursuant to the exemption. In addition, Chase
commented that the reference in Section I(j) of the Notice to Section
I(i)(3) is duplicative and should be deleted.
Section I(i)(3) of the Notice (65 FR at 6238) requires that the
termination form be provided as part of the initial disclosure to the
Independent Fiduciaries of single Client Plans, while Section I(j) of
the Notice (65 FR at 6238) requires that such a termination form also
be provided at least annually. Section I(k)(3), (l), and (m) of the
Notice (65 FR at 6238, 6239) contain parallel requirements for the
Independent Fiduciaries of Client Plans investing in a Pooled Fund. The
Applicants argued that termination forms are unnecessary, given the
type of sophisticated plans that would be covered by the exemption and
the quarterly disclosures that would also be required. They stated that
a more practical and efficient alternative would be the addition to the
quarterly reports of a reminder that a Client Plan's prior consent to
the covered transactions may be withdrawn at any time.
For a single Client Plan, it was suggested that such notification
explicitly state that the authorization to engage in the covered
transactions, as described in the quarterly report, may be terminated
without penalty by the Independent Fiduciary on no more than five days'
notice and would identify a contact person. For Client Plans investing
a Pooled Fund that engages in the covered transactions, the
notification would explicitly state that the Independent Fiduciary may
terminate investment in the Pooled Fund without penalty and would
identify a contact person.
The Department concurs in the Applicants' request to eliminate
initial termination forms for single Client Plans and annual
termination forms for both single Client Plans and Client Plans
investing in a Pooled Fund. However, the Department believes that it is
important for Client Plans in a Pooled Fund to receive a termination
form as part of the initial disclosure materials, since withdrawing
from the Pooled Fund is the only option available to a Client Plan not
wishing to authorize use of the exemption. In lieu of annual
termination forms, notification to the Independent Fiduciaries
regarding their right to terminate authorization may be made in the
quarterly reports, provided that such notification is prominently
displayed. These modifications are reflected in Section I(i)(3), (j) &
(k)(3), (l) and (m) of the final exemption. In this regard, the
Department notes that the cross-reference in the original Section I(m)
of the Notice to Section I(k)(3) was a typographical error that should
have been a cross-reference to Section I(k)(2). To clarify, the
Department has deleted such cross-references in parallel conditions
Section I(j) and (m) of the final exemption and written out the
relevant language concerning the requirement for making ongoing
disclosures to the Independent Fiduciaries. The Department believes
that these revisions are also responsive to Chase's comment regarding
Section I(j) of the Notice.
10. Section I(o)--$50 Million Plan Size Requirement
A comment concerning Section I(o) of the Notice was submitted by an
unidentified financial institution which supports the grant of this
final exemption by the Department. Although not one of the original
Applicants, the
[[Page 35133]]
unidentified financial institution raised a concern that may be shared
by other similarly situated financial institutions interested in the
subject transactions.
The commentator noted that Section I(o) of the Notice limited
exemptive relief to Client Plans with total net assets of $50 million
or more, or to Pooled Funds where at least 50 percent of the units of
beneficial interest in such Pooled Fund are held by Client Plans having
total net assets of at least $50 million. The Department stated, in
paragraph 13 of the Discussion of the Proposed Exemption in the Notice
(65 FR at 6236), that the minimum plan size requirements will help
insure that Client Plans have the resources and investment
sophistication needed to monitor the Asset Manager's investment
performance with respect to the covered transactions. However, the
commentator argued that some smaller companies with qualified plans
having total assets in the range of $10 million to $50 million are very
sophisticated. The commentator stated that lowering the minimum plan
size requirement would afford smaller companies and newer plans access
to desirable investment opportunities.
After consideration of the issue, the Department has determined
that the present minimum plan size requirements are necessary to insure
an appropriate level of plan investor sophistication for the covered
transactions. Of course, upon proper application, the Department would
be prepared to consider additional relief for transactions that do not
meet all the conditions of this exemption, provided that the findings
under section 408(a) of the Act may be made.
11. Section I(o)--Single Master Trust Requirement
Three of the Applicants, J.P. Morgan, Goldman, and Morgan Stanley,
requested a modification to Section I(o) of the Notice. The second
paragraph of Section I(o) provides that the assets of a group of Client
Plans maintained by a single employer, or controlled group of
employers, may be aggregated for purposes of meeting the minimum size
requirements therein, but only if the assets are pooled for investment
purposes in a single master trust. Under the modification requested by
the Applicants, aggregation of plan assets would be permitted even when
such assets are not in a single master trust, if managed by a single
Independent Fiduciary.
As noted in Item 10, above, the minimum size requirements for
Client Plans and Pooled Funds in Section I(o) are designed to insure a
certain level of investment sophistication on the part of the
Independent Fiduciaries who will be responsible for approving and
monitoring the covered transactions. However, the Applicants argued
that, if the assets of related plans are not pooled in a single master
trust, that fact is not necessarily indicative of a lack of
sophistication on the part of a single fiduciary who may be managing
such assets.
After consideration of the issue, the Department is not persuaded
by the arguments submitted in favor of modifying the exception to the
minimum plan size requirements. Accordingly, the Department has
retained the condition that aggregation of certain plan assets for
purposes of meeting the minimum size requirements in Section I(o) of
the final exemption is permitted only if the assets are held in a
single master trust.
12. Section I(q)--10 Percent Limitation on In-house Plan Investment in
Pooled Funds
Four of the Applicants, J.P. Morgan, Goldman, Chase, and Morgan
Stanley, requested deletion of the requirement in Section I(q) of the
Notice that no more than 10 percent of the assets of a Pooled Fund may
be comprised of assets of employee benefit plans maintained by the
Asset Manager, Affiliated Broker-Dealer, or an affiliate thereof, for
their own employees (an In-house Plan), for which the Asset Manager,
Affiliated Broker-Dealer, or an affiliate exercises investment
discretion. This condition would be measured at the time of a covered
transaction.
The Applicants stated that this 10 percent limitation has no direct
bearing on the covered transactions themselves, insofar as permissible
fees or the disclosure and approval process for Client Plans. Further,
In-house Plans are limited in their ability to invest in Pooled Funds,
even in situations where an additional investment may be in the
interests of the In-house Plans. As an alternative to eliminating any
percentage limitation altogether, J.P. Morgan suggested that a 25
percent limitation be substituted for the 10 percent limitation in
Section I(q) of the Notice.
With respect to the Applicants' request to eliminate the 10 percent
limitation in Section I(q) of the Notice, the Department is not
persuaded by the arguments submitted in favor of deletion of this
percentage requirement. The Department believes that elimination of
this condition could result in a failure to insure a sufficient level
of independent client oversight over transactions involving a Pooled
Fund.
However, the Department believes that a 20 percent limitation would
still insure a sufficient level of independent investor oversight of
the Asset Manager and would not unduly restrict the investment
opportunities available for In-house Plans. Accordingly, the Department
has substituted a 20 percent limitation on In-house Plan investment in
Pooled Funds in Section I(q) of the final exemption.
13. Section II(g)--Definition of Independent Fiduciary
The five Applicants commented that Section II(g) of the Notice
defining the term ``Independent Fiduciary'' for purposes of the subject
transactions is too narrow. Specifically, Section II(g)(2) deems a
fiduciary not to be ``independent'' of the Asset Manager if such
fiduciary, or any officer, director, partner, employee, or relative of
the fiduciary, is an officer, director, partner, or employee of the
Asset Manager (or is a relative of such persons). The Applicants noted
that it is too administratively burdensome to be required to track all
such relationships to specific individuals who may be employed by such
large organizations, especially when most of these persons would have
no power to influence any decisions of the fiduciary on matters
relating to the exemption.
As a solution to this problem, Chase favored the deletion of a
separate definition of ``Independent Fiduciary'' and noted that users
of certain class exemptions, such as PTE 94-20 (59 FR 8022, February
17, 1994) \7\ and PTE 98-54 (63 FR 63503, November 13, 1998), \8\
determine themselves whether a fiduciary is independent. Chase, along
with Goldman and Morgan Stanley, suggested the adoption of the
functional test for an Independent Fiduciary, as used in PTE 86-128 (51
FR 41686, November 18, 1986). \9\ In Section I(f) of PTE 86-128, a plan
fiduciary is deemed to be independent of a person in the absence of a
relationship or interest in such person that might affect the
[[Page 35134]]
exercise of such fiduciary's best judgment in connection with the
subject transactions.
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\7\ PTE 94-20 provides a class exemption, under certain
conditions, for the purchase and sale of foreign currencies between
an employee benefit plan and a bank or a broker-dealer or an
affiliate thereof, which is a party in interest with respect to such
plan.
\8\ PTE 98-54 provides a class exemption, under certain
conditions, for foreign exchange transactions executed pursuant to
standing instructions.
\9\ PTE 86-128 provides a class exemption, under certain
conditions, permitting persons who serve as fiduciaries for employee
benefit plans to effect or execute securities transactions on behalf
of such plans.
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As a third possibility, J.P. Morgan, Goldman, Morgan Stanley, and
Citigroup requested an expansion of the ``carve-out'' provision, in
Section II(g) of the Notice, for the Asset Manager's personnel who
serve as directors of other organizations. Under the expanded ``carve-
out'' provision, another organization may still be deemed
``independent'' of the Asset Manager, if such organization's officer,
partner, or employee, as well as director, (or a relative of such
persons), who is affiliated with the Asset Manager, abstains from
participation in certain decisions relating to the retention of the
Asset Manager and the required authorizations under the exemption. In
this regard, J.P. Morgan suggested specific language to be added to the
end of Section II(g) of the Notice.
The Department concurs in the Applicants' request for a revision to
the definition of ``Independent Fiduciary'' in Section II(g) of the
Notice. After discussion with all of the Applicants, the Department is
persuaded that such definition can be revised in a manner calculated to
minimize administrative burdens in connection with the exemption, while
restricting those persons whose independent judgment might be
compromised from acting as a fiduciary for a Client Plan because of
certain relationships to the Asset Manager. Accordingly, the Department
has modified the definition of ``Independent Fiduciary'' in Section
II(g) of the final exemption to read as follows:
(g)(1) The term ``Independent Fiduciary'' means a fiduciary of a
Client Plan who is unrelated to, and independent of, the Asset
Manager and the Affiliated Broker-Dealer. For purposes of this
exemption, a Client Plan fiduciary will be deemed to be unrelated
to, and independent of, the Asset Manager and the Affiliated Broker-
Dealer if such fiduciary represents that neither such fiduciary, nor
any individual responsible for the decision to authorize or
terminate authorization for transactions described in Section I, is
an officer, director, or highly compensated employee (within the
meaning of section 4975(e)(2)(H) of the Code) of the Asset Manager
or the Affiliated Broker-Dealer and represents that such fiduciary
shall advise the Asset Manager if those facts change.
(2) Notwithstanding anything to the contrary in this Section
II(g), a fiduciary is not independent if:
(i) such fiduciary directly or indirectly controls, is
controlled by, or is under common control with the Asset Manager or
the Affiliated Broker-Dealer;
(ii) such fiduciary directly or indirectly receives any
compensation or other consideration from the Asset Manager or the
Affiliated Broker-Dealer for his or her own personal account in
connection with any transaction described in this exemption;
(iii) any officer, director, or highly compensated employee
(within the meaning of section 4975(e)(2)(H) of the Code) of the
Asset Manager, responsible for the transactions described in Section
I, is an officer, director, or highly compensated employee (within
the meaning of section 4975(e)(2)(H) of the Code) of the Client Plan
sponsor or of the fiduciary responsible for the decision to
authorize or terminate authorization for transactions described in
Section I. However, if such individual is a director of the Client
Plan sponsor or of the responsible fiduciary, and if he or she
abstains from participation in (A) the choice of the Plan's
investment manager/adviser and (B) the decision to authorize or
terminate authorization for transactions described in Section I,
then Section II (g)(2)(iii) shall not apply.
(3) The term ``officer'' means a president, any vice president
in charge of a principal business unit, division or function (such
as sales, administration or finance), or any other officer who
performs a policy-making function for the entity.
(4) In the case of existing Client Plans in a Pooled Fund, at
the time the Asset Manager provides such Client Plans with initial
notice pursuant to this exemption, the Asset Manager will notify the
fiduciaries of such Client Plans that they must advise the Asset
Manager, in writing, if they are not independent, within the meaning
of this Section II (g).
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act, which require, among other things, that a fiduciary
discharge his or her duties respecting a plan solely in the interest of
the participants and beneficiaries of such plan and in a prudent manner
in accordance with section 404(a)(1)(B) of the Act; nor does it affect
the requirements of section 401(a) of the Code that the plan operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) In accordance with section 408(a) of the Act and section
4975(c)(2) of the Code, the Department finds that the exemptions are
administratively feasible, in the interests of the affected plans and
their participants and beneficiaries, and protective of the rights of
those participants and beneficiaries; and
(3) The exemptions are supplemental to, and not in derogation of,
any other provisions of the Act and the Code, including statutory or
administrative exemptions. Furthermore, the fact that a transaction is
subject to an administrative or statutory exemption is not dispositive
of whether the transaction is, in fact, a prohibited transaction.
(4) The exemptions are subject to the express condition that the
material facts and representations contained in the applications
accurately describe all material terms of the transactions that are the
subject of the exemptions.
Exemption
Under the authority of section 408(a) of the Employee Retirement
Income Security Act (the Act) and section 4975(c)(2) of the Internal
Revenue Code of 1986 (the Code) and in accordance with the procedures
set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, August 10,
1990), the Department grants the following individual Prohibited
Transaction Exemptions (PTEs): PTE 2000-, Morgan Guaranty Trust Company
of New York and J.P. Morgan Investment Management Inc.; PTE 2000-,
Goldman, Sachs & Co.; PTE 2000-, The Chase Manhattan Bank; PTE 2000-,
Citigroup Inc; and PTE 2000-, Morgan Stanley Dean Witter & Co.
Section I--Transactions
Effective February 8, 2000, the restrictions of section 406 of the
Act and the sanctions resulting from the application of section 4975 of
the Code, by reason of section 4975(c)(1) of the Code, shall not apply
to the purchase of any securities by the Asset Manager on behalf of
employee benefit plans (Client Plans), including Client Plans investing
in a pooled fund (Pooled Fund), for which the Asset Manager acts as a
fiduciary, from any person other than the Asset Manager or an affiliate
thereof, during the existence of an underwriting or selling syndicate
with respect to such securities, where the Affiliated Broker-Dealer is
a manager or member of such syndicate, provided that the following
conditions are satisfied:
(a) The securities to be purchased are--
(1) either:
(i) part of an issue registered under the Securities Act of 1933
(the 1933 Act) (15 U.S.C. 77a et seq.) or, if exempt from such
registration requirement, are (A) issued or guaranteed by the United
States or by any person controlled or supervised by and acting as an
instrumentality of the United States
[[Page 35135]]
pursuant to authority granted by the Congress of the United States, (B)
issued by a bank, (C) exempt from such registration requirement
pursuant to a federal statute other than the 1933 Act, or (D) are the
subject of a distribution and are of a class which is required to be
registered under section 12 of the Securities Exchange Act of 1934 (the
1934 Act) (15 U.S.C. 781), and the issuer of which has been subject to
the reporting requirements of section 13 of that Act (15 U.S.C. 78m)
for a period of at least 90 days immediately preceding the sale of
securities and has filed all reports required to be filed thereunder
with the Securities and Exchange Commission (SEC) during the preceding
12 months; or
(ii) part of an issue that is an ``Eligible Rule 144A Offering,''
as defined in SEC Rule 10f-3 (17 CFR 270.10f-3(a)(4)). Where the
Eligible Rule 144A Offering is of equity securities, the offering
syndicate shall obtain a legal opinion regarding the adequacy of the
disclosure in the offering memorandum;
(2) purchased prior to the end of the first day on which any sales
are made, at a price that is not more than the price paid by each other
purchaser of securities in that offering or in any concurrent offering
of the securities, except that--
(i) if such securities are offered for subscription upon exercise
of rights, they may be purchased on or before the fourth day preceding
the day on which the rights offering terminates; or
(ii) if such securities are debt securities, they may be purchased
at a price that is not more than the price paid by each other purchaser
of securities in that offering or in any concurrent offering of the
securities and may be purchased on a day subsequent to the end of the
first day on which any sales are made, provided that the interest rates
on comparable debt securities offered to the public subsequent to the
first day and prior to the purchase are less than the interest rate of
the debt securities being purchased; and
(3) offered pursuant to an underwriting or selling agreement under
which the members of the syndicate are committed to purchase all of the
securities being offered, except if--
(i) such securities are purchased by others pursuant to a rights
offering; or
(ii) such securities are offered pursuant to an over-allotment
option.
(b) The issuer of such securities has been in continuous operation
for not less than three years, including the operation of any
predecessors, unless--
(1) such securities are non-convertible debt securities rated in
one of the four highest rating categories by at least one nationally
recognized statistical rating organization, i.e., Standard & Poor's
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co., or Fitch IBCA, Inc., or their successors (collectively, the
Rating Organizations); or
(2) such securities are issued or fully guaranteed by a person
described in paragraph (a)(1)(i)(A) of this exemption; or
(3) such securities are fully guaranteed by a person who has issued
securities described in (a)(1)(i)(B), (C), or (D), and who has been in
continuous operation for not less than three years, including the
operation of any predecessors.
(c) The amount of such securities to be purchased by the Asset
Manager on behalf of a Client Plan does not exceed three percent of the
total amount of the securities being offered. Notwithstanding the
foregoing, the aggregate amount of any securities purchased with assets
of all Client Plans (including Pooled Funds) managed by the Asset
Manager (or with respect to which the Asset Manager renders investment
advice within the meaning of 29 CFR 2510.3-21(c)) does not exceed:
(1) 10 percent of the total amount of any equity securities being
offered;
(2) 35 percent of the total amount of any debt securities being
offered that are rated in one of the four highest rating categories by
at least one of the Rating Organizations; or
(3) 25 percent of the total amount of any debt securities being
offered that are rated in the fifth or sixth highest rating categories
by at least one of the Rating Organizations; and
(4) if purchased in an Eligible Rule 144A Offering, the total
amount of the securities being offered for purposes of determining the
percentages for (1)-(3) above is the total of:
(i) the principal amount of the offering of such class sold by
underwriters or members of the selling syndicate to ``qualified
institutional buyers'' (QIBs), as defined in SEC Rule 144A (17 CFR
230.144A(a)(1)); plus
(ii) the principal amount of the offering of such class in any
concurrent public offering.
(d) The consideration to be paid by the Client Plan in purchasing
such securities does not exceed three percent of the fair market value
of the total net assets of the Client Plan, as of the last day of the
most recent fiscal quarter of the Client Plan prior to such
transaction.
(e) The transaction is not part of an agreement, arrangement, or
understanding designed to benefit the Asset Manager or an affiliate.
(f) The Affiliated Broker-Dealer does not receive, either directly,
indirectly, or through designation, any selling concession or other
consideration that is based upon the amount of securities purchased by
Client Plans pursuant to this exemption. In this regard, the Affiliated
Broker-Dealer may not receive, either directly or indirectly, any
compensation that is attributable to the fixed designations generated
by purchases of securities by the Asset Manager on behalf of its Client
Plans.
(g)(1) The amount the Affiliated Broker-Dealer receives in
management, underwriting or other compensation is not increased through
an agreement, arrangement, or understanding for the purpose of
compensating the Affiliated Broker-Dealer for foregoing any selling
concessions for those securities sold pursuant to this exemption.
Except as described above, nothing in this paragraph shall be construed
as precluding the Affiliated Broker-Dealer from receiving management
fees for serving as manager of the underwriting or selling syndicate,
underwriting fees for assuming the responsibilities of an underwriter
in the underwriting or selling syndicate, or other consideration that
is not based upon the amount of securities purchased by the Asset
Manager on behalf of Client Plans pursuant to this exemption; and
(2) The Affiliated Broker-Dealer shall provide to the Asset Manager
a written certification, signed by an officer of the Affiliated Broker-
Dealer, stating the amount that the Affiliated Broker-Dealer received
in compensation during the past quarter, in connection with any
offerings covered by this exemption, was not adjusted in a manner
inconsistent with Section I, paragraphs (e), (f), or (g), of this
exemption.
(h) In the case of a single Client Plan, the covered transaction is
performed under a written authorization executed in advance by an
independent fiduciary (Independent Fiduciary) of the Client Plan.
(i) Prior to the execution of the written authorization described
in paragraph (h) above, the following information and materials must be
provided by the Asset Manager to the Independent Fiduciary of each
single Client Plan:
(1) a copy of the notice of proposed exemption and of the final
exemption, as published in the Federal Register; and
(2) any other reasonably available information regarding the
covered transactions that the Independent Fiduciary requests.
[[Page 35136]]
(j) Subsequent to an Independent Fiduciary's initial authorization
permitting the Asset Manager to engage in the covered transactions on
behalf of a single Client Plan, the Asset Manager will continue to be
subject to the requirement to provide any reasonably available
information regarding the covered transactions that the Independent
Fiduciary requests.
(k) In the case of existing plan investors in a Pooled Fund, such
Pooled Fund may not engage in any covered transactions pursuant to this
exemption, unless the Asset Manager has provided the written
information described below to the Independent Fiduciary of each plan
participating in the Pooled Fund. The following information and
materials shall be provided not less than 45 days prior to the Asset
Manager's engaging in the covered transactions on behalf of the Pooled
Fund pursuant to the exemption:
(1) A notice of the Pooled Fund's intent to purchase securities
pursuant to this exemption and a copy of the notice of proposed
exemption and of the final exemption, as published in the Federal
Register;
(2) Any other reasonably available information regarding the
covered transactions that the Independent Fiduciary requests; and
(3) A termination form expressly providing an election for the
Independent Fiduciary to terminate the plan's investment in the Pooled
Fund without penalty to the plan. Such form shall include instructions
specifying how to use the form. Specifically, the instructions will
explain that the plan has an opportunity to withdraw its assets from
the Pooled Fund for a period at least 30 days after the plan's receipt
of the initial notice described in subparagraph (1) above and that the
failure of the Independent Fiduciary to return the termination form by
the specified date shall be deemed to be an approval by the plan of its
participation in covered transactions as a Pooled Fund investor.
Further, the instructions will identify the Asset Manager and its
Affiliated Broker-Dealer and state that this exemption may be
unavailable unless the Independent Fiduciary is, in fact, independent
of those persons. Such fiduciary must advise the Asset Manager, in
writing, if it is not an ``independent Fiduciary,'' as that term is
defined in Section II(g) of this exemption.
For purposes of this paragraph, the requirement that the
authorizing fiduciary be independent of the Asset Manager shall not
apply in the case of an in-house plan sponsored by the Applicant or an
affiliate thereof. However, in-house plans must notify the Asset
Manager, as provided above.
(l) In the case of a plan whose assets are proposed to be invested
in a Pooled Fund subsequent to implementation of the procedures to
engage in the covered transactions, the plan's investment in the Pooled
Fund is subject to the prior written authorization of an Independent
Fiduciary, following the receipt by the Independent Fiduciary of the
materials described in subparagraphs (1) and (2) of paragraph (k). For
purposes of this paragraph, the requirement that the authorizing
fiduciary be independent of the Asset Manager shall not apply in the
case of an in-house plan sponsored by the Applicant or an affiliate
thereof.
(m) Subsequent to an Independent Fiduciary's initial authorization
of a plan's investment in a Pooled Fund that engages in the covered
transactions, the Asset Manager will continue to be subject to the
requirement to provide any reasonably available information regarding
the covered transactions that the Independent Fiduciary requests.
(n) At least once every three months, and not later than 45 days
following the period to which such information relates, the Asset
Manager shall:
(1) furnish the Independent Fiduciary of each single Client Plan,
and of each plan investing in a Pooled Fund, with a report (which may
be provided electronically) disclosing all securities purchased on
behalf of that Client Plan or Pooled Fund pursuant to the exemption
during the period to which such report relates, and the terms of the
transactions, including:
(i) the type of security (including the rating of any debt
security);
(ii) the price at which the securities were purchased;
(iii) the first day on which any sale was made during this
offering;
(iv) the size of the issue;
(v) the number of securities purchased by the Asset Manager for the
specific Client Plan or Pooled Fund;
(vi) the identity of the underwriter from whom the securities were
purchased;
(vii) the spread on the underwriting;
(ix) the price at which any such securities purchased during the
period were sold; and
(x) the market value at the end of such period of each security
purchased during the period and not sold;
(2) provide to the Independent Fiduciary in the quarterly report a
representation that the Asset Manager has received a written
certification signed by an officer of the Affiliated Broker-Dealer, as
described in paragraph (g)(2), affirming that, as to each offering
covered by this exemption during the past quarter, the Affiliated
Broker-Dealer acted in compliance with Section I, paragraphs (e), (f),
and (g) of this exemption, and that a copy of such certification will
be provided to the Independent Fiduciary upon request;
(3) disclose to the Independent Fiduciary that, upon request, any
other reasonably available information regarding the covered
transactions that the Independent Fiduciary requests will be provided,
including, but not limited to:
(i) the date on which the securities were purchased on behalf of
the plan;
(ii) the percentage of the offering purchased on behalf of all
Client Plans and Pooled Funds; and
(iii) the identity of all members of the underwriting syndicate;
(4) disclose to the Independent Fiduciary in the quarterly report,
any instance during the past quarter where the Asset Manager was
precluded for any period of time from selling a security purchased
under this exemption in that quarter because of its status as an
affiliate of the Affiliated Broker-Dealer and the reason for this
restriction;
(5) provide explicit notification, prominently displayed in each
quarterly report, to the Independent Fiduciary of a single Client Plan,
that the authorization to engage in the covered transactions may be
terminated, without penalty, by the Independent Fiduciary on no more
than five days' notice by contacting an identified person; and
(6) provide explicit notification, prominently displayed in each
quarterly report, to the Independent Fiduciary of a Client Plan
investing a Pooled Fund, that the Independent Fiduciary may terminate
investment in the Pooled Fund, without penalty, by contacting an
identified person.
(o) Each single Client Plan shall have total net assets with a
value of at least $50 million. In addition, in the case of a
transaction involving an Eligible Rule 144A Offering on behalf of a
single Client Plan, each such Client Plan shall have at least $100
million in securities, as determined pursuant to SEC Rule 144A (17 CFR
230.144A). In the case of a Pooled Fund, the $50 million requirement
will be met if 50 percent or more of the units of beneficial interest
in such Pooled Fund are held by plans having total net assets with a
value of at least $50 million. For purchases involving an Eligible Rule
144A Offering on behalf of a Pooled Fund, the $100 million requirement
will be met if 50 percent or more of the units of beneficial interest
in such Pooled Fund are held by plans having at least $100 million in
assets and the Pooled Fund
[[Page 35137]]
itself qualifies as a QIB, as determined pursuant to SEC Rule 144A (17
CFR 230.144A(a)(F)).
For purposes of the net asset tests described above, where a group
of Client Plans is maintained by a single employer or controlled group
of employers, as defined in section 407(d)(7) of the Act, the $50
million net asset requirement or the $100 million net asset requirement
may be met by aggregating the assets of such Client Plans, if the
assets are pooled for investment purposes in a single master trust.
(p) The Asset Manager qualifies as a ``qualified professional asset
manager'' (QPAM), as that term is defined under Part V(a) of Prohibited
Transaction Exemption 84-14 (49 FR 9494, 9506, March 13, 1984) and, in
addition, has, as of the last day of its most recent fiscal year, total
client assets under its management and control in excess of $5 billion
and shareholders' or partners' equity in excess of $1 million.
(q) No more than 20 percent of the assets of a Pooled Fund, at the
time of a covered transaction, are comprised of assets of employee
benefit plans maintained by the Asset Manager, the Affiliated Broker-
Dealer, or an affiliate for their own employees, for which the Asset
Manager, the Affiliated Broker-Dealer, or an affiliate exercises
investment discretion.
(r) The Asset Manager and the Affiliated Broker-Dealer maintain, or
cause to be maintained, for a period of six years from the date of any
covered transaction such records as are necessary to enable the persons
described in paragraph(s) of this exemption to determine whether the
conditions of this exemption have been met, except that--
(1) no party in interest with respect to a Client Plan, other than
the Asset Manager and the Affiliated Broker-Dealer, shall be subject to
a civil penalty under section 502(i) of the Act or the taxes imposed by
section 4975(a) and (b) of the Code, if such records are not
maintained, or not available for examination, as required by paragraph
(s); and
(2) a prohibited transaction shall not be considered to have
occurred if, due to circumstances beyond the control of the Asset
Manager or the Affiliated Broker-Dealer, such records are lost or
destroyed prior to the end of the six-year period.
(s)(1) Except as provided in subparagraph (2) of this paragraph (s)
and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (r) are
unconditionally available at their customary location for examination
during normal business hours by--
(i) any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the SEC; or
(ii) any fiduciary of a Client Plan, or any duly authorized
employee or representative of such fiduciary; or
(iii) any employer of participants and beneficiaries and any
employee organization whose members are covered by a Client Plan, or
any authorized employee or representative of these entities; or
(iv) any participant or beneficiary of a Client Plan, or duly
authorized employee or representative of such participant or
beneficiary;
(2) none of the persons described in paragraphs (s)(1)(ii)-(iv)
shall be authorized to examine trade secrets of the Asset Manager or
the Affiliated Broker-Dealer, or commercial or financial information
which is privileged or confidential; and
(3) should the Asset Manager or the Affiliated Broker-Dealer refuse
to disclose information on the basis that such information is exempt
from disclosure pursuant to paragraph (s)(2) above, the Asset Manager
shall, by the close of the thirtieth (30th) day following the request,
provide a written notice advising that person of the reasons for the
refusal and that the Department may request such information.
Section II--Definitions
(a) The term ``Asset Manager'' means any asset management affiliate
of the Applicant (as ``affiliate'' is defined in paragraph (c)) that
meets the requirements of this exemption.
(b) The term ``Affiliated Broker-Dealer'' means any broker-dealer
affiliate of the Applicant (as ``affiliate'' is defined in paragraph
(c)) that meets the requirements of this exemption. Such Affiliated
Broker-Dealer may participate in an underwriting or selling syndicate
as a manager or member. The term ``manager'' means any member of an
underwriting or selling syndicate who, either alone or together with
other members of the syndicate, is authorized to act on behalf of the
members of the syndicate in connection with the sale and distribution
of the securities being offered, or who receives compensation from the
members of the syndicate for its services as a manager of the
syndicate.
(c) The term ``affiliate'' of a person includes:
(1) any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with such person;
(2) any officer, director, partner, employee, or relative (as
defined in section 3(15) of the Act) of such person; and
(3) any corporation or partnership of which such person is an
officer, director, partner, or employee.
(d) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(e) The term ``Client Plan'' means an employee benefit plan that is
subject to the fiduciary responsibility provisions of the Act and whose
assets are under the management of the Asset Manager, including a plan
investing in a Pooled Fund (as ``Pooled Fund'' is defined in paragraph
(f) below).
(f) The term ``Pooled Fund'' means a common or collective trust
fund or pooled investment fund maintained by the Asset Manager.
(g)(1) The term ``Independent Fiduciary'' means a fiduciary of a
Client Plan who is unrelated to, and independent of, the Asset Manager
and the Affiliated Broker-Dealer. For purposes of this exemption, a
Client Plan fiduciary will be deemed to be unrelated to, and
independent of, the Asset Manager and the Affiliated Broker-Dealer if
such fiduciary represents that neither such fiduciary, nor any
individual responsible for the decision to authorize or terminate
authorization for transactions described in Section I, is an officer,
director, or highly compensated employee (within the meaning of section
4975(e)(2)(H) of the Code) of the Asset Manager or the Affiliated
Broker-Dealer and represents that such fiduciary shall advise the Asset
Manager if those facts change.
(2) Notwithstanding anything to the contrary in this Section II(g),
a fiduciary is not independent if:
(i) such fiduciary directly or indirectly controls, is controlled
by, or is under common control with the Asset Manager or the Affiliated
Broker-Dealer;
(ii) such fiduciary directly or indirectly receives any
compensation or other consideration from the Asset Manager or the
Affiliated Broker-Dealer for his or her own personal account in
connection with any transaction described in this exemption;
(iii) any officer, director, or highly compensated employee (within
the meaning of section 4975(e)(2)(H) of the Code) of the Asset Manager,
responsible for the transactions described in Section I, is an officer,
director, or highly compensated employee (within the meaning of section
4975(e)(2)(H) of the
[[Page 35138]]
Code) of the Client Plan sponsor or of the fiduciary responsible for
the decision to authorize or terminate authorization for transactions
described in Section I. However, if such individual is a director of
the Client Plan sponsor or of the responsible fiduciary, and if he or
she abstains from participation in (A) the choice of the Plan's
investment manager/adviser and (B) the decision to authorize or
terminate authorization for transactions described in Section I, then
Section II (g)(2)(iii) shall not apply.
(3) The term ``officer'' means a president, any vice president in
charge of a principal business unit, division or function (such as
sales, administration or finance), or any other officer who performs a
policy-making function for the entity.
(4) In the case of existing Client Plans in a Pooled Fund, at the
time the Asset Manager provides such Client Plans with initial notice
pursuant to this exemption, the Asset Manager will notify the
fiduciaries of such Client Plans that they must advise the Asset
Manager, in writing, if they are not independent, within the meaning of
this Section II (g).
(h) The term ``security'' shall have the same meaning as defined in
section 2(36) of the Investment Company Act of 1940 (the 1940 Act), as
amended (15 U.S.C. 80a-2(36)(1996)). For purposes of this exemption,
mortgage-backed or other asset-backed securities rated by a Rating
Organization will be treated as debt securities.
(i) The term ``Eligible Rule 144A Offering'' shall have the same
meaning as defined in SEC Rule 10f-3(a)(4) (17 CFR 270. 10f-3(a)(4))
under the 1940 Act.
(j) The term ``qualified institutional buyer'' or ``QIB'' shall
have the same meaning as defined in SEC Rule 144A (17 CFR
230.144A(a)(1)) under the 1933 Act.
(k) The term ``Rating Organizations'' means Standard & Poor's
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co., or Fitch IBCA, Inc., or their successors.
Signed at Washington, D.C., this 25th day of May, 2000.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 00-13641 Filed 5-31-00; 8:45 am]
BILLING CODE 4510-29-P
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