EBSA (Formerly PWBA) Federal Register Notice

Notice of Proposed Individual Exemption To Modify Prohibited Transaction Exemption 97-08 (PTE 97-08) Involving Morgan Stanley Dean Witter & Co. Incorporated (MSDW&Co) Located in New York, NY [09/07/2001]

Volume 66, Number 174, Page 46843-46845

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10997]

 
Notice of Proposed Individual Exemption To Modify Prohibited 
Transaction Exemption 97-08 (PTE 97-08) Involving Morgan Stanley Dean 
Witter & Co. Incorporated (MSDW&Co) Located in New York, NY

AGENCY: Pension and Welfare Benefits Administration U.S. Department of 
Labor

ACTION: Notice of proposed individual exemption to modify PTE 97-08.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed individual 
administrative exemption which, if granted, would amend PTE 97-08 (62 
FR 4811, January 31, 1997), an exemption which was granted to Morgan 
Stanley & Co., Incorporated (MSC), a subsidiary of MSDW&Co. PTE 97-08 
provided relief for certain securities lending, principal transactions, 
and extensions of credit. If granted, this proposed exemption to modify 
PTE 97-08 would permit a U.S. affiliate of a foreign broker-dealer to 
guaranty the obligations of such broker-dealer that arise in connection 
with transactions described in PTE 97-08 and would affect the 
participants and beneficiaries of certain employee benefit plans (the 
Plans or Plan) participating in such transactions and the fiduciaries 
with respect to such plans.

EFFECTIVE DATE: If granted, the proposed amendments will be effective, 
as of August 25, 1995, the effective date of PTE 97-08.

DATES: Written comments and requests for a public hearing should be 
received by the Department on or before October 22, 2001.

ADDRESSES: All written comments and requests for a public hearing 
(preferably, three copies) should be sent to the Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210, Attention: Application No. D-10997.

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The application pertaining to the proposed exemption to amend PTE 97-08 
and the comments received will be available for public inspection in 
the Public Disclosure Room of the Pension and Welfare Benefits 
Administration, U.S. Department of Labor, Room N-1513, 200 Constitution 
Avenue, NW., Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc, Office of 
Exemption Determinations, Pension and Welfare Benefits Administration, 
U.S. Department of Labor, telephone (202) 219-8883. (This is not a 
toll-free number.)

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed exemption that would modify PTE 97-
08. PTE 97-08 provides an exemption from certain prohibited transaction 
restrictions of section 406 of the Employee Retirement Income Security 
Act of 1974 (the Act) and from the sanctions resulting from the 
application of section 4975 of the Internal Revenue Code of 1986 (the 
Code), as amended, by reason of section 4975(c)(1) of the Code. 
Specifically, PTE 97-08 provides retroactive exemptive relief from the 
restrictions of section 406(a)(1)(A) through (D) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (D) of the Code, for certain 
principal transactions between Plans and broker-dealers affiliated with 
MSC which are subject to British law (the MSC/UK Affiliates), the 
lending of securities that are assets of Plans to MSC/UK Affiliates, 
and any extensions of credit to Plans by MSC/UK Affiliates to permit 
the settlement of securities transactions or in connection with the 
writing of options contracts; provided certain conditions are 
satisfied.
    The proposed amendment has been requested in an application filed 
on behalf of MSDW&Co, MSC, and any current and future U.K. broker-
dealer affiliates of MSDW&CO and MSC (the Applicants), 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 2570, subpart B (55 
FR 32836, August 10, 1990). Effective December 31, 1978, section 102 of 
Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978) 
transferred the authority of the Secretary of the Treasury to issue 
exemptions of the type requested to the Secretary of Labor. 
Accordingly, this proposed exemption is issued solely by the 
Department.
    MSDW&Co is the parent holding company for a number of subsidiaries 
which, among other businesses, perform securities underwriting, 
distribution and trading, merger, acquisition, restructuring and other 
corporate finance services for clients around the world and provides 
investment advisory services, equipment and other finances businesses 
credit card services. Further, MSDW&Co currently has foreign affiliates 
that are registered under foreign broker-dealer registration laws that 
are represented to be comparable to the Securities Exchange Act of 1934 
(the Exchange Act).
    MSC, an affiliate of MSDW&Co, is a broker-dealer registered with 
the Securities and Exchange Commission under the Exchange Act, 
providing, among other things, investment banking, securities and asset 
management services to institutional investors, including multinational 
corporations, governments, emerging growth companies, financial 
institutions, employee benefit plans, universities, foundations, and 
individual investors.
    Pursuant to PTE 97-08, the MSC/UK Affiliates, in particular Morgan 
Stanley & Co. International LTD, which is regulated by the Securities 
and Futures Authority in the United Kingdom, effective August 25, 1995, 
may enter into principal transactions with Plan accounts, borrow 
securities from such Plan accounts, and engage in extensions of credit 
to such Plans, including those in connection with the settlement of 
securities transactions and the writing of options contracts; provided 
certain conditions, as set forth in PTE 97-08, are satisfied. With 
respect to that section of PTE 97-08 that permits extensions of credit, 
the MSC/UK Affiliates have found that Plans often seek a guaranty of 
the MSC/UK Affiliates' obligations, particularly in connection with the 
writing of options contracts. The requested modification to PTE 97-08 
would permit a guaranty to be given to a Plan by MSDW&Co or any U.S. 
affiliate of MSDW&Co, so long as such guaranty when given: (a) Is in 
connection with one of the transactions, described in Section I (A), 
(B), or (C) of PTE 97-08, for which the specific conditions for such 
transaction and all of the general conditions, as set forth in PTE 97-
08 have been satisfied; (b) is lawful under the applicable securities 
laws; (c) is provided at no separate cost to the Plan; and (d) is not a 
prohibited transaction under section 503(b) of the Code. In the absence 
of a modification to PTE 97-08, a violation of section 406(a)(1)(B) of 
the Act could occur, if MSDW&Co or one of its affiliates were a party 
in interest with respect to a Plan and also provided a guaranty to such 
Plan. It is represented that the Plans that potentially could be 
affected by this proposed modification of PTE 07-08 have not been 
identified, either because they are not capable of being known or are 
too numerous to mention.
    The Applicants have requested that the modification to PTE 97-08 be 
made retroactive, as of August 25, 1995, the effective date of PTE 97-
08. The Applicants represent that, to their knowledge, while there has 
never been an occasion on which a guaranty has been drawn on by a Plan, 
guaranties have been made with respect to many transactions.
    The Applicants maintain that principal transactions, securities 
lending transactions, and extensions of credit in connection with the 
global securities business are a typical and increasingly common part 
of a Plan's investment strategy. It is represented that guaranties by 
affiliates of broker-dealers are common in many transactions, and in 
particular, in the purchase and sale of options. The Applicants argue 
that to the extent that an affiliate of a broker-dealer adds a credit 
guaranty to the obligations of such broker-dealer, a Plan would be 
advantaged.
    The proposed modification of PTE 97-08 would be administratively 
feasible, because the guaranty will be part of the contract between the 
Plan and the party in interest and will be enforceable by the Plan in 
the U.S. courts. Further, because Standard & Poor's provides a rating 
for the outstanding debt of MSDW&Co (AA-, as of May 2001), Plans are 
able to effectively monitor the credit quality of the guaranty.
    The Applicants maintain that the proposed modification of PTE 97-08 
would be in the interest of affected Plans. In this regard, it is 
represented that the guaranty can only benefit Plans, as it provides an 
additional party for a Plan to look to in the event of a default by a 
broker-dealer.
    The proposed modification of PTE 97-08 will be protective of Plans, 
because the guaranty will add safety and provide credit enhancement to 
many securities transactions. If the requested modification of PTE 97-
08 were to be denied, affected Plans would not have the benefit in 
their dealings with parties in interest of the security provided by the 
guaranty.
    In summary, the Applicants represent that the proposed modification 
of PTE 97-08 satisfies the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons: (a) The guaranty 
has been and will be given in connection with any transaction

[[Page 46845]]

which is exempt, pursuant to PTE 97-08; (b) the guaranty has been and 
will be lawful under the applicable securities laws; (c) the guaranty 
has been and will be provided at no separate cost to the Plan; (d) the 
guaranty has not been and will not be a prohibited transaction under 
section 503(b) of the Code; (e) the guaranty has been and will be 
enforceable by the Plan in the U.S. courts; (f) Plans have benefited 
and will benefit from the addition of a credit guaranty by MSDW&Co of 
the obligations of its broker-dealer affiliates; (g) various rating 
agencies are able to determine the quality of the outstanding debt of 
MSDW&Co, thus providing a mechanism by which Plans are able to monitor 
the viability of the guaranty; (h) Plans have had and will have an 
additional party to look to in the event of a default by a broker-
dealer.

Notice to Interested Persons

    Notification of the publication of the Notice of Proposed Exemption 
to Modify PTE 97-08 (the Notice) will be mailed by first class mail to 
those Plan accounts that trade most frequently with the MSC/UK 
Affiliates. Such notification will be given within 15 days of the 
publication of the Notice in the Federal Register. The notification 
will contain a copy of the Notice, as published in the Federal 
Register, and a copy of the supplemental statement, as required 
pursuant to 29 CFR 2570.43(b)(2). The supplemental statement will 
inform interested persons of their right to comment on and/or to 
request a hearing with respect to the pending exemption. Written 
comments and hearing requests are due within 45 days of the publication 
of the Notice in the Federal Register.

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, a fiduciary to 
discharge his or her duties respecting the plan solely in the interest 
of the participants and beneficiaries of the plan and in a prudent 
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it 
affect the 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) The proposed exemption, if granted, will not extend to 
transactions prohibited under section 406(b) of the Act and section 
4975(c)(1) (E) or (F) of the Code;
    (3) Before an exemption can be granted under section 408(a) of the 
Act and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interest of the plan 
and of its participants and beneficiaries and protective of the rights 
of participants and beneficiaries of the plan;
    (4) This proposed exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and the Code, 
including statutory or administrative exemptions. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction; and
    (5) This proposed exemption, if granted, is subject to the express 
condition that the Summary of Facts and Representations set forth in 
the notice of proposed exemption relating to PTE 97-08, as modified by 
this Notice, accurately describe, where relevant, the material terms of 
the transactions to be consummated pursuant to this exemption.

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a hearing on the pending exemption to the address above, 
within the time frame set forth above, after the publication of this 
proposed exemption in the Federal Register. All comments will be made a 
part of the record. Comments received will be available for public 
inspection with the referenced applications at the address set forth 
above.

Proposed Exemption

    Based on the facts and representations set forth in the 
application, under the authority of section 408(a) of the Act and 
section 4975(c)(2) of the Code and in accordance with the procedures 
set forth in 29 CFR part 2570, subpart B (55 FR 32836, August 10, 
1990), the Department proposes to modify PTE 97-08 to include in 
Section I an additional transaction (D), as set forth below:

Section I. Transactions

    D. If the exemption is granted, effective August 25, 1995, the 
restrictions of section 406(a)(1)(A) through (D) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (D) of the Code, shall not 
apply, to a guaranty given to a Plan by MSDW&Co or any U.S. affiliate 
of MSDW&Co, provided that the guaranty when given: (a) Is in connection 
with one of the transactions, described in Section I(A), (B), or (C) of 
PTE 97-08, for which the specific conditions for such transaction and 
all of the general conditions, as set forth in PTE 97-08 have been 
satisfied; (b) is lawful under the applicable securities laws; (c) is 
provided at no separate cost to the Plan; and (d) is not a prohibited 
transaction under section 503(b) of the Code.
    The availability of this proposed exemption is subject to the 
express condition that the material facts and representations contained 
in the application for exemption are true and complete and accurately 
describe all material terms of the transactions. In the case of 
continuing transactions, if any of the material facts or 
representations described in the applications change, the exemption 
will cease to apply as of the date of such change. In the event of any 
such change, an application for a new exemption must be made to the 
Department.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant PTE 97-08, refer to the 
proposed exemption and the grant notice that are cited above.

    Signed at Washington, DC, this 4th day of September, 2001.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 01-22480 Filed 9-6-01; 8:45 am]
BILLING CODE 4510-29-P