Proposed Exemptions; Deutsche Bank, AG, et al. [Notices] [02/27/2002]
Proposed Exemptions; Deutsche Bank, AG, et al. [02/27/2002]
Volume 67, Number 39, Page 9069-9097
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Part III
Department of Labor
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Pension and Welfare Benefits Administration
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Proposed Exemptions; Deutsche Bank, AG, et al.; Notice
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10924, et al.]
Proposed Exemptions; Deutsche Bank, AG, et al.
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
requests 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 requests for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration (PWBA), 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. Interested persons are also invited to submit
comments and/or hearing requests to PWBA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
moffittb@pwba.dol.gov, or by FAX to (202) 219-0204 by the end of the
scheduled comment period. 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-1513, 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.
Deutsche Bank AG (DB)
Located in Germany, with Affiliates in New York, New York and Other
Locations
[Exemption Application No. D-10924]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act, section 8477(c)(3) of the
Federal Employees' Retirement System Act of 1986 (FERSA) and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10,
1990).\1\
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\1\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
to the corresponding provisions of FERSA and the Code.
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Section I--Transactions
If the exemption is granted, the restrictions of section
406(a)(1)(A) through (D) and 406(b)(1) and (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)(A) through (E) of the Code, shall not apply to:
(a) the lending of securities to:
(1) Deutsche Banc Alex. Brown, Inc., its successors or affiliates
(DBAB);
(2) any current or future affiliate of DB,\2\ that is a bank, as
defined in section 202(a)(2) of the Investment Advisers Act of 1940,
that is supervised by the U.S. or a state, any broker-dealer registered
under the Securities Exchange Act of 1934 (the ``1934 Act''), or any
foreign affiliate that is a bank or broker-dealer that is supervised by
(1) the Securities and Futures Authority (``SFA'') in the United
Kingdom; (2) the Deutsche Bundesbank and/or the Federal Banking
Supervisory Authority, i.e., das Bundesaufsichtsamt fuer das
Kreditwesen (the ``BAK'') in Germany; (3) the Ministry of Finance
(``MOF'') and/or the Tokyo Stock Exchange in Japan; (4) the Ontario
Securities Commission, the Investment Dealers Association and/or the
Office of Superintendent of Financial Institutions in Canada; (5) the
Swiss Federal Banking Commission in Switzerland; and (6) the Reserve
Bank of Australia or the Australian Securities and Investments
Commission and/or Australian Stock Exchange Limited in Australia (the
branches and/or affiliates in the six enumerated foreign countries
hereinafter referred to as the ``Foreign Affiliates'') and together
with the U.S. branches or affiliates (individually, ``Affiliated
Borrower'' and collectively, ``Affiliated Borrowers''), by employee
benefit plans, including commingled investment funds holding plan
assets (the Client Plans or Plans),\3\ for which DB or an affiliate
acts as securities lending agent or subagent (the ``DB Lending
Agent'')\4\ and also may serve as
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trustee, custodian or investment manager of securities being lent; and
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\2\ Any reference to DB shall be deemed to include any
successors thereto.
\3\ The common and collective trust funds trusteed, custodied,
and/or managed by DB or an affiliate, and in which Client Plans
invest, are referred to herein as ``Commingled Funds.'' The Client
Plan separate accounts trusteed, custodied, and/or managed by DB or
an affiliate are referred to herein as ``Separate Accounts.''
Commingled Funds and Separate Accounts are collectively referred to
herein as ``Lender'' or ``Lenders.''
\4\ DB or an affiliate may be retained by primary securities
lending agents to provide securities lending services in a sub-agent
capacity with respect to portfolio securities of clients of such
primary securities lending agents. As a securities lending sub-
agent, DB's role parallels that under the lending transactions for
which DB or an affiliate acts as a primary securities lending agent
on behalf of its clients. References to DB's performance of services
as securities lending agent should be deemed to include its parallel
performance as a securities lending sub-agent and references to the
Client Plans should be deemed to include those plans for which the
DB Lending Agent is acting as a sub-agent with respect to securities
lending, unless otherwise specifically indicated or by the context
of the reference.
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(b) the receipt of compensation by the DB Lending Agent in
connection with these transactions.
Section II--Conditions
Section I of this exemption applies only if the conditions of
Section II are satisfied. For purposes of this exemption, any
requirement that the approving fiduciary be independent of the DB
Lending Agent or the Affiliated Borrower shall not apply in the case of
an employee benefit plan sponsored and maintained by the DB Lending
Agent and/or an affiliate for its own employees (a DB Plan) invested in
a Commingled Fund, provided that at all times the holdings of all DB
Plans in the aggregate comprise less than 10% of the assets of the
Commingled Fund.
(a) For each Client Plan, neither the DB Lending Agent nor any
affiliate (except as expressly permitted herein) has or exercises
discretionary authority or control with respect to the investment of
the assets of Client Plans involved in the transaction or renders
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to such assets, including decisions concerning a Client Plan's
acquisition or disposition of securities available for loan.
This paragraph (a) will be deemed satisfied notwithstanding that
the DB Lending Agent exercises discretionary authority or control or
renders investment advice in connection with an Index Fund or Model-
Driven Fund managed by the DB Lending Agent in which Client Plans
invest.
(b) Any arrangement for the DB Lending Agent to lend securities is
approved in advance by a Plan fiduciary who is independent of the DB
Lending Agent (the Independent Fiduciary).
(c) The specific terms of the securities loan agreement (the Loan
Agreement) are negotiated by the DB Lending Agent which acts as a
liaison between the Lender and the Affiliated Borrower to facilitate
the securities lending transaction. In the case of a Separate Account,
the Independent Fiduciary of a Client Plan approves the general terms
of the Loan Agreement between the Client Plan and the Affiliated
Borrower as well as any material change in such Loan Agreement. In the
case of a Commingled Fund, approval is pursuant to the procedure
described in paragraph (i), below.
(d) The terms of each loan of securities by a Lender to an
Affiliated Borrower are at least as favorable to such Separate Account
or Commingled Fund as those of a comparable arm's length transaction
between unrelated parties.
(e) A Client Plan, in the case of a Separate Account, may terminate
the lending agency or sub-agency arrangement at any time, without
penalty, on five business days notice. A Client Plan in the case of a
Commingled Fund may terminate its participation in the lending
arrangement by terminating its investment in the Commingled Fund no
later than 35 days after the notice of termination of participation is
received, without penalty to the Plan, in accordance with the terms of
the Commingled Fund. Upon termination, the Affiliated Borrowers will
transfer securities identical to the borrowed securities (or the
equivalent thereof in the event of reorganization, recapitalization or
merger of the issuer of the borrowed securities) to the Separate
Account or, if the Plan's withdrawal necessitates a return of
securities, to the Commingled Fund, within:
(1) The customary delivery period for such securities;
(2) Five business days; or
(3) The time negotiated for such delivery by the Client Plan, in a
Separate Account, or by the DB Lending Agent, as lending agent to a
Commingled Fund, and the Affiliated Borrowers, whichever is least.
(f) The Separate Account, Commingled Fund or another custodian
designated to act on behalf of the Client Plan, receives from each
Affiliated Borrower (either by physical delivery, book entry in a
securities depository located in the United States, wire transfer or
similar means) by the close of business on or before the day the loaned
securities are delivered to the Affiliated Borrower, collateral
consisting of U.S. currency, securities issued or guaranteed by the
United States Government or its agencies or instrumentalities,
irrevocable bank letters of credit issued by a U.S. bank, other than DB
(or any subsequent parent corporation of the DB Lending Agent) or an
affiliate thereof, or any combination thereof, or other collateral
permitted under Prohibited Transaction Exemption 81-6 (46 FR 7527,
January 23, 1981) (PTE 81-6) (as it may be amended or superseded)
(collectively, the Collateral). The Collateral will be held on behalf
of a Client Plan in a depository account separate from the Affiliated
Borrower.
(g) The market value (or in the case of a letter of credit, a
stated amount) of the Collateral on the close of business on the day
preceding the day of the loan is initially at least 102 percent of the
market value of the loaned securities. The applicable Loan Agreement
gives the Separate Account or the Commingled Fund in which the Client
Plan has invested a continuing security interest in, and a lien on or
title to, the Collateral. The level of the Collateral is monitored
daily by the DB Lending Agent. If the market value of the Collateral,
on the close of trading on a business day, is less than 100 percent of
the market value of the loaned securities at the close of business on
that day, the Affiliated Borrower is required to deliver, by the close
of business on the next day, sufficient additional Collateral such that
the market value of the Collateral will again equal 102 percent.
(h)(1) For a Lender that is a Separate Account, prior to entering
into a Loan Agreement, the applicable Affiliated Borrower furnishes its
most recently available audited and unaudited statements to the DB
Lending Agent which will, in turn, provide such statements to the
Client Plan before the Client Plan approves the terms of the Loan
Agreement. The Loan Agreement contains a requirement that the
applicable Affiliated Borrower must give prompt notice at the time of a
loan of any material adverse changes in its financial condition since
the date of the most recently furnished financial statements. If any
such changes have taken place, the DB Lending Agent will not make any
further loans to the Affiliated Borrower unless an Independent
Fiduciary of the Client Plan in a Separate Account is provided notice
of any material change and approves the continuation of the lending
arrangement in view of the changed financial condition.
(2) For a Lender that is a Commingled Fund, the DB Lending Agent
will furnish upon reasonable request to an Independent Fiduciary of
each Client Plan invested in the Commingled Fund the most recently
available audited and unaudited financial statements of the applicable
Affiliated Borrower prior to authorization of lending, and annually
thereafter.
(i) In the case of Commingled Funds, the information described in
paragraph (c) (including any information with respect to any material
change in the arrangement) shall be furnished by the DB Lending Agent
as lending fiduciary to the Independent Fiduciary of each Client Plan
whose assets are invested in the Commingled Fund, not less than 30 days
prior to implementation of the arrangement or material change to the
lending arrangement as previously described to the Client Plan, and
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thereafter, upon the reasonable request of the Client Plan's
Independent Fiduciary. In the event of a material adverse change in the
financial condition of an Affiliated Borrower, the DB Lending Agent
will make a decision, using the same standards of credit analysis the
DB Lending Agent would use in evaluating unrelated borrowers, whether
to terminate existing loans and whether to continue making additional
loans to the Affiliated Borrower.
In the event any such Independent Fiduciary submits a notice in
writing within the 30 day period provided in the preceding paragraph to
the DB Lending Agent, as lending fiduciary, objecting to the
implementation of, material change in, or continuation of the
arrangement, the Plan on whose behalf the objection was tendered is
given the opportunity to terminate its investment in the Commingled
Fund, without penalty to the Plan, no later than 35 days after the
notice of withdrawal is received. In the case of a Plan that elects to
withdraw pursuant to the foregoing, such withdrawal shall be effected
prior to the implementation of, or material change in, the arrangement;
but an existing arrangement need not be discontinued by reason of a
Plan electing to withdraw. In the case of a Plan whose assets are
proposed to be invested in the Commingled Fund subsequent to the
implementation of the arrangement, the Plan's investment in the
Commingled Fund shall be authorized in the manner described in
paragraph (c).
(j) In return for lending securities, the Lender either--
(1) Receives a reasonable fee, which is related to the value of the
borrowed securities and the duration of the loan; or
(2) Has the opportunity to derive compensation through the
investment of cash Collateral. (Under such circumstances, the Lender
may pay a loan rebate or similar fee to the Affiliated Borrowers, if
such fee is not greater than the fee the Lender would pay in a
comparable arm's length transaction with an unrelated party.)
(k) Except as otherwise expressly provided herein, all procedures
regarding the securities lending activities will, at a minimum, conform
to the applicable provisions of PTE 81-6 and Prohibited Transaction
Exemption 82-63 (46 FR 14804, April 6, 1982) (PTE 82-63), both as
amended or superseded, as well as to applicable securities laws of the
United States, the United Kingdom, Canada, Australia, Switzerland,
Japan and Germany.
(l) DB agrees to indemnify and hold harmless the Client Plans in
the United States (including the sponsor and fiduciaries of such Client
Plans) for any transactions covered by this exemption with an
Affiliated Borrower so that the Client Plans do not have to litigate
(e.g., in the case of Deutsche Bank AG, London Branch) in a foreign
jurisdiction nor sue to realize on the indemnification. Such
indemnification is against any and all reasonably foreseeable damages,
losses, liabilities, costs and expenses (including attorney's fees)
which the Client Plans may incur or suffer, arising from any
impermissible use by an Affiliated Borrower of the loaned securities,
from an event of default arising from the failure of an Affiliated
Borrower to deliver loaned securities in accordance with the applicable
Loan Agreement or from an Affiliated Borrower's other failure to comply
with the terms of such agreement, except to the extent that such losses
are caused by the Client Plan's own negligence.
If any event of default occurs, to the extent that (i) liquidation
of the pledged Collateral or (ii) additional cash received from the
Affiliated Borrower does not provide sufficient funds on a timely
basis, the DB Lending Agent, as securities lending agent, promptly and
at its own expense (subject to rights of subrogation in the Collateral
and against such Affiliated Borrower) will purchase or cause to be
purchased, for the account of the Client Plan, securities identical to
the borrowed securities (or their equivalent as discussed above). If
the Collateral and any such additional cash is insufficient to
accomplish such purchase, DB, pursuant to the indemnification,
indemnifies the Client Plan invested in a Separate Account or
Commingled Fund for any shortfall in the Collateral plus interest on
such amount and any transaction costs incurred (including attorney's
fees). Alternatively, if such replacement securities cannot be obtained
in the open market, DB pays the Lender the difference in U.S. dollars
between the market value of the loaned securities and the market value
of the related Collateral as determined on the date of the Affiliated
Borrower's breach of the obligation to return the securities pursuant
to the applicable Loan Agreement.
(m) The Lender receives the equivalent of all distributions made to
holders of the borrowed securities during the term of the loan,
including but not limited to all interest and dividends on the loaned
securities, shares of stock as a result of stock splits and rights to
purchase additional securities, or other distributions.
(n) Prior to any Client Plan's approval of the lending of its
securities to any Affiliated Borrower, a copy of the final exemption
(if granted) and this notice of proposed exemption is provided to the
Client Plan.
(o) The Independent Fiduciary of each Client Plan that is invested
in a Separate Account is provided with (including by electronic means)
quarterly reports with respect to the securities lending transactions,
including, but not limited to, the information described in
Representation 24 of the Summary of Facts and Representations, and the
certification of an auditor selected by the DB Lending Agent who is
independent of the DB Lending Agent (but may or may not be independent
of the Client Plan) that the loans appear no less favorable to the
Lender than the pricing established in the schedule described in
Representation 16, so that the Independent Fiduciary may monitor such
transactions with the Affiliated Borrower. The Independent Fiduciary of
a Client Plan invested in a Commingled Fund will receive the auditor's
certification and, upon request, will also receive the quarterly
report.
(p) Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to the
Affiliated Borrowers; provided, however, that--
(1) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization, whose assets are commingled for investment purposes in a
single master trust or any other entity the assets of which are ``plan
assets'' under 29 CFR 2510.3-101 (the Plan Asset Regulation), which
entity is engaged in securities lending arrangement with the DB Lending
Agent, the foregoing $50 million requirement shall be deemed satisfied
if such trust or other entity has aggregate assets which are in excess
of $50 million; provided that if the fiduciary responsible for making
the investment decision on behalf of such master trust or other entity
is not the employer or an affiliate of the employer, such fiduciary has
total assets under its management and control, exclusive of the $50
million threshold amount attributable to plan investment in the
commingled entity, which are in excess of $100 million.
(2) In the case of two or more Client Plans which are not
maintained by the same employer, controlled group of corporations or
employee organization, whose assets are commingled for investment
purposes in a group trust or any other form of entity the assets of
which are ``plan assets'' under the Plan
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Asset Regulation, which entity is engaged in securities lending
arrangements with the DB Lending Agent, the foregoing $50 million
requirement is satisfied if such trust or other entity has aggregate
assets which are in excess of $50 million (excluding the assets of any
Client Plan with respect to which the fiduciary responsible for making
the investment decision on behalf of such group trust or other entity
or any member of the controlled group of corporations including such
fiduciary is the employer maintaining such Plan or an employee
organization whose members are covered by such Plan). However, the
fiduciary responsible for making the investment decision on behalf of
such group trust or other entity--
(A) Has full investment responsibility with respect to plan assets
invested therein; and
(B) Has total assets under its management and control, exclusive of
the $50 million threshold amount attributable to plan investment in the
commingled entity, which are in excess of $100 million.
In addition, none of the entities described above are formed for
the sole purpose of making loans of securities.
(q) With respect to any calendar quarter, at least 50 percent or
more of the outstanding dollar value of securities loans negotiated on
behalf of Lenders will be to borrowers unrelated to the DB Lending
Agent.
(r) In addition to the above, all loans involving foreign
Affiliated Borrowers have the following requirements:
(1) The foreign Affiliated Borrower is a bank, supervised either by
a state or the United States, a broker-dealer registered under the
Securities Exchange Act of 1934 or a bank or broker-dealer that is
supervised by (1) the SFA in the United Kingdom; (2) the BAK in
Germany; (3) the MOF and/or the Tokyo Stock Exchange in Japan; (4) the
Ontario Securities Commission, the Investment Dealers Association and/
or the Office of Superintendent of Financial Institutions in Canada;
(5) the Swiss Federal Banking Commission in Switzerland; and (6) the
Reserve Bank of Australia or the Australian Securities and Investments
Commission and/or Australian Stock Exchange Limited in Australia;
(2) The foreign Affiliated Borrower is in compliance with all
applicable provisions of Rule 15a-6 under the Securities Exchange Act
of 1934 (17 CFR 240.15a-6)(Rule 15a-6) which provides foreign broker-
dealers a limited exemption from United States registration
requirements;
(3) All Collateral is maintained in United States dollars or U.S.
dollar-denominated securities or letters of credit (unless an
applicable exemption provides otherwise);
(4) All Collateral is held in the United States and the situs of
the securities lending agreements is maintained in the United States
under an arrangement that complies with the indicia of ownership
requirements under section 404(b) of the Act and the regulations
promulgated under 29 CFR 2550.404(b)-1 related to the lending of
securities; and
(5) Prior to a transaction involving a foreign Affiliated Borrower,
the foreign Affiliated Borrower--
(A) Agrees to submit to the jurisdiction of the United States;
(B) Agrees to appoint an agent for service of process in the United
States, which may be an affiliate (the Process Agent);
(C) Consents to service of process on the Process Agent; and
(D) Agrees that enforcement by a Client Plan of the indemnity
provided by DB may occur in the United States courts.
(s) The DB Lending Agent maintains, or causes to be maintained,
within the United States for a period of six years from the date of
such transaction, in a manner that is convenient and accessible for
audit and examination, such records as are necessary to enable the
persons described in paragraph (t)(1) to determine whether the
conditions of the 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 the DB Lending
Agent and/or its affiliates, the records are lost or destroyed prior to
the end of the six-year period; and
(2) No party in interest other than the DB Lending Agent or its
affiliates 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 below by paragraph (t)(1).
(t)(1) Except as provided in subparagraph (t)(2) of this paragraph
and notwithstanding any provisions of sections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (s) are
unconditionally available at their customary location for examination
during normal business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission;
(B) Any fiduciary of a participating Client Plan or any duly
authorized representative of such fiduciary;
(C) Any contributing employer to any participating Client Plan or
any duly authorized employee or representative of such employer; and
(D) Any participant or beneficiary of any participating Client
Plan, or any duly authorized representative of such participant or
beneficiary.
(t)(2) None of the persons described above in paragraphs (t)(1)(B)-
(t)(1)(D) are authorized to examine the trade secrets of the DB Lending
Agent or its affiliates or commercial or financial information which is
privileged or confidential.
Section III--Definitions
(a) DB Plan: An ERISA covered employee benefit plan sponsored and
maintained by the DB Lending Agent and/or an affiliate for its own
employees.
(b) Index Fund: Any investment fund, account or portfolio
sponsored, maintained, trusteed or managed by the DB Lending Agent or
an affiliate, 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 Index 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 the DB Lending Agent or its affiliate 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 Plan Asset Regulation; and,
(4) that involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund which is intended to
benefit the DB Lending Agent or its affiliate or any party in which the
DB Lending Agent or its affiliate may have an interest.
(c) Model-Driven Fund: Any investment fund, account or portfolio
sponsored, maintained, trusteed or managed by the DB Lending Agent or
an affiliate, 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 the DB Lending Agent or an affiliate, to
transform an Index;
[[Page 9074]]
(2) which contains ``plan assets'' subject to the Act, pursuant to
the Department's Plan Asset Regulation; 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 the DB Lending
Agent, any affiliate of the DB Lending Agent, or any party in which the
DB Lending Agent or any affiliate may have an interest.
(d) Index: 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;
(2) the index is created and maintained by an organization
independent of DB; and
(3) the index is a generally accepted standardized index of
securities which is not specifically tailored for the use of the DB
Lending Agent or an affiliate.
Summary of Facts and Representations
1. Deutsche Bank AG (hereafter referred to as either ``DB'' or
``the Applicant'') is a German banking corporation. DB is a leading
commercial bank which provides a wide range of banking, fiduciary,
record-keeping, custodial, brokerage and investment services to
corporations, institutions, governments, employee benefit plans,
governmental retirement plans and private investors worldwide. DB is
one of the largest financial institutions in the world in terms of
assets. As of calendar year 2001, total assets of DB were 928,994
million Euros. Shareholders equity equaled 43,683 million Euros. DB
manages over $585 billion in assets either through collective trusts,
separately managed accounts or mutual funds.
Outside the United States, DB, as a whole, is not supervised by a
state or by the United States. However, DB is regulated and supervised
globally by the BAK in cooperation with the Deutsche Bundesbank (the
``Bundesbank'').\5\ The BAK is a federal institution with ultimate
responsibility to the German Ministry of Finance. The Bundesbank is the
central bank of the Federal Republic of Germany and an integral part of
the European Central Banks. The BAK supervises the operations of banks,
banking groups, financial holding groups and foreign bank branches in
Germany, and has the authority to (a) issue and withdraw banking
licenses, (b) issue regulations on capital and liquidity requirements
of banks, (c) request information and conduct investigations, and (d)
intervene in cases of inadequate capital or liquidity endangered
deposits, or bankruptcy by temporarily prohibiting certain banking
transactions. The BAK ensures that DB has procedures for monitoring and
controlling its worldwide activities through various statutory and
regulatory standards. Among these standards are requirements for
adequate internal controls, oversight, administration, and financial
resources. The BAK reviews compliance with these operational and
internal control standards through an annual audit performed by the
year-end auditor and through special audits ordered by the BAK. The
supervisory authorities require information on the condition of DB and
its branches through periodic, consolidated financial reports and
through a mandatory annual report prepared by the auditor. The
supervisory authorities also require information from DB regarding
capital adequacy, country risk exposure, and foreign exchange (FX)
exposures. German banking law mandates penalties to ensure correct
reporting to the supervisory authorities, and auditors face penalties
for gross violations of their duties.
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\5\ In addition, Deutsche Bank AG, New York Branch, is regulated
and supervised by the New York State Banking Department. Certain
activities of Deutsche Bank's New York branch are also regulated and
supervised by the Federal Reserve Bank of New York. Bankers Trust
Company, an indirect wholly-owned subsidiary of DB, is a New York
State bank and a member of the Federal Reserve System.
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Additionally, the BAK in cooperation with the Bundesbank supervises
all branches of DB, wherever located, subjecting them to announced and
unannounced on-site audits, and all other supervisory controls
applicable to German banks. With respect to branches located in the
European Economic Area (``EEA'') member states,\6\ such audits are
carried out consistent with the applicable European Directives, and
with respect to branches outside the EEA, consistent with applicable
international agreements, memoranda of understanding, or other
arrangements with the relevant foreign supervisory authorities.\7\
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\6\ DB's branches domiciled outside the EEA are also subject to
local regulation and supervision by the host country's supervisory
authority, e.g., the MOF in Japan, the Swiss Federal Banking
Commission in Switzerland, the Australian Prudential Regulation
Authority in Australia, and the Office of the Superintendent of
Financial Institutions in Canada. For DB's branches domiciled in EEA
member states, the BAK is the lead supervisory authority pursuant to
the rules on the ``European passport,'' and only some aspects are
subject to complementary supervision by the host country's
supervisory authority (e.g., the Securities and Futures Authority in
the United Kingdom supervises the conduct of the investment business
of DB in the United Kingdom).
\7\ As a result of meetings between the U.S. and German
Regulators in October 1993, the U.S. Department of Treasury has
accorded national treatment to German bank branches, and the German
Ministry of Finance has granted relief to branches of U.S. banks in
Germany, in particular with respect to ``dotation'' or endowment
capital requirements and capital adequacy standards. Since the
German Banking Act (s. 53c) allows such exemptions only insofar as
branches of German companies are afforded equal exemptions in the
foreign state, this confirms indirectly the recognition of the
German banking supervisory standards by the U.S. regulators. Thus,
with respect to capital adequacy, each government has agreed to
accept the capital adequacy requirements of the other for foreign
banks doing business in the other's jurisdiction.
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DB's subsidiaries that pursue banking and other financial
activities (other than insurance) or activities that are closely
related thereto are consolidated with DB and form a ``banking group''
for purposes of the capital ratios and the large exposure limits that
the bank is required to meet also on a group-wide basis. In conformity
the European Directives,\8\ the BAK supervises such banking groups
(where their parent institution is domiciled in Germany) on a
consolidated basis. While oversight is less individualized for
subsidiaries than for branches, the supervision extends to adequacy of
equity capital of banking and financial holding groups and compliance
with the regulations regarding large loans granted by such groups.
Thus, DB is subject to comprehensive supervision and regulation on a
consolidated basis by its home country supervisor.\9\
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\8\ See, e.g., Council Directive 92/30/EEC of 6 April 1992 on
the supervision of credit institutions on a consolidated basis,
Council Directive 92/121/EEC of 21 December 1992 on the monitoring
and control of large exposures of credit.
\9\ This is also the conclusion reached by the Board of
Governors of the Federal Reserve System in its Order approving DB's
application to become a bank holding company, effective May 20,
1999.
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Bankers Trust Company, a wholly-owned subsidiary of DB, is a New
York banking corporation and a leading commercial bank, providing a
wide range of banking and related services to various entities,
including employee benefit plans and other institutional investors.
Bankers Trust Company, and other affiliates or branches of the
Applicant, advise various portfolios subject to ERISA that are invested
in
[[Page 9075]]
certain Index or Model-Driven Funds (collectively, Indexed Accounts)
that are, respectively, designed to either track or transform an
independently maintained securities index. Currently, securities in
those portfolios may be lent to banks and broker-dealers that are not
DB affiliates through the DB securities lending program.\10\
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\10\ In this regard, the Department granted a class exemption
known as Prohibited Transaction Exemption (PTE) 81-6 (46 FR 7527,
January 23, 1981; as amended at 52 FR 18754, May 19, 1987) to
provide relief from section 406(a) of the Act for loans of
securities to borrowers who are not affiliated with the entity that
is the investment manager of the affected plan or that provides
investment advice for the plan with respect to the assets being
loaned. PTE 81-6 does not provide relief for loans to any entities
that are affiliates of the plans' lending agent. The Department also
granted certain individual exemptions, known as PTE 98-23 (63 FR
29435, May 29, 1998)) and PTE 99-50 (65 FR 534, January 5, 2000), to
provide relief for loans to certain affiliates of DB, but not in
connection with loans of securities over which DB or an affiliate
has investment discretion (e.g., assets held in the Indexed
Accounts).
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2. The Applicant seeks an exemption to permit it, through its
branches and affiliates (including bank subsidiaries and affiliated
broker-dealers) in the United States, Canada, Japan, Switzerland,
Australia, Germany and the United Kingdom (i.e., Affiliated Borrowers)
to borrow securities from Indexed Accounts under the conditions
described herein. For purposes of this proposed exemption, an
Affiliated Borrower will be any bank, as defined in section 202(a)(2)
of the Investment Advisers Act of 1940, that is supervised by the U.S.
or state, any broker-dealer registered under the Securities Exchange
Act of 1934 (the ``1934 Act''), or any foreign affiliate of Bankers
Trust Company that is a bank or broker-dealer that is supervised by (1)
the SFA in the United Kingdom; (2) the BAK in Germany; (3) the MOF and/
or the Tokyo Stock Exchange in Japan; (4) the Ontario Securities
Commission, the Investment Dealers Association and/or the Office of
Superintendent of Financial Institutions in Canada; (5) the Swiss
Federal Banking Commission in Switzerland; and (6) the Reserve Bank of
Australia or the Australian Securities and Investments Commission and/
or Australian Stock Exchange Limited in Australia (i.e., the Foreign
Affiliates).
Branches and/or affiliates in the enumerated countries include:
Deutsche Bank AG, London Branch; Deutsche Securities Limited, Tokyo
Branch, Japan Bankers Trust, Ltd. and Deutsche Bank AG, Tokyo Branch;
DB in Germany; Deutsche Bank AG, Sydney Branch; Deutsche Bank Canada
and Deutsche Bank Securities Limited; and Deutsche Bank (Suisse) S.A.
The Applicant and its affiliates actively engage in the borrowing and
lending of securities, with daily outstanding loan volume averaging
billions of dollars. The Affiliated Borrowers utilize borrowed
securities to satisfy their trading requirements or to re-lend to other
broker-dealers and others who need a particular security for various
periods of time.
The Applicant currently offers through various affiliates,
including Bankers Trust Company, more than 20 collective investment
funds that are invested according to the criteria of various third-
party indexes or are model-driven based on such indexes (i.e., Index or
Model-Driven Funds). For example, some funds track the Russell 2000
Index, while other funds track the Standard & Poor's 500 Composite
Stock Price Index (the S&P 500 Index). The Index or Model-Driven Funds
pertinent to this requested exemption track, among others, indices of
foreign securities such as the MSCI EAFE, the DAX or the Kokosai
Index.\11\ Most of the Funds track stock indexes, although some Funds
track indexes of debt securities, such as the Lehman Brothers Bond
Indexes.\12\
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\11\ Morgan Stanley maintains the MSCI (``Morgan Stanley
Composite Index'') EAFE and Kokosai indexes. The DAX (Deutsche
Aktienindex) is maintained by the Deutsche Boerse, a German stock
exchange.
\12\ The indexes of debt securities used for the Funds, such as
the Lehman Brothers Bond Index, consist primarily of high-quality
fixed-income securities representing the U.S. government, corporate,
and mortgage-backed securities sectors of the bond market in the
U.S. The Applicant currently has several debt Index Funds.
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In addition to Index or Model-Driven Funds that are collective
investment funds, DB or an affiliate may have investment responsibility
for individual investment funds which are separate portfolios for
various client accounts, including employee benefit plans, where the
portfolio is invested in accordance with a third-party index or a model
based on that index. Such separately managed accounts and collective
investment funds are also referred to herein as Indexed Accounts.
3. The securities lending transactions that would be covered by
this proposed exemption will be initiated for an Indexed Account, as a
Lender described herein, by a DB Lending Agent, following disclosure to
the Client Plans of the borrower's affiliation with the DB Lending
Agent.
The Applicant represents that the DB Plans will only use the
exemption to the extent that the DB Plan is invested in a Commingled
Fund with respect to which, at all times, the holdings of all DB Plans
in the aggregate comprise less than 10% of the assets of the Commingled
Fund. No DB Plan Separate Accounts will participate.
The Applicant represents that at all times, the DB Lending Agent
will effect loans in a prudent and diversified manner. While the DB
Lending Agent will normally lend securities to requesting borrowers on
a ``first come, first served'' basis, as a means of assuring uniformity
of treatment among borrowers, the Applicant represents that in some
cases it may not be possible to adhere to a ``first come, first
served'' allocation. This can occur, for instance, where (a) the credit
limit established for such borrower by the DB Lending Agent and/or the
Client Plan has already been satisfied; (b) the ``first in line''
borrower is not approved as an Affiliated Borrower by the particular
Lender whose securities are sought to be borrowed; (c) the borrower and
the DB Lending Agent have negotiated rates more advantageous to the
Lender than the rates other borrowers have offered; or (d) the ``first
in line'' borrower cannot be ascertained, as an operational matter,
because several borrowers spoke to different DB Lending Agent
representatives at or about the same time with respect to the same
security. In situations (a) and (b) above, loans would normally be
effected with the ``second in line.'' In situation (c) above, this may
mean that the ``first in line'' borrower receives the next lending
opportunity. In situation (d) above, securities would be allocated
equitably among all eligible borrowers.
4. Except as described herein in connection with Index and Model-
Driven Funds managed by the DB Lending Agent, the Applicant represents
that neither the DB Lending Agent nor any affiliate will have
discretionary authority or control with regard to the investment of the
assets of Client Plans involved in the transaction or will render
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to such assets, including decisions regarding a Client Plan's
acquisition or disposition of securities available for loan.
The plan assets for which the DB Lending Agent, to a limited
extent, exercises discretionary authority or control or renders
investment advice and which will be available for lending to the
Affiliated Borrowers will be limited to those invested in Index and
Model-Driven Funds. All procedures for lending securities will be
designed to comply with the applicable conditions
[[Page 9076]]
of PTE 81-6 \13\ and PTE 82-63,\14\ as amended or superseded, except as
described herein.
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\13\ As noted earlier, PTE 81-6 provides an exemption under
certain conditions from section 406(a)(1)(A) through (D) of the Act
and the corresponding provisions of section 4975(c)(1) of the Code
for the lending of securities that are assets of an employee benefit
plan to a U.S. broker-dealer registered under the 1934 Act (or
exempted from registration under the 1934 Act as a dealer in exempt
Government securities, as defined therein), or to a bank.
\14\ PTE 82-63 provides an exemption under certain conditions
from section 406(b)(1) of the Act and section 4975(c)(1)(E) of the
Code for the payment of compensation to a plan fiduciary for
services rendered in connection with loans of plan assets that are
securities. PTE 82-63 permits the payment of compensation to a plan
fiduciary for the provision of securities lending services only if
the loan of securities itself is not prohibited under section 406(a)
of the Act.
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5. The Applicant represents that any arrangement for the DB Lending
Agent to lend securities will be approved in advance by a Plan
fiduciary who is independent of the DB Lending Agent. In addition, the
Client Plan will acknowledge the relationship between the DB Lending
Agent and the Affiliated Borrowers. However, all conditions described
herein that require an independent Plan fiduciary will not, in the case
of a DB Plan, require that the fiduciary be independent of the DB
Lending Agent or the Affiliated Borrower.
6. When acting as a direct securities lending agent, the DB Lending
Agent, pursuant to authorization from its client, will negotiate the
terms of loans to Affiliated Borrowers and otherwise act as a liaison
between the Lender (and its custodian) and the Affiliated Borrower. As
lending agent, the DB Lending Agent will have the responsibility for
monitoring receipt of all collateral required, marking such collateral
to market daily to ensure adequate levels of collateral can be
maintained, monitoring and evaluating the performance and
creditworthiness of borrowers, and, if authorized by a client, holding
and investing cash collateral pursuant to given investment guidelines.
The DB Lending Agent may also act as trustee, custodian and/or
investment manager for the Client Plan.
The DB Lending Agent, as securities lending agent for the Lenders,
will negotiate a master securities borrowing agreement with a schedule
of modifications attached thereto (Loan Agreement) with the Affiliated
Borrowers, as is the case with all borrowers. The Loan Agreement will
specify, among other things, the right of the Lender to terminate a
loan at any time and the Lender's rights in the event of any default by
the Affiliated Borrowers. The Loan Agreement will set forth the basis
for compensation to the Lender for lending securities to the Affiliated
Borrowers under each category of collateral. The Loan Agreement will
also contain a requirement that the Affiliated Borrowers must pay all
transfer fees and transfer taxes related to the securities loans.
7. With respect to Lenders who are Separate Accounts, as direct
lending agent, the DB Lending Agent will, prior to lending the Client
Plan's securities, enter into an agreement (Client Agreement) with the
Client Plan, signed by a fiduciary of the Client Plan who is
independent of the DB Lending Agent and the Affiliated Borrowers. The
Client Agreement will, among other things, describe the operation of
the lending program, disclose the form of the securities loan agreement
to be entered into on behalf of the Client Plan with borrowers,
identify the securities which are available to be lent, and identify
the required collateral and the required daily marking-to-market. The
Client Agreement will also set forth the basis and rate of the DB
Lending Agent's compensation for the performance of securities lending
and cash collateral investment services. The Client Plan may terminate
the Client Agreement at any time, without penalty, on no more than five
business days notice.
The Client Agreement will contain provisions to the effect that if
any Affiliated Borrower is designated by the Client Plan as an approved
borrower, the Client Plan will acknowledge the relationship between the
Affiliated Borrower and the DB Lending Agent. The DB Lending Agent will
represent to the Client Plan that each and every loan made to the
Affiliated Borrower on behalf of the Client Plan will be effected at
arm's length terms, and such terms will be in no case less favorable to
the Client Plan than the pricing established according to the schedule
described in paragraph 16.
8. When the DB Lending Agent is lending agent with respect to a
Commingled Fund, the DB Lending Agent will, prior to the investment of
a Client Plan's assets in such Commingled Fund, obtain from the Client
Plan authorization to lend any securities held by the Commingled Fund
to brokers and other approved borrowers, including the Affiliated
Borrowers. Prior to obtaining such approval, the DB Lending Agent will
provide a written description of the operation of the lending program
(including the basis and rate of the DB Lending Agent's compensation
for the performance of securities lending and cash collateral
investment services), disclose the form of the securities loan
agreement to be entered into on behalf of the Commingled Fund with the
borrowers, identify the securities which are available to be lent, and
identify the required collateral and the required daily marking-to-
market.\15\ If the Client Plan objects to the arrangement, it will be
permitted to withdraw from the Commingled Fund, without penalty, no
later than 35 days after the notice of withdrawal is received.
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\15\ The DB Lending Agent may make transmittals required by the
exemption to Plan fiduciaries via authorized recordkeepers. The DB
Lending Agent represents that all decisions reserved to fiduciaries
under the terms of the exemption will be made by the fiduciaries and
never by the recordkeeper on behalf of the fiduciary.
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In addition, the Client Plan will acknowledge the relationship
between the DB Lending Agent and the Affiliated Borrowers, and the DB
Lending Agent will represent that each and every loan made to the
Affiliated Borrowers by the Commingled Fund will be effected at arm's
length terms, and such terms will be in no case less favorable to the
Client Plan than the pricing established according to the schedule
described in paragraph 16.
9. When the DB Lending Agent is lending securities under a sub-
agency arrangement, before the Plan participates in the securities
lending program, the primary lending agent will enter into a securities
lending agency agreement (Primary Lending Agreement) with a fiduciary
of the Client Plan who is independent of such primary lending agent,
the DB Lending Agent, and the Affiliated Borrowers. The primary lending
agent also will be unrelated to the DB Lending Agent and the Affiliated
Borrowers. The Primary Lending Agreement will contain provisions
substantially similar to those in the Client Agreement relating to: the
description of the lending program, use of an approved form of
securities loan agreement, specification of the securities to be lent,
specification of the required collateral margin and the requirement of
daily marking-to-market, and provision of a list of approved borrowers
(which will include one or more of the Affiliated Borrowers). The
Primary Lending Agreement will specifically authorize the primary
lending agent to appoint sub-agents (including the DB Lending Agent) to
facilitate performance of securities lending agency functions. The
Primary Lending Agreement will expressly disclose that the DB Lending
Agent is to
[[Page 9077]]
act in a sub-agency capacity. The Primary Lending Agreement will also
set forth the basis and rate for the primary lending agent's
compensation from the Client Plan for the performance of securities
lending services and will authorize the primary lending agent to pay a
portion of its fee, as the primary lending agent determines in its sole
discretion, to any sub-agent(s) it retains (including the DB Lending
Agent) pursuant to the authority granted under such agreement.
Pursuant to its authority to appoint sub-agents, the primary
lending agent will enter into a securities lending sub-agency agreement
(Sub-Agency Agreement) with the DB Lending Agent under which the
primary lending agent will retain and authorize the DB Lending Agent,
as sub-agent, to lend securities of the primary lending agent's Client
Plans, subject to the same terms and conditions specified in the
Primary Lending Agreement. The DB Lending Agent represents that the
Sub-Agency Agreement will contain provisions that are in substance
comparable to those described above in connection with a Client
Agreement in situations where the DB Lending Agent is the primary
lending agent. The DB Lending Agent will make in the Sub-Agency
Agreement the same representations described above in paragraph 7 with
respect to arm's length dealing with the Affiliated Borrowers. The Sub-
Agency Agreement will also set forth the basis and rate for the DB
Lending Agent's compensation to be paid by the primary lending agent.
10. In all cases, the DB Lending Agent will maintain transactional
and market records sufficient to assure compliance with its
representation that all loans to the Affiliated Borrowers are effected
at arm's length terms, and in no case less favorable to the Client Plan
than the pricing established according to the schedule described in
paragraph 16. Such records will be made available upon reasonable
request and without charge to the Client Plan fiduciary, who (other
than in the case of a DB Plan) is independent of the DB Lending Agent
and the Affiliated Borrowers, in the manner and format agreed to by the
Client Plan fiduciary and the DB Lending Agent.
11. A Lender, in the case of a Separate Account, will be permitted
to terminate the lending agency or sub-agency arrangement at any time
without penalty, on five business days notice. A Client Plan in the
case of a Commingled Fund will be permitted to terminate its
participation in the lending arrangement by terminating its investment
in the Commingled Fund no later than 35 days after the notice of
termination of participation is received, without penalty to the Plan,
in accordance with the terms of the Commingled Fund. Upon a
termination, the Affiliated Borrower will be contractually obligated to
return securities identical to the borrowed securities (or the
equivalent thereof in the event of reorganization, recapitalization or
merger of the issuer of the borrowed securities) to the Lender within
one of the following time periods, whichever is least: the customary
delivery period for such securities, five business days of written
notification of termination, or the time negotiated for such delivery
by the Client Plan, in a Separate Account, or by the DB Lending Agent,
as lending agent to a Commingled Fund, and the Affiliated Borrowers.
Because the securities must be returned before the end of the
customary delivery period for sale of those securities, the DB Lending
Agent need not wait to sell the securities as long as it has the
contractual assurance that they will be returned before settlement.
Consequently, the lending has no impact on the investment decision to
sell or its implementation and, therefore, no effect on tracking error
vis-a-vis the relevant index.
12. The Lender, or another custodian designated to act on its
behalf, will receive collateral from each Affiliated Borrower by
physical delivery, book entry in a U.S. securities depository, wire
transfer or similar means by the close of business on or before the day
the loaned securities are delivered to the Affiliated Borrower. All
collateral will be received by the Lender or other custodian in the
United States. The collateral will consist of U.S. currency, securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or irrevocable bank letters of credit issued by a
U.S. bank other than DB (or any subsequent parent corporation of the DB
Lending Agent) or an affiliate thereof, or any combination thereof, or
other collateral permitted under PTE 81-6 (as amended or superseded).
The collateral will be held on behalf of a Client Plan in a depository
account separate from the Affiliated Borrower.
The market value (or, in the case of a letter of credit, a stated
amount) of the collateral on the close of business on the day preceding
the day of the loan will be at least 102 percent of the market value of
the loaned securities. The Loan Agreement will give the Lender a
continuing security interest in and a lien on or title to the
collateral. The DB Lending Agent will monitor the level of the
collateral daily. If the market value of the collateral, on the close
of trading on a business day, is less than 100 percent (or such greater
percentage as agreed to by the parties) of the market value of the
loaned securities at the close of business on that day, the DB Lending
Agent will require the Affiliated Borrowers to deliver by the close of
business on the next day sufficient additional collateral to bring the
level back to at least 102 percent.
13. Prior to making any loans under the Loan Agreement from
Separate Accounts, the Affiliated Borrowers will furnish their most
recent available audited and unaudited financial statements to the DB
Lending Agent, which will provide such statements to the Client Plan
invested in such Separate Account before the authorizing fiduciary of
the Client Plan is asked to approve the proposed lending to the
Affiliated Borrowers. The terms of the Loan Agreement will contain a
requirement that the Affiliated Borrowers must give prompt notice to
the DB Lending Agent at the time of any loan of any material adverse
change in their financial condition since the date of the most recently
furnished financial statements. If any such material adverse change has
taken place, the DB Lending Agent will request that the independent
fiduciary of the Client Plan, if invested in a Separate Account,
approve continuation of the lending arrangement in view of the changed
financial conditions.
In addition, upon request, the DB Lending Agent will provide the
audited financial statements of the applicable Affiliated Borrowers to
Client Plans invested in Commingled Funds on an annual basis.
14. In the case of Client Plans currently invested in Commingled
Funds, approval of lending to the Affiliated Borrowers will be
accomplished by the following special procedure for Commingled Funds.
The information described in paragraph 8 will be furnished by the DB
Lending Agent as lending fiduciary to an independent fiduciary of each
Client Plan invested in Commingled Funds not less than 30 days prior to
implementation of the lending arrangement, and thereafter, upon the
reasonable request of the authorizing fiduciary. In the event any such
authorizing fiduciary submits a notice in writing within the 30-day
period to the DB Lending Agent, in its capacity as the lending
fiduciary, objecting to the implementation of or continuation of the
lending arrangement with the Affiliated Borrowers, the Plan on whose
behalf the objection was tendered will be given the opportunity to
terminate its investment in the Commingled Fund,
[[Page 9078]]
without penalty to the Plan, no later than 35 days after the notice of
withdrawal is received. In the case of a Plan that elects to withdraw
pursuant to the foregoing, such withdrawal shall be effected prior to
the implementation of the arrangement; but an existing arrangement need
not be discontinued by reason of a Plan electing to withdraw. In the
case of a Plan whose assets are proposed to be invested in a Commingled
Fund subsequent to the implementation of the arrangement, the Plan's
investment in the Commingled Fund shall be authorized in the manner
described in paragraph 8.
In the case of loans made by Commingled Funds, upon notice by the
Affiliated Borrower to the DB Lending Agent of a material adverse
change in its financial conditions, the DB Lending Agent will make a
decision whether to terminate existing loans and whether to continue
making additional loans to the Affiliated Borrower, using the same
standards of credit analysis the DB Lending Agent would use in
evaluating unrelated borrowers. In the event the Plan invested in a
Commingled Fund has any objection to the continuation of lending to an
Affiliated Borrower, it may withdraw from the fund as described above.
15. With respect to material changes in the lending arrangement
with the Affiliated Borrowers after approval by Client Plans, the DB
Lending Agent will obtain approval from Client Plans (whether in
Separate Accounts or Commingled Funds) prior to implementation of any
such change. For those Client Plans invested in Commingled Funds,
approval of the proposed material change will be by the procedure
described in paragraph 14.
16. In return for lending securities, the Lender either will
receive a reasonable fee which is related to the value of the borrowed
securities and the duration of the loan, or will have the opportunity
to derive compensation through the investment of cash collateral. Under
such circumstances, the Lender may pay a loan rebate or similar fee to
the Affiliated Borrowers, if such fee is not greater than the fee the
Lender would pay in a comparable arm's length transaction with an
unrelated party.
In this regard, each time a Lender loans securities to an
Affiliated Borrower pursuant to the Loan Agreement, the DB Lending
Agent will reflect in its records the material terms of the loan,
including the securities to be loaned, the required level of
collateral, and the fee or rebate payable. The fee or rebate payable
for each loan will be effected at arm's-length terms, and such terms
will be in no case less favorable to the Client Plan than the pricing
established according to the schedule described below. The rebate
rates, which are established for cash collateralized loans made by the
Lender, will take into account the potential demand for the loaned
securities, the applicable benchmark cost of funds (typically the U.S.
Federal Funds rate established by the Federal Reserve System), the
overnight ``repo'' rate, or the like and the anticipated investment
returns on the investment of cash collateral. Further, the lending fees
with respect to loans collateralized by other than cash will be set
daily to reflect conditions as influenced by potential market demand.
The Applicant represents that the securities lending agent fee paid to
the DB Lending Agent will comply with the requirements of PTE 82-63.
The DB Lending Agent will establish each day a written schedule of
lending fees \16\ and rebate rates \17\ with respect to new loans of
designated classes of securities, such as U.S. Government securities,
U.S. equities and corporate bonds, international fixed income
securities and non-U.S. equities, in order to assure uniformity of
treatment among borrowers and to limit the discretion the DB Lending
Agent would have in negotiating securities loans to Affiliated
Borrowers. Loans to all borrowers of a given security on that day will
be made at rates or lending fees on the relevant daily schedules or at
rates or lending fees which are more advantageous to the Lenders. The
Applicant represents that in no case will loans be made to Affiliated
Borrowers at rates or lending fees that are less advantageous to the
Lenders than those on the relevant schedules. In addition, it is
represented that the method of determining the daily securities lending
rates (fees and rebates) will be disclosed to each Client Plan, whether
in Separate Accounts or Commingled Funds. For those Client Plans
invested in Commingled Funds, disclosure will be by the special
procedure described in paragraph 14.
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\16\ The DB Lending Agent will adopt minimum daily lending fees
for non-cash collateral payable by Affiliated Borrowers to the DB
Lending Agent on behalf of a Lender. Separate minimum daily lending
fees will be established with respect to loans of designated classes
of securities. With respect to each designated class of securities,
the minimum lending fee will be stated as a percentage of the
principal value of the loaned securities. The DB Lending Agent will
submit the method for determining such minimum daily lending fees to
an authorizing fiduciary of the Client Plan, in the case of a
Separate Account, for approval before initially lending any
securities to Affiliated Borrowers on behalf of such Client Plan.
The DB Lending Agent will submit the method for determining such
minimum daily lending fees to an authorizing fiduciary of each
Client Plan involved in or planning to invest in a Commingled Fund
pursuant to the procedure described in paragraph 14, above.
\17\ Separate maximum daily rebate rates will be established
with respect to loans of securities within the designated classes
identified above. Such rebate rates will be based upon an objective
methodology which takes into account several factors, including
potential demand for loaned securities, the applicable benchmark
cost of fund indices, and anticipated investment return on overnight
investments permitted by the Client Plan's independent fiduciary.
The DB Lending Agent will submit the method for determining such
maximum daily rebate rates to such fiduciary before initially
lending any securities to an Affiliated Borrower on behalf of the
Client Plan.
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17. When a loan of securities by a Lender is collateralized with
cash, the DB Lending Agent will transfer such cash to the trust or
other investment vehicle for investment that the Client Plan has
authorized, and will rebate a portion of the earnings on such
collateral to the appropriate Affiliated Borrower as agreed to in the
securities lending agreement between Lender and the Borrower. The DB
Lending Agent will share with the Client Plan the income earned on the
investment of cash collateral for the DB Lending Agent's provision of
lending services, which will reduce the income earned by the Client
Plans (whether in a Commingled Fund or Separate Account) from the
lending of securities. The DB Lending Agent may receive a separate
management fee for providing cash collateral investment services. Where
collateral other than cash is used, the Affiliated Borrower will pay a
fee to the Lender based on the value of the loaned securities. These
fees will also be shared between the Client Plans (whether in a
Commingled Fund or Separate Account) and the DB Lending Agent. Any
income or fees shared will be net of cash collateral management fees
and borrower rebate fees. The sharing of income and fees will be in
accordance with the arrangements authorized by the Client Plan in
advance of commencement of the lending program.
An authorizing fiduciary of the Client Plan also may authorize the
DB Lending Agent to act as investment manager, custodian, and/or
directed trustee of the Client Plan's Index or Model-Driven portfolio
of securities available for lending whether in a Separate Account or
Commingled Fund, and to receive a reasonable fee for such services.
18. The DB Lending Agent will negotiate rebate rates for cash
collateral payable to each borrower, including Affiliated Borrowers, on
behalf of a Lender. The fees or rebate rates negotiated will be
effected at arm's length terms, and in no case will be less favorable
to the Client Plan than the
[[Page 9079]]
pricing established according to the schedule described in paragraph
16.
With respect to any loan to an Affiliated Borrower, the DB Lending
Agent, at the inception of such loan, will not negotiate and agree to a
rebate rate with respect to such loan which it expects would produce a
zero or negative return to the Lender over the life of the loan
(assuming no default on the investments made by the DB Lending Agent
where it has investment discretion over the cash collateral or on
investments expected to be made by the Client Plan's designee, where
the DB Lending Agent does not have investment discretion over cash
collateral).
19. The DB Lending Agent may, depending on market conditions,
reduce the lending fee or increase the rebate rate on any outstanding
loan to an Affiliated Borrower, or any other borrower. Except in the
case of a change resulting from a change in the value of any third
party independent index with respect to which the fee or rebate is
calculated, such reduction in lending fee or increase in rebate shall
not establish a lending fee below the minimum or a rebate above the
maximum set in the schedule of fees and rebates described in paragraph
16. If the DB Lending Agent reduces the lending fee or increases the
rebate rate on any outstanding loan from a Separate Account to an
Affiliated Borrower (except in the case of a change resulting from a
change in the value of any third party independent index with respect
to which the fee or rebate is calculated), the DB Lending Agent, by the
close of business on the date of such adjustment, will provide the
independent fiduciary of the Client Plan invested in the Separate
Account with notice (including by electronic means) that it has reduced
such fee or increased the rebate rate to such Affiliated Borrower and
that the Client Plan may terminate such loan at any time.
20. Except as otherwise expressly provided in the exemption, the
Applicant represents that all procedures regarding the securities
lending activities will, at a minimum, conform to the applicable
provisions of PTE 81-6 and PTE 82-63, both as amended or superseded, as
well as to applicable securities laws of the United States and the
United Kingdom.
21. DB agrees to indemnify and hold harmless the Client Plans in
the United States (including the sponsor and fiduciaries of such Client
Plans) for any transactions covered by this exemption with the
Affiliated Borrower so that the Lender does not have to litigate, in
the case of a foreign Affiliated Borrower, in a foreign jurisdiction,
nor sue to realize on the indemnification. Such indemnification will be
against any and all reasonably foreseeable losses, costs and expenses
(including attorneys fees) which the Lender may incur or suffer arising
from any impermissible use by an Affiliated Borrower of the loaned
securities, from an event of default arising from the failure of an
Affiliated Borrower to deliver loaned securities when due in accordance
with the provisions of the Loan Agreement or from an Affiliated
Borrower's other failure to comply with the terms of the Loan
Agreement, except to the extent that such losses are caused by the
Client Plan's own negligence. The applicable Affiliated Borrower will
also be liable to the Lender for breach of contract for any failure by
such Borrower to deliver loaned securities when due or to otherwise
comply with the terms of the Loan Agreement.
If any event of default occurs to the extent that (i) liquidation
of the pledged collateral or (ii) additional cash received from the
Affiliated Borrower does not provide sufficient funds on a timely
basis, the DB Lending Agent, as securities lending agent, promptly and
at its own expense, shall purchase or cause to be purchased for the
account of the Lender, securities identical to the borrowed securities
(or their equivalent). If the collateral and any such additional cash
is insufficient to accomplish such purchase, DB, pursuant to the
indemnification, will indemnify the Lender for any shortfall in the
collateral plus interest on such amount and any transaction costs
incurred (including attorneys' fees). Alternatively, if such
replacement securities cannot be obtained in the open market, DB will
pay the Lender the difference in U.S. dollars between the market value
of the loaned securities and the market value of the related collateral
as determined on the date of the Affiliated Borrower's breach of the
obligation to return the securities pursuant to the applicable Loan
Agreement.
The ``market value'' of any securities listed on a national
securities exchange in the United States will be the last sales price
on such exchange on the preceding business day or, if there is no sale
on that day, the last sale price on the next preceding business day on
which there is a sale on such exchange, as quoted on the consolidated
tape. If the principal market for securities to be valued is the over-
the-counter market, the securities' market value will be the closing
sale price as quoted on the National Association of Securities Dealers
Automated Quotation System (NASDAQ) on the preceding business day or
the opening price on such business day if the securities are issues for
which last sale prices are not quoted on NASDAQ. If the securities to
be valued are not quoted on NASDAQ, their market value shall be the
highest bid quotation appearing in The Wall Street Journal, National
Quotation Bureau pink sheets, Salomon Brothers quotation sheets,
quotation sheets of registered market makers and, if necessary,
independent dealers' telephone quotations on the preceding business
day. (In each case, if the relevant quotation does not exist on such
day, then the relevant quotation on the next preceding business day in
which there is such a quotation would be the market value.)
22. The Lender will be entitled to receive the equivalent of all
distributions made to holders of the borrowed securities during the
term of the loan, including but not limited to, interest and dividends,
shares of stock as a result of a stock split and rights to purchase
additional securities, or other distributions during the loan
period.\18\
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\18\ The Applicant represents that dividends and other
distributions on foreign securities payable to a Lender may be
subject to foreign tax withholdings. Under these circumstances, the
applicable Affiliated Borrower, where necessary, will gross-up the
in-lieu-of-payment (in respect of such dividend or distribution it
makes) to the Lender so that the Lender will receive back what it
otherwise would have received (by way of dividend or distribution)
had it not loaned the securities.
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23. Further, prior to a Client Plan's authorization of a securities
lending program, the DB Lending Agent will provide a Plan fiduciary
with copies of the final exemption (if granted) and this notice of
proposed exemption.
24. In order to provide the means for monitoring lending activity
in Separate Accounts and Commingled Funds, a quarterly report will be
provided to an auditor selected by the DB Lending Agent who is
independent of the DB Lending Agent (but may or may not be independent
of the Client Plan). This report will show the fees or rebates (as
applicable) on loans to Affiliated Borrowers compared with loans to
other borrowers, as well as the level of collateral on the loans. The
Applicant represents that the quarterly report will show, on a daily
basis, the market value of all outstanding security loans to Affiliated
Borrowers and to other borrowers as compared to the total collateral
held for both categories of loans. Further, the quarterly report will
state the daily fees where collateral other than cash is utilized and
will specify the details used to establish the daily rebate payable to
all borrowers
[[Page 9080]]
where cash is used as collateral. The quarterly report also will state,
on a daily basis, the rates at which securities are loaned to
Affiliated Borrowers compared with those at which securities are loaned
to other borrowers.
The independent auditor will review the lending data on a quarterly
basis and certify whether the loans have satisfied the criteria of this
exemption, in that they appear no less favorable to the Separate
Account or Commingled Fund than the pricing established in the schedule
described in paragraph 16. Client Plans invested in Separate Accounts
will receive both the quarterly report and the auditor's certification
as described above. Client Plans invested in Commingled Funds will
receive the auditor's certification and, upon request, will receive the
quarterly report.
In the event an authorizing fiduciary of a Plan invested in a
Commingled Fund submits a notice in writing to the DB Lending Agent
objecting to the continuation of the lending program to the Affiliated
Borrowers, the Plan on whose behalf the objection was tendered will be
given the opportunity to terminate its investment in the Commingled
Fund, without penalty to the Plan, no later than 35 days after the
notice of withdrawal is received.
25. To ensure that any lending of securities to an Affiliated
Borrower will be monitored by an authorizing fiduciary of above average
experience and sophistication in matters of this kind, only Client
Plans with total assets having an aggregate market value of at least
$50 million will be permitted to lend securities to the Affiliated
Borrowers. However, in the case of two or more Client Plans which are
maintained by the same employer, controlled group of corporations or
employee organization, whose assets are commingled for investment
purposes in a single master trust or any other entity the assets of
which are ``plan assets'' under 29 CFR 2510.3-101 (the Plan Asset
Regulation), which entity is engaged in securities lending arrangement
with the DB Lending Agent, the foregoing $50 million requirement will
be deemed satisfied if such trust or other entity has aggregate assets
which are in excess of $50 million; provided that if the fiduciary
responsible for making the investment decision on behalf of such master
trust or other entity is not the employer or an affiliate of the
employer, such fiduciary must have total assets under its management
and control, exclusive of the $50 million threshold amount attributable
to plan investment in the commingled entity, which are in excess of
$100 million. In the case of two or more Client Plans which are not
maintained by the same employer, controlled group of corporations or
employee organization, whose assets are commingled for investment
purposes in a group trust or any other form of entity the assets of
which are ``plan assets'' under the Plan Asset Regulation, which entity
is engaged in securities lending arrangements with the DB Lending
Agent, the foregoing $50 million requirement will be satisfied if such
trust or other entity has aggregate assets which are in excess of $50
million (excluding the assets of any Client Plan with respect to which
the fiduciary responsible for making the investment decision on behalf
of such group trust or other entity or any member of the controlled
group of corporations including such fiduciary is the employer
maintaining such Plan or an employee organization whose members are
covered by such Plan). However, the fiduciary responsible for making
the investment decision on behalf of such group trust or other entity
must have full investment responsibility with respect to plan assets
invested therein, and must have total assets under its management and
control, exclusive of the $50 million threshold amount attributable to
plan investment in the commingled entity, which are in excess of $100
million. In addition, none of the entities described above may be
formed for the sole purpose of making loans of securities.
26. With respect to any calendar quarter, at least 50 percent or
more of the outstanding dollar value of securities loans negotiated on
behalf of Lenders by the DB Lending Agent will be to borrowers
unrelated to the DB Lending Agent. Thus, the competitiveness of the
loan fee will be continuously tested in the marketplace. Accordingly,
the Applicant believes that loans to Affiliated Borrowers should result
in competitive fee income to the Lenders.
27. With respect to foreign Affiliated Borrowers, the Applicant
represents that each such entity (e.g., Deutsche Bank AG, London Branch
and other affiliates in the United Kingdom) is regulated by the host
country's supervisory authority (e.g., the UK SFA) and is, therefore,
authorized to conduct an investment banking business in and from the
host country (e.g., the United Kingdom) as a broker-dealer. The
proposed exemption will be applicable only to transactions effected by
a DB Lending Agent with an Affiliated Borrower which is registered as a
broker-dealer with the host country's supervisory authority (the
Foreign Authority) and in compliance with Rule 15a-6 under the
Securities Exchange Act of 1934 (Rule 15a-6). The Applicant represents
that the role of a broker-dealer in a principal transaction in each of
the host countries (the United Kingdom, Germany, Japan, Canada,
Switzerland and Australia) is substantially identical to that of a
broker-dealer in a principal transaction in the United States. The
Applicant further represents that registration of a broker-dealer with
the Foreign Authority is equivalent to registration of a broker-dealer
with the SEC under the 1934 Act. The Applicant maintains that the
Foreign Authority has promulgated rules for broker-dealers which are
equivalent to SEC rules relating to registration requirements, minimum
capitalization, reporting requirements, periodic examinations, fund
segregation, client protection, and enforcement. The Applicant
represents that the rules and regulations set forth by the Foreign
Authority and the SEC share a common objective: the protection of the
investor by the regulation of securities markets. The Applicant
explains that under each Foreign Authority's rules, a person who
manages investments or gives advice with respect to investments must be
registered as a ``registered representative.'' If a person is not a
registered representative and, as part of his duties, makes commitments
in market dealings or transactions, that person must be registered as a
``registered trader.'' The Applicant represents that the Foreign
Authority's rules require each firm which employs registered
representatives or registered traders to have positive tangible net
worth and to be able to meet its obligations as they fall due, and that
the Foreign Authority's rules set forth comprehensive financial
resource and reporting/disclosure rules regarding capital adequacy. In
addition to demonstration of capital adequacy, the Applicant states
that the Foreign Authority's rules impose reporting/disclosure
requirements on broker-dealers with respect to risk management,
internal controls, and all records relating to a counterparty, and that
all records must be produced at the request of the Foreign Authority at
any time. The Applicant states that Foreign Authority's registration
requirements for broker-dealers are backed up by potential fines and
penalties and rules which establish a comprehensive disciplinary
system.
28. In addition to the protections afforded by registration with
the Foreign Authority, the Applicant represents that the Affiliated
Borrower will comply
[[Page 9081]]
with the applicable provisions of Rule 15a-6 (described below). The
Applicant represents that compliance by the Affiliated Borrower with
the requirements of Rule 15a-6 will offer additional protections in
lieu of registration with the SEC. The Applicant represents that Rule
15a-6 provides an exemption from U.S. broker-dealer registration for a
foreign broker-dealer that induces or attempts to induce the purchase
or sale of any security (including over-the-counter equity and debt
options) by a ``U.S. institutional investor'' or a ``major U.S.
institutional investor,'' provided that the foreign broker-dealer,
among other things, enters into these transactions through a U.S.
registered broker-dealer intermediary. The term ``U.S. institutional
investor'', as defined in Rule 15a-6(b)(7), includes an employee
benefit plan within the meaning of the Act if (a) the investment
decision is made by a plan fiduciary, as defined in section 3 (21) of
the Act, which is either a bank, savings and loan association,
insurance company or registered investment advisor, (b) the employee
benefit plan has total assets in excess of $5,000,000, or (c) the
employee benefit plan is a self-directed plan with investment decisions
made solely by persons that are ``accredited investors'' as defined in
Rule 501(a)(1) of Regulation D of the Securities Act of 1933, as
amended. The term ``major U.S. institutional investor'' is defined as a
person that is a U.S. institutional investor that has, or has under
management, total assets in excess of $100 million, or is an investment
adviser registered under section 203 of the Investment Advisers Act of
1940 that has total assets under management in excess of $100 million.
The Applicant represents that the intermediation of the U.S. registered
broker-dealer imposes upon the foreign broker-dealer the requirement
that the securities transaction be effected in accordance with a number
of U.S. securities laws and regulations applicable to U.S. registered
broker-dealers.
The Applicant represents that, under Rule 15a-6, a foreign broker-
dealer that induces or attempts to induce the purchase or sale of any
security by a U.S. institutional or major U.S. institutional investor
in accordance with 15a-6 must, among other things:
a. Consent to service of process for any civil action brought by,
or proceeding before, the SEC or any self-regulatory organization;
b. Provide the SEC with any information or documents within its
possession, custody or control, any testimony of any foreign associated
persons,\19\ and any assistance in taking the evidence of other
persons, wherever located, that the SEC requests and that relates to
transactions effected pursuant to Rule 15a-6; and
c. Rely on the U.S. registered broker-dealer through which the
transactions with the U.S. institutional and major U.S. institutional
investors are effected to (among other things):
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\19\ A foreign associated person is defined in Rule 15a-6(b)(2)
as any natural person domiciled outside the United States who is an
associated person, as defined in section 3(a)(18) of the 1934 Act,
of the foreign broker or dealer, and who participates in the
solicitation of a U.S. institutional investor or a major U.S.
institutional investor under Rule 15a-6(a)(3).
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1. Effect the transactions, other than negotiating their terms;
2. Issue all required confirmations and statements;
3. As between the foreign broker-dealer and the U.S. registered
broker-dealer, extend or arrange for the extension of credit in
connection with the transactions;
4. Maintain required books and records relating to the
transactions, including those required by Rules 17a-3 (Records to be
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved by
Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
5. Receive, deliver and safeguard funds and securities in
connection with the transactions on behalf of the U.S. institutional
investor or major U.S. institutional investor in compliance with Rule
15c3-3 of the 1934 Act (Customer Protection-Reserves and Custody of
Securities); and
6. Participate in all oral communications (e.g., telephone calls)
between a foreign associated person and the U.S. institutional investor
(other than a major U.S. institutional investor), and accompany the
foreign associated person on all visits with both U.S. institutional
and major U.S. institutional investors. By virtue of this
participation, the U.S. registered broker-dealer would become
responsible for the content of all these communications.
All collateral will be maintained in United States dollars or U.S.
dollar-denominated securities or letters of credit. All collateral will
be held in the United States and the DB Lending Agent will maintain the
situs of the Loan Agreements (evidencing the Lender's right to return
of the loaned securities and the continuing interest in and lien on or
title to the collateral) in the United States under an arrangement that
complies with the indicia of ownership requirements under section
404(b) of the Act and the regulations promulgated under 29 CFR
2550.404(b)-1.
Prior to a transaction involving a foreign Affiliated Borrower, the
foreign Affiliated Borrower will (a) agree to submit to the
jurisdiction of the courts of the United States; (b) agree to appoint a
Process Agent for service of process in the United States, which may be
an affiliate; (c) consent to service of process on the Process Agent;
and (d) agree that enforcement by a Client Plan of the indemnity
provided by DB may occur in the United States Courts.
29. In summary, the Applicant represents that the proposed
transactions will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
a. For each Client Plan, neither the DB Lending Agent nor any
affiliate (except as expressly permitted in the exemption) will have or
exercise discretionary authority or control with respect to the
investment of the assets of Client Plans involved in the transaction or
will render investment advice with respect to such assets, including
decisions concerning a Client Plan's acquisition or disposition of
securities available for loan, except to the extent that the DB Lending
Agent exercises discretionary authority or control or renders
investment advice in connection with an Index Fund or Model-Driven Fund
managed by the DB Lending Agent in which Client Plans invest.
b. Any arrangement for the DB Lending Agent to lend securities will
be approved in advance by a Plan fiduciary who (except in the case of a
DB Plan) is independent of the DB Lending Agent.
c. The terms of each loan of securities by a Lender to an
Affiliated Borrower will be at least as favorable to such Separate
Account or Commingled Fund as those of a comparable arm's length
transaction between unrelated parties.
d. Upon termination of a loan, the Affiliated Borrowers will
transfer securities identical to the borrowed securities (or the
equivalent thereof) to the Lender within one of the following time
periods, whichever is least: (1) The customary delivery period for such
securities; (2) five business days; or (3) the time negotiated for such
delivery by the Client Plan, in a Separate Account, or by the DB
Lending Agent, as lending agent to a Commingled Fund, and the
Affiliated Borrowers.
e. The Lender will receive from each Affiliated Borrower collateral
consisting of U.S. currency, securities issued or guaranteed by the
United States Government or its agencies or instrumentalities,
irrevocable bank
[[Page 9082]]
letters of credit issued by a U.S. bank (other than DB or any
subsequent parent corporation of the DB Lending Agent, or an affiliate
thereof, or any combination thereof) or other collateral permitted
under PTE 81-6 (as amended or superseded), which will be held in a
depository account separate from the Affiliated Borrower.
f. In return for lending securities, the Lender either will receive
a reasonable fee, which is related to the value of the borrowed
securities and the duration of the loan, or will have the opportunity
to derive compensation through the investment of cash collateral.
g. DB agrees to indemnify and hold harmless the Client Plans in the
United States (including the sponsor and fiduciaries of such Client
Plans) for any transactions covered by this exemption with an
Affiliated Borrower so that the Client Plans do not have to litigate,
in the case of a foreign Affiliated Borrower, in a foreign jurisdiction
nor sue to realize on the indemnification.
h. All loans involving foreign Affiliated Borrowers will involve
Affiliated Borrowers that are registered as broker-dealers subject to
regulation by the Foreign Authority and that are in compliance with all
applicable provisions of Rule 15a-6.
i. Prior to a transaction involving a foreign Affiliated Borrower,
the foreign Affiliated Borrower will: agree to submit to the
jurisdiction of the United States; agree to appoint a Process Agent in
the United States; consent to service of process on the Process Agent;
and agree that enforcement by a Client Plan of the indemnity provided
by DB may occur in the United States courts.
FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department,
telephone (202) 693-8546. (This is not a toll-free number).
Barclays Global Investors, N.A. (BGI)
Located in San Francisco, California
[Exemption Application No. D-10925]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act, section 8477(c)(3) of the
Federal Employees' Retirement System Act of 1986 (FERSA) and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10,
1990).\20\
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\20\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
to the corresponding provisions of FERSA and the Code.
---------------------------------------------------------------------------
Section I--Transactions
If the exemption is granted, the restrictions of section
406(a)(1)(A) through (D) and 406(b)(1) and (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)(A) through (E) of the Code, shall not apply to:
(a) The lending of securities to:
(1) Barclays Capital Inc., its successors or affiliates (BC NY);
(2) Barclays Capital Securities Limited, its successors or
affiliates (BC UK);
(3) Barclays Global Investor Services, its successors or affiliates
(BGIS); and
(4) any future affiliate of BGI \21\, subject to the regulatory
requirements applicable to BC NY, BC UK and/or BGIS (individually,
``Borrower'' and collectively, ``Borrowers''), which are domestic or
foreign broker-dealers, by employee benefit plans, including commingled
investment funds holding plan assets (the Client Plans or Plans)\22\,
for which BGI, an affiliate of the proposed Borrowers, acts as
securities lending agent or subagent\23\ and also may serve as trustee,
custodian or investment manager of securities being lent; and
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\21\ Any reference to BGI shall be deemed to include any
successors thereto.
\22\ The common and collective trust funds trusteed, custodied,
and/or managed by BGI, and in which Client Plans invest, are
referred to herein as ``Commingled Funds.'' The Client Plan separate
accounts trusteed, custodied, and/or managed by BGI are referred to
herein as ``Separate Accounts.'' Commingled Funds and Separate
Accounts are collectively referred to herein as ``Lender'' or
``Lenders.''
\23\ BGI may be retained by primary securities lending agents to
provide securities lending services in a sub-agent capacity with
respect to portfolio securities of clients of such primary
securities lending agents. As a securities lending sub-agent, BGI's
role parallels that under the lending transactions for which BGI
acts as a primary securities lending agent on behalf of its clients.
References to BGI's performance of services as securities lending
agent should be deemed to include its parallel performance as a
securities lending sub-agent and references to the Client Plans
should be deemed to include those plans for which BGI is acting as a
sub-agent with respect to securities lending, unless otherwise
specifically indicated or by the context of the reference.
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(b) the receipt of compensation by BGI in connection with these
transactions.
Section II--Conditions
Section I of this exemption applies only if the conditions of
Section II are satisfied. For purposes of this exemption, any
requirement that the approving fiduciary be independent of BGI or the
Borrower shall not apply in the case of a Barclays Plan invested in a
Commingled Fund, provided that at all times, the holdings of all
Barclays Plans in the aggregate comprise less than 10% of the assets of
the Commingled Fund.
(a) For each Client Plan, neither BGI nor any affiliate (except as
expressly permitted herein) has or exercises discretionary authority or
control with respect to the investment of the assets of Client Plans
involved in the transaction or renders investment advice (within the
meaning of 29 CFR 2510.3-21(c)) with respect to such assets, including
decisions concerning a Client Plan's acquisition or disposition of
securities available for loan.
This paragraph (a) will be deemed satisfied notwithstanding that
BGI exercises discretionary authority or control or renders investment
advice in connection with an Index Fund or Model-Driven Fund managed by
BGI in which Client Plans invest.
(b) Any arrangement for BGI to lend securities is approved in
advance by a Plan fiduciary who is independent of BGI (the Independent
Fiduciary).
(c) The specific terms of the securities loan agreement (the Loan
Agreement) are negotiated by BGI which acts as a liaison between the
Lender and the Borrower to facilitate the securities lending
transaction. In the case of a Separate Account, the Independent
Fiduciary of a Client Plan approves the general terms of the Loan
Agreement between the Client Plan and the Borrower as well as any
material change in such Loan Agreement. In the case of a Commingled
Fund, approval is pursuant to the procedure described in paragraph (i),
below.
(d) The terms of each loan of securities by a Lender to a Borrower
are at least as favorable to such Separate Account or Commingled Fund
as those of a comparable arm's length transaction between unrelated
parties.
(e) A Client Plan, in the case of a Separate Account, may terminate
the lending agency or sub-agency arrangement at any time, without
penalty, on five business days notice. A Client Plan in the case of a
Commingled Fund may terminate its participation in the lending
arrangement by terminating its investment in the Commingled Fund no
later than 35 days after the notice of termination of participation is
received, without penalty to the Plan, in accordance with the terms of
the Commingled Fund. Upon termination, the Borrowers will transfer
securities identical to the borrowed securities (or the equivalent
thereof in the event of reorganization, recapitalization or merger of
the issuer of the borrowed securities) to the Separate Account or, if
the Plan's withdrawal necessitates a
[[Page 9083]]
return of securities, to the Commingled Fund, within:
(1) The customary delivery period for such securities;
(2) Five business days; or
(3) The time negotiated for such delivery by the Client Plan, in a
Separate Account, or by BGI, as lending agent to a Commingled Fund, and
the Borrowers, whichever is least.
(f) The Separate Account, Commingled Fund or another custodian
designated to act on behalf of the Client Plan, receives from each
Borrower (either by physical delivery, book entry in a securities
depository located in the United States, wire transfer or similar
means) by the close of business on or before the day the loaned
securities are delivered to the Borrower, collateral consisting of U.S.
currency, securities issued or guaranteed by the United States
Government or its agencies or instrumentalities, irrevocable bank
letters of credit issued by a U.S. bank, other than Barclays Bank PLC
(Barclays)(or any subsequent parent corporation of BGI, BC NY, BC UK
and BGIS) or an affiliate thereof, or any combination thereof, or other
collateral permitted under Prohibited Transaction Exemption 81-6 (46 FR
7527, January 23, 1981) (PTE 81-6) (as it may be amended or superseded)
(collectively, the Collateral). The Collateral will be held on behalf
of a Client Plan in a depository account separate from the Borrower.
(g) The market value (or in the case of a letter of credit, a
stated amount) of the Collateral on the close of business on the day
preceding the day of the loan is initially at least 102 percent of the
market value of the loaned securities. The applicable Loan Agreement
gives the Separate Account or the Commingled Fund in which the Client
Plan has invested a continuing security interest in and a lien on or
title to the Collateral. The level of the Collateral is monitored daily
by BGI. If the market value of the Collateral, on the close of trading
on a business day, is less than 100 percent of the market value of the
loaned securities at the close of business on that day, the Borrower is
required to deliver, by the close of business on the next day,
sufficient additional Collateral such that the market value of the
Collateral will again equal 102 percent.
(h) (1) For a Lender that is a Separate Account, prior to entering
into a Loan Agreement, the applicable Borrower furnishes its most
recently available audited and unaudited statements to BGI which will,
in turn, provide such statements to the Client Plan before the Client
Plan approves the terms of the Loan Agreement. The Loan Agreement
contains a requirement that the applicable Borrower must give prompt
notice at the time of a loan of any material adverse changes in its
financial condition since the date of the most recently furnished
financial statements. If any such changes have taken place, BGI will
not make any further loans to the Borrower unless an Independent
Fiduciary of the Client Plan in a Separate Account is provided notice
of any material change and approves the continuation of the lending
arrangement in view of the changed financial condition.
(2) For a Lender that is a Commingled Fund, BGI will furnish upon
reasonable request to an Independent Fiduciary of each Client Plan
invested in the Commingled Fund the most recently available audited and
unaudited financial statements of the applicable Borrower prior to
authorization of lending, and annually thereafter.
(i) In the case of Commingled Funds, the information described in
paragraph (c) (including any information with respect to any material
change in the arrangement) shall be furnished by BGI as lending
fiduciary to the Independent Fiduciary of each Client Plan whose assets
are invested in the Commingled Fund, not less than 30 days prior to
implementation of the arrangement or material change to the lending
arrangement as previously described to the Client Plan, and thereafter,
upon the reasonable request of the Client Plan's Independent Fiduciary.
In the event of a material adverse change in the financial condition of
a Borrower, BGI will make a decision, using the same standards of
credit analysis BGI would use in evaluating unrelated borrowers,
whether to terminate existing loans and whether to continue making
additional loans to the Borrower.
In the event any such Independent Fiduciary submits a notice in
writing within the 30 day period provided in the preceding paragraph to
BGI, as lending fiduciary, objecting to the implementation of, material
change in, or continuation of the arrangement, the Plan on whose behalf
the objection was tendered is given the opportunity to terminate its
investment in the Commingled Fund, without penalty to the Plan, no
later than 35 days after the notice of withdrawal is received. In the
case of a Plan that elects to withdraw pursuant to the foregoing, such
withdrawal shall be effected prior to the implementation of, or
material change in, the arrangement; but an existing arrangement need
not be discontinued by reason of a Plan electing to withdraw. In the
case of a Plan whose assets are proposed to be invested in the
Commingled Fund subsequent to the implementation of the arrangement,
the Plan's investment in the Commingled Fund shall be authorized in the
manner described in paragraph (c).
(j) In return for lending securities, the Lender either'
(1) Receives a reasonable fee, which is related to the value of the
borrowed securities and the duration of the loan; or
(2) Has the opportunity to derive compensation through the
investment of cash Collateral. (Under such circumstances, the Lender
may pay a loan rebate or similar fee to the Borrowers, if such fee is
not greater than the fee the Lender would pay in a comparable arm's
length transaction with an unrelated party.)
(k) Except as otherwise expressly provided herein, all procedures
regarding the securities lending activities will, at a minimum, conform
to the applicable provisions of PTE 81-6 and Prohibited Transaction
Exemption 82-63 (46 FR 14804, April 6, 1982) (PTE 82-63), both as
amended or superseded, as well as to applicable securities laws of the
United States and the United Kingdom.
(l) Barclays agrees to indemnify and hold harmless the Client Plans
in the United States (including the sponsor and fiduciaries of such
Client Plans) for any transactions covered by this exemption with a
Borrower so that the Client Plans do not have to litigate, in the case
of BC UK, in a foreign jurisdiction nor sue to realize on the
indemnification. Such indemnification is against any and all reasonably
foreseeable damages, losses, liabilities, costs and expenses (including
attorney's fees) which the Client Plans may incur or suffer, arising
from any impermissible use by a Borrower of the loaned securities, from
an event of default arising from the failure of a Borrower to deliver
loaned securities in accordance with the applicable Loan Agreement or
from a Borrower's other failure to comply with the terms of such
agreement, except to the extent that such losses are caused by the
Client Plan's own negligence.
If any event of default occurs, to the extent that (i) liquidation
of the pledged Collateral or (ii) additional cash received from the
Borrower does not provide sufficient funds on a timely basis, BGI, as
securities lending agent, promptly and at its own expense (subject to
rights of subrogation in the Collateral and against such Borrower) will
purchase or cause to be purchased, for the account of the Client Plan,
securities identical to the borrowed securities (or their equivalent as
[[Page 9084]]
discussed above). If the Collateral and any such additional cash is
insufficient to accomplish such purchase, Barclays, pursuant to the
indemnification, indemnifies the Client Plan invested in a Separate
Account or Commingled Fund for any shortfall in the Collateral plus
interest on such amount and any transaction costs incurred (including
attorney's fees). Alternatively, if such replacement securities cannot
be obtained in the open market, Barclays pays the Lender the difference
in U.S. dollars between the market value of the loaned securities and
the market value of the related Collateral as determined on the date of
the Borrower's breach of the obligation to return the securities
pursuant to the applicable Loan Agreement.
(m) The Lender receives the equivalent of all distributions made to
holders of the borrowed securities during the term of the loan,
including but not limited to all interest and dividends on the loaned
securities, shares of stock as a result of stock splits and rights to
purchase additional securities, or other distributions.
(n) Prior to any Client Plan's approval of the lending of its
securities to any Borrower, a copy of this notice of proposed
exemption, and, if granted, the final exemption, is provided to the
Client Plan.
(o) The Independent Fiduciary of each Client Plan that is invested
in a Separate Account is provided with (including by electronic means)
quarterly reports with respect to the securities lending transactions,
including, but not limited to, the information described in
Representation 24 of the Summary of Facts and Representations, and the
certification of an auditor selected by BGI who is independent of BGI
(but may or may not be independent of the Client Plan) that the loans
appear no less favorable to the Lender than the pricing established in
the schedule described in Representation 16, so that the Independent
Fiduciary may monitor such transactions with the Borrower. The
Independent Fiduciary of a Client Plan invested in a Commingled Fund
will receive the auditor's certification and, upon request, will also
receive the quarterly report.
(p) Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to the
Borrowers; provided, however, that --
(1) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization, whose assets are commingled for investment purposes in a
single master trust or any other entity the assets of which are ``plan
assets'' under 29 CFR 2510.3-101 (the Plan Asset Regulation), which
entity is engaged in securities lending arrangement with BGI, the
foregoing $50 million requirement shall be deemed satisfied if such
trust or other entity has aggregate assets which are in excess of $50
million; provided that if the fiduciary responsible for making the
investment decision on behalf of such master trust or other entity is
not the employer or an affiliate of the employer, such fiduciary has
total assets under its management and control, exclusive of the $50
million threshold amount attributable to plan investment in the
commingled entity, which are in excess of $100 million.
(2) In the case of two or more Client Plans which are not
maintained by the same employer, controlled group of corporations or
employee organization, whose assets are commingled for investment
purposes in a group trust or any other form of entity the assets of
which are ``plan assets'' under the Plan Asset Regulation, which entity
is engaged in securities lending arrangements with BGI, the foregoing
$50 million requirement is satisfied if such trust or other entity has
aggregate assets which are in excess of $50 million (excluding the
assets of any Client Plan with respect to which the fiduciary
responsible for making the investment decision on behalf of such group
trust or other entity or any member of the controlled group of
corporations including such fiduciary is the employer maintaining such
Plan or an employee organization whose members are covered by such
Plan). However, the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity.
(A) Has full investment responsibility with respect to plan assets
invested therein; and
(B) Has total assets under its management and control, exclusive of
the $50 million threshold amount attributable to plan investment in the
commingled entity, which are in excess of $100 million.
In addition, none of the entities described above are formed for
the sole purpose of making loans of securities.
(q) With respect to any calendar quarter, at least 50 percent or
more of the outstanding dollar value of securities loans negotiated on
behalf of Lenders will be to borrowers unrelated to BGI.
(r) In addition to the above, all loans involving foreign Borrowers
have the following requirements:
(1) The foreign Borrower is registered as a broker-dealer subject
to regulation by the Securities and Futures Authority of the United
Kingdom (the SFA);
(2) The foreign Borrower is in compliance with all applicable
provisions of Rule 15a-6 under the Securities Exchange Act of 1934 (17
CFR 240.15a-6)(Rule 15a-6) which provides foreign broker-dealers a
limited exemption from United States registration requirements;
(3) All Collateral is maintained in United States dollars or U.S.
dollar-denominated securities or letters of credit (unless an
applicable exemption provides otherwise);
(4) All Collateral is held in the United States and the situs of
the securities lending agreements is maintained in the United States
under an arrangement that complies with the indicia of ownership
requirements under section 404(b) of the Act and the regulations
promulgated under 29 CFR 2550.404(b)-1 related to the lending of
securities; and
(5) Prior to a transaction involving a foreign Borrower, the
foreign Borrower-
(A) Agrees to submit to the jurisdiction of the United States;
(B) Agrees to appoint an agent for service of process in the United
States, which may be an affiliate (the Process Agent);
(C) Consents to service of process on the Process Agent; and
(D) Agrees that enforcement by a Client Plan of the indemnity
provided by Barclays may occur in the United States courts.
(s) BGI maintains, or causes to be maintained, within the United
States for a period of six years from the date of such transaction, in
a manner that is convenient and accessible for audit and examination,
such records as are necessary to enable the persons described in
paragraph (t)(1) to determine whether the conditions of the 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 BGI and/or its
affiliates, the records are lost or destroyed prior to the end of the
six-year period; and
(2) No party in interest other than BGI or its affiliates 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 below by paragraph (t)(1).
(t)(1) Except as provided in subparagraph (t)(2) of this paragraph
and notwithstanding any provisions of sections (a)(2) and (b) of
section 504 of
[[Page 9085]]
the Act, the records referred to in paragraph (s) are unconditionally
available at their customary location for examination during normal
business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission;
(B) Any fiduciary of a participating Client Plan or any duly
authorized representative of such fiduciary;
(C) Any contributing employer to any participating Client Plan or
any duly authorized employee or representative of such employer; and
(D) Any participant or beneficiary of any participating Client
Plan, or any duly authorized representative of such participant or
beneficiary. (t)(2) None of the persons described above in paragraphs
(t)(1)(B)-(t)(1)(D) are authorized to examine the trade secrets of BGI
or its affiliates or commercial or financial information which is
privileged or confidential.
Section III--Definitions
(a) Barclays Plan: An ERISA covered employee benefit plan sponsored
and maintained by BGI and/or an affiliate for its own employees.
(b) Index Fund: Any investment fund, account or portfolio
sponsored, maintained, trusteed or managed by BGI or an affiliate, 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 Index 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 BGI or its affiliate 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 Plan Asset Regulation; and, (4) that involves no
agreement, arrangement, or understanding regarding the design or
operation of the Fund which is intended to benefit BGI or its affiliate
or any party in which BGI or its affiliate may have an interest.
(c) Model-Driven Fund: Any investment fund, account or portfolio
sponsored, maintained, trusteed or managed by BGI or an affiliate, 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 BGI or an
affiliate, to transform an Index;
(2) which contains ``plan assets'' subject to the Act, pursuant to
the Department's Plan Asset Regulation; 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 BGI, any
affiliate of BGI, or any party in which BGI or any affiliate may have
an interest.
(d) Index: 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 fi |
