EBSA (Formerly PWBA) Federal Register Notice
Proposed Exemptions; Deutsche Bank AG [03/29/2002]
[PDF Version]
Volume 67, Number 61, Page 15230-15249
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-11002, et al.]
Proposed Exemptions; Deutsche Bank AG
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
[[Page 15231]]
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, Located in Frankfurt/Main, Germany
[Exemption Application No.: D-11002]
Proposed Exemption
The Department of Labor is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).\1\
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\1\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer to the corresponding provisions of the Code.
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I. General Exemption
Effective for the period from June 12, 2001, through July 27, 2009,
the restrictions of section 406(a)(1)(A) through (D) of the Act and the
taxes imposed by section 4975(a) and (b) of the Code by reason of
section 4975(c)(1)(A) through (D) of the Code, shall not apply to a
transaction between a party in interest with respect to an employee
benefit plan and an investment fund (as defined in section V(b)), in
which the plan has an interest, and which is managed by Deutsche Bank
AG (Deutsche Bank or the Applicant)(as defined in section V(a)), if the
following conditions are satisfied:
(a) At the time of the transaction (as defined in section V(i)),
the party in interest, or its affiliate (as defined in section V(c)),
does not have, and during the immediately preceding one (1) year has
not exercised, the authority to--
(1) Appoint or terminate Deutsche Bank as a manager of any of the
plan's assets, or
(2) Negotiate the terms of the management agreement with Deutsche
Bank (including renewals or modifications thereof) on behalf of such
plan;
(b) The transaction is not described in--
(1) Prohibited Transaction Class Exemption 81-6 (PTCE 81-6) \2\
(relating to securities lending arrangements);
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\2\ 46 FR 7527, January 23, 1981.
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(2) Prohibited Transaction Class Exemption 83-1 (PTCE 83-1) \3\
(relating to acquisitions by plans of interests in mortgage pools), or
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\3\ 48 FR 895, January 7, 1983.
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(3) Prohibited Transaction Class Exemption 82-87 (PTCE 82-87) \4\
(relating to certain mortgage financing arrangements);
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\4\ 47 FR 21331, May 18, 1982.
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(c) The terms of the transaction are negotiated on behalf of the
investment fund by, or under the authority and general direction of
Deutsche Bank, and either Deutsche Bank, or (so long as Deutsche Bank
retains full fiduciary responsibility with respect to the transaction)
a property manager acting in accordance with written guidelines
established and administered by Deutsche Bank, makes the decision on
behalf of the investment fund to enter into the transaction, provided
that the transaction is not part of an agreement, arrangement, or
understanding designed to benefit a party in interest;
(d) The party in interest dealing with the investment fund is
neither Deutsche Bank nor a person related to Deutsche Bank (within the
meaning of section V(h));
(e) The transaction is not entered into with a party in interest
with respect to any plan whose assets managed by Deutsche Bank, when
combined with the assets of other plans established or maintained by
the same employer (or affiliate thereof described in section V(c)(1) of
this exemption) or by the same employee organization, and managed by
Deutsche Bank, represent more than 20 percent (20%) of the total client
assets managed by Deutsche Bank at the time of the transaction;
(f) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of Deutsche Bank, the terms of the transaction are at least as
favorable to the investment fund as the terms generally available in
arm's length transactions between unrelated parties;
(g)(1) Neither Deutsche Bank nor any affiliate thereof (as defined
in section V(d)), nor any owner, direct or rect, of a 5 percent (5%) or
more interest in Deutsche Bank is a person who, within the ten (10)
years immediately preceding the transaction, has been either convicted
or released from imprisonment, whichever is later, as a result of any
felony involving abuse or misuse of such person's employee benefit plan
position or employment, or position or employment with a labor
organization; any felony arising out of the conduct of the business of
a broker, dealer, investment adviser, bank, insurance company, or
fiduciary; income tax evasion; any felony involving the larceny, theft,
robbery, extortion, forgery, counterfeiting, fraudulent concealment,
embezzlement, fraudulent conversion, or misappropriation of funds or
securities; conspiracy or attempt to commit any such crimes or a crime
in which any of the foregoing crimes is an element; or any other crime
described in section 411 of the Act.
(2) The relief provided by this exemption is available to Deutsche
Bank (as defined in section V(a)), notwithstanding the guilty plea on
March 11, 1999, of Deutsche Bank's affiliate, Bankers Trust Company
(Bankers Trust), to three counts of violations of 18 U.S.C. Sec. 1005,
provided that neither Deutsche Bank nor any affiliate, nor any owner,
direct or indirect of a 5 percent (5%) or more interest in Deutsche
Bank is convicted of any of the crimes (described in section I(g)(1)),
and provided that Bankers Trust is not subsequently convicted of any
crimes (described in section I(g)(1)).
(3) For purposes of this section I(g), a person shall be deemed to
have been ``convicted'' from the date of the judgment of the trial
court, regardless of
[[Page 15232]]
whether that judgment remains under appeal.
(h) Prior to entering into a transaction covered by this exemption
Deutsche Bank must agree in writing with a plan:
(1) That the transaction is governed by the laws of the United
States and that Deutsche Bank is a fiduciary of the plan pursuant to
the provisions of the Act;
(2) To submit to the jurisdiction of the United States district
courts;
(3) To appoint an agent for service of process in the United
States, which may be an affiliate (the Process Agent); and
(4) To consent to service of process on the Process Agent.
(i) Upon request, Deutsche Bank provides to each plan affected by
this exemption copies of the Notice of Proposed Exemption (the Notice)
and the final exemption, if granted;
(j) Deutsche Bank provides each plan affected by this exemption
with a written consent to service of process in the United States and
to the jurisdiction of the courts of the United States for any civil
action or proceeding brought against Deutsche Bank with respect to the
subject transactions, which consent provides that process may be served
on Deutsche Bank through service on Deutsche Bank's New York branch (or
any other branch or affiliate of Deutsche Bank that is domiciled in the
United States);
(k) Deutsche Bank and/or its affiliates (as defined in section
V(c)(1)), maintains or causes to be maintained within the United States
for a period of six (6) years from the date of each transaction covered
by this exemption, in a manner that is convenient and accessible for
audit and examination, such records as are necessary to enable persons
(as described in section I(l)) 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 Deutsche Bank
and/or its affiliates (as defined in section V(c)(1)), records are lost
or destroyed prior to the end of the six (6) year period; and
(2) No party in interest other than Deutsche Bank and/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 by section I(l)(1));
(l)(1) Except as provided in section I(l)(2) and notwithstanding
any provisions of subsections (a)(2) and (b) of section 504 of the Act,
the records referred to, above, in section I(k) are unconditionally
available at their customary location during normal business hours to:
(i) Any duly authorized employee or representative of the Department,
the Internal Revenue Service or the Securities and Exchange Commission;
(ii) any fiduciary of a plan affected by this exemption or any duly
authorized representative of such fiduciary; (iii) any contributing
employer to any plan affected by this exemption or any duly authorized
employee representative of such employer; and (iv) any participant or
beneficiary of any plan affected by this exemption, or any duly
authorized representative of such participant or beneficiary;
(2) None of the persons described above in section I(l)(1)(ii)-(iv)
are authorized to examine the trade secrets of Deutsche Bank or
commercial or financial information which is privileged or
confidential;
(m) Upon request, Deutsche Bank discloses to the plan sponsor and/
or the named fiduciary of each plan affected by this exemption
information concerning the nature and extent of Deutsche Bank's
regulation by German governmental authorities.
II. Specific Exemptions for Employers
Effective for the period from June 12, 2001, through July 27, 2009,
the restrictions of sections 406(a), 406(b)(1) and 407(a) of the Act
and the taxes imposed by section 4975(a) and (b) of the Code, by reason
of Code section 4975(c)(1)(A) through (E), shall not apply to:
(a) The sale, leasing, or servicing of goods (as defined in section
V(j)), or to the furnishing of services, to an investment fund managed
by Deutsche Bank, by a party in interest with respect to a plan having
an interest in the investment fund, if--
(1) The party in interest is an employer any of whose employees are
covered by the plan or is a person who is a party in interest by virtue
of a relationship to such an employer described in section V(c),
(2) The transaction is necessary for the administration or
management of the investment fund,
(3) The transaction takes place in the ordinary course of a
business engaged in by the party in interest with the general public,
(4) Effective for taxable years of the party in interest furnishing
goods and services after the date this exemption is granted, the amount
attributable in any taxable year of the party in interest to
transactions engaged in with an investment fund pursuant to section
II(a) of this exemption does not exceed one percent (1%) of the gross
receipts derived from all sources for the prior taxable year of such
party in interest, and
(5) The requirements of sections I(c) through (n) are satisfied
with respect to the transaction;
(b) The leasing of office or commercial space by an investment fund
managed by Deutsche Bank to a party in interest with respect to a plan
having an interest in the investment fund, if--
(1) The party in interest is an employer any of whose employees are
covered by such plan or is a person who is a party in interest by
virtue of a relationship to such an employer described in section V(c),
(2) No commission or other fee is paid by the investment fund to
Deutsche Bank or to the employer, or to an affiliate of Deutsche Bank
or the employer (as defined in section V(c)), in connection with the
transaction,
(3) Any unit of space leased to the party in interest by the
investment fund is suitable (or adaptable without excessive cost) for
use by different tenants;
(4) The amount of space covered by the lease does not exceed
fifteen (15) percent of the rentable space of the office building,
integrated office park, or of the commercial center (if the lease does
not pertain to office space),
(5) In the case of a plan that is not an eligible individual
account plan (as defined in section 407(d)(3) of the Act), immediately
after the transaction is entered into, the aggregate fair market value
of employer real property and employer securities held by investment
funds of Deutsche Bank in which such plan has an interest does not
exceed 10 percent (10%) of the fair market value of the assets of such
plan held in those investment funds. In determining the aggregate fair
market value of employer real property and employer securities as
described herein, a plan shall be considered to own the same
proportionate undivided interest in each asset of the investment fund
or funds as its proportionate interest in the total assets of the
investment fund(s). For purposes of this requirement, the term,
``employer real property,'' means real property leased to, and the
term, ``employer securities,'' means securities issued by, an employer
any of whose employees are covered by such plan or a party in interest
of the plan by reason of a relationship to the employer described in
subparagraphs (E) or (G) of section 3(14) of the Act, and
(6) The requirements of sections I(c) through (n) are satisfied
with respect to the transaction.
[[Page 15233]]
III. Specific Lease Exemption for Deutsche Bank
Effective for the period from June 12, 2001, through July 27, 2009,
the restrictions of sections 406(a)(1)(A) through (D) and 406(b)(1) and
(2) of the Act and the taxes imposed by Code section 4975(a) and (b),
by reason of Code section 4975(c)(1)(A) through (E), shall not apply to
the leasing of office or commercial space by an investment fund managed
by Deutsche Bank to Deutsche Bank, a person who is a party in interest
of a plan by virtue of a relationship to Deutsche Bank described in
subparagraphs (G), (H), or (I) of section 3(14) of the Act, or a person
not eligible for the General Exemption of Part I of this exemption by
reason of section I(a), if--
(a) The amount of space covered by the lease does not exceed the
greater of 7500 square feet or one percent (1%) of the rentable space
of the office building, integrated office park or of the commercial
center in which the investment fund has the investment,
(b) The unit of space subject to the lease is suitable (or
adaptable without excessive cost) for use by different tenants,
(c) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of Deutsche Bank, the terms of the transaction are not more
favorable to the lessee than the terms generally available in arm's
length transactions between unrelated parties, and
(d) No commission or other fee is paid by the investment fund to
Deutsche Bank, any person possessing the disqualifying powers described
in section I(a), or any affiliate of such persons (as defined in
section V(c)), in connection with the transaction.
IV. Transactions Involving Places of Public Accommodation
Effective for the period from June 12, 2001, through July 27, 2009,
the restrictions of sections 406(a)(1)(A) through (D) and 406(b)(1) and
(b)(2) of the Act and the taxes imposed by section 4975(a) and (b) of
the Code, by reason of section 4975(c)(1)(A) through (E) of the Code,
shall not apply to the furnishing of services and facilities (and goods
incidental thereto) by a place of public accommodation owned by an
investment fund managed by Deutsche Bank to a party in interest with
respect to a plan having an interest in the investment fund, if the
services and facilities (and incidental goods) are furnished on a
comparable basis to the general public.
V. Definitions
For purposes of this exemption:
(a) The term, ``Deutsche Bank'' means Deutsche Bank AG, provided
that Deutsche Bank AG: (i) has the power to manage, acquire or dispose
of assets of a plan affected by this exemption; (ii) has, as of the
last day of its most recent fiscal year, equity capital (as defined in
section V(k)) in excess of $10,000,000; (iii) has acknowledged in a
written management agreement that it is a fiduciary with respect to
each plan that has retained Deutsche Bank AG to manage the assets of
the plan; and (iv) is subject to regulation by the German federal
banking supervisory authority, known as the Bundesaufsichtsamt fuer das
Kreditwesen (the BAK).
(b) An ``investment fund'' includes individual trusts and common,
collective or group trusts maintained by a bank, and any other account
or fund to the extent that the disposition of its assets (whether or
not in the custody of Deutsche Bank) is subject to the discretionary
authority of Deutsche Bank.
(c) For purposes of section I(a), section I(k), and Part II, an
``affiliate'' of a person means--
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any corporation, partnership, trust, or unincorporated
enterprise of which such person is an officer, director, 5 percent (5%)
or more partner, or employee (but only if the employer of such employee
is the plan sponsor), and
(3) Any director of the person or any employee of the person who is
a highly compensated employee, as defined in section 4975(e)(2)(H) of
the Code, or who has direct or indirect authority, responsibility, or
control regarding the custody, management, or disposition of plan
assets. A named fiduciary (within the meaning of section 402(a)(2) of
the Act) of a plan, and an employer any of whose employees are covered
by such plan will also be considered affiliates with respect to each
other for purposes of section I(a), if such employer or an affiliate of
such employer has the authority, alone or shared with others, to
appoint or terminate the named fiduciary or otherwise negotiate the
terms of the named fiduciary's employment agreement.
(d) For purposes of section I(g), an ``affiliate'' of a person
means--
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any director of, relative of, or partner in, any such person,
(3) Any corporation, partnership, trust, or unincorporated
enterprise of which such person is an officer, director, or 5 percent
(5%) or more partner, or owner, and
(4) Any employee or officer of the person who--
(A) Is a highly compensated employee (as described in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent (10%) or more
of the yearly wages of such person), or
(B) Has direct or indirect authority, responsibility, or control
regarding the custody, management, or disposition of plan assets.
(e) The term, ``control,'' means the power to exercise a
controlling influence over the management or policies of a person other
than an individual.
(f) The term, ``party in interest,'' means a person described in
section 3(14) of the Act and includes a ``disqualified person,'' as
defined in section 4975(e)(2) of the Code.
(g) The term, ``relative,'' means a relative as that term is
defined in section 3(15) of the Act, or a brother, a sister, or a
spouse of a brother or sister.
(h) Deutsche Bank is ``related'' to a party in interest for
purposes of section I(d) of this exemption, if the party in interest
(or a person controlling, or controlled by, the party in interest) owns
a 5 percent (5%) or more interest in Deutsche, Bank or if Deutsche Bank
(or a person controlling, or controlled by, Deutsche Bank) owns a 5
percent (5%) or more interest in the party in interest. For purposes of
this definition:
(1) The term, ``interest,'' means with respect to ownership of an
entity--
(A) The combined voting power of all classes of stock entitled to
vote or the total value of the shares of all classes of stock of the
entity if the entity is a corporation,
(B) The capital interest or the profits interest of the entity if
the entity is a partnership; or
(C) The beneficial interest of the entity if the entity is a trust
or unincorporated enterprise; and
(2) A person is considered to own an interest held in any capacity
if the person has or shares the authority--
(A) To exercise any voting rights, or to direct some other person
to exercise the voting rights relating to such interest, or
(B) To dispose or to direct the disposition of such interest.
(i) The ``time'' as of which any transaction occurs is the date
upon which the transaction is entered into. In addition, in the case of
a transaction
[[Page 15234]]
that is continuing, the transaction shall be deemed to occur until it
is terminated. If any transaction is entered into on or after the
effective date of this exemption, or a renewal that requires the
consent of Deutsche Bank occurs on or after such effective date, and
the requirements of this exemption are satisfied at the time the
transaction is entered into or renewed, respectively, the requirements
will continue to be satisfied thereafter with respect to the
transaction. Notwithstanding the foregoing, this exemption shall cease
to apply to a transaction exempt by virtue of Part I or Part II at such
time as the percentage requirement contained in section I(e) is
exceeded, unless no portion of such excess results from an increase in
the assets transferred for discretionary management to Deutsche Bank.
For this purpose, assets transferred do not include the reinvestment of
earnings attributable to those plan assets already under the
discretionary management of Deutsche Bank. Nothing in this paragraph
shall be construed as exempting a transaction entered into by an
investment fund which becomes a transaction described in section 406 of
the Act or section 4975 of the Code while the transaction is
continuing, unless the conditions of this exemption were met either at
the time the transaction was entered into or at the time the
transaction would have become prohibited but for this exemption.
(j) The term, ``goods'' includes all things which are movable or
which are fixtures used by an investment fund but does not include
securities, commodities, commodities futures, money, documents,
instruments, accounts, chattel paper, contract rights, and any other
property, tangible or intangible, which, under the relevant facts and
circumstances, is held primarily for investment.
(k) For purposes of section V(a) of this exemption, the term
``equity capital'' means stock (common and preferred), surplus,
undivided profits, contingency reserves and other capital reserves.
Temporary Nature of Exemption
The Department has determined that the relief provided by this
exemption, if granted, will be effective retroactively but will be
temporary in nature. In this regard, Deutsche Bank, AG, among others,
on July 27, 1999, obtained Prohibited Transaction Exemption 99-29 (PTE
99-29) \5\ which provided that it would not be precluded from
functioning as a ``qualified professional asset manager'' (a QPAM),
pursuant to Prohibited Transaction Class Exemption 84-14 (PTCE 84-
14),\6\ solely because of a failure to satisfy section I(g) of PTCE 84-
14, as a result of a guilty plea filed by an affiliate on March 11,
1999, to three counts of a felony. The relief provided by PTE 99-29 was
limited to a period of ten (10) years from July 27, 1999, the date of
the publication of the final exemption for PTE 99-29 in the Federal
Register. The Department in proposing the subject exemption does not
intend that, if granted, the relief, as described herein, be available
beyond the time remaining in the ten (10) year period established by
PTE 99-29. Accordingly, the relief provided by this exemption, if
granted, will be retroactive, effective as of June 12, 2001, the date
when the application for exemption was filed with the Department, and
will continue to be available through July 27, 2009, the date that is
ten (10) years from the publication in the Federal Register of the
final exemption for PTE 99-29.
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\5\ 64 FR 40623, July 27, 1999
\6\ 49 FR 9494 (March 13, 1984), as corrected, 50 FR 41430
(October 10, 1985).
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In the case of a transaction that continues beyond July 27, 2009,
the transaction shall be deemed to occur until it is terminated.
Although the relief provided by this exemption will not be available
after July 27, 2009, for any new, or other transactions that require
the consent of Deutsche Bank, as described herein, such relief will
continue to apply beyond July 27, 2009, for continuing transactions
entered into prior to that date, provided such transactions satisfied
the conditions of this exemption. In this regard, see section V(i)
regarding continuing transactions.
Should the Applicant wish to extend, beyond July 27, 2009, the
relief provided by this exemption to new or additional transactions, or
should the Applicant wish for any reason to amend the conditions of
this exemption, the Applicant may submit another application for
exemption. In this regard, the Department expects that prior to filing
another exemption application seeking relief for new or additional
transactions or to amend this exemption, the Applicant should be
prepared to demonstrate compliance with the conditions of this
exemption.
Summary of Facts and Representations
1. The request for relief from the prohibited transaction
provisions of the Act and Code was filed on behalf of Deutsche Bank
and, if granted, will be applicable to Deutsche Bank, as that term is
defined in Section V(a) of this proposed exemption. Deutsche Bank is a
bank organized under the laws of the Federal Republic of Germany. In
this regard, Deutsche Bank provides a broad variety of banking,
fiduciary, record keeping, custodial, brokerage, and investment
services to corporations, institutions, governments, employee benefit
plans, governmental retirement plans, and private investors worldwide.
As of December 31, 2000, Deutsche Bank held 697,306 million Euros
in assets and 19,807 million Euros in stockholder equity. Deutsche Bank
manages over $585 billion in assets either through collective trusts,
separately managed accounts, or mutual funds. It is represented that,
as of the last day of its most recent fiscal year, Deutsche Bank has
equity capital in excess of $10,000,000.
2. It is anticipated that plans, particularly large plans, with
hundreds or thousands of known and unknown parties in interest may
enter into the transactions described in this proposed exemption.
Deutsche Bank anticipates that such transactions would include
derivatives, repurchase agreements with foreign banks or broker
dealers, foreign exchange transactions, and other transactions not
exempted by other individual or class exemptions.\7\
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\7\ The Department notes that the general standards of fiduciary
conduct under the Act would apply to the investment transactions
permitted by this proposed exemption, and that satisfaction of the
conditions of this proposed exemption should not be viewed as an
endorsement of any particular investment by the Department. Section
404 of the Act requires, among other things, that a fiduciary
discharge his duties with respect to a plan solely in the interest
of the plan's participants and beneficiaries and in a prudent
fashion. Accordingly, the manager or other plan fiduciary must act
prudently with respect to the decision to enter into an investment
transaction, as well as to the negotiation of the specific terms
under which the plan will engage in such transaction. In addition,
the plan's named fiduciary must act prudently and solely in the
interest of the plan's participants and beneficiaries in selecting
Deutsche Bank to manage plan assets and in periodically monitoring
Deutsche Bank's performance.
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3. The exemption requested by Deutsche Bank would permit: (1)
Transactions between parties in interest with respect to a plan and an
investment fund in which such plan has an interest, if the assets in
such fund are managed by Deutsche Bank; (2) the sale, leasing,
servicing of goods, or the furnishing of services to an investment fund
managed by Deutsche Bank by an employer or an affiliate, and the
leasing of office or commercial space by such investment fund to an
employer or an affiliate where plans sponsored by such employer or an
affiliate have an interest in such fund; (3) the leasing of office or
commercial space by an investment fund managed by Deutsche Bank to
Deutsche Bank or a person who is a
[[Page 15235]]
party in interest of a plan by virtue of a relationship to Deutsche
Bank, as described in 3(14)(G) (H), or (I) of the Act, or a person not
eligible for the general exemption of Part I of this proposed exemption
by reason of section I(a); and (4) the furnishing of services and
facilities (and goods incidental thereto) by a place of public
accommodation owned by an investment fund which is managed by Deutsche
Bank to a party in interest with respect to a plan having an interest
in such fund; provided certain condition are satisfied. The Applicant
represents that these transactions have not been consummated, nor will
such transactions be consummated without an exemption.
Relief is requested from the prohibitions of sections 406(a),
406(b)(1), 406(b)(2), and 407(a) of the Act and section 4975(c)(1)(A)-
(E) of the Code. According to the Applicant, the transactions described
in Parts I, II, III, and IV of this proposed exemption may violate
section 406(a)(1)(A)-(D) of the Act, because a party in interest is
involved or may be benefitted. Further, in the opinion of the
Applicant, the transactions described in Parts II, III, and IV of this
proposed exemption would arguably violate 406(b)(1) of the Act, because
such transactions may benefit a sponsoring employer, investment
manager, or other plan fiduciaries. Further, the transactions described
in section II(b) of the proposed exemption may violate section 407(a)
of the Act, because such transactions involve the leasing of fund real
property to sponsoring employers. Finally, the transactions described
in sections III and IV of this proposed exemption could violate section
406(b)(2) of the Act and section 4975(c)(1)(E) of the Code to the
extent that Deutsche Bank, the employer, or other fiduciary with
authority or control over plan assets is involved in the transactions.
4. With regard to each of the transactions described in paragraph 3
above, Deutsche Bank has requested relief from the prohibited
transaction provisions of the Act and Code which is identical to the
relief granted in PTCE 84-14. PTCE 84-14 provides conditional relief
for various parties in interest to engage in transactions involving
plan assets if, among other conditions, such assets are managed by a
QPAM, who is independent of such parties in interest.
PTCE 84-14 does not permit a foreign bank to act as a QPAM. In this
regard, section V(a)(1) of PTCE 84-14 requires that, in order to
qualify as a QPAM, a bank must be a banking institution organized under
the laws of the United States, as defined in section 202(a)(1) of the
Investment Advisers Act of 1940. As Deutsche Bank is organized under
the laws of the Federal Republic of Germany, rather than the laws of
the United States, Deutsche Bank does not qualify as a QPAM, and cannot
rely on the relief provided by PTCE 84-14. Accordingly, Deutsche Bank
has submitted an application for administrative exemption and requested
the relief proposed herein.
In the opinion of the Applicant, the fact that Deutsche Bank is not
a U.S.-chartered bank carries little, if any significance in terms of
the ability of Deutsche Bank to operate independently or to manage plan
assets efficiently and effectively. Given Deutsche Bank's size, global
geographic distribution, financial strength, and experience managing
assets, the Applicant maintains that Deutsche Bank is better qualified
than many U.S. banks to act as an independent asset manager.
5. Deutsche Bank believes that its operations are regulated as much
as U.S.-chartered banks. In this regard, Deutsche Bank's operations are
regulated not only by the supervisory authorities of various host
countries, but by German authorities, as well. Specifically, Deutsche
Bank is subject globally to comprehensive supervision and regulation on
a consolidated basis by the German federal banking supervisory
authority, referred to herein as the BAK. The BAK is a federal
institution with ultimate responsibility to the German Ministry of
Finance. 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, (d) intervene in cases of
inadequate capital or liquidity, endangered deposits, or bankruptcy by
temporarily prohibiting certain banking transactions.
The BAK ensures that Deutsche Bank 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
Deutsche Bank and its branches through periodic consolidated financial
reports and through a mandatory annual report prepared by the auditor.
Additionally, the BAK in cooperation with the Deutsche Bundesbank
(Bundesbank) supervises all branches of Deutsche Bank, wherever
located. The Bundesbank is the central bank of the Federal Republic of
Germany and is an integral part of the European Central Banks. For
Deutsche Bank's branches domiciled in European Economic Area (EEA)
member states, the BAK is the lead supervisory authority pursuant to
the rule on the ``European Passport,'' and only some aspects are
subject to complementary supervision by supervisory authority of the
host country.
It is represented that Deutsche Bank is subject to announced and
unannounced on-site audits, and all other supervisory controls
applicable to German Banks. With respect to branches located in EEA
member states, such audits are carried out consistent with applicable
European directives. With respect to branches outside the EEA, such
audits are carried out consistent with applicable international
agreements, memoranda of understanding, or other arrangements with the
relevant foreign supervisory authorities.
Deutsche Bank's branches domiciled outside the EEA are also subject
to local regulation and supervision by the supervisory authority of the
host country. In this regard, for example, Deutsche Bank AG, New York
Branch, is regulated and supervised by the New York State Banking
Department. Certain activities of Deutsche Bank AG, New York Branch are
also regulated and supervised by the Federal Reserve Bank of New York.
There are two deposit insurance programs that cover Deutsche Bank.
The first is a European Union required mandatory deposit insurance
system established in 1998 that insures deposits denominated in the
currency of an EEA member state up to the lesser of 90 percent (90%) of
the deposit amount or 20,000 euros. This statutory deposit protection
scheme is maintained, as far as private commercial banks like Deutsche
Bank are concerned, by a separate institution and is subject to
supervision by the BAK. In addition since 1976, the Association of
German Banks has maintained a voluntary deposit protection program
called the Deposit Protection Fund that safeguards liabilities in
excess of the thresholds guaranteed by the European Union program, up
to a protection ceiling for each creditor of 30 percent (30%) of the
liable capital of the bank. The Deposit
[[Page 15236]]
Protection Fund is funded by regular contributions paid by every German
bank which has elected to participate in the Deposit Protection Fund.
Participating banks may be required to make special contributions to
the extent requested by the Deposit Protection Fund to enable it to
fulfill its purpose. It is represented that Deutsche Bank has elected
to participate in the Deposit Protection Fund.
Upon request, Deutsche Bank will disclose to the plan sponsor and/
or the named fiduciary of each plan affected by this exemption
information concerning the nature and extent of Deutsche Bank's
regulation by German governmental authorities, as described above and
in the application for exemption. In addition, Deutsche Bank will
provide to each plan affected by this exemption, if granted, copies of
the proposed and the final exemption.
6. The Applicant maintains that the proposed exemption is
administratively feasible because, the requested exemption would not
impose any administrative burden on the Department which is not already
imposed by PTCE 84-14. In this regard, no action would be necessary on
the part of the Department to effect the transactions other than by
granting the exemption. As a condition of this exemption, Deutsche Bank
or an affiliate must maintain or cause to be maintained within the
United States, for a period of six (6) years from the date of each
transaction, the records necessary to enable the Department, the IRS,
and other persons to determine whether the conditions of this exemption
have been met.
7. The Applicant believes that the proposed exemption is in the
best interest of the participants and beneficiaries of the affected
plans. In this regard, the Applicant maintains that the proposed
transaction would broaden the choice of qualified independent assets
managers available to such plans, would increase transactional
efficiencies, and would afford greater opportunities to such plans to
diversify through international investments. With a physical presence
in 27 different countries and with access to 90 markets worldwide, the
Applicant maintains that Deutsche Bank can provide more informed and
cost-efficient asset management services for international investments
than most U.S. banks.
8. Without the proposed exemption, plans might lose opportunities
to enter into beneficial financial transactions with parties in
interest that would enhance the return to such plans. In this regard,
restricting plans to domestic banks which may have little or no
expertise or connections with a given target market may result in
inefficient execution, investment decisions based on imperfect
information, or missed investment opportunities.
9. In the absence of the proposed exemption, the Applicant must
undertake costly and time consuming steps to examine each transaction
to ensure that a given transaction on behalf of a plan investor does
not involve or benefit the many parties in interest that may exist with
respect to such plan. These efforts encompass not only a plan's primary
investments, but also collateral investments and investment-related
transactions, including, e.g., sweep investments necessary for cash
management, foreign exchange transactions necessary for investments
denominated in foreign currencies, securities lending, and the use of
brokers and agents to execute the foregoing. In this regard, the
Applicant points out that the costs of these efforts are ultimately
borne by the plan investors, as reflected in higher asset management
fees, higher transaction costs, and opportunity costs.
10. The proposed exemption contains conditions which are designed
to ensure the presence of adequate safeguards to protect the interests
of the participants and beneficiaries of plans regarding the subject
transactions. Except for the fact that Deutsche Bank is not a U.S.-
chartered bank, as required by section V(a)(1) of PTCE 84-14, the
proposed exemption contains conditions substantially similar to those
which are set forth in PTCE 84-14.
In addition to the requirements of the PTCE 84-14, Deutsche Bank
has agreed to additional conditions, as set forth in section I(h)
through (m), which are designed to ensure that the plans are protected.
In this regard, Deutsche Bank will indemnify and hold harmless each
plan affected by this exemption against any harm, damage, or injury
(including interest and attorney's fees) arising from any fiduciary
breach or other wrongdoing of Deutsche Bank acting in its capacity as
asset manager for such plan. Further, Deutsche Bank has agreed that
enforcement by a Plan of the indemnity provided by Deutsche Bank will
occur in the United States district courts.
It is represented that there are adequate safeguards to minimize
the risks associated with the Deutsche Bank's foreign nationality.
Deutsche Bank will comply with the indicia of ownership of plan assets
requirements under section 404(b) of the Act and the regulations
promulgated under 29 CFR 2550.404(b)-1. To ensure that a plan will not
have to litigate in a foreign country, Deutsche Bank has consented to
the appointment of an agent for service of process in the United
States; has consented to service of process on such agent; and to the
jurisdiction of the district courts of the United States for any civil
action or proceeding brought against Deutsche Bank with respect to the
subject transactions. Such consent provides that process may be served
on Deutsche Bank through service on Deutsche Bank's New York branch (or
other branch of Deutsche Bank that is domiciled in the United States).
11. In summary, the Applicant represents that the subject
transactions will satisfy the statutory criteria of section 408(a) of
the Act and section 4975(c)(2) of the Code because:
(a) Deutsche Bank has, as of the last day of its most recent fiscal
year, equity capital in excess of $10,000,000;
(b) Except for the fact that Deutsche Bank is not a U.S.-chartered
bank, as required by section V(a)(1) of PTCE 84-14, the proposed
exemption contains conditions substantially similar to those which are
set forth in PTCE 84-14;
(c) The requested exemption will not impose any administrative
burden on the Department which is not already imposed by PTCE 84-14;
(d) In addition to the requirements of the PTCE 84-14, Deutsche
Bank has agreed to conditions, as set forth in section I(h) through
(m), which are designed to ensure that the affected plans are
protected;
(e) Deutsche Bank's operations are subject to significant
regulation, not only by the supervisory authorities of various host
countries, but by German authorities, as well;
(f) Upon request, Deutsche Bank will disclose to the plan sponsor
and/or the named fiduciary of each plan affected by this exemption
information concerning the nature and extent of Deutsche Bank's
regulation by German governmental authorities;
(g) Upon request, Deutsche Bank will provide to each plan affected
by this exemption copies of the proposed and the final exemption, if
granted;
(h) The proposed exemption will broaden the choice of qualified
independent assets managers available to the affected plans, will
increase transactional efficiencies, and will afford greater
opportunities to such plans to diversify through international
investments; and
(i) Without the proposed exemption, plans might lose opportunities
to enter into beneficial financial transactions with parties in
interest that would enhance the return to such plans.
[[Page 15237]]
Notice to Interested Persons
Deutsche Bank will furnish a copy of the Notice of Proposed
Exemption (the Notice) along with the supplemental statement (the
Supplemental Statement), as described at 29 CFR Sec. 2570.43(b)(2), to
the an independent fiduciary for each plan to which Deutsche Bank
currently provides investment management services to inform such
persons of the pendency of this proposed exemption. A copy of the
Notice, as it appears in the Federal Register, and a copy of the
Supplemental Statement, will be provided, by first class mailing,
within fifteen (15) days of the publication of the Notice in the
Federal Register. Comments and requests for a hearing are due from
interested persons on or before 45 days from the date of the
publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc of the
Department, telephone (202) 693-8551 (this is not a toll-free number).
EquiLend LLC (EquiLend), Located in New York, New York
[Exemption Application No.: D-11026]
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).
Section I. Sale of EquiLend Products to Plans
If the exemption is granted, the restrictions of section
406(a)(1)(A) and (D) of the Act and the sanctions resulting from the
application of section 4975(a) and (b) of the Code, by reason of
section 4975(c)(1)(A) and (D) of the Code, shall not apply to the sale
or licensing of certain data and/or analytical tools to an employee
benefit plan by EquiLend, a party in interest with respect to such
plan, if the following conditions are met:
(a) The terms of any such sale or licensing are at least as
favorable to the plan as the terms generally available in an arm's-
length transaction involving an unrelated party;
(b) Any data sold/licensed to the plan will be limited to:
(1) Current and historical data related to transactions proposed or
occurring on EquiLend's electronic securities lending platform (the
Platform) or,
(2) Data derived from current and historical data using statistical
or computational techniques; and
(c) Each analytical tool sold/licensed to the plan will be an
objective statistical or computational tool designed to permit the
evaluation of securities lending activities.
Section II. Use of Platform by Owner Lending Agent/ Sale of EquiLend
Products to Plans Represented by Owner Lending Agent
If the exemption is granted, the restrictions of sections 406(a)
and 406(b) of the Act, section 8477(c)(2) of FERSA, and the sanctions
resulting from the application of section 4975(a) and (b) of the Code,
by reason of section 4975(c)(1)(A) through (F) of the Code, shall not
apply to: (1) The participation in the Platform by an equity owner of
EquiLend (an Equity Owner), in its capacity as a securities lending
agent for a plan (an Owner Lending Agent); and (2) the sale or
licensing of certain data and/or analytical tools by EquiLend to a plan
for which an Equity Owner acts as a securities lending agent, if the
following conditions are met:
(a) In the case of participation in the Platform on behalf of a
plan, to the extent applicable the procedures regarding the securities
lending activities conform to the provisions of Prohibited Transaction
Class Exemption (PTE) 81-6 (46 FR 7527 (Jan. 23, 1981)), PTE 82-63 (46
FR 14804 (Apr. 6, 1982)), and/or any applicable individual exemption;
(b) None of the fees imposed by EquiLend for securities lending
transactions conducted through the use of the Platform at the direction
of an Owner Lending Agent will be charged to a plan;
(c) Each securities lender and securities borrower participating in
a securities lending transaction through EquiLend will be notified by
EquiLend as to its responsibilities with respect to compliance, as
applicable, with the Act, the Code, and FERSA;
(d) EquiLend will not act as a principal in any securities lending
transaction involving plan assets;
(e) Each Owner Lending Agent will provide prior written notice to
its plan clients of its intention to participate in EquiLend;
(f) (1) Except as otherwise provided in paragraph (i), the
arrangement pursuant to which the Owner Lending Agent utilizes the
services of EquiLend on behalf of a plan for securities lending:
(A) Is subject to the prior written authorization of an independent
fiduciary (``an authorizing fiduciary'' as defined in paragraph (b) of
section III). For purposes of subparagraph (f)(1), the requirement that
the authorizing fiduciary be independent shall not apply in the case of
a plan of an Equity Owner (Equity Owner Plan);
(B) May be terminated by the authorizing fiduciary, without penalty
to the plan, within the lesser of: (i) The time negotiated for such
notice of termination by the plan and the Owner Lending Agent, or (ii)
five business days.
Notwithstanding the foregoing, the requirement for prior written
authorization will be deemed satisfied in the case of any plan for
which the authorizing fiduciary has previously provided written
authorization to the Owner Lending Agent pursuant to PTE 82-63, unless
such authorizing fiduciary objects to participation in the Platform in
writing to the Owner Lending Agent within 30 days following disclosure
of the information described in paragraphs (e) and (g) of this section
to such authorizing fiduciary; and
(2) Except as otherwise provided in paragraph (i), each purchase or
license of a securities lending-related product from EquiLend on behalf
of a plan by an Owner Lending Agent:
(A) Is subject to the prior written authorization of an authorizing
fiduciary. For purposes of subparagraph (f)(2), the requirement for
prior written authorization shall not apply to any purchase or
licensing of an EquiLend securities lending-related product by an
Equity Owner Plan if the fee or cost associated with such purchase or
licensing is not paid by the Equity Owner Plan; and
(B) May be terminated by the authorizing fiduciary within (i) the
time negotiated for such notice of termination by the plan and the
Owner Lending Agent or (ii) five business days, whichever is lesser, in
either case without penalty to the plan, provided that, such
authorizing fiduciary shall be deemed to have given the necessary
authorization in satisfaction of this paragraph (f)(2) with respect to
each specific product purchased or licensed pursuant thereto unless
such authorizing fiduciary objects to the Owner Lending Agent within 15
days after the delivery of information regarding such specific product
to the authorizing fiduciary in accordance with paragraph (g) of this
exemption;
(g) The authorization described in paragraph (f) of this section
shall not be deemed to have been made unless the Owner Lending Agent
has furnished the authorizing fiduciary with any reasonably available
information that the Owner Lending Agent reasonably believes to be
necessary for the
[[Page 15238]]
authorizing fiduciary to determine whether such authorization should be
made, and any other reasonably available information regarding the
matter that the authorizing fiduciary may reasonably request. This
includes, but is not limited to: (1) A statement that the Equity Owner,
as securities lending agent, has a financial interest in the successful
operation of EquiLend, and (2) a statement, provided on an annual
basis, that the authorizing fiduciary may terminate the arrangement(s)
described in (f) above at any time;
(h) Any purchase or licensing of data and/or analytical tools with
respect to securities lending activities by a plan pursuant to this
section complies with the relevant conditions of section I and will be
authorized in advance by an authorizing fiduciary in accordance with
the applicable procedures of paragraphs (f), (g) and (i);
(i) (Special Rule for Commingled Investment Funds) In the case of a
pooled separate account maintained by an insurance company qualified to
do business in a state or a common or collective trust fund maintained
by a bank or trust company supervised by a state or federal agency
(Commingled Investment Fund), the requirements of paragraph (f) of this
section shall not apply, provided that--
(1) The information described in paragraph (g) (including
information with respect to any material change in the arrangement) of
this section and a description of the operation of the Platform
(including a description of the fee structure paid by securities
lenders and borrowers), shall be furnished by the Owner Lending Agent
to the authorizing fiduciary (described in paragraph (b) of section
III) with respect to each plan whose assets are invested in the account
or fund, not less than 30 days prior to implementation of any such
arrangement or material changes thereto, or, not less than 15 days
prior to the purchase or license of any specific securities lending-
related product, and, where requested, upon the reasonable request of
the authorizing fiduciary. For purposes of this subparagraph, the
requirement that the authorizing fiduciary be independent shall not
apply in the case of an Equity Owner Plan;
(2) In the event any such authorizing fiduciary notifies the Owner
Lending Agent that it objects to participation in the Platform, or to
the purchase or license of any EquiLend securities lending-related tool
or product, the plan on whose behalf the objection was tendered is
given the opportunity to terminate its investment in the account or
fund, without penalty to the plan, within such time as may be necessary
to effect the withdrawal in an orderly manner that is equitable to all
withdrawing plans and to the non-withdrawing plans. 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 or purchase or license, but any existing
arrangement need not be discontinued by reason of a plan electing to
withdraw; and
(3) In the case of a plan whose assets are proposed to be invested
in the pooled account or fund subsequent to the implementation of the
arrangements and which has not authorized the arrangements in the
manner described in paragraphs (i)(1) and (i)(2), the plan's investment
in the account or fund shall be authorized in the manner described in
paragraph (f);
(j) The Equity Owner, together with its affiliates (as defined in
paragraph (a) of section III), does not own at the time of the
execution of a securities lending transaction on behalf of a plan by
the Equity Owner (i.e., in its capacity as Owner Lending Agent) through
EquiLend or at the time of the purchase, or commencement of licensing,
of data and/or analytical tools by the plan, more than 20% of:
(1) If EquiLend is a corporation, including a limited liability
company taxable as a corporation, the combined voting power of all
classes of stock entitled to vote or the total value of shares of all
classes of stock of EquiLend, or
(2) If EquiLend is a partnership, including a limited liability
company taxable as a partnership, the capital interest or the profits
interest of EquiLend;
(k) Any information, authorization, or termination of authorization
may be provided by mail or electronically; and
(l) No Equity Owner Plan, as defined in section III(e) below, will
participate in the Platform, other than through a Commingled Investment
Fund in which the aggregate investment of all Equity Owner Plans at the
time of the transaction constitutes less than 20% of the total assets
of such fund. Notwithstanding the foregoing, this prohibition shall not
apply to the participation by an Equity Owner Plan as of the date that
the aggregate loan balance of all securities lending transactions
entered into through EquiLend by all participants outstanding on such
date (excluding transactions entered into on behalf of Equity Owner
Plans) is equal to or greater than $10 billion; provided that if such
aggregate loan balance is later determined to be less than $10 billion,
no additional participation by an Equity Owner Plan (other than through
a Commingled Investment Fund) shall occur until such time as the $10
billion threshold amount is again met.
Section III. Definitions
For purposes of this exemption:
(a) An ``affiliate'' of another person means:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act) of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
For purposes of this paragraph, the term ``control'' means the
power to exercise a controlling influence over the management or
policies of a person other than an individual.
(b) The term ``authorizing fiduciary'' means, with respect to an
Owner Lending Agent, a plan fiduciary who is unrelated to, and
independent of, such Owner Lending Agent. In this regard, an
authorizing fiduciary will not be considered independent of an Owner
Lending Agent if:
(1) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with the Owner Lending Agent; or
(2) Such fiduciary directly or indirectly receives any compensation
or other consideration from the Owner Lending Agent or an affiliate for
his or her own personal account in connection with any securities
lending transaction described herein.
For purposes of section II, no Equity Owner or any affiliate may be
an authorizing fiduciary. Notwithstanding the foregoing, the
requirements for consent by an authorizing fiduciary with respect to
participation in the Platform, and the annual right of such fiduciary
to terminate such participation, shall be deemed met to the extent that
the Owner Lending Agent's proposed utilization of the services of
EquiLend on behalf of a plan for securities lending has been approved
by an order of a United States district court.
(c) The term ``Owner Lending Agent'' means a fiduciary of a plan
acting as securities lending agent in connection with loans of plan
assets that are securities.
[[Page 15239]]
(d) The term ``Equity Owner'' means an entity that either directly
or through an affiliate owns an equity ownership interest in EquiLend.
(e) The term ``Equity Owner Plan'' means an employee benefit plan,
as defined under section 3(3) of the Act, which is established or
maintained by an Equity Owner of EquiLend, as defined in section III(d)
above, as an employer of employees covered by such plan, or by its
affiliate.
(f) The terms ``employee benefit plan'' and/or ``plan'' means:
(1) An ``employee benefit plan'' within the meaning of section 3(3)
of the Act subject to Part 4 of Subtitle B of Title I of the Act,
(2) A ``plan'' (within the meaning of section 4975(e)(1) of the
Code) subject to section 4975 of the Code, or
(3) The Federal Thrift Savings Fund.
Summary of Facts and Representations
1. EquiLend is a Delaware limited liability company established on
May 16, 2001. As of October 17, 2001, the Equity Owners of EquiLend
were as follows: Barclays California Corporation; Bear Stearns
Securities Corp.; JP Morgan Strategic Securities Lending Corp. (a
wholly owned subsidiary of The Chase Manhattan Bank); LB I Group Inc.
(a wholly owned subsidiary of Lehman Brothers Inc.); Merrill Lynch,
Pierce, Fenner & Smith Inc.; SSB Investments, Inc. (a wholly owned
subsidiary of State Street Corporation); Strategic Investments I, Inc.
(a wholly owned subsidiary of Morgan Stanley Dean Witter & Co.); The
Goldman Sachs Group, Inc.; Northern Trust Corporation and UBS (USA)
Inc., or affiliates of the foregoing entities. The applicant represents
that, as of October 17, 2001, each Equity Owner owned 10 percent of
EquiLend.
2. EquiLend intends to provide the Platform, a common electronic
platform for the negotiation of securities lending and borrowing
transactions.\8\ The applicant represents that securities lending
transactions involving the use of the Platform will not change the
fundamental nature of how securities lending transactions are currently
conducted. In this regard, the applicant states that most securities
owners use a custodian bank, asset manager, or non-custodian lending
agent to lend securities. The lending agent is typically responsible
for, among other things, identifying borrowers, negotiating loan
transactions, maintaining the appropriate records, marking to market
all outstanding loans, ensuring the maintenance of collateral, and
monitoring the delivery and control of the collateral.
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\8\ The proposed exemption does not provide relief under Section
I from section 406(a) of the Act with respect to the use of the
Platform on behalf of a plan by a lending fiduciary which is not an
Equity Owner. In this regard, based on the representations made by
the applicant, any relief from section 406(a) that may be necessary
in such a situation is provided by the statutory exemption for the
provision of services to a plan by a party in interest contained in
section 408(b)(2) of the Act.
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The applicant represents that the Platform will provide a tool for
lending agents to fulfil the above-mentioned responsibilities. In this
regard, the Platform will include:
(A) An interactive screen;
(B) Screens for trade negotiations, auctions, auto-borrowing, rate
posting, loan returns, recalls by lenders, and inventory broadcasts
(posting of securities available for lending);
(C) Additional services such as the comparison of a transaction as
reflected on lender and borrower books with the underlying contract and
the identification of the differences between lender and borrower
records, including mark to market comparisons and fee billing
comparisons;
(D) The disclosure of the identity of counterparties to a
transaction whereby members will have the ability to direct trades and
control inventory broadcasts;
(E) The reflection of agreed transaction terms on a shared
electronic trade ticket in a form for automated input to members'
systems; and
(F) The creation of securities lending indices to assist in the
benchmarking of the performance of securities lending agents.
3. The applicant states that, in providing these services, EquiLend
will not be a principal in any securities lending transaction and will
not guarantee any transaction executed through the Platform. In
addition, the applicant states that employee benefit plans will not pay
any fees to EquiLend in connection with securities lending transactions
conducted through the use of the Platform. In this regard, the fees
charged by EquiLend will be paid by, and will be the same for,
securities lending agents and securities borrowers.
The fees charged by EquiLend are expected to include an annual fee
and a one-time initiation fee; both of which will be structured on a
tiered basis to allow for the participation in EquiLend by entities of
varying sizes. Each level of the annual fees will entitle the member to
a certain number of transactions and, thereafter, excess transactions
will be subject to additional charges. The applicant represents that,
although the Equity Owners will pay the same annual fees as non-owners,
no such owner will pay the initiation fee.
4. The applicant states that, in addition to compliance with the
terms of this proposed exemption, lenders and borrowers utilizing
EquiLend services will remain responsible for compliance with other
relevant laws and exemptions. In this regard, each securities lending
transaction involving the use of the Platform by an Equity Owner as
Owner Lending Agent will remain subject to all relevant provisions of
the Act, the Code, and FERSA, as well as any applicable individual or
class exemption (including but not limited to PTEs 81-6 and 82-63). In
the event that a particular securities lending transaction does not
comply with any applicable law and/or exemption, the relief contained
in this exemption, if granted, will no longer be available with respect
to such transaction.
5. The applicant anticipates that many of the entities currently
conducting securities lending and borrowing transactions, including
banks, broker-dealers and investment managers, will become members of
EquiLend. The applicant anticipates that an entity participating in
EquiLend and/or its Platform must, among other things:
(A) Be qualified in its jurisdiction to engage in securities
lending transactions through EquiLend and be subject to an appropriate
level of regulatory supervision (as determined by EquiLend);
(B) Execute a ``User Agreement'' which shall set forth the terms
and conditions for access to, and use of, EquiLend's platform and which
shall contain appropriate representations, warranties and indemnities
from the participant, including those typically provided by users of
electronic trading platforms; and
(C) Have the ability to pay all applicable EquiLend fees;
(D) Have the ability to originate a certain number of loans per
month having a certain aggregate US dollar nominal value (which number
and nominal value will be set prior to EquiLend's launch at levels
designed to ensure that the applicant is a legitimate participant in
the securities lending marketplace); and
(E) In order to remain a member in good standing, meet or exceed
the levels described in (D) of this paragraph. The applicant notes that
no Equity Owner Plan will participate in the Platform except to the
extent that such Plan participates in a commingled fund having less
than 20% of its assets comprised of one or more Equity Owner Plans.
6. The applicant represents that an Equity Owner may be a party to
transactions involving EquiLend sales
[[Page 15240]]
and/or services. In this regard, each Equity Owner may conduct
securities lending transactions on behalf of a plan, in its capacity as
an Owner Lending Agent, through EquiLend to the extent that such Equity
Owner does not own more than 20% of EquiLend. The applicant represents
that plans will not incur any incremental cost as a result of an Owner
Lending Agent conducting such transactions through EquiLend.
The applicant states that to the extent an Owner Lending Agent
lends plan-owned securities through EquiLend, plan participants will be
adequately protected. In this regard, the applicant represents that
prior to such an arrangement, each Owner Lending Agent will disclose to
a plan's authorizing fiduciary (who is independent of the Owner Lending
Agent and EquiLend) that such Owner Lending Agent intends to
participate in the Platform. In addition, each Owner Lending Agent will
disclose all of the information that the Owner Lending Agent believes
is necessary for the authorizing fiduciary to determine whether the
arrangement should be approved.\9\ Thereafter, the applicant states,
the plan's authorizing fiduciary must authorize the Owner Lending
Agent's use of the Platform to lend securities on behalf of such plan.
This authorization may be terminated by the authorizing fiduciary, the
applicant states, without penalty to the plan, within the lesser of:
(i) The time negotiated for such notice of termination by the plan and
the Owner Lending Agent, or (ii) five business days.\10\
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\9\ The Department notes that the Act's general standards of
fiduciary conduct also would apply to the proposed service and
compensation arrangements. In this regard, section 404 requires,
among other things, a fiduciary to discharge his duties respecting a
plan solely in the interest of the plan's participants and
beneficiaries and in a prudent manner. Accordingly, an independent
plan fiduciary must act prudently with respect to: (1) The decision
to enter into an above-described arrangement; and (2) the
negotiation of the terms of such arrangement including any payment
of compensation. The Department further emphasizes that it expects
plan fiduciaries, prior to entering into any of the proposed service
and compensation arrangements, to fully understand the extent of the
services to be provided, the fee structure and the risks associated
with these types of arrangements following disclosure by the service
provider of all relevant information. In addition, the Department
notes that such plan fiduciaries are responsible for periodically
monitoring the services provided.
\10\ However, with respect to any plan for which the authorizing
fiduciary has previously given written authorization to the Owner
Lending Agent pursuant to PTE 82-63, the applicant requests that
such authorizing fiduciary be deemed to have given the required
authorization unless such authorizing fiduciary objects in writing
to participation in the Platform to the Owner Lending Agent within
30 days after disclosure of the information described above.
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7. In addition to providing the Platform discussed above, EquiLend
intends to sell and/or license data. In this regard, the applicant
represents that such data: (A) Will be historical in nature and will
relate to transactions proposed or occurring on the system; or (B) will
be derived from current and historical data utilizing statistical or
computational techniques. EquiLend also intends to sell or license
certain analytical tools. Such analytical tools, the applicant states,
will be objective statistical or computational tools that will permit
users to use data provided to evaluate securities lending activities.
The applicant represents that EquiLend seeks to sell and/or license
such data and tools to various types of entities, including employee
benefit plans. In this regard, the applicant states that, if this
proposed exemption is granted, to the extent EquiLend sells or licenses
data and/or analytical tools to a plan with respect to which EquiLend
is a party in interest, the terms of such sale or licensing will be at
least as favorable to such plan as the terms associated with an arm's-
length transaction involving unrelated parties. In addition, the
applicant represents that if EquiLend sells or licenses a product to a
plan with respect to which an Equity Owner acts as an Owner Lending
Agent, such sale or licensing will be authorized in advance by a
fiduciary who is independent of both EquiLend and the Owner Lending
Agent upon such fiduciary's receipt from the Owner Lending Agent of all
of the information that the Owner Lending Agent believes is necessary
for the authorizing fiduciary to approve the purchase or license.
8. The applicant represents that the proposed exemption, if
granted, will benefit plans. In this regard, the applicant states that
the use of the Platform by lending fiduciaries will enable plans to,
among other things, communicate with multiple borrowers, devise and
implement more efficient lending strategies, and monitor ongoing
securities loan activities. In turn, affected plans may benefit from
more efficient pricing, reduced execution costs, streamlined front and
back-office activities, less failed trades and more on-going
information regarding lending activities. In addition, according to the
applicant, if EquiLend sells or licenses data related to securities
lending activities and provides related analytical tools to plans,
plans will have access to information that will permit the enhanced
evaluation of the performance of lending agents and the returns on
lending portfolios.
9. In summary, the applicant represents that the requirements of
section 408(a) of ERISA will be met with respect to the sale or
licensing of certain data and/or analytical tools to employee benefit
plans by EquiLend since: the terms of any such sale or licensing will
be at least as favorable to a plan as the terms generally available in
an arm's-length transaction involving an unrelated party; any data
sold/licensed to a plan will be current and historical data related to
transactions proposed or occurring on the Platform; and any tool sold/
licensed will be objective and designed to permit the evaluation of
securities lending transactions.
In addition, the applicant represents that the requirements of
section 408(a) of ERISA will be met with respect to: (1) The
participation in the Platform by an Equity Owner, in its capacity as an
Owner Lending Agent; and (2) the sale or licensing of certain data and/
or analytical tools by EquiLend to a plan for which an Equity Owner
acts as a securities lending agent because, among other things:
(A) In the case of participation in the Platform on behalf of a
plan, to the extent applicable the procedures regarding the securities
lending activities conform to the provisions of PTE 81-6, PTE 82-63,
and/or any applicable individual exemption;
(B) None of the fees imposed by EquiLend for securities lending
transactions conducted through the use of the Platform at the direction
of an Owner Lending Agent will be charged to a plan;
(C) Each securities lender and securities borrower participating in
a securities lending transaction through EquiLend will be notified by
EquiLend as to its responsibilities with respect to compliance, as
applicable, with the Act, the Code, and FERSA;
(D) Each Equity Owner will provide prior written notice to its plan
clients of its intention to participate in EquiLend;
(E) With certain exceptions described above, the arrangement
pursuant to which the Equity Owner utilizes the services of EquiLend on
behalf of a plan:
(1) Is subject to the prior written authorization of an authorizing
fiduciary;
(2) May be terminated by the authorizing fiduciary, without penalty
to the plan, within the lesser of: (i) The time negotiated for such
notice of termination by the plan and the Equity Owner, or (ii) five
business days;
(F) With certain exceptions described above, each purchase or
license of a securities lending-related product from EquiLend is
subject to the prior
[[Page 15241]]
authorization of an authorizing fiduciary;
(G) The Equity Owner will furnish each authorizing fiduciary with
any reasonably available information which the Equity Owner reasonably
believes to be necessary to determine whether such authorization should
be made or renewed; and
(H) The Equity Owner, together with its affiliates, does not own at
the time of the execution of a securities lending transaction on behalf
of a plan by the Equity Owner through EquiLend or at the time of the
purchase, or commencement of licensing, of data and/or analytical tools
by the plan, more than 20% of EquiLend.
Notice to Interested Persons: The applicant represents that the
potentially interested participants and beneficiaries cannot all be
identified and therefore the only practical means of notifying such
participants and beneficiaries of this proposed exemption is by the
publication of this notice in the Federal Register. Comments and
requests for a hearing must be received by the Department not later
than 35 days from the date of publication of this notice of proposed
exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Christopher Motta of the Department,
telephone (202) 693-8544. (This is not a toll-free number.)
Morgan Stanley Dean Witter & Co., Located in New York, New York
[Exemption Application No.: D-11048]
Proposed Exemption
The Department of Labor is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures as set forth in 29 CFR
Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).\11\
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\11\ For the purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
to the corresponding provisions of the Code.
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Section I--Transactions
If the exemption is granted, the restrictions of section
406(a)(1)(A) through (D) of the Act and the sanctions resulting from
the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply, effective
November 13, 2001, to:
(a) The lending of securities by an employee benefit plan,
including a commingled investment fund holding assets of such plan(the
Plan(s)) with respect to which Morgan Stanley Dean Witter & Co. (Morgan
Stanley) or any of its affiliates is a party in interest, under certain
exclusive borrowing arrangements with:
(1) Morgan Stanley;
(2) Morgan Stanley & Co. Incorporated (MS&Co); MS Securities
Services Inc. (MSSSI); and any other affiliate of Morgan Stanley that,
now or in the future, is a U.S. registered broker-dealer or a
government securities broker or dealer (collectively, the MS US Broker-
Dealers);
(3) Morgan Stanley & Co. International Limited (MSIL), which is
subject to regulation by the Financial Services Authority (FSA)in the
United Kingdom; \12\
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\12\ As of December 1, 2001, the FSA replaced the United Kingdom
Securities and Futures Authority.
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(4) Morgan Stanley Japan Limited (MSJL), which is subject to
regulation by the Ministry of Finance, Financial Services Agency, the
Tokyo Stock Exchange, and the Osaka Stock Exchange in Japan; and
(5) Any broker-dealer that, now or in the future, is an affiliate
of Morgan Stanley which is subject to regulation by the FSA in the
United Kingdom or which is subject to regulation by the Ministry of
Finance, the Financial Services Agency, the Tokyo Stock Exchange, and
the Osaka Stock Exchange in Japan; \13\ and
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\13\ Each affiliated foreign broker-dealer is referred to
herein, individually, as a Foreign Borrower or collectively, as
Foreign Borrowers. The Foreign Borrowers together with Morgan
Stanley and the MS US Broker-Dealers are referred to, herein,
collectively as Borrowers or Applicants, and individually, as the
Borrower.
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(b) The receipt of compensation by Morgan Stanley or any of its
affiliates in connection with securities lending transactions; provided
that for the transactions, set forth in section I(a) and (b), above,
the conditions set forth in section II, below, are satisfied.
Section II--Conditions
(a) For each Plan, neither the Borrower nor any affiliate has or
exercises discretionary authority or control over such Plan's
investment in the securities available for loan, nor do they render
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to those assets.
(b) The party in interest dealing with the Plan is a party in
interest with respect to such Plan (including a fiduciary) solely by
reason of providing services to such Plan, or solely by reason of a
relationship to a service provider described in section 3(14)(F), (G),
(H), or (I) of the Act.
(c) The Borrower directly negotiates an exclusive borrowing
agreement (the Borrowing Agreement) with the Plan fiduciary which is
independent of the Borrower and its affiliates.
(d) The terms of each loan of securities by the Plan to the
Borrower are at least as favorable to such Plan as those of a
comparable arm's-length transaction between unrelated parties, taking
into account the exclusive arrangement.
(e) In exchange for granting the Borrower an exclusive right to
borrow certain securities, the Plan receives from such Borrower either
(i) a flat fee (which may be equal to a percentage of the value of the
total securities subject to the Borrowing Agreement from time to time),
(ii) a periodic payment that is equal to a percentage of the value of
the total balance of outstanding borrowed securities, or (iii) any
combination of (i) and (ii) (collectively, the Exclusive Fee). If the
Borrower pledges cash collateral, all the earnings generated by such
cash collateral shall be returned to such Borrower; provided that such
Borrower may, but shall not be obligated to, agree with the independent
fiduciary of the Plan that a percentage of the earnings on the
collateral may be retained by such Plan, or the Plan may agree to pay
the Borrower a rebate fee and retain the earnings on the collateral
(the Shared Earnings Compensation). If the Borrower pledges non-cash
collateral, all earnings on the non-cash collateral shall be returned
to such Borrower; provided that the Borrower may, but shall not be
obligated to, agree to pay the Plan a lending fee (the Lending Fee, and
together with the Shared Earnings Compensation, is referred to as the
Transaction Lending Fee). The Transaction Lending Fee, if any, shall be
either in addition to the Exclusive Fee or an offset against the
Exclusive Fee. The Exclusive Fee and the Transaction Lending Fee may be
determined in advance or pursuant to an objective formula and may be
different for different securities or different groups of securities
subject to the Borrowing Agreement. Any change in the Exclusive Fee or
the Transaction Lending Fee that the Borrower pays to the Plan with
respect to any securities loan requires the prior written consent of
the independent fiduciary of such Plan, except that consent is presumed
where the Exclusive Fee or the Transaction Lending Fee changes pursuant
to an objective formula. Where the Exclusive Fee or the Transaction
Lending Fee changes pursuant to an objective formula, the independent
fiduciary of the Plan must be notified at least 24 hours in advance of
such change and such independent Plan fiduciary must not object in
writing to such change,
[[Page 15242]]
prior to the effective time of such change.
(f) The Borrower may, but shall not be required to, agree to
maintain a minimum balance of borrowed securities subject to the
Borrowing Agreement. Such minimum balance may be a fixed U.S. dollar
amount, a flat percentage or other percentage determined pursuant to an
objective formula.
(g) By the close of business on or before the day on which the
loaned securities are delivered to the Borrower, the Plan receives from
such Borrower (by physical delivery, book entry in a securities
depository located in the United States, wire transfer, or similar
means) collateral consisting of U.S. currency, securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
irrevocable bank letters of credit issued by a U.S. bank, other than
the Borrower or any affiliate thereof, or any combination thereof, or
other collateral permitted under Prohibited Transaction Exemption 81-6
(as amended or superseded)(PTE 81-6).\14\
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\14\ 46 FR 7527, Jan. 23 1981, as amended at 52 FR 18754, May
19, 1987). 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) 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 Securities Exchange Act of
1934 (the 1934 Act) (or exempted from registration under the 1934
Act as a dealer in exempt Government securities, as defined therein)
or to a U.S. bank, that is a party in interest with respect to such
plan.
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Such collateral will be deposited and maintained in an account
which is separate from the Borrower's accounts and will be maintained
with an institution other than the Borrower. For this purpose, the
collateral may be held on behalf of the Plan by an affiliate of the
Borrower that is the trustee or custodian of the Plan.
(h) The market value (or in the case of a letter of credit, the
stated amount) of the collateral initially equals at least 102 percent
(102%) of the market value of the loaned securities on the close of
business on the day preceding the day of the loan and, if the market
value of the collateral at any time falls below 100 percent (100%) (or
such higher percentage as the Borrower and the independent fiduciary of
the Plan may agree upon) of the market value of the loaned securities,
the Borrower delivers additional collateral on the following day to
bring the level of the collateral back to at least 102 percent (102%).
The level of the collateral is monitored daily by the Plan or its
designee, which may be Morgan Stanley or any of its affiliates which
provides custodial or trustee services in respect of the securities
covered by the Borrowing Agreement for the Plan. The applicable
Borrowing Agreement shall give the Plan a continuing security interest
in, title to, or the rights of a secured creditor with respect to the
collateral and a lien on the collateral.
(i) Before entering into a Borrowing Agreement, the Borrower
furnishes to the Plan the most recent publicly available audited and
unaudited statements of its financial condition, as well as any
publicly available information which it believes is necessary for the
independent fiduciary to determine whether such Plan should enter into
or renew the Borrowing Agreement.
(j) The Borrowing Agreement contains a representation by the
Borrower that, as of each time it borrows securities, there has been no
material adverse change in its financial condition since the date of
the most recently furnished statements of financial condition.
(k) The Plan receives the equivalent of all distributions made
during the loan period, including, but not limited to, cash dividends,
interest payments, shares of stock as a result of stock splits, and
rights to purchase additional securities, that such Plan would have
received (net of tax withholdings) \15\ had it remained the record
owner of the securities.
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\15\ The Department notes the Applicants' representation that
dividends and other distributions on foreign securities payable to a
lending Plan are subject to foreign tax withholdings and that the
Borrower will always put the Plan back in at least as good a
position as it would have been had it not loaned securities.
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(l) The Borrowing Agreement and/or any securities loan outstanding
may be terminated by either party at any time without penalty (except
for, if the Plan has terminated its Borrowing Agreement, the return to
the Borrower of a pro-rata portion of the Exclusive Fee paid by the
Borrower to the Plan) whereupon the Borrower delivers 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 Plan within the lesser of five (5)
business days of written notice of termination or the customary
settlement period for such securities.
(m) In the event that the Borrower fails to return securities in
accordance with the Borrowing Agreement, the Plan will have the right
under the Borrowing Agreement to purchase securities identical to the
borrowed securities and apply the collateral to payment of the purchase
price. If the collateral is insufficient to satisfy the Borrower's
obligation to return the Plan's securities, the Borrower will indemnify
the Plan in the U.S. with respect to the difference between the
replacement cost of securities and the market value of the collateral
on the date the loan is declared in default, together with expenses
incurred by the Plan plus applicable interest at a reasonable rate,
including reasonable attorneys' fees incurred by the Plan for legal
action arising out of default on the loans, or failure by the Borrower
to properly indemnify the Plan.
(n) Except as otherwise provided herein, all procedures regarding
the securities lending activities, at a minimum, conform to the
applicable provisions of PTE 81-6 (as amended or superseded), as well
as to applicable securities laws of the United States, the United
Kingdom and/or Japan, as appropriate.
(o) Only 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 Plans which are maintained by the
same employer, controlled group of corporations or employee
organization (the Related Plans), 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
arrangements with the Borrowers, 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 Plans which are not maintained by
the same employer, controlled group of corporations or employee
organization (the Unrelated Plans), 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
Borrowers, the foregoing $50 million requirement is satisfied if such
trust or other entity has
[[Page 15243]]
aggregate assets which are in excess of $50 million (excluding the
assets of any 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--
(i) Has full investment responsibility with respect to plan assets
invested therein; and
(ii) 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.)
(p) Prior to any Plan's approval of the lending of its securities
to the Borrowers, a copy of the notice of proposed exemption, and a
copy of the final exemption, if granted, is provided to the Plan, and
the Borrower informs the independent fiduciary that the Borrower is not
acting as a fiduciary of the Plan in connection with its borrowing
securities from the Plan.\16\
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\16\ The Department notes the Applicants' representation that,
under the proposed exclusive borrowing arrangements, neither the
Borrower nor any of its affiliates will perform the essential
functions of a securities lending agent, i.e., the Applicants will
not be the fiduciary who negotiates the terms of the Borrowing
Agreement on behalf of the Plan, the fiduciary who identifies the
appropriate borrowers of the securities or the fiduciary who decides
to lend securities pursuant to an exclusive arrangement. However,
the Applicants or their affiliates may monitor the level of
collateral and the value of the loaned securities.
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(q) The independent fiduciary of the Plan receives monthly reports
with respect to the securities lending transactions, including but not
limited to the information set forth in this paragraph, so that an
independent Plan fiduciary may monitor such transactions with the
Borrowers. The monthly report will list for a specified period all
outstanding or closed securities lending transactions. The report will
identify for each open loan position, the securities involved, the
value of the security for collateralization purposes, the current value
of the collateral, the rebate or premium (if applicable) at which the
security is loaned, and the number of days the security has been on
loan. At the request of the Plan, such a report will be provided on a
daily or weekly basis, rather than a monthly basis. Also, upon request
of the Plan, the Borrower will provide the Plan with daily
confirmations of securities lending transactions.
(r) In addition to the above conditions, all loans involving
Foreign Borrowers must satisfy the following supplemental requirements:
(1) Such Foreign Borrower is a registered broker-dealer subject to
regulation by the FSA in the United Kingdom or is subject to regulation
in Japan by the Ministry of Finance, the Financial Services Agency, the
Tokyo Stock Exchange, and the Osaka Stock Exchange;
(2) Such Foreign Borrower is in compliance with all applicable
provisions of Rule 15a-6 (17 CFR 240.15a-6) under the 1934 Act which
provides foreign broker-dealers a limited exception from United States
registration requirements;
(3) All collateral is maintained in United States dollars or in
U.S. dollar-denominated securities or letters of credit or such other
collateral as may be permitted under PTE 81-6 (as amended or
superseded) from time to time;
(4) All collateral is held in the United States and the situs of
the Borrowing Agreement 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 C.F.R. 2550.404(b)-1; and
(5) Prior to entering into a transaction involving a Foreign
Borrower, the Foreign Borrower must:
(i) Agree to submit to the jurisdiction of the United States;
(ii) Agree to appoint an agent for service of process in the United
States, which may be an affiliate (the Process Agent);
(iii) Consent to the service of process on the Process Agent; and
(iv) Agree that enforcement by a Plan of the indemnity provided by
the Foreign Borrower will occur in the United States courts.
(s) The Borrower maintains, or causes to be maintained, within the
United States for a period of six (6) years from the date of each
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 Morgan Stanley
and/or its affiliates, the records are lost or destroyed prior to the
end of the six (6) year period; and
(2) No party in interest other than the Borrower 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 subsections (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--
(i) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission (SEC);
(ii) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(iii) Any contributing employer to any participating Plan or any
duly authorized employee representative of such employer; and
(iv) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(2) None of the persons described above in subparagraphs
(t)(1)(ii)-(t)(1)(iv) are authorized to examine the trade secrets of
Morgan Stanley or its affiliates or commercial or financial information
which is privileged or confidential.
Section III--Definitions
(a) An ``affiliate'' of a person means:
(i) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person. (For purposes of this paragraph, the term ``control''
means the power to exercise a controlling influence over the management
or policies of a person other than an individual);
(ii) Any officer, director, employee or relative (as defined in
section 3(15) of the Act) of any such other person or any partner in
any such person; and
(iii) Any corporation or partnership of which such person is an
officer, director or employee, or in which such person is a partner.
(b) The terms, ``Foreign Borrower'' or ``Foreign Borrowers,''
includes MSIL and any broker-dealer that, now or in the future, is an
affiliate of Morgan Stanley which is subject to regulation by the FSA
in the United Kingdom, and MSJL, and any broker-dealer that, now or in
the future, is an affiliate of Morgan
[[Page 15244]]
Stanley which is subject to regulation by the Ministry of Finance,
Financial Services Agency, the Tokyo Stock Exchange, and the Osaka
Stock Exchange in Japan.
(c) The term, ``Borrower,'' includes Morgan Stanley, MS&Co, MSSSI,
the Foreign Borrowers, and any other affiliate of Morgan Stanley that,
now or in the future, is a U.S. registered broker-dealer or a
government securities broker or dealer.
Effective Date: This proposed exemption, if granted, will be
effective as of November 11, 2001, the date the application was
received by the Department.
Summary of Facts and Representations
1. Morgan Stanley, a publicly traded Delaware corporation and a
registered investment adviser, is a full-line investment services firm.
As of November 30, 2000, Morgan Stanley had approximately $426.8
billion in total assets and $19.3 billion in stockholders' equity.
Morgan Stanley has several affiliates which are broker-dealers.
MS&Co, a subsidiary of Morgan Stanley, is a financial services firm
which is a member of the New York Stock Exchange and other principal
securities exchanges in the United States and is a member of the
National Association of Securities Dealers (NASD). MS&Co is
incorporated under the laws of the State of Delaware and is registered
with and regulated by the SEC as a U.S. broker-dealer under section 15
of the 1934 Act. As of May 31, 2001, MS&Co had approximately $299
billion in assets.
MSSSI, a subsidiary of MS&Co, is a financial services company which
is incorporated under the laws of the state of Delaware and is
registered with and regulated by the SEC as a broker-dealer under the
1934 Act, as amended, and is also a member of the NASD. As of November
20, 2000, MSSSI had approximately $47 billion in assets.
The Foreign Borrowers and their respective regulating entities, are
as follows: (a) MSIL, located in London and subject to regulation by
the FSA in the United Kingdom, and (b) MSJL, located in Tokyo, and
subject to regulation by the Ministry of Finance, Financial Services
Agency, the Tokyo Stock Exchange, and the Osaka Stock Exchange in
Japan. As of November 30, 2000, MSIL had approximately $194 million in
assets. As of March 31, 2001, MSJL Tokyo Branch had approximately
5,560 billion in assets.
2. The Borrowers, acting as principal, actively engage in the
borrowing and lending of securities. The Borrowers utilize borrowed
securities either to satisfy their own trading requirements or to re-
lend to other broker-dealers and entities which need a particular
security for a certain period of time. The Applicants represent that in
the United States, as described in the Federal Reserve Board's
Regulation T, borrowed securities are often used in short sales, for
non-purpose loans to exempted borrowers, or in the event of a failure
to receive securities that a broker-dealer is required to deliver.
The Applicants wish to enter into exclusive borrowing arrangements
with Plans for which Morgan Stanley or any affiliate of Morgan Stanley
may be an investment manager for the assets of such Plans that are
unrelated to the assets involved in the transaction. Morgan Stanley or
any of its affiliates may provide securities custodial services,
trustee services, clearing and/or reporting functions in connection
with securities lending transactions, or other services to such Plans.
3. The Applicants represent that although MSIL or any other foreign
broker-dealer of Morgan Stanley in the United Kingdom will not be
registered with the SEC, their activities are governed by the rules,
regulations, and membership requirements of the FSA. In this regard,
the Applicants state that these broker-dealers are subject to the FSA
rules relating to, among other things, minimum capitalization,
reporting requirements, periodic examinations, client money and safe
custody rules, and books and records requirements with respect to
client accounts. The Applicants represent that the rules and
regulations set forth by the FSA and the SEC share a common objective--
the protection of the investor by the regulation of the securities
industry. The Applicants represent that the FSA 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 may fall due, and that the FSA rules set forth comprehensive
financial resource and reporting/disclosure rules regarding capital
adequacy. In addition, to demonstrate capital adequacy, the Applicants
state that the FSA rules impose reporting/disclosure requirements on
broker-dealers with respect to risk management, internal controls, and
transaction reporting and record-keeping requirements. In this regard,
required records must be produced at the request of the FSA at any
time. The Applicants further state that the rules and regulations of
the FSA for broker-dealers are backed up by potential fines and
penalties as well as a comprehensive disciplinary system.
4. Japan has comprehensive financial resource and reporting/
disclosure rules concerning broker-dealers. Broker-dealers are required
to demonstrate their capital adequacy. The reporting/disclosure rules
impose requirements on broker-dealers with respect to risk management,
internal controls, and records relating to counter-parties. All such
records must be produced at the request of the agency at any time. The
agencies' registration requirements for broker-dealers are enforced by
fines and penalties and thus constitute a comprehensive disciplinary
system.
5. The Applicants represent that in addition to the protections
afforded by the FSA, the Ministry of Finance, Financial Services
Agency, the Tokyo Stock Exchange, or the Osaka Stock Exchange,
compliance by the Applicants with the requirements of Rule 15a-6 of the
1934 Act (and the amendments and interpretations thereof) will offer
further protections to the Plans.\17\ Rule 15a-6 provides an exemption
from U.S. registration requirements 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
[[Page 15245]]
investment advisor, or (b) the employee benefit plan has total assets
in excess of $5 million, 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 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.\18\ The Applicants
represent 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.
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\17\ According to the Applicants, section 3(a)(4) of the 1934
Act defines ``broker,'' to mean ``any person engaged in the business
of effecting transactions in securities for the account of others,
but it does not include a bank.'' Section 3(a)(5) of the 1934 Act
provides a similar exclusion for ``banks'' in the definition of the
term, ``dealer.'' However, section 3(a)(6) of the 1934 Act defines
``bank'' to mean a banking institution organized under the laws of
the United States or a State of the United States. Further, Rule
15a-6(b)(3) provides that the term, ``foreign broker-dealer,'' means
``any non-U.S. resident person * * * whose securities activities, if
conducted in the United States, would be described by the definition
of `broker' or `dealer' in sections 3(a)(4) or 3(a)(5) of the [1934]
Act.'' Therefore, the test of whether an entity is a ``foreign
broker'' or ``dealer'' is based on the nature of such foreign
entity's activities and, with certain exceptions, only banks that
are regulated by either the United States or a State of the United
States are excluded from the definition of the term, ``broker'' or
``dealer.'' Thus, for purposes of this exemption request, the
Applicants are willing to represent that they will comply with the
applicable provisions and relevant SEC interpretations and
amendments of Rule 15a-6.
\18\ Note that the categories of entities that qualify as
``major U.S. institutional investors'' has been expanded by a
Securities and Exchange Commission No-action letter. See SEC No-
Action Letter issued to Cleary, Gottlieb, Steen & Hamilton on April
9, 1997, (April 9, 1997 No-Action Letter).
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The Applicants represent 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 Rule 15a-6 \19\ must, among other things:
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\19\ If it is determined that applicable regulation under the
1934 Act does not require Morgan Stanley or the Borrower to comply
with Rule 15a-6, both entities will nevertheless comply with
subparagraphs (a) and (b) of Representation 5.
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(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 such foreign
associated persons, and any assistance in taking the evidence of other
persons, wherever located, that the SEC requests and that relates to
the transactions effected pursuant to the Rule;
(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):
(1) Effect the transactions, other than negotiating the 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); \20\ and
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\20\ Under certain circumstances described in the April 9, 1997,
No-Action Letter (e.g., clearance and settlement transactions),
there may be direct transfers of funds and securities between a Plan
and Morgan Stanley or between a Plan and the Foreign Borrower. The
Applicants note that in such situations, the U.S. registered broker-
dealer will not be acting as principal with respect to any duties it
is required to undertake pursuant to Rule 15a-6.
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(6) Participate in certain oral communications (e.g., telephone
calls) between the foreign associated person and the U.S. institutional
investor (not the major U.S. institutional investor), and accompany the
foreign associated person on certain visits with both U.S.
institutional and major U.S. institutional investors. The Applicants
represent that, under certain circumstances, the foreign associated
person may have direct communications and contact with the U.S.
Institutional Investor.\21\ (See April 9, 1997, No-Action Letter.)
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\21\ The term ``foreign associated person'' as defined in Rule
15a-6(b)(2) means 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-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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6. An institutional investor, such as a pension fund, lends
securities in its portfolio to a broker-dealer or bank in order to earn
a fee while continuing to enjoy the benefits of owning the securities
(e.g., from the receipt of any interest, dividends, or other
distributions due on those securities and from any appreciation in the
value of the securities). The lender requires that the securities loan
be fully collateralized, and the collateral usually is in the form of
cash or high quality liquid securities, such as U.S. Government or
Federal Agency obligations or irrevocable bank letters of credit. If
the borrower deposits cash collateral, the lender invests the
collateral, and the borrowing agreement may provide that the lender pay
the borrower a previously-agreed upon amount or a rebate fee and keep
the earnings on the collateral. If the borrower deposits government
securities, the borrower is entitled to the earnings on its deposited
securities and may pay the lender a lending fee. If the borrower
deposits irrevocable bank letters of credit as collateral, the borrower
pays the lender a fee as compensation for the loan of its securities.
These fees, referred to above, as the Transaction Lending Fee, may be
determined in advance or pursuant to an objective formula, and may be
different for different securities or different groups of securities
subject to the Borrowing Agreement.
7. The Borrowers request an exemption for the lending of
securities, under certain exclusive borrowing arrangements, by Plans
with respect to which Morgan Stanley or any of its affiliates is a
party in interest (including a fiduciary) solely by reason of providing
services to such Plan, or solely by reason of a relationship to a
service provider described in section 3(14)(F), (G), (H) or (I) of the
Act. For each Plan, neither the Borrowers nor any of its affiliates
will have discretionary authority or control over the Plan's investment
in the securities available for loan, nor will they render investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets. The Applicants represent that because the Borrowers, by
exercising their contractual rights under the proposed exclusive
borrowing arrangements, will have discretion with respect to whether
there is a loan of particular Plan securities to the Borrowers, the
lending of securities to the Borrowers may be outside the scope of
relief provided by PTE 81-6.\22\
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\22\ PTE 81-6 requires in part that neither the borrower nor an
affiliate of the borrower may have discretionary authority or
control over the investment of the plan assets involved in the
transaction.
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8. For each Plan, the Borrowers will directly negotiate a Borrowing
Agreement with a Plan fiduciary which is independent of the Borrowers.
Under the Borrowing Agreement, the Borrowers will have exclusive access
for a specified period of time to borrow certain securities of the Plan
pursuant to certain conditions. The form of the Borrowing Agreement to
be used in foreign jurisdictions will reflect appropriate local
industry or market standards.\23\ The Borrowing Agreement
[[Page 15246]]
will specify all material terms of the agreement, including the basis
for compensation to the Plan under each category of securities
available for loan. The Borrowing Agreement will also contain a
requirement that the Borrowers pay all transfer fees and transfer taxes
relating to the securities loans. The terms of each loan of securities
by a Plan to a Borrower will be at least as favorable to such Plan as
those of a comparable arm's-length transaction between unrelated
parties, taking into account the exclusive arrangement.
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\23\ For example, the form of the Borrowing Agreement to be used
in the United Kingdom differs from the standard U.S. Borrowing
Agreement. Under the form Borrowing Agreement to be used in the
United Kingdom, the Plan receives title to (rather than a pledge of
or a security interest in) the collateral.
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9. The Borrowers may, but shall not be required to, agree to
maintain a minimum balance of borrowed securities subject to the
Borrowing Agreement. Such minimum balance may be a fixed U.S. dollar
amount, a flat percentage or other percentage determined pursuant to an
objective formula.
10. In exchange for granting the Borrower the exclusive right to
borrow certain securities, the Plan receives an Exclusive Fee from the
Borrower. If the Borrower deposits cash collateral, all the earnings
generated by such cash collateral shall be returned to the Borrower;
provided that the Borrower may, but shall not be obligated to, agree
with the independent fiduciary of the Plan to Shared Earnings
Compensation. If the Borrower deposits non-cash collateral, all
earnings on the non-cash collateral shall be returned to the Borrower;
provided that the Borrower may, but shall not be obligated to, agree to
pay the Plan a Lending Fee. The Lending Fee, together with the Shared
Earnings Compensation, is called the Transaction Lending Fee.
The Transaction Lending Fee, if any, may be in addition to the
Exclusive Fee or an offset against such Exclusive Fee. The Exclusive
Fee and the Transaction Lending Fee may be determined in advance or
pursuant to an objective formula, and may be different for different
securities or different groups of securities subject to the Borrowing
Agreement. For example, in addition to the Borrower paying different
fees for different portfolios of securities (i.e., the fee for a
domestic securities portfolio may be different than the fee for a
foreign securities portfolio), the Borrower may also pay different fees
for securities of issuers in different foreign countries (i.e., there
may be a different fee for German securities than for French
securities). In addition, with respect to, for example, the French
securities, there may be different fees for liquid securities than for
illiquid securities.
Any change in, or a change in the method of determining, the
Exclusive Fee or the Transaction Lending Fee that the Applicants pay to
the Plan with respect to any securities loan requires the prior written
consent of the independent fiduciary of the Plan, except that consent
is presumed where the Exclusive Fee or the Transaction Lending Fee
changes pursuant to an objective formula. Where the Exclusive Fee or
the Transaction Lending Fee changes pursuant to an objective formula,
the independent fiduciary of the Plan must be notified at least 24
hours in advance of such change and such independent Plan fiduciary
must not object in writing to such change, prior to the effective time
of such change.
The Plan is entitled to the equivalent of all distributions made to
holders of the borrowed securities during the loan period, including,
but not limited to, cash dividends, interest payments, shares of stock
as a result of stock splits, and rights to purchase additional
securities that the Plan would have received (net of tax withholdings
in the case of foreign securities), had it remained the record owner of
the securities.
11. By the close of business on or before the day on which the
loaned securities are delivered to the Borrower, the Plan will receive
from the Borrower (by physical delivery, book entry in a securities
depository located in the United States, wire transfer, or similar
means) collateral consisting of U.S. currency, securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
irrevocable bank letters of credit issued by U.S. banks, or other
collateral permitted under PTE 81-6 (as amended or superseded). Such
collateral will be deposited and maintained in an account on behalf of
the Plan which is separate from the Borrower's accounts and will be
maintained with an institution other than the Borrower. For this
purpose, the collateral may be held on behalf of the Plan by an
affiliate of the Borrower that is the trustee or custodian of the Plan.
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 Plan, its independent fiduciary or its
designee, which may be Morgan Stanley or any of its affiliates which
provides custodial or trustee services in respect of the securities
covered by the Borrowing Agreement for the Plan, will monitor the level
of the collateral daily and, if the market value of the collateral on
the close of a business day falls below 100 percent (or such higher
percentage as the Borrower and the independent fiduciary of the Plan
may agree upon) of the market value of the loaned securities at the
close of business on such day, the Borrower will deliver additional
collateral by the close of business on the following day to bring the
level of the collateral back to at least 102 percent. The applicable
Borrowing Agreement will give the Plan a continuing security interest
in, title to, or the rights of a secured creditor with respect to the
collateral and a lien on the collateral.
If the Borrower pledges cash collateral, the Plan invests the
collateral, and all earnings on such cash collateral shall be returned
to the Borrower; provided that the Borrowing Agreement may provide that
the Plan receive Shared Earnings Compensation, which, as discussed
above, may be a percentage of the earnings on the collateral which may
be retained by the Plan or the Plan may agree to pay the Borrower a
rebate fee and retain the earnings on the collateral. The terms of the
rebate fee for each loan will be at least as favorable to the Plan as
those of comparable arm's length transactions between unrelated parties
taking into account the exclusive arrangement, and will be based upon
an objective methodology which takes into account several factors,
including potential demand for the loaned securities, the applicable
benchmark cost of fund indices (typically, the U.S. Federal Funds rate
established by the U.S. Federal Reserve System (the Federal Funds), the
overnight REPO \24\ rate, or the like) and the anticipated investment
return on overnight investments permitted by the independent fiduciary
of the Plan.
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\24\ An overnight REPO is an overnight repurchase agreement that
is an arrangement whereby securities dealers and banks finance their
inventories of Treasury bills, notes and bonds. The dealer or bank
sells securities to an investor with a temporary surplus of cash,
agreeing to buy them back the next day. Such transactions are
settled in immediately available Federal Funds, usually at a rate
below the Federal Funds rate (the rate charged by banks lending
funds to each other).
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If the Borrower pledges non-cash collateral, such as government
securities or irrevocable bank letters of credit, the Borrower shall be
entitled to the earnings on its non-cash collateral; provided that the
Borrower may, but shall not be obligated to, agree to pay the Plan a
Lending Fee. The Exclusive Fee and the Transaction Lending Fee may be
determined in advance or pursuant to an objective formula, and
[[Page 15247]]
may be different for different securities or different groups of
securities subject to the Borrowing Agreement.
The Borrower will provide a monthly report to the independent
fiduciary of the Plan which includes the following information. The
monthly report will list for a specified period all outstanding or
closed securities lending transactions. The report will identify for
each open loan position, the securities involved, the value of the
security for collateralization purposes, the current value of the
collateral, the rebate or premium (if applicable) at which the security
is loaned, and the number of days the security has been on loan. At the
request of the Plan, such a report will be provided on a daily or
weekly basis, rather than a monthly basis. Also, upon request of the
Plan, the Borrower will provide the Plan with daily confirmations of
securities lending transactions.
12. Before entering into a Borrowing Agreement, the Borrower will
furnish to the Plan the most recent publicly available audited and
unaudited statements of its financial condition, as well as any
publicly available information which it believes is necessary for the
independent fiduciary to determine whether the Plan should enter into
or renew the Borrowing Agreement. Further, the Borrowing Agreement will
contain a representation by the Borrower that as of each time it
borrows securities, there has been no material adverse change in its
financial condition since the date of the most recently furnished
financial statements.
13. Prior to any Plan's approval of the lending of its securities
to the Borrowers, a copy of the notice of proposed exemption and a copy
of the final exemption, if granted, will be provided to the Plan, and
the Borrower will inform the independent fiduciary that the Borrower is
not acting as a fiduciary of the Plan in connection with its borrowing
securities from the Plan.
14. With regard to those Plans for which Morgan Stanley or any of
its affiliates provides custodial, trustee, clearing and/or reporting
functions relative to securities loans, Morgan Stanley and a Plan
fiduciary independent of Morgan Stanley and its affiliates will agree
in advance and in writing to any fees that Morgan Stanley or any of its
affiliates is to receive for such services. Such fees, if any, would be
fixed fees (e.g., Morgan Stanley or any of its affiliates might
negotiate to receive a fixed percentage of the value of the assets with
respect to which it performs these services or to receive a stated
dollar amount) and any such fee would be in addition to any fee Morgan
Stanley or any of its affiliates has negotiated to receive from any
such Plan for standard custodial or other services unrelated to the
securities lending activity. The arrangement for Morgan Stanley or any
of its affiliates to provide such functions relative to securities
loans to the Borrowers will be terminable by the Plan within five (5)
business days of the receipt of written notice without penalty to the
Plan, except for the return to the Borrowers of a pro-rata portion of
the Exclusive Fee paid by the Borrowers to the Plan, if the Plan has
also terminated its exclusive borrowing arrangement with the Borrowers.
15. The Borrowing Agreement and/or any securities loan outstanding
may be terminated by either party at any time without penalty. Upon
termination of any securities loan, the Borrower will deliver
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 Plan within the lesser of
five (5) business days of written notice of termination or the
customary settlement period for such securities.
16. In the event that the Borrower fails to return securities in
accordance with the Borrowing Agreement, the Plan will have the right
under the Borrowing Agreement to purchase securities identical to the
borrowed securities and apply the collateral to payment of the purchase
price. If the collateral is insufficient to satisfy the Borrower's
obligation to return the Plan's securities, the Borrower will indemnify
the Plan in the U.S. with respect to the difference between the
replacement cost of securities and the market value of the collateral
on the date the loan is declared in default, together with expenses
incurred by the Plan plus applicable interest at a reasonable rate,
including reasonable attorneys' fees incurred by the Plan for legal
action arising out of default on the loans or failure by the Borrower
to properly indemnify the Plan.
17. Except as provided herein, all the procedures under the
Borrowing Agreement will, at a minimum, conform to the applicable
provisions of PTE 81-6 (as amended or superseded), as well as to
applicable securities laws of the United States, the United Kingdom
and/or Japan, as appropriate. In addition, in order to ensure that the
independent fiduciary representing a Plan has the experience,
sophistication, and resources necessary to adequately review the
Borrowing Agreement and the fee arrangements thereunder, only 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--
(a) In the case of the Related Plans, whose assets are commingled
for investment purposes in a single master trust or any other entity
the assets of which are ``plan assets'' under the Plan Asset
Regulation, which entity is engaged in securities lending arrangements
with the Borrowers, 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.
(b) In the case of the Unrelated Plans, 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 Borrowers, 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 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--
(i) Has full investment responsibility with respect to plan assets
invested therein; and
(ii) 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.)
18. It is represented that the lending of securities is an
attractive investment opportunity because it enables the owner of the
securities to earn additional income from the securities while
continuing to receive the dividends, interest payments, and other
[[Page 15248]]
distributions made with respect to the loaned securities. The
Applicants represent that the opportunity for the Plans to enter into
exclusive borrowing arrangements with the Borrowers under the flexible
fee structures described herein is in the interests of the Plans
because the Plans will then be able to choose among an expanded number
of competing exclusive borrowers, as well as maximizing the volume of
securities lent and the return on such securities.
19. The proposed transaction contain safeguards sufficient to
protect the Plans and the participants and beneficiaries of such Plans.
In this regard, in addition to the above conditions, all loans
involving Foreign Borrowers must satisfy the following supplemental
requirements:
(i) Such Foreign Borrower is a registered broker-dealer subject to
regulation by the FSA or the Ministry of Finance, Financial Services
Agency, the Tokyo Stock Exchange, or the Osaka Stock Exchange;
(ii) Such Foreign Borrower is in compliance with all applicable
provisions of Rule 15a-6 (17 CFR 240.15a-6) under the 1934 Act which
provides foreign broker-dealers a limited exception from United States
registration requirements;
(iii) All collateral is maintained in United States dollars or in
U.S. dollar-denominated securities or letters of credit or such other
collateral as may be permitted under PTE 81-6 from time to time;
(iv) All collateral is held in the United States and the situs of
the Borrowing Agreement 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; and
(v) Prior to entering into a transaction involving a Foreign
Borrower, the Foreign Borrower must:
(1) Agree to submit to the jurisdiction of the United States;
(2) Agree to appoint a Process Agent for service of process in the
United States, which may be an affiliate;
(3) Consent to the service of process on the Process Agent; and
(4) Agree that enforcement by a Plan of the indemnity provided by
the Foreign Borrower will occur in the United States courts.
20. In addition to the protections cited above, the Borrower will
maintain, or cause to be maintained, within the United States for a
period of six years from the date of a transaction, such records as are
necessary to enable the Department and other persons (as specified
herein in section II(t)(1)) to determine whether the conditions of the
exemption have been met.
21. The requested exemption is administratively feasible because
the conditions to which the Applicants have consented to be subject are
comparable to those described in PTE 81-6. The proposed exemption
requires the review and approval of the borrowing arrangement by a
fiduciary of the Plan that is independent of Morgan Stanley and its
affiliates and does not require any further action by the Department.
22. In summary, the Applicants represent that the described
transactions satisfy the statutory criteria of section 408(a) of the
Act because:
(a) The Borrower will directly negotiate a Borrowing Agreement with
an independent fiduciary of each Plan;
(b) The Plans will be permitted to lend to the Borrower, a major
securities borrower who will be added to an expanded list of competing
exclusive borrowers, enabling the Plans to earn additional income from
the loaned securities on a secured basis, while continuing to enjoy the
benefits of owning the securities;
(c) In exchange for granting the Borrower the exclusive right to
borrow certain securities, the Borrower will pay the Plan the Exclusive
Fee, which as discussed above may be either (i) a flat fee (which may
be a percentage of the value of the total securities subject to the
Borrowing Agreement), (ii) a percentage of the total balance of
outstanding borrowed securities, or (iii) any combination of (i) and
(ii);
(d) Any change in the Exclusive Fee or Shared Earnings Compensation
that the Borrower pays to the Plan with respect to any securities loan
will require the prior written consent of the independent fiduciary,
except that consent will be presumed where the Exclusive Fee or Shared
Earnings Compensation changes pursuant to an objective formula
specified in the Borrowing Agreement and the independent fiduciary is
notified at least 24 hours in advance of such change and does not
object in writing thereto, prior to the effective time of such change;
(e) The Borrower will provide sufficient information concerning its
financial condition to a Plan before a Plan lends any securities to the
Borrower;
(f) The collateral posted with respect to each loan of securities
to the Borrower initially will be at least 102 percent of the market
value of the loaned securities and will be monitored daily by the
independent fiduciary;
(g) The Borrowing Agreement and/or any securities loan outstanding
may be terminated by either party at any time without penalty, except
for the return to the Borrower of a pro-rata portion of the Exclusive
Fee paid by the Borrower to the Plan, and whereupon the Borrower will
return any borrowed securities (or the equivalent thereof in the event
of reorganization, recapitalization, or merger of the issuer of the
borrowed securities) to the Plan within the lesser of five (5) business
days of written notice of termination or the customary settlement
period for such securities;
(h) Neither the Borrower nor any of its affiliates will have
discretionary authority or control over the Plan's investment in the
securities available for loan;
(i) The minimum Plan size requirement (as specified in section
II(o)) will ensure that the Plans will have the resources necessary to
adequately review and negotiate all aspects of the exclusive borrowing
arrangements; and
(j) All the procedures will, at a minimum, conform to the
applicable provisions of PTE 81-6 (as amended or superseded), as well
as applicable securities laws of the United States, the United Kingdom
and/or Japan, as appropriate.
Notice to Interested Persons
Included among those persons who may be interested in the pendency
of the proposed exemption are: (1) The independent fiduciaries of the
Plans that the Applicants can identify as being currently interested in
lending securities to the Borrowers under circumstances described in
the proposed exemption; and (2) Plans which may be potentially
interested in the proposed transactions but cannot be identified at the
time the Notice is published in the Federal Register. These two classes
of interested persons will be notified as follows.
With respect to Plans that the Applicants can identify as being
currently interested in lending securities to the Borrowers, the
Applicants represent that they will furnish a copy of the Notice of
Proposed Exemption (the Notice) along with the supplemental statement,
described at 29 CFR 2570.43(b)(2), to the independent fiduciary of such
Plan either by hand delivery or first class mailing, within fifteen
(15) days following the publication of the Notice in the Federal
Register. In addition, the Applicants represent that they will provide
the independent fiduciary of such Plans a copy of the final exemption,
if granted, within fifteen (15) days following the
[[Page 15249]]
publication of such final exemption in the Federal Register.
With respect to the Plans which may be potentially interested in
the proposed transactions but cannot be identified at the time the
Notice is published in the Federal Register, the only practical means
of notifying the fiduciaries of such Plans of the pendency of the
Notice is by publication of the Notice in the Federal Register.
The Applicants also represent that a copy of the Notice and a copy
of the final exemption, if granted, will be provided by hand delivery
or first class mailing to the independent fiduciary of a Plan prior to
entering into any exclusive borrowing arrangement with such Plan
involving securities lending covered by this exemption.
Written comments and/or requests for a hearing on the proposed
exemption must be received by the Department on or before 45 days from
the date following publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 25th day of March, 2002.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 02-7520 Filed 3-28-02; 8:45 am]
BILLING CODE 4510-29-P