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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Deutsche Bank AG [Notices] [03/29/2002]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    (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).
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    (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
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    (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.)
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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