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Secretary of Labor Thomas E. Perez
Proposed Amendment to Prohibited Transaction Exemption (PTE) 2000-58 Involving Bear, Stearns & Co. Inc., Prudential Securities Incorporated, et al. [Notices] [05/22/2002]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Amendment to Prohibited Transaction Exemption (PTE) 2000-58 Involving Bear, Stearns & Co. Inc., Prudential Securities Incorporated, et al. [05/22/2002]

[PDF Version]

Volume 67, Number 99, Page 36028-36030

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application Number D-11077]

 
Proposed Amendment to Prohibited Transaction Exemption (PTE) 
2000-58 Involving Bear, Stearns & Co. Inc., Prudential Securities 
Incorporated, et al.

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

ACTION: Notice of a proposed amendment to certain of the Underwriter 
Exemptions.\1\

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    \1\ The term Underwriter Exemptions refers 
to the following individual Prohibited Transaction Exemptions 
(PTEs): PTE 89-88, 54 FR 42582 (October 17, 1989); PTE 89-89, 54 FR 
42569 (October 17, 1989); PTE 89-90, 54 FR 42597 (October 17, 1989); 
PTE 90-22, 55 FR 20542 (May 17, 1990); PTE 90-23, 55 FR 20545 (May 
17, 1990); PTE 90-24, 55 FR 20548 (May 17, 1990); PTE 90-28, 55 FR 
21456 (May 24, 1990); PTE 90-29, 55 FR 21459 (May 24, 1990); PTE 90-
30, 55 FR 21461 (May 24, 1990); PTE 90-31, 55 FR 23144 (June 6, 
1990); PTE 90-32, 55 FR 23147 (June 6, 1990); PTE 90-33, 55 FR 23151 
(June 6, 1990); PTE 90-36, 55 FR 25903 (June 25, 1990); PTE 90-39, 
55 FR 27713 (July 5, 1990); PTE 90-59, 55 FR 36724 (September 6, 
1990); PTE 90-83, 55 FR 50250 (December 5, 1990); PTE 90-84, 55 FR 
50252 (December 5, 1990); PTE 90-88, 55 FR 52899 (December 24, 
1990); PTE 91-14, 55 FR 48178 (February 22, 1991); PTE 91-22, 56 FR 
03277 (April 18, 1991); PTE 91-23, 56 FR 15936 (April 18, 1991); PTE 
91-30, 56 FR 22452 (May 15, 1991); PTE 91-62, 56 FR 51406 (October 
11, 1991); PTE 93-31, 58 FR 28620 (May 5, 1993); PTE 93-32, 58 FR 
28623 (May 14, 1993); PTE 94-29, 59 FR 14675 (March 29, 1994); PTE 
94-64, 59 FR 42312 (August 17, 1994); PTE 94-70, 59 FR 50014 
(September 30, 1994); PTE 94-73, 59 FR 51213 (October 7, 1994); PTE 
94-84, 59 FR 65400 (December 19, 1994); PTE 95-26, 60 FR 17586 
(April 6, 1995); PTE 95-59, 60 FR 35938 (July 12, 1995); PTE 95-89, 
60 FR 49011 (September 21, 1995); PTE 96-22, 61 FR 14828 (April 3, 
1996); PTE 96-84, 61 FR 58234 (November 13, 1996); PTE 96-92, 61 FR 
66334 (December 17, 1996); PTE 96-94, 61 FR 68787 (December 30, 
1996); PTE 97-05, 62 FR 1926 (January 14, 1997); PTE 97-28, 62 FR 
28515 (May 23, 1997); PTE 97-34, 62 FR 39021 (July 21, 1997); PTE 
98-08, 63 FR 8498 (February 19, 1998); PTE 99-11, 64 FR 11046 (March 
8, 1999); PTE 2000-19, 65 FR 25950 (May 4, 2000); PTE 2000-33, 65 FR 
37171 (June 13, 2000); PTE 2000-41, 65 FR 51039 (August 22, 2000); 
and PTE 2000-55 (November 13, 2000).
    In addition, the Department notes that it is also proposing 
individual exemptive relief for: Deutsche Bank A.G., New York Branch 
and Deutsche Morgan Grenfell/C.J. Lawrence Inc., Final Authorization 
Number (FAN) 97-03E (December 9, 1996); Credit Lyonnais Securities 
(USA) Inc., FAN 97-21E (September 10, 1997); ABN AMRO Inc., FAN 98-
08E (April 27, 1998); Ironwood Capital Partners Ltd., FAN 99-31E 
(December 20, 1999); and William J. Mayer Securities LLC, FAN 01-25E 
(October 15, 2001), which received the approval of the Department to 
engage in transactions substantially similar to the transactions 
described in the Underwriter Exemptions pursuant to PTE 96-62.
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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed amendment to certain 
of the Underwriter Exemptions. The Underwriter Exemptions are 
individual exemptions that provide relief for the origination and 
operation of certain asset pool investment trusts and the acquisition, 
holding and disposition by employee benefit plans (Plans) of certain 
asset-backed pass-through certificates representing undivided interests 
in those investment trusts. The proposed amendment, if granted, would 
permit the trustee of the trust to be an affiliate of the underwriter 
of the certificates. If adopted, the proposed amendment would affect 
the participants and beneficiaries of the Plans participating in such 
transactions and the fiduciaries with respect to such Plans.

DATES: Written comments and requests for a public hearing should be 
received by the Department on or before 45 days from the date of the 
publication in the Federal Register of this notice of proposed 
amendment. If granted, the amendment will be effective as of March 13, 
2002.

ADDRESSES: All written comments and requests for a public hearing 
(preferably three copies) should be addressed to the U.S. Department of 
Labor, Office of Exemption Determinations, Pension and Welfare Benefits 
Administration, Room N-5649, 200 Constitution Avenue, NW, Washington, 
DC 20210, (attention: Application No. D-11077; Proposal to Amend 
Underwriter Exemptions). 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 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.

FOR FURTHER INFORMATION CONTACT: Karen E. Lloyd, Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, U.S. 
Department of Labor, telephone (202) 693-8540. (This is not a toll-free 
number.)

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed exemption that would amend certain 
of the Underwriter Exemptions. The Underwriter Exemptions are 
individual exemptions that provide relief from certain of the 
prohibited transaction restrictions of sections 406(a), 406(b) and 
407(a) of the Employee Retirement Income Security Act of 1974 (the 
Act), as amended, and from the taxes imposed by section 4975(a) and (b) 
of the Internal Revenue Code of 1986 (the Code), as amended, by reason 
of certain provisions of section 4975(c)(1) of the Code. All of the 
Underwriter Exemptions were amended by Prohibited Transaction Exemption 
97-34 (62 FR 39021, July 21, 1997) and by Prohibited Transaction 
Exemption 2000-58 (65 FR 67765, November 13, 2000).
    On March 28, 2002, the Department granted a final exemption to J.P. 
Morgan Chase & Company (J.P. Morgan Chase) which amended three of the 
Underwriter Exemptions granted to J.P. Morgan Chase and certain of its 
affiliates.\2\ (See PTE 2002-19, 67 FR 14979). The Department 
subsequently contacted The Bond Market Association, a trade association 
which represents securities firms and banks that underwrite, trade and 
sell debt securities, which confirmed that a majority of its members 
currently possessing Underwriter Exemptions desire the same relief 
provided to J.P. Morgan Chase under PTE 2002-19. Accordingly, the 
Department has determined to amend the remaining Underwriter Exemptions 
on its own motion.
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    \2\ The exemptions are PTE 90-23 (55 FR 20545, May 17, 1990), 
PTE 90-31 (55 FR 23144, June 6, 1990), and PTE 90-33 (55 FR 23151, 
June 6, 1990).
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    The Underwriter Exemptions permit Plans to purchase certain 
securities representing interests in asset-or mortgage-backed 
investment pools. The securities generally take the form of 
certificates issued by a trust (the Trust). The Underwriter Exemptions 
permit transactions involving a Trust (including the servicing, 
management and operation of the Trust) and certificates evidencing 
interests therein (including the sale, exchange or transfer of 
certificates in the initial issuance of the certificates or in the 
secondary market for such certificates). The entities covered include 
the sponsor of

[[Page 36029]]

the Trust as well as the underwriter for the certificates issued by the 
Trust when the sponsor, servicer, trustee or insurer of the Trust, the 
underwriter of the certificates issued by the Trust, or an obligor of 
the receivables contained in the Trust, is a party in interest with 
respect to an investing Plan.\3\
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    \3\ Interested persons should review the Department's 
regulations at 29 CFR 2510.3-101 (Definition of plan 
assets-plan investments) for the reasons a Plan's 
investment in certificates issued by a Trust may raise prohibited 
transaction issues with respect to parties in interest.
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    One of the requirements of the Underwriter Exemptions (except as 
amended by PTE 2002-19) is that the trustee of the Trust not be an 
affiliate of any member of what the Underwriter Exemptions define as 
the Restricted Group; i.e., in addition to the 
trustee, each underwriter, each servicer, each insurer, the sponsor, 
any more than 5% obligor with respect to receivables included in the 
Trust, each counterparty in an Eligible Swap Agreement, and any 
affiliate of such persons.
    Like PTE 2002-19, the amendment proposed herein would permit the 
trustee of a Trust to be an affiliate of the underwriter of the 
securities issued by the Trust. The Bond Market Association represents 
that the facts and circumstances presented in the amendment requested 
by J.P. Morgan Chase are equally relevant and applicable with respect 
to other situations in which underwriters possessing an Underwriter 
Exemption may have trustee affiliates.
    In connection with its application to amend its Underwriter 
Exemptions, J.P. Morgan Chase represented that, while the provision 
requiring an independent trustee was not a major issue in 1989, 
developments in the banking industry over the past twelve years have 
caused the requirement to become onerous and disadvantageous to 
investors, including Plans. As the banking industry has consolidated, 
the number of banks participating in the corporate trust business has 
shrunk dramatically. This trend has been due to a number of factors 
which have made participation in the trust business less attractive to 
banks. On the income side, these factors include competitive pressure 
on pricing corporate trust services and loss of transactional fees and 
traditional float income due to the growth in book entry securities. On 
the expense side, the cost of entry into the corporate trust business 
and the cost of remaining in the business have increased dramatically. 
This increase includes both technological and personnel costs. The cost 
increase is particularly acute in the structured finance sector of the 
corporate trust business, where both systems and staff need to have the 
capability of supporting increasingly complex transactions.
    J.P. Morgan Chase represented that the changes in the securities 
underwriting business are equally significant. These include the 
increased participation by banks and bank affiliates, and consolidation 
within the industry. As of the calendar year 2000, four of the top ten 
underwriters for structured finance transactions had affiliated 
corporate trust businesses. Eight of the top ten trustees, a group with 
a combined market share of over 76 percent in 2000, were affiliates of 
underwriters active in the structured finance sector. The trend in the 
market to broadly syndicate underwriting exacerbates the problem: the 
Underwriter Exemptions prohibit affiliation not only between the 
trustee and the lead underwriter, but between the trustee and any 
underwriter, without regard to the amount underwritten.
    J.P. Morgan Chase stated that currently, most providers of 
corporate trust and related services in the structured finance 
marketplace are large banks that have the requisite staff and systems 
resources to efficiently serve this marketplace. Most of these same 
banks, particularly those that are profitable and well-capitalized, 
have expanded into the securities underwriting business, including 
underwriting of structured finance transactions. Not only will 
investors (including Plans) be disadvantaged if banks and their 
affiliates which underwrite securities continue to be precluded from 
providing trust services, but further, it is clearly not in the best 
interest of investors, including Plan investors, to eliminate those 
banks- often the most competent in the servicing of structured finance 
transactions-from the pool of available corporate trust providers.
    A trustee in a structured finance transaction, while involved in 
complex calculations and reporting, typically does not perform any 
discretionary functions. Such a trustee operates as a stakeholder and 
strictly in accordance with the explicit terms of the governing 
agreements so that the intent of the crafters of the transaction may be 
carried out. These functions are essentially ministerial, such as 
establishing accounts, receiving funds, making payments and issuing 
reports, all in a predetermined manner. Unlike trustees for corporate 
or municipal debt, there is no need for trustees in structured finance 
transactions to assume discretionary functions in order to protect the 
interests of debt holders in the event of default or bankruptcy, 
because structured finance entities are bankruptcy remote vehicles. 
There is no issuer outside the structured 
transaction to pursue for repayment of the debt. The trustee's role is 
defined by a contract, which provides an explicit structure spelling 
out the action to be taken upon the happening of specified events. 
There is no opportunity or incentive for the trustee in a structured 
finance transaction, by reason of its affiliation with an underwriter 
or otherwise, to take or not to take actions which might benefit the 
underwriter to the detriment of Plan investors.
    J.P. Morgan Chase represented that the role of the underwriter in a 
structured financing involves, among other things, assisting the 
sponsor or originator in structuring the contemplated transaction. The 
trustee becomes involved later in the process, after the principal 
parties have agreed on the essential components, to review the proposed 
transaction from the limited standpoints of technical workability and 
potential trustee liability. After the issuance of securities to the 
public, in a structured financing, while the trustee performs its role 
as trustee over the life of the transaction, the underwriter has no 
further role in the transaction. The trustee has no opportunity to take 
or not take action, or to use information in ways which might advantage 
the underwriter to the detriment of Plan investors. In fact, from the 
point of view of enhancing its reputation, the underwriter clearly 
wants the transaction to succeed as it was structured, which includes 
the trustee performing in a manner independent of the underwriter. 
Accordingly, J.P. Morgan Chase requested a modification to its 
Underwriter Exemptions in order to permit the trustee of the Trust to 
be an affiliate of the underwriter.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which require, among other things, a fiduciary to 
discharge his or her duties respecting the plan solely in the interest 
of the participants and beneficiaries of

[[Page 36030]]

the plan and in a prudent fashion in accordance with section 
404(a)(1)(B) of the Act; nor does it affect the requirements of section 
401(a) of the Code that the plan operate for the exclusive benefit of 
the employees of the employer maintaining the plan and their 
beneficiaries;
    (2) Before an exemption can be granted under section 408(a) of the 
Act and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interest of the plan 
and of its participants and beneficiaries and protective of the rights 
of participants and beneficiaries of the plan; and
    (3) This proposed exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and the Code, 
including statutory or administrative exemptions. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction.

Written Comments and Hearing Requests

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

Proposed Exemption

    Based on the facts and representations set forth in the 
application, under the authority of section 408(a) of the Act and 
section 4975(c)(2) of the Code and in accordance with the procedures 
set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, August 10, 
1990), the Department proposes to modify the following individual 
Prohibited Transaction Exemptions (PTEs), as set forth below: PTE 89-
88, 54 FR 42582 (October 17, 1989); PTE 89-89, 54 FR 42569 (October 17, 
1989); PTE 89-90, 54 FR 42597 (October 17, 1989); PTE 90-22, 55 FR 
20542 (May 17, 1990); PTE 90-24, 55 FR 20548 (May 17, 1990); PTE 90-28, 
55 FR 21456 (May 24, 1990); PTE 90-29, 55 FR 21459 (May 24, 1990); PTE 
90-30, 55 FR 21461 (May 24, 1990); PTE 90-32, 55 FR 23147 (June 6, 
1990); PTE 90-36, 55 FR 25903 (June 25, 1990); PTE 90-39, 55 FR 27713 
(July 5, 1990); PTE 90-59, 55 FR 36724 (September 6, 1990); PTE 90-83, 
55 FR 50250 (December 5, 1990); PTE 90-84, 55 FR 50252 (December 5, 
1990); PTE 90-88, 55 FR 52899 (December 24, 1990); PTE 91-14, 55 FR 
48178 (February 22, 1991); PTE 91-22, 56 FR 03277 (April 18, 1991); PTE 
91-23, 56 FR 15936 (April 18, 1991); PTE 91-30, 56 FR 22452 (May 15, 
1991); PTE 91-62, 56 FR 51406 (October 11, 1991); PTE 93-31, 58 FR 
28620 (May 5, 1993); PTE 93-32, 58 FR 28623 (May 14, 1993); PTE 94-29, 
59 FR 14675 (March 29, 1994); PTE 94-64, 59 FR 42312 (August 17, 1994); 
PTE 94-70, 59 FR 50014 (September 30, 1994); PTE 94-73, 59 FR 51213 
(October 7, 1994); PTE 94-84, 59 FR 65400 (December 19, 1994); PTE 95-
26, 60 FR 17586 (April 6, 1995); PTE 95-59, 60 FR 35938 (July 12, 
1995); PTE 95-89, 60 FR 49011 (September 21, 1995); PTE 96-22, 61 FR 
14828 (April 3, 1996); PTE 96-84, 61 FR 58234 (November 13, 1996); PTE 
96-92, 61 FR 66334 (December 17, 1996); PTE 96-94, 61 FR 68787 
(December 30, 1996); PTE 97-05, 62 FR 1926 (January 14, 1997); PTE 97-
28, 62 FR 28515 (May 23, 1997); PTE 98-08, 63 FR 8498 (February 19, 
1998); PTE 99-11, 64 FR 11046 (March 8, 1999); PTE 2000-19, 65 FR 25950 
(May 4, 2000); PTE 2000-33, 65 FR 37171 (June 13, 2000); PTE 2000-41, 
65 FR 51039 (August 22, 2000); and PTE 2000-55 (November 13, 2000), 
each as subsequently amended by PTE 97-34 and PTE 2000-58.
    In addition, the Department notes that it is also proposing 
individual exemptive relief for: Deutsche Bank A.G., New York Branch 
and Deutsche Morgan Grenfell/C.J. Lawrence Inc., Final Authorization 
Number (FAN) 97-03E (December 9, 1996); Credit Lyonnais Securities 
(USA) Inc., FAN 97-21E (September 10, 1997); ABN AMRO Inc., FAN 98-08E 
(April 27, 1998); Ironwood Capital Partners Ltd., FAN 99-31E (December 
20, 1999); and William J. Mayer Securities, FAN 01-25E (October 15, 
2001), which received the approval of the Department to engage in 
transactions substantially similar to the transactions described in the 
Underwriter Exemptions pursuant to PTE 96-62.
    The first sentence of section II.A.(4) of these exemptions is 
amended to read:

    The Trustee is not an Affiliate of any member of the Restricted 
Group, other than an Underwriter.

    If granted, the amendment will be effective as of March 13, 2002.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant the Underwriter 
Exemptions, refer to the proposed exemptions and the grant notices that 
are cited above.

    Signed at Washington, DC, this 17th day of May, 2002.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 02-12831 Filed 5-21-02; 8:45 am]
BILLING CODE 4510-29-P