EBSA (Formerly PWBA) Federal Register Notice
Proposed Exemptions; Deutsche Bank AG and Its Affiliates [07/03/2002]
[PDF Version]
Volume 67, Number 128, Page 44625-44642
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10991, et al.]
Proposed Exemptions; Deutsche Bank AG and Its Affiliates
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration (PWBA), Office of Exemption Determinations, Room N-5649,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ----------, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to PWBA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``moffittb@pwba.dol.gov'', or by FAX to (202) 219-0204 by the end of
the scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Deutsche Bank AG and Its Affiliates, Located in Frankfurt am Main,
Germany
[Application No. D-10991]
Proposed Exemption
The Department 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).\1\
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\1\ For purposes of the proposed exemption, all references to
specific provisions of Title I of the Act, unless otherwise
indicated, shall refer also to the corresponding provisions of the
Code.
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Section I--Transactions
If the exemption is granted, the restrictions of section
406(a)(1)(A) through (D) of the Act and the sanctions resulting from
the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply, as of April 24,
2001, to
(a) the lending of securities, under certain ``exclusive
borrowing'' arrangements, to
(1) Deutsche Bank AG (Deutsche Bank); or
(2) Its affiliates Deutsche Bank Securities Inc. (DBS), Deutsche
Bank AG, New York Branch (DBNY), and the ``Foreign Borrowers,'' as
defined in Section III (collectively, with Deutsche Bank, referred to
as the ``Borrowers,'' as defined in Section III)
by employee benefit plans (Plans), including commingled investment
funds holding assets of such Plans, with respect to which the Borrowers
are a party in interest; and
(b) The receipt of compensation by Deutsche Bank or its affiliates
in connection with the securities lending transactions, provided that
the conditions, set forth in Section II, are satisfied.
Section II--Conditions
(a) For each Plan, neither the Borrower nor any affiliate has or
exercises discretionary authority or control over the 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 the Plan (including a fiduciary) solely by
reason of providing services to the 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 a Plan fiduciary that is
independent of the Borrower and its affiliates.
(d) The terms of each loan of securities by a Plan to a 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 the exclusive right to
borrow certain securities, the Plan receives from the 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
[[Page 44626]]
equal to a percentage of the value of the total balance of the
outstanding borrowed securities, or (iii) any combination of (i) and
(ii) (collectively, the Exclusive Fee). 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 that
a percentage of the earnings on the collateral 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 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)(the Lending Fee and the Shared Earnings
Compensation are collectively 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 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. 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 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.
(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 the loaned
securities are delivered to the Borrower, the Plan receives 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 a U.S. bank other than
Deutsche Bank or any affiliate thereof, or any combination thereof, or
other collateral permitted under Prohibited Transaction Exemption (PTE)
81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR 18754, May 19,
1987) (and as further amended or superseded).\2\ 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 with a
third party, an affiliate of the Borrower, or a branch of Deutsche Bank
other than the Borrower that is a trustee or custodian of the Plan. If
maintained by an affiliate of the Borrower or a branch of Deutsche Bank
other than the Borrower, the collateral will be segregated from the
assets of such affiliate or branch.
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\2\ PTE 81-6 provides an exemption under certain conditions from
section 406(a)(1)(A) through (D) of the Act and the corresponding
provisions of section 4975(c) of the Code for the lending of
securities that are assets of an employee benefit plan to a U.S.
broker-dealer registered under the Securities Exchange Act of 1934
(the 1934 Act) (or exempted from registration under the 1934 Act as
a dealer in exempt Government securities, as defined therein) or to
a U.S. bank, that is a party in interest with respect to such plan.
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(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
of the market value of the loaned securities on the close of business
on the day preceding the date of the loan and, if the market value of
the collateral at any time 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, the
Borrower delivers additional collateral on the following day to bring
the level of the collateral back to at least 102 percent. The level of
the collateral is monitored daily by the Plan or its designee, which
may be Deutsche Bank or any of its affiliates, including Deutsche Bank
Trust Company Americas (DBT), which provides custodial or directed
trustee services in respect of the securities covered by the Borrowing
Agreement for the Plan. The Borrowing Agreement will provide the Plan
with a continuing security interest in, and a lien on, the collateral,
or will provide for the transfer of title to the collateral to the
Plan.
(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 the Plan should enter into
or renew the Borrowing Agreement--provided, however, that in the case
of a Borrower that is a branch of Deutsche Bank, the Borrower will
furnish to the Plan the most recent publicly available audited and
unaudited statement of Deutsche Bank's financial condition.
(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 the Plan would have
received (net of tax withholdings) \3\ had it remained the record owner
of the securities.
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\3\ The Department notes the Borrowers' representation that
dividends and other distributions on foreign securities payable to a
lending Plan are subject to foreign tax withholdings and that the
Borrower will always put the Plan back in at least as good a
position as it would have been had it not loaned securities.
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(l) The Borrowing Agreement and/or any securities loan outstanding
may be terminated by either party at any time without penalty (except
for, if the Plan has terminated its Borrowing Agreement, the return to
the Borrower of a pro-rata portion of the Exclusive Fee paid by the
Borrower to the Plan) whereupon the Borrower delivers securities
identical to the borrowed securities (or the equivalent thereof in the
event of reorganization, recapitalization, or merger of the issuer of
the borrowed securities) to the Plan within the lesser of five 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,
[[Page 44627]]
the Borrower will indemnify the Plan in the United States 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, Germany, the
United Kingdom, Japan, Canada, and/or Australia, 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 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 is 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 this exemption, if granted, (and the notice
of pendency) 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.\4\
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\4\ The Department notes the Borrowers' 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 Borrowers 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 Borrowers or their affiliates may monitor the level of
collateral and the value of the loaned securities.
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(q) The independent fiduciary of the Plan receives monthly reports
with respect to the securities lending transactions, including, but not
limited to, the information set forth in the following sentence, 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 subject to regulation by (i) the
Bundesaufsichtsamt fuer das Kreditwesen (the BAK) and the Deutsche
Bundesbank in Germany, (ii) the Financial Services Authority and the
Securities and Futures Authority in the United Kingdom, (iii) the
Ministry of Finance or the Financial Services Agency and the Tokyo
Stock Exchange or the Osaka Stock Exchange in Japan, (iv) the Office of
the Superintendent of Financial Institutions Canada, Ontario Securities
Commission, and the Investment Dealers Association in Canada, or (v)
the Australian Prudential Regulation Authority, Australian Securities
and Investments Commission, and the Australian Stock Exchange Limited
in Australia.
(2) Such Foreign Borrower is in compliance with all applicable
provisions of Rule 15a-6 (17 C.F.R. 240.15a-6) under the Securities
Exchange Act of 1934 (the 1934 Act) that provides foreign broker-
dealers a limited exception from U.S. registration requirements;
(3) All collateral is maintained in U.S. dollars or in U.S. dollar-
denominated securities or letters of credit, or other collateral
permitted under PTE 81-6 (as amended or superseded);
(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 CFR 2550.404(b)-1; and
(5) Prior to entering into a transaction involving a Foreign
Borrower, Deutsche Bank or 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
Deutsche Bank or the Foreign Borrower will occur in the U.S. courts.
(s) Deutsche Bank or the Borrower maintains, or causes to be
maintained, within the United States for a period of six years from the
date of such transaction, in a manner that is convenient and accessible
for audit and examination, such records as are
[[Page 44628]]
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 Deutsche Bank
and/or its affiliates, the records are lost or destroyed prior to the
end of the six-year period; and
(2) No party in interest other than the 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
Deutsche Bank 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 term ``Foreign Borrower'' or ``Foreign Borrowers'' means
any broker-dealer or bank that, now or in the future, is an affiliate
of Deutsche Bank that is subject to regulation by (i) the BAK and the
Deutsche Bundesbank in Germany, (ii) the Financial Services Authority
and the Securities and Futures Authority in the United Kingdom, (iii)
the Ministry of Finance or the Financial Services Agency and the Tokyo
Stock Exchange or the Osaka Stock Exchange in Japan, (iv) the Office of
the Superintendent of Financial Institutions Canada, Ontario Securities
Commission, and the Investment Dealers Association in Canada, or (v)
the Australian Prudential Regulation Authority, Australian Securities
and Investments Commission, and the Australian Stock Exchange Limited
in Australia.
(c) The term ``Borrower'' or ``Borrowers'' means Deutsche Bank,
DBS, DBNY, the Foreign Borrowers, and any other affiliate of Deutsche
Bank that, now or in the future, is a U.S. registered broker-dealer or
a government securities broker or dealer or a U.S. bank.
Effective Date: The proposed exemption, if granted, will be
effective as of April 24, 2001.
Summary of Facts and Representations
1. Deutsche Bank AG, a full service universal bank, is organized
under German law and is regulated by the Deutsche Bundesaufsichtsamt
fuer das Kreditwesen (i.e., the BAK) and the Deutsche Bundesbunk.
Deutsche Bank, as of December 31, 2000, had approximately [euro]
697,306,000 in assets and [euro] 19,807,000 in stockholders' equity.
Deutsche Bank Trust Company Americas (i.e., DBT), a wholly owned
subsidiary of Deutsche Bank, is a New York banking corporation and a
leading commercial bank, providing a wide range of banking, fiduciary,
custodial, brokerage, and investment services to corporations,
institutions, governments, employee benefit plans, governmental
retirement plans, and private investors. Deutsche Bank indirectly owns
all of the equity interest of DBT, which is also a member bank of the
Federal Reserve system. DBT is one of the largest trustees of ERISA
plans and a large manager of passively managed funds. Other Deutsche
Bank asset managers may also manage ERISA assets in passively managed
styles in the future.
Deutsche Bank AG, New York Branch (i.e., DBNY) is subject to
regulation by the New York State Banking Authority and the Board of
Governors of the Federal Reserve Bank. In addition, DBNY is subject to
regulation by the BAK and the Deutsche Bundesbank. Deutsche Bank
Securities Inc. (i.e., DBS), an affiliate of Deutsche Bank, 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 December 31, 2000, DBS had approximately
$98,070,582,098 in assets and $6,705,615,063 in stockholders' equity.
Deutsche Bank has foreign branches and affiliates worldwide that are in
the business of trading securities and engaging in broker-dealer
activities (among other investment and trading activities) in their
respective countries. The affiliated foreign broker-dealers or banks of
Deutsche Bank to be covered by this proposed exemption (i.e., the
Foreign Borrowers), and their respective regulating entities, are as
follows:
(a) Deutsche Bank AG, located in Frankfurt am Main, is subject to
regulation in Germany by the BAK and the Deutsche Bundesbank;
(b) Deutsche Bank AG, London Branch, located in London, is subject
to regulation by the BAK and the Deutsche Bundesbank and, in the United
Kingdom, is subject to regulation by the Securities and Futures
Authority in respect of the conduct of investment business;
(c) Morgan Grenfell & Co., Ltd., located in London, is subject to
regulation in the United Kingdom by the Financial Services Authority in
respect of prudential supervision;
(d) Deutsche Bank Securities Limited, Tokyo Branch, located in
Tokyo, is subject to regulation in Japan by the Ministry of Finance,
the Financial Services Agency, the Tokyo Stock Exchange, and the Osaka
Stock Exchange;
(e) Deutsche Bank AG, Canada Branch, Deutsche Bank Canada, and
Deutsche Bank Securities Limited, located in Toronto, are subject to
regulation in Canada by the Office of the Superintendent of Financial
Institutions Canada and the Ontario Securities Commission, as well as
the Investment Dealers Association, a self-regulatory organization. In
addition, Deutsche Bank AG, Canada Branch is also subject to regulation
by the BAK and the Deutsche Bundesbank; and
(f) Deutsche Bank AG, Sydney Branch and Deutsche Securities
Australia Ltd., located in Sydney, are subject to regulation in
Australia by the Australian Prudential Regulation Authority, the
Australian Securities and Investments Commission, and the Australian
Stock Exchange Limited. In addition, Deutsche Bank AG, Sydney Branch is
[[Page 44629]]
also subject to regulation by the BAK and the Deutsche Bundesbank.
Deutsche Bank requests an individual exemption to cover the Foreign
Borrowers identified above, as well as any broker-dealer or bank that,
now or in the future, is an affiliate of Deutsche Bank that is subject
to regulation by (i) the BAK, and the Deutsche Bundesbank in Germany,
(ii) the Financial Services Authority and the Securities and Futures
Authority in the United Kingdom, (iii) the Ministry of Finance or the
Financial Services Agency and the Tokyo Stock Exchange or the Osaka
Stock Exchange in Japan, (iv) the Office of the Superintendent of
Financial Institutions Canada, Ontario Securities Commission, and the
Investment Dealers Association in Canada, or (v) the Australian
Prudential Regulation Authority, Australian Securities and Investments
Commission, and the Australian Stock Exchange Limited in Australia.
2. The Borrowers, acting as principals, 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 Borrowers 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.
3. Deutsche Bank represents that the Foreign Borrowers are subject
to regulation by a governmental agency in the foreign country in which
they are located. Deutsche Bank further represents that registration of
a foreign broker-dealer or bank with the governmental agency in these
cases addresses regulatory concerns similar to those concerns addressed
by registration of a broker-dealer with the SEC under the 1934 Act. The
rules and regulations set forth by the above-referenced agencies and
the SEC share a common objective: The protection of the investor by the
regulation of securities markets.
With respect to Germany, the BAK, a federal institution with
ultimate responsibility to the Ministry of Finance, in cooperation with
the Deutsche Bundesbank, the central bank of the German banking system,
provides extensive regulation of the banking sector. The BAK ensures
that Deutsche Bank has procedures for monitoring and controlling its
worldwide activities through various statutory and regulatory
standards, such as requirements regarding adequate internal controls,
oversight, administration, and financial resources. The BAK reviews
compliance with these limitations on operations and internal control
requirements through an annual audit performed by the year-end auditor
and through special audits, e.g., on specific sections of the Banking
Act, as ordered by the BAK and the respective State Central Bank
auditors. The BAK obtains information on the condition of Deutsche Bank
by requiring submission of periodic, consolidated financial reports and
through a mandatory annual report prepared by the auditor. The BAK also
receives information regarding capital adequacy, country risk exposure,
and foreign exchange exposure from Deutsche Bank. German banking law
mandates penalties to ensure correct reporting to the BAK. The auditors
face penalties for gross violation of their duties in auditing, for
reporting misleading information, omitting essential information from
the audit report, failing to request pertinent information, or failing
to report to the BAK.
Germany, the United Kingdom, Japan, Canada, and Australia all have
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 counterparties. 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 for the violation of such rules.
4. Deutsche Bank represents that, in addition to the protections
afforded by the applicable foreign regulatory body, compliance by the
Foreign Borrowers with any applicable requirements of Rule 15a-6 (17
CFR 240.15a-6) of the 1934 Act (and the amendments and interpretations
thereof) will offer further protections to the Plans.\5\ SEC 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 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.\6\ The Borrowers
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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\5\ According to the Borrowers, 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
Borrowers are willing to represent that they will comply with the
applicable provisions and relevant SEC interpretations and
amendments of Rule 15a-6.
\6\ Note that the categories of entities that qualify as ``major
U.S. institutional investors'' has been expanded by a No-Action
letter issued by the SEC. See SEC No-Action Letter issued to Cleary,
Gottlieb, Steen & Hamilton on April 9, 1997 (April 9, 1997 No-Action
Letter).
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The Borrowers represent that under SEC 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
[[Page 44630]]
with Rule 15a-6 \7\ must, among other things:
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\7\ If it is determined that applicable regulation under the
1934 Act does not require Deutsche Bank or the Borrower to comply
with SEC Rule 15a-6, both entities will nevertheless comply with
subparagraphs (a) and (b) of Item 4 above.
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(a) Consent to service of process for any civil action brought by,
or proceeding before, the SEC or any self-regulatory organization;
(b) Provide the SEC with any information or documents within its
possession, custody or control, any testimony of any such foreign
associated persons, and any assistance in taking the evidence of other
persons, wherever located, that the SEC requests and that relates to
the transactions effected pursuant to the Rule;
(c) Rely on the U.S. registered broker-dealer through which the
transactions with the U.S. institutional and major U.S. institutional
investors are effected to (among other things):
(1) Effect the transactions, other than negotiating the terms;
(2) Issue all required confirmations and statements;
(3) As between the foreign broker-dealer and the U.S. registered
broker-dealer, extend or arrange for the extension of credit in
connection with the transactions;
(4) Maintain required books and records relating to the
transactions, including those required by SEC 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); \8\ and
---------------------------------------------------------------------------
\8\ 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 Deutsche Bank or between a Plan and the Foreign Borrower. The
Borrowers 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 Borrowers
represent that, under certain circumstances, the foreign associated
person may have direct communications and contact with the U.S.
Institutional Investor.\9\ (See April 9, 1997 No-Action Letter.)
---------------------------------------------------------------------------
\9\ 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 or dealer, and who
participates in the solicitation of a U.S. institutional investor or
a major U.S. institutional investor under Rule 15a-6(a)(3).
---------------------------------------------------------------------------
5. 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 generally 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 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, defined below 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.
6. The Borrowers request an individual exemption for the lending of
securities, under certain exclusive borrowing arrangements, by Plans
with respect to which Deutsche Bank or any of its affiliates is a party
in interest (including a fiduciary) solely by reason of providing
services to the 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 Borrower 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. It is represented 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.\10\
---------------------------------------------------------------------------
\10\ 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.
---------------------------------------------------------------------------
7. 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 Borrowing Agreement 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.
8. 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.
9. In exchange for granting the Borrower the exclusive right to
borrow certain securities, the Borrower will pay the Plan either (i) a
flat fee (which may be equal to a percentage of the value of the total
securities subject to the Borrowing Agreement), (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) (i.e., the Exclusive Fee).
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 that a percentage of the
earnings on the collateral may be retained by the Plan, or the Plan may
agree to pay the Borrower a rebate fee
[[Page 44631]]
and retain the earnings on the collateral (i.e., the 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 referred to as 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's paying different
fees to different Plans, the Borrower may pay different fees for
different portfolios of securities (i.e., the fee for a domestic
securities portfolio may be different from the fee for a foreign
securities portfolio). The Borrower may also pay different fees for
securities of issuers in different foreign countries; for example,
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 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 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 will be 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.
10. By the close of business on or before the day 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 other than
Deutsche Bank or its affiliates, 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 a 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. If maintained by an affiliate of the
Borrower or a branch of Deutsche Bank other than the Borrower, the
collateral will be segregated from the assets of such affiliate or
branch.
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 Deutsche Bank or any of its affiliates which
provides custodial or directed 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 Borrowing Agreement will provide the Plan with a continuing
security interest in, and lien on, the collateral, or will provide for
the transfer of title to the collateral to the Plan.
If the Borrower deposits cash collateral, the Plan invests the
collateral, and all earnings on such cash collateral shall be returned
to the Borrower--except 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 a comparable arm's length transaction 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 \11\ rate, or the like), and anticipated
investment return on overnight investments permitted by the independent
fiduciary of the Plan. If the Borrower deposits 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--except 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 may be different for different securities or
different groups of securities subject to the Borrowing Agreement.
---------------------------------------------------------------------------
\11\ 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 the banks lending
funds to each other).
---------------------------------------------------------------------------
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.
11. 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
[[Page 44632]]
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--provided, however,
that in the case of a Borrower that is a branch of Deutsche Bank, the
Borrower will furnish to the Plan the most recent publicly available
audited and unaudited statement of Deutsche Bank's financial condition.
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 statements of financial condition.
12. Prior to any Plan's approval of the lending of its securities
to the Borrowers, a copy of this exemption, if granted, (and the notice
of pendency) 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.
13. With regard to those Plans for which Deutsche Bank or any of
its affiliates provides custodial, directed trustee, clearing and/or
reporting functions relative to securities loans, Deutsche Bank and a
Plan fiduciary independent of Deutsche Bank and its affiliates will
agree in advance, and in writing, to any fee that Deutsche Bank or any
of its affiliates is to receive for such custodial, directed trustee,
clearing and/or reporting services. Such fees, if any, would be fixed
fees (e.g., Deutsche Bank 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 Deutsche Bank
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 Deutsche Bank or any of its
affiliates to provide such functions relative to securities loans to
the Borrowers will be terminable by the Plan within five 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.
14. 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 business days of written notice of termination or the customary
settlement period for such securities.
15. 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 United States 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.
16. 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, Germany, the United
Kingdom, Japan, Canada and/or Australia, 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 two or more 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 two or more 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 is formed for the sole
purpose of making loans of securities.)
The Borrowers 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.
17. In addition to the above conditions, all loans involving
Foreign Borrowers must satisfy the following supplemental requirements:
(i) Such Foreign Borrower is a bank which is subject to regulation
by (a) the BAK and the Deutsche Bundesbank in Germany, (b) the
Financial Services Authority and the Securities and Futures Authority
in the United Kingdom, (c) the Ministry of Finance or the Financial
Services Agency and the Tokyo Stock Exchange or the Osaka Stock
Exchange in Japan, (d) the Office of the Superintendent of Financial
Institutions Canada, Ontario Securities
[[Page 44633]]
Commission, and the Investment Dealers Association in Canada, or (e)
the Australian Prudential Regulation Authority, Australian Securities
and Investments Commission, and the Australian Stock Exchange Limited
in Australia;
(ii) Such Foreign Borrower is in compliance with all applicable
provisions of Rule 15a-6 (17 CFR 240.15a-6) under the 1934 Act that
provides foreign broker-dealers a limited exception from U.S.
registration requirements;
(iii) All collateral is maintained in U.S. dollars or in U.S.
dollar-denominated securities or letters of credit, or other collateral
permitted under PTE 81-6 (as amended or superseded);
(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, Deutsche Bank or the Foreign Borrower must:
(1) Agree to submit to the jurisdiction of the United States;
(2) Agree to appoint a Process Agent in the United States;
(3) Consent to the service of process on the Process Agent; and
(4) Agree that enforcement by a Plan of the indemnity provided by
Deutsche Bank or the Foreign Borrower will occur in the U.S. courts.
18. In summary, the Borrowers represent that the subject
transactions satisfy the statutory criteria of section 408(a) of the
Act because:
(a) Each 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 value 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 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) above) 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, Germany, the United
Kingdom, Japan, Canada and/or Australia, as appropriate.
For Further Information Contact: Ms. Karin Weng of the Department,
telephone (202) 693-8540. (This is not a toll-free number.)
Goldman Sachs & Co. (located in New York, NY) and its Affiliates
[Application No. D-11084]
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).\12\
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\12\ 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.
---------------------------------------------------------------------------
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 as of March 22,
2002, to:
(a) The lending of securities, under certain exclusive borrowing
arrangements, to:
(1) Goldman, Sachs & Co. (Goldman) and any affiliate of Goldman
that, now or in the future, is a U.S. registered broker-dealer, a
government securities broker or dealer or U.S. bank (together with
Goldman, the ``U.S. Broker-Dealers'');
(2) Goldman Sachs Canada Inc., which is subject to regulation in
Canada by the Ontario Securities Commission and the Investment Dealers
Association;
(3) Goldman Sachs International and Goldman Sachs Equity Securities
(U.K.), which are subject to regulation in the United Kingdom by the
Financial Services Authority (the UK FSA) (formerly, the Securities and
Futures Authority (the UK SFA));
(4) Goldman, Sachs & Co. oHG, which is subject to regulation in
Germany by the Deutsche Bundesbank and the Federal Banking Supervisory
Authority, e.g., der Bundesaufsichtsamt f[uuml]r das Kreditwesen (the
BAK);
(5) Goldman Sachs (Japan) Ltd., which is subject to regulation in
Japan by the Financial Services Agency and the Tokyo Stock Exchange;
(6) Goldman Sachs Australia Pty Limited, which is subject to
regulation in Australia by the Australian Securities & Investments
Commission (the ASIC);
(7) Goldman, Sachs & Co. Bank, which is subject to regulation in
Switzerland by the Swiss Federal Banking Commission; and
(8) Any broker-dealer or bank that, now or in the future, is an
affiliate of Goldman which is subject to regulation
[[Page 44634]]
by the Ontario Securities Commission and the Investment Dealers
Association in Canada, the UK FSA in the United Kingdom, the Deutsche
Bundesbank and/or the BAK in Germany, the Financial Services Agency and
the Tokyo Stock Exchange in Japan, the ASIC in Australia or the Swiss
Federal Banking Commission in Switzerland (each such affiliated foreign
broker-dealer or bank referred to as a ``Foreign Borrower,'' and,
together with the U.S. Broker-Dealers, collectively referred to as the
``Borrowers''), by employee benefit plans, including commingled
investment funds holding assets of such plans (Plans) with respect to
which Goldman or any of its affiliates is a party in interest; and
(b) The receipt of compensation by Goldman or any of its affiliates
in connection with securities lending transactions, provided that the
following 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 the 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 the Plan (including a fiduciary) solely by
reason of providing services to the 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 a Plan fiduciary which is
independent of the Borrower and its affiliates.
(d) The terms of each loan of securities by a Plan to a 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 the exclusive right to
borrow certain securities, the Plan receives from the 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, any 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 that a percentage of the earnings on the
collateral may be retained by the Plan and/or the Plan may agree to pay
the Borrower a rebate fee and retain any earnings on the collateral
(the Shared Earnings Compensation). If the Borrower pledges non-cash
collateral, any 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'')
(the Lending Fee and the Shared Earnings Compensation are referred to
herein as the ``Transaction Lending Fee''). The Transaction Lending
Fee, if any, shall be either 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. 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 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.
(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 of portfolio value 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
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 a U.S. bank other than
Goldman or an affiliate of Goldman, or any combination thereof, or
other collateral permitted under Prohibited Transaction Exemption 81-6
(46 FR 7527, Jan. 23 1981, as amended at 52 FR 18754, May 19, 1987)
(PTE 81-6) (as amended or superseded) \13\ having, as of the close of
business on the preceding business day, a market value or, in the case
of letters of credit a stated amount, equal to not less than 102
percent of the then market value of the securities lent. 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 a custodian of the Plan. If maintained by an
affiliate of the Borrower, the collateral will be segregated from the
assets of such affiliate.
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\13\ 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 adealer in exempt Government securities, as defined therein)
or to a U.S. bank, that is a party in interest with respect to such
plan.
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(h) If the market value of the collateral at any time 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, the Borrower delivers additional collateral
on the following day to bring the level of the collateral back to at
least 102 percent. The level of the collateral is monitored daily by
the Plan or its designee, which may be Goldman or any of its affiliates
which provides custodial or directed 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 the 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
[[Page 44635]]
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, any 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)\14\ had it remained the
record owner of the securities.
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\14\ The Department notes that Applicants' representation that
dividends and other distributions on foreign securities payable to a
lending Plan are subject to foreing tax withholdings and that the
Borrower will alwsays 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 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 and paragraph (l) above, the
Plan's remedy will be 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. against
any losses resulting from its use of the borrowed securities equal 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, Canada, the
United Kingdom, Germany, Japan, Australia, or Switzerland, 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
Borrower; 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 Borrower, 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
Borrower, 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.)
(p) Prior to any Plan's approval of the lending of its securities
to the Borrower, a copy of this exemption, if granted, (and the notice
of pendency) 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.\15\
---------------------------------------------------------------------------
\15\ 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, e.g., 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 the following sentence, so that
an independent Plan fiduciary may monitor such transactions with the
Borrower. 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 a
Foreign Borrower must satisfy the following supplemental requirements:
(1) Such Foreign Borrower is a registered broker-dealer subject to
regulation in Canada by the Ontario Securities Commission and the
Investment Dealers Association, in the United Kingdom by the UK FSA, in
Germany by the Deutsche Bundesbank and the BAK, in Japan by the
Financial Services Agency and the Tokyo Stock Exchange, in Australia by
the ASIC, or in Switzerland by the Swiss Federal Banking Commission;
[[Page 44636]]
(2) Such Foreign Borrower is in compliance with all applicable
provisions of Rule 15a-6 (17 C.F.R. 240.15a-6) under the Securities
Exchange Act of 1934 (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);
(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 CFR 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) Goldman or the Borrower maintains, or causes to be maintained,
within the United States for a period of six years from the date of
such transaction, in a manner that is convenient and accessible for
audit and examination, such records as are necessary to enable the
persons described in paragraph (t)(1) to determine whether the
conditions of the exemption have been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Goldman and/or
its affiliates, the records are lost or destroyed prior to the end of
the six year period; and
(2) No party in interest other than the 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
Goldman 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 term ``Foreign Borrower'' or ``Foreign Borrowers'' means
Goldman Sachs Canada Inc. or any broker-dealer or bank, now or in the
future, that is an affiliate of Goldman subject to regulation in Canada
by the Ontario Securities Commission and the Investment Dealers
Association, Goldman Sachs International and Goldman Sachs Equity
Securities (U.K.) or any broker-dealer or bank, now or in the future,
that is an affiliate of Goldman subject to regulation in the United
Kingdom by the UK FSA, Goldman, Sachs & Co. oHG or any broker-dealer or
bank, now or in the future, that is an affiliate of Goldman subject to
regulation in Germany by the Deutsche Bundesbank and the BAK, Goldman
Sachs (Japan) Ltd. or any broker-dealer or bank, now or in the future,
that is an affiliate of Goldman subject to regulation in Japan by the
Financial Services Agency and the Tokyo Stock Exchange, Goldman Sachs
Australia Pty Limited or any broker-dealer or bank, now or in the
future, that is an affiliate of Goldman subject to regulation in
Australia by the ASIC, Goldman, Sachs & Co. Bank or any broker-dealer
or bank, now or in the future, that is an affiliate of Goldman subject
to regulation in Switzerland by the Swiss Federal Banking Commission.
(c) The term ``Borrower'' includes Goldman, the U.S. Broker-
Dealers, and the Foreign Borrowers.
Effective Date: This proposed exemption, if granted, will be
effective as of March 22, 2002.
Summary of Facts and Representations
1. Goldman, Sachs & Co. (Goldman), a New York limited partnership,
is a wholly owned subsidiary and the principal operating subsidiary of
The Goldman Sachs Group, Inc. (the GS Group), a Delaware corporation.
Goldman, a full-line investment services firm, is registered with and
regulated by the Securities and Exchange Commission (the SEC) as a
broker-dealer and as an investment adviser, is registered with and
regulated by the Commodity Futures Trading Commission (the CFTC) as a
futures commission merchant, is a member of the New York Stock Exchange
(the NYSE) and other principal securities exchanges in the United
States, and is also a member of the National Association of Securities
Dealers, Inc. (the NASD). As of August 31, 2001, the GS Group had
approximately $302 billion in assets and $17.96 billion in
shareholders' equity.
Goldman has several foreign affiliates which are broker-dealers or
banks. The affiliated foreign broker-dealers or banks of Goldman that
will be covered by this proposed exemption (the Foreign Borrowers), and
their respective regulating entities, are as follows: (a) Goldman Sachs
Canada Inc., located in Toronto, is subject to regulation by the
Ontario Securities Commission and the Investment Dealers Association in
Canada, (b) Goldman Sachs International and Goldman Sachs Equity
Securities (U.K.), located in London, are subject to regulation by the
Securities and Futures Authority (the UK FSA) (formerly, the Securities
and Futures Authority (the UK SFA)) in the United Kingdom, (c) Goldman,
Sachs & Co. oHG, located in Frankfurt, is subject to regulation by the
Deutsche Bundesbank and the Federal Banking Supervisory Authority,
i.e., der Bundesaufsichtsamt f[uuml]r das Krewitwesen (the BAK) in
Germany, (d) Goldman Sachs (Japan) Ltd., located in Tokyo, is subject
to regulation by the Financial Services
[[Page 44637]]
Agency and the Tokyo Stock Exchange in Japan, (e) Goldman Sachs
Australia Pty Limited, located in Sydney, is subject to regulation by
the Australian Securities & Investments Commission (the ASIC) in
Australia, (f) Goldman, Sachs & Co. Bank, located in Zurich, is subject
to regulation by the Swiss Federal Banking Commission in Switzerland,
and (g) any broker-dealer or bank that, now or in the future, is an
affiliate of Goldman which is subject to regulation by the Ontario
Securities Commission and the Investment Dealers Association in Canada,
the UK SFA in the United Kingdom, the Deutsche Bundesbank and the BAK
in Germany, the Financial Services Agency and the Tokyo Stock Exchange
in Japan, the ASIC in Australia, or the Swiss Federal Banking
Commission in Switzerland.
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 employee benefit plans, including commingled investment funds
holding the assets of such plans (Plans), for which Goldman or any
affiliate of Goldman may be a party in interest. For example, Goldman
or an affiliate may be an investment manager for assets of a Plan that
are unrelated to the assets involved in the transaction. Goldman or any
of its affiliates may provide securities custodial services, directed
trustee services, clearing and/or reporting functions in connection
with securities lending transactions, or other services to the Plan.
3. The Applicants represent that although the Foreign Borrowers
will not be registered with the SEC, their activities are subject to
regulation by a governmental agency in the foreign country in which
they are located. The Applicants further represent that registration of
a foreign broker-dealer or bank with the governmental agency in these
cases addresses regulatory concerns similar to those concerns addressed
by registration of a broker-dealer with the SEC under the 1934 Act. The
rules and regulations set forth by the above-referenced agencies and
the SEC share a common objective: the protection of the investor by the
regulation of securities markets.
4. The Applicants represent that although Goldman Sachs
International and Goldman Sachs Equity Securities (U.K.) or any other
foreign broker-dealer of Goldman in the United Kingdom will not be
registered with the SEC, their activities are governed by the rules,
regulations and membership requirements of the UK FSA. In this regard,
the Applicants state that these broker-dealers are subject to the UK
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 UK 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 UK 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 UK FSA rules impose reporting/
disclosure requirements on broker-dealers with respect to risk
management, internal controls, and transaction reporting and
recordkeeping requirements. In this regard, required records must be
produced at the request of the UK FSA at any time. The Applicants
further state that the rules and regulations of the UK FSA for broker-
dealers are backed up by potential fines and penalties as well as a
comprehensive disciplinary system.
5. With respect to Canada, the United Kingdom, Japan, and
Australia, all these countries have 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
counterparties. 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 for the violation of such rules.
6. With respect to Germany, the BAK, an independent federal
institution with ultimate responsibility to the Ministry of Finance, in
cooperation with the Deutsche Bundesbank, the central bank of the
German banking system, provides extensive regulation of the banking
sector. The BAK insures that Goldman, Sachs & Co. oHG has procedures
for monitoring and controlling its worldwide activities through various
statutory and regulatory standards, such as requirements regarding
adequate internal controls, oversight, administration and financial
resources. The BAK reviews compliance with these limitations on
operations and internal control requirements through an annual audit
performed by the year-end auditor and through special audits, e.g., on
specific sections of the Banking Act, as ordered by the BAK and the
respective State Central Bank auditors. The BAK obtains information on
the condition of Goldman, Sachs & Co. oHG by requiring submission of
periodic, consolidated financial reports and through a mandatory annual
report prepared by the auditor. The BAK also receives information
regarding capital adequacy, country risk exposure, and foreign exchange
exposure from Goldman, Sachs & Co. oHG. German banking law mandates
penalties to insure correct reporting to the BAK. The auditors face
penalties for gross violation of their duties in auditing, for
reporting misleading information, omitting essential information from
the audit report, failing to request pertinent information, or failing
to report to the BAK.
7. With respect to Switzerland, the powers of the Swiss Federal
Banking Commission include licensing banks, issuing directives to
address violations by or irregularities involving banks, requiring
information from a bank or its auditor regarding supervisory matters
and revoking bank licenses. The Swiss Federal Banking Commission
exercises oversight over Swiss banks, such as Goldman, Sachs & Co.
Bank, through independent auditors known as ``Recognized Auditors,''
which act on behalf of the Commission under detailed statutory
provisions. Each Swiss bank, including Goldman, Sachs & Co. Bank, must
appoint a recognized Auditor and notify the Swiss Federal Banking
Commission of an intent to change its auditor. The Recognized Auditor
may take action within a bank as deemed necessary or as instructed by
the Swiss Federal Banking Commission and must inform the Commission of
supervisory matters. The Swiss Federal Banking Commission insures that
Goldman, Sachs & Co. 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
[[Page 44638]]
financial resources. The Swiss Federal Banking Commission reviews
compliance with these limitations on operations and internal control
requirements through an annual audit performed by the Recognized
Auditor.
The Swiss Federal Banking Commission obtains information on the
condition of Goldman, Sachs & Co. Bank and its foreign offices and
subsidiaries by requiring submission of periodic, consolidated
financial reports and through a mandatory annual report prepared by the
Recognized Auditor. The Swiss Federal Banking Commission also receives
information regarding capital adequacy, country risk exposure, and
foreign exchange exposures from Goldman, Sachs & Co. Bank.
Swiss banking law mandates penalties to insure correct reporting to
the Swiss Federal Banking Commission. Recognized Auditors face
penalties for gross violations of their duties in auditing, or
reporting misleading information, omitting essential information from
the audit report, failing to request pertinent information or failing
to report to the Swiss Federal Banking Commission.
8. With respect to Australia, Goldman Sachs Australia Pty Limited
is subject to regulation by ASIC, and as a participating organization,
by the Australian Stock Exchange Limited (ASX). The rules of ASX (which
are more detailed than those of ASIC) require each firm to have a
positive tangible net worth and be able to meet its obligations as they
may fall due. In addition, the rules of ASX set forth comprehensive
financial resource and reporting/disclosure rules regarding capital
adequacy. Further, to demonstrate capital adequacy, the rules of the
ASX impose reporting/disclosure requirements on broker-dealers with
respect to risk management, internal controls, and transaction
reporting, and recordkeeping requirements, to the effect that required
records must be produced upon request. ASIC also has rules covering
these matters. Finally, the rules and regulations of ASX and ASIC
impose potential fines and penalties on broker-dealers, establishing a
comprehensive disciplinary system.
9. Goldman represents that, in connection with the transactions
covered by this proposed exemption, the Foreign Borrowers' compliance
with any applicable requirements of Rule 15a-6 (17 C.F.R. 240.15a-6) of
the 1934 Act (as discussed further in Paragraph 10, below), and SEC
interpretations thereof, providing for foreign affiliates a limited
exemption from U.S. registration requirements, will offer additional
protections to the Plans.\16\
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\16\ 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 to Rule 15a-6.
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10. 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 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.\17\ 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\ Note that the categories of entities that qualify as
``major U.S. institutional investors'' has been expanded by a
Securities and Exchange Commission No-Action letter. See SEC No-
Action Letter issued to Cleary, Gottlieb, Steen & Hamilton on April
9, 1997 (April 9, 1997 No-Action Letter).
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The Applicants represent that under Rule 15a-6, a foreign broker-
dealer that induces or attempts to induce the purchase or sale of any
security by a U.S. institutional or major U.S. institutional investor
in accordance with Rule 15a-6 \18\ must, among other things:
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\18\ If it is determined that applicable regulation under the
1934 Act does not require Goldman or the Borrower to comply with
Rule 15a-6, both entities will nevertheless comply with
subparagraphs (a) and (b) of Representation 10.
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(a) Consent to service of process for any civil action brought by,
or proceeding before, the SEC or any self-regulatory organization;
(b) Provide the SEC with any information or documents within its
possession, custody or control, any testimony of any such foreign
associated persons, and any assistance in taking the evidence of other
persons, wherever located, that the SEC requests and that relates to
the transactions effected pursuant to the Rule;
(c) Rely on the U.S. registered broker-dealer through which the
transactions with the U.S. institutional and major U.S. institutional
investors are effected to (among other things):
(1) Effect the transactions, other than negotiating the terms;
(2) Issue all required confirmations and statements;
(3) As between the foreign broker-dealer and the U.S. registered
broker-dealer, extend or arrange for the extension of credit in
connection with the transactions;
(4) Maintain required books and records relating to the
transactions, including those required by Rules 17a-3 (Records to be
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved by
Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
(5) Receive, deliver, and safeguard funds and securities in
connection with the transactions on behalf of the U.S. institutional
investor or major U.S. institutional investor in compliance with Rule
15c3-3 of the 1934 Act (Customer Protection--Reserves and Custody of
Securities);\19\ and
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\19\ 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 Goldman or between a Plan and the Foreign Borrower. The
Applicants note that in such situations, the U.S. registered broker-
dealer will not be acting as principal with respect to any duties it
is required to undertake pursuant to Rule 15a-6.
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[[Page 44639]]
(6) Participate in certain oral communications (e.g., telephone
calls) between the foreign associated person \20\ and the U.S.
institutional investor (other than a 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. (See April 9, 1997 No-
Action Letter.)
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\20\ The term ``foreign associated person'' as defined in Rule
15a-6(b)(2) means any natural person domiciled outside the United
States who is an associated person, as defined in section 3(a)(18)
of the 1934 Act, of the foreign broker-dealer, and who participates
in the solicitation of a U.S. institutional investor or a major U.S.
institutional investor under Rule 15a-6(a)(3).
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11. 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 generally 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 rebate fee and keep
any 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, defined below 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.
12. The Applicants request an exemption for the lending of
securities, under certain exclusive borrowing arrangements, by Plans
with respect to which Goldman or any of its affiliates is a party in
interest (including a fiduciary) solely by reason of providing services
to the 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 Borrower 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 Borrower, by
exercising its contractual rights under the proposed exclusive
borrowing arrangement, will have discretion with respect to whether
there is a loan of particular Plan securities to the Borrower, the
lending of securities to the Borrower may be outside the scope of
relief provided by PTE 81-6.\21\
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\21\ 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.
---------------------------------------------------------------------------
13. For each Plan, the Borrower will directly negotiate a Borrowing
Agreement with a Plan fiduciary which is independent of the Borrower.
Under the Borrowing Agreement, the Borrower 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.\22\ The Borrowing Agreement 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 Borrower pay all transfer fees and transfer taxes relating to the
securities loans. The terms of each loan of securities by a Plan to a
Borrower will be at least as favorable to such Plan as those of a
comparable arm's-length transaction between unrelated parties, taking
into account the exclusive arrangement.
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\22\ For example, the form of the Borrowing Agreement to be used
in the United Kingdom differs from the standard U.S. Borrowing
Agreement. Under the form Borrowing Agreement to be used in the
United Kingdom, the Plan receives title to (rather than a pledge of
or a security interest in) the collateral.
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14. 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 of portfolio value or other percentage
determined pursuant to an objective formula.
15. In exchange for granting the Borrower the exclusive right to
borrow certain securities, the Plan receives from the 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 deposits cash collateral, any 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 that a percentage of the earnings on the
collateral may be retained by the Plan and/or the Plan may agree to pay
the Borrower a rebate fee and retain any earnings on the collateral
(the 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'')
(the Lending Fee and the Shared Earnings Compensation are referred to
herein as 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
[[Page 44640]]
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 will be 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.
16. An independent fiduciary of a Plan may provide written
instructions directing that the investment of any cash collateral, or
any portion thereof, be managed by Goldman or any of its affiliates or
be invested in one or more mutual funds managed by Goldman or any of
its affiliates. Goldman or such affiliate, as applicable, may receive a
reasonable and customary investment management fee, provided that the
independent fiduciary of the Plan approves of such compensation
arrangement after receiving written disclosure of the compensation
arrangement to be paid to Goldman or such affiliate, as applicable, in
connection with such investment management. The independent fiduciary
of the Plan may revoke such written instructions at any time.\23\
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\23\ This transaction is outside the scope of the proposed
exemption. The Department notes that it is the responsibility of
Goldman to determine whether the conditions of ERISA section
408(b)(2) will be met with respect to the transaction (i.e., the
reasonable contract or arrangement requirement and the reasonable
compensation requirement).
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17. 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 other than
Goldman or an affiliate of Goldman, or other collateral permitted under
PTE 81-6 (as amended or superseded) having, as of the close of business
on the preceding business day, a market value or, in the case of
letters of credit a stated amount, equal to not less than 102 percent
of the then market value of the securities lent. 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 Plan, its independent
fiduciary or its designee, which may be Goldman or any of its
affiliates which provides custodial or directed 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 any 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 may take into account one or more of
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/or the
anticipated investment return on overnight investments permitted by the
independent fiduciary of the Plan. If the Borrower pledges non-cash
collateral, such as government securities or irrevocable bank letters
of credit, the Borrower shall be entitled to any 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 may be different for different
securities or different groups of securities subject to the Borrowing
Agreement.
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\24\ An overnight REPO is an overnight repurchase agreement that
is an arrangement whereby securities dealers and banks finance their
inventories of Treasury bills, notes and bonds. The dealer or bank
sells securities to an investor with a temporary surplus of cash,
agreeing to buy them back the next day. Such transactions are
settled in immediately available Federal Funds, usually at a rate
below the Federal Funds rate (the rate charged by the banks lending
funds to each other).
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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.
18. 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
statements of financial condition.
19. Prior to any Plan's approval of the lending of its securities
to the Borrower, a copy of this exemption, if granted, (and the notice
of pendency) 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.
[[Page 44641]]
20. With regard to those Plans for which Goldman or any of its
affiliates provides custodial, directed trustee, clearing and/or
reporting functions relative to securities loans, Goldman or its
applicable affiliate and a Plan fiduciary independent of Goldman and
its affiliates will agree in advance and in writing to any fee that
Goldman or any of its affiliates is to receive for such services. Such
fees, if any, would be fixed fees (e.g., Goldman 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 Goldman 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 Goldman or any
of its affiliates to provide such functions relative to securities
loans to the Borrower will be terminable by the Plan within five
business days of the receipt of written notice without penalty to the
Plan, except for the return to the Borrower of a pro-rata portion of
the Exclusive Fee paid by the Borrower to the Plan, if the Plan has
also terminated its exclusive borrowing arrangement with the Borrower.
21. 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 business days of written notice of termination or the customary
settlement period for such securities.
22. In the event that the Borrower fails to return securities in
accordance with the Borrowing Agreement and the immediately preceding
paragraph, the Plan's remedy will be 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. against any losses resulting from its use of the borrowed
securities equal 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.
23. 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, Canada, the United
Kingdom, Germany, Japan, Australia or Switzerland, 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 Borrower; provided, however, that--
(a) 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 C.F.R. 2510.3-101 (the
Plan Asset Regulation), which entity is engaged in securities lending
arrangements with the Borrower, 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 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
Borrower, 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.)
The Applicants represent that the opportunity for the Plans to
enter into exclusive borrowing arrangements with the Borrower 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
return on the lending portfolio.
24. 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 in Canada by the Ontario Securities Commission and the
Investment Dealers Association, in the United Kingdom by the UK FSA, in
Germany by the Deutsche Bundesbank and the BAK, in Japan by the
Financial Services Agency and the Tokyo Stock Exchange, in Australia by
the ASIC, or in Switzerland by the Swiss Federal Banking Commission;
(ii) Such Foreign Borrower is in compliance with all applicable
provisions of Rule 15a-6 (17 C.F.R. 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 (as amended or
superseded);
(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 C.F.R. 2550.404(b)-1; and
[[Page 44642]]
(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 an agent for service of process in the United
States, which may be an affiliate (the Process Agent);
(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.
25. In addition to the protections cited above, Goldman or 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.
26. 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 value 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 have, as of the close of business on the
preceding business day, a market value or, in the case of letters of
credit a stated amount, equal to not less than 102 percent of the then
market value of the securities lent and will be monitored daily by the
independent fiduciary or its designee, which may be Goldman or any of
its affiliates which provides custodial or directed trustee services in
respect of the securities covered by the Borrowing Agreement for the
Plan;
(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 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, Canada, the United
Kingdom, Germany, Japan, Australia or Switzerland, as appropriate.
Effective Date: This proposed exemption, if granted, will be
effective as of March 22, 2002.
For Further Information Contact: Karen E. Lloyd, U.S. Department of
Labor, 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 28th day of June, 2002.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 02-16736 Filed 7-2-02; 8:45 am]
BILLING CODE 4510-29-P