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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Deutsche Bank AG and Its Affiliates [Notices] [07/03/2002]

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

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

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

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

    (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\
---------------------------------------------------------------------------

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

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

    \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.

---------------------------------------------------------------------------

[[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.)
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

    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