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Notice of Proposed Individual Exemption To Replace Prohibited Transaction Exemption 97-63 (PTE 97-63) Involving State Street Bank and Trust Company (State Street) Located in Boston, MA [02/06/2003]
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Volume 68, Number 25, Page 6197-6205
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11122]
Notice of Proposed Individual Exemption To Replace Prohibited
Transaction Exemption 97-63 (PTE 97-63) Involving State Street Bank and
Trust Company (State Street) Located in Boston, MA
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Notice of proposed individual exemption to replace PTE 97-63.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed individual exemption
which, if granted, would replace PTE 97-63 (62 FR 66689, December 19,
1997). The exemption, as proposed, would permit securities lending
transactions between State Street, its United States (U.S.) domiciled
affiliates, and certain employee benefit plans (the Client Plan(s)),
including commingled investment funds holding plan assets, for which
State Street, through any division or U.S. affiliate of State Street or
of its parent acts as securities lending agent (or sub-agent). The
exemption, as proposed, would also permit receipt of compensation by an
U.S. registered introducing broker affiliated with State Street (the
Introducing Broker) in connection with an arrangement whereby
securities are lent to an unrelated U.S. registered broker-dealer (the
Clearing Broker) who in turn lends such securities to clients of the
Introducing Broker; provided that certain conditions are satisfied.
In addition, State Street has requested that this exemption
incorporate various modifications to specific terms and conditions of
PTE 97-63. The replacement of PTE 97-63 will affect the participants
and beneficiaries of the Client Plans participating in securities
lending transactions and the fiduciaries with respect to such Client
Plans.
EFFECTIVE DATE: If granted, the exemption will be effective as of the
date this notice of proposed exemption (the notice) is published in the
Federal Register.
DATES: Written comments and requests for a public hearing should be
received by the Department on or before 45 days from the date of the
publication in the Federal Register of this notice.
ADDRESSES: All written comments and requests for a public hearing
(preferably, three copies) should be sent to the Office of Exemption
Determinations, Employee Benefits Security Administration, Room N-5649,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210, Attention: Application No. D-11122. The application pertaining
to this notice and the comments received will be available for public
inspection in the Public Disclosure Room of the Employee Benefits
Security Welfare Benefits Administration, U.S. Department of Labor,
Room N-1513, 200 Constitution Avenue, NW., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc, Office of
Exemption Determinations, Employee Benefits Security Administration,
U.S. Department of Labor, telephone number (202) 693-8540. (This is not
a toll-free number.)
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed exemption that would replace PTE
97-63. The proposed exemption has been requested in an application
filed on behalf of State Street and its U.S. affiliates (the
Applicants), pursuant to section 408(a) of the Employee Retirement
Income Security Act of 1974 (the Act) and section 4975(c)(2) of the
Internal Revenue Code of 1986 (the Code), and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
August 10, 1990). Effective December 31, 1978, section 102 of
Reorganization Plan No. 4 of 1978 (5 U.S.C. App. 1, 1995) transferred
the authority of the Secretary of the Treasury to issue exemptions of
the type requested to the Secretary of Labor. Accordingly, this
proposed exemption is issued solely by the Department.
PTE 97-63 provides an exemption from certain prohibited transaction
restrictions of section 406 of the Act and from the sanctions resulting
from the application of section 4975 of the Code, as amended, by reason
of section 4975(c)(1) of the Code. Specifically, PTE 97-63 provides
relief from the restrictions of sections 406(a)(1)(A) through (D),
406(b)(1), and 406(b)(2) 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 (E) of the Code, for:
(1) The lending of securities to State Street, acting through
its Financial Markets Group (FMG) (formerly the Money Market
Division of the Capital Markets Area) or acting through any other
division or U.S. affiliate of State Street that is a successor to
the activities of FMG; and for the lending of securities to any U.S.
registered broker-dealer affiliated with State Street (the
Affiliated Broker Dealer(s)) \1\ by certain Client Plans (the Client
Plans or the Client Plan), including commingled investment funds
holding plan assets, for which State Street, through its Master
Trust Services Division, acts as directed trustee or custodian, and
for which State Street, through its Global Securities Lending
Division or any other similar division of State Street or U.S.
affiliate of State Street or of its parent (collectively, GSL) acts
as securities lending agent (or sub-agent), and (2) the receipt of
compensation by GSL in connection with such securities lending
transactions; provided that certain conditions are satisfied.
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\1\ FMG, any division or U.S. affiliate of State Street that
becomes a successor to the activities of FMG, and U.S. registered
broker-dealers affiliated with State Street (the Affiliated Broker
Dealer(s)) are collectively referred to, herein, as the ``SSB
Group.''
The Applicants have confirmed that the representations, as set
forth in paragraphs 18, 19, 20, 21, 22, and 23 of the summary of facts
and representations of the notice of proposed exemption relating to PTE
97-63 (62 FR 51684, at 51686, October 2, 1997) continue to accurately
describe the material terms of the transactions to be consummated,
pursuant to this proposed exemption, except that (i) the factual
statements contained in the second and third sentences of paragraph 21
related to market conditions at the time, may not be accurate currently
and should be deleted, and (ii) the provisions of paragraph 22 that
contemplate that an affirmative approval or consent will be given by
the Client Plan will be overridden by the negative consent procedure
contained in conditions (p) and (q) of this proposed exemption to the
extent that the requirements thereof have been satisfied. Accordingly,
the Department, hereby, incorporates by reference such representations
(as adjusted by the preceding sentence) into the preamble of this
proposed exemption.
The proposed exemption would replace PTE 97-63 and expand the
relief beyond that already provided, pursuant to PTE 97-63. In this
regard, it is represented that one of State Street's Affiliated Broker
Dealers proposes to act as a ``prime broker'' with respect to certain
of its clients, including hedge fund clients (the Prime Brokerage
Client(s)). As a prime broker, the Affiliated Broker Dealer will
provide a wide range of services to its Prime Brokerage Clients,
including daily trade reporting, trade break resolution, consolidated
position and profit and loss reporting, custodial services, risk
analytics, and performance reporting.
Because these Prime Brokerage Clients frequently engage in short
sales of securities (i.e., the sale of securities that are not owned by
the seller), such
[[Page 6198]]
clients are often required to borrow the securities needed to engage in
such short selling activity. Accordingly, one of the services that the
Prime Brokerage Clients seek is the ability to borrow the required
securities from their prime broker. This, in turn, frequently causes
the prime broker to borrow the required securities on the institutional
securities lending market from lenders such as the Client Plans. It is
represented that a significant component of the institutional
securities lending market consists of the lending of securities to
broker-dealers who require such securities in order to meet the short
selling needs of their prime brokerage clients.
As noted above, one of State Street's Affiliated Broker Dealers
proposes to provide prime brokerage services to its Prime Brokerage
Clients. Eventually, this Affiliated Broker Dealer intends to self-
clear all of the securities transactions (including the securities
borrowing and lending transactions) required of a prime broker. It is
represented that, at that time, the Affiliated Broker Dealer
anticipates that it will borrow the required securities on the
institutional lending market, including borrowing such securities from
the Client Plans, pursuant to PTE 97-63.\2\
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\2\ The Department notes that the proposed exemption, if
granted, will replace PTE 97-63. Accordingly, the Applicants must
comply with the terms and conditions of this exemption, if granted,
in order to obtain relief for securities lending transactions
between Client Plans and an Affiliated Broker Dealer, acting as a
prime broker for the Prime Brokerage Clients.
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It is represented that the Affiliated Broker Dealer will not
initially have all of the administrative and back-office capability
required to perform such self-clearing functions. As a result, until
these functions and capabilities are developed, the Affiliated Broker
Dealer will limit its role to acting as Introducing Broker for its
Prime Brokerage Clients and will utilize a Clearing Broker to actually
borrow securities to meet the Prime Brokerage Clients' short selling
needs. It is represented that the Clearing Broker will be well-known
within the industry as providing complete clearing services for
introducing broker-dealers. It is further represented that the
provision of such clearing services will be a core focus of such
Clearing Broker's business.
It is represented that the Introducing Broker will select the
Clearing Broker based on all of the relevant facts and circumstances,
including such factors as the Clearing Broker's: (1) Financial
stability; (2) ability to execute effectively the trading activities of
the Prime Brokerage Clients; (3) ability to meet such clients' needs
for financing of margin transactions; (4) ability to meet such clients'
needs to borrow securities to implement short selling strategies; (5)
internal systems and controls; (6) reporting capabilities; and (7)
credibility within the industry. It is represented that the Clearing
Broker will be registered as a broker-dealer under the Security
Exchange Act of 1934 and will satisfy all of the Securities Exchange
Commission and NASD requirements for clearing brokers. In addition, the
Clearing Broker will be required to have net capital at least equal to
$10 million.
As indicated above, it is anticipated that the Clearing Broker will
frequently borrow securities to meet the Prime Brokerage Clients' short
selling needs. To the extent that it is necessary for the Clearing
Broker to borrow securities for this purpose, the Clearing Broker will
act as a principal in borrowing the requisite securities from
institutional lenders, such as the Client Plans. In this regard, the
Applicants have requested relief that encompasses securities lending
transactions, as described in PTE 97-63, and also encompasses
securities lending transactions between the Client Plans and the
Clearing Broker, in situations where an Affiliated Broker Dealer is
acting as the Introducing Broker for the Clearing Broker, provided that
certain conditions are satisfied.\3\
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\3\ The Department, herein, is not providing relief for
securities lending transactions engaged in by the Clearing Broker,
beyond that available, pursuant to Prohibited Transaction Exemption
81-6 (PTE 81-6) (46 FR 7527, January 23, 1981, as amended at 52 FR
18754, May 19, 1987) and Prohibited Transaction Exemption 82-63 (PTE
82-63) (47 FR 14804, April 6, 1982); provided the condition of these
class exemptions are satisfied.
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The Applicants have also requested relief for receipt of
compensation by the Introducing Broker in connection with an
arrangement with the Clearing Broker. In this regard, it is anticipated
that the Introducing Broker will receive consideration from the
Clearing Broker based upon the revenue generated by the Clearing Broker
through its use of the securities borrowed from the Client Plans. The
Applicants have provided the following example of how the cash flow
would operate in the context of the interim transition period when both
the Clearing Broker and the Introducing Broker are involved in a
securities lending transaction covered by this exemption.
Example: Assume one of the Introducing Broker's Prime Brokerage
Clients desires to borrow a particular security in order to consummate
a short sale. The Prime Brokerage Client contacts the Introducing
Broker who, as agent for the Prime Brokerage Client, contacts the
Clearing Broker. The Clearing Broker can satisfy the request (i.e.,
lend the required securities) using: (A) Securities that the Clearing
Broker already holds in its own inventory, (B) securities that the
Clearing Broker borrows from GSL (i.e., from the Client Plans) pursuant
to its securities loan agreement with GSL, or (C) securities that the
Clearing Broker borrows from some other securities lender.
Further, assume that the Clearing Broker elects to borrow the
securities from GSL, pursuant to this proposed exemption, and that the
loan is collateralized with cash. Under the applicable securities loan
agreement, GSL will invest the cash collateral and will agree to pay
the Clearing Broker a specified rate (the rebate rate) throughout the
term of the loan. In turn, the Clearing Broker will loan the securities
that it has just borrowed from GSL to the Introducing Broker's Prime
Brokerage Client, will receive cash collateral from the Prime Brokerage
Client, and will agree to pay the Introducing Broker, as agent for its
Prime Brokerage Client, a rebate rate (typically lower than the rebate
rate that the Clearing Broker will receive from GSL) with respect to
the cash collateral throughout the term of the loan. The Introducing
Broker will pay a portion of this rebate rate to its Prime Brokerage
Client, retaining the difference as its compensation for serving as the
Introducing Broker.
Utilizing hypothetical numbers for illustrative purposes, GSL might
agree to pay the Clearing Broker a rebate rate of 200 basis points
while the Clearing Broker in turn might pay the Introducing Broker, as
agent for its Prime Brokerage Client, a rebate rate of 185 basis points
of which the Introducing Broker might retain 5 basis points.
Accordingly, if one assumes that GSL earns 250 basis points by
investing the cash collateral during the term of the loan, GSL will pay
200 basis points to the Clearing Broker (leaving 50 basis points as the
securities lending income to be split between the Client Plan and GSL).
The Clearing Broker will, in turn, pay 185 basis points to the
Introducing Broker, as agent for its Prime Brokerage Client, with 15
basis points remaining with the Clearing Broker as its compensation.
Finally, the Introducing Broker will pay 180 basis points to its Prime
Brokerage Client, with 5 basis points remaining with the Introducing
Broker as its compensation.
The Applicants believe that the receipt of consideration by the
[[Page 6199]]
Introducing Broker from the Clearing Broker could be deemed a
prohibited transaction. In this regard, the decision by GSL, acting as
a fiduciary of a Client Plan, to lend such securities to the Clearing
Broker could be deemed to violate section 406(b) of the Act.
Accordingly, the Applicants have requested relief from section 406(a),
406(b)(1), 406(b)(2), and 406(b)(3) of the Act and section
4975(c)(1)(A) through (F) of the Code for the receipt of such
compensation paid to the Introducing Broker by the Clearing Broker;
provided that certain conditions are satisfied.
The Applicants have also requested that the underlined phrase,
below, from the opening paragraph of PTE 97-63, be deleted from the
proposed exemption:
The restrictions of sections 406(a)(1)(A) through (D) and
406(b)(1) and (b)(2) 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 (E) of the Code, shall not apply to the
lending of securities to State Street Bank and Trust Company (State
Street), acting through its Financial Markets Group (FMG) (formerly
the Money Market Division of the Capital Markets Area) or acting
through any other division or U.S. affiliate of State Street that is
a successor to the activities of FMG; and shall not apply to the
lending of securities to any U.S. registered broker-dealers
affiliated with State Street (the Affiliated Broker Dealers) by
employee benefit plans (the Client Plans or the Client Plan),
including commingled investment funds holding plan assets for which
State Street, through its Master Trust Services Division (the Trust
Division) acts as directed trustee or custodian, and for which State
Street, through its Global Securities Lending Division or any other
similar division of State Street or U.S. affiliate of State Street
or of its parent (collectively, GSL) acts as securities lending
agent (or sub-agent); and shall not apply to the receipt of
compensation by GSL in connection with the transactions, provided
that the following conditions are met.
In this regard, the Applicants have informed the Department that
State Street, in most cases, will be either the trustee or the
custodian of the Client Plans. However, on occasion GSL may be retained
as a securities lending agent by a Client Plan as to which State Street
is neither the trustee nor the custodian. The Applicants do not believe
that there is any reason to deprive such Client Plans of the
opportunity to participate in securities lending transactions for which
GSL acts as agent (or sub-agent). Further, the Applicants do not
believe that there is any reason to impose the incremental
administrative burdens on GSL that would be entailed, if such Client
Plans were treated differently from all other securities lending
clients in this regard. Accordingly, the Applicants request that the
specified phrase in PTE 97-63 not be included in the language of the
proposed exemption in order to provide the flexibility needed to enable
a non-trustee, non-custodial Client Plan to lend securities.
In connection with the expansion of PTE 97-63, the Applicants have
requested relief which would permit securities lending by certain index
funds (the Index Fund(s)) or model-driven funds (the Model-Driven
Fund(s)) managed by State Street or one of its divisions or U.S.
affiliates. Specifically, the Applicants request that the Department
modify Condition (a) of PTE 97-63. In this regard, Condition (a) of PTE
97-63 precludes the lending of securities to the SSB Group, if State
Street or any of its divisions or affiliates has or exercises
discretionary authority or renders investment advice with respect to
the assets being lent. The Applicants have acknowledged that section
II(a) in this proposed exemption precludes the lending of securities to
either the SSB Group or the Clearing Broker, if State Street, the
Clearing Broker, or any affiliate of State Street or the Clearing
Broker has discretionary authority or renders investment advice with
respect to such securities.
However, the Applicants note that the management of Index Funds and
Model-Driven Funds entails a very limited degree of discretionary
authority. As a result, the Applicants maintain that the potential for
the abuse which Condition (a), as set forth in PTE 97-63, was designed
to protect against (i.e., that the investment decisions relating to a
portfolio will be influenced by the possibility that the securities in
such portfolio will be available for loan to an affiliated borrower) is
not present in the context of Index Funds and Model-Driven Funds.
Accordingly, the Applicants have requested that the language of section
II(a) of this proposed exemption permit the lending of securities by an
Index Fund or a Model-Driven Fund, managed by State Street or one of
its divisions or U.S. affiliates, to members of the SSB Group or to the
Clearing Broker. In this regard, the Applicants submit that it would be
in the interest of such Index Funds and Model-Driven Funds to allow
such funds to lend securities, as this would increase the securities
lending opportunities available to such funds and enable such funds to
generate additional securities lending revenue.
In addition, the Applicants request that the proposed exemption
incorporate various modifications to specific terms and conditions, as
set forth in PTE 97-63, including the following:
1. Modification of the language of Condition (f), as set forth in
PTE 97-63, such that any reference to PTE 81-6 and PTE 82-63 also refer
to such class exemptions as they may be amended from time to time or,
alternatively, refer to any superseding class exemption that may be
issued to cover securities lending by employee benefit plans. The
Applicants maintain that the request is consistent with the
Department's approach taken in Condition (d) of PTE 97-63 with respect
to eligible collateral for securities loans.
2. Modification of the language in Condition (g), as set forth in
PTE 97-63, to clarify that State Street is not required to indemnify
the Client Plans against any potential investment losses associated
with the investment of cash collateral received by such Client Plan in
connection with securities lending transactions. The Applicants
maintain that the request incorporates language previously provided by
the Department in an interpretive letter relating to PTE 97-63.\4\
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\4\ Letter from Ivan L. Strasfeld, Director, Office of Exemption
Determinations, U.S. Department of Labor, to William A. Schmidt,
Esq. and Eric Berger, Esq. (February 27, 2001) (C-9199).
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3. Change in the language of Condition (j), as set forth in PTE 97-
63, to modify the plan size requirement in a context of master trusts
and collective investment funds. In this regard, Condition (j), as set
forth in PTE 97-63, provides that only Client Plans with total assets
having an aggregate market value of at least $50 million are permitted
to lend securities to the SSB Group. The Applicants note that in recent
years the Department, in various class exemptions and individual
exemptions, has recognized that the plan size requirement should be
adjusted in the case of two or more Client Plans whose assets are
commingled for investment purposes in a master trust or collective
fund, provided certain conditions are satisfied. Accordingly, the
Applicants request that the language in section II(j) of this proposed
exemption address master trusts and collective funds in a comparable
manner. It is represented that the specific language suggested by the
Applicants for this purpose is substantially similar to that found in
Prohibited Transaction Exemption 2002-45 (PTE 2002-45) granted to
Deutsche Bank AG, as amended.\5\
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\5\ PTE 2002-45; granted (67 FR 59564, September 23, 2002, as
corrected, 67 FR 69046, November 14, 2002); proposed (67 FR 9070,
February 27, 2002); application no. D-10924.
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(4) Modification of the language of Condition (l), as set forth in
PTE 97-63, to require quarterly, rather than
[[Page 6200]]
monthly, reporting. The Applicants maintain that this request is
consistent with the approach approved by the Department in PTE 2002-45,
and would make the provision of such reports to all Client Plans more
administratively feasible.
The Applicants also request the addition of the following
conditions to the requirements of this proposed exemption:
(1) A new section II(p) which would permit certain authorizations
and approvals required or contemplated by this proposed exemption to be
obtained by a negative consent procedure, provided that an initial
affirmative authorization and approval was obtained from an independent
fiduciary of each Client Plan. In this regard, the Applicants maintain
that a requirement that affirmative approval be obtained from the
independent fiduciary of each Client Plan for each change in the
securities lending program imposes unnecessary administrative burdens.
In the opinion of the Applicants, it is appropriate for such subsequent
authorizations and approvals to be obtained by means of a procedure
whereby each independent fiduciary of a Client Plan receives full
disclosure of all of the required information and has a reasonable
opportunity to object. Failure by an independent fiduciary to object
within a prescribed time period would be deemed to constitute
authorization and approval; and
(2) A new section II(q) which would set forth special authorization
and approval rules in the context of certain commingled Index Funds and
commingled Model-Driven Funds in which Client Plans invest and for
which State Street or a U.S. affiliate serves as a trustee, custodian,
and/or manager (collectively, the Commingled Index Fund(s) and the
Commingled Model-Driven Funds(s)). It is represented that these special
rules are appropriate in order to avoid the type of administrative
burden and disruption that could result from including a requirement
that an independent fiduciary of each Client Plan that participates in
a Commingled Index Fund or Commingled Model-Driven Fund must give
affirmative authorization or approval before a securities lending
program (or a change in such program) can be implemented with respect
to such fund.
Further, the Applicants have requested a special rule applicable to
any employee benefit plans maintained by State Street (or a U.S.
affiliate) for its own employees (the State Street Plan(s)) that
participate in a Commingled Index Fund or a Commingled Model-Driven
Fund. In this regard, the Applicants have requested that in the case of
a State Street Plan that has invested in a Commingled Index Fund or
Commingled Model-Driven Fund, the requirement that the fiduciary be
independent shall not apply; provided that at all times the holdings of
all State Street Plans invested in such fund in the aggregate comprise
less than 10% of the assets of such fund.
In addition, the Applicants have suggested a number of definitions
for terms utilized in this proposed exemption. These definitions are
set forth in section III of this proposed exemption.
Finally, the Department has determined to include the following
conditions to this proposed exemption which provide additional
safeguards for the Client Plans:
(1) A new section II(s) and a new section II(t) concerning the
requirement that the Applicants establish and maintain certain records
for a period of six years; and
(2) A new section II(o) which would require that at least 50% of
the dollar value of all securities lending transactions negotiated by
GSL be negotiated with borrowers unrelated to both State Street and the
Clearing Broker. The language of section II(o), as set forth in this
proposed exemption, tracks the language that was included in the
Summary of Facts and Representations relating to PTE 97-63 (62 FR
51684, at 51686, October 2, 1997), but which did not appear in the
operative language or conditions of PTE 97-63.
It is represented that the proposed exemption would be
administratively feasible, because it involves identifiable
transactions which will require minimal on-going monitoring by the
Department. Specifically, it is represented that any loans of
securities made pursuant to this proposed exemption are clearly
identifiable and do not raise any issues from the perspective of
administrative feasibility that are any different from the issues
raised by PTE 97-63. Further, the Applicants maintain that the
requested exemption incorporates approaches and concepts that the
Department has utilized in other comparable contexts and has determined
to be administratively feasible in those contexts.
It is represented that the proposed exemption is in the interest of
affected Client Plans, because the ability to lend securities to the
Clearing Broker in situations where the Affiliated Broker Dealer is
acting as the Introducing Broker will enable the Client Plans to have
access to the additional securities lending opportunities generated by
the prime brokerage business of the Introducing Broker. Such additional
securities lending opportunities will, in turn, enable the Client Plans
to generate additional securities lending revenue.
The proposed exemption is protective of the Client Plans, because
it provides all of the same protections for the Client Plans as does
PTE 97-63, including, without limitation, the collateral requirement
contained in Condition (d) of PTE 97-63 and the indemnity requirement
imposed by Condition (g) of PTE 97-63.
In summary, the Applicants represent that the proposed replacement
of PTE 97-63 satisfies the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons:
a. The proposed exemption will be as administratively feasible as
PTE 97-63 and will provide all of the same benefits and protections as
PTE 97-63;
b. To the extent that securities are lent to the Clearing Broker,
the Client Plans will be able to look to the creditworthiness of both
the Clearing Broker (as the borrower, pursuant to the terms of the
securities loan agreement) and the SSB Group (as indemnitor, pursuant
to section II(g) of this proposed exemption);
c. The proposed exemption will benefit Client Plans in that it will
enable them to take advantage of additional securities lending
opportunities that will be generated by the prime brokerage business of
the Affiliated Broker Dealer during any period that the such broker-
dealer acts only as an Introducing Broker which, in turn, will permit
the Client Plans to generate incremental securities lending revenue;
and
d. For each Client Plan, neither the SSB Group, the Clearing
Broker, nor any affiliate of the SSB Group or the Clearing Broker will
have or exercise discretionary investment authority or control with
respect to the investment of the assets of such Client Plan involved in
the transaction or render investment advice with respect to such
assets, including a Client Plan's acquisition or disposition of
securities available for loan, except to the extent that State Street
or a division or affiliate of State Street exercises discretionary
authority or control or renders investment advice in connection with an
Index Fund or Model-Driven Fund in which Client Plans invest.
Notice to Interested Persons
Notification of the publication of the notice in the Federal
Register will be mailed by first class mail to sponsors of the Client
Plans who participate in securities lending transactions, as
[[Page 6201]]
described herein. Such notification will be given within 15 days of the
publication of the notice in the Federal Register. The notification
will contain a copy of the notice, as published in the Federal
Register, and a copy of the supplemental statement, as required
pursuant to 29 CFR 2570.43(b)(2). The supplemental statement will
inform interested persons of their right to comment on and/or to
request a hearing with respect to the pending exemption. Written
comments and hearing requests are due within 45 days of the publication
of the notice in the Federal Register.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act, which require, among other things, a fiduciary to
discharge his or her duties respecting the plan solely in the interest
of the participants and beneficiaries of the plan and in a prudent
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it
affect the requirements of section 401(a) of the Code that the plan
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption can be granted under section 408(a) of the
Act and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interest of the plan
and of its participants and beneficiaries, and protective of the rights
of participants and beneficiaries of the plan;
(3) This proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and the Code,
including statutory or administrative exemptions. Furthermore, the fact
that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is in fact a
prohibited transaction; and
(4) This proposed exemption, if granted, is subject to the express
condition that the summary of facts and representations, as set forth
in this notice, and the summary of facts and representations, as set
forth in the notice of proposed exemption relating to PTE 97-63,
accurately describe the material terms of the transactions to be
consummated pursuant to this exemption.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemption to the address above,
within the time frame set forth above, after the publication of this
proposed exemption in the Federal Register. All comments will be made a
part of the record. Comments received will be available for public
inspection with the referenced application at the address set forth
above.
Proposed Exemption
Based on the facts and representations set forth in the
application, under the authority of section 408(a) of the Act and
section 4975(c)(2) of the Code and in accordance with the procedures
set forth in 29 CFR part 2570, subpart B (55 FR 32836, August 10,
1990), the Department of Labor (the Department) proposes to replace
Prohibited Transaction Exemption 97-63 (PTE 97-63), as set forth below.
I. Transactions
(a) The restrictions of sections 406(a)(1)(A) through (D),
406(b)(1), and 406(b)(2) of the Employee Retirement Income Security Act
of 1974 (the Act) and the sanctions resulting from the application of
section 4975 of the Internal Revenue Code of 1986 (the Code), by reason
of 4975(c)(1)(A) through (E) of the Internal Revenue Code of 1986 (the
Code),\6\ shall not apply to the lending of securities:
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\6\ For purposes of this exemption, references to specific
provisions of title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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(1) To State Street Bank and Trust Company (State Street), acting
through its Financial Markets Group (FMG) (formerly the Money Market
Division of the Capital Markets Area) or acting through any other
division or United States (U.S.) domiciled affiliate, as defined in
this exemption in section III(a)(1), below, of State Street that is a
successor to the activities of FMG; or
(2) To any U.S. registered broker-dealers affiliated with State
Street (the Affiliated Broker Dealer(s)); \7\ by an employee benefit
plan (the Client Plan(s)), including any commingled investment fund
holding plan assets, for which State Street, through its Global
Securities Lending Division or any other similar division of State
Street or U.S. affiliate of State Street or of its parent
(collectively, GSL) acts as securities lending agent (or sub-agent);
\8\
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\7\ FMG, any division or U.S. affiliate of State Street that
becomes a successor to the activities of FMG, and the Affiliated
Broker Dealers are collectively referred to, herein, as ``the SSB
Group.''
\8\ For the sake of simplicity, future references to GSL's
performance of services as securities lending agent should be deemed
to include its parallel performance as securities lending sub-agent,
and references to Client Plans should be deemed to refer to plans
for which GSL is acting as sub-agent with respect to securities
lending activities, unless otherwise indicated specifically or by
the context of reference.
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(b) The restrictions of sections 406(a)(1)(A) through (D),
406(b)(1), and 406(b)(2) of the Act and the sanctions resulting from
the application of section of 4975 of the Code, by reason of
4975(c)(1)(A) through (E) of the Code, shall not apply to the receipt
of compensation by GSL in connection with any securities lending
transaction, as described, above, in section I(a) of this exemption;
and
(c) The restrictions of section 406 of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of 4975(c)(1) of the Code shall not apply to an arrangement whereby a
U.S. registered broker-dealer affiliated with State Street (the
Introducing Broker) receives compensation from the Clearing Broker in
connection with, or as a direct or indirect result of, the lending of
securities to the Clearing Broker by an employee benefit plan for which
GSL acts as securities lending agent; provided that the conditions, set
forth in section II, below, are satisfied.
II. Conditions
Section I of this exemption applies only if the conditions of
section II of this exemption are satisfied.
(a) Neither State Street, the SSB Group, GSL, the Clearing Broker,
nor any other division or U.S. affiliate of State Street or of the
Clearing Broker has or exercises discretionary authority or control
with respect to the investment of the assets of Client Plans involved
in the transactions which are the subject of this exemption (other than
with respect to the investment of cash collateral after securities have
been loaned and collateral received), nor renders investment advice
(within the meaning of 29 CFR 2510.3-21(c)) with respect to such
assets, including decisions concerning the acquisition or disposition
of securities available for loan by a Client Plan.
Section II(a) of this exemption will be deemed satisfied
notwithstanding the fact that State Street or any division or
[[Page 6202]]
affiliate of State Street has or exercises discretionary authority or
control or renders investment advice in connection with an index fund
(the Index Fund(s)), as defined, below, in section III(d) of this
exemption, or a model-driven fund (the Model-Driven Fund(s)), as
defined, below, in section III(e) of this exemption, managed by State
Street or any division or U.S. affiliate of State Street in which
Client Plans invest. An Index Fund or a Model-Driven Fund with multiple
Client Plan investors is referred to herein as a commingled Index Fund
or a commingled Model-Driven Fund (the Commingled Index Fund(s) or the
Commingled Model-Driven Fund(s));
(b) Except as otherwise provided, below, in section II(q) of this
exemption with respect to Commingled Index Funds or Commingled Model-
Driven Funds, before a Client Plan participates in a securities lending
program, and before any loan of securities to the SSB Group or the
Clearing Broker is effected, pursuant to this exemption, the fiduciary
of the plan who is independent of State Street, GSL, the SSB Group, the
Clearing Broker, and any other division or affiliate of State Street or
the Clearing Broker must have:
(1) Authorized and approved the securities lending authorization
agreement with GSL (the Agency Agreement), where GSL is acting as the
direct securities lending agent; or
(2) Authorized and approved the primary securities lending
authorization agreement (the Primary Lending Agreement) with the
primary lending agent, where GSL is lending securities under a sub-
agency arrangement with the primary lending agent;\9\ and
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\9\ The Department, herein, is not providing relief for
securities lending transactions engaged in by primary lending
agents, other than GSL, beyond that provided, pursuant to Prohibited
Transaction Exemption 81-6 (PTE 81-6) (46 FR 7527, January 23, 1981,
as amended at 52 FR 18754, May 19, 1987) and Prohibited Transaction
Exemption 82-63 (PTE 82-63) (47 FR 14804, April 6, 1982).
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(3) Approved the general terms of the securities loan agreement
(the Loan Agreement) between the plan and the SSB Group or the Clearing
Broker, as applicable, the specific terms of which are negotiated and
entered into by GSL;
(c)(1) Each Client Plan may terminate the Agency Agreement or the
Primary Lending Agreement at any time, without penalty to such Client
Plan, on five business days notice, whereupon the borrower shall
deliver certificates for 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 Client Plan within: (A) The customary delivery period for such
securities, (B) five business days, or (C) the time negotiated for such
delivery by the Client Plan and the borrower, whichever is lesser. With
respect to a Commingled Index Fund or a Commingled Model-Driven Fund in
which a Client Plan invests, termination is pursuant to the procedure,
as set forth, below, in section II(q) of this exemption;
(2) If any event of default occurs (e.g., a loan is terminated and
the borrower fails to return the borrowed securities or the equivalent
thereof within the time described, above, in section II(c)(1) of this
exemption), to the extent that (A) liquidation of the pledged
collateral, or (B) additional cash received from the SSB Group or the
Clearing Broker, as applicable, does not provide sufficient funds on a
timely basis, a Client Plan, including a Commingled Index Fund or a
Commingled Model-Driven Fund in which a Client Plan invests, will have
the right under the terms of the Loan Agreement to purchase securities
identical to the borrowed securities (or their equivalent as discussed
above) and may apply the collateral to the payment of the purchase
price, any other obligations of the borrower under the agreement, and
any expenses associated with the sale and/or purchase. If the
collateral is insufficient to accomplish such purchase, State Street
will indemnify the Client Plan, including a Client Plan invested in a
Commingled Index Fund or Commingled Model-Driven Fund, pursuant to
section II(g) of this exemption;
(d) Each Client Plan or Commingled Index Fund or Commingled Model-
Driven Fund in which a Client Plan invests will receive from the SSB
Group or the Clearing Broker, as applicable, (either by physical
delivery, or by book entry in a securities depository, wire transfer or
similar means) by the close of business on or before the day the loaned
securities are delivered to the SSB Group or the Clearing Broker, as
applicable, collateral consisting of U.S. currency, securities issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities, an irrevocable bank letter of credit issued by a
person other than State Street, the Clearing Broker, or an affiliate
thereof, or any combination thereof, or other collateral permitted
under PTE 81-6 (as amended from time to time or, alternatively, any
superseding class exemption that may be issued to cover securities
lending by employee benefit plans). The collateral will be held on
behalf of a Client Plan in a manner that causes such collateral to be
(i) segregated from and not commingled with the general assets of State
Street, the Clearing Broker, or any of their affiliates, and (ii)
identifiable and reachable by such Client Plan;
(e) The market value of the collateral (or in the case of a letter
of credit the stated amount) must, as of the close of business on the
preceding business day, initially equal at least 102 percent (102%) of
the market value of the loaned securities. If the market value of the
collateral, on the close of trading on a business day, is less than 100
percent (100%) (or such greater percentage as agreed to by the parties)
of the market value of the loaned securities at the close of business
on that day, the SSB Group or the Clearing Broker, as applicable, is
required to deliver by the close of business on the following day
sufficient additional collateral such that the market value of the
collateral will again equal at least 102 percent (102%). The applicable
Loan Agreement will give Client Plans or a Commingled Index Fund or
Commingled Model-Driven Funds in which a Client Plan invests 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.
GSL will monitor the level of the collateral daily;
(f) All GSL's procedures regarding securities lending activities
will at a minimum conform to PTE 81-6 and PTE 82-63 (as amended from
time to time or, alternatively, any superseding class exemption that
may be issued to cover securities lending by employee benefit plans);
(g) State Street will agree to indemnify and hold harmless each
lending Client Plan (including the sponsor and fiduciaries of each
Client Plan) and any Client Plan invested in a Commingled Index Fund or
Commingled Model-Driven Fund against any and all damages, losses,
liabilities, costs, and expenses (including attorneys' fees) which such
plans may incur or suffer directly arising out of the lending of the
securities to the SSB Group or the Clearing Broker, as applicable;
provided that this condition does not require State Street to indemnify
a plan against any potential investment losses associated with the
investment of cash collateral received by such Client Plan (or by such
Commingled Index Fund or Commingled Model-Driven Fund) in connection
with such securities lending transactions;
(h) Each Client Plan, including a Commingled Index Fund or
Commingled Model-Driven Fund in which a Client Plan invests, will
receive the equivalent of all distributions made to holders of the
borrowed securities during the term of any loan, including,
[[Page 6203]]
but not limited to, cash dividends, interest payments, shares of stock
as a result of stock splits and rights to purchase additional
securities, or other distributions;
(i) Each Client Plan, including a Client Plan invested in a
Commingled Index Fund or Commingled Model-Driven Fund, will receive
prior to any approval of the lending of securities to the SSB Group or
the Clearing Broker, as applicable, a copy of this notice of proposed
exemption (the notice), a copy of the final exemption, if granted, a
copy of PTE 97-63, and a copy of the notice of proposed exemption
related to PTE 97-63 (the previous notice);
(j) Only Client Plans with total assets having an aggregate market
value of at least $50 million will be permitted to lend securities to
the SSB Group or to the Clearing Broker, as applicable; provided,
however that--
(1) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization, 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 a securities lending arrangement with GSL, 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 Client Plans which are not
maintained by the same employer, controlled group of corporations or
employee organization, 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 a securities lending arrangement with GSL, 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 Client 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
Client Plan or an employee organization whose members are covered by
such Client Plan). However, the fiduciary responsible for making the
investment decision on behalf of such group trust or other entity--
(A) Has full investment responsibility with respect to plan assets
invested therein; and
(B) 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.
(3) In the case of two or more Client Plans whose assets are
commingled for investment purposes in an entity, whether or not through
an entity described, above, in section II(j)(1) or (j)(2) of this
exemption, the $50 million requirement shall be deemed satisfied if 50
percent (50%) or more of the units of beneficial interest in such
entity are held by investors each having total net assets of at least
$50 million. Such investors may include Client Plans, entities
described, above, in section II(j)(1) or (j)(2) of this exemption, or
other investors that are not employee benefit plans covered by section
406 of the Act, or section 4975 of the Code.
In addition, none of the entities described above are formed for
the sole purpose of making loans of securities;
(k) The terms of each loan of securities by a Client Plan or by a
Commingled Index Fund or Commingled Model-Driven Fund in which a Client
Plan invests to the SSB Group or the Clearing Broker, as applicable,
will be at least as favorable to the plan as those of a comparable
arm's-length transaction between unrelated parties;
(l) Each Client Plan, including a Client Plan invested in a
Commingled Index Fund or Commingled Model-Driven Fund, will receive
quarterly reports with respect to the securities lending transactions
which are the subject of this exemption, including but not limited to
the information described in paragraph 26 of the previous notice, so
that an independent fiduciary of the plan may monitor the securities
lending transactions with the SSB Group and, if applicable, the
Clearing Broker. In the event the identity of the Clearing Broker has
changed since the issuance of the report for the immediately preceding
calendar quarter, the report for the current calendar quarter must
contain name of the new Clearing Broker and the most recently available
audited and unaudited financial statements of such Clearing Broker;
(m) Except in the case of a Commingled Index Fund or Commingled
Model-Driven Fund subject to the requirements, as set forth, below, in
section II(q) of this exemption, before entering into the Loan
Agreement and before a Client Plan lends any securities to the SSB
Group or to the Clearing Broker, as applicable, an independent
fiduciary of the Client Plan will receive sufficient information,
concerning the financial condition of State Street and, if applicable,
the Clearing Broker, including but not limited to the most recently
available audited and unaudited financial statements of State Street's
parent corporation and, if applicable, the Clearing Broker. In the
event of a change in the identity of the Clearing Broker, the name of
such Clearing Broker and the information required by this section (m)
with respect to the new Clearing Broker must be provided to the
independent fiduciary of the Client Plan before such Client Plan lends
any securities to the new Clearing Broker;
(n) Except in the case of a Commingled Index Fund or Commingled
Model-Driven Fund subject to the requirements, as set forth, below, in
section II(q) of this exemption, the SSB Group and, if applicable, the
Clearing Broker, will provide to a Client Plan prompt notice at the
time of each loan by such plan of any material adverse changes in State
Street's and, if applicable, the Clearing Broker's financial condition,
since the date of the most recently furnished financial statements.
If any such material adverse changes have taken place, GSL will not
make any further loans to the Affiliated Broker Dealers and, if
applicable, the Clearing Broker, unless an independent fiduciary of the
Client Plan is provided notice of the material change and approves the
continuation of the lending arrangement in view of the changed
financial condition.
If the independent fiduciary of a Client Plan not invested in a
Commingled Index Fund or Commingled Model-Driven Fund objects to any
material adverse change, as disclosed pursuant to section II(n) of this
exemption, such plan may terminate its participating in the Agency
Agreement or the Primary Lending Agreement, without penalty to such
plan, pursuant to section II(c), above, of this exemption. In the case
of a Client Plan invested in a Commingled Index Fund or Commingled
Model-Driven Fund, termination is pursuant to the procedure described,
below, in section II(q)(2), of this exemption;
[[Page 6204]]
(o) With respect to any calendar quarter, at least 50 percent (50%)
or more of the outstanding dollar value of securities loans negotiated
on behalf of all securities lending clients of GSL will be to borrowers
unrelated to both State Street and the Clearing Broker;
(p) If an independent fiduciary of a Client Plan has given the
initial affirmative authorization and approval for such plan to engage
in securities lending transactions, pursuant to the terms of PTE 97-63,
or pursuant to section II(b), above, of this exemption, then any
subsequent authorization or approval contemplated under this exemption
shall be deemed to have been given, if such independent fiduciary has
not objected in writing to GSL within 30 days following disclosure to
the independent fiduciary of all material information required in
connection with said authorization or approval, a statement apprizing
the independent fiduciary that PTE 97-63 has been replaced by this
exemption, and a copy of this notice, and a copy of the final
exemption, if granted;
(q) In the case of a Commingled Index Fund or Commingled Model-
Driven Fund in which a Client Plan invests:
(1) The requirement, as set forth, above, in section II(b) of this
exemption, shall not apply, provided that the information described in
sections II(b), II(i), and II(m), above, of this exemption, including a
description of the proposed securities lending arrangement, shall be
furnished by GSL to a fiduciary who is independent of State Street,
GSL, the SSB Group, the Clearing Broker, and any other division or
affiliate of State Street or the Clearing Broker with respect to each
Client Plan whose assets are invested in the Commingled Index Fund or
Commingled Model-Driven Fund, not less than 30 days prior to
implementation of any such securities lending arrangement, or any
material changes thereto, and, thereafter, upon the reasonable request
of the independent fiduciary of a Client Plan whose assets are invested
in a Commingled Index Fund or Commingled Model-Driven Fund.
In the event of a material adverse change in the financial
condition of the SSB Group, or the Clearing Broker, as applicable, GSL
will make a decision, using the same standards of credit analysis GSL
would use in evaluating unrelated borrowers, whether to terminate
existing loans and whether to continue making additional loans to the
SSB Group, or the Clearing Broker, as applicable.
For purposes of section II(q) of this exemption, any requirement
that the fiduciary be independent of State Street and its affiliates
shall not apply in the case of an employee benefit plan sponsored and
maintained by State Street and/or an affiliate for its own employees
(the State Street Plan(s)), as defined, below, in section III(c) of
this exemption; provided such plan is invested in a Commingled Index
Fund or Commingled Model-Driven Fund, and provided further that at all
times the value of the aggregate holdings of all State Street Plans in
such fund comprises less than 10% of the value of the total assets of
such fund;
(2) In the event that the independent fiduciary of a Client Plan
whose assets are invested in the Commingled Index Fund or Commingled
Model-Driven Fund submits a notice in writing within 30 days after
receipt of notification of implementation of any such securities
lending arrangement, or any material changes thereto, to GSL, as
securities lending agent to the Commingled Index Fund or Commingled
Model-Driven Fund, objecting to the implementation of, material change
in, or continuation of the securities lending arrangement, the Client
Plan on whose behalf the objection was tended is given the opportunity
to terminate its investment in the Commingled Index Fund or Commingled
Model-Driven Fund, without penalty to such Client Plan, no later than
35 days after the notice of withdrawal is received.
In the case of a Client Plan that elects to withdraw pursuant to
the foregoing, such withdrawal shall be effected prior to the
implementation of, or material change in, the securities leading
arrangement; but an existing securities lending arrangement need not be
discontinued by reason of such Client Plan electing to withdraw. If a
Client Plan's withdrawal necessitates a return of securities to the
Commingled Index Fund or Commingled Model-Driven Fund, the SSB Group or
the Clearing Broker, as applicable, will transfer securities identical
to the borrowed securities (or the equivalent thereof in the event of
reorganization, or merger of the issuer of the borrowed securities) to
the Commingled Index Fund or Commingled Model-Driven Fund within:
(A) The customary delivery period for such securities;
(B) Five business days; or
(C) The time negotiated for such delivery by GSL, as lending agent
to the Commingled Index Fund or Commingled Model-Driven Fund, and the
SSB Group or Clearing Broker, as applicable, whichever is least; and
(3) In the case of a Client Plan whose assets are proposed to be
invested in a Commingled Index Fund or Commingled Model-Driven Fund
subsequent to the implementation of the securities lending arrangement,
the Client Plan's investment in a Commingled Index Fund or Commingled
Model-Driven Fund shall be authorized in the manner described, above,
in section II(b) of this exemption;
(4) The provisions of section II(q) of this exemption shall not
apply to a Commingled Index Fund or Commingled Model-Driven Fund, if
more than 10% of the ownership interests in such fund are held by State
Street Plans;
(5) In the case of a Commingled Index Fund or Commingled Model-
Driven Fund subject to the requirements of section II(q) of this
exemption, GSL will furnish upon reasonable request to the independent
fiduciary of any Client Plan invested in such fund,\10\ the most
recently available audited and unaudited financial statements of the
parent corporation of State Street and, if applicable, the Clearing
Broker (or any new Clearing Broker) prior to the authorization of the
securities lending program, and annually after such authorization;
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\10\ The Department notes that it is the responsibility of the
independent fiduciary for the Client Plan to periodically monitor
any material changes in the securities lending program, including
but not limited to a change in the Clearing Broker or in the
Clearing Broker's financial status, that may occur after an initial
authorization to participate in the program, pursuant to this
exemption.
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(r) In return for lending securities, a Client Plan, including a
Client Plan invested in a Commingled Index Fund or Commingled Model-
Driven Fund, either--
(1) Receives a reasonable fee, which is related to the value of the
borrowed securities and the duration of the loan; or
(2) Has the opportunity to derive compensation through the
investment of cash collateral. (Under such circumstances, such plan may
pay a loan rebate or similar fee to the SSB Group or the Clearing
Broker, as applicable, if such fee is not greater than the fee such
plan would pay in a comparable arm's length transaction with an
unrelated party);
(s) State Street and/or its affiliates maintain, or cause to be
maintained, within the United States for a period of six years from the
date of each transaction which is subject to this exemption, in a
manner that is convenient and accessible for audit and examination,
such records as are necessary to enable the persons described, below,
in section II(t)(1), to determine whether the conditions of
[[Page 6205]]
this exemption have been met, except that--
(1) This record-keeping condition shall not be violated if, due to
circumstances beyond the control of State Street 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 State Street and its affiliates
shall be subject to the civil penalty that may be assessed under
section 502(i) of the Act, or to the taxes imposed by section 4975(a)
and (b) of the Code, if the records are not maintained, or are not
available for examination as required by section II(t)(1) of this
exemption; and
(t)(1)Except as provided in section II(t)(2), below, of this
exemption and notwithstanding any provisions of sections (a)(2) and (b)
of section 504 of the Act, the records referred to in section II(s) of
this exemption are unconditionally available at their customary
location for examination during normal business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission;
(B) Any fiduciary of a participating Client Plan, a State Street
Plan, or any duly authorized representative of such fiduciary;
(C) Any contributing employer to any participating Client Plan,
State Street Plan, or any duly authorized employee or representative of
such employer; and
(D) Any participant or beneficiary of any participating Client
Plan, State Street Plan, or any duly authorized representative of such
participant or beneficiary.
(2) None of the persons described above in section II(t)(1)(B)-
(t)(1)(D) are authorized to examine the trade secrets of State Street
or its affiliates or commercial or financial information which is
privileged or confidential.
III. Definitions
For purposes of this proposed exemption, the following definition
shall apply:
(a) The term, ``affiliate'' or ``affiliates,'' means:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, or partner in any such person;
and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee;
(b) The term, ``control,'' means the power to exercise a
controlling influence over the management or policies of a person other
than an individual;
(c) The term, ``State Street Plan(s),'' refer to employee benefit
plans covered by the Act sponsored and maintained by State Street and/
or an affiliate for its own employees;
(d) The term, ``Index Fund(s),'' refers to any investment fund,
account or portfolio sponsored, maintained, trusteed, or managed by
State Street or a U.S. affiliate, in which one or more investors
invest, and
(1) Which is designed to track the rate of return, risk profile and
other characteristics of an Index, as defined, below, in section III(f)
of this exemption, by either:
(A) Replicating the same combination of securities which compose
such Index, or
(B) Sampling the securities which compose such Index based on
objective criteria and data;
(2) For which State Street or its affiliate does not use its
discretion, or data within its control, to affect the identity or
amount of securities to be purchased or sold;
(3) That contains ``plan assets'' subject to the Act, pursuant to
the Plan Asset Regulation; and
(4) That involves no agreement, arrangement, or understanding
regarding the design or operation of the fund which is intended to
benefit State Street or its affiliate or any party in which State
Street or its affiliate may have an interest;
(e) The term, ``Model-Driven Fund(s),'' refers to any investment
fund, account or portfolio sponsored, maintained, trusteed, or managed
by State Street or a U.S. affiliate, in which one or more investors
invest, and
(1) Which is composed of securities the identity of which and the
amount of which are selected by a computer model that is based on
prescribed objective criteria using independent third-party data, not
within the control of State Street or an affiliate, to transform an
Index;
(2) Which contains ``plan assets'' subject to the Act, pursuant to
the Plan Asset Regulation; and
(3) That involves no agreement, arrangement or understanding
regarding the design or operation of the fund or the utilization of any
specific objective criteria which is intended to benefit State Street,
any affiliate of State Street, or any party in which State Street or
any affiliate may have an interest;
(f) The term, ``Index,'' refers to a securities index that
represents the investment performance of a specific segment of the
public market for equity or debt securities in the United States and/or
foreign countries, but only if--
(1) The organization creating and maintaining the index is--
(A) Engaged in the business of providing financial information,
evaluation, advice or securities brokerage services to institutional
clients,
(B) A publisher of financial news or information, or
(C) A public stock exchange or association of securities dealers;
(2) The index is created and maintained by an organization
independent of State Street; and
(3) The index is a generally accepted standardized index of
securities which is not specifically tailored for the use of State
Street; and
(g) The term, ``Clearing Broker,'' means a U.S. broker-dealer
registered under the Securities Exchange Act of 1934 that is unrelated
to State Street, that has net capital equal to at least $10 million and
that regularly serves as a clearing broker for introducing brokers in
the ordinary course of its business, but only in the context, and to
the extent, of its service as a clearing broker for an Affiliated
Broker Dealer that is acting as introducing broker.
For a complete statement of the facts and representations
supporting the Department's decision to grant PTE 97-63, refer to the
proposed exemption and the grant notice that are cited above.
Signed in Washington, DC, this 3rd day of February, 2003.
Ivan L. Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, Department of Labor.
[FR Doc. 03-2962 Filed 2-5-03; 8:45 am]
BILLING CODE 4510-29-P
