Skip to page content
Secretary of Labor Thomas E. Perez

EBSA Federal Register Notice

Proposed Exemption; Deutsche Bank Securities Inc. and Its Affiliates [02/06/2003]

[PDF Version]

Volume 68, Number 25, Page 6187-6194


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


DEPARTMENT OF LABOR


Employee Benefits Security Administration


[Application No. D-10988]


 
Proposed Exemption; Deutsche Bank Securities Inc. and Its 
Affiliates


AGENCY: Employee Benefits Security Administration, Labor.


ACTION: Notice of proposed exemption.


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


SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed exemption 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 exemption, 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 Employee Benefits Security 
Administration (EBSA), Office of Exemption Determinations, Room N-5649, 
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210.


[[Page 6188]]


Attention: Application No. ------, stated in each Notice of Proposed 
Exemption. Interested persons are also invited to submit comments and/
or hearing requests to EBSA 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 
Employee Benefits Security Administration, U.S. Department of Labor, 
Room N-1513, 200 Constitution Avenue, NW., Washington, DC 20210.


Notice to Interested Persons


    Notice of the proposed exemption 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 exemption was requested in an 
application 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 application contains representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the application on file with the Department for a complete 
statement of the facts and representations.


Deutsche Bank Securities Inc. and Its Affiliates Located in New York, 
NY


[Application No. D-10988]


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 set forth in 29 CFR Part 
2570, Subpart B (55 FR 32847, August 10, 1990).
Section I--Transactions
    If the exemption is granted, the restrictions of sections 
406(a)(1)(A) through (D) of the Act and the sanctions resulting from 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (D) of the Code, shall not apply to any purchase 
or sale of securities, in the context of a portfolio liquidation or 
restructuring, between (i) Deutsche Bank Securities Inc. (DBSI) and its 
current and future affiliates, including certain foreign broker-dealers 
or banks (the Foreign Affiliates, as defined in Section III below), 
(collectively, the Applicant) and (ii) employee benefit plans (the 
Plans) with respect to which the Applicant is a party in interest, 
provided that the conditions set forth in Section II are satisfied.
Section II--Conditions
    A. The Applicant customarily purchases and sells securities for its 
own account in the ordinary course of its business as a broker-dealer 
or bank;
    B. Neither the Applicant nor an affiliate thereof has discretionary 
authority or control with respect to the investment of the Plan assets 
involved in the transaction, or renders investment advice (within the 
meaning of 29 CFR 2510.3-21(c)) with respect to those assets.
    Notwithstanding the foregoing, the Applicant may be a directed 
trustee (as defined in Section III below) with respect to the Plan 
assets involved in the transaction.
    In addition, this condition will be deemed satisfied if the 
Applicant is being terminated as a manager of the plan assets involved 
in the transaction, the termination is effective prior to the 
commencement of the portfolio liquidation or restructuring, and the 
Applicant has not used its discretion to appoint the transition broker-
dealer.
    Lastly, a transaction will not fail to meet the requirements of 
this section solely because the Applicant is being retained as an 
investment manager with respect to the Plan assets involved in the 
transaction, provided that: (i) The Applicant has not used its 
discretion to appoint the transition broker-dealer; (ii) the plan 
assets are to be managed as an Index or Model-Driven Fund; or (iii) the 
investment manager of such assets supplies a list of securities to be 
purchased, which list is prepared without regard to the identity of the 
broker-dealer and without reference to the portfolio being liquidated 
or restructured (i.e., the list is substantially the same as would be 
provided to other similarly situated investors with similar objectives 
or consists of substantially the same securities as those in other 
existing investment portfolios managed in the same style);
    C. The transaction is a purchase or sale, for no consideration 
other than cash;
    D. The terms of any transaction are at least as favorable to the 
Plan as those obtainable in a comparable arm's length transaction with 
an unrelated party;
    E. An Independent Fiduciary has given prior approval for the 
transaction, specifying (solely in the case where the price for any 
principal transaction is not based on an objective measure) whether the 
transaction is to be agency or principal, either on a security-by-
security basis, or based on the whole portfolio or an identifiable part 
of the portfolio (such as all debt securities, all equity securities, 
all domestic securities, or the like);
    F. All purchases and sales are effected within two days following 
the Independent Fiduciary's direction to purchase or sell a given 
security--except that, with the approval of the Independent Fiduciary, 
the Applicant may extend such initial period for a time not exceeding 
two additional days;
    G. Prior to any transaction, the Independent Fiduciary agrees that 
the purchase or sale of a security, which must be one that is publicly 
traded, may be effectuated through a principal transaction at a price 
that--
    (1) In the case of an equity security, is specified in advance by 
the Independent Fiduciary and is a stated dollar amount, or is based on 
an objective measure (as of a specified date or dates), including, but 
not limited to, the closing price, the opening price, or the volume-
weighted average price; or
    (2) In the case of a fixed income security, is a stated dollar 
amount, or is within the bid and asked spread, as of the close of the 
relevant market (on a specified date or dates), as reported by an 
independent third party reporting service or a publicly available 
electronic exchange;
    H. The Independent Fiduciary is furnished with confirmations 
including the relevant information required under Rule 10b-10 of the 
Securities Exchange Act of 1934 (the 1934 Act), as well as a report, 
within five business days of the transaction, containing the following 
information with respect to each security:
    (1) The identity of the security;
    (2) The date on which the transaction occurred;
    (3) The quantity and price of the securities involved; and


[[Page 6189]]


    (4) Whether the transaction was executed with the Applicant as 
principal or agent;
    I. Each Plan shall have total net assets with a value of at least 
$100 million. For purposes of the net assets test, where a group of 
Plans is maintained by a single employer or controlled group of 
employers, as defined in section 407(d)(7) of the Act, the $100 million 
net assets requirement may be met by aggregating the assets of such 
Plans, if the assets are pooled for investment purposes in a single 
master trust;
    J. The Applicant complies with all applicable securities or banking 
laws relating to the transaction;
    K. Any Foreign Affiliate is a registered broker-dealer or bank 
subject to regulation by a governmental agency, as described in Section 
III, B, and is in compliance with all applicable rules and regulations 
thereof in connection with any transaction covered by the proposed 
exemption;
    L. Any Foreign Affiliate, in connection with any transaction 
covered by the proposed exemption, is in compliance with the 
requirements of Rule 15a-6 (17 CFR 240.15a-6) of the 1934 Act, and 
Securities and Exchange Commission (SEC) interpretations thereof, 
providing for foreign affiliates a limited exemption from U.S. broker-
dealer registration requirements;
    M. Prior to any transaction, the Foreign Affiliate enters into a 
written agreement with the Plan in which the Foreign Affiliate consents 
to the jurisdiction of the courts of the United States for any civil 
action or proceeding brought in respect of the subject transactions. In 
this regard, the Foreign Affiliate 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); and (iii) consent to service of process on the Process 
Agent;
    N. The Applicant maintains, or causes to be maintained, within the 
United States for a period of six years from the date of any 
transaction, such records as are necessary to enable the persons 
described in Paragraph O, below, to determine whether the conditions of 
the exemption have been met, except that--
    (1) A party in interest with respect to a Plan, other than the 
Applicant, shall not be subject to a civil penalty under section 502(i) 
of the Act, or the taxes imposed by section 4975 (a) and (b) of the 
Code, if such records are not maintained, or not available for 
examination, as required by Paragraph O; and
    (2) This record-keeping condition shall not be violated if, due to 
circumstances beyond the Applicant's control, such records are lost or 
destroyed prior to the end of the six year period; and
    O. Notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the Applicant makes the records referred to in 
Paragraph N, above, unconditionally available within the United States 
during normal business hours at their customary location to the 
following persons or a duly authorized representative thereof: (1) The 
Department, the Internal Revenue Service, or the SEC; (2) any fiduciary 
of a Plan; (3) any contributing employer to a Plan; (4) any employee 
organization any of whose members are covered by a Plan; and (5) any 
participant or beneficiary of a Plan. However, none of the persons 
described in Items (2) through (5) of this subsection is authorized to 
examine the trade secrets of the Applicant, or commercial or financial 
information which is privileged or confidential.
Section III--Definitions
    A. The term ``DBSI'' means Deutsche Bank Securities Inc. DBSI and 
its domestic affiliates must be one of the following:
    (i) A broker-dealer registered under the 1934 Act; (ii) a reporting 
dealer who makes primary markets in securities of the United States 
Government or of any agency of the United States Government 
(``Government securities'') and reports daily to the Federal Reserve 
Bank of New York its positions with respect to Government securities 
and borrowings thereon; or (iii) a bank supervised by the United States 
or a State. DBSI and its current and future affiliates, including the 
Foreign Affiliates (as defined in Paragraph C, below), are collectively 
referred to herein as ``the Applicant.''
    B. The term ``affiliate'' shall include: (1) Any person directly or 
indirectly, through one or more intermediaries, controlling, controlled 
by, or under common control with such person; (2) any officer, 
director, or partner, employee or relative (as defined in section 3(15) 
of the Act) of such person; and (3) any corporation or partnership of 
which such person is an officer, director or partner. For purposes of 
this definition, 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 ``Foreign Affiliate'' means an affiliate of DBSI that 
is subject to regulation as a broker-dealer or bank by: (1) The 
Securities and Futures Authority or the Financial Services Authority in 
the United Kingdom; (2) the Federal Authority for Financial Services 
Supervision, i.e., der Bundesanstalt fuer Finanzdienstleistungsaufsicht 
(the BAFin) in Germany; (3) the Ministry of Finance and/or the Tokyo 
Stock Exchange in Japan; (4) the Ontario Securities Commission and/or 
the Investment Dealers Association, or the Office of the Superintendent 
of Financial Institutions, in Canada; (5) the Swiss Federal Banking 
Commission in Switzerland; or (6) the Australian Prudential Regulation 
Authority or the Australian Securities & Investments Commission, and/or 
the Australian Stock Exchange Limited, in Australia.
    D. The term ``security'' shall include equities, fixed income 
securities, options on equity or fixed income securities, government 
obligations, and any other instrument that constitutes a security under 
U.S. securities laws. The term ``security'' does not include swap 
agreements or other notional principal contracts.
    E. The term ``index'' means 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--
    (i) Engaged in the business of providing financial information, 
evaluation, advice, or securities brokerage services to institutional 
clients,
    (ii) A publisher of financial news or information, or
    (iii) A public securities exchange or association of securities 
dealers;
    (2) The index is created and maintained by an organization 
independent of the Applicant; and
    (3) The index is a generally accepted standardized index of 
securities that is not specifically tailored for the use of the 
Applicant.
    F. The term ``Index Fund'' means any investment fund, account, or 
portfolio trusteed or managed by the Applicant, 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 independently maintained securities 
index (as ``index'' is defined in Paragraph E, above) by either (i) 
replicating the same combination of securities that compose such index, 
or (ii) sampling the securities that compose such index based on 
objective criteria and data;
    (2) For which the Applicant does not use its discretion, or data 
within its control, to affect the identity or amount of securities to 
be purchased or sold;


[[Page 6190]]


    (3) That contains ``plan assets'' subject to the Act, pursuant to 
the Department's regulations (see 29 CFR 2510.3-101, Definition of 
``plan assets''--plan investments); and
    (4) That involves no agreement, arrangement, or understanding 
regarding the design or operation of the Fund that is intended to 
benefit the Applicant or any party in which the Applicant may have an 
interest.
    G. The term ``Model-Driven Fund'' means any investment fund, 
account, or portfolio trusteed or managed by the Applicant, 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 the Manager, to transform an Index (as defined in 
Paragraph E, above);
    (2) Which contains ``plan assets'' subject to the Act, pursuant to 
the Department's regulations (see 29 CFR 2510.3-101, Definition of 
``plan assets''--plan investments); 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, that is intended to benefit the 
Applicant or any party in which the Applicant may have an interest.
    H. The term ``Plan'' means an employee benefit plan that is subject 
to the fiduciary responsibility provisions of the Act.
    I. The term ``Independent Fiduciary'' means a fiduciary of a Plan 
who is unrelated to, and independent of, the Applicant. For purposes of 
the proposed exemption, a Plan fiduciary will be deemed to be unrelated 
to, and independent of, the Applicant if such fiduciary represents that 
neither such fiduciary, nor any individual responsible for the decision 
to authorize or terminate authorization for transactions described in 
Section I, is an officer, director, or highly compensated employee 
(within the meaning of section 4975(e)(2)(H) of the Code) of the 
Applicant and represents that such fiduciary shall advise the Applicant 
if those facts change.
    (1) Notwithstanding anything to the contrary in this Section III, 
I, a fiduciary is not independent if:
    (i) Such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with the Applicant;
    (ii) Such fiduciary directly or indirectly receives any 
compensation or other consideration from the Applicant for his or her 
own personal account in connection with any transaction described in 
the proposed exemption;
    (iii) Any officer, director, or highly compensated employee (within 
the meaning of section 4975(e)(2)(H) of the Code) of the Applicant, 
responsible for the transactions described in Section I, is an officer, 
director, or highly compensated employee (within the meaning of section 
4975(e)(2)(H) of the Code) of the Plan sponsor or the fiduciary 
responsible for the decision to authorize or terminate authorization 
for transactions described in Section I. However, if such individual is 
a director of the Plan sponsor or the responsible fiduciary, and if he 
or she abstains from participation in (A) the choice of the Plan's 
broker-dealer or bank executing the transactions covered herein, and 
(B) the decision to authorize or terminate authorization for 
transactions described in Section I, then Section III, I(1)(iii) shall 
not apply.
    (2) The term ``officer'' means a president, any vice president in 
charge of a principal business unit, division or function (such as 
sales, administration or finance), or any other officer who performs a 
policy-making function for the entity.
    J. The term ``directed trustee'' means a Plan trustee whose powers 
and duties with respect to any assets of the Plan involved in the 
portfolio liquidation or restructuring are limited to (i) the provision 
of nondiscretionary trust services to the Plan, and (ii) duties imposed 
on the trustee by any provision or provisions of the Act or the Code. 
The term ``nondiscretionary trust services'' means custodial services 
and services ancillary to custodial services, none of which services is 
discretionary. For purposes of the proposed exemption, a person who is 
otherwise a directed trustee will not fail to be a directed trustee 
solely by reason of having been delegated, by the sponsor of a master 
or prototype Plan, the power to amend such Plan.


Summary of Facts and Representations


    1. Deutsche Bank Securities Inc. (i.e., DBSI) is an indirect 
wholly-owned subsidiary of Deutsche Bank AG, a German banking 
corporation regulated by the BAFin. DBSI, a Delaware corporation, is a 
full-service broker-dealer, providing research, sales and trading, 
investment banking, retail, investment advisory services, and prime 
brokerage services. DBSI is registered as a U.S. broker-dealer under 
Section 15 of the 1934 Act, as amended, and is a member of the New York 
Stock Exchange, American Stock Exchange, Chicago Board of Options 
Exchange, and the Chicago Stock Exchange, among others, and DBSI is a 
member of the National Association of Securities Dealers.
    DBSI's affiliate, Deutsche Bank Trust Company Americas (DBT), is a 
wholly-owned subsidiary of Deutsche Bank Trust Corporation, which, in 
turn, is an indirectly wholly-owned subsidiary of Deutsche Bank AG. 
DBT, a New York State banking corporation, is supervised by the Federal 
Reserve Bank of New York.
    2. DBSI also has several foreign affiliates which are broker-
dealers or banks. Those covered by the proposed exemption (i.e., the 
Foreign Affiliates) include but are not limited to:
    (a) United Kingdom--Morgan Grenfell & Co., Ltd., Bankers Trust 
International PLC, and the London Branch of Deutsche Bank;
    (b) Germany--Deutsche Bank AG;
    (c) Japan--Japan Bankers Trust Ltd., Deutsche Bank Securities 
Limited, Tokyo Branch, and Deutsche Trust Bank Limited;
    (d) Canada--Deutsche Bank Canada and Deutsche Bank Securities 
Limited;
    (e) Switzerland--Deutsche Bank (Suisse) S.A.; and
    (f) Australia--Deutsche Bank Securities Australia, Limited and the 
Sydney Branch of Deutsche Bank.
    The Applicant requests an individual exemption for DBSI and its 
current and future affiliates, including the Foreign Affiliates 
identified above, which would permit principal transactions with 
employee benefit plans (i.e., the Plans), as described herein.
    The Applicant represents that the Foreign Affiliates are subject to 
regulation by a governmental agency in the foreign country in which 
they are located. The Applicant states that registration of a foreign 
broker-dealer or bank with the governmental agency in these cases 
addresses regulatory concerns similar to those 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. The foreign regulatory regimes have 
been described in detail in numerous other exemptions previously 
granted by the Department [see, e.g., PTE 99-50 (65 FR 534, January 5, 
2000), granted to Bankers Trust Company, now known as Deutsche Bank 
Trust Company Americas].
    Further, the Applicant represents that, in connection with the 
transactions covered by the proposed exemption, the Foreign Affiliates' 
compliance with any applicable requirements of Rule 15a-6


[[Page 6191]]


(17 CFR 240.15a-6) of the 1934 Act (as discussed further in Item 9, 
below), and SEC interpretations thereof, providing for foreign 
affiliates a limited exemption from U.S. registration requirements, 
will offer additional protections to the Plans.
    3. The Applicant represents that it customarily purchases and sells 
securities for its own account in the ordinary course of its business 
as a broker-dealer or bank. Such trades are referred to as principal 
transactions. In the subject principal transactions with Plans, 
occurring in the context of a portfolio liquidation or restructuring, 
the Applicant may be a party in interest with respect to such Plans.
    The Applicant believes that the principal transactions at issue may 
fall outside the scope of relief provided by Prohibited Transaction 
Exemption (PTE) 75-1 (40 FR 50845, October 31, 1975), Part II,\1\ 
because that class exemption is unavailable where the broker-dealer's 
affiliate is the trustee of a Plan, even if only a directed trustee. In 
addition, because PTE 75-1 provides an exemption only for U.S. 
registered broker-dealers and U.S. banks, it is unavailable for the 
Applicant's Foreign Affiliates.\2\ Thus, the Applicant seeks an 
individual exemption permitting it to execute principal transactions 
with Plans in the situations described above.
---------------------------------------------------------------------------


    \1\ PTE 75-1, Part II, provides a class exemption, subject to 
certain conditions, from section 406(a) of the Act and section 
4975(c)(1)(A) through (D) of the Code, for principal transactions 
between employee benefit plans and U.S. registered broker-dealers or 
U.S. banks that are parties in interest with respect to such plans. 
PTE 75-1, Part II(d) states, among other things, that ``such broker-
dealer, reporting dealer or bank is not a fiduciary with respect to 
the plan, and such broker-dealer, reporting dealer or bank is a 
party in interest or disqualified person with respect to the plan 
solely by reason of section 3(14)(B) of the Act or section 
4975(e)(2)(B) of the Code, or by reason of a relationship to a 
person described in such sections.''
    \2\ Deutsche Bank AG, and certain foreign affiliates thereof, 
filed Submission No. E-00194 and obtained authorization from the 
Department to engage in principal transactions, among other things, 
with employee benefit plans, pursuant to an authorization made under 
PTE 96-62 (61 FR 39988, July 31, 1996), and which was designated 
Final Authorization No. (FAN) 2000-28E, effective November 25, 2000. 
In this regard, the Department notes that the relief provided by FAN 
2000-28E may not cover the principal transactions described in this 
proposed exemption.
---------------------------------------------------------------------------


    As a condition of the proposed exemption, neither the Applicant nor 
an affiliate thereof may have discretionary authority or control with 
respect to the investment of the Plan assets involved in the principal 
transaction, or render investment advice (within the meaning of 29 CFR 
2510.3-21(c)) with respect to those assets. However, one or more of the 
entities affiliated with the Applicant may be a directed trustee of the 
Plan (as discussed further in Item 5, below).
    In addition, this condition will be deemed met if the Applicant or 
an affiliate is the ``legacy manager'' whose appointment as a manager 
of plan assets has been terminated prior to the commencement of the 
portfolio liquidation or restructuring, since the legacy manager would 
not have been involved in the selection of the ``transition broker-
dealer'' and would no longer be acting as a fiduciary with respect to 
the assets involved in the liquidation or restructuring.
    This condition will also be met if the Applicant or an affiliate is 
the ``destination manager,'' who was not involved in the selection of 
the transition broker-dealer but provides such broker-dealer with a 
list of securities to be purchased for the Plan with the proceeds of 
the securities being liquidated, so long as the list represents those 
securities in an Index or Model-Driven Fund.
    Similarly, this condition will be met if the destination manager 
prepares for the Plan sponsor (i.e., the Independent Fiduciary) a list 
of securities to be purchased for the Plan with the proceeds of the 
securities being liquidated, so long as that list is prepared without 
regard to the identity of the transition broker-dealer and without 
reference to the portfolio being liquidated or restructured (i.e., the 
list is substantially the same as would be provided to other similarly 
situated investors with similar objectives or consists of substantially 
the same securities as those in other existing investment portfolios 
managed in the same style).
    Thus, the Applicant or an affiliate may be retained as an 
investment manager for the Plan with respect to some or all of the 
portfolio resulting from the liquidation or restructuring (as discussed 
further in Item 6, below), provided that an Independent Fiduciary has 
given prior approval for the principal transactions, as part of the 
liquidation or restructuring, and the other conditions set forth herein 
are met.\3\
---------------------------------------------------------------------------


    \3\ The Department notes that the proposed exemption is 
unavailable for any principal transaction occurring upon or after 
the Applicant's assumption of responsibility as an investment 
manager for the Plan assets that would be involved in such 
transaction (notwithstanding the transactions described herein). 
Once the transition has been completed and the purchases and sales 
have been consummated, the destination manager will then assume 
fiduciary responsibility for the portfolio, and the proposed 
exemption will not apply to any subsequent principal transactions 
with an affiliate, as described herein, unless the manager is 
terminated (i.e., a ``legacy'' investment manager).
---------------------------------------------------------------------------


    4. The Applicant represents that when sponsors of Plans terminate 
an investment manager, it is customary to hire a broker-dealer to 
liquidate the portfolio of the terminated manager and/or create the 
portfolio of the newly hired manager. An Independent Fiduciary, 
generally the Plan sponsor, hires a broker-dealer to perform these so-
called ``transition services.'' The Independent Fiduciary instructs the 
broker-dealer to purchase or sell a list of securities within a 
specified period. The list of securities to be sold is from the 
portfolio held by the Plan at the time the manager is terminated. The 
list of securities to be purchased is from a list prepared by the new 
manager (who may or may not be affiliated with the Applicant). 
Generally, the transition broker-dealer takes both the legacy 
portfolios and the destination portfolios, matches any securities that 
appear in both, and allocates such securities to the appropriate 
destination managers ratably. Then the remaining legacy securities are 
sold, the cash proceeds placed in the appropriate custody account, and 
the destination securities are purchased.
    The Applicant represents that, while the Independent Fiduciary may 
specify that the transactions are to be executed by the broker-dealer 
as agent in markets where such transactions are typical,\4\ it is often 
the case that the markets involved require principal transactions, such 
as is the case for NASDAQ National Market securities or fixed income 
securities.
    The Applicant represents that often the Independent Fiduciary and 
the transition broker-dealer will agree that certain principal 
transactions will be effected at a price determined by an objective 
reference outside the control of the transition broker-dealer, 
including, but not limited to, the opening or closing price of the 
security for the day on the principal exchange on which the security is 
traded, the volume-weighted average price \5\ for the day, or the price 
as reported by an independent reporting service for that particular 
day. In such case, the Applicant represents that the price at which the 
principal transaction will


[[Page 6192]]


occur will be determined by market forces and not by the broker-dealer.
---------------------------------------------------------------------------


    \4\ The Applicant represents that where securities are to be 
purchased or sold on an agency basis, the Applicant will comply with 
the safe harbor provided by 29 CFR 2510.3-21(d) for the execution of 
a securities transaction.
    Further, the Department notes that PTE 86-128 (51 FR 41686, 
November 18, 1986) provides a class exemption permitting, among 
other things, persons who serve as fiduciaries for employee benefit 
plans to effect or execute securities transactions as an agent for 
the plan, provided the conditions set forth therein are met.
    \5\ For purposes of the proposed exemption, the term volume-
weighted average price means the weighted average of the price of 
each trade that was reported for the security on a given day.
---------------------------------------------------------------------------


    Prior to any transaction that is not based on an objective 
reference for pricing, the Independent Fiduciary shall specify whether 
the transaction is to be agency or principal, either on a security-by-
security basis, or based on the whole portfolio or an identifiable part 
of the portfolio (such as all debt securities, all equity securities, 
all domestic securities, or the like). Any principal transaction will 
be for cash, and the terms at least as favorable to the Plan as those 
obtainable in a comparable arm's length transaction with an unrelated 
party.
    5. The Applicant represents that purchases and sales of securities 
effected as part of transition services will take place as follows. The 
Independent Fiduciary of a Plan, after such due diligence as it deems 
appropriate under the circumstances, selects a broker-dealer to 
purchase or sell a specified portfolio of securities. Where the broker-
dealer selected is the Applicant and an affiliate of the Applicant is 
the directed trustee of the Plan, such affiliate must be a fiduciary 
that has no discretionary authority or control with respect to the 
investment of the Plan assets involved in the transaction (including 
determining the broker-dealer to be hired to provide transition 
services for the Plan), nor renders investment advice (within the 
meaning of 29 CFR 2510.3-21(c)) with respect to those assets.
    The Applicant asserts that permitting it to engage in principal 
transactions where one of its affiliates is a directed trustee of a 
Plan will provide Plans with additional expert broker-dealers 
experienced at transition services from which Plans may choose to 
implement changes in investment managers or investment strategies.
    In such situations, the Applicant believes it may not be able to 
rely on the Department's class exemptions providing relief for 
principal transactions. For example, the Applicant believes that the 
Independent Fiduciary for the subject transactions is unlikely to be a 
``qualified professional asset manager'' (QPAM), as defined in PTE 84-
14, (49 FR 9494, 9506, March 13, 1984),\6\ or an ``in-house asset 
manager'' (INHAM), as defined in PTE 96-23 (61 FR 15975, April 10, 
1996).\7\
---------------------------------------------------------------------------


    \6\ PTE 84-14 provides a class exemption, subject to certain 
conditions, for transactions between a party in interest with 
respect to an employee benefit plan and an investment fund 
(including a single customer or pooled separate account) in which 
the plan has an interest and which is managed by a QPAM.
    \7\ PTE 96-23 provides a class exemption, subject to certain 
conditions, for transactions between a party in interest with 
respect to an employee benefit plan and an investment fund 
(including a single customer or pooled separate account) in which 
the plan has an interest and which is managed by an INHAM.
---------------------------------------------------------------------------


    6. Although the Applicant may not have discretionary authority or 
control over the Plan assets involved at the time of the transaction, 
this condition is not violated and the proposed exemption provides 
relief for purchases and sales of securities where the Applicant's 
affiliate will serve as the new investment manager for such assets, 
where such manager has provided a list of securities to be purchased 
for the Plan to the transition broker-dealer, as described below.
    Where the destination manager will be managing the assets in an 
Index Fund (as defined in Section III, F) or a Model-Driven Fund (as 
defined in Section III, G), the list of securities to be purchased is 
the optimum portfolio that has been identified by the manager's 
computer model, or is a slice of the underlying index, or a slice of 
the Fund (taking into account round lots and other conventions).
    Where the destination manager of an actively managed portfolio 
supplies a list of securities that it would purchase if it were to 
receive cash, the transition broker-dealer uses that list to assemble 
the desired portfolio prior to the date that the destination manager 
assumes responsibility for the portfolio. That list is prepared without 
reference to the identity of the transition broker-dealer, without 
reference to the portfolio being liquidated, and without reference to 
the securities held in inventory by the transition broker-dealer. The 
Applicant asserts that compliance with condition II.B(iii) can be 
demonstrated by comparison with a list that was provided on the same 
day to other similarly situated investors with similar objectives or by 
comparison with the holdings in other existing investment portfolios 
managed in the same style.
    According to the Applicant, the choice of a destination manager of 
an actively managed portfolio generally precedes and is separate from 
any decision regarding the transition broker-dealer. The Independent 
Fiduciary has selected the destination manager on the basis of its 
investment style and performance, and the Plan's asset allocation 
requirements. The destination manager may introduce the transition 
broker-dealer to the Independent Fiduciary but is not responsible for 
choosing the transition broker-dealer, nor for giving advice on which 
the Independent Fiduciary intends to rely as a primary basis for such 
choice. When the transition broker-dealer is selected, the Independent 
Fiduciary requests that the destination manager provide the list of 
securities to be purchased, which is the same list that the destination 
manager would provide to any new client with the same investment style 
choices, as described above. The Applicant further represents that the 
situation should not present an opportunity for self-dealing on the 
part of the transition broker-dealer or destination manager, since the 
destination manager would not be acting as a fiduciary with respect to 
the buy portfolio until after the portfolio is purchased.\8\
---------------------------------------------------------------------------


    \8\ The Department notes, and the Applicant concurs, that no 
relief would be provided under the proposed exemption for any 
violation of section 406(b) of the Act by the destination manager or 
transition broker-dealer. In this regard, section 406(b) of the Act 
prohibits, among other things, a fiduciary for a plan from dealing 
with the assets of the plan in his own interest or for his own 
account or acting, in his individual or in any other capacity, in a 
transaction involving the plan on behalf of a party (or representing 
a party) whose interests are adverse to the interests of the plan or 
the interest of its participants or beneficiaries.
---------------------------------------------------------------------------


    7. Generally, the time period for the transition program is 
specified in advance by the Independent Fiduciary as of a date certain, 
to be completed by a date certain. The Applicant represents that this 
time period may vary, based on the size of the portfolio, but, 
generally, does not exceed four business days. As a condition of the 
proposed exemption, all purchases and sales must be effected within two 
days following an Independent Fiduciary's direction to purchase or sell 
a given security--except that, with the approval of the Independent 
Fiduciary, the Applicant may extend such initial period for an 
additional two days.
    8. The Applicant represents that the Independent Fiduciary often 
specifies an objective method or reference for pricing, such as the 
closing price, opening price, or the volume-weighted average price for 
the security on a particular day. In the fixed income markets, it is 
generally customary for an Independent Fiduciary to specify that the 
price be within the bid-asked spread, as of the close of the relevant 
market. Such benchmarks provide an Independent Fiduciary with a basis 
for measuring the performance of the broker-dealer and satisfying 
itself that the Plan obtained best execution.
    The Applicant represents that it will provide the Independent 
Fiduciary with confirmations that include the relevant information 
required under Rule 10b-10 of the 1934 Act, as well as a report, within 
five business days after any principal transaction, which specifies the 
security, the date of the transaction,


[[Page 6193]]


the quantity and price paid or received by the Plan, and the manner of 
execution (agency or principal). The Applicant states that such 
disclosure is meaningful because it can be verified against objective 
prices obtainable through independent pricing services available to the 
public.
    Only Plans with total assets in excess of $100 million are covered 
by the proposed exemption. However, for purposes of the net assets 
test, where a group of Plans is maintained by a single employer or 
controlled group of employers, as defined in section 407(d)(7) of the 
Act, the $100 million net assets requirement may be met by aggregating 
the assets of such Plans, if the assets are pooled for investment 
purposes in a single master trust.
    9. Finally, the Applicant notes that many Plans have expanded their 
investment portfolios in recent years to include foreign securities. 
With respect to the Foreign Affiliates covered by the proposed 
exemption, the Applicant represents that Rule 15a-6 of the 1934 Act 
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 principal transactions through a U.S. 
registered broker or 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 adviser, 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,'' as defined in Rule 
15a-6(b)(4), includes a U.S. institutional investor that has total 
assets in excess of $100 million.\9\ The Applicant represents that the 
intermediation of the U.S. registered broker or 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.
---------------------------------------------------------------------------


    \9\ The Department notes that the categories of entities that 
qualify as ``major U.S. institutional investors'' has been expanded 
by an SEC No-Action letter. See No-Action Letter issued to Cleary, 
Gottlieb, Steen & Hamilton on April 9, 1997 (the April 9, 1997 No-
Action Letter).
---------------------------------------------------------------------------


    The Applicant represents 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 must, among other things:
    (a) Provide written consent to service of process for any civil 
action brought by or proceeding before the SEC or a self-regulatory 
organization;
    (b) Provide the SEC with any information or documents within its 
possession, custody or control, any testimony of foreign associated 
persons, and any assistance in taking the evidence of other persons, 
wherever located, that the SEC requests and that relates to 
transactions effected pursuant to the Rule;
    (c) Rely on the U.S. registered broker or dealer through which the 
principal transactions with the U.S. institutional and major U.S. 
institutional investors are effected, among other things, for:
    (1) Effecting the transactions, other than negotiating their terms;
    (2) Issuing all required confirmations and statements;
    (3) As between the foreign broker-dealer and the U.S. registered 
broker or dealer, extending or arranging for the extension of any 
credit in connection with the transactions;
    (4) Maintaining 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; \10\
    (5) Receiving, delivering, and safeguarding 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 (Customer Protection--Reserves and Custody of Securities) of the 
1934 Act; \11\ and
---------------------------------------------------------------------------


    \10\ The Applicant represents that all such requirements 
relating to record-keeping of principal transactions would be 
applicable for any Foreign Affiliate in a transaction that would be 
covered by the proposed exemption.
    \11\ 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 a Foreign Affiliate. Please note that in such situations (as in 
the other situations covered by Rule 15a-6), the U.S. broker-dealer 
will not be acting as a principal with respect to any duties it is 
required to undertake pursuant to Rule 15a-6.
---------------------------------------------------------------------------


    (6) Participating in all oral communications (e.g., telephone 
calls) between the foreign associated person and the U.S. institutional 
investor, other than a major U.S. institutional investor. 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.)
    10. Prior to any transaction, the Foreign Affiliate will enter into 
a written agreement with the Plan in which the Foreign Affiliate 
consents to the jurisdiction of the courts of the United States for any 
civil action or proceeding brought in respect of the subject 
transactions. In this regard, the Foreign Affiliate must (i) Agree to 
submit to the jurisdiction of the United States; (ii) agree to appoint 
a Process Agent for service of process in the United States; and (iii) 
consent to service of process on the Process Agent.
    11. In summary, the Applicant represents that the proposed 
transactions will satisfy the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons:
    (a) Permitting the Applicant to engage in principal transactions 
where its affiliate is the directed trustee of a Plan will provide 
Plans with additional expert broker-dealers experienced at transition 
services from which Plans may choose as service providers;
    (b) Permitting the Applicant to engage in principal transactions, 
as described herein, will provide Plans with more predictable and 
verifiable pricing and enable transitions to occur in dealer markets in 
a timely and efficient manner, by transferring to the broker-dealer the 
risk of adverse execution;
    (c) An Independent Fiduciary will give prior approval for the 
principal transactions and will monitor the prices received by the Plan 
through independent, verifiable means; and
    (d) An Independent Fiduciary will ensure that securities assembled 
for either an Index or Model-Driven Fund or actively managed portfolio 
by a transition broker-dealer affiliated with the destination manager 
are consistent with the Plan's investment guidelines and objectives.
    For Further Information Contact: Ms. Karin Weng of the Department, 
telephone (202) 693-8540. (This is not a toll-free number.)


General Information


    The attention of interested persons is directed to the following:


[[Page 6194]]


    (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 in Washington, DC, this 3rd day of February, 2003.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, Department of Labor.
[FR Doc. 03-2964 Filed 2-5-03; 8:45 am]

BILLING CODE 4510-29-P