Proposed Exemption; Deutsche Bank Securities Inc. and Its
Affiliates [02/06/2003]
Volume 68, Number 25, Page 6187-6194
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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.
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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.
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\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.
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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\
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\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).
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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.
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\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.
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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\
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\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.
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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\
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\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.
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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.
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\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).
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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
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\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.
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(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
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