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Employee Benefits Security Administration

EBSA Federal Register Notice

Proposed Exemptions; ACR Homes, Inc. Employee Stock Ownership Plan and Trust (the ESOP) [04/16/2003]

[PDF Version]

Volume 68, Number 73, Page 18685-18704

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application No. D-11146, et al.]

 
Proposed Exemptions; ACR Homes, Inc. Employee Stock Ownership 
Plan and Trust (the ESOP)

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
requests for a hearing should state: (1) the name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing.

ADDRESSES: All written comments and requests for a hearing (at least 
three copies) should be sent to the Employee Benefits Security 
Administration (EBSA), Office of Exemption Determinations, Room N-5649, 
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No. ------, stated in each Notice of 
Proposed Exemption. Interested persons are also invited to submit 
comments and/or hearing requests to 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 exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the 
Secretary of the Treasury to issue exemptions of the type requested to 
the Secretary of Labor. Therefore, these notices of proposed

[[Page 18686]]

exemption are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

ACR Homes, Inc. Employee Stock Ownership Plan and Trust (the ESOP) 
Located in Roseville, Minnesota

[Application No. D-11146]

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 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to the past sale on August 28, 2001 (the Stock 
Redemption), by the ESOP to the ACR Homes, Inc., the sponsoring 
employer (the Employer), of 3,600 shares of the Employer's class A 
common stock (the Shares) for $511,250 in cash; provided that the 
following conditions were satisfied:
    (a) The Stock Redemption was a one-time cash transaction;
    (b) The ESOP received the fair market value of the Shares as 
determined by an independent, qualified appraiser on the date of the 
Stock Redemption; and
    (c) The ESOP paid no commissions or other expenses associated with 
the Stock Redemption.

EFFECTIVE DATE: If granted, this exemption will be effective as of 
August 28, 2001.

Summary of Facts and Representations

    1. The ESOP was established by the Employer on January 1, 1995 for 
the benefit of its employees. Since 1995, the ESOP has been amended and 
restated from time to time to comply with the Act, the Code and the 
regulations thereunder. Specifically, the ESOP was amended and restated 
on January 1, 1998, to reflect the Employer's status as a subchapter 
``S'' corporation, as elected under section 1361 of the Code. It is 
represented that the ESOP meets the requirements of sections 401(a), 
409, and 4975(e)(7) of the Code, as well as the relevant requirements 
of the Act.\1\
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    \1\ Section 407(d)(6) of the Act defines the term ``employee 
stock ownership plan'' as an individual account plan (A) which is a 
stock bonus plan which is qualified, or a stock bonus plan and money 
purchase plan both of which are qualified, under section 401 of the 
Code, and which is designed to invest primarily in qualifying 
employer securities, and (B) which meets such other requirements as 
the Secretary of the Treasury may prescribe by regulation.
    The Department is providing no opinion herein as to whether such 
requirements have been met.
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    As of November 25, 2002, the ESOP had approximately 350 
participants and beneficiaries. James A. Nelson (Mr. Nelson) and 
Dorothy Nelson (Mrs. Nelson, collectively; the Nelsons) are trustees of 
the ESOP. After the Stock Redemption, Mr. Nelson and Mrs. Nelson 
respectively owned 30.5% and 29.5% of the issued and outstanding shares 
of the Employer's stock (the Stock). Mr. Nelson is the president of the 
Employer. Mrs. Nelson is a vice-president and secretary of the 
Employer.
    The Employer is a Minnesota corporation that provides residential 
services for people with developmental disabilities. The Employer owns 
a subsidiary, ACR Mississippi, Inc., that provides similar services.
    2. The Employer has only one class of shares of the Stock (a/k/a, 
the Class A Shares). As of December 31, 2000 (i.e., before the Stock 
Redemption), there were 1,000,000 Class A Shares authorized and a total 
of 40,000 shares issued and outstanding with the following ownership:

----------------------------------------------------------------------------------------------------------------
                  Shareholder                                 Type                 No. of shares    % Ownership
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ESOP..........................................  Class A.........................          19,600              49
James Nelson..................................  Class A.........................          10,400              26
Dorothy Nelson................................  Class A.........................          10,400              25
                                               -----------------------------------
    Total.....................................  ................................          40,000             100
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An appraisal for the Stock dated June 15, 2001 (the Appraisal), was 
prepared by the Hawthorne Company, an independent and qualified 
appraising firm in Minneapolis, Minnesota. The Appraisal stated that 
each Share of the Stock was worth $140, as of December 31, 2000. 
Therefore, as of December 31, 2000, the ESOP's ownership interest in 
the Stock (i.e., 19,600 shares) was worth $2,744,000.
    3. Under a Stock Redemption Agreement dated August 28, 2001 (the 
Agreement), the ESOP sold 3,600 shares of the Stock (i.e., the Shares) 
to the Employer for a purchase price of $511,200 or $142 per Share. 
This purchase price was determined by an update of the Appraisal, as 
discussed more fully below. The Employer paid the entire purchase price 
in cash.
    The applicant represents that the cash received by the ESOP in the 
Stock Redemption was immediately credited to the accounts of 
participants in proportion to the Shares that were sold from their 
accounts in the Stock Redemption.\2\ The applicant represents that the 
Stock Redemption was in the best interest of the ESOP's participants 
and beneficiaries. The specific reasons are discussed more fully below.
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    \2\ For example, if a participant had 100 Shares allocated to 
her account and 18 had been redeemed, after the Stock Redemption, 
such account would have been allocated an additional $2,556 of cash 
(i.e., $142 per share x 18 shares).
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    The Employer financed its purchase of the Shares through two 
simultaneous sales of 1,800 of newly-issued shares of the Stock to Mr. 
Nelson and Mrs. Nelson, respectively, at the same price of $142 per 
Share (the Nelson Sale).\3\
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    \3\ The applicant represents that the Nelsons were advised, by a 
prior law firm (see discussion in Paragraph 7), to structure the 
Stock Redemption as a two-step transaction.
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    The applicant represents that the Stock Redemption and the Nelson 
Sale decreased the ESOP's ownership of the total outstanding Stock of 
the Employer from 49% to 40%, and increased the Nelsons' combined 
ownership of the Stock from 51% to 60%.
    Following the Stock Redemption on August 28, 2001, the total 
outstanding shares of the Stock were owned as follows:

[[Page 18687]]



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                                                                                    Number of
                 Shareholder                                 Type                    shares        % Ownership
----------------------------------------------------------------------------------------------------------------
ESOP.........................................  Class A.........................          16,000             40
James Nelson.................................  Class A.........................          12,200             30.5
Dorothy Nelson...............................  Class A.........................          11,800             29.5
    Total....................................  ................................          40,000            100
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    4. As stated earlier, the Appraisal was prepared on June 15, 2001 
by Hawthorne Company, an independent qualified appraisal firm (the 
Appraiser). The Appraisal considered three valuation approaches: (i) 
The market approach, (ii) the income approach, and (iii) the asset 
approach. In determining fair market value of the Shares, the Appraisal 
primarily relied on the income approach. The Appraisal utilized the 
single-period capitalization of cash flows method in the valuation of 
the Shares. Using this method, the Appraiser generated an estimate of 
the long-term sustainable ``free cash flow'' of the Employer, given its 
current operating status.\4\
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    \4\ The Appraiser defined ``free cash flow'' as all cash 
remaining after operating the business, repaying debt, and investing 
in fixed assets. Thus, ``free cash flow'' represents the theoretical 
dividend paying capacity of the Employer. The Appraiser then applied 
an appropriate capitalization multiple to that estimate of cash 
flows.
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    The Appraiser represents that it utilized an 18% required annual 
rate of return in the past valuations of the Shares. Because the 
Appraiser did not believe the risk profile of the Employer had changed 
since the last valuation, it continued to utilize an 18% required 
annual rate of return in the Appraisal. By subtracting an estimate of 
long-term growth from the required rate of return, the Appraiser 
arrived at a capitalization rate of 9.5%. This capitalization rate of 
9.5% was applied to the projected net cash flow figure. Under this 
methodology, the Appraisal established a fair market value of a 
minority interest in the Stock at $140 per Share as of December 31, 
2000.
    5. An update to the Appraisal was prepared on August 28, 2001 (the 
Update), which was the date of the Stock Redemption. The Update stated 
that the ESOP should sell 3,600 Shares to the Employer for the purchase 
price of $511,200, or $142 per Share.\5\ In preparing the Update, the 
Appraiser reviewed the Employer's current annual financial statements; 
the Employer's operational status as of August 28, 2001; the Stock 
Redemption Agreement; the Employer's Board of Directors' minutes 
approving the Stock Redemption, and subscription agreements between the 
Employer and the Nelsons. In addition, the Appraiser held discussions 
with representatives of the Employer regarding the current operations, 
financial condition, future prospects, projected operations and 
performance of the Employer. Finally, the Appraiser considered any 
restrictions on transferability associated with the Shares.\6\
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    \5\ The Update was actually characterized as a ``fairness 
opinion'' by the Appraiser. Under the Update, the Appraiser 
concluded that the ESOP would not be receiving less than fair market 
value for the Stock. In response to the Department's request for 
more specificity regarding the valuation, the Appraiser noted, by 
letter dated March 6, 2003, that they were of the opinion that on 
August 28, 2001, the fair market value of the Stock was 
approximately $141.00 per share.
    \6\ The appraiser further maintains that its method of valuation 
of the Shares follows the guidelines set forth by the IRS's Revenue 
Ruling 59-60, 1959-1 Cum. Bull. 237 [as modified by Rev. Rul 68-609 
(1968-2 C.B. 327)] for the valuation of corporate securities. In 
addition, the Appraiser followed the guidelines of the Valuation 
Advisory Committee of the ESOP Association [incorporating the 
Department's Proposed Regulations Relating to the Definition of 
``Adequate Consideration'' (see 53 FR 17632; May 17, 1988)], the 
Uniform Standards of Professional Appraisal Practice, the American 
Society of Appraisers, and the Institute of Business Appraisers.
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    6. The Stock Redemption was a one-time cash transaction. The ESOP 
did not pay any commissions or other expenses associated with the sale. 
The applicant represents that the fair market value of the Shares was 
determined by an independent, qualified appraiser at the time of the 
transaction. In this regard, the Employer paid the ESOP $142 per Share, 
in accordance with the Appraiser's valuation of the Stock, as stated in 
the Update, at the time of the transaction. The applicant maintains 
that the sale was in the best interest and protective of the ESOP and 
its participants and beneficiaries at the time of the transaction. 
Among other things, the sale increased the liquidity and 
diversification of the ESOP's portfolio. The sale enabled the ESOP to 
realize a portion of the gains that had been earned on the investment, 
following its acquisition of the Stock in 1996. Specifically, the 
transaction allowed the ESOP's participants to realize a reasonable 
rate of return from the appreciation of the Stock over a 5-year period.
    7. The applicant's current legal counsel states that at the time of 
the sale, the Employer was represented by another law firm. The 
applicant states that the prior law firm failed to advise the Employer 
that the Stock Redemption would be a prohibited transaction under the 
Act. In this regard, the applicant maintains that the prior law firm 
drafted the legal documents governing all aspects of the Stock 
Redemption and the subsequent sale to the Nelsons. The Employer 
represents that it understood, from the nature of the prior law firm's 
involvement in designing and documenting the transaction, that the law 
firm did not see any legal obstacles to completing the transaction. 
When the Employer's current legal counsel discovered the prohibited 
transaction, the applicant promptly applied to the Department to 
request a retroactive exemption.
    8. In summary, the applicant represents that the transaction 
satisfied the statutory criteria of section 408(a) of the Act and 
section 4975(c)(2) of the Code because:
    (a) The Stock Redemption was a one-time cash transaction;
    (b) The ESOP received the current fair market value for the Shares, 
as established by an independent, qualified appraiser;
    (c) The ESOP paid no commissions or other expenses associated with 
the Stock Redemption; and
    (d) The Stock Redemption provided the ESOP and its participants and 
beneficiaries with more liquidity, a reasonable rate of return on its 
investment in the Stock, and an opportunity to diversify the overall 
investment portfolio.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department 
at (202) 693-8540. (This is not a toll-free number.)

Lehman Brothers Holding Inc. (LBHI) and Lehman Brothers Inc. (LBI), et 
al. (Collectively, the Applicants) Located in New York, NY

[Application No. D-11164]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408 of the Act (or ERISA) and section 
4975(c)(2) of the Code and in accordance with the procedures set

[[Page 18688]]

forth in 29 CFR Part 2570, Subpart B (55 FR 32836, August 10, 1990).\7\
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    \7\ For purposes of this proposed exemption, references to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of Title II of the Code.
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Section I. Covered Transactions
    If the exemption is granted, the restrictions of section 406 of the 
Act and the sanctions resulting from the application of section 4975 of 
the Code, by reason of section 4975(c)(1) of the Code, shall not apply 
April 16, 2003, to the purchase of any securities by LBHI and LBI and 
their affiliates, (collectively, the Asset Manager), on behalf of 
employee benefit plans (the Client Plans), including Client Plans 
investing in a pooled fund (the Pooled Fund), for which the Asset 
Manager acts as a fiduciary, from any person other than the Asset 
Manager or an affiliate thereof, during the existence of an 
underwriting or selling syndicate with respect to such securities, 
where LBI and its affiliates (collectively, the Affiliated Broker-
Dealer) are a manager or member of such syndicate, provided that the 
following conditions are satisfied:
    (a) The securities to be purchased are--
    (1) Either:
    (i) Part of an issue registered under the Securities Act of 1933 
(the 1933 Act) (15 U.S.C. 77a et seq.) or, if exempt from such 
registration requirement, are (A) issued or guaranteed by the United 
States or by any person controlled or supervised by and acting as an 
instrumentality of the United States pursuant to authority granted by 
the Congress of the United States, (B) issued by a bank, (C) exempt 
from such registration requirement pursuant to a federal statute other 
than the 1933 Act, or (D) are the subject of a distribution and are of 
a class which is required to be registered under section 12 of the 
Securities Exchange Act of 1934 (the 1934 Act) (15 U.S.C. 781), and the 
issuer of which has been subject to the reporting requirements of 
section 13 of that Act (15 U.S.C. 78m) for a period of at least 90 days 
immediately preceding the sale of securities and has filed all reports 
required to be filed thereunder with the Securities and Exchange 
Commission (SEC) during the preceding 12 months; or
    (ii) Part of an issue that is an ``Eligible Rule 144A Offering'' 
(the Eligible Rule 144A Offering), as defined in SEC Rule l0f-3 (17 CFR 
270.10f-3(a)(4)). Where the Eligible Rule 144A Offering is of equity 
securities, the offering syndicate shall obtain a legal opinion 
regarding the adequacy of the disclosure in the offering memorandum;
    (2) Purchased prior to the end of the first day on which any sales 
are made, at a price that is not more than the price paid by each other 
purchaser of securities in that offering or in any concurrent offering 
of the securities, except that--
    (i) If such securities are offered for subscription upon exercise 
of rights, they may be purchased on or before the fourth day preceding 
the day on which the rights offering terminates; or
    (ii) If such securities are debt securities, they may be purchased 
at a price that is not more than the price paid by each other purchaser 
of securities in that offering or in any concurrent offering of the 
securities and may be purchased on a day subsequent to the end of the 
first day on which any sales are made, provided that the interest rates 
on comparable debt securities offered to the public subsequent to the 
first day and prior to the purchase are less than the interest rate of 
the debt securities being purchased; and
    (3) Offered pursuant to an underwriting or selling agreement under 
which the members of the syndicate are committed to purchase all of the 
securities being offered, except if--
    (i) Such securities are purchased by others pursuant to a rights 
offering; or
    (ii) Such securities are offered pursuant to an over-allotment 
option.
    (b) The issuer of such securities has been in continuous operation 
for not less than three years, including the operation of any 
predecessors, unless--
    (1) Such securities are non-convertible debt securities rated in 
one of the four highest rating categories by at least one nationally 
recognized statistical rating organization, i.e., Standard & Poor's 
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit 
Rating Co., or Fitch IBCA, Inc., or their successors (collectively, the 
Rating Organizations); or
    (2) Such securities are issued or fully guaranteed by a person 
described in paragraph (a)(1)(i)(A) of Section I of this exemption; or
    (3) Such securities are fully guaranteed by a person who has issued 
securities described in paragraphs (a)(1)(i)(B), (C), or (D) of Section 
I, and who has been in continuous operation for not less than three 
years, including the operation of any predecessors.
    (c) The amount of such securities to be purchased by the Asset 
Manager on behalf of a Client Plan does not exceed three percent of the 
total amount of the securities being offered. Notwithstanding the 
foregoing, the aggregate amount of any securities purchased with assets 
of all Client Plans managed by the Asset Manager (or with respect to 
which the Asset Manager renders investment advice within the meaning of 
29 CFR 2510.3-21(c)) does not exceed:
    (1) 10 percent of the total amount of any equity securities being 
offered;
    (2) 35 percent of the total amount of any debt securities being 
offered that are rated in one of the four highest rating categories by 
at least one of the Rating Organizations; or
    (3) 25 percent of the total amount of any debt securities being 
offered that are rated in the fifth or sixth highest rating categories 
by at least one of the Rating Organizations; and
    (4) If purchased in an Eligible Rule 144A Offering, the total 
amount of the securities being offered for purposes of determining the 
percentages for (1)-(3) above is the total of:
    (i) The principal amount of the offering of such class sold by 
underwriters or members of the selling syndicate to ``qualified 
institutional buyers'' (QIBs), as defined in SEC Rule 144A (17 CFR 
230.144A(a)(1)); plus
    (ii) The principal amount of the offering of such class in any 
concurrent public offering.
    (d) The consideration to be paid by the Client Plan in purchasing 
such securities does not exceed three percent of the fair market value 
of the total net assets of the Client Plan, as of the last day of the 
most recent fiscal quarter of the Client Plan prior to such 
transaction.
    (e) The transaction is not part of an agreement, arrangement, or 
understanding designed to benefit the Asset Manager or an affiliate.
    (f) The Affiliated Broker-Dealer does not receive, either directly, 
indirectly, or through designation, any selling concession or other 
consideration that is based upon the amount of securities purchased by 
Client Plans pursuant to this exemption. In this regard, the Affiliated 
Broker-Dealer may not receive, either directly or indirectly, any 
compensation that is attributable to the fixed designations generated 
by purchases of securities by the Asset Manager on behalf of its Client 
Plans.
    (g)(1) The amount the Affiliated Broker-Dealer receives in 
management, underwriting or other compensation is not increased through 
an agreement, arrangement, or understanding for the purpose of 
compensating the Affiliated Broker-Dealer for foregoing any selling 
concessions for those securities sold pursuant to this exemption. 
Except as described above, nothing in this paragraph shall be construed 
as precluding the Affiliated Broker-Dealer

[[Page 18689]]

from receiving management fees for serving as manager of the 
underwriting or selling syndicate, underwriting fees for assuming the 
responsibilities of an underwriter in the underwriting or selling 
syndicate, or other consideration that is not based upon the amount of 
securities purchased by the Asset Manager on behalf of Client Plans 
pursuant to this exemption; and
    (2) The Affiliated Broker-Dealer shall provide to the Asset Manager 
a written certification, signed by an officer of the Affiliated Broker-
Dealer, stating the amount that the Affiliated Broker-Dealer received 
in compensation during the past quarter, in connection with any 
offerings covered by this exemption, was not adjusted in a manner 
inconsistent with Section I(e), (f), or (g) of this exemption.
    (h) In the case of a single Client Plan, the covered transaction is 
performed under a written authorization executed in advance by an 
independent fiduciary (Independent Fiduciary) of the Client Plan.
    (i) Prior to the execution of the written authorization described 
in paragraph (h) above of this Section I, the following information and 
materials must be provided in hard copy or in electronic form by the 
Asset Manager to the Independent Fiduciary of each single Client Plan:
    (1) A copy of the notice of proposed exemption and of the final 
exemption as published in the Federal Register; and
    (2) Any other reasonably available information regarding the 
covered transactions that the Independent Fiduciary requests.
    (j) Subsequent to an Independent Fiduciary's initial authorization 
permitting the Asset Manager to engage in the covered transactions on 
behalf of a single Client Plan, the Asset Manager will continue to be 
subject to the requirement to provide any reasonably available 
information regarding the covered transactions that the Independent 
Fiduciary requests.
    (k) In the case of existing plan investors in a Pooled Fund, such 
Pooled Fund may not engage in any covered transactions pursuant to this 
exemption, unless the Asset Manager has provided the written 
information described below to the Independent Fiduciary of each plan 
participating in the Pooled Fund. The following information and 
materials shall be provided in hard copy or in electronic form not less 
than 45 days prior to the Asset Manager's engaging in the covered 
transactions on behalf of the Pooled Fund pursuant to the exemption:
    (1) A notice of the Pooled Fund's intent to purchase securities 
pursuant to this exemption and a copy of the notice of proposed 
exemption and of the final exemption as published in the Federal 
Register;
    (2) Any other reasonably available information regarding the 
covered transactions that the Independent Fiduciary requests; and
    (3) A termination form expressly providing an election for the 
Independent Fiduciary to terminate the plan's investment in the Pooled 
Fund without penalty to the plan. Such form shall include instructions 
specifying how to use the form. Specifically, the instructions will 
explain that the plan has an opportunity to withdraw its assets from 
the Pooled Fund for a period at least 30 days after the plan's receipt 
of the initial notice described in paragraph (1) of this Section I(k) 
above and that the failure of the Independent Fiduciary to return the 
termination form by the specified date shall be deemed to be an 
approval by the plan of its participation in covered transactions as a 
Pooled Fund investor. Further, the instructions will identify the Asset 
Manager and its Affiliated Broker-Dealer and state that this exemption 
may be unavailable unless the Independent Fiduciary is, in fact, 
independent of those persons. Such fiduciary must advise the Asset 
Manager, in writing, if it is not an ``Independent Fiduciary,'' as that 
term is defined in Section II(g) of this exemption.
    For purposes of this paragraph, the requirement that the 
authorizing fiduciary be independent of the Asset Manager shall not 
apply in the case of an in-house plan sponsored by the Applicants or an 
affiliate thereof. However, in-house plans must notify the Asset 
Manager, as provided above.
    (1) In the case of a plan whose assets are proposed to be invested 
in a Pooled Fund subsequent to implementation of the procedures to 
engage in the covered transactions, the plan's investment in the Pooled 
Fund is subject to the prior written authorization of an Independent 
Fiduciary, following the receipt by the Independent Fiduciary of the 
materials described in Section I(k)(1) and (2). For purposes of this 
paragraph, the requirement that the authorizing fiduciary be 
independent of the Asset Manager shall not apply in the case of an in-
house plan sponsored by the Applicants or an affiliate thereof.
    (m) Subsequent to an Independent Fiduciary's initial authorization 
of a plan's investment in a Pooled Fund that engages in the covered 
transactions, the Asset Manager will continue to be subject to the 
requirement to provide any reasonably available information regarding 
the covered transactions that the Independent Fiduciary requests.
    (n) At least once every three months, and not later than 45 days 
following the period to which such information relates, the Asset 
Manager shall:
    (1) Furnish the Independent Fiduciary of each single Client Plan, 
and of each plan investing in a Pooled Fund, with a report (which may 
be provided electronically) disclosing all securities purchased on 
behalf of that Client Plan or Pooled Fund pursuant to this exemption 
during the period to which such report relates, and the terms of the 
transactions, including:
    (i) The type of security (including the rating of any debt 
security);
    (ii) The price at which the securities were purchased;
    (iii) The first day on which any sale was made during this 
offering;
    (iv) The size of the issue;
    (v) The number of securities purchased by the Asset Manager for the 
specific Client Plan or Pooled Fund;
    (vi) The identity of the underwriter from whom the securities were 
purchased;
    (vii) The spread on the underwriting;
    (viii) The price at which any such securities purchased during the 
period were sold; and
    (ix) The market value at the end of such period of each security 
purchased during the period and not sold;
    (2) Provide to the Independent Fiduciary in the quarterly report a 
representation that the Asset Manager has received a written 
certification signed by an officer of the Affiliated Broker-Dealer, as 
described in paragraph (g)(2) of this Section I, affirming that, as to 
each offering covered by this exemption during the past quarter, the 
Affiliated Broker-Dealer acted in compliance with Section I(e), (f), 
and (g) of this exemption, and that a copy of such certification will 
be provided to the Independent Fiduciary upon request;
    (3) Disclose to the Independent Fiduciary that, upon request, any 
other reasonably available information regarding the covered 
transactions that the Independent Fiduciary requests will be provided, 
including, but not limited to:
    (i) The date on which the securities were purchased on behalf of 
the plan;
    (ii) The percentage of the offering purchased on behalf of all 
Client Plans and Pooled Funds; and
    (iii) The identity of all members of the underwriting syndicate;
    (4) Disclose to the Independent Fiduciary in the quarterly report, 
any instance during the past quarter where the Asset Manager was 
precluded for any period of time from selling a security purchased 
under this

[[Page 18690]]

exemption in that quarter because of its status as an affiliate of the 
Affiliated Broker-Dealer and the reason for this restriction;
    (5) Provide explicit notification, prominently displayed in each 
quarterly report, to the Independent Fiduciary of a single Client Plan, 
that the authorization to engage in the covered transactions may be 
terminated, without penalty, by the Independent Fiduciary on no more 
than five days' notice by contacting an identified person; and
    (6) Provide explicit notification, prominently displayed in each 
quarterly report, to the Independent Fiduciary of a plan investing in a 
Pooled Fund, that the Independent Fiduciary may terminate investment in 
the Pooled Fund, without penalty, by contacting an identified person.
    (o) Each single Client Plan shall have total net assets with a 
value of at least $50 million. In addition, in the case of a 
transaction involving an Eligible Rule l44A Offering on behalf of a 
single Client Plan, each such Client Plan shall have at least $100 
million in securities, as determined pursuant to SEC Rule 144A (17 CFR 
230.144A). In the case of a Pooled Fund, the $50 million requirement 
will be met if 50 percent or more of the units of beneficial interest 
in such Pooled Fund are held by plans having total net assets with a 
value of at least $50 million. For purchases involving an Eligible Rule 
144A Offering on behalf of a Pooled Fund, the $100 million requirement 
will be met if 50 percent or more of the units of beneficial interest 
in such Pooled Fund are held by plans having at least $100 million in 
assets and the Pooled Fund itself qualifies as a QIB, as determined 
pursuant to SEC Rule 144A (17 CFR 230.144A(a)(F)).
    For purposes of the net asset tests described above, where a group 
of Client Plans is maintained by a single employer or controlled group 
of employers, as defined in section 407(d)(7) of the Act, the $50 
million net asset requirement or the $100 million net asset requirement 
may be met by aggregating the assets of such Client Plans, if the 
assets are pooled for investment purposes in a single master trust.
    (p) The Asset Manager qualifies as a ``qualified professional asset 
manager'' (QPAM), as that term is defined under Part V(a) of PTE 84-14 
(49 FR 9494, 9506, March 13, 1984) and, in addition, has, as of the 
last day of its most recent fiscal year, total client assets under its 
management and control in excess of $5 billion and shareholders' or 
partners' equity in excess of $1 million.
    (q) No more than 20 percent of the assets of a Pooled Fund, at the 
time of a covered transaction, is comprised of assets of employee 
benefit plans maintained by the Asset Manager, the Affiliated Broker-
Dealer, or an affiliate for their own employees, for which the Asset 
Manager, the Affiliated Broker-Dealer, or an affiliate exercises 
investment discretion.
    (r) The Asset Manager and the Affiliated Broker-Dealer maintain, or 
cause to be maintained, for a period of six years from the date of any 
covered transaction such records as are necessary to enable the persons 
described in Section I(s) of this exemption to determine whether the 
conditions of this exemption have been met, except that --
    (1) No party in interest with respect to a Client Plan, other than 
the Asset Manager and the Affiliated Broker-Dealer, shall be subject to 
a civil penalty under section 502(i) of the Act or the sanctions 
imposed by section 4975(a) and (b) of the Code, if such records are not 
maintained, or not available for examination, as required by Section 
I(s); and
    (2) A prohibited transaction shall not be considered to have 
occurred if, due to circumstances beyond the control of the Asset 
Manager or the Affiliated Broker-Dealer, such records are lost or 
destroyed prior to the end of the six-year period.
    (s)(1) Except as provided in subparagraph (2) of this Section I(s) 
and notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the records referred to in Section I(r) are 
unconditionally available at their customary location for examination 
during normal business hours by --
    (i) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the SEC;
    (ii) Any fiduciary of a Client Plan, or any duly authorized 
employee or representative of such fiduciary;
    (iii) Any employer of participants and beneficiaries and any 
employee organization whose members are covered by a Client Plan, or 
any authorized employee or representative of these entities; or
    (iv) Any participant or beneficiary of a Client Plan, or duly 
authorized employee or representative of such participant or 
beneficiary;
    (2) None of the persons described in subparagraphs (s)(1)(ii)--(iv) 
of this Section I shall be authorized to examine trade secrets of the 
Asset Manager or the Affiliated Broker-Dealer, or commercial or 
financial information which is privileged or confidential; and
    (3) Should the Asset Manager or the Affiliated Broker-Dealer refuse 
to disclose information on the basis that such information is exempt 
from disclosure pursuant to Section I (s)(2) above, the Asset Manager 
shall, by the close of the (thirtieth)(30th) day following the request, 
provide a written notice advising that person of the reasons for the 
refusal and that the Department may request such information.

Section II. Definitions

    (a) The term ``Asset Manager'' means any asset management affiliate 
of any Applicant (as ``affiliate'' is defined in Section II(c)) that 
meets the requirements of this exemption.
    (b) The term ``Affiliated Broker-Dealer'' means any broker-dealer 
affiliate of any Applicant (as ``affiliate'' is defined in paragraph 
(c) of this Section II) that meets the requirements of this exemption. 
Such Affiliated Broker-Dealer may participate in an underwriting or 
selling syndicate as a manager or member. The term ``manager'' means 
any member of an underwriting or selling syndicate who, either alone or 
together with other members of the syndicate, is authorized to act on 
behalf of the members of the syndicate in connection with the sale and 
distribution of the securities being offered, or who receives 
compensation from the members of the syndicate for its services as a 
manager of the syndicate.
    (c) The term ``affiliate'' of a person includes:
    (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, 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, partner, or employee.
    (d) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (e) The term ``Client Plan'' means an employee benefit plan that is 
subject to the fiduciary responsibility provisions of the Act and whose 
assets are under the management of the Asset Manager, including a plan 
investing in a Pooled Fund (as ``Pooled Fund'' is defined in Section 
II(f) below).
    (f) The term ``Pooled Fund'' means a common or collective trust 
fund or pooled investment fund maintained by the Asset Manager.

[[Page 18691]]

    (g)(1) The term ``Independent Fiduciary'' means a fiduciary of a 
Client Plan who is unrelated to, and independent of, the Asset Manager 
and the Affiliated Broker-Dealer. For purposes of this exemption, a 
Client Plan fiduciary will be deemed to be unrelated to, and 
independent of, the Asset Manager and the Affiliated Broker-Dealer 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 Asset Manager or the Affiliated 
Broker-Dealer and represents that such fiduciary shall advise the Asset 
Manager if those facts change.
    (2) Notwithstanding anything to the contrary in this Section II(g), 
a fiduciary is not independent if:
    (i) Such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with the Asset Manager or the Affiliated 
Broker-Dealer;
    (ii) Such fiduciary directly or indirectly receives any 
compensation or other consideration from the Asset Manager or the 
Affiliated Broker-Dealer for his or her own personal account in 
connection with any transaction described in this exemption;
    (iii) Any officer, director, or highly compensated employee (within 
the meaning of section 4975(e)(2)(H) of the Code) of the Asset Manager, 
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 Client Plan sponsor or of 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 Client Plan sponsor or of the 
responsible fiduciary, and if he or she abstains from participation in 
(A) the choice of the Plan's investment manager/adviser and (B) the 
decision to authorize or terminate authorization for transactions 
described in Section I, then this Section II(g)(2)(iii) shall not 
apply.
    (3) 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.
    (4) In the case of existing Client Plans in a Pooled Fund, at the 
time the Asset Manager provides such Client Plans with initial notice 
pursuant to this exemption, the Asset Manager will notify the 
fiduciaries of such Client Plans that they must advise the Asset 
Manager, in writing, if they are not independent, within the meaning of 
this Section II(g).
    (h) The term ``security'' shall have the same meaning as defined in 
section 2(36) of the Investment Company Act of 1940 (the 1940 Act), as 
amended (15 U.S.C. 80a-2(36)(l996)). For purposes of this exemption, 
mortgage-backed or other asset-backed securities rated by a Rating 
Organization will be treated as debt securities.
    (i) The term ``Eligible Rule 144A Offering'' shall have the same 
meaning as defined in SEC Rule 10f-3(a)(4) (17 CFR 270.10f-3(a)(4)) 
under the 1940 Act.
    (j) The term ``qualified institutional buyer'' or ``QIB'' shall 
have the same meaning as defined in SEC Rule 144A (SEC Rule 144A) (17 
CFR 230.144A(a)(1)) under the Securities Act of 1933.
    (k) The term ``Rating Organizations'' means Standard & Poor's 
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit 
Rating Co., or Fitch IBCA, Inc., or their successors.

EFFECTIVE DATE: If granted, this proposed exemption will be effective 
as of April 16, 2003.

Summary of Facts and Representations

The Applicants

    1. LBHI, a Delaware corporation, is one of the leading global 
investment banks. LBHI and its numerous subsidiaries serve 
institutional, corporate, retirement plan, government and high net 
worth individual clients and customers. The businesses of LBHI and its 
subsidiaries include asset management; \8\ capital raising for clients 
through securities underwriting and direct placements; corporate 
finance and strategic advisory services; merchant banking; securities 
sales and trading; research; and the trading of foreign exchange, 
derivative products and certain commodities. Hereinafter, LBHI, 
together with its affiliates including LBI shall be referred to as the 
``Asset Manager'' when discussing their activities relating to 
investment advisory and/or investment management services. LBHI and its 
affiliates currently have approximately $21 billion in assets under 
management. LBI is a wholly owned direct subsidiary of LBHI and is a 
U.S. registered broker-dealer.
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    \8\ It should be noted that Lincoln Capital Fixed Income 
Management Company, LLC, a subsidiary of LBHI, acquired the fixed 
income management business of Lincoln Capital Asset Management 
Company (Lincoln) as of the close of business on January 31, 2003. 
Currently, the fixed income management business of Lincoln has 
approximately $27.4 billion in assets under management.
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    2. It is represented that the Applicants and their various 
affiliates are all regulated by other federal government agencies such 
as the SEC, as well as state government agencies, and industry self-
regulatory organizations (e.g., the New York Stock Exchange (NYSE) and 
the National Association of Securities Dealers).
Requested Exemption
    3. The Applicants request a prohibited transaction exemption that 
would permit the purchase of securities by the Asset Manager for its 
ERISA-covered Client Plans, including any Pooled Funds, from 
underwriting or selling syndicates in which the Affiliated Broker-
Dealer participates as a manager or member. Such purchase would be made 
by the Asset Manager for the Client Plans from an underwriter or 
broker-dealer, other than the Affiliated Broker-Dealer, and such 
Affiliated Broker-Dealer would receive no selling concessions in 
connection with the securities sold to the Client Plans. If granted, 
the proposed exemption would be effective as the date the proposed 
exemption is published in the Federal Register.
    4. The Applicants represent that if the Affiliated Broker-Dealer is 
a member of an underwriting or selling syndicate, the Asset Manager may 
purchase underwritten securities for Client Plans in accordance with 
Part III of Class PTE 75-1, (40 FR 50845, October 31, 1975). Part III 
of this class exemption provides limited relief from the Act's 
prohibited transaction provisions for plan fiduciaries that purchase 
securities from an underwriting or selling syndicate of which the 
fiduciary or an affiliate is a member. However, such relief is not 
available if the Affiliated Broker-Dealer manages the underwriting or 
selling syndicate.
    5. In addition, regardless of whether a fiduciary or its affiliate 
is a manager or merely a member of an underwriting or selling 
syndicate, PTE 75-1 does not provide exemptive relief for the purchase 
of unregistered securities. This includes those securities that are 
purchased by an underwriter for resale to a ``qualified institutional 
buyer'' (i.e., a QIB) pursuant to the SEC's Rule 144A under the 1933 
Act. Rule 144A is commonly utilized in connection with sales of 
securities issued by foreign corporations to U.S. investors that are 
QIBs. Notwithstanding the unregistered nature of such shares, 
syndicates selling Rule 144A Securities are the functional equivalent 
of those selling registered securities.

[[Page 18692]]

    6. The Applicants represent that the Affiliated Broker-Dealer 
regularly serves as manager of underwriting or selling syndicates for 
registered securities, and as a manager or a member of underwriting or 
selling syndicates for Rule 144A Securities. Accordingly, the Asset 
Manager is currently unable to purchase on behalf of the Client Plans 
Rule 144A Securities sold in such offerings, resulting in such Client 
Plans being unable to participate in significant investment 
opportunities.
    7. Since 1975, there has been a significant amount of consolidation 
in the financial services industry in the United States. As a result, 
there are more situations in which a plan fiduciary may be affiliated 
with the manager of an underwriting syndicate.\9\ Further, many plans 
have expanded investment portfolios in recent years to include 
securities issued by foreign corporations. As a result, the exemption 
provided in PTE 75-1, Part III, is often unavailable for purchase of 
domestic and foreign securities that may otherwise constitute 
appropriate plan investments.\10\
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    \9\ For additional information, please see the studies submitted 
by the Morgan Guaranty Trust Company of New York and J.P. Morgan 
Investment Management Inc. in connection with the exemption 
application underlying PTE 2000-25.
    \10\ Pursuant to the Gramm-Leach-Bliley Act, signed into law in 
November 1999, certain provisions of the Glass-Steagall Act and the 
Bank Holding Company Act of 1956, as amended, were repealed. The 
effect of such law will likely be further consolidation in the 
industry. The law facilitates cross-ownership and control among bank 
holding companies and securities firms through the creation of 
``financial holding companies'' that are permitted to engage in a 
broad range of financial and related activities, including 
underwriting and broker-dealer activities.
---------------------------------------------------------------------------

Client Plan Investments in Offered Securities

    8. The Applicants represent that the Asset Manager makes its 
investment decisions on behalf of, or renders investment advice to, 
Client Plans pursuant to the governing document of the particular 
Client Plan or Pooled Fund and the investment guidelines and objectives 
set forth in the management or advisory agreement. Because the Client 
Plans are covered by Title I of the Act, such investment decisions are 
subject to the fiduciary responsibility provisions of the Act.
    9. The Applicants state, therefore, that the decision to invest in 
a particular offering is made on the basis of price, value, and a 
Client Plan's investment criteria, not on whether the securities are 
currently being sold through an underwriting or selling syndicate. The 
Applicants further state that, because the Asset Manager's compensation 
for its services is generally based upon assets under management, the 
Asset Manager has little incentive to purchase securities in an 
offering in which the Affiliated Broker-Dealer is an underwriter unless 
such a purchase is in the interests of Client Plans. If the assets 
under management do not perform well, the Asset Manager will receive 
less compensation and could lose clients, costs which far outweigh any 
gains from the purchase of underwritten securities.\11\
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    \11\ In fact, under the terms of the proposed exemption set 
forth below, the Affiliated Broker-Dealer may receive no 
compensation or other consideration, direct or indirect, in 
connection with any transaction that would be permitted under the 
proposed exemption.
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    10. The Applicants state that the Asset Manager generally purchase 
securities in large blocks because the same investments will be made 
across several accounts. If there is a new offering of an equity or 
fixed income security that the Asset Manager wishes to purchase, it may 
be able to purchase the security through the offering syndicate at a 
lower price than it would pay in the open market, without transaction 
costs and with reduced market impact if it is buying a relatively large 
quantity. This is because a large purchase in the open market can cause 
an increase in the market price and, consequently, in the cost of the 
securities. Purchasing from an offering syndicate can thus reduce the 
costs to the Client Plans.
    11. However, absent an exemption, if the Affiliated Broker-Dealer 
is a manager of a syndicate that is underwriting a securities offering, 
the Asset Manager will be foreclosed from purchasing any securities on 
behalf of its Client Plans from that underwriting syndicate. This will 
force the Asset Manager to purchase the same securities in the 
secondary market. In such a circumstance, the Client Plans may incur 
greater costs both because the market price is often higher than the 
offering price, and because of transaction and market impact costs. In 
turn, this will cause the Asset Manager to forego other investment 
opportunities because the purchase price of the underwritten security 
in the secondary market exceeds the price that the Asset manager would 
have paid to the selling syndicate.

Underwriting of Securities Offerings

    12. The Applicants represent that the Affiliated Broker-Dealer 
currently manages and participates in firm commitment underwriting 
syndicates for registered offerings of both equity and debt securities. 
While equity and debt underwritings may operate differently with regard 
to the actual sales process, the basic structures are the same. In a 
firm commitment underwriting, the underwriting syndicate acquires the 
securities from the issuer and then sells the securities to investors.
    13. The Applicants represent that while, as a legal matter, a 
selling syndicate assumes the risk that the underwritten securities 
might not be fully sold, as a practical matter, this risk is reduced, 
in marketed deals, through ``building a book'' (i.e., taking 
indications of interest from potential purchasers) prior to pricing the 
securities. Accordingly, there is no incentive for the underwriters to 
use their discretionary accounts (or the discretionary accounts of 
their affiliates) to buy up the securities as a way to avoid 
underwriting liabilities.
    14. Each selling syndicate has a lead manager, who is the principal 
contact between the syndicate and the issuer and who is responsible for 
organizing and coordinating the syndicate. The syndicate may also have 
co-managers, who generally assist the lead manager in working with the 
issuer to prepare the registration statement to be filed with the SEC 
and in distributing the underwritten securities. While equity 
syndicates typically include additional members that are not managers, 
more recently, membership in many debt syndicates has been limited to 
lead and co-managers.
    15. If more than one underwriter is involved in a selling 
syndicate, the lead manager, who has been selected by the issuer of the 
underwritten securities, contacts other underwriters, and the 
underwriters enter into an ``Agreement Among Underwriters.'' Most lead 
managers have a standing form of agreement. This document is then 
supplemented for the particular deal by sending an ``invitation telex'' 
or ``terms telex'' that sets forth particular terms to the other 
underwriters.
    16. The arrangement between the syndicate and the issuer of the 
underwritten securities is embodied in an underwriting agreement, which 
is signed on behalf of the underwriters by one or more of the managers. 
In a firm commitment underwriting, the underwriting agreement provides, 
subject to certain closing conditions, that the underwriters are 
obligated to purchase the underwritten securities from the issuer in 
accordance with their respective commitments. This obligation is met by 
using the proceeds received from the buyers of the securities in the 
offering, although there is a risk that the underwriters will have

[[Page 18693]]

to pay for a portion of the securities in the event that not all of the 
securities are sold.
    17. The Applicants represent that, generally, the risk that the 
securities will not be sold is small because the underwriting agreement 
is not executed until after the underwriters have obtained sufficient 
indications of interest to purchase the securities from a sufficient 
number of investors to assure that all the securities being offered 
will be acquired by investors. Once the underwriting agreement is 
executed, the underwriters immediately begin contacting the investors 
to confirm the sales, first orally and then by written confirmation, 
and sales are finalized within hours and sometimes minutes. In 
registered transactions, the underwriters are particularly anxious to 
complete the sales as soon as possible because until they ``break 
syndicate,'' they cannot enter the market. In many cases, the 
underwriters will act as market-makers for the security. A market-maker 
holds itself out as willing to buy or sell the security for its own 
account on a regular basis.
    18. The Applicants represent that the process of ``building a 
book'' or soliciting indications of interest occurs as follows: In a 
registered equity offering, after a registration statement is filed 
with the SEC and, while it is under review by the SEC staff, 
representatives of the issuer of the securities and the selling 
syndicate managers conduct meetings with potential investors, who learn 
about the company and the underwritten securities. Potential investors 
also receive a preliminary prospectus. The underwriters cannot make any 
firm sales until the registration statement is declared effective by 
the SEC. Prior to the effective date, while the investors cannot become 
legally obligated to make a purchase, they indicate whether they have 
an interest in buying, and the managers compile a ``book'' of investors 
who are willing to ``circle'' a particular portion of the issue. These 
indications of interest are sometimes referred to as a ``soft circle'' 
because investors cannot be legally bound to buy the securities until 
the registration statement is effective. However, the Applicants 
represent that investors generally follow through on their indications 
of interest, and would be expected to do so, barring any sudden adverse 
developments (in which case it is likely that the offering would be 
withdrawn or the price range modified and the process restarted), 
because, if the investors that gave an indication of interest do not 
follow through, the underwriters may be reluctant to include them in 
future offerings.
    19. Assuming that the marketing efforts have produced sufficient 
indications of interest, the Applicants represent that the issuer of 
the securities and the selling syndicate managers together will set the 
price of the securities and ask the SEC to declare the registration 
effective. After the registration statement becomes effective and the 
underwriting agreement is executed, the underwriters contact those 
investors that have indicated an interest in purchasing securities in 
the offering to execute the sales. The Applicants represent that 
offerings are often oversubscribed, and many have an over-allotment 
option that the underwriters can exercise to acquire additional shares 
from the issuer. Where an offering is oversubscribed, the underwriters 
decide how to allocate the securities among the potential purchasers. 
However, if an issue is a ``hot issue,'' (i.e., it is selling in the 
market at a premium above its offering price) the underwriters may not 
hold this hot issue in their own accounts, nor sell it to their 
employees, officers and directors. Subject to certain exceptions, a hot 
issue may also not be sold to the personal accounts of those 
responsible for investing for others, such as officers of banks, 
insurance companies, mutual funds, and investment advisers. (NASD 
Manual & Notices to Members, IM-2110-1)
    20. The Applicants represent that debt offerings may be 
``negotiated'' offerings, ``competitive bid'' offerings, or ``bought 
deals.'' ``Negotiated'' offerings, which often involve non-investment 
grade securities, are conducted in the same manner as an equity 
offering with regard to when the underwriting agreement is executed and 
how the securities are offered. ``Competitive bid'' offerings, in which 
the issuer determines the price for the securities through competitive 
bidding rather than negotiating the price with the underwriting 
syndicate, are performed under ``shelf'' registration statements 
pursuant to the SEC's Rule 415 under the 1933 Act (17 CFR 230.415).\12\
---------------------------------------------------------------------------

    \12\ Rule 415 permits an issuer to sell debt as well as equity 
securities under an effective registration statement previously 
filed with the SEC by filing a post-effective amendment or 
supplemental prospectus.
---------------------------------------------------------------------------

    21. In a competitive bid offering, prospective lead underwriters 
will bid against one another to purchase debt securities, based upon 
their determinations of the degree of investor interest in the 
securities. Depending on the level of investor interest and the size of 
the offering, a bidding lead underwriter may bring in co-managers to 
assist in the sales process. Most of the securities are frequently sold 
within hours, or sometimes even less than an hour, after the securities 
are made available for purchase.
    22. Because of market forces and the requirements of Rule 415, the 
competitive bid process is generally available only to issuers of 
investment-grade securities who have been subject to the reporting 
requirements of the 1934 Act for at least one (1) year.
    23. Occasionally, in highly-rated debt issues, underwriters ``buy'' 
the entire deal off of a ``shelf registration'' before obtaining 
indications of interest. These ``bought'' deals involve issuers whose 
securities enjoy a deep and liquid secondary market, such that an 
underwriter has confidence without pre-marketing that it can identify 
purchasers for the bonds.

Structure of Diversified Financial Services Firms

    24. The Applicants represent that there are internal policies in 
place that restrict contact and the flow of information between 
investment management personnel and non-investment management personnel 
in the same or affiliated financial service firms. These policies are 
designed to protect against ``insider trading,'' i.e., trading on 
information not available to the general public that may affect the 
market price of the securities. Diversified financial services firms 
must be concerned about insider trading problems because one part of 
the firm--e.g., the mergers and acquisitions group--could come into 
possession of non-public information regarding an upcoming transaction 
involving a particular issuer, while another part of the firm--e.g., 
the investment management group--could be trading in the securities of 
that issuer for its clients.\13\
---------------------------------------------------------------------------

    \13\ The Insider Trading and Securities Fraud Enforcement Act of 
1988 required broker-dealers to maintain and enforce written 
policies and procedures that are ``reasonably designed . . . to 
prevent misuse in violation of [the federal securities laws] . . . 
of material, nonpublic information by such broker or dealer or any 
person associated with such broker or dealer.'' (Section 15(f) of 
the 1934 Act (15 U.S.C. 780(f)); see also, Rules 342 and 351 of the 
NYSE and SEC Regulation M (17 CFR 242.100(b)(3)).
---------------------------------------------------------------------------

    25. The Applicants represent that their business separation 
policies and procedures are also structured to restrict the flow of any 
information to or from the Asset Manager that could limit its 
flexibility in managing client assets, and of information obtained or 
developed by the Asset Manager that could be used by other parts of the 
organization, to the

[[Page 18694]]

detriment of the Asset Manager's clients.
    26. The Applicants represent that major clients of the Affiliated 
Broker-Dealer include investment management firms that are competitors 
of the Asset Manager. Similarly, the Asset Manager deals on a regular 
basis with broker-dealers that compete with the Affiliated Broker-
Dealer. If special consideration were shown to an affiliate, such 
conduct would likely have an adverse effect on the relationships of the 
Affiliated Broker-Dealer and of the Asset Manager with firms that 
compete with such affiliate. Therefore, a goal of the Applicants' 
business separation policies is to avoid any possible perception of 
improper flows of information between the Affiliated Broker-Dealer and 
the Asset Manager, in order to prevent any adverse impact on client and 
business relationships.

Underwriting Compensation

    27. The Applicants represent that the underwriters are compensated 
through the ``spread,'' or difference, between the price at which the 
underwriters purchase the securities from the issuer and the price at 
which the securities are sold to the public. The spread is divided into 
three components.
    28. The first component includes the management fee, which 
generally represents an agreed upon percentage of the overall spread 
and is allocated among the lead manager and co-managers. Where there is 
more than one managing underwriter, the way the management fee will be 
allocated among the managers is generally agreed upon between the 
managers and the issuer prior to soliciting indications of interest. 
Thus, the allocation of the management fee is not reflective of the 
amount of securities that a particular manager sells in an offering.
    29. The second component is the underwriting fee, which represents 
compensation to the underwriters (including the non-managers, if any) 
for the risks they assume in connection with the offering and for the 
use of their capital. This component of the spread is also used to 
cover the expenses of the underwriting that are not otherwise 
reimbursed by the issuer of the securities.
    30. The first and second components of the ``spread'' are received 
without regard to how the underwritten securities are allocated for 
sales purposes or to whom the securities are sold. The third component 
of the spread is the selling concession, which generally constitutes 60 
percent or more of the spread. The selling concession compensates the 
underwriters for their actual selling efforts. The allocation of 
selling concessions among the underwriters generally follows the 
allocation of the securities for sales purposes. However, a buyer of 
the underwritten securities may designate other broker-dealers (who may 
be other underwriters, as well as broker-dealers outside the syndicate) 
to receive the selling concessions arising from the securities they 
purchase.
    31. Securities are allocated for sales purposes into two 
categories. The first and larger category is the ``institutional pot,'' 
which is the pot of securities from which sales are made to 
institutional investors. Selling concessions for securities sold from 
the institutional pot are generally designated by the purchaser to go 
to particular underwriters or other broker-dealers. If securities are 
sold from the institutional pot, the selling syndicate managers 
sometimes receive a portion of the selling concessions, referred to as 
a ``fixed designation,'' \14\ attributable to securities sold in this 
category, without regard to who sold the securities or to whom they 
were sold. For securities covered by this proposed exemption, however, 
the Affiliated Broker-Dealer may not receive, either directly or 
indirectly, any compensation that is attributable to the fixed 
designation generated by purchases of securities by the Asset Manager 
on behalf of its Client Plans.
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    \14\ A fixed designation is sometimes referred to as an ``auto 
pot split.''
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    32. The second category of allocated securities is ``retail,'' 
which are the securities retained by the underwriters for sale to their 
retail customers. The underwriters receive the selling concessions from 
their respective retail retention allocations. Securities may be 
shifted between the two categories based upon whether either category 
is oversold or undersold during the course of the offering.
    33. The Applicants assert that the Affiliated Broker-Dealer's 
inability to receive any selling concessions, or any compensation 
attributable to the fixed designations generated by purchases of 
securities by the Asset Manager's Client Plans, removes the primary 
economic incentive for the Asset Manager to make purchases that are not 
in the interests of its Client Plans from offerings for which the 
Affiliated Broker-Dealer is an underwriter. The reason is that the 
Affiliated Broker-Dealer will not receive any additional fees as a 
result of such purchases by the Asset Manager.

Rule 144A Securities

    34. The Applicants represent that a number of the offerings of Rule 
144A Securities in which the Affiliated Broker-Dealer participates 
represent good investment opportunities for the Asset Manager's Client 
Plans. Particularly with respect to foreign securities, a Rule 144A 
offering may provide the least expensive and most accessible means for 
obtaining these securities. However, PTE 75-1, part III, does not cover 
Rule 144A Securities. Therefore, absent an exemption, the Asset Manager 
is foreclosed from purchasing such securities for its Client Plans in 
offerings in which the Affiliated Broker-Dealer participates.
    35. The Applicants state that Rule 144A acts as a ``safe harbor'' 
exemption from the registration provisions of the 1933 Act for sales of 
certain types of securities to QIBs. QIBs include several types of 
institutional entities, such as employee benefit plans and commingled 
trust funds holding assets of such plans, which own and invest on a 
discretionary basis at least $100 million in securities of unaffiliated 
issuers.
    36. Any securities may be sold pursuant to Rule 144A except for 
those of the same class or similar to a class that is publicly traded 
in the United States, or certain types of investment company 
securities. This limitation is designed to prevent side-by-side public 
and private markets developing for the same class of securities as is 
the reason that Rule 144A transactions are generally limited to debt 
securities.
    37. Buyers of Rule 144A Securities must be able to obtain, upon 
request, basic information concerning the business of the issuer and 
the issuer's financial statements, much of the same information as 
would be furnished if the offering were registered. This condition does 
not apply, however, to an issuer filing reports with the SEC under the 
1934 Act, for which reports are publicly available. The condition also 
does not apply to a ``foreign private issuer'' for whom reports are 
furnished to the SEC under Rule 12g3-2(b) of the 1934 Act (17 CFR 
240.12g3-2(b)), or to issuers who are foreign governments or political 
subdivisions thereof and are eligible to use Schedule B under the 1933 
Act (which describes the information and documents required to be 
contained in a registration statement filed by such issuers).
    38. Sales under Rule 144A, like sales in a registered offering, 
remain subject to the protections of the anti-fraud rules of federal 
and state securities laws. These rules include section 10(b) of the 
1934 Act and Rule 10b-5) thereunder

[[Page 18695]]

(17 CFR 240.10b-5 and section 17(a) of the 1933 Act (15 USA 77a). 
Through these and other provisions, the SEC may use its full range of 
enforcement powers to exercise its regulatory authority over the market 
for Rule 144A Securities, in the event that it detects improper 
practices.
    39. The Applicants represent that this potential liability for 
fraud provides a considerable incentive to the issuer of the securities 
and the members of the selling syndicate to insure that the information 
contained in a Rule 144A offering memorandum is complete and accurate 
in all material respects. Among other things, the lead manager 
typically obtains an opinion from a law firm, commonly referred to as a 
``10b-5'' opinion, stating that the law firm has no reason to believe 
that the offering memorandum contains any untrue statement of material 
fact or omits to state a material fact necessary in order to make sure 
the statements made, in light of the circumstances under which they 
were made, are not misleading.
    40. The Applicants represent that Rule 144A offerings generally are 
structured in the same manner as underwritten registered offerings. The 
major difference is that a Rule 144A offering uses an offering 
memorandum rather than a prospectus that is filed with the SEC. The 
marketing process is the same in most respects, except that the selling 
efforts are limited to contacting QIBs and there are no general 
solicitations for buyers (e.g. no general advertising). In addition, 
the Affiliated Broker-Dealer's role in these offerings is typically 
that of a lead or co-manager. Generally, there are no non-manager 
members in a Rule 144A selling syndicate. However, the Applicants 
request that the proposed exemption extend to authorization for 
situations where the Affiliated Broker-Dealer acts only as a syndicate 
member, not as a manager.
    41. According to the Applicant, one of the policy objectives of 
Rule 144A was to attract more foreign issuers to the United States, and 
Rule 144A has been achieving this objective--from April 1990 through 
December 1993, the first three years of Rule 144A, over $25.6 billion 
in foreign securities was sold under Rule 144A placements. See SEC 
Staff Report on Rule 144A (August 18, 1994), [1994-95 Transfer Binder] 
Fed. Sec. L. Rep. ]85,428 (Question 1). This figure continued to hold 
in 1998, at 30.4 percent, so that foreign issuer Rule 144A offerings 
have kept pace with the rapid growth of Rule 144A offerings overall. 
(Securities Data Company, Inc.)

Summary

    41. In summary, the Applicants represent that the subject 
transactions have satisfied or will satisfy the statutory criteria for 
an exemption set forth under section 408(a) of the Act because:
    (a) The Client Plans have gained or will gain access to desirable 
investment opportunities;
    (b) In each offering, the Asset Manager has purchased or will 
purchase the securities for its Client Plans from an underwriter or 
broker-dealer other than the Affiliated Broker-Dealer;
    (c) Conditions similar to those of PTE 75-1, part III, have 
restricted or will restrict the types of securities that may be 
purchased, the types of underwriting or selling syndicates and issuers 
involved, and the price and timing of the purchases;
    (d) The amount of securities that the Asset Manager may purchase on 
behalf of Client Plans has been subject to or will be subject to 
percentage limitations;
    (e) The Affiliated Broker-Dealer has not permitted and will not be 
permitted to receive, either directly, indirectly or through 
designation, any selling concession with respect to the securities sold 
to the Asset Manager for the account of a Client Plan;
    (f) Prior to any purchase of securities, the Asset Manager has made 
or will make the required disclosures to an Independent Fiduciary of 
each Client Plan and obtain written authorization;
    (g) The Asset Manager has provided or will provide regular 
reporting to an Independent Fiduciary of each Client Plan with respect 
to all securities purchased pursuant to the exemption, if granted;
    (h) Each Client Plan has been subject or will be subject to a 
minimum size requirement of at least $50 million ($100 million for 
Eligible Rule 144A offerings),\15\ with certain exceptions for Pooled 
Funds; and
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    \15\ SEC Rule 10f-3(a)(4) (17 CFR 270.10f-3(a)(4)) states that 
the term ``Eligible Rule 144A Offering'' means an offering of 
securities that meets the following conditions:
    (i) The securities are offered or sold in transactions exempt 
from registration under section 4(2) of the Securities Act of 1933 
(15 U.S.C. 77d(2)), Rule 144A thereunder, or Rules 501-508 
thereunder;
    (ii) The securities are sold to persons that the seller and any 
person acting on behalf of the seller reasonably believe to include 
QIBs, as defined in Rule 144A; and
    (iii) The seller and any person acting on behalf of the seller 
reasonably believe that the securities are eligible for resale to 
other QIBs pursuant to Rule 144A.
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    (i) The Asset Manager is required or will be required to have total 
assets under management in excess of $5 billion and shareholders' or 
partners' equity in excess of $1 million.

Discussion of Proposed Exemption

    1. The exemptive relief for underwritings proposed herein is 
similar to that provided in PTE 75-1, Part III. Under PTE 75-1, 
exemptive relief is subject to a number of conditions and limitations, 
including the following: (1) The plan fiduciary or its affiliate may 
not be a manager of the underwriting or selling syndicate; (2) the 
purchase must be from a person other than the plan fiduciary or its 
affiliate; (3) the types of securities that may be purchased and the 
price and timing of the purchases are circumscribed; (4) the amount of 
securities purchased on behalf of each plan may not exceed three 
percent of the offering; and (5) the consideration paid may not exceed 
three percent of the plan's total net assets (one percent, if the 
consideration involved exceeds $1 million).
    2. The exemptive relief proposed herein differs from that provided 
by PTE 75-1 in the following respects: (1) The proposed exemption 
covers transactions where the plan fiduciary is affiliated with a 
manager, as well as a member, of the underwriting or selling 
syndicate;\16\ (2) the proposed exemption covers purchases of Rule 144A 
Securities;\17\ (3) percentage limitations on the amount of securities 
that may be purchased have been modified to provide an aggregate 
limitation on a fiduciary's purchases for all Client Plans from a 
particular offering; and (4) the proposed exemption provides additional 
conditions, including the following: (a) The transaction is not part of 
an agreement, arrangement, or understanding designed to benefit the 
plan fiduciary or its affiliate; (b) neither a manager nor a member of 
the underwriting or selling syndicate may

[[Page 18696]]

receive any selling concessions with respect to the securities 
purchased for Client Plans by its affiliate; (c) prior to any purchase 
of securities on behalf of a Client Plan, certain disclosures are 
provided to an Independent Fiduciary of each such Client Plan and 
written authorization is obtained; (d) periodic reporting regarding the 
covered transactions is provided to an Independent Fiduciary of each 
Client Plan; and (e) investing plans and their investment managers must 
meet certain minimum size requirements.
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    \16\ In restricting the scope of PTE 75-1, Part III, to exclude 
transactions where the plan fiduciary is affiliated with the 
syndicate manager, the Department was concerned that the syndicate 
manager, as distinguished from a mere member of a syndicate, has a 
greater interest in the success of the sale of the new securities. 
If an affiliate of the managing underwriter is an investment manager 
for plans, those plans could provide a potential market for the less 
attractive offerings of underwritten securities. This proposed 
exemption contains certain safeguards and conditions that are 
designed to address these potential conflict of interest situations.
    \17\ The Department notes that the provisions of the Act do not 
preclude plans from investing in any securities sold by an 
underwriting or offering syndicate, including those securities sold 
pursuant to Rule 144A. The exemptive relief provided by PTE 75-1, 
Part III, and the additional relief sought here are required because 
of the affiliation between the plan fiduciary and a member of the 
underwriting or selling syndicate.
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Types of Securities and Offerings

    3. In Section I, paragraphs (a) and (b) of the proposed exemption 
are derived from PTE 75-1, Part III, and provide the following: (1) The 
securities \18\ are part of an issue registered under the 1933 Act, or 
if exempt from registration under such Act, fall within specified 
categories: (a) Issued or guaranteed by the United States; (b) issued 
by a bank; (c) exempt from registration under a federal statute other 
than the 1933 Act; (d) registered under the 1934 Act; or (e) are part 
of an ``Eligible Rule 144A Offering;\19\ (2) the securities are 
purchased for not more than the offering price within a specific time 
period,\20\ subject to certain specified exceptions for rights 
offerings and debt offerings;\21\ (3) the securities are sold pursuant 
to a firm-commitment offering, in which the syndicate members are 
committed to purchasing all the securities being offered, subject to 
certain exceptions for rights offerings and over-allotment options; and 
(4) the issuer of the securities has been in continuous operation for 
not less than three years (including the operation of any 
predecessors), with certain exceptions.
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    \18\ With respect to any purchase of asset-backed securities by 
a Client Plan, the Department notes that this proposed exemption 
provides relief only for the transactions described herein and does 
not cover any additional prohibited transactions that may occur as a 
result of a purchase of such securities. For example, additional 
prohibited transactions may occur by operation of the ``look-through 
rule'' contained in the Department's regulation defining ``plan 
assets'' for purposes of plan investments (see 29 CFR 2510.3-101). 
Such additional prohibited transactions may be covered by one of the 
Department's existing individual exemptions for asset-backed 
securities. A listing of such exemptions is provided in the text of 
the operative language of PTE 2002-41 (67 FR 54487, August 22, 
2002), which granted an amendment to these exemptions.
    Further, the Department has noted that, under the Department's 
plan asset regulation, if a plan invests in a publicly-offered 
security, the plan's assets will not include, solely by reason of 
such investment, any of the underlying assets of the entity issuing 
the security (i.e., the ``look-through rule'' will not apply and the 
operations of the entity will not be subject to scrutiny under the 
prohibited transaction provisions of the Act). The regulation 
defines a ``publicly-offered'' security as one that is freely 
transferable, widely-held, and registered under the federal 
securities laws. For this purpose, a class of securities is 
considered ``widely held'' if it is owned by 100 or more investors 
who are independent of the issuer and of one another (see 29 CFR 
2510.3-101(b)(3)).
    \19\ In Section I, paragraph (a)(1)(ii) of the proposed 
exemption requires that if the securities are equity securities in 
an Eligible Rule 144A Offering, the offering syndicate shall obtain 
a legal opinion regarding the adequacy of the disclosure in the 
offering memorandum. This condition may be satisfied by the type of 
``10b-5'' opinion customarily obtained in connection with such 
offerings. The Department believes that requiring such review by a 
law firm will help insure that the offering memorandum meets federal 
securities law standards. The Department notes that in Section I, 
paragraph (c) of the proposed exemption requires debt securities to 
be rated by at least one independent nationally recognized 
statistical rating organization, thus insuring that sufficient 
information about those securities and their issuer will be 
available to investors.
    \20\ The language regarding the timing of the purchase differs 
slightly from PTE 75-1, Part III. This language is based upon Rule 
10f-3 (17 CFR 270.10f-3).
    \21\ In Section I, paragraph (a)(2)(ii) of the proposed 
exemption permits certain purchases of debt after the first day of 
the offering. Should the debt be downgraded after the offering 
commences and prior to being purchased for a Client Plan, the 
Department expects that the Asset Manager would consider whether, 
prior to purchase, the price was adjusted to reflect the downgrade.
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Percentage Limitations on the Amount of Purchased Securities

    4. In Section I, paragraphs (c) and (d) of the proposed exemption 
contain percentage limitations applicable to the amount of purchased 
securities. The first percentage test in paragraph (c) provides that 
the amount of securities to be purchased by the Asset Manager on behalf 
of a particular Client Plan may not exceed three percent of the total 
amount of securities being offered. Paragraph (c) further provides 
percentage limitations on the aggregate amount of securities that the 
Asset Manager may purchase for all its Client Plans, including Pooled 
Funds, from the total amount of securities being offered: (1) 10 
percent for equity securities; (2) 35 percent for debt securities rated 
in one of the four highest rating categories by at least one nationally 
recognized statistical rating organization, i.e., Standard & Poor's 
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit 
Rating Co., or Fitch IBCA, Inc., or their successors (collectively, the 
Rating Organizations); and (3) 25 percent for debt securities rated in 
the fifth or sixth highest rating categories by at least one of the 
Rating Organizations.\22\
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    \22\ In Section I, paragraph (c)(4) of the proposed exemption 
requires that when calculating the percentages of securities 
purchased in an Eligible Rule 144A Offering, one must consider any 
concurrent public offering. The Department notes than any concurrent 
offering will necessarily be in a foreign securities market, since 
Rule 144A is unavailable where there is a concurrent domestic 
offering.
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    5. Paragraph (d) of Section I provides that the consideration to be 
paid by the Client Plan in purchasing the offered securities may not 
exceed three percent of the fair market value of such Client Plan's 
total net assets. However, paragraph (d) eliminates the requirement 
contained in PTE 75-1, Part III, that, if the consideration involved 
exceeds $1 million, it may not exceed one percent of the fair market 
value of the plan's total assets. This modification by the Department 
parallels the amendment in 1997 of the SEC Rule 10f-3.

Underwriting Compensation

    6. The proposed exemption requires in paragraph (e) of Section I 
that any purchase of securities by the Asset Manager pursuant to the 
exemption may not be part of an agreement, arrangement, or 
understanding designed to benefit the Asset Manager or an 
affiliate.\23\ Paragraph (f) of Section I further provides that the 
Affiliated Broker-Dealer may not receive, either directly, indirectly, 
or through designation, any selling concession or other consideration 
that is based upon the amount of securities purchased by the Asset 
Manager's Client Plans pursuant to the proposed exemption. The 
Affiliated Broker-Dealer may also not receive, either directly or 
indirectly, that portion of the fixed designation that is attributable 
to securities purchased pursuant to the exemption. The Affiliated 
Broker-Dealer is not precluded from receiving management fees, 
underwriting fees, or other consideration that is not based upon the 
amount of securities actually sold to the Asset Manager's Client Plans.
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    \23\ The Department notes that the intent of the condition in 
paragraph (e) of Section I of the proposed exemption is not to deny 
direct benefits to other parties to a transaction but, rather, to 
exclude relief for transactions that are part of a broader overall 
agreement, arrangement, or understanding designed to benefit parties 
in interest.
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    7. Paragraph (g) of section I provides that the amount the 
Affiliated Broker-Dealer receives in management fees, underwriting 
fees, or other compensation may not be increased for the purpose of 
offsetting the reduction of the Affiliated Broker-Dealer's compensation 
from selling concessions. Further, the Affiliated Broker-Dealer must 
provide the Asset Manager with a written certification, signed by an 
officer of the Affiliated Broker-Dealer, that the Affiliated Broker-
Dealer complied with the underwriting compensation requirements found 
in paragraphs (e), (f), and (g) of section I of

[[Page 18697]]

the proposed exemption, in any offering where the Asset Manager 
purchased securities for its Client Plans.\24\
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    \24\ The certification required in paragraph (g)(2) of Section I 
of the proposed exemption is necessary because the Asset Manager and 
its Client Plans must monitor compliance with all the conditions of 
the exemption, if granted. However, the Asset Manager would not 
normally have access to the Affiliated Broker-Dealer's records 
detailing each underwriter's share of the compensation from a 
particular underwriting, as those records are considered 
confidential. Such records are required to be maintained pursuant to 
SEC and NASD rules and would, of course, be made available to the 
Department pursuant to the terms of the exemption, if granted.
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Disclosures

    8. The proposed exemption requires in paragraphs (h) and (l) of 
section I that the Asset Manager obtain written authorization from an 
Independent Fiduciary of each Client Plan, including each fiduciary of 
a plan that invests in a Pooled Fund, before engaging in the covered 
transactions.\25\ Prior to, and subsequent to, execution of the written 
authorization, the Asset Manager must provide certain disclosures 
described in Section I (i), (j), (k), and (m) to an Independent 
Fiduciary of each Client Plan.
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    \25\ In this regard, the Department notes that the fiduciary 
responsibility provisions of the Act apply to the decision of an 
Independent Fiduciary to authorize the Asset Manager to invest in 
securities covered by this proposed exemption (the Covered 
Securities) and to the decision to continue such authorization. 
Section 404(a)(1) of the Act requires, among other things, that a 
fiduciary of a plan must act prudently, solely in the interest of 
the plan's participants and beneficiaries, and for the exclusive 
purpose of providing benefits to participants and beneficiaries. 
Accordingly, the Independent Fiduciary must act ``prudently'' with 
respect to the decision to authorize investment in these Covered 
Securities and the decision to continue such authorization.
    The Department wishes to emphasize that it expects that the 
Independent Fiduciary, prior to authorizing investment in these 
Covered Securities, will fully understand the potential risks and 
rewards associated with investing in the initial offering of a 
security, following disclosure by the Asset Manager of all relevant 
information pertaining to the proposed transactions. Such 
consideration must necessarily include the fact that the Asset 
Manager's affiliate may be the managing underwriter. In addition, 
the Independent Fiduciary must be capable of periodically monitoring 
the actions taken by the Asset Manager in the performance of its 
duties. Thus, in considering whether to enter into transactions of 
the kind described herein, the Independent Fiduciary should take 
into account its ability to provide adequate oversight of the Asset 
Manager.
    The Department further notes that, under section 405(a) of the 
Act, any plan fiduciary (including an investment manager) will have 
co-fiduciary liability for any breach of fiduciary responsibility of 
another plan fiduciary: (1) if he knowingly participates in or 
conceals such breach; (2) if, by his failure to comply with section 
404(a)(1) of the Act, he enables another fiduciary to commit such a 
breach; or (3) if he has knowledge of the breach of another 
fiduciary and he fails to make a reasonable effort, under the 
circumstances, to remedy the breach.Finally, the granting of the 
exemption proposed herein should not be viewed as an endorsement by 
the Department of any plans' participation in the covered 
transactions.
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Periodic Reporting

    9. In Section I, paragraph (n) of the proposed exemption requires 
that at least on a quarterly basis, the Asset Manager provide a report 
to an Independent Fiduciary of each Client Plan and of each plan 
investing in a Pooled Fund containing information about the Covered 
Securities purchased during the previous quarter. The Department 
modeled paragraph (n), in part, on the reporting provisions of Rule 
10f-3 (17 CFR 270.10f-3).\26\
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    \26\ PTE 75-1, Part III, was based, in part, on a prior version 
of Rule 10f-3.
---------------------------------------------------------------------------

    10. Because the transactions covered by this proposed exemption are 
similar in nature to those covered by Rule 10f-3, the Department has 
determined that it is appropriate to adopt similar reporting 
requirements as in that rule. However, in addition to the items 
required to be reported by investment companies under Rule 10f-3, the 
proposed exemption requires that the Asset Manager report to the 
Independent Fiduciary the price at which any securities purchased 
during the reporting period were sold and the market value at the end 
of the reporting period of each security purchased during such 
period.\27\
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    \27\ See Section I(n) of the proposed exemption, below.
---------------------------------------------------------------------------

    11. The additional information should help the Independent 
Fiduciary monitor compliance with the exemption, if granted. The 
Independent Fiduciaries of the Client Plans would play a similar role 
to that of the Board of Directors of an investment company, i.e., they 
have a fiduciary duty to monitor the activities of the Asset Manager. 
In monitoring compliance, the Independent Fiduciary should bear in mind 
that the Asset Manager's subsequent decision to hold or sell a security 
purchased pursuant to the exemption, would not be covered by the 
exemption, if granted.\28\
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    \28\ The Department notes that this proposed exemption would 
provide relief from the self-dealing and conflict of interest 
provisions of Part 4 of Title I of the Act for purchases of 
securities by the Asset Manager from an underwriting or selling 
syndicate in which an affiliate of the Asset Manager participates as 
a manager or member of such syndicate. It would not provide relief 
from any acts of self-dealing not directly arising from a purchase 
of the Covered Securities. Thus, no relief would be available for 
any violation of section 406(b) of the Act that may arise after the 
purchase. For example, because it is well-documented that securities 
purchased in IPOs may not perform well in the long term, a violation 
of the Act could occur if the Asset Manager's decision regarding the 
holding or sale of the Covered Securities by the Client Plan was 
influenced by the interests of the Affiliated Broker-Dealer.
    The Affiliated Broker-Dealer's interest in the security may 
extend beyond the sale of the security. As the SEC noted in its 
preamble to Regulation M, addressing Regulation M's protections 
against price manipulation: ``[I]mmediately following an offering * 
* * underwriters now engage in substantial syndicate-related market 
activity, and enforce penalty bids in order to reduce volatility in 
the market for the offering security'' (62 FR 519, 521, January 3, 
1997). The SEC defines penalty bid as ``an arrangement that permits 
the managing underwriter to reclaim a selling concession from a 
syndicate member in connection with an offering when the securities 
originally sold by the syndicate member are purchased in syndicate 
covering transactions.'' SEC Regulation M (17 CFR 242.100(b)).
---------------------------------------------------------------------------

    12. Further, the Asset Manager must report any instance during the 
past quarter where the Asset Manager was precluded from selling any 
security purchased under the exemption for any period of time because 
of its status as an affiliate of the Affiliated Broker-Dealer. Such a 
situation could arise where a security was purchased by the Asset 
Manager pursuant to this proposed exemption on the first day of the 
offering and the rest of the offering was not selling well. In this 
situation, SEC Regulation M,\29\ or the general anti-fraud or anti-
manipulation provisions of the securities laws,\30\ may limit the Asset 
Manager's ability to subsequently trade in that security, although 
these restrictions will generally not apply to the Asset Manager if the 
proper business separations are in place between the Affiliated Broker-
Dealer and the Asset Manager. (see, e.g., Regulation M, 17 CFR 
242.100(b)(3)). Should the Asset Manager's ability to trade a security 
purchased on behalf of a Client Plan be restricted, this information 
may be relevant to the decision whether or not to continue to permit 
purchases under the exemption.
---------------------------------------------------------------------------

    \29\ A security might be put on a restricted list, for example, 
if the offering was not completely sold before the security begins 
trading in the market. In this instance, the restricted period for 
purposes of Regulation M (17 CFR 242.101(a))) continues until all of 
the securities are sold.
    \30\ These rules include section 17(a) of the 1933 Act (15 
U.S.C. 77q(a)) and sections 9, 10(b), and 15(c) of the 1934 Act (15 
U.S.C. 78i, 78j(b) and 78o(c)).
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Minimum Size Requirements

    13. The proposed exemption applies only to Client Plans with total 
net assets of at least $50 million, as provided in paragraph (o) of 
Section I. In the case of a Pooled Fund, however, the $50 million 
requirement will be met if 50 percent or more of the units of 
beneficial interest in such Pooled Fund are held by plans having total 
net assets of at least $50 million. In the case of an Eligible Rule 
144A Offering, each Client Plan must have at least $100 million in 
securities. For a Pooled Fund, the $100 million requirement will be met 
if 50 percent or more of the units of

[[Page 18698]]

beneficial interest in such Pooled Fund are held by plans having at 
least $100 million in assets and the Pooled Fund itself qualifies as a 
QIB, as determined pursuant to Rule 144A (17 CFR 230.144A(a)(F)). The 
Department believes that these minimum size requirements are necessary 
to insure an appropriate level of plan investor sophistication for the 
covered transactions.
    14. Further, the proposed exemption applies only if the Asset 
Manager is a ``qualified professional asset manager'' (QPAM), as 
defined under Part V(a) of PTE 84-14 (49 FR 9494, 9506, March 13, 
1984),\31\ subject to the following modifications: The Asset Manager 
has as of the last day of its most recent fiscal year, total client 
assets under its management and control in excess of $5 billion and 
shareholders' or partners' equity in excess of $1 million.
---------------------------------------------------------------------------

    \31\ PTE 84-14 provides a class exemption, under 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.

FOR FURTHER INFORMATION CONTACT: Ms. Silvia Quezada of the Department 
at (202) 693-8553. (This is not a toll-free number.)

Goldman, Sachs & Co. and Its Affiliates Located in New York, New York

[Application No. D-11169]

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) Goldman, Sachs & Co. (Goldman) 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. The Applicant (including an affiliate) does not have 
discretionary authority or control with respect to the investment of 
the Plan assets involved in the transaction, nor 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, although the Applicant does not have discretionary 
authority or control over such Plan assets at the time of the 
transaction and has not used its discretion to appoint the transition 
broker-dealer, it may act as a fiduciary with respect to the Plan 
assets involved in the transaction, solely as: (i) The investment 
manager of such assets to be managed as an Index or Model-Driven Fund; 
or (ii) the investment manager of such assets who supplies a list of 
securities or other investments 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, and is 
substantially the same list that would be provided to other similarly 
situated investors with substantially similar investment guidelines and 
objectives, or is substantially similar to the investments in existing 
portfolios managed in the same style.
    Lastly, a transaction will not fail to meet the requirements of 
this section if the Applicant is being terminated as a manager of the 
Plan assets involved in the transaction, its investment discretion is 
terminated prior to the commencement of the portfolio liquidation or 
restructuring, and the Applicant has not used its discretion to appoint 
the transition broker-dealer;
    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 that the 
transaction may be effectuated as a principal transaction and at a 
price that--
    (1) For 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) For 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 
(or another predetermined time on a specified date or dates), as 
reported by an independent third party reporting service or a publicly 
available electronic exchange or trading system;
    F. In the case where the price for any transaction is not based on 
an objective measure, the Independent Fiduciary has given prior 
approval for the transaction, specifying 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);
    G. All purchases and sales executed on a principal basis 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, on the 
same terms;
    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), to the extent required 
under Rule 10b-10, as well as a report, within five business days after 
the transaction is completed, 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
    (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

[[Page 18699]]

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 ``Goldman'' means Goldman, Sachs & Co. and its current 
and future affiliates, including the Foreign Affiliates (as defined in 
Paragraph C, below); each domestic affiliate 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. Goldman, including its current and future affiliates, 
including the Foreign Affiliates, 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 Goldman 
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, or any 
governmental regulatory authority that is a successor in interest to 
any such regulator.
    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;
    (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--

[[Page 18700]]

    (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.
    Effective Date: This proposed exemption, if granted, will be 
effective as of February 6, 2003.

Summary of Facts and Representations

    1. The Goldman, Sachs entities (the GS Entities) collectively form 
a leading global investment banking, securities and investment 
management firm that provide a wide range of services worldwide to a 
substantial and diversified client base that includes corporations, 
financial institutions, governments, and high-net-worth individuals. 
The Goldman, Sachs Group, Inc. is a financial holding company 
incorporated under Delaware law in May 1999 and headquartered in New 
York, New York, and is the parent company of Goldman, Sachs & Co. 
(i.e., Goldman) and other principal subsidiaries. As of May 31, 2002, 
the GS Entities collectively had approximately $327.2 billion in 
assets, and approximately $18.86 billion in shareholders' equity.
    2. Goldman's Foreign Affiliates that are covered by the proposed 
exemption are subject to regulation as a broker-dealer or bank by the 
following: (i) The Securities and Futures Authority or the Financial 
Services Authority in the United Kingdom, (ii) the Federal Authority 
for Financial Services Supervision, i.e., the BAFin in Germany, (iii) 
the Ministry of Finance and/or the Tokyo Stock Exchange in Japan, (iv) 
the Ontario Securities Commission and/or the Investment Dealers 
Association, or the Office of the Superintendent of Financial 
Institutions, in Canada, (v) the Swiss Federal Banking Commission in 
Switzerland, or (vi) the Australian Prudential Regulation Authority or 
the Australian Securities & Investments Commission, and/or the 
Australian Stock Exchange Limited, in Australia, or any governmental 
regulatory authority that is a successor in interest to any such 
regulator.
    The Applicant requests an individual exemption for Goldman 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., Prohibited Transaction Exemption 
(PTE) 2000-57 (65 FR 56341, September 18, 2000), granted to Goldman, 
Sachs & Co.].
    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 (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,

[[Page 18701]]

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 PTE 75-1 (40 FR 50845, 
October 31, 1975), Part II,\32\ 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.\33\ 
Thus, the Applicant seeks an individual exemption permitting it to 
execute principal transactions with Plans in the situations described 
above.
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    \32\ 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.''
    \33\ Goldman, and certain foreign affiliates thereof, obtained 
an individual exemption PTE 2000-57 (65 FR 56341, September 18, 
2000) from the Department to engage in principal transactions, among 
other things, with employee benefit plans, effective April 15, 1999. 
In this regard, the Department notes that the relief provided by PTE 
2000-57 may not cover the principal transactions described in this 
proposed exemption.
---------------------------------------------------------------------------

    As a condition of the proposed exemption, the Applicant (including 
an affiliate) may not have discretionary authority or control with 
respect to the investment of the Plan assets involved in the 
transaction, nor render investment advice (within the meaning of 29 CFR 
2510.3-21(c)) with respect to those assets. However, 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 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 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, and is 
substantially the same list that would be provided to other similarly 
situated investors with substantially similar investment guidelines and 
objectives, or is substantially similar to the investments in existing 
portfolios managed in the same style.
    Thus, the Applicant 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.\34\
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    \34\ 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,\35\ 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.
---------------------------------------------------------------------------

    \35\ 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.
---------------------------------------------------------------------------

    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 \36\ 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 occur will be determined by 
market forces and not by the broker-dealer.
---------------------------------------------------------------------------

    \36\ 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, as in the case of a security that is not 
publicly traded, 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). According to the Applicant, the 
Independent Fiduciary can assess the fairness of pricing for a non-
publicly-traded security by one of the following means: (i) Review the 
value at which the security is being carried by the Plan; (ii) review 
the price that other dealers are quoting and the prices at which the

[[Page 18702]]

security has been trading in the recent past; or (iii) canvass other 
holders of the security regarding an appropriate trading price.
    Regardless of the type of investment, 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),\37\ or an ``in-house asset 
manager'' (INHAM), as defined in PTE 96-23 (61 FR 15975, April 10, 
1996).\38\
---------------------------------------------------------------------------

    \37\ 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.
    \38\ 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(ii) can be 
demonstrated by comparison with a list that was provided on the same 
day to other similarly situated investors with substantially similar 
investment guidelines and objectives or by comparison with the holdings 
in 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.\39\
---------------------------------------------------------------------------

    \39\ 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 executed on a principal 
basis 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, on the same 
terms.
    8. As previously described in Item 4, above, 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 (or another 
predetermined time on a specified date or dates). 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, to the extent required 
under Rule 10b-10, as well as a report, within five business days after 
any principal transaction, which specifies the security, the date of 
the transaction,

[[Page 18703]]

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.\40\ 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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    \40\ 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; \41\
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    \41\ 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.
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    (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; \42\ and
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    \42\ 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 18704]]

    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which, among other things, require a fiduciary 
to discharge his duties respecting the plan solely in the interest of 
the participants and beneficiaries of the plan and in a prudent fashion 
in accordance with section 404(a)(1)(b) of the Act; nor does it affect 
the requirement of section 401(a) of the Code that the plan must 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries, and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete, and that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 11th day of April, 2003.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor.
[FR Doc. 03-9352 Filed 4-15-03; 8:45 am]

BILLING CODE 4510-29-P