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Employee Benefits Security Administration

EBSA Federal Register Notice

Grant of Individual Exemption To Replace Prohibited Transaction Exemption 97-63 (PTE 97-63) Involving State Street Bank and Trust Company (State Street) Located in Boston, MA [06/24/2003]

[PDF Version]

Volume 68, Number 121, Page 37526-37534


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Prohibited Transaction Exemption 2003-19 Application No. D-11122]

 
Grant of Individual Exemption To Replace Prohibited Transaction 
Exemption 97-63 (PTE 97-63) Involving State Street Bank and Trust 
Company (State Street) Located in Boston, MA

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Grant of individual exemption to replace PTE 97-63.

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SUMMARY: This document contains a final exemption before the Department 
of Labor (the Department) which replaces PTE 97-63 (62 FR 66689, 
December 19, 1997). This exemption permits securities lending 
transactions between State Street, its United States (U.S.) domiciled 
affiliates, and certain employee benefit plans (the Client Plan(s)) 
and/or commingled investment funds holding plan assets (CIF(s)); 
provided State Street, through any division or U.S. affiliate of State 
Street or of its parent acts as securities lending agent (or sub-
agent). This exemption also permits receipt of compensation by a U.S. 
registered introducing broker affiliated with State Street (the 
Introducing Broker) in connection with an arrangement whereby 
securities are lent to an unrelated U.S. registered broker-dealer (the 
Clearing Broker) who in turn lends such securities to clients of the 
Introducing Broker; provided that certain conditions are satisfied.
    In addition, this exemption incorporates various modifications to 
specific terms and conditions of PTE 97-63. The replacement of PTE 97-
63 affects the participants and beneficiaries of the Client Plans 
participating in securities lending transactions and the fiduciaries 
with respect to such Client Plans.

EFFECTIVE DATE: This exemption is effective as of February 6, 2003, the 
date when the Notice of Proposed Exemption (the Notice) was published 
in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc, Office of 
Exemption Determinations, Employee Benefits Security Administration, 
U.S. Department of Labor, telephone number (202) 693-8540. (This is not 
a toll-free number.)

SUPPLEMENTARY INFORMATION: On February 6, 2003, the Department 
published in the Federal Register the notification that it was 
considering replacing PTE 97-63.
    PTE 97-63 provides an exemption from certain prohibited transaction 
restrictions of section 406 of the Act and from the sanctions resulting 
from the application of section 4975 of the Code, as amended, by reason 
of section 4975(c)(1) of the Code. Specifically, PTE 97-63 provides 
relief from the restrictions of sections 406(a)(1)(A) through (D), 
406(b)(1), and 406(b)(2) of the Act and the sanctions resulting from 
the application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code, for:

    (1) The lending of securities to State Street, acting through 
its Financial Markets Group (FMG) (formerly the Money Market 
Division of the Capital Markets Area) or acting through any other 
division or U.S. affiliate of State Street that is a successor to 
the activities of FMG; and for the lending of securities to any U.S. 
registered broker-dealer affiliated with State Street (the 
Affiliated Broker Dealer(s)) by certain Client Plans (the Client 
Plans or the Client Plan), including commingled investment funds 
holding plan assets, for which State Street, through its Master 
Trust Services Division, acts as directed trustee or custodian, and 
for which State Street, through its Global Securities Lending 
Division or any other similar division of State Street or U.S. 
affiliate of State Street or of its parent (collectively, GSL) acts 
as securities lending agent (or sub-agent), and (2) the receipt of 
compensation by GSL in connection with such securities lending 
transactions; provided that certain conditions are satisfied.

    The exemption was requested in an application filed on behalf of 
State Street and its U.S. affiliates (the Applicants), pursuant to 
section 408(a) of the Employee Retirement Income Security Act of 1974 
(the Act) and section 4975(c)(2) of the Internal Revenue Code of 1986 
(the Code), and in accordance with the procedures set forth in 29 CFR 
part 2570, subpart B (55 FR 32836, August 10, 1990). Effective December 
31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (5 U.S.C. 
App. 1, 1995) transferred the authority of the Secretary of the 
Treasury to issue exemptions of the type requested to the Secretary of 
Labor. Accordingly, this final exemption is issued solely by the 
Department.
    In the notice, the Department invited all interested persons to 
submit written comments and/or requests for hearing on the proposed 
replacement of PTE 97-63 within forty-five (45) days of the date of the 
publication of the Notice in the Federal Register on February 6, 2003. 
All comments and/or requests for a hearing were due by March 24, 2003.
    By letter dated April 30, 2003, the Applicants confirmed that a 
copy of a cover letter, a copy of the Notice, and a copy of the 
Supplemental Statement (the Supplemental Statement), as described at 29 
CFR 2570.43(b)(2) of the Department's regulations, were delivered by 
first class mail on or before February 21, 2003, to each known sponsor 
of a Client Plan that on that date was a direct client of GSL, 
informing the sponsors of such Client Plans of the right to comment 
and/or request a hearing by March 24, 2003. Such Client Plans are 
interested persons with respect to the transactions which are the 
subject of this exemption.
    In a telephone conversation on February 20, 2003, the Applicants 
identified other interested persons with respect to the transactions 
which are the subject of this exemption. In this regard, the Applicants 
informed the Department that a Client Plan which participates in an 
index fund (the Index Fund(s)) or a model-driven fund (the Model-Driven 
Fund(s)) managed by State Street or any division or U.S. affiliate of 
State Street would also be an interested person. The Applicants further 
indicated that notification to Client Plans that participate in Index 
Funds or Model-Driven Funds, including a copy of the cover letter, a 
copy of the Notice, and a copy of the Supplemental Statement, would not 
be mailed until March 6, 2003. In light of the fact that the 
notification to the Client Plans that participate in Index Funds or 
Model-Driven Funds managed by State Street or any division or U.S. 
affiliate of State Street would not be provided until March 6, 2003, 
and in order to give all interested persons the benefit of the full 
thirty (30) day comment period the Department required, and the 
Applicants agreed to, an extension until April 10, 2003, of the 
deadline when comments and/or requests for hearing would be due on the 
proposed exemption.
    In a telephone conversation on April 3, 2003, the Applicants 
informed the Department that: (1) The notification to some Client Plans 
that participate in Index Funds or Model-Driven Funds managed by State 
Street or any division or U.S. affiliate of State Street was mailed on 
March 7, 2003, rather than on March 6, 2003; (2) the notification 
indicated that the comment period would close on April 7, 2003, rather 
than April 10, 2003, as agreed to by the Applicants; and (3) a cover 
letter attached to the notification included a few sentences that 
deviated from the form of the cover letter that had been previously 
approved by the Department.
    In light of the above, and in order to give all interested persons 
an opportunity to comment and/or request

[[Page 37527]]

a hearing on the proposed exemption, the Department required, and the 
Applicants agreed, that the Client Plans that participate in Index 
Funds or Model-Driven Funds managed by State Street or any division or 
U.S. affiliate of State Street would again be notified of the pendency 
of the Notice in the Federal Register. It was agreed that: (1) Such 
notification would be sent by a first class mailing to the fiduciary of 
each Client Plan that participates in an Index Fund or a Model-Driven 
Fund managed by State Street or any division or U.S. affiliate of State 
Street; (2) such mailing would contain a copy of a cover letter the 
contents of which was approved by the Department in advance; and (3) 
such mailing would contain a copy of the Supplemental Statement, as 
required, pursuant to 29 CFR 2570.43(b)(2). The Department determined 
that, as the Client Plans that participate in Index Funds or Model-
Driven Funds managed by State Street or any division or U.S. affiliate 
of State Street had already received a copy of the Notice in the 
mailing on March 6, or March 7, 2003, that it was not necessary for the 
Applicants to include an additional copy of the Notice in this second 
mailing; provided that the cover letter included: (1) An offer from the 
Applicants to provide another copy of the Notice upon request; and (2) 
a website address where a copy of the Notice could be found.
    In order to give all interested persons the benefit of the full 
thirty (30) day comment period the Department required, and the 
Applicants agreed to, an extension until May 15, 2003, of the deadline 
when comments and/or requests for hearing would be due on the proposed 
exemption.
    The Applicants confirmed by letter dated April 30, 2003, that a 
copy of the cover letter and a copy of the Supplemental Statement were 
delivered by first class mail on or before April 15, 2003, to each 
known sponsor of a Client Plan that on that date was invested in an 
Index Fund or Model-Driven Fund that was authorized to engage in 
securities lending activities and was managed by State Street or any 
division or U.S. affiliate of State Street. The sponsors of such Client 
Plans were informed of the right to comment and/or request a hearing by 
May 15, 2003.
    During the comment period the Department received no requests for a 
hearing. However, the Department did receive several comment letters 
from the Applicants. In this regard, in a letter dated March 7, 2003, 
the Applicants requested certain changes to the operant language of the 
exemption, as published in the Notice. Subsequently, in letters dated 
April 1, April 30, and May 21, 2003, the Applicants clarified the 
position taken in their March 7, 2003, comment letter.
    A discussion of the points raised in the Applicants' comment 
letters, as clarified, and the Department's response, thereto are set 
forth in the numbered paragraphs below.
    1. The Applicants requested an amendment to the language of section 
II(e) of the exemption. In this regard, the Applicants asked that the 
words, ``on the following day,'' as set forth in the Notice, on page 
6202, column 3, line 20, be revised to read ``on the following business 
day.'' The Applicants maintain that this change would be consistent 
with both the corresponding references to ``business day,'' in section 
II(e) of the Notice, on page 6202, column 3, on lines 8 and 13, and 
consistent with the practical realities of operating a securities 
lending program.
    The Department concurs and in the final exemption has amended the 
language of section II(e), accordingly.
    2. The Applicants requested that the exemption be modified to 
permit the indemnification required by section II(g) of the exemption 
to be provided by State Street's parent corporation. In this regard, 
the Applicants asked that the phrase, ``State Street will agree to 
indemnify,'' as set forth in section II(g) of the notice, on page 6202, 
column 3, line 41, be revised to read ``State Street or its parent 
corporation will agree to indemnify.'' Subsequently, in a letter, dated 
April 1, 2003, State Street withdrew the request.
    The Department concurs with the withdrawal of the Applicants' 
request.
    3. The Applicants requested a change in the language of section 
II(j)(1) and section II(j)(2), as set forth in the notice, in the 
following locations:
    (a) In section II(j)(1) on page 6203, column 1, lines 39-40;
    (b) in section II(j)(2) on page 6203, column 1, lines 64-66; and
    (c) in section II(j)(2) on page 6203, column 2, lines 4-6. In this 
regard, the Applicants, asked that in each of these locations the 
phrase, ``the fiduciary responsible for making the investment 
decision,'' be revised in the final exemption to read, ``the fiduciary 
responsible for making the decision to authorize the Client Plan to 
engage in securities lending.'' In the opinion of the Applicants, this 
change would more accurately describe the appropriate fiduciary 
contemplated in these sections and would also cause the fiduciary 
referred to in these provisions to be the same as the fiduciary 
referred to in other sections of the exemption (e.g., the fiduciary 
described in section II(b) of the exemption).
    In a letter dated, April 30, 2003, the Applicants submitted a 
revision of their requested wording of section II(j)(1) and (j)(2). In 
this regard, the Applicants believe that in the context of securities 
lending the revised wording would be consistent with the actual 
operation of entities (the Entities), as described in section II(j), 
including a master trust, a group trust, or other entity the assets of 
which are ``plan assets'' under 29 CFR 2510.3-101 of the Department's 
regulations. In particular, the Applicants believe that the language of 
section II(j) of the notice, as drafted, incorrectly focuses on the 
fiduciary who is responsible for making investment decisions on behalf 
of such Entities. In the opinion of the Applicants, the focus should be 
on the fiduciary who is making the decision to authorize such Entities 
to engage in securities lending, to retain GSL as the lending agent, 
and to authorize the loans made pursuant to the subject exemption, 
whether or not such fiduciary makes ``investment decisions'' with 
respect to the assets involved in the securities lending program. 
Accordingly, the Applicants propose that the language of section II(j), 
as set forth in the notice on page 6203, column 1, lines 40, 44, 47, 
65-66; and on page 6203, column 2, lines 4-6, 8-11, and 14-15, be 
revised as set forth below. Words that have been stricken from the text 
of the notice appear in closed brackets, and additions to the text of 
the notice appear in bold italics.

    (j) Only Client Plans with total assets having an aggregate 
market value of at least $50 million will be permitted to lend 
securities to the SSB Group or to the Clearing Broker, as 
applicable; provided, however that--
    (1) In the case of two or more Client Plans which are maintained 
by the same employer, controlled group of corporations or employee 
organization, whose assets are commingled for investment purposes in 
a single master trust or any other entity the assets of which are 
``plan assets'' under 29 CFR 2510.3-101 (the Plan Asset Regulation), 
which entity is engaged in a securities lending arrangement with 
GSL, the foregoing $50 million requirement shall be deemed 
satisfied, if such trust or other entity has aggregate assets which 
are in excess of $50 million; provided that if the fiduciary 
responsible for [making the investment decision] authorizing the 
securities lending arrangement with GSL on behalf of such master 
trust or other entity is not the employer or an affiliate of the 
employer, such fiduciary has total assets under its overall 
management and control, exclusive of the $50 million threshold 
amount attributable to plan investment in [the] such commingled 
entity, which are in excess of $100 million.
    (2) In the case of two or more Client Plans which are not 
maintained by the same

[[Page 37528]]

employer, controlled group of corporations or employee organization, 
whose assets are commingled for investment purposes in a group trust 
or any other form of entity the assets of which are ``plan assets'' 
under the Plan Asset Regulation, which entity is engaged in a 
securities lending arrangement with GSL, the foregoing $50 million 
requirement is satisfied, if such trust or other entity has 
aggregate assets which are in excess of $50 million (excluding the 
assets of any Client Plan with respect to which the fiduciary 
responsible for [making the investment decision] authorizing the 
securities lending arrangement with GSL on behalf of such group 
trust or other entity or any member of the controlled group of 
corporations including such fiduciary is the employer maintaining 
such Client Plan or an employee organization whose members are 
covered by such Client Plan) [. However], provided that the 
fiduciary responsible for [making] authorizing the [investment 
decision] securities lending arrangement on behalf of such group 
trust or other entity--
    [(A) Has full investment responsibility with respect to plan 
assets invested therein; and
    (B) Has] has total assets under its overall management and 
control, exclusive of the $50 million threshold amount attributable 
to plan investment in [the] such commingled entity and the assets 
referred to in the foregoing parenthetical, which are in excess of 
$100 million.

    The Department continues to believe that the appropriate focus in 
section II(j) is the investment manager of the Entities described 
therein, including a master trust, a group trust, or other entity the 
assets of which are ``plan assets'' under 29 CFR 2510.3-101 of the 
Department's regulations. Accordingly, the Department has not changed 
the language, section II(j), as set forth in the final exemption, with 
the exception that throughout section II(j), the terms, ``Client 
Plan(s),'' ``employee benefit plan(s)'' or ``plan(s),'' have been used 
where appropriate.
    4. The Applicants have requested an amendment of the language of 
section II(p). Section II(p), as set forth in the notice, on page 6204, 
column 1, lines 8-28, reads as follows:

    If an independent fiduciary of a Client Plan has given the 
initial affirmative authorization and approval for such plan to 
engage in securities lending transactions, pursuant to the terms of 
PTE 97-63, or pursuant to section II(b), above, of this exemption, 
then any subsequent authorization or approval contemplated under 
this exemption shall be deemed to have been given, if such 
independent fiduciary has not objected in writing to GSL within 30 
days following disclosure to the independent fiduciary of all 
material information required in connection with said authorization 
or approval, a statement apprizing the independent fiduciary that 
PTE 97-63 has been replaced by this exemption, and a copy of this 
Notice, and a copy of the final exemption, if granted.

    In this regard, the Applicants wish to clarify what information 
must be provided to independent fiduciaries in connection with any 
subsequent authorization or approval, pursuant to section II(p) of the 
subject exemption. It is the Applicants' view that only in the case of 
an independent fiduciary whose initial authorization was obtained 
pursuant to PTE 97-63 that the provision of the statement apprizing the 
independent fiduciary that PTE 97-63 has been replaced by the subject 
exemption and the disclosure of the additional information (i.e., a 
copy of the notice and a copy of the final exemption) would be 
relevant. In this regard, the Applicants maintain that any independent 
fiduciary whose initial authorization was given pursuant to the subject 
exemption would have already been provided a copy of the Notice and a 
copy of the final exemption, in accordance with section II(i). In 
addition, the statement indicating that PTE 97-63 has been replaced 
would be irrelevant to any independent fiduciary whose initial 
authorization was given pursuant to the subject exemption.
    Accordingly, the Applicants requested that the language of section 
II(p), as set forth in the Notice, on page 6204, column 1, lines 23-28 
be amended: (1) To insert a period between the word, ``approval,'' and 
the words, ``a statement;'' (2) to delete the phrase:

    A statement apprizing the independent fiduciary that PTE 97-63 
has been replaced by this exemption, and a copy of this Notice, and 
a copy of the final exemption, if granted;

and (3) to substitute the following phrase:

    In the case of an independent fiduciary whose initial 
authorization was pursuant to PTE 97-63, the independent fiduciary 
should, in connection with its initial authorization to lend 
securities pursuant to this exemption, be provided a statement 
indicating that PTE 97-63 has been replaced by this exemption, a 
copy of this notice, and a copy of the final exemption, if granted.

    Subsequently, based upon a conversation with the Department, the 
Applicants in a letter dated April 1, 2003, substituted the following 
revised wording for the language quoted in item (3), above:

    In addition, before an independent fiduciary, whose initial 
authorization was given pursuant to PTE 97-63, may give its first 
subsequent authorization or approval under this exemption in 
accordance with the procedures contained in this section II(p), such 
independent fiduciary must be provided with a statement indicating 
that PTE 97-63 has been replaced by this exemption, a copy of this 
Notice, and a copy of the final exemption, if granted.

    In order to maintain consistent language throughout the exemption, 
the Department has determined in the final exemption to adopt the 
following wording for section II(p):

    In addition, before an independent fiduciary of a Client Plan 
(and/or the independent fiduciary of a CIF, as applicable), whose 
initial authorization was given pursuant to PTE 97-63, may give its 
first subsequent authorization or approval under this exemption in 
accordance with the procedures contained in this section II(p), such 
independent fiduciary must be provided with a statement indicating 
that PTE 97-63 has been replaced by this exemption, and a copy of 
the Notice, and a copy of the final exemption.

    5. The Applicants requested amendment of the language of section 
II(a), section III(d), and section III(e), as set forth in the Notice, 
in the following locations:
    (a) In section II(a) on page 6202, column 1, line 9;
    (b) In section III(d) on page 6205, column 2, line 11; and
    (c) In section III(e) on page 6205, column 2, line 43.
    Specifically, the Applicants requested that the phrase, ``managed 
by,'' in section II(a) be revised to read ``trusteed, managed, or 
advised by.'' Further, in section III(d) and in section III(e), the 
Applicants requested the phrase, ``trusteed, or managed by'' should be 
revised (in both instances) to read, ``trusteed, managed, or advised 
by.'' As support for the requested changes, the Applicants point out 
that State Street would have even less discretionary authority with 
respect to an Index Fund or a Model-Driven Fund that is ``advised by'' 
State Street, as compared to the minimal degree of discretionary 
authority that State Street has with respect to such a fund that is 
``managed by'' State Street.
    Subsequently, in a letter dated, May 21, 2003, the Applicants 
withdrew their previous request and proposed that the language of 
section II(a), as set forth in the Notice on page 6201, column 3, lines 
57-59 and on page 6202, column 1, lines 1-11, be revised as set forth 
below. Words that have been stricken from the text of the Notice appear 
in closed brackets, and additions to the text of the notice appear in 
bold italics.

    Section II(a) of this exemption will be deemed satisfied 
notwithstanding the fact that State Street or any division or 
affiliate of State Street has or exercises discretionary authority 
or control [or renders investment advice] in connection with an 
index fund (the Index Fund(s)), as defined, below, in section III(d) 
of this exemption, or a model-driven fund (the Model-Driven 
Fund(s)), as defined, below, in section III(e) of this exemption, 
[managed by] as to which State

[[Page 37529]]

Street or any division or U.S. affiliate of State Street serves as 
discretionary trustee or manager and * * *.

    The Department concurs and in the final exemption has amended the 
language of section II(a), as requested in the May 21, 2003, letter 
from the Applicants. In addition, in order to maintain consistent 
language throughout the exemption, the Department has determined to 
make a conforming changes to the definition of the term, ``Index 
Fund(s),'' as set forth in the notice in section III(d) on page 6205, 
column 2, line 11; and in the definition of the term, ``Model-Driven 
Fund(s),'' as set forth in the notice in section III(e) on page 6205, 
column 2, line 43. Accordingly, in the final exemption, the Department 
has adopted the following language for section III(d) and section 
III(e). Words that have been stricken from the text of the notice 
appear in closed brackets, and additions to the text of the notice 
appear in bold italics.

    II(d) The term, ``Index Fund(s),'' refers to any investment 
fund, account or portfolio [sponsored, maintained, trusteed, or 
managed by] as to which State Street or a U.S. affiliate serves as 
discretionary trustee or manager and in which one or more investors 
invest, and
    (1) which is designed to track the rate of return, risk profile, 
and other characteristics of an Index, as defined, below, in section 
III(f) of this exemption, by either:
    (A) replicating the same combination of securities which compose 
such Index, or
    (B) sampling the securities which compose such Index based on 
objective criteria and data;
    (2) for which State Street or its affiliate does not use its 
discretion, or data within its control, to affect the identity or 
amount of securities to be purchased or sold;
    (3) that contains ``plan assets'' subject to the Act, pursuant 
to the Plan Asset Regulation; and
    (4) that involves no agreement, arrangement, or understanding 
regarding the design or operation of the fund which is intended to 
benefit State Street or its affiliate or any party in which State 
Street or its affiliate may have an interest;
    II(e) The term, ``Model-Driven Fund(s),'' refers to any 
investment fund, account, or portfolio [sponsored, maintained, 
trusteed, or managed by] as to which State Street or a U.S. 
affiliate serves as discretionary trustee or manager and in which 
one or more investors invest, and
    (1) which is composed of securities the identity of which and 
the amount of which are selected by a computer model that is based 
on prescribed objective criteria using independent third-party data, 
not within the control of State Street or an affiliate, to transform 
an Index;
    (2) which contains ``plan assets'' subject to the Act, pursuant 
to the Plan Asset Regulation; and
    (3) that involves no agreement, arrangement, or understanding 
regarding the design or operation of the fund or the utilization of 
any specific objective criteria which is intended to benefit State 
Street, any affiliate of State Street, or any party in which State 
Street or any affiliate may have an interest;

    6. The Department notes that the subject exemption provides relief 
for the lending of securities by a Client Plan or Client Plans (and/or 
by a CIF or CIFs, as applicable); provided State Street, through GSL, 
acts as securities lending agent. In order to describe the subject 
transaction with more clarity, the Department has decided to change the 
language of section I, as set forth in the notice at the following 
locations: (a) In section I(a)(2) on page 6201, column 2, line 58; (b) 
in section I(a)(2) on page 6201, column 3, line 2; and (c) in section 
I(c) on page 6201, column 3, lines 31-32. Accordingly, in the final 
exemption, the Department has adopted the following language for 
section I(a)(2)) and section I(c). Words that have been stricken from 
the text of the notice appear in closed brackets, and additions to the 
text of the notice appear in bold italics.

    I(a)(2) to any U.S. registered broker-dealers affiliated with 
State Street (the Affiliated Broker Dealer(s)); by an employee 
benefit plan (the Client Plan(s)),[including any] and/or by a 
commingled investment fund holding plan assets [for which] (the 
CIF(s)); provided State Street, through its Global Securities 
Lending Division or any other similar division of State Street or 
U.S. affiliate of State Street or of its parent (collectively, GSL) 
acts as securities lending agent (or sub-agent);
    I(c) the restrictions of section 406 of the Act and the 
sanctions resulting from the application of section 4975 of the 
Code, by reason of 4975(c)(1) of the Code shall not apply to an 
arrangement whereby a U.S. registered broker-dealer affiliated with 
State Street (the Introducing Broker) receives compensation from a 
clearing broker (the Clearing Broker), as defined in section III(g), 
in connection with, or as a direct or indirect result of, the 
lending of securities to the Clearing Broker by [an employee benefit 
plan] a Client Plan (and/or a CIF, as applicable), for which GSL 
acts as securities lending agent; provided that the conditions, set 
forth in section II, below, are satisfied.

    Further, throughout the notice, many references are made to the 
term, ``Client Plan(s).'' For some such references, the Department 
intended the term to include both a Client Plan and a CIF. For other 
such references, the Department intended the term only to refer to a 
Client Plan and not to a CIF. To eliminate ambiguity, the Department 
has determined to change the language, as set forth in the notice. 
Accordingly, throughout the final exemption, the Department has used 
the phrase, ``a Client Plan (and/or a CIF, as applicable).''
    For further information regarding the matters discussed herein, 
interested persons are encouraged to obtain copies of the exemption 
application file (Exemption Application No. D-11122) that the 
Department is maintaining in this case. The complete application file, 
as well as all supplemental submissions received from the Applicants by 
the Department are made available for public inspection in the Public 
Disclosure Room of the Employee Benefit Security Administration, Room 
N-1513, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210.
    Accordingly, after giving full consideration to the entire record, 
the Department has decided to grant the exemption to replace PTE 97-63, 
as amended.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which require, among other things, a fiduciary to 
discharge his or her duties respecting the plan solely in the interest 
of the participants and beneficiaries of the plan and in a prudent 
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it 
affect the requirements of section 401(a) of the Code that the plan 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) In accordance with section 408(a) of the Act and section 
4975(c)(2) of the Code, and the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, August 10, 1990), and based upon the 
entire record, the Department finds that the exemption is 
administratively feasible, in the interest of the plan and of its 
participants and beneficiaries, and protective of the rights of 
participants and beneficiaries of the plan;
    (3) This exemption is supplemental to, and not in derogation of, 
any other provisions of the Act and the Code, including statutory or 
administrative exemptions. Furthermore, the fact that a transaction is 
subject to an

[[Page 37530]]

administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) This exemption is subject to the express condition that the 
Summary of Facts and Representations, as set forth in the notice, and 
the Summary of Facts and Representations, as set forth in the notice of 
Proposed Exemption relating to PTE 97-63, accurately describe the 
material terms of the transactions to be consummated pursuant to this 
exemption.

Exemption

    Based on the facts and representations set forth in the 
application, under the authority of section 408(a) of the Employee 
Retirement Income Security Act of 1974 (the Act) and section 4975(c)(2) 
of the Internal Revenue Code of 1986 (the Code) and in accordance with 
the procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 
August 10, 1990), the Department of Labor (the Department) hereby 
replaces Prohibited Transaction Exemption 97-63 (PTE 97-63), as set 
forth below.

I. Transactions

    (a) The restrictions of sections 406(a)(1)(A) through (D), 
406(b)(1), and 406(b)(2) of the Act and the sanctions resulting from 
the application of section 4975 of the Code, by reason of 4975(c)(1)(A) 
through (E) of the Code,\1\ shall not apply to the lending of 
securities:
---------------------------------------------------------------------------

    \1\ For purposes of this exemption, references to specific 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
---------------------------------------------------------------------------

    (1) to State Street Bank and Trust Company (State Street), acting 
through its Financial Markets Group (FMG) (formerly the Money Market 
Division of the Capital Markets Area) or acting through any other 
division or United States (U.S.) domiciled affiliate, as defined in 
this exemption in section III(a)(1), below, of State Street that is a 
successor to the activities of FMG; or
    (2) to any U.S. registered broker-dealers affiliated with State 
Street (the Affiliated Broker Dealer(s)); \2\ by an employee benefit 
plan (the Client Plan(s)), and/or by a commingled investment fund 
holding plan assets (the CIF(s)); provided State Street, through its 
Global Securities Lending Division or any other similar division of 
State Street or U.S. affiliate of State Street or of its parent 
(collectively, GSL) acts as securities lending agent (or sub-agent); 
\3\
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    \2\ FMG, any division or U.S. affiliate of State Street that 
becomes a successor to the activities of FMG, and the Affiliated 
Broker Dealers are collectively referred to, herein, as ``the SSB 
Group.''
    \3\ For the sake of simplicity, future references to GSL's 
performance of services as securities lending agent should be deemed 
to include its parallel performance as securities lending sub-agent, 
and references to Client Plans (and/or CIFs, as applicable) should 
be deemed to refer to Client Plans (and/or CIFs, as applicable) for 
which GSL is acting as sub-agent with respect to securities lending 
activities, unless otherwise indicated specifically or by the 
context of reference.
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    (b) the restrictions of sections 406(a)(1)(A) through (D), 
406(b)(1), and 406(b)(2) of the Act and the sanctions resulting from 
the application of section of 4975 of the Code, by reason of 
4975(c)(1)(A) through (E) of the Code, shall not apply to the receipt 
of compensation by GSL in connection with any securities lending 
transaction, as described, above, in section I(a) of this exemption; 
and
    (c) the restrictions of section 406 of the Act and the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of 4975(c)(1) of the Code shall not apply to an arrangement whereby a 
U.S. registered broker-dealer affiliated with State Street (the 
Introducing Broker) receives compensation from a clearing broker (the 
Clearing Broker), as defined in section III(g), in connection with, or 
as a direct or indirect result of, the lending of securities to the 
Clearing Broker by a Client Plan (and/or a CIF, as applicable), for 
which GSL acts as securities lending agent; provided that the 
conditions, set forth in section II, below, are satisfied.

II. Conditions

    Section I of this exemption applies only if the conditions of 
Section II of this exemption are satisfied.
    (a) Neither State Street, the SSB Group, GSL, the Clearing Broker, 
nor any other division or U.S. affiliate of State Street or of the 
Clearing Broker has or exercises discretionary authority or control 
with respect to the investment of the assets of a Client Plan (and/or a 
CIF, as applicable), involved in the transactions which are the subject 
of this exemption (other than with respect to the investment of cash 
collateral after securities have been loaned and collateral received), 
nor renders investment advice (within the meaning of 29 CFR 2510.3-
21(c)) with respect to such assets, including decisions concerning the 
acquisition or disposition of securities available for loan by a Client 
Plan (and/or a CIF, as applicable).
    Section II(a) of this exemption will be deemed satisfied 
notwithstanding the fact that State Street or any division or affiliate 
of State Street has or exercises discretionary authority or control in 
connection with an index fund (the Index Fund(s)), as defined, below, 
in section III(d) of this exemption, or a model-driven fund (the Model-
Driven Fund(s)), as defined, below, in section III(e) of this 
exemption, as to which State Street or any division or U.S. affiliate 
of State Street serves as discretionary trustee or manager and in which 
Client Plans (and/or CIFs, as applicable) invest. An Index Fund or a 
Model-Driven Fund with multiple Client Plan (and/or CIF, as applicable) 
investors is referred to herein as a commingled Index Fund or a 
commingled Model-Driven Fund (the Commingled Index Fund(s) or the 
Commingled Model-Driven Fund(s));
    (b) Except as otherwise provided, below, in section II(q) of this 
exemption with respect to Commingled Index Funds or Commingled Model-
Driven Funds, before a Client Plan (and/or a CIF, as applicable) 
participates in a securities lending program, and before any loan of 
securities to the SSB Group or the Clearing Broker is effected, 
pursuant to this exemption, the fiduciary of the Client Plan (and/or 
the fiduciary of the CIF, as applicable) who is independent of State 
Street, GSL, the SSB Group, the Clearing Broker, and any other division 
or affiliate of State Street or the Clearing Broker must have:
    (1) Authorized and approved the securities lending authorization 
agreement with GSL (the Agency Agreement), where GSL is acting as the 
direct securities lending agent; or
    (2) Authorized and approved the primary securities lending 
authorization agreement (the Primary Lending Agreement) with the 
primary lending agent, where GSL is lending securities under a sub-
agency arrangement with the primary lending agent; \4\ and
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    \4\ The Department, herein, is not providing relief for 
securities lending transactions engaged in by primary lending 
agents, other than GSL, beyond that provided, pursuant to Prohibited 
Transaction Exemption 81-6 (PTE 81-6) (46 FR 7527, January 23, 1981, 
as amended at 52 FR 18754, May 19, 1987) and Prohibited Transaction 
Exemption 82-63 (PTE 82-63)(47 FR 14804, April 6, 1982).
---------------------------------------------------------------------------

    (3) Approved the general terms of the securities loan agreement 
(the Loan Agreement) between the Client Plan (and/or CIF, as 
applicable) and the SSB Group or the Clearing Broker, as applicable, 
the specific terms of which are negotiated and entered into by GSL;
    (c)(1) Each Client Plan (and/or CIF, as applicable) may terminate 
the Agency Agreement or the Primary Lending Agreement at any time, 
without penalty to such Client Plan (and/or CIF, as applicable), on 
five (5) business days notice, whereupon the borrower shall deliver 
certificates for securities

[[Page 37531]]

identical to the borrowed securities (or the equivalent thereof in the 
event of reorganization, recapitalization or merger of the issuer of 
the borrowed securities) to the Client Plan (and/or CIF, as applicable) 
within: (A) The customary delivery period for such securities, (B) five 
(5) business days, or (C) the time negotiated for such delivery by the 
Client Plan (and/or CIF, as applicable) and the borrower, whichever is 
lesser. With respect to a Commingled Index Fund or a Commingled Model-
Driven Fund in which a Client Plan (and/or CIF, as applicable) invests, 
termination is pursuant to the procedure, as set forth, below, in 
section II(q) of this exemption;
    (2) If any event of default occurs (e.g., a loan is terminated and 
the borrower fails to return the borrowed securities or the equivalent 
thereof within the time described, above, in section II(c)(1) of this 
exemption), to the extent that (A) liquidation of the pledged 
collateral, or (B) additional cash received from the SSB Group or the 
Clearing Broker, as applicable, does not provide sufficient funds on a 
timely basis, a Client Plan (and/or CIF, as applicable), including a 
Commingled Index Fund, or a Commingled Model-Driven Fund in which a 
Client Plan (and/or CIF, as applicable) invests, will have the right 
under the terms of the Loan Agreement to purchase securities identical 
to the borrowed securities (or their equivalent as discussed above) and 
may apply the collateral to the payment of the purchase price, any 
other obligations of the borrower under the agreement, and any expenses 
associated with the sale and/or purchase. If the collateral is 
insufficient to accomplish such purchase, State Street will indemnify 
the Client Plan (and/or CIF, as applicable), including a Client Plan 
(and/or CIF, as applicable) invested a Commingled Index Fund or 
Commingled Model-Driven Fund, pursuant to section II(g) of this 
exemption;
    (d) Each Client Plan (and/or CIF, as applicable), including a 
Commingled Index Fund or Commingled Model-Driven Fund in which a Client 
Plan (and/or CIF, as applicable) invests will receive from the SSB 
Group or the Clearing Broker, as applicable, (either by physical 
delivery, or by book entry in a securities depository, wire transfer or 
similar means) by the close of business on or before the day the loaned 
securities are delivered to the SSB Group or the Clearing Broker, as 
applicable, collateral consisting of U.S. currency, securities issued 
or guaranteed by the U.S. Government or its agencies or 
instrumentalities, an irrevocable bank letter of credit issued by a 
person other than State Street, the Clearing Broker, or an affiliate 
thereof, or any combination thereof, or other collateral permitted 
under PTE 81-6 (as amended from time to time or, alternatively, any 
superseding class exemption that may be issued to cover securities 
lending by employee benefit plans). The collateral will be held on 
behalf of such Client Plan (and/or CIF, as applicable) in a manner that 
causes such collateral to be (i) segregated from and not commingled 
with the general assets of State Street, the Clearing Broker, or any of 
their affiliates, and (ii) identifiable and reachable by such Client 
Plan (and/or CIF, as applicable);
    (e) The market value of the collateral (or in the case of a letter 
of credit the stated amount) must, as of the close of business on the 
preceding business day, initially equal at least 102 percent (102%) of 
the market value of the loaned securities. If the market value of the 
collateral, on the close of trading on a business day, is less than 100 
percent (100%) (or such greater percentage as agreed to by the parties) 
of the market value of the loaned securities at the close of business 
on that day, the SSB Group or the Clearing Broker, as applicable, is 
required to deliver by the close of business on the following business 
day sufficient additional collateral such that the market value of the 
collateral will again equal at least 102 percent (102%). The applicable 
Loan Agreement will give Client Plans (and/or CIFs, as applicable), 
including a Commingled Index Fund or Commingled Model-Driven Fund in 
which a Client Plan (and/or CIF, as applicable) invests, a continuing 
security interest in, title to, or the rights of a secured creditor 
with respect to the collateral and a lien on the collateral. GSL will 
monitor the level of the collateral daily;
    (f) All GSL's procedures regarding securities lending activities 
will at a minimum conform to PTE 81-6 and PTE 82-63 (as amended from 
time to time or, alternatively, any superseding class exemption that 
may be issued to cover securities lending by employee benefit plans);
    (g) State Street will agree to indemnify and hold harmless each 
lending Client Plan (and/or CIF, as applicable) (including the sponsor 
and fiduciaries of each such Client Plan (and/or CIF, as applicable), 
and any Client Plan (and/or CIF, as applicable) invested in a 
Commingled Index Fund or Commingled Model-Driven Fund) against any and 
all damages, losses, liabilities, costs, and expenses (including 
attorneys' fees) which such Client Plan (and/or CIF, as applicable) may 
incur or suffer directly arising out of the lending of the securities 
to the SSB Group or the Clearing Broker, as applicable; provided that 
this condition does not require State Street to indemnify a Client Plan 
(and/or CIF, as applicable) against any potential investment losses 
associated with the investment of cash collateral received by such 
Client Plan (and/or CIF, as applicable) in connection with such 
securities lending transactions;
    (h) Each Client Plan (and/or CIF, as applicable), including a 
Commingled Index Fund or Commingled Model-Driven Fund in which a Client 
Plan (and/or CIF, as applicable) invests, will receive the equivalent 
of all distributions made to holders of the borrowed securities during 
the term of any loan, including, but not limited to, cash dividends, 
interest payments, shares of stock as a result of stock splits and 
rights to purchase additional securities, or other distributions;
    (i) Each Client Plan (and/or CIF, as applicable), including a 
Client Plan (and/or CIF, as applicable) invested in a Commingled Index 
Fund or Commingled Model-Driven Fund, will receive prior to any 
approval of the lending of securities to the SSB Group or the Clearing 
Broker, as applicable, a copy of the Notice of Proposed Exemption (the 
Notice), a copy of the final exemption, a copy of PTE 97-63, and a copy 
of the Notice of Proposed Exemption related to PTE 97-63 (the Previous 
Notice);
    (j) Only Client Plans with total assets having an aggregate market 
value of at least $50 million will be permitted to lend securities to 
the SSB Group or to the Clearing Broker, as applicable; provided, 
however that--
    (1) In the case of two or more Client Plans which are maintained by 
the same employer, controlled group of corporations or employee 
organization, whose assets are commingled for investment purposes in a 
single master trust or any other entity the assets of which are ``plan 
assets'' under 29 CFR 2510.3-101 (the Plan Asset Regulation), which 
entity is engaged in a securities lending arrangement with GSL, the 
foregoing $50 million requirement shall be deemed satisfied, if such 
trust or other entity has aggregate assets which are in excess of $50 
million; provided that if the fiduciary responsible for making the 
investment decision on behalf of such master trust or other entity is 
not the employer or an affiliate of the employer, such fiduciary has 
total assets under its management and control, exclusive of the $50 
million threshold amount attributable to Client

[[Page 37532]]

Plan investment in the commingled entity, which are in excess of $100 
million.
    (2) In the case of two or more Client Plans which are not 
maintained by the same employer, controlled group of corporations or 
employee organization, whose assets are commingled for investment 
purposes in a group trust or any other form of entity the assets of 
which are ``plan assets'' under the Plan Asset Regulation, which entity 
is engaged in a securities lending arrangement with GSL, the foregoing 
$50 million requirement is satisfied, if such trust or other entity has 
aggregate assets which are in excess of $50 million (excluding the 
assets of any employee benefit plan with respect to which the fiduciary 
responsible for making the investment decision on behalf of such group 
trust or other entity or any member of the controlled group of 
corporations including such fiduciary is the employer maintaining such 
plan or an employee organization whose members are covered by such 
plan). However, the fiduciary responsible for making the investment 
decision on behalf of such group trust or other entity--
    (A) Has full investment responsibility with respect to plan assets 
invested therein; and
    (B) Has total assets under its management and control, exclusive of 
the $50 million threshold amount attributable to Client Plan investment 
in the commingled entity, which are in excess of $100 million.
    (3) In the case of two or more Client Plans whose assets are 
commingled for investment purposes in an entity, whether or not through 
an entity described, above, in section II(j)(1) or (j)(2) of this 
exemption, the $50 million requirement shall be deemed satisfied if 50 
percent (50%) or more of the units of beneficial interest in such 
entity are held by investors each having total net assets of at least 
$50 million. Such investors may include employee benefit plans, 
entities described, above, in section II(j)(1) or (j)(2) of this 
exemption, or other investors that are not employee benefit plans 
covered by section 406 of the Act, or section 4975 of the Code.
    In addition, none of the entities described above are formed for 
the sole purpose of making loans of securities;
    (k) The terms of each loan of securities by a Client Plan (and/or 
by a CIF, as applicable), including by a Commingled Index Fund or 
Commingled Model-Driven Fund in which a Client Plan (and/or CIF, as 
applicable) invests, to the SSB Group or the Clearing Broker, as 
applicable, will be at least as favorable to such Client Plan (and/or 
CIF, as applicable) or to the Commingled Index Fund or Commingled 
Model-Driven Fund in which a Client Plan (and/or CIF, as applicable) 
invests, as those of a comparable arm's-length transaction between 
unrelated parties;
    (l) Each Client Plan (and/or CIF, as applicable), including a 
Client Plan (and/or CIF, as applicable) invested in a Commingled Index 
Fund or Commingled Model-Driven Fund, will receive quarterly reports 
with respect to the securities lending transactions which are the 
subject of this exemption, including but not limited to the information 
described in paragraph 26 of the Previous Notice, so that an 
independent fiduciary of the Client Plan (and/or CIF, as applicable) 
may monitor the securities lending transactions with the SSB Group and, 
if applicable, the Clearing Broker. In the event the identity of the 
Clearing Broker has changed since the issuance of the report for the 
immediately preceding calendar quarter, the report for the current 
calendar quarter must contain the name of the new Clearing Broker and 
the most recently available audited and unaudited financial statements 
of such Clearing Broker;
    (m) Except in the case of a Commingled Index Fund or Commingled 
Model-Driven Fund subject to the requirements, as set forth, below, in 
section II(q) of this exemption, before entering into the Loan 
Agreement and before a Client Plan (and/or a CIF, as applicable) lends 
any securities to the SSB Group or to the Clearing Broker, as 
applicable, an independent fiduciary of the Client Plan (and/or the 
independent fiduciary of the CIF, as applicable) will receive 
sufficient information, concerning the financial condition of State 
Street and, if applicable, the Clearing Broker, including but not 
limited to the most recently available audited and unaudited financial 
statements of State Street's parent corporation and, if applicable, the 
Clearing Broker. In the event of a change in the identity of the 
Clearing Broker, the name of such Clearing Broker and the information 
required by this section (m) with respect to the new Clearing Broker 
must be provided to the independent fiduciary of the Client Plan (and/
or the independent fiduciary of the CIF, as applicable) before such 
Client Plan (and/or CIF, as applicable) lends any securities to the new 
Clearing Broker;
    (n) Except in the case of a Commingled Index Fund or Commingled 
Model-Driven Fund subject to the requirements, as set forth, below, in 
section II(q) of this exemption, the SSB Group and, if applicable, the 
Clearing Broker, will provide to a Client Plan (and/or to a CIF, as 
applicable) prompt notice at the time of each loan by such Client Plan 
(and/or CIF, as applicable) of any material adverse changes in State 
Street's and, if applicable, the Clearing Broker's financial condition, 
since the date of the most recently furnished financial statements.
    If any such material adverse changes have taken place, GSL will not 
make any further loans to the Affiliated Broker Dealers and, if 
applicable, the Clearing Broker, unless an independent fiduciary of the 
Client Plan (and/or the independent fiduciary of the CIF, as 
applicable) is provided notice of the material change and approves the 
continuation of the lending arrangement in view of the changed 
financial condition.
    In the case of a Client Plan (and/or CIF, as applicable) which is 
not invested in a Commingled Index Fund or Commingled Model-Driven 
Fund, if the independent fiduciary of the Client Plan (and/or the 
independent fiduciary of the CIF, as applicable), objects to any 
material adverse change, as disclosed pursuant to section II(n) of this 
exemption, such Client Plan (and/or CIF, as applicable) may terminate 
its participation in the Agency Agreement or the Primary Lending 
Agreement, without penalty to such Client Plan (and/or CIF, as 
applicable), pursuant to section II(c), above, of this exemption. In 
the case of a Client Plan (and/or CIF, as applicable) invested in a 
Commingled Index Fund or Commingled Model-Driven Fund, termination is 
pursuant to the procedure described, below, in section II(q)(2), of 
this exemption;
    (o) With respect to any calendar quarter, at least 50 percent (50%) 
or more of the outstanding dollar value of securities loans negotiated 
on behalf of all securities lending clients of GSL will be to borrowers 
unrelated to both State Street and the Clearing Broker;
    (p) If an independent fiduciary of a Client Plan (and/or an 
independent fiduciary of a CIF, as applicable) has given the initial 
affirmative authorization and approval for such Client Plan (and/or 
CIF, as applicable) to engage in securities lending transactions, 
pursuant to the terms of PTE 97-63, or pursuant to section II(b), 
above, of this exemption, then any subsequent authorization or approval 
contemplated under this exemption shall be deemed to have been given, 
if such independent fiduciary has not objected in writing to GSL within 
30 days following disclosure to such independent fiduciary of all 
material

[[Page 37533]]

information required in connection with said authorization or approval. 
In addition, before an independent fiduciary of a Client Plan (and/or 
an independent fiduciary of a CIF, as applicable), whose initial 
authorization was given pursuant to PTE 97-63, may give its first 
subsequent authorization under this exemption in accordance with the 
procedures contained in this section II(p), such independent fiduciary 
must be provided with a statement indicating that PTE 97-63 has been 
replaced by this exemption, and a copy of the Notice, and a copy of the 
final exemption;
    (q) In the case of a Commingled Index Fund or Commingled Model-
Driven Fund in which a Client Plan (and/or a CIF, as applicable) 
invests:
    (1) The requirement, as set forth, above, in section II(b) of this 
exemption, shall not apply, provided that the information described in 
sections II(b), II(i), and II(m), above, of this exemption, including a 
description of the proposed securities lending arrangement, shall be 
furnished by GSL to a fiduciary who is independent of State Street, 
GSL, the SSB Group, the Clearing Broker, and any other division or 
affiliate of State Street or the Clearing Broker with respect to each 
Client Plan (and/or each CIF, as applicable) whose assets are invested 
in the Commingled Index Fund or Commingled Model-Driven Fund, not less 
than 30 days prior to implementation of any such securities lending 
arrangement, or any material changes thereto, and, thereafter, upon the 
reasonable request of the independent fiduciary of the Client Plan 
(and/or the independent fiduciary of the CIF, as applicable) whose 
assets are invested in the Commingled Index Fund or Commingled Model-
Driven Fund.
    In the event of a material adverse change in the financial 
condition of the SSB Group, or the Clearing Broker, as applicable, GSL 
will make a decision, using the same standards of credit analysis GSL 
would use in evaluating unrelated borrowers, whether to terminate 
existing loans and whether to continue making additional loans to the 
SSB Group, or the Clearing Broker, as applicable.
    For purposes of section II(q) of this exemption, any requirement 
that the fiduciary be independent of State Street and its affiliates 
shall not apply in the case of an employee benefit plan sponsored and 
maintained by State Street and/or an affiliate for its own employees 
(the State Street Plan(s)), as defined, below, in section III(c) of 
this exemption; provided such State Street Plan is invested in a 
Commingled Index Fund or Commingled Model-Driven Fund, and provided 
further that at all times the value of the aggregate holdings of all 
State Street Plans in such fund comprises less than 10% of the value of 
the total assets of such fund;
    (2) In the event that the independent fiduciary of a Client Plan 
(and/or the independent fiduciary of a CIF, as applicable) whose assets 
are invested in a Commingled Index Fund or Commingled Model-Driven Fund 
submits a notice in writing within 30 days after receipt of 
notification of implementation of any such securities lending 
arrangement, or any material changes thereto, to GSL, as securities 
lending agent to the Commingled Index Fund or Commingled Model-Driven 
Fund, objecting to the implementation of, material change in, or 
continuation of the securities lending arrangement, the Client Plan 
(and/or CIF, as applicable) on whose behalf the objection was tended is 
given the opportunity to terminate its investment in the Commingled 
Index Fund or Commingled Model-Driven Fund, without penalty to such 
Client Plan (and/or CIF, as applicable), no later than 35 days after 
the notice of withdrawal is received.
    In the case of a Client Plan (and/or CIF, as applicable) that 
elects to withdraw pursuant to the foregoing, such withdrawal shall be 
effected prior to the implementation of, or material change in, the 
securities lending arrangement; but an existing securities lending 
arrangement need not be discontinued by reason of such Client Plan 
(and/or CIF, as applicable) electing to withdraw. If a Client Plan's 
(and/or CIF's, as applicable) withdrawal necessitates a return of 
securities to the Commingled Index Fund or Commingled Model-Driven 
Fund, the SSB Group or the Clearing Broker, as applicable, will 
transfer securities identical to the borrowed securities (or the 
equivalent thereof in the event of reorganization, or merger of the 
issuer of the borrowed securities) to the Commingled Index Fund or 
Commingled Model-Driven Fund within:
    (A) The customary delivery period for such securities;
    (B) five (5) business days; or
    (C) the time negotiated for such delivery by GSL, as lending agent 
to the Commingled Index Fund or Commingled Model-Driven Fund, and the 
SSB Group or Clearing Broker, as applicable, whichever is least; and
    (3) In the case of a Client Plan (and/or CIF, as applicable) whose 
assets are proposed to be invested in a Commingled Index Fund or 
Commingled Model-Driven Fund subsequent to the implementation of the 
securities lending arrangement, the Client Plan's (and/or CIF's, as 
applicable) investment in the Commingled Index Fund or Commingled 
Model-Driven Fund shall be authorized in the manner described, above, 
in section II(b) of this exemption;
    (4) The provisions of section II(q) of this exemption shall not 
apply to a Commingled Index Fund or Commingled Model-Driven Fund, if 
more than ten percent (10%) of the ownership interests in such fund are 
held by State Street Plans;
    (5) In the case of a Commingled Index Fund or Commingled Model-
Driven Fund subject to the requirements of section II(q) of this 
exemption, GSL will furnish upon reasonable request to the independent 
fiduciary of any Client Plan (and/or to the independent fiduciary of 
any CIF, as applicable) invested in such fund,\5\ the most recently 
available audited and unaudited financial statements of the parent 
corporation of State Street and, if applicable, the Clearing Broker (or 
any new Clearing Broker) prior to the authorization of the securities 
lending program, and annually after such authorization;
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    \5\ The Department notes that it is the responsibility of the 
independent fiduciary for the Client Plan (and/or the independent 
fiduciary of the CIF, as applicable) to periodically monitor any 
material changes in the securities lending program, including but 
not limited to a change in the Clearing Broker or in the Clearing 
Broker's financial status, that may occur after an initial 
authorization to participate in the program, pursuant to this 
exemption.
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    (r) In return for lending securities, a Client Plan (and/or CIF, as 
applicable), including a Commingled Index Fund or Commingled Model-
Driven Fund in which a Client Plan (and/or CIF, as applicable) invests, 
either--
    (1) receives a reasonable fee, which is related to the value of the 
borrowed securities and the duration of the loan; or
    (2) Has the opportunity to derive compensation through the 
investment of cash collateral. (Under such circumstances, such Client 
Plan (and/or CIF, as applicable) may pay a loan rebate or similar fee 
to the SSB Group or the Clearing Broker, as applicable, if such fee is 
not greater than the fee such Client Plan (and/or CIF, as applicable), 
would pay in a comparable arm's length transaction with an unrelated 
party);
    (s) State Street and/or its affiliates maintain, or cause to be 
maintained, within the United States for a period of six (6) years from 
the date of each transaction which is subject to this exemption, in a 
manner that is convenient and accessible for audit and

[[Page 37534]]

examination, such records as are necessary to enable the persons 
described, below, in section II(t)(1), to determine whether the 
conditions of this exemption have been met, except that--
    (1) This record-keeping condition shall not be violated if, due to 
circumstances beyond the control of State Street and/or its affiliates, 
the records are lost or destroyed prior to the end of the six-year 
period; and
    (2) No party in interest other than State Street and its affiliates 
shall be subject to the civil penalty that may be assessed under 
section 502(i) of the Act, or to the taxes imposed by section 4975(a) 
and (b) of the Code, if the records are not maintained, or are not 
available for examination as required by section II(t)(1) of this 
exemption; and
    (t)(1) Except as provided in section II(t)(2), below, of this 
exemption and notwithstanding any provisions of sections (a)(2) and (b) 
of section 504 of the Act, the records referred to in section II(s) of 
this exemption are unconditionally available at their customary 
location for examination during normal business hours by:
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the Securities and 
Exchange Commission;
    (B) Any fiduciary of a participating Client Plan, (and/or a CIF, as 
applicable), or a State Street Plan, or any duly authorized 
representative of such fiduciary;
    (C) Any contributing employer to any participating Client Plan, 
State Street Plan, or any duly authorized employee or representative of 
such employer; and
    (D) Any participant or beneficiary of any participating Client 
Plan, State Street Plan, or any duly authorized representative of such 
participant or beneficiary.
    (2) None of the persons described above in section II(t)(1)(B)-
(t)(1)(D) are authorized to examine the trade secrets of State Street 
or its affiliates or commercial or financial information which is 
privileged or confidential.

III. Definitions

    For purposes of this exemption, the following definitions shall 
apply:
    (a) The term, ``affiliate'' or ``affiliates,'' means:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, or partner in any such person; 
and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee;
    (b) The term, ``control,'' means the power to exercise a 
controlling influence over the management or policies of a person other 
than an individual;
    (c) The term, ``State Street Plan(s),'' refer to employee benefit 
plans covered by the Act sponsored and maintained by State Street and/
or an affiliate for its own employees;
    (d) The term, ``Index Fund(s),'' refers to any investment fund, 
account or portfolio as to which State Street or a U.S. affiliate 
serves as discretionary trustee or manager and in which one or more 
investors invest, and
    (1) which is designed to track the rate of return, risk profile, 
and other characteristics of an Index, as defined, below, in section 
III(f) of this exemption, by either:
    (A) Replicating the same combination of securities which compose 
such Index, or
    (B) sampling the securities which compose such Index based on 
objective criteria and data;
    (2) for which State Street or its affiliate does not use its 
discretion, or data within its control, to affect the identity or 
amount of securities to be purchased or sold;
    (3) that contains ``plan assets'' subject to the Act, pursuant to 
the Plan Asset Regulation; and
    (4) that involves no agreement, arrangement, or understanding 
regarding the design or operation of the fund which is intended to 
benefit State Street or its affiliate or any party in which State 
Street or its affiliate may have an interest;
    (e) The term, ``Model-Driven Fund(s),'' refers to any investment 
fund, account, or portfolio as to which State Street or a U.S. 
affiliate serves as discretionary trustee or manager and in which one 
or more investors invest, and
    (1) which is composed of securities the identity of which and the 
amount of which are selected by a computer model that is based on 
prescribed objective criteria using independent third-party data, not 
within the control of State Street or an affiliate, to transform an 
Index;
    (2) which contains ``plan assets'' subject to the Act, pursuant to 
the Plan Asset Regulation; and
    (3) that involves no agreement, arrangement, or understanding 
regarding the design or operation of the fund or the utilization of any 
specific objective criteria which is intended to benefit State Street, 
any affiliate of State Street, or any party in which State Street or 
any affiliate may have an interest;
    (f) The term, ``Index,'' refers to a securities index that 
represents the investment performance of a specific segment of the 
public market for equity or debt securities in the United States and/or 
foreign countries, but only if--
    (1) The organization creating and maintaining the index is--
    (A) engaged in the business of providing financial information, 
evaluation, advice, or securities brokerage services to institutional 
clients,
    (B) a publisher of financial news or information, or
    (C) a public stock exchange or association of securities dealers;
    (2) the index is created and maintained by an organization 
independent of State Street; and
    (3) the index is a generally accepted standardized index of 
securities which is not specifically tailored for the use of State 
Street; and
    (g) The term, ``Clearing Broker,'' means a U.S. broker-dealer 
registered under the Securities Exchange Act of 1934 that is unrelated 
to State Street or its affiliates, that has net capital equal to at 
least $10 million and that regularly serves as a clearing broker for 
introducing brokers in the ordinary course of its business, but only in 
the context, and to the extent, of its service as a clearing broker for 
an Affiliated Broker Dealer that is acting as introducing broker.
    For a complete statement of the facts and representations 
supporting the Department's decision to grant PTE 97-63, refer to the 
proposed exemption (62 FR 51684, October 2, 1997) and the final 
exemption (62 FR 66689, December 19, 1997). For a more complete 
statement of the facts and representations supporting the Department's 
decision to grant this exemption replacing PTE 97-63, refer to the 
notice (68 FR 6197, February 6, 2003).

    Signed at Washington, DC, this 19th day of June, 2003.
Ivan L. Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, Department of Labor.
[FR Doc. 03-15930 Filed 6-23-03; 8:45 am]

BILLING CODE 4510-29-P