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
[[Page 37526]]
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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:
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\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.
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(1) to State Street Bank and Trust Company (State Street), acting
through its Financial Markets Group (FMG) (formerly the Money Market
Division of the Capital Markets Area) or acting through any other
division or United States (U.S.) domiciled affiliate, as defined in
this exemption in section III(a)(1), below, of State Street that is a
successor to the activities of FMG; or
(2) to any U.S. registered broker-dealers affiliated with State
Street (the Affiliated Broker Dealer(s)); \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).
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(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