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Employee Benefits Security Administration

EBSA Federal Register Notice

Proposed Exemptions; D-11318, Barclays Global Investors, N.A., (BGI) and Its Investment Advisory Affiliates, Including Barclays Global [09/10/2007]

[PDF Version]

Volume 72, Number 174, Page 51668-51685

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

 
Proposed Exemptions; D-11318, Barclays Global Investors, N.A., 
(BGI) and Its Investment Advisory Affiliates, Including Barclays Global 
Fund Advisors (BGFA; Together, the Applicants); and D-11420 BlackRock, 
Inc. (Black Rock) and Merrill Lynch & Co. (Merrill Lynch) 
(Collectively, the Applicants)

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of proposed exemptions.

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

Written Comments and Hearing Requests

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

ADDRESSES: All written comments and requests for a hearing (at least 
three copies) should be sent to the Employee Benefits Security 
Administration (EBSA), Office of Exemption Determinations, Room N-5700, 
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No. ----, stated in each Notice of 
Proposed Exemption. Interested persons are also invited to submit 
comments and/or hearing requests to EBSA via e-mail or FAX. Any such 
comments or requests should be sent either by e-mail to: 
moffitt.betty@dol.gov, or by FAX to (202) 219-0204 by the end of the 

scheduled comment period. The applications for exemption and the 
comments received will be available for public inspection in the Public 
Documents Room of the Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue, NW., 
Washington, DC 20210.

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the 
Secretary of the Treasury to issue exemptions of the type requested to 
the Secretary of Labor. Therefore, these notices of proposed exemption 
are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

Barclays Global Investors, N.A., (BGI) and Its Investment Advisory 
Affiliates, Including Barclays Global Fund Advisors (BGFA; Together, 
the Applicants), Located in San Francisco, California

[Application No. D-11318]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR 2570, 
subpart B (55 FR 32836, 32847, August 10, 1990).
Section I. Transactions Involving Open-End Management Investment 
Companies Other Than Exchange-Traded Funds
    Effective as of September 10, 2007, the restrictions of sections 
406(a) and (b) of the Act, section 8477(c)(1) and (c)(2) of FERSA, and 
the taxes imposed by section 4975(a) and (b) of the Code, by reason of 
section 4975(c)(1)(A) through (F) of the Code, shall not apply to the 
acquisition, sale or exchange by an Account of shares, including 
through in-kind redemptions of shares or acquisitions of shares in 
exchange for Account assets transferred in-kind from an Account, of an 
open-end investment company (``the Fund'') registered under the 
Investment Company Act of 1940 (the 1940 Act), other than an exchange-
traded fund (an ``ETF''), the Investment Adviser for which is also a 
fiduciary with respect to the Account (or an affiliate of such 
fiduciary) (hereinafter, BGI and all its affiliates will be referred to 
as ``Investment Adviser''), and the receipt of fees for acting as an 
investment adviser for such Funds, as well as fees for providing other 
services to the Funds which are ``Secondary Services,'' as defined 
herein, in connection with the investment by the Accounts in shares of 
the Funds, provided that the conditions set forth in Section II are 
met.
Section II. Conditions
    (a) The Account does not pay a sales commission or other similar 
fees to the Investment Adviser or its affiliates in connection with 
such acquisition, sale, or exchange.
    (b) The Account does not pay a redemption or similar fee to the 
Investment Adviser in connection with the sale by the Account to the 
Fund of such shares, and the existence of any other redemption fee is 
disclosed in the Fund's prospectus in effect at all times.
    (c) The Account does not pay an investment management, investment 
advisory or similar fee with respect to

[[Page 51669]]

Account assets invested in Fund shares for the entire period of such 
investment. This condition does not preclude the payment of investment 
advisory fees by the Fund under the terms of its investment advisory 
agreement adopted in accordance with section 15 of the Investment 
Company Act of 1940 (the 1940 Act). This condition also does not 
preclude payment of an investment advisory fee by the Account under the 
following circumstances:
    (1) For Accounts billed in arrears, an investment advisory fee may 
be paid based on total Account assets from which a credit has been 
subtracted representing the Account's pro rata share of investment 
advisory fees paid by the Fund;
    (2) For Accounts billed in advance, the Investment Adviser must 
employ a reasonably designed method to ensure that the amount of the 
prepaid fee that constitutes the fee with respect to the Account assets 
invested in the Fund shares:
    (A) Is anticipated and subtracted from the prepaid fee at the time 
of payment of such fee,
    (B) Is returned to the Account no later than during the immediately 
following fee period or
    (C) Is offset against the prepaid fee for the immediately following 
fee period or for the fee period immediately following thereafter. For 
purposes of this paragraph, a fee shall be deemed to be prepaid for any 
fee period if the amount of such fee is calculated as of a date not 
later than the first day of such period; or
    (3) An investment advisory fee may be paid based on total plan 
assets if the Account will receive a cash rebate of such Account's 
proportionate share of all fees charged to the Fund by the Investment 
Adviser for investment management, investment advisory or similar 
services no later than one business day after the receipt of such fees 
by the Investment Adviser.
    (d) The rebating, crediting, or offsetting of any fees in paragraph 
(c) is audited at least annually by the Investment Adviser through a 
system of internal controls to verify the accuracy of the fee mechanism 
adopted by the Investment Adviser under paragraph (c).
    (e) The combined total of all fees received by the Investment 
Adviser for the provision of services to an Account, and for the 
provision of any services to a Fund in which an Account may invest, is 
not in excess of ``reasonable compensation'' within the meaning of 
section 408(b)(2) of the Act;
    (f) The Investment Adviser and its affiliates do not receive any 
fees payable pursuant to Rule 12b-1 under the 1940 Act in connection 
with the transactions covered by this proposed exemption;
    (g) In advance of any initial investment in a Fund by a Separately 
Managed Account or by a new Plan investor in a Pooled Fund, a Second 
Fiduciary with respect to that Plan, who is independent of and 
unrelated to the Investment Adviser or any affiliate thereof, receives 
in written or in electronic form, full and detailed written disclosure 
of information concerning such Fund(s). The disclosure described in 
this paragraph (g) includes, but is not limited to:
    (1) A current prospectus issued by each of the Fund(s);
    (2) A statement describing the fees for investment advisory or 
similar services, any Secondary Services, and all other fees to be 
charged to or paid by the Account and by the Fund(s), including the 
nature and extent of any differential between the rates of such fees;
    (3) The reasons why the Investment Adviser may consider such 
investment to be appropriate for the Account;
    (4) A statement describing whether there are any limitations 
applicable to the Investment Adviser with respect to which Account 
assets may be invested in shares of the Fund(s) and, if so, the nature 
of such limitations, and
    (5) A copy of the proposed exemption and the final exemption if it 
is published in the Federal Register, and any other reasonably 
available information regarding the transaction described herein that 
the Second Fiduciary requests.
    (h) After receipt and consideration of the information referenced 
in paragraph (g), the Second Fiduciary of the Separately Managed 
Account or the new Plan investing in a Pooled Fund approves in writing 
the investment of Plan assets in each particular Fund and the fees to 
be paid by a Fund to the Investment Adviser.
    (i)(1) In the case of existing Plan investors in a Pooled Fund, 
such Pooled Fund may not engage in any covered transactions pursuant to 
this proposed exemption, unless the Second Fiduciary receives in 
written or in electronic form, the information described in paragraph 
(2) of this paragraph (i) not less than 30 days prior to the Investment 
Adviser's engaging in the covered transactions on behalf of the Pooled 
Fund pursuant to this proposed exemption.
    (2) The information required by paragraph (1) of this section 
includes:
    (A) A notice of the Pooled Fund's intent to engage in the covered 
transactions described herein, a copy of the notice of proposed 
exemption, and a copy of the final exemption if it is published in the 
Federal Register;
    (B) Any other reasonably available information regarding the 
covered transactions that a Second Fiduciary requests; and
    (C) A Termination Form, within the meaning of paragraph (j).
    Approval to engage in any covered transactions pursuant to this 
proposed exemption may be presumed notwithstanding that the Investment 
Adviser does not receive any response from a Second Fiduciary.
    (j) All authorizations made by a Second Fiduciary regarding 
investments in a Fund and the fees paid to the Investment Adviser will 
be subject to an annual reauthorization wherein any such prior 
authorization shall be terminable at will by an Account, without 
penalty to the Account, upon receipt by the Investment Adviser of 
written notice of termination. A form expressly providing an election 
to terminate the authorization (``Termination Form'') with instructions 
on the use of the form will be supplied to the Second Fiduciary no less 
than annually, in written or in electronic form. The instructions for 
the Termination Form will include the following information:
    (1) The authorization is terminable at will by the Account, without 
penalty to the Account, upon receipt by the Investment Adviser of 
written notice from the Second Fiduciary. Such termination will be 
effected by the Investment Adviser by selling the shares of the Fund 
held by the affected Account within one business day following receipt 
by the Investment Adviser of the Termination Form or any other written 
notice of termination; provided that if, due to circumstances beyond 
the control of the Investment Adviser, the sale cannot be executed 
within one business day, the Investment Adviser shall have one 
additional business day to complete such sale; and provided further 
that, where a Plan's interest in a Pooled Fund cannot be sold within 
this time frame, the Plan's interest will be sold as soon as 
administratively practicable;
    (2) Failure of the Second Fiduciary to return the Termination Form 
will result in continued authorization of the Investment Adviser to 
engage in the covered transactions on behalf of an Account; and
    (3) The identity of BGI, the asset management affiliate of BGI, and 
the affiliated investment advisers, and the address of the asset 
management affiliate of BGI. The instructions will state that this 
exemption is not available, unless the fiduciary of each Plan 
participating in the covered transactions as an investor in a Pooled

[[Page 51670]]

Fund is, in fact, independent of the Investment Adviser. The 
instructions will also state that the fiduciary of each such Plan must 
advise the asset management affiliate of BGI, in writing, if it is not 
a ``Second Fiduciary,'' as that term is defined, below, in Section 
V(l).
    However, if the Termination Form has been provided to the Second 
Fiduciary pursuant to this paragraph or paragraphs (i), (k), or (l), 
the Termination Form need not be provided again for an annual 
reauthorization pursuant to this paragraph unless at least six months 
has elapsed since the form was previously provided.
    (k) In situations where the Fund-level fee is neither rebated nor 
credited against the Account-level fee, The Second Fiduciary of each 
Account invested in a particular Fund will receive full disclosure, in 
written or in electronic form, in a statement which is separate from 
the Fund prospectus, of any proposed increases in the rates of fees for 
investment advisory or similar services, and any Secondary Services, at 
least 30 days prior to the implementation of such increase in fees, 
accompanied by a Termination Form. In situations where the Fund-level 
fee is rebated or credited against the Account-level fee, the Second 
Fiduciary will receive full disclosure, in a Fund prospectus or 
otherwise, in the same time and manner set forth above, of any 
increases in the rates of fees to be charged by the Investment Adviser 
to the Fund for investment advisory services. Failure to return the 
Termination Form will be deemed an approval of the increase and will 
result in the continued authorization of the Investment Adviser to 
engage in the covered transactions on behalf of an Account.
    (l) In the event that the Investment Adviser provides an additional 
Secondary Service to a Fund for which a fee is charged or there is an 
increase in the rate of any fees paid by the Funds to the Investment 
Adviser for any Secondary Services resulting from either an increase in 
the rate of such fee or from a decrease in the number or kind of 
services provided by the Investment Adviser for such fees over an 
existing rate for such Secondary Service in connection with a 
previously authorized Secondary Service, the Second Fiduciary will 
receive notice, at least 30 days in advance of the implementation of 
such additional service or fee increase, in written or in electronic 
form, explaining the nature and the amount of such services or of the 
effective increase in fees of the affected Fund. Such notice shall be 
accompanied by a Termination Form. Failure to return the Termination 
Form will be deemed an approval of the Secondary Service and will 
result in continued authorization of the Investment Adviser to engage 
in the covered transactions on behalf of the Account.
    (m) On an annual basis, the Second Fiduciary of an Account 
investing in a Fund, will receive, in written or in electronic form:
    (1) A copy of the current prospectus for the Fund and, upon such 
fiduciary's request, a copy of the Statement of Additional Information 
for such Fund which contains a description of all fees paid by the Fund 
to the Investment Adviser;
    (2) A copy of the annual financial disclosure report of the Fund in 
which such Account is invested, which includes information about the 
Fund portfolios as well as audit findings of an independent auditor of 
the Fund, within 60 days of the preparation of the report; and
    (3) With respect to each of the Funds in which an Account invests, 
in the event such Fund places brokerage transactions with the 
Investment Adviser, the Investment Adviser will provide the Second 
Fiduciary of such Account, in the same manner described above, at least 
annually with a statement specifying the following (and responses to 
oral or written inquiries of the Second Fiduciary as they arise):
    (A) The total, expressed in dollars, brokerage commissions of each 
Fund's investment portfolio that are paid to the Investment Adviser by 
such Fund;
    (B) The total, expressed in dollars, of brokerage commissions of 
each Fund's investment portfolio that are paid by such Fund to 
brokerage firms unrelated to the Investment Adviser;
    (C) The average brokerage commissions per share, expressed as cents 
per share, paid to the Investment Adviser by each portfolio of a Fund; 
and
    (D) The average brokerage commissions per share, expressed as cents 
per share, paid by each portfolio of a Fund to brokerage firms 
unrelated to the Investment Adviser.
    (n) In all instances in which the Investment Adviser provides 
electronic distribution of information to Second Fiduciaries who have 
provided electronic mail addresses, such electronic disclosure will be 
provided in a manner similar to the procedures described in 29 CFR 
section 2520.104b-1(c).
    (o) Any Separately Managed Account does not hold assets of a Plan 
sponsored by the Investment Adviser or an affiliate. If a Pooled Fund 
holds assets of a Plan or Plans sponsored by the Investment Adviser or 
an affiliate, the total assets of all such Plans shall not exceed 10% 
of the total assets of such Pooled Fund.
    (p) In-kind transactions with an Account shall only involve 
publicly-traded securities for which market quotations are readily 
available, as determined pursuant to procedures established by the 
Funds under Rule 2a-4 of the 1940 Act, and cash in the event that the 
aforementioned securities are odd lot securities, fractional shares, or 
accruals on such securities. Such securities will not include:
    (1) Securities that, if publicly offered or sold, would require 
registration under the Securities Act of 1933;
    (2) Securities issued by entities in countries that (i) restrict or 
prohibit the holding of securities by non-nationals other than through 
qualified investment vehicles, such as the Funds, or (ii) permit 
transfers of ownership of securities to be effected only by 
transactions conducted on a local stock exchange;
    (3) Certain portfolio positions (such as forward foreign currency 
contracts, futures and options contracts, swap transactions, 
certificates of deposit and repurchase agreements), that, although 
liquid and marketable, involve the assumption of contractual 
obligations, require special trading facilities, or can be traded only 
with the counter-party to the transaction to effect a change in 
beneficial ownership;
    (4) Cash equivalents (such as certificates of deposit, commercial 
paper, and repurchase agreements);
    (5) Other assets that are not readily distributable (including 
receivables and prepaid expenses), net of all liabilities (including 
accounts payable); and
    (6) Securities subject to ``stop transfer'' instructions or similar 
contractual restrictions on transfer.
    (q) Subject to the exceptions described in section (p) above, in 
the case of an in-kind exchange of assets [in-kind redemptions and in-
kind transfers of Plan assets] between an Account and a Fund (other 
than an ETF), the Account will receive its pro rata portion of the 
securities of the Fund equal in value to that of the number of shares 
redeemed, or the Fund shares having a total net asset value (NAV) equal 
to the value of the assets transferred on the date of the transfer, as 
determined in a single valuation, using sources independent of the 
Investment Adviser, performed in the same manner as it would for any 
other person or entity at the close of the same business day in 
accordance with the procedures established by the Fund pursuant to Rule 
2a-4 under the 1940 Act, and the then-existing valuation procedures

[[Page 51671]]

established by its Board of Directors or Trustees, as applicable for 
the valuation of such assets, that are in compliance with the rules 
administered by the Securities and Exchange Commission (the SEC). In 
the case of a redemption, the value of the securities and any cash 
received by the Account for each redeemed Fund share equals the NAV of 
such share at the time of the transaction. In the case of any other in-
kind exchange, the value of the Fund shares received by the Account 
equals the NAV of the transferred securities and any cash on the date 
of the transfer.
    (r) The Investment Adviser shall provide the Second Fiduciary with 
a written confirmation containing information necessary to perform a 
post-transaction review of any in-kind transaction so that the material 
aspects of such transaction, including pricing, can be reviewed. Such 
information must be furnished no later than thirty (30) business days 
after the completion of the in-kind transaction. This information shall 
include:
    (1) With respect to securities either transferred by, or received, 
by an Account in-kind in exchange for Fund shares,
    (i) the identity of each security either received by the Account 
pursuant to the redemption, or transferred to the Fund by the Account, 
(and the related aggregate dollar value of all securities) determined 
in accordance with Rule 2a-4 under the 1940 Act and the then-existing 
procedures established by the Board of Trustees of the Fund (using 
sources independent of the Investment Adviser); and
    (ii) the current market price of each security transferred or 
received in-kind by the Account as of the date of the in-kind transfer.
    (2) With respect to Fund shares either transferred by, or received 
by, an Account in-kind in exchange for securities,
    (i) the number of Fund shares held by the Account immediately 
before the redemption (and the related per share net asset value and 
the total dollar value of Fund shares, determined in accordance with 
Rule 2a-4 under the 1940 Act, using sources independent of the 
Investment Adviser); or
    (ii) the number of Fund shares held by the Account immediately 
after the in-kind transfer (and the related per share net asset value 
of the Fund shares received and the total dollar value of Fund shares, 
determined in accordance with Rule 2a-4 under the 1940 Act using 
sources independent of the Investment Adviser).
    (3) The identity of each pricing service or market-maker consulted 
in determining the value of the securities.
    (s) Prior to the consummation of an in-kind transaction, the 
Investment Adviser must document in writing and determine that such 
transaction is fair to the Account and comparable to, and no less 
favorable than, terms obtainable at arm's-length between unaffiliated 
parties, and that the in-kind transaction is in the best interests of 
the Account and the participants and beneficiaries of the participating 
Plans.
    (t) All of the Accounts' other dealings with the Funds, the 
Investment Adviser, or any affiliated person thereof, are on terms that 
are no less favorable to the Account than such dealings are with other 
shareholders of the Funds.
    (u) BGI and its affiliates, as applicable, maintain, or cause to be 
maintained, for a period of six
    (6) years from the date of any covered transaction such records as 
are necessary to enable the persons, described, below, in Section 
II(v), to determine whether the conditions of this exemption have been 
met, except that--
    (1) No party in interest with respect to a Plan which engages in 
the covered transactions, other than BGI, and its affiliates, as 
applicable, shall be subject to a civil penalty under section 502(i) of 
the Act or the taxes imposed by section 4975(a) and (b) of the Code, if 
such records are not maintained, or not available for examination, as 
required, below, by Section II(v); and
    (2) A separate prohibited transaction shall not be considered to 
have occurred solely because due to circumstances beyond the control of 
BGI or its affiliate, as applicable, such records are lost or destroyed 
prior to the end of the six-year period.
    (v)(1) Except as provided, below, in Section II(v)(2), and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to, above, in Section II(t) are 
unconditionally available at their customary location for examination 
during normal business hours by--
    (i) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the SEC; or
    (ii) Any fiduciary of any Plan that engages in the covered 
transactions, or any duly authorized employee or representative of such 
fiduciary; or
    (iii) Any employer of participants and beneficiaries and any 
employee organization whose members are covered by a Plan that engages 
in the covered transactions, or any authorized employee or 
representative of these entities; or
    (iv) Any participant or beneficiary of a Plan that engages in the 
covered transactions, or duly authorized employee or representative of 
such participant or beneficiary;
    (2) None of the persons described, above, in Section II(v)(1)(ii)-
(iv) shall be authorized to examine trade secrets of the Investment 
Adviser, or commercial or financial information which is privileged or 
confidential; and
    (3) Should the Investment Adviser refuse to disclose information on 
the basis that such information is exempt from disclosure, the 
Investment Adviser shall, by the close of the thirtieth (30th) day 
following the request, provide a written notice advising that person of 
the reasons for the refusal and that the Department may request such 
information.
Section III. Transactions Involving Exchange-Traded Funds
    Effective as of September 10, 2007, the restrictions of sections 
406(a) and (b) of the Act, section 8477(c)(1) and (c)(2) of FERSA, and 
the taxes imposed by section 4975(a) and (b) of the Code, by reason of 
section 4975(c)(1)(A) through (F) of the Code, shall not apply to the 
following transactions involving an Account and an ETF, the Investment 
Adviser for which is also a fiduciary with respect to the Account (or 
an affiliate of such fiduciary) (i.e., ``Investment Adviser''), and the 
receipt of fees for acting as an investment adviser for such ETF, as 
well as fees for providing other services to the ETF which are 
``Secondary Services,'' as defined herein, in connection with the 
investment by the Account in shares of the ETF, provided that the 
conditions set forth in Section IV are met:
    (a) The acquisition, sale or exchange by an Account of ETF shares, 
including through in-kind exchanges, in a principal transaction with a 
broker-dealer not an affiliate of the Investment Adviser, registered 
under the Securities Exchange Act of 1934, including an Authorized 
Participant.
    (b) The acquisition or sale by an Account of ETF shares on a 
national securities exchange when a broker-dealer not an affiliate of 
the Investment Adviser, registered under the Securities Exchange Act of 
1934, including an Authorized Participant, acts as agent for the 
Account.
    (c) The acquisition, sale or exchange by an Account of ETF shares, 
including through in-kind exchanges, through an Authorized Participant, 
acting as an agent dealing directly with the ETF, and the Account is 
exchanging securities and/or cash for the ETF shares during a Creation 
process, or exchanging ETF

[[Page 51672]]

shares for securities and/or cash during a Redemption process.
Section IV. Conditions
    (a)(1) In the case of a principal transaction described in Section 
III(a), the specific terms of the transaction are fixed at the time the 
Account agrees to exchange the in-kind assets with the broker-dealer.
    (2) In the case of a transaction described in Section III(c), the 
value of the securities transferred to the ETF, in exchange for ETF 
shares issued at the closing ETF NAV at the end of the business day, 
and the value of the securities received from the ETF, in exchange for 
ETF shares redeemed at the closing ETF NAV at the end of the business 
day is: (A) Determined pursuant to a single valuation using sources 
independent of the Investment Adviser; and (B) Performed in the same 
manner as it would for any other person or entity at the end of the 
same business day. Such valuation is made in accordance with procedures 
established by the ETF pursuant to Rule 2a-4 under the 1940 Act, and 
the then existing valuation procedures established by its Board of 
Directors or Trustees, as applicable, that are in compliance with the 
rules administered by the SEC.
    In the case of a redemption, the value of the securities and any 
cash received by the Account for each redeemed ETF share equals the NAV 
of such share at the time of the transaction. In the case of any other 
in-kind exchange, the value of the ETF shares received by the Account 
equals the NAV of the transferred securities and any cash on the date 
of the transfer.
    (b) All ETFs are either Index Funds or Model-Driven Funds.
    (c) The Authorized Participant is not an affiliate of the 
Investment Adviser.
    (d) Conditions (a) through (p), and (r) through (v) of Section II 
have been met. For purposes of this Section IV(d), the term ``Fund'' in 
Section II includes an ETF.
Section V. Definitions
    (a) The term ``Account'' means either a Separately Managed Account 
or a Pooled Fund in which investments are made by plans described in 
section 3(3) of the Act and/or section 4975(e)(1) of the Code and a 
plan covered by The Federal Employees' Retirement System Act of 1986 
(FERSA).
    (b) An ``affiliate'' of a person includes any person directly or 
indirectly through one or more intermediaries, controlling, controlled 
by, or under common control with the person; any officer of, director 
of, highly compensated employee (within the meaning of Code section 
4975(e)(2)(H)) of, or partner in any such person; and any corporation 
or partnership of which such person is an officer, director, partner or 
owner, or highly compensated employee (within the meaning of Code 
section 4975(e)(2)(H)).
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The term ``Authorized Participant'' means a broker-dealer 
registered under the Securities Exchange Act of 1934 which may acquire 
or redeem ETF Shares directly from ETFs. Such Authorized Participant is 
not an affiliate of the Investment Adviser.
    (e) The term ``Fund'' means any open end investment company 
registered under the Investment Company Act of 1940, including 
exchange-traded funds.
    (f) The term ``Index'' means a securities index that represents the 
investment performance of a specific segment of the public market for 
equity or debt securities in the United States and/or foreign 
countries, but only if--
    (1) The organization creating and maintaining the index is--
    (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;
    (C) A public securities exchange or association of securities 
dealers; and,
    (2) The index is created and maintained by an organization 
independent of the Applicants and their affiliates; and,
    (3) The index is a generally accepted standardized index of 
securities which is not specifically tailored for the use of the 
Applicants.
    (g) The term ``Index Fund'' means any investment fund, sponsored, 
maintained, trusteed or managed by the Applicants, in which one or more 
investors invest, and--
    (1) Which is designed to track the rate of return, risk profile, 
and other characteristics of an independently maintained securities 
index by either (i) replicating the same combination of securities that 
compose such index, or (ii) sampling the securities that compose such 
index based on objective criteria and data;
    (2) For which the Applicants do not use their discretion, or data 
within their control, to affect the identity or amount of securities to 
be purchased or sold; and
    (3) That involves no agreement, arrangement or understanding 
regarding the design or operation of the Fund which is intended to 
benefit the Applicants, their affiliates, or any party in which the 
Applicants or their affiliates have an interest.
    (h) The term ``Investment Adviser'' means Barclays Global 
Investors, N.A. or any of its current or future affiliates.
    (i) The term ``Model-Driven Fund'' means any investment fund, 
sponsored, maintained, trusteed or managed by the Applicants, in which 
one or more investors invest, and--
    (1) Which is composed of securities the identity of which and the 
amount of which are selected by a computer model that is based on 
prescribed objective criteria using independent third party data not 
within the control of the Applicants, to transform an index (as defined 
in (f), above); and
    (2) 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 the 
Applicants, their affiliates, or any party in which the Applicants or 
their affiliates may have an interest.
    (j) The term ``Plan'' means a plan described in section 3(3) of the 
Act, a plan described in section 4975(e)(1) of the Code, and a plan 
covered by FERSA.
    (k) The term ``Pooled Fund'' means any commingled fund sponsored, 
maintained, advised or trusteed by the Investment Adviser, which fund 
holds Plan assets.
    (l) The term ``Second Fiduciary'' means a fiduciary of a Plan who 
is independent of and unrelated to the Investment Adviser. For purposes 
of this exemption, the Second Fiduciary will not be deemed to be 
independent of and unrelated to the Investment Adviser if:
    (1) Such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with the Investment Adviser;
    (2) Such fiduciary, or any officer, director, partner, or employee 
of the fiduciary is an officer, director, partner, employee or 
affiliate of the Investment Adviser; or
    (3) Such fiduciary directly or indirect receives any compensation 
or other consideration for his or her own personal account in 
connection with any transaction described in this exemption. If an 
officer, director, partner, affiliate or employee of the Investment 
Adviser is a director of such Second Fiduciary, and if he or she 
abstains from participation in (A) the choice of the Plan's investment 
adviser, (B) the approval for the acquisition, sale, holding, and/or 
exchange of Fund shares by such Plan, and (C) the

[[Page 51673]]

approval of any change in fees charged to or paid by the Plan in 
connection with any of the transactions described herein, then 
subparagraph (2) above shall not apply.
    (m) The term ``Secondary Service'' means a service other than an 
investment management, investment advisory or similar service which is 
provided by the Investment Adviser to the Funds, including but not 
limited to custodial, accounting, brokerage, administrative or any 
other similar service.
    (n) The term ``Separately Managed Account'' means any Account other 
than a Pooled Fund, and includes single-employer Plans.
    (o) The term ``Creation'' or ``Redemption'' refers to a transaction 
where the ETF is the buyer or seller of large-blocks of ETF shares.

Summary of Facts and Representations

    1. BGI is a national banking association headquartered in San 
Francisco, California. BGI serves as an investment manager and 
fiduciary for employee benefit plans governed by the Act which are 
invested in both separately managed accounts and pooled funds. BGI also 
manages certain assets for the Federal Thrift Savings Plan established 
pursuant to the provisions of FERSA. The employee benefit plans to be 
covered by this exemption, including the Thrift Savings Plan, will be 
referred to as ``Plans.''
    2. BGI seeks an exemption under the Act, as amended, the Code, and 
FERSA, for the investment of Plan Account assets in certain open-end 
investment companies registered under the 1940 Act (i.e., ``Funds''), 
some of which are exchange-traded funds (i.e., ``ETFs''), managed or 
advised by BGI or its investment advisory affiliates, including BGFA.
    3. The Applicants represent that the proposed transactions may 
violate the Act, the Code, and/or FERSA, because the investment of Plan 
assets in the Funds may constitute a prohibited furnishing of services, 
or transfer of Plan assets to a party in interest or a fiduciary.
    4. The relief sought by the Applicants involves the investment of 
Separately Managed Accounts, as well as the assets of Pooled Funds, in 
both ``iShares[reg],'' which are exchange-traded funds (i.e., ETFs) 
advised by BGFA, and other open-end investment companies also advised 
by BGFA. The Applicants represent that BGFA is an investment adviser 
registered under the Investment Advisers Act of 1940. BGFA provides 
investment advice to various accounts and funds, including as an 
investment adviser or sub-adviser to certain mutual funds and exchange-
traded funds.
    5. An ETF is an open-end investment company registered under the 
1940 Act. Shares issued by each ETF are registered under the Securities 
Act of 1933. ETF shares are continuously offered to the public in the 
secondary market through securities exchanges and can be purchased and 
redeemed on a daily basis. Such shares can be bought and sold by 
investors on a securities exchange, through brokers, acting as agent, 
throughout the trading day like other shares of publicly-traded 
securities. In such a case, the investors would pay the price then 
prevailing on the exchange plus customary brokerage commissions.\1\ 
There is no minimum investment for such secondary market transactions.
---------------------------------------------------------------------------

    \1\ In Advisory Opinion 2002-05A (June 7, 2002), the Department 
considered whether Prohibited Transaction Exemption 77-4 (PTE 77-4, 
42 FR 18732, April 8, 1977) applies to purchases or sales of ETF 
shares through unaffiliated brokers. The Department stated that the 
term ``sales commission'' as used in section II(a) of PTE 77-4 does 
not include brokerage commissions paid to a broker in connection 
with purchases or sales of shares of registered open-end investment 
companies on an exchange if the broker is unaffiliated with the 
fund, its principal underwriter, investment adviser or any affiliate 
thereof.
---------------------------------------------------------------------------

    6. Alternatively, an investor who buys or sells iShares may engage 
in the transaction directly with the broker, which executes as 
principal. Under this circumstance, the broker (which may or may not be 
an Authorized Participant) may buy the iShares for its own inventory or 
sell the iShares from its own inventory (on a principal basis), in 
which case the customer would pay a mark-up or a mark-down (dealer 
spread) that is part of the sales price. The Account in this case 
specifies a set number of iShares that it wants to buy from, or sell 
to, the broker. The Account and the broker negotiate upfront and agree 
upon (i) what the purchase or sale price of the iShares will be and 
(ii) whether the Account will pay or receive (as the case may be) cash, 
in-kind securities, or a combination of both. Thus, the specific terms 
of the transaction are fixed at the time the parties agree to enter the 
transaction.
    7. The ETF purchases and redeems shares at the ETF's then net asset 
value (i.e., ``NAV'') only in large blocks, generally through an in-
kind tender of a basket of securities by a broker-dealer called an 
``Authorized Participant.'' \2\ Only Authorized Participants may 
acquire or redeem iShares directly from iShares Funds, and only in 
large block sizes (e.g., 50,000 shares). Such an acquisition and 
redemption are called ``Creation'' and ``Redemption,'' respectively. An 
Authorized Participant may acquire or redeem iShares as principal for 
its own account, or as agent on behalf of a customer in a transaction 
directly with an ETF.
---------------------------------------------------------------------------

    \2\ Where purchases and redemptions involve an in-kind 
transaction, cash may be exchanged to make up for any difference 
between securities exchanged and the NAV of a Fund.
---------------------------------------------------------------------------

    8. To effect a purchase or sale through an Authorized Participant 
on an agency basis where the buyer or seller is the Fund and the 
process is by creation or redemption, the Investment Adviser, acting as 
a fiduciary, may approach an Authorized Participant who is not one of 
the Applicants (or an affiliate) to purchase or sell ETF shares on 
behalf of an Account. As part of this process, the Authorized 
Participant may purchase ETF shares on behalf of an Account by 
assembling a ``creation unit'' of the securities held by the ETF, such 
as S&P 500 securities in appropriate weights for an S&P 500 Index ETF. 
An Account may provide all or part of the securities necessary to make 
up a ``creation unit.'' For creation units, the Account transfers cash, 
in-kind securities, or a mix of cash and in-kind securities to the Fund 
in exchange for iShares using that day's NAV, at the close of business, 
as determined by the ETF in accordance with the rules governing 
registered investment companies. For redemptions, the Plan transfers 
the iShares to the ETF in exchange for in-kind securities and cash, if 
necessary, using the valuation of the assets used by the ETF in 
accordance with the rules governing registered investment companies. 
The purchase and sale price is the NAV of iShares next determined after 
an order is placed and is the same price that is paid or received for 
the iShares by any other investor at that time dealing with the ETF. 
Thus, if an order is placed for shares during the day, it is priced at 
the NAV at the end of that day. The basket of securities to be 
delivered or received on account of a creation or redemption is 
specified by the ETF to all Authorized Participants in advance each day 
because the securities ``called for'' each day may be driven by the 
output of a model which may require deviations from the underlying 
index. The amount of cash needed to round out the order would be 
determined as of the time the NAV is calculated based on the difference 
between the value of the in-kind securities and the Fund NAV as of the 
time that the NAV is calculated.
    9. The Applicants represent that the decision as to which method is 
used to effect a purchase or sale is a fiduciary decision which is 
governed by the prudence and exclusive benefit requirements of the Act. 
Because the

[[Page 51674]]

transactions are never executed through an affiliated broker, the 
Applicants' affiliates do not benefit from the trading. The fiduciary 
makes the decision for the Plan, as it makes all trading decisions, and 
bases the decisions on the most cost-effective method for the Plan, 
where the Plan will receive the most advantageous prices available for 
the securities with the lowest attendant transaction fees.
    10. An Authorized Participant's arrangement with an ETF distributor 
\3\ is subject to an agreement between those two parties. Where the 
Authorized Participant does not have the requisite ETF shares in its 
possession, or prefers not to trade such ETF shares, it may assemble a 
creation unit in exchange for ETF shares, pursuant to its arrangement 
with the ETF distributor.
---------------------------------------------------------------------------

    \3\ The ``distributor'' of a registered investment company is a 
statutory term under the 1940 Act. The distributor of an ETF or 
other registered investment company is a registered broker-dealer 
that accepts orders to purchase or redeem Fund shares from 
intermediaries on behalf of the Fund.
---------------------------------------------------------------------------

    11. The Applicants represent that the transactions that would be 
covered by the proposed exemption are substantially similar to the 
transactions permitted under PTE 77-4 and similar individual 
exemptions.\4\ As described below, the Investment Adviser will follow 
similar procedures to those set forth in PTE 77-4 in order to avoid 
duplicative investment management and advisory fees, and procedures 
similar to PTE 86-128 and other individual exemptions with respect to 
obtaining consent for the transactions described herein. In situations 
where the Fund-level fee is neither rebated nor credited against the 
Account-level fee, there must be separate disclosure (apart from the 
prospectus) of any proposed increases in the rates of fees for 
investment advisory or similar services, and any Secondary Services, at 
least 30 days prior to the implementation of such increase in fees, 
accompanied by a Termination Form, made to the Second Fiduciary.
---------------------------------------------------------------------------

    \4\ Although Advisory Opinion 2002-05A addressed whether PTE 77-
4 would be available for purchases or sales of ETF shares on an 
exchange if brokerage commissions were paid to an unaffiliated 
broker-dealer, the Applicants requested that the transaction 
described in that Advisory Opinion be included in the relief 
provided by this proposed exemption so that the Investment Adviser 
has the ability to comply with the requirements of this proposal 
rather than PTE 77-4.
---------------------------------------------------------------------------

    12. The Applicants represent that investment in Funds is customary 
for Plan investors and is becoming increasingly more popular. If Plans 
(particularly those invested in Pooled Funds) cannot invest in Funds, 
they cannot take advantage of a beneficial and liquid investment 
opportunity. The Applicants also represent that the more practical 
rules on negative consent that were adopted by the Department in PTE 
86-128 and later exemptions are not included in PTE 77-4 or similar 
exemptions, making the latter set of exemptions less helpful.
    13. The Applicants represent that among the reasons why the 
Investment Adviser may determine that investment in Funds is 
appropriate to achieve the investment objectives of an Account is the 
management of liquidity. Many Accounts require liquidity, especially in 
the defined contribution plan context, and pooled funds have a 
particular need for liquidity to deal with inflows and outflows of 
assets. Fully investing a pooled fund in securities, only to liquidate 
any time a Plan requests a distribution, creates additional costs that 
are not in the best interest of these Accounts. On the other hand, cash 
left idle (or invested in money market instruments, cash funds, or the 
like) fails to replicate the model or index of the Account, creating 
tracking error or benchmark drift. The Applicants represent that 
another reason that Plans may want to invest in Funds is that they also 
provide a beneficial method of equitizing investment assets.
    14. The requested exemption would permit acquisitions, sales and 
exchanges of Fund shares, both in cash or in-kind. The Applicants 
represent that in-kind exchanges are appropriate to advance client 
objectives where, for example, a client is changing managers and wants 
an Account to have a particular exposure (i.e., exposure to a 
particular investment strategy) during the transition period.
    15. The Applicants represent that if the Account specifies in its 
order that it will use in-kind (or a combination of in-kind and cash) 
to acquire the iShares or wants to receive in-kind (or a combination of 
in-kind and cash) for its iShares, there is a natural hedge between the 
in-kind securities and the iShares. The market value of the in-kind 
securities determines the NAV of the iShares. Therefore, as the Account 
waits for Creation or Redemption to be done at the end of the day, at 
NAV, if the market value of the in-kind securities goes up or down, the 
NAV of the iShares will go up or down (as the case may be) in tandem. 
This is different than a Plan's purchase of mutual fund shares, where 
the Plan would have exposure to market moves between the time it places 
an order and the time that the value of any shares (i.e., NAV) 
purchased or redeemed is determined.
    16. The Applicants represent that, although the requested exemption 
will permit the Investment Adviser to consider ETFs and other Funds as 
possible investments, where there are identical investment 
alternatives, it is up to the investment manager to determine which 
approach is best for Plans. In some markets, such as certain emerging 
market equity strategies, other reasonable alternatives may not exist.
    17. The Applicants represent that investment in the Funds would 
only take place when such investment is consistent with the investment 
guidelines of a Separately Managed Account or Pooled Fund, and where 
such investment is appropriate to achieve the investment objectives of 
such account or fund.
    18. ETFs have an imbedded management fee (paid to BGFA), and a 
commission for secondary market purchases may also be paid to 
unaffiliated brokers with respect to investment in an ETF.
    19. The Applicants represent that investment management fees 
related to investment in the Funds would be offset, credited or waived 
at the Account level, as provided for in PTE 77-4 and other similar 
individual exemptions. The Applicants represent that the billing 
systems and processes at BGI have been designed to correctly rebate or 
credit the advisory fees from Funds against the Plan level fees or 
credit the Plan level fees. These processes and systems are part of the 
billing function of BGI, and with respect to PTE 77-4 compliance, have 
been tested over the years to ensure compliance.
    20. The Applicants represent that often, where Plans are invested 
in a pooled vehicle, the rules in PTE 77-4 that relate to investment of 
pooled vehicles in open-end investment companies are expensive to 
administer, impractical, time consuming and burdensome. In particular, 
it is represented that it is difficult for many pooled vehicles to 
comply with written consent requirements similar to those contained in 
PTE 77-4.
    21. The requested exemption would require the Investment Adviser to 
provide certain disclosures to Separately Managed Accounts, and to 
Accounts invested in Pooled Funds, prior to investing in the Funds, but 
would permit ``deemed consent'' or negative consent to occur where the 
Investment Adviser receives no response to such disclosures. In 
addition, the proposed exemption contains disclosure and consent 
procedures which would apply with respect to existing Account investors 
in a pooled fund. The proposed exemption contains annual 
reauthorization requirements, which may be satisfied through the use of 
a Termination Form,

[[Page 51675]]

similar to the requirements contained in other exemptions similar to 
PTE 77-4.
    22. The proposed exemption would allow disclosures to be provided 
in written or in electronic form. A Second Fiduciary may request a non-
electronic copy of any required disclosure. In all instances in which 
the Investment Adviser provides electronic distribution of information 
to Second Fiduciaries who have provided electronic mail addresses, such 
electronic disclosure will be provided in a manner similar to the 
procedures described in 29 CFR section 2520.104b-1(c) to ensure that 
the Investment Adviser's system of providing electronic disclosures 
results in actual receipt by the intended recipient.
    23. The proposed exemption includes a condition which would 
prohibit Separately Managed Accounts that hold assets of a Plan 
sponsored by the Investment Adviser from engaging in the proposed 
transactions. In addition, if a Pooled Fund engaging in the proposed 
transactions holds assets of a Plan or Plans sponsored by the 
Investment Adviser or its affiliate, the total assets of all such Plans 
invested in such Pooled Fund shall not exceed 10% of the total assets 
of such Pooled Fund.
    24. The proposed exemption contains valuation requirements which 
apply to any in-kind exchange between a Plan and a Fund. In general, 
the condition requires that the value of securities received by an 
Account with respect to an in-kind exchange with a Fund will be 
determined based on the same valuation principles which govern 
valuation of the underlying securities held by the Fund, and will use 
the same pricing sources used by the Fund with respect to its assets. 
Each Fund must also value its assets pursuant to procedures established 
by the Fund's Board of Directors or Trustees, as applicable, and as 
required by the 1940 Act.
    25. In summary, the Applicants represent that the criteria of 
section 408(a) of the Act are satisfied for the following reasons: (a) 
The transactions will allow the Plans to enjoy the advantages of 
investment in ETFs, which will provide the Plans with liquid 
investments; (b) Prior to the initial investment of Plan assets in the 
Funds, a second, independent fiduciary of each Plan will receive full 
disclosure regarding the proposed investment and the fees to be 
received by the Investment Adviser, and has the opportunity to approve 
or disapprove the investment; (c) No sales commissions or similar fees 
will be paid by the Accounts to the Investment Adviser in connection 
with such purchase, sale or exchange; (d) No Separately Managed Account 
holding assets of a Plan sponsored by the Investment Adviser will 
engage in the proposed transactions, and if a Pooled Fund engaging in 
the proposed transactions holds assets of a Plan or Plans sponsored by 
the Investment Adviser, the total assets of all such Plans invested in 
such Pooled Fund shall not exceed 10% of the total assets of such 
Pooled Fund; (e) In-kind transactions with an Account will only involve 
securities which are publicly-traded and for which market quotations 
are readily available; (f) The Investment Adviser and its affiliates 
will not receive any fees payable pursuant to Rule 12b-1 under the 1940 
Act in connection with the transactions described herein; (g) The 
Accounts will pay no redemption or similar fees to the Investment 
Adviser in connection with the sales by the Account to Funds of Fund 
shares; (h) There will be no double payment of investment management, 
investment advisory and similar fees to the Investment Adviser by the 
Accounts; and (i) The combined total of all fees received by the 
Investment Adviser for the provision of services to an Account, and in 
connection with the provision of any services to any of the Funds in 
which an Account may invest, will not be in excess of ``reasonable 
compensation'' within the meaning of section 408(b)(2) of the Act.

FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the 
Department, telephone (202) 693-8546. (This is not a toll-free number.)

BlackRock, Inc. (BlackRock), and Merrill Lynch & Co. (Merrill Lynch) 
(collectively, the Applicants), Located in New York, New York

[Application No. D-11420]

Proposed Exemption

    The Department of Labor (the Department) is considering granting an 
exemption 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, 
32847, August 10, 1990).
Section I--Transactions
    If the proposed exemption is granted, the restrictions of section 
406 of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(F) of the Code, shall not apply to the purchase of certain securities 
(the Securities), as defined below in Section III(k), by an Asset 
Manager, as defined below in Section III(f), from any person other than 
a Merrill Lynch/BlackRock Related Entity or Merrill Lynch/BlackRock 
Related Entities, as defined below in Section III(c), during the 
existence of an underwriting or selling syndicate with respect to such 
Securities, where a Merrill Lynch/BlackRock Related Broker-Dealer, as 
defined below in Section III(b), is a manager or member of such 
syndicate and the Asset Manager purchases such Securities, as a 
fiduciary:
    (a) On behalf of an employee benefit plan or employee benefit plans 
(Client Plan(s)), as defined below in Section III(h); or
    (b) on behalf of Client Plans, and/or In-House Plans, as defined 
below in Section III(o), which are invested in a pooled fund or in 
pooled funds (Pooled Fund(s)), as defined below in Section III(i); 
provided that the conditions as set forth below in Section II, are 
satisfied (An affiliated underwriter transaction (AUT)).\5\
---------------------------------------------------------------------------

    \5\ For purposes of this proposed exemption an In-House Plan may 
engage in AUTs only through investment in a Pooled Fund.
---------------------------------------------------------------------------

Section II--Conditions
    The proposed exemption is conditioned upon adherence to the 
material facts and representations described herein and upon 
satisfaction of the following requirements:
    (a)(1) The Securities to be purchased are either--
    (i) Part of an issue registered under the Securities Act of 1933 
(the 1933 Act) (15 U.S.C. 77a et seq.). If the Securities to be 
purchased are part of an issue that is exempt from such registration 
requirement, such Securities:
    (A) Are issued or guaranteed by the United States or by any person 
controlled or supervised by and acting as an instrumentality of the 
United States pursuant to authority granted by the Congress of the 
United States,
    (B) Are issued by a bank,
    (C) Are exempt from such registration requirement pursuant to a 
federal statute other than the 1933 Act, or
    (D) Are the subject of a distribution and are of a class which is 
required to be registered under section 12 of the Securities Exchange 
Act of 1934 (the 1934 Act) (15 U.S.C. 781), and are issued by an issuer 
that has been subject to the reporting requirements of section 13 of 
the 1934 Act (15 U.S.C. 78m) for a period of at least ninety (90) days 
immediately preceding the sale of such Securities and that has filed 
all reports required to be filed thereunder with the Securities and 
Exchange Commission (SEC) during the preceding twelve (12) months; or

[[Page 51676]]

    (ii) Part of an issue that is an Eligible Rule 144A Offering, as 
defined in SEC Rule 10f-3 (17 CFR 270.10f-3(a)(4)). Where the Eligible 
Rule 144A Offering of the Securities is of equity securities, the 
offering syndicate shall obtain a legal opinion regarding the adequacy 
of the disclosure in the offering memorandum;
    (2) The Securities to be purchased are purchased prior to the end 
of the first day on which any sales are made, pursuant to that 
offering, at a price that is not more than the price paid by each other 
purchaser of the Securities in that offering or in any concurrent 
offering of the Securities, except that--
    (i) If such Securities are offered for subscription upon exercise 
of rights, they may be purchased on or before the fourth day preceding 
the day on which the rights offering terminates; or
    (ii) If such Securities are debt securities, they may be purchased 
at a price that is not more than the price paid by each other purchaser 
of the Securities in that offering or in any concurrent offering of the 
Securities and may be purchased on a day subsequent to the end of the 
first day on which any sales are made, pursuant to that offering, 
provided that the interest rates, as of the date of such purchase, on 
comparable debt securities offered to the public subsequent to the end 
of the first day on which any sales are made and prior to the purchase 
date are less than the interest rate of the debt Securities being 
purchased; and
    (3) The Securities to be purchased are offered pursuant to an 
underwriting or selling agreement under which the members of the 
syndicate are committed to purchase all of the Securities being 
offered, except if--
    (i) Such Securities are purchased by others pursuant to a rights 
offering; or
    (ii) Such Securities are offered pursuant to an over-allotment 
option.
    (b) The issuer of the Securities to be purchased pursuant to this 
proposed exemption must have been in continuous operation for not less 
than three years, including the operation of any predecessors, unless 
the Securities to be purchased--
    (1) Are non-convertible debt securities rated in one of the four 
highest rating categories by Standard & Poor's Rating Services, Moody's 
Investors Service, Inc., Fitch Ratings, Inc., Dominion Bond Rating 
Service Limited, Dominion Bond Rating Service, Inc., or any successors 
thereto (collectively, the Rating Organizations); provided that none of 
the Rating Organizations rates such securities in a category lower than 
the fourth highest rating category; or
    (2) are debt securities issued or fully guaranteed by the United 
States or by any person controlled or supervised by and acting as an 
instrumentality of the United States pursuant to authority granted by 
the Congress of the United States; or
    (3) are debt securities which are fully guaranteed by a person (the 
Guarantor) that has been in continuous operation for not less than 
three years, including the operation of any predecessors, provided that 
such Guarantor has issued other securities registered under the 1933 
Act; or if such Guarantor has issued other securities which are exempt 
from such registration requirement, such Guarantor has been in 
continuous operation for not less than three years, including the 
operation of any predecessors, and such Guarantor:
    (a) Is a bank, or
    (b) Is an issuer of securities which are exempt from such 
registration requirement, pursuant to a Federal statute other than the 
1933 Act; or
    (c) Is an issuer of securities that are the subject of a 
distribution and are of a class which is required to be registered 
under section 12 of the Securities Exchange Act of 1934 (the 1934 Act) 
(15 U.S.C. 781), and are issued by an issuer that has been subject to 
the reporting requirements of section 13 of the 1934 Act (15 U.S.C. 
78m) for a period of at least ninety (90) days immediately preceding 
the sale of such securities and that has filed all reports required to 
be filed hereunder with the SEC during the preceding twelve (12) 
months.
    (c) The aggregate amount of Securities of an issue purchased, 
pursuant to this proposed exemption, by the Asset Manager with: (i) The 
assets of all Client Plans; and (ii) the assets, calculated on a pro-
rata basis, of all Client Plans and In-House Plans investing in Pooled 
Funds managed by the Asset Manager; and (iii) the assets of plans to 
which the Asset Manager renders investment advice within the meaning of 
29 CFR 2510.3-21(c) does not exceed:
    (1) 10 percent (10%) of the total amount of the Securities being 
offered in an issue, if such Securities are equity securities;
    (2) 35 percent (35%) of the total amount of the Securities being 
offered in an issue, if such Securities are debt securities rated in 
one of the four highest rating categories by at least one of the Rating 
Organizations; provided that none of the Rating Organizations rates 
such Securities in a category lower than the fourth highest rating 
category; or
    (3) 25 percent (25%) of the total amount of the Securities being 
offered in an issue, if such Securities are debt securities rated in 
the fifth or sixth highest rating categories by at least one of the 
Rating Organizations; provided that none of the Rating Organizations 
rates such Securities in a category lower than the sixth highest rating 
category; and
    (4) The assets of any single Client Plan (and the assets of any 
Client Plans and any In-House Plans investing in Pooled Funds) may not 
be used to purchase any Securities being offered, if such Securities 
are debt securities rated lower than the sixth highest rating category 
by any of the Rating Organizations;
    (5) Notwithstanding the percentage of Securities of an issue 
permitted to be acquired, as set forth in Section II(c)(1), (2), and 
(3), above, of this proposed exemption, the amount of Securities in any 
issue (whether equity or debt securities) purchased, pursuant to this 
proposed exemption, by the Asset Manager on behalf of any single Client 
Plan, either individually or through investment, calculated on a pro-
rata basis, in a Pooled Fund may not exceed three percent (3%) of the 
total amount of such Securities being offered in such issue, and;
    (6) If purchased in an Eligible Rule 144A Offering, the total 
amount of the Securities being offered for purposes of determining the 
percentages, described, above, in Section II(c)(1)-(3) and (5), is the 
total of:
    (i) The principal amount of the offering of such class of 
Securities sold by underwriters or members of the selling syndicate to 
``qualified institutional buyers'' (QIBs), as defined in SEC Rule 144A 
(17 CFR 230.144A(a)(1)); plus
    (ii) The principal amount of the offering of such class of 
Securities in any concurrent public offering.
    (d) The aggregate amount to be paid by any single Client Plan in 
purchasing any Securities which are the subject of this proposed 
exemption, including any amounts paid by any Client Plan or In-House 
Plan in purchasing such Securities through a Pooled Fund, calculated on 
a pro-rata basis, does not exceed three percent (3%) of the fair market 
value of the net assets of such Client Plan or In-House Plan, as of the 
last day of the most recent fiscal quarter of such Client Plan or In-
House Plan prior to such transaction.
    (e) The covered transactions are not part of an agreement, 
arrangement, or understanding designed to benefit any Merrill/Lynch 
BlackRock Related Entity.
    (f) No Merrill Lynch/BlackRock Related Broker-Dealer receives, 
either directly, indirectly, or through

[[Page 51677]]

designation, any selling concession, or other compensation or 
consideration that is based upon the amount of Securities purchased by 
any single Client Plan, or that is based on the amount of Securities 
purchased by Client Plans or In-House Plans through Pooled Funds, 
pursuant to this proposed exemption. In this regard, a Merrill Lynch/
BlackRock Related Broker-Dealer may not receive, either directly or 
indirectly, any compensation or consideration that is attributable to 
the fixed designations generated by purchases of the Securities by the 
Asset Manager on behalf of any single Client Plan or any Client Plan or 
In-House Plan in Pooled Funds.
    (g)(1) The amount a Merrill Lynch/BlackRock Related Broker-Dealer 
receives in management, underwriting, or other compensation or 
consideration is not increased through an agreement, arrangement, or 
understanding for the purpose of compensating such Merrill Lynch/
BlackRock Related Broker-Dealer for foregoing any selling concessions 
for those Securities sold pursuant to this proposed exemption. Except 
as described above, nothing in this Section II(g)(1) shall be construed 
as precluding a Merrill Lynch/BlackRock Related Broker-Dealer from 
receiving management fees for serving as manager of an underwriting or 
selling syndicate, underwriting fees for assuming the responsibilities 
of an underwriter in the underwriting or selling syndicate, or other 
compensation or consideration that is not based upon the amount of 
Securities purchased by the Asset Manager on behalf of any single 
Client Plan, or on behalf of any Client Plan or In-House Plan 
participating in Pooled Funds, pursuant to this proposed exemption; and
    (2) Each Merrill Lynch/BlackRock Related Broker-Dealer shall 
provide to the Asset Manager a written certification, signed by an 
officer of such Merrill Lynch/BlackRock Related Broker-Dealer, stating 
the amount that each such Merrill Lynch/BlackRock Related Broker-Dealer 
received in compensation or consideration during the past quarter, in 
connection with any offerings covered by this proposed exemption, was 
not adjusted in a manner inconsistent with Section II(e), (f), or (g) 
of this proposed exemption.
    (h) The covered transactions are performed under a written 
authorization executed in advance by an independent fiduciary of each 
single Client Plan (the Independent Fiduciary), as defined, below, in 
Section III(j).
    (i) Prior to the execution by an Independent Fiduciary of a single 
Client Plan of the written authorization described, above, in Section 
II(h), the following information and materials (which may be provided 
electronically) must be provided by the Asset Manager to such 
Independent Fiduciary:
    (1) A copy of the Notice of Proposed Exemption (the Notice) and a 
copy of the final exemption (the Grant) as published in the Federal 
Register, provided that the Notice and the Grant are supplied 
simultaneously; and
    (2) Any other reasonably available information regarding the 
covered transactions that such Independent Fiduciary requests the Asset 
Manager to provide.
    (j) Subsequent to the initial authorization by an Independent 
Fiduciary of a single Client Plan permitting the Asset Manager to 
engage in the covered transactions on behalf of such single Client 
Plan, the Asset Manager will continue to be subject to the requirement 
to provide within a reasonable period of time any reasonably available 
information regarding the covered transactions that the Independent 
Fiduciary requests the Asset Manager to provide.
    (k)(1) In the case of an existing employee benefit plan investor 
(or existing In-House Plan investor, as the case may be) in a Pooled 
Fund, such Pooled Fund may not engage in any covered transactions 
pursuant to this proposed exemption, unless the Asset Manager provides 
the written information, as described, below, and within the time 
period described, below, in this Section II(k)(2), to the Independent 
Fiduciary of each such plan participating in such Pooled Fund (and to 
the fiduciary of each such In-House Plan participating in such Pooled 
Fund).
    (2) The following information and materials, (which may be provided 
electronically) shall be provided by the Asset Manager not less than 45 
days prior to such Asset Manager engaging in the covered transactions 
on behalf of a Pooled Fund, pursuant to this proposed exemption; and 
provided further that the information described, below, in this Section 
II(k)(2)(i) and (iii) is supplied simultaneously:
    (i) A notice of the intent of such Pooled Fund to purchase 
Securities pursuant to this proposed exemption, a copy of this Notice, 
and a copy of the Grant, as published in the Federal Register;
    (ii) Any other reasonably available information regarding the 
covered transactions that the Independent Fiduciary of a plan (or 
fiduciary of an In-House Plan) participating in a Pooled Fund requests 
the Asset Manager to provide; and
    (iii) A termination form expressly providing an election for the 
Independent Fiduciary of a plan (or fiduciary of an In-House Plan) 
participating in a Pooled Fund to terminate such plan's (or In-House 
Plan's) investment in such Pooled Fund without penalty to such plan (or 
In-House Plan). Such form shall include instructions specifying how to 
use the form. Specifically, the instructions will explain that such 
plan (or such In-House Plan) has an opportunity to withdraw its assets 
from a Pooled Fund for a period of no more than 30 days after such 
plan's (or such In-House Plan's) receipt of the initial notice of 
intent, described, above, in Section II(k)(2)(i), and that the failure 
of the Independent Fiduciary of such plan (or fiduciary of such In-
House Plan) to return the termination form to the Asset Manager in the 
case of a plan (or In-House Plan) participating in a Pooled Fund by the 
specified date shall be deemed to be an approval by such plan (or such 
In-House Plan) of its participation in the covered transactions as an 
investor in such Pooled Fund.
    Further, the instructions will identify the Asset Manager and the 
Merrill Lynch/BlackRock Related Broker-Dealer and will provide the 
address of the Asset Manager. The instructions will state that this 
proposed exemption may be unavailable, unless the fiduciary of each 
plan participating in the covered transactions as an investor in a 
Pooled Fund is, in fact, independent of the Merrill Lynch/BlackRock 
Related Entities. The instructions will also state that the fiduciary 
of each such plan must advise the Asset Manager, in writing, if it is 
not an ``Independent Fiduciary,'' as that term is defined, below, in 
Section III(j).
    For purposes of this Section II(k), the requirement that the 
fiduciary responsible for the decision to authorize the transactions 
described, above, in Section I of this proposed exemption for each plan 
be independent of the Merrill Lynch/BlackRock Related Entities shall 
not apply in the case of an In-House Plan.
    (l)(1) In the case of each plan (and in the case of each In-House 
Plan) whose assets are proposed to be invested in a Pooled Fund after 
such Pooled Fund has satisfied the conditions set forth in this 
proposed exemption to engage in the covered transactions, the 
investment by such plan (or by such In-House Plan) in the Pooled Fund 
is subject to the prior written authorization of an Independent 
Fiduciary representing such plan (or the prior written authorization by 
the fiduciary of such In-House Plan, as the case may be), following the 
receipt by

[[Page 51678]]

such Independent Fiduciary of such plan (or by the fiduciary of such 
In-House Plan, as the case may be) of the written information 
described, above, in Section II(k)(2)(i) and (ii); provided that the 
Notice and the Grant, described, above, in Section II(k)(2)(i) are 
provided simultaneously.
    (2) For purposes of this Section II(l), the requirement that the 
fiduciary responsible for the decision to authorize the transactions 
described, above, in Section I of this proposed exemption for each plan 
proposing to invest in a Pooled Fund be independent of the Merrill 
Lynch/BlackRock Related Entities shall not apply in the case of an In-
House Plan.
    (m) Subsequent to the initial authorization by an Independent 
Fiduciary of a plan (or by a fiduciary of an In-House Plan) to invest 
in a Pooled Fund that engages in the covered transactions, the Asset 
Manager will continue to be subject to the requirement to provide 
within a reasonable period of time any reasonably available information 
regarding the covered transactions that the Independent Fiduciary of 
such plan (or the fiduciary of such In-House Plan, as the case may be) 
requests the Asset Manager to provide.
    (n) At least once every three months, and not later than 45 days 
following the period to which such information relates, the Asset 
Manager shall furnish:
    (1) In the case of each single Client Plan that engages in the 
covered transactions, the information described, below, in this Section 
II(n)(3)-(7), to the Independent Fiduciary of each such single Client 
Plan.
    (2) In the case of each Pooled Fund in which a Client Plan (or in 
which an In-House Plan) invests, the information described, below, in 
this Section II(n)(3)-(6) and (8), to the Independent Fiduciary of each 
such Client Plan (and to the fiduciary of each such In-House Plan) 
invested in such Pooled Fund.
    (3) A quarterly report (the Quarterly Report) (which may be 
provided electronically) which discloses all the Securities purchased 
pursuant to this proposed exemption during the period to which such 
report relates on behalf of the Client Plan, In-House Plan, or Pooled 
Fund to which such report relates, and which discloses the terms of 
each of the transactions described in such report, including:
    (i) The type of Securities (including the rating of any Securities 
which are debt securities) involved in each transaction;
    (ii) The price at which the Securities were purchased in each 
transaction;
    (iii) The first day on which any sale was made during the offering 
of the Securities;
    (iv) The size of the issue of the Securities involved in each 
transaction;
    (v) The number of Securities purchased by the Asset Manager for the 
Client Plan, In-House Plan, or Pooled Fund to which the transaction 
relates;
    (vi) The identity of the underwriter from whom the Securities were 
purchased for each transaction;
    (vii) The underwriting spread in each transaction (i.e., the 
difference, between the price at which the underwriter purchases the 
securities from the issuer and the price at which the securities are 
sold to the public);
    (viii) The price at which any of the Securities purchased during 
the period to which such report relates were sold; and
    (ix) The market value at the end of the period to which such report 
relates of the Securities purchased during such period and not sold;
    (4) The Quarterly Report contains:
    (i) A representation that the Asset Manager has received a written 
certification signed by an officer of each Merrill Lynch/BlackRock 
Related Broker-Dealer, as described, above, in Section II(g)(2), 
affirming that, as to each AUT covered by this proposed exemption 
during the past quarter, such Merrill Lynch/BlackRock Related Broker-
Dealer acted in compliance with Section II(e), (f), and (g) of this 
proposed exemption, and
    (ii) a representation that copies of such certifications will be 
provided upon request;
    (5) A disclosure in the Quarterly Report that states that any other 
reasonably available information regarding a covered transaction that 
an Independent Fiduciary (or fiduciary of an In-House Plan) requests 
will be provided, including, but not limited to:
    (i) The date on which the Securities were purchased on behalf of 
the Client Plan (or the In-House Plan) to which the disclosure relates 
(including Securities purchased by Pooled Funds in which such Client 
Plan (or such In-House Plan) invests;
    (ii) The percentage of the offering purchased on behalf of all 
Client Plans (and the pro-rata percentage purchased on behalf of Client 
Plans and In-House Plans investing in Pooled Funds); and
    (iii) The identity of all members of the underwriting syndicate;
    (6) The Quarterly Report discloses any instance during the past 
quarter where the Asset Manager was precluded for any period of time 
from selling Securities purchased under this proposed exemption in that 
quarter because of its relationship to a Merrill Lynch/BlackRock 
Related Broker-Dealer and the reason for this restriction;
    (7) Explicit notification, prominently displayed in each Quarterly 
Report sent to the Independent Fiduciary of each single Client Plan 
that engages in the covered transactions that the authorization to 
engage in such covered transactions may be terminated, without penalty 
to such single Client Plan, within five (5) days after the date that 
the Independent Fiduciary of such single Client Plan informs the person 
identified in such notification that the authorization to engage in the 
covered transactions is terminated; and
    (8) Explicit notification, prominently displayed in each Quarterly 
Report sent to the Independent Fiduciary of each Client Plan (and to 
the fiduciary of each In-House Plan) that engages in the covered 
transactions through a Pooled Fund that the investment in such Pooled 
Fund may be terminated, without penalty to such Client Plan (or such 
In-House Plan), within such time as may be necessary to effect the 
withdrawal in an orderly manner that is equitable to all withdrawing 
plans and to the non-withdrawing plans, after the date that that the 
Independent Fiduciary of such Client Plan (or the fiduciary of such In-
House Plan, as the case may be) informs the person identified in such 
notification that the investment in such Pooled Fund is terminated.
    (o) For purposes of engaging in covered transactions, each Client 
Plan (and each In-House Plan) shall have total net assets with a value 
of at least $50 million (the $50 Million Net Asset Requirement). For 
purposes of engaging in covered transactions involving an Eligible Rule 
144A Offering,\6\ each Client Plan (and each In-House Plan) shall have 
total net assets of at least $100 million in securities of issuers that 
are not affiliated with such Client Plan (or such In-House Plan, as the 
case may

[[Page 51679]]

be) (the $100 Million Net Asset Requirement).
---------------------------------------------------------------------------

    \6\ SEC Rule 10f-3(a)(4), 17 CFR Sec.  270.10f-3(a)(4), states 
that the term ``Eligible Rule 144A Offering'' means an offering of 
securities that meets the following conditions:
    (i) The securities are offered or sold in transactions exempt 
from registration under section 4(2) of the Securities Act of 1933 
[15 U.S.C. 77d(d)], rule 144A there under [Sec.  230.144A of this 
chapter], or rules 501-508 there under [Sec. Sec.  230.501-230-508 
of this chapter];
    (ii) The securities are sold to persons that the seller and any 
person acting on behalf of the seller reasonably believe to include 
qualified institutional buyers, as defined in Sec.  230.144A(a)(1) 
of this chapter; and
    (iii) The seller and any person acting on behalf of the seller 
reasonably believe that the securities are eligible for resale to 
other qualified institutional buyers pursuant to Sec.  230.144A of 
this chapter.
---------------------------------------------------------------------------

    For purposes of a Pooled Fund engaging in covered transactions, 
each Client Plan (and each In-House Plan) in such Pooled Fund shall 
have total net assets with a value of at least $50 million. 
Notwithstanding the foregoing, if each such Client Plan (and each such 
In-House Plan) in such Pooled Fund does not have total net assets with 
a value of at least $50 million, the $50 Million Net Asset Requirement 
will be met, if 50 percent (50%) or more of the units of beneficial 
interest in such Pooled Fund are held by Client Plans (or by In-House 
Plans) each of which has total net assets with a value of at least $50 
million. For purposes of a Pooled Fund engaging in covered transactions 
involving an Eligible Rule 144A Offering, each Client Plan (and each 
In-House Plan) in such Pooled Fund shall have total net assets of at 
least $100 million in securities of issuers that are not affiliated 
with such Client Plan (or such In-House Plan, as the case may be). 
Notwithstanding the foregoing, if each such Client Plan (and each such 
In-House Plan) in such Pooled Fund does not have total net assets of at 
least $100 million in securities of issuers that are not affiliated 
with such Client Plan (or In-House Plan, as the case may be), the $100 
Million Net Asset Requirement will be met if 50 percent (50%) or more 
of the units of beneficial interest in such Pooled Fund are held by 
Client Plans (or by In-House Plans) each of which have total net assets 
of at least $100 million in securities of issuers that are not 
affiliated with such Client Plan (or such In-House Plan, as the case 
may be), and the Pooled Fund itself qualifies as a QIB, as determined 
pursuant to SEC Rule 144A (17 CFR 230.144A(a)(F)).
    For purposes of the net asset requirements described, above, in 
this Section II(o), where a group of Client Plans is maintained by a 
single employer or controlled group of employers, as defined in section 
407(d)(7) of the Act, the $50 Million Net Asset Requirement (or in the 
case of an Eligible Rule 144A Offering, the $100 Million Net Asset 
Requirement) may be met by aggregating the assets of such Client Plans, 
if the assets of such Client Plans are pooled for investment purposes 
in a single master trust.
    (p) No more than 20 percent of the assets of a Pooled Fund, at the 
time of a covered transaction, are comprised of assets of In-House 
Plans for which the Asset Manager or a Merrill Lynch/BlackRock Related 
Entity exercises investment discretion.
    (q) The Asset Manager and the Merrill Lynch/BlackRock Related 
Broker-Dealer, as applicable, maintain, or cause to be maintained, for 
a period of six (6) years from the date of any covered transaction such 
records as are necessary to enable the persons, described, below, in 
Section II(r), to determine whether the conditions of this proposed 
exemption have been met, except that--
    (1) No party in interest with respect to a plan which engages in 
the covered transactions, other than the Asset Manager, and the Merrill 
Lynch/BlackRock Related Broker-Dealer, as applicable, shall be subject 
to a civil penalty under section 502(i) of the Act or the taxes imposed 
by section 4975(a) and (b) of the Code, if such records are not 
maintained, or not available for examination, as required, below, by 
Section II(r); and
    (2) A prohibited transaction shall not be considered to have 
occurred if, due to circumstances beyond the control of the Asset 
Manager, or the Merrill Lynch/BlackRock Related Broker-Dealer, as 
applicable, such records are lost or destroyed prior to the end of the 
six-year period.
    (r)(1) Except as provided, below, in Section II(r)(2), and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to, above, in Section II(q) are 
unconditionally available at their customary location for examination 
during normal business hours by--
    (i) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the SEC; or
    (ii) Any fiduciary of any plan that engages in the covered 
transactions, or any duly authorized employee or representative of such 
fiduciary; or
    (iii) Any employer of participants and beneficiaries and any 
employee organization whose members are covered by a plan that engages 
in the covered transactions, or any authorized employee or 
representative of these entities; or
    (iv) Any participant or beneficiary of a plan that engages in the 
covered transactions, or duly authorized employee or representative of 
such participant or beneficiary;
    (2) None of the persons described, above, in Section II(r)(1)(ii)-
(iv) shall be authorized to examine trade secrets of the Asset Manager, 
or the Merrill Lynch/BlackRock Related Broker-Dealer, or commercial or 
financial information which is privileged or confidential; and
    (3) Should the Asset Manager, or the Merrill Lynch/BlackRock 
Related Broker-Dealer refuse to disclose information on the basis that 
such information is exempt from disclosure, pursuant to Section 
II(r)(2), above, the Asset Manager shall, by the close of the thirtieth 
(30th) day following the request, provide a written notice advising 
that person of the reasons for the refusal and that the Department may 
request such information.
Section III--Definitions
    (a) The term, ``the Applicants,'' means BlackRock Inc. and Merrill 
Lynch & Co, Inc.
    (b) The term, ``Merrill Lynch/BlackRock Related Broker-Dealer,'' 
means any broker-dealer that is a Merrill Lynch/BlackRock Related 
Entity that meets the requirements of this proposed exemption. Such 
Merrill Lynch/BlackRock Related Broker-Dealer may participate in an 
underwriting or selling syndicate as a manager or member. The term, 
``manager,'' means any member of an underwriting or selling syndicate 
who, either alone or together with other members of the syndicate, is 
authorized to act on behalf of the members of the syndicate in 
connection with the sale and distribution of the Securities, as 
defined, below, in Section III(k), being offered or who receives 
compensation from the members of the syndicate for its services as a 
manager of the syndicate.
    (c) The term, ``Merrill Lynch/BlackRock Related Entity(s)'' 
includes all entities listed in this Section III(c)(i) and (ii): (i) 
Merrill Lynch and any person directly or indirectly, through one or 
more intermediaries, controlling, controlled by, or under common 
control with Merrill Lynch, and (ii) BlackRock and any person directly 
or indirectly, through one or more intermediaries, controlling, 
controlled by, or under common control with, BlackRock. For purposes of 
this proposed exemption, the definition of a Merrill Lynch/BlackRock 
Related Entity shall include any entity that satisfies such definition 
in the future.
    (d) The term, ``BlackRock Related Entity'' or ``BlackRock Related 
Entities,'' means BlackRock and any person directly or indirectly, 
through one or more intermediaries, controlling, controlled by, or 
under common control with BlackRock.
    (e) The term, ``Merrill Lynch Related Entity'' or ``Merrill Lynch 
Related Entities,'' means Merrill Lynch and any person directly or 
indirectly, through one or more intermediaries, controlling, controlled 
by, or under common control with Merrill Lynch.
    (f) The term, ``Asset Manager,'' means a BlackRock Related Entity, 
as defined, above, in Section III(d). For purposes of this proposed 
exemption, the Asset Manager must be registered with the

[[Page 51680]]

Securities and Exchange Commission as an investment advisor, have total 
client assets under management in excess of $5 billion, have 
shareholders' or partners' equity in excess of $1 million, and must 
satisfy the definition of a ``qualified professional asset manager'' 
(QPAM), as that term is defined in Part V(a) of PTE 84-14, 49 FR 9494 
(Mar. 13, 1984), as amended, 70 FR 49305 (Aug. 23, 2005). Furthermore, 
the requirement that the Asset Manager must have total client asset 
under its management and control in excess of $5 billion, as of the 
last day of it most recent fiscal year and shareholders' or partners' 
equity in excess of $1 million applies whether such Asset Manager, 
qualifies as a QPAM, pursuant to Part V(a)(1), (a)(2), (a)(3) or (a)(4) 
of PTE 84-14.
    (g) The term, ``control,'' means the power to exercise a 
controlling influence over the management or policies of a person other 
than an individual.
    (h) The term, ``Client Plan(s),'' means an employee benefit plan or 
employee benefit plans that are subject to the Act and/or the Code, and 
for which plan(s) an Asset Manager exercises discretionary authority or 
discretionary control respecting management or disposition of some or 
all of the assets of such plan(s), but excludes In-House Plans, as 
defined, below, in Section III(o).
    (i) The term, ``Pooled Fund(s),'' means a common or collective 
trust fund(s) or a pooled investment fund(s): (i) In which employee 
benefit plan(s) subject to the Act and/or Code invest, (ii) which is 
maintained by an Asset Manager, and (iii) for which such Asset Manager 
exercises discretionary authority or discretionary control respecting 
the management or disposition of the assets of such fund(s).
    (j)(1) The term, ``Independent Fiduciary,'' means a fiduciary of a 
plan who is unrelated to, and independent of any Merrill Lynch/
BlackRock Related Entity. For purposes of this proposed exemption, a 
fiduciary of a plan will be deemed to be unrelated to, and independent 
of any Merrill Lynch/BlackRock Related Entity, if such fiduciary 
represents that neither such fiduciary, nor any individual responsible 
for the decision to authorize or terminate authorization for the 
transactions described, above, in Section I of this proposed exemption, 
is an officer, director, or highly compensated employee (within the 
meaning of section 4975(e)(2)(H) of the Code) of any Merrill Lynch/
BlackRock Related Entity, and represents that such fiduciary shall 
advise the Asset Manager within a reasonable period of time after any 
change in such facts occur.
    (2) Notwithstanding anything to the contrary in this Section 
III(j), a fiduciary of a plan is not independent:
    (i) If such fiduciary, directly or indirectly, through one or more 
intermediaries, controls, is controlled by, or is under common control 
with any Merrill Lynch/BlackRock Related Entity;
    (ii) If such fiduciary directly or indirectly receives any 
compensation or other consideration from any Merrill Lynch/BlackRock 
Related Entity for his or her own personal account in connection with 
any transaction described in this proposed exemption;
    (iii) If any officer, director, or highly compensated employee 
(within the meaning of section 4975(e)(2)(H) of the Code) of the Asset 
Manager responsible for the transactions described, above, in Section I 
of this proposed exemption, is an officer, director, or highly 
compensated employee (within the meaning of section 4975(e)(2)(H) of 
the Code) of the sponsor of a plan or of the fiduciary responsible for 
the decision to authorize or terminate authorization for the 
transactions described, above, in Section I. However, if such 
individual is a director of the sponsor of a plan or of the responsible 
fiduciary, and if he or she abstains from participation in: (A) the 
choice of such plan's investment manager/adviser; and (B) the decision 
to authorize or terminate authorization for transactions described, 
above, in Section I, then Section III(j)(2)(iii) shall not apply.
    (3) The term, ``officer,'' means a president, any vice president in 
charge of a principal business unit, division, or function (such as 
sales, administration, or finance), or any other officer who performs a 
policy-making function for a Merrill Lynch/BlackRock Related Entity.
    (k) The term, ``Securities,'' shall have the same meaning as 
defined in section 2(36) of the Investment Company Act of 1940 (the 
1940 Act), as amended (15 U.S.C. 80a-2(36)(1996)). For purposes of this 
proposed exemption, mortgage-backed or other asset-backed securities 
rated by one of the Rating Organizations, as defined, below, in Section 
III(n), will be treated as debt securities.
    (l) The term, ``Eligible Rule 144A Offering,'' shall have the same 
meaning as defined in SEC Rule 10f-3(a)(4) (17 CFR 270. 10f-3(a)(4)) 
under the 1940 Act.
    (m) The term, ``qualified institutional buyer,'' or the term, 
``QIB,'' shall have the same meaning as defined in SEC Rule 144A (17 
CFR 230.144A(a)(1)) under the 1933 Act.
    (n) The term, ``Rating Organizations,'' means Standard & Poor's 
Rating Services, Moody's Investors Service, Inc., Fitch Ratings Inc., 
Dominion Bond Ratings Service Limited, and Dominion Bond Rating 
Service, Inc., or any successors thereto.
    (o) The term, ``In-House Plan(s),'' means an employee benefit 
plan(s) that is subject to the Act and/or the Code, and that is 
sponsored by: (i) A Merrill Lynch Related Entity, as defined, above, in 
Section III(e), or (ii) a BlackRock Related Entity, as defined, above, 
in Section III(d), for their respective employees.
    The availability of this proposed exemption is subject to the 
express condition that the material facts and representations contained 
in the application for exemption are true and complete and accurately 
describe all material terms of the transactions. In the case of 
continuing transactions, if any of the material facts or 
representations described in the applications change, the exemption 
will cease to apply as of the date of such change. In the event of any 
such change, an application for a new exemption must be made to the 
Department.
    Effective Date: If granted, this proposed exemption will be 
effective as of the date the Grant is published in the Federal 
Register.

Summary of Facts and Representations

    1. BlackRock, based in New York, NY, is a publicly-traded 
investment management firm. BlackRock, through its SEC-registered 
investment advisor subsidiaries, currently manages assets for 
institutional and individual investors worldwide through a variety of 
equity, fixed income, cash management, and alternative investment 
products. As of December 31, 2006, BlackRock, through its advisor 
subsidiaries, had approximately $1.125 trillion in assets under 
management. Furthermore, BlackRock's asset managers satisfy the 
definition of the term, Asset Manager, as set forth in Section III(f) 
of this proposed exemption.
    Merrill Lynch is a holding company that, through its subsidiaries, 
provides broker-dealer, investment banking, financing, wealth 
management, advisory, insurance, lending, and related products and 
services on a global basis. Merrill Lynch is a ``Consolidated 
Supervised Entity'' and is subject to group-wide supervision by the 
SEC.
    Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S) is the 
principal wholly-owned subsidiary of Merrill Lynch. MLPF&S is a 
Delaware

[[Page 51681]]

corporation registered with and regulated by the SEC as a broker-
dealer, and is a member of the New York Stock Exchange, and the 
National Association of Securities Dealers, Inc. MLPF&S is also 
regulated by the Municipal Securities Rulemaking Board (with respect to 
municipal securities activities) and the Commodity Futures Trading 
Commission and the National Futures Association (with respect to the 
activities of MLPF&S as a futures commission merchant). MLPF&S is a 
broker and/or dealer in the purchase and sale of corporate equity and 
debt securities, mutual funds, money market instruments, government 
securities, high yield bonds, municipal securities, financial futures 
contracts, and options. As an investment banking firm, MLPF&S provides 
corporate, institutional, and government clients with a wide variety of 
financial services including underwriting the sale of securities to the 
public, structured and derivative financing, private placements, 
mortgage and lease financing, and financial advisory services, 
including advice on mergers and acquisitions. MLPF&S also acts as a 
prime broker for hedge funds. MLPF&S further operates mutual fund 
advisory programs, in which plans governed by the Act or section 4975 
of the Code can receive investment advice in connection with their 
purchase of shares of mutual funds.
    2. On September 29, 2006, Merrill Lynch combined its asset 
management business with BlackRock (the Merger). The resulting entity 
retained the BlackRock name and continues to trade on the New York 
Stock Exchange under the symbol, ``BLK''. Prior to the Merger, PNC 
Financial Services Group, Inc. (PNC) owned approximately 70.6 percent 
(70.6%) of BlackRock. As a result of the Merger, Merrill Lynch now owns 
a 50.3 percent (50.3%) economic interest and an approximate 45 percent 
(45%) voting interest in BlackRock, and PNC's ownership interest has 
been reduced to approximately 34 percent (34%) of BlackRock. The 
remaining interest in BlackRock is owned by the public and by BlackRock 
employees.
    Merrill Lynch and PNC each have two seats on the Board of Directors 
of BlackRock, as a result of the Merger. The remaining seats on the 
Board of Directors, which include a majority of the total board seats, 
are held by independent directors. The Applicants represent that the 
Merrill Lynch and PNC board members are, except in limited 
circumstances, required to cast their votes in the same manner as the 
independent directors.
    3. It is represented that the BlackRock Related Entities and the 
Merrill Lynch Related Entities to which the proposed exemption applies 
are regulated by federal government agencies such as the SEC, as well 
as state government agencies and industry self-regulatory organizations 
(e.g., the New York Stock Exchange and the National Association of 
Securities Dealers).
    4. The Applicants request an individual administrative exemption 
that would permit the purchase of securities, including Rule 144A 
Securities, by an Asset Manager acting on behalf of Client Plans, from 
underwriting and selling syndicates in which a Merrill Lynch/BlackRock 
Related Broker-Dealer is a member or a manager, where such purchase 
would be made by such Asset Manager for such plans from any person 
other than the Merrill Lynch/BlackRock Related Entities, and such 
Merrill Lynch/BlackRock Related Broker-Dealer will receive no selling 
concessions in connection with the securities sold to such plans.
    5. The Applicants represent that, prior to the effective date of 
the Merger, and because BlackRock and Merrill Lynch did not have 
ownership interests in each other, asset management affiliates of 
BlackRock routinely purchased, on behalf of plans, securities 
(including Rule 144A Securities) from underwriting or selling 
syndicates where a broker-dealer affiliated with Merrill Lynch was a 
member or manager. Since BlackRock and Merrill Lynch did not have any 
ownership interest in each other, these purchases could be consummated 
without relying on Part III of Prohibited Transaction Exemption 75-1 
(PTE 75-1, Part III) or on any individual administrative exemption. In 
addition, prior to the effective date of the Merger, the asset 
management affiliates of Merrill Lynch could purchase on behalf of 
plans, subject to the Act, securities in underwritings or selling 
syndicates where a broker-dealer affiliated with Merrill Lynch was a 
member in accordance with PTE 75-1, Part III.
    6. The Applicants represent that since the effective date of the 
Merger, BlackRock has had a general policy with respect to Client Plans 
not to purchase securities, including Rule 144A Securities, from 
underwriting or selling syndicates with respect to which a Merrill 
Lynch/BlackRock Related Broker-Dealer is a member or manager out of 
concern that such purchases may give rise to prohibited transactions 
under the Act. Notwithstanding the sizable equity stakes in BlackRock, 
it is not clear that Merrill Lynch or any subsidiaries of Merrill Lynch 
will be considered ``affiliates'' of BlackRock. Among the reasons for 
the lack of clarity include the stockholder agreements between 
BlackRock and PNC and BlackRock and Merrill Lynch, each of which 
severely restricts the ability of Merrill Lynch and PNC, individually 
or in combination, to control the activities of BlackRock. For example, 
as noted above, Merrill Lynch and PNC board members are generally 
required to cast their votes in the same manner as the BlackRock 
independent directors. In addition, Merrill Lynch has agreed to cap its 
ownership in BlackRock such that it is not permitted to hold greater 
than 45 percent (45%) of the voting shares of BlackRock. PNC has a 
similar cap. Therefore, an argument can be made that neither Merrill 
Lynch nor PNC are or will be in a position to ``control'' BlackRock. 
Nevertheless, when an Asset Manager is a fiduciary with investment 
discretion with respect to a Client Plan, and such Asset Manager is 
deciding whether to purchase securities in an underwriting or selling 
syndicate in which a Merrill Lynch/BlackRock Related Broker-Dealer is a 
manager or member, it might be argued that the ownership interest of 
Merrill Lynch in BlackRock could affect such Asset Manager's best 
judgment as a fiduciary, raising issues under Section 406(b) of the 
Act. Accordingly, the Applicants seek the requested relief to cover 
Merrill Lynch/BlackRock Related Broker-Dealers. The Applicants 
represent that the failure to provide the requested relief will result 
in Client Plans being unfairly precluded from participating in a 
significant amount of investment opportunities.
    7. Regardless of whether a fiduciary or its affiliate is a manager 
or merely a member of an underwriting or selling syndicate, the 
requested exemption modeled on PTE 75-1, Part III would not provide 
relief for the purchase of unregistered securities. This includes Rule 
144A Securities resold to QIBs. Rule 144A is commonly utilized in 
connection with sales of securities issued by foreign issuers to U.S. 
investors that are QIBs. Notwithstanding the unregistered nature of 
such shares, syndicates selling Rule 144A Securities are the functional 
equivalent of those selling registered securities.
    8. The Applicants represent that Merrill Lynch/BlackRock Related 
Broker-Dealers regularly serve as managers of underwriting or selling 
syndicates for registered securities, and as managers or members of 
underwriting or selling syndicates for Rule 144A Securities. 
Accordingly, Asset Managers are currently refraining

[[Page 51682]]

from purchasing on behalf of Client Plans securities where a Merrill 
Lynch/BlackRock Related Broker-Dealer is the manager of the 
underwriting or selling syndicate, including Rule 144A Securities sold 
in such offerings, resulting in such Client Plans being unable to 
participate in significant investment opportunities.
    9. It is represented that many plans have expanded investment 
portfolios in recent years to include securities issued by foreign 
entities. As a result, the exemption provided in PTE 75-1, Part III is 
often unavailable for purchases of domestic and foreign securities that 
may otherwise constitute appropriate plan investments.
    10. The Applicants represent that Asset Managers make their 
respective investment decisions on behalf of, or render investment 
advice to, Client Plans pursuant to the governing document of the 
particular Client Plan or pooled fund and the investment guidelines and 
objectives set forth in the management or advisory agreement. Because 
the Client Plans are covered by Title I of the Act, such investment 
decisions are subject to the fiduciary responsibility provisions of the 
Act.
    11. The Applicants state, therefore, that the decision to invest in 
a particular offering is made on the basis of price, value, and the 
investment criteria of a Client Plan, not on whether the securities are 
currently being sold through an underwriting or selling syndicate. The 
Applicants further state that, because an Asset Manager's compensation 
for its services is generally based upon assets under management, such 
Asset Manager has little incentive to purchase securities in an 
offering in which a Merrill Lynch/BlackRock Related Broker-Dealer is an 
underwriter unless such a purchase is in the interests of Client Plans. 
If the assets under management do not perform well, the Asset Manager 
will receive less compensation and could lose clients, costs which far 
outweigh any gains from the purchase of underwritten securities. The 
Applicants point out that under the terms of the proposed exemption, a 
Merrill Lynch/BlackRock Related Broker-Dealer may receive no selling 
concessions, direct or indirect, that are attributable to the amount of 
securities purchased by the Asset Manager on behalf of Client Plans.
    12. The Applicants state that the Asset Managers generally purchase 
securities in large blocks because the same investments will be made 
across several accounts. If there is a new offering of an equity or 
fixed income security that an Asset Manager wishes to purchase, it may 
be able to purchase the security through the offering syndicate at a 
lower price than it would pay in the open market, without transaction 
costs and with reduced market impact if it is buying a relatively large 
quantity. This is because a large purchase in the open market can cause 
an increase in the market price and, consequently, in the cost of the 
securities. Purchasing from an offering syndicate can thus reduce the 
costs to Client Plans.
    13. The Applicants point out that absent this proposed exemption, 
if a Merrill Lynch/BlackRock Related Broker-Dealer is a manager of a 
syndicate that is underwriting an offering of securities, the Asset 
Managers will be foreclosed from purchasing any securities on behalf of 
Client Plans from that underwriting syndicate. In this regard, an Asset 
Manager would have to purchase the same securities in the secondary 
market. In such a circumstance, the Client Plans may incur greater 
costs both because the market price is often higher than the offering 
price, and because there are transaction and market impact costs. In 
turn, this will cause the Asset Manager to forego other investment 
opportunities because the purchase price of the underwritten security 
in the secondary market exceeds the price that the Asset Manager would 
have paid to the selling syndicate.

Registered Securities Offerings

    14. The Applicants represent that Merrill Lynch/BlackRock Related 
Broker-Dealers currently manage and participate in firm commitment 
underwriting syndicates for registered offerings of both equity and 
debt securities. While equity and debt underwritings may operate 
differently with regard to the actual sales process, the basic 
structures are the same. In a firm commitment underwriting, the 
underwriting syndicate purchases the securities from the issuer and 
then resells the securities to investors.
    15. The Applicants represent that while, as a legal matter, a 
selling syndicate assumes the risk that the underwritten securities 
might not be fully sold, as a practical matter, this risk is reduced in 
marketed deals, through ``building a book'' (i.e., taking indications 
of interest from potential purchasers) prior to pricing the securities. 
Accordingly, there is generally no incentive for the underwriters to 
use their discretionary accounts (or the discretionary accounts of 
their affiliates) to buy up the securities as a way to avoid 
underwriting obligations.
    16. It is represented that each selling syndicate has one or more 
lead managers, who are the principal contact between the syndicate and 
the issuer and who are responsible for organizing and coordinating the 
syndicate. The syndicate may also have co-managers, who generally 
assist in distributing the underwritten securities. While equity 
syndicates may include additional underwriters that are not managers, 
more recently, membership in many debt syndicates has been limited to 
lead and co-managers.
    17. It is represented that if more than one underwriter is involved 
in a selling syndicate, the lead manager and the underwriters enter 
into an ``Agreement among Underwriters'' in the form designated by one 
of the lead managers selected by the issuer. Most lead managers have a 
standing form of agreement. This master agreement is then commonly 
supplemented for the particular deal by sending an ``invitation wire'' 
or ``terms telex'' that sets forth particular terms to the other 
underwriters.
    18. The arrangement between the syndicate and the issuer of the 
underwritten securities is embodied in an underwriting agreement, which 
is signed on behalf of the underwriters by one or more of the managers. 
In a firm commitment underwriting, the underwriting agreement provides, 
subject to certain closing conditions, that the underwriters are 
obligated to purchase all of the underwritten securities from the 
issuer in accordance with their respective commitments, if any 
securities are not purchased. This obligation is met by using the 
proceeds received from investors purchasing securities in the offering, 
although there is a risk that the underwriters will have to pay for a 
portion of the securities in the event that not all of the securities 
are sold or an investor defaults on its obligation.
    19. The Applicants represent that, generally, it is unlikely that 
in marketed deals all offered securities will not be sold. In marketed 
deals, the underwriting agreement is not executed until after the 
underwriters have obtained sufficient indications of interest to 
purchase the securities from a sufficient number of investors to assure 
that all the securities being offered will be acquired by investors. 
Once the underwriting agreement is executed, the underwriters promptly 
begin contacting the investors to confirm the sales, at first by oral 
communication and then by written confirmation. Sales may be finalized 
within hours and sometimes minutes, but in any event prior to the 
opening of

[[Page 51683]]

the market for trading the next day. In registered transactions, the 
underwriters have a strong interest in completing the sales as soon as 
possible because, until they ``break syndicate,'' they cannot 
recommence normal trading activity, which includes buying and selling 
the securities for their customers or own account.
    20. The Applicants represent that the process of ``building a 
book'' or soliciting indications of interest occurs in a registered 
equity offering, after a registration statement is filed with the SEC. 
While it is under review by the SEC staff, representatives of the 
issuer of the securities and the selling syndicate managers conduct 
meetings with potential investors, who learn about the company and the 
underwritten securities. Potential investors also receive a preliminary 
prospectus. The underwriters cannot make any firm sales until the 
registration statement is declared effective by the SEC. Prior to the 
effective date, while the investors cannot become legally obligated to 
make a purchase, such investors indicate whether they have an interest 
in buying, and the lead managers compile a ``book'' of investors who 
are willing to ``circle'' a particular portion of the issue. Although 
investors cannot be legally bound to buy the securities until the 
registration statement is effective, investors generally follow through 
on their indications of interest.
    21. Assuming that the marketing efforts have produced sufficient 
indications of interest, the Applicants represent that the issuer of 
the securities, after consultation with the lead manager, will set the 
price of the securities upon being declared effective by the SEC. After 
the registration statement has been declared effective by the SEC and 
the underwriting agreement is executed, the underwriters contact those 
investors that have indicated an interest in purchasing securities in 
the offering to execute the sales. The Applicants represent that 
offerings are often oversubscribed, and many have an over-allotment 
option that the underwriters can exercise to acquire additional shares 
from the issuer. Where an offering is oversubscribed, the underwriters 
decide how to allocate the securities among the potential purchasers. 
However, if the offering is an initial public offering of an equity 
security, then the underwriters may not sell the securities to (among 
others) any person that is a broker-dealer, an associated person of a 
broker-dealer, a portfolio manager, or an owner of a broker-dealer. 
Additionally, underwriters may not withhold for their own account any 
initial public offering of an equity security.
    22. The Applicants represent that debt offerings and certain equity 
offerings may be ``negotiated'' offerings, ``competitive bid'' 
offerings, or ``bought deals.'' ``Negotiated'' offerings are conducted 
in the same manner as marketed equity offerings with regard to when the 
underwriting agreement is executed and how the securities are offered. 
``Competitive bid'' offerings, in which the issuer determines the price 
for the securities through competitive bidding rather than negotiating 
the price with the underwriting syndicate, are often performed under 
``shelf'' registration statements pursuant to the SEC's Rule 415 under 
the 1933 Act (Rule 415) (17 CFR 230.415).\7\
---------------------------------------------------------------------------

    \7\ The Applicants maintain that Rule 415 permits an issuer to 
sell debt as well as equity securities under an effective 
registration statement previously filed with the SEC by filing a 
post-effective amendment or supplemental prospectus.
---------------------------------------------------------------------------

    23. In a competitive bid offering, prospective lead underwriters 
will bid against one another to purchase debt securities, based upon 
their determinations of the degree of investor interest in the 
securities. Depending on the level of investor interest and the size of 
the offering, a bidding lead underwriter may bring in co-managers to 
assist in the sales process. Most of the securities are frequently sold 
within hours, or sometimes even less than an hour, after the securities 
are made available for purchase.
    24. It is represented that because of market forces and the 
requirements of Rule 415, the competitive bid process is generally, 
though not exclusively, available only to issuers who have been subject 
to the reporting requirements of the Securities Exchange Act of 1934 
(the 1934 Act) for at least one (1) year.
    25. Occasionally, underwriters ``buy'' the entire deal off of a 
``shelf registration'' or in a Rule 144A offering before obtaining 
indications of interest. These ``bought'' deals involve issuers whose 
securities enjoy a deep and liquid secondary market, such that an 
underwriter has confidence without pre-marketing that it can identify 
purchasers for the securities.

Information Barriers

    26. Prior applicants for similar relief have represented that there 
are internal policies in place that restrict contact and the flow of 
information between investment management personnel and non-investment 
management personnel in the same or affiliated financial service firms. 
The Applicants represent that, notwithstanding the concerns raised 
herein pertaining to the level of ownership in BlackRock by Merrill 
Lynch, the firms are independent businesses, each with policies 
restricting the distribution of proprietary and other non-public 
information, and each subject to restrictions on disclosure under the 
U.S. securities laws. Further, each has a fiduciary obligation not to 
share proprietary and non-public information outside the firm. Merrill 
Lynch and BlackRock also represent that they do not share information 
with each other which is not generally available to the public that may 
affect the market price of securities.
    27. Prior applicants for substantially similar relief have further 
represented that their business separation policies and procedures are 
also structured to restrict the flow of any information to or from the 
Asset Manager that could limit its flexibility in managing client 
assets, and of information obtained or developed by the Asset Manager 
that could be used by other parts of the organization, to the detriment 
of the Asset Manager's clients. Because BlackRock and Merrill Lynch are 
independent businesses, no such policies are required.\8\
---------------------------------------------------------------------------

    \8\ The Applicants represent that no BlackRock Related Entity is 
currently in the business of underwriting or placing securities for 
third parties. In the event a BlackRock Related Entity engages in 
such activities, the Applicants represent that appropriate business 
separation policies and procedures would be instituted.
---------------------------------------------------------------------------

    28. The Applicants represent that major clients of Merrill Lynch/
BlackRock Related Broker-Dealers include investment management firms 
that are competitors of the Asset Manager. Similarly, an Asset Manager 
deals on a regular basis with broker-dealers that compete with Merrill 
Lynch/BlackRock Related Broker-Dealers. If special consideration was 
shown to a Merrill Lynch/BlackRock Related Broker-Dealer, such conduct 
would likely have an adverse effect on the relationships of the Asset 
Manager with firms that compete with such Merrill Lynch/BlackRock 
Related Broker-Dealer. Each of the prior applicants for similar relief 
have represented that a goal of its business separation policies is to 
avoid any possible perception of improper flows of information in order 
to prevent any adverse impact on client and business relationships. 
Because BlackRock and Merrill Lynch are independent businesses, it is 
represented that no such policies are required.

Underwriting Compensation

    29. The Applicants represent that the underwriters are compensated 
through

[[Page 51684]]

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

Rule 144A Securities

    36. The Applicants represent that a number of the offerings of Rule 
144A Securities in which a Merrill Lynch/BlackRock Related Broker-
Dealer participates represent good investment opportunities for the 
Asset Manager's Client Plans. Particularly with respect to foreign 
securities, a Rule 144A offering may provide the least expensive and 
most accessible means for obtaining these securities. However, as 
discussed above, PTE 75-1, Part III, does not cover Rule 144A 
Securities. Therefore, absent an exemption, the Asset Manager is 
foreclosed from purchasing such securities for its Client Plans in 
offerings in which a Merrill Lynch/BlackRock Related Broker-Dealer 
participates.
    37. The Applicants state that Rule 144A acts as a ``safe harbor'' 
exemption from the registration provisions of the 1933 Act for re-sales 
of certain types of securities to QIBs. QIBs include several types of 
institutional entities, such as employee benefit plans and commingled 
trust funds holding assets of such plans, which own and invest on a 
discretionary basis at least $100 million in securities of unaffiliated 
issuers.
    38. Any securities may be sold pursuant to Rule 144A except for 
those of the same class or similar to a class that is publicly traded 
in the United States, or certain types of investment company 
securities. This limitation is designed to prevent side-by-side public 
and private markets developing for the same class of securities and is 
the reason that Rule 144A transactions are generally limited to debt 
securities.
    39. Buyers of Rule 144A Securities must be able to obtain, upon 
request, basic information concerning the business of the issuer and 
the issuer's financial statements, much of the same information as 
would be furnished if the offering were registered. This condition does 
not apply, however, to an issuer filing reports with the SEC under the 
1934 Act, for which reports are publicly available. The condition also 
does not apply to a ``foreign private issuer'' for whom reports are 
furnished to the SEC under Rule 12g3-2(b) of the 1934 Act (17 CFR 
240.12g3-2(b)), or to issuers who are foreign governments or political 
subdivisions thereof and are eligible to use Schedule B under the 1933 
Act (which describes the information and documents required to be 
contained in a registration statement filed by such issuers).
    40. Sales under Rule 144A, like sales in a registered offering, 
remain subject to the protections of the anti-fraud rules of federal 
and state securities laws. These rules include Section 10(b) of the 
1934 Act and Rule l0b-5 thereunder (17 CFR 240.10b-5) and Section 17(a) 
of the 1933 Act (15 U.S.C. 77a). Through these and other provisions, 
the SEC may use its full range of enforcement powers to exercise its 
regulatory authority over the market for Rule 144A Securities, in the 
event that it detects improper practices.
    41. The Applicants represent that this potential liability for 
fraud provides a considerable incentive to the issuer of the securities 
and the members of the selling syndicate to insure that the information 
contained in a Rule 144A offering memorandum is complete and accurate 
in all material respects. Among other things, the lead manager 
typically obtains an opinion from a law firm, commonly referred to as a 
``10b-5'' opinion, stating that the law firm has no reason to believe 
that the offering memorandum contains any untrue statement of material 
fact or omits to state a material fact necessary in order to make sure 
the statements made, in light of the circumstances under which they 
were made, are not misleading.
    42. The Applicants represent that Rule 144A offerings generally are 
structured in the same manner as underwritten registered offerings. 
They may be ``negotiated'' offerings, ``competitive bid'' offerings or 
``ought deals.'' One difference is that a Rule

[[Page 51685]]

144A offering uses an offering memorandum rather than a prospectus that 
is filed with the SEC. The marketing process is substantially similar, 
except that the selling efforts are limited to contacting QIBs and 
there are no general solicitations for buyers (e.g., no general 
advertising). In addition, contracts for sale may be entered into with 
investors and securities may be priced before a selling agreement is 
executed (and this is typically the case with respect to sales of 
asset-backed securities). Further, generally, there are no non-manager 
members in a Rule 144A selling syndicate. The Applicants nonetheless 
request that the proposed exemption extend to authorization for 
situations where a Merrill Lynch/BlackRock Related Broker-Dealer acts 
as manager or as a member.
    43. The proposed exemption is administratively feasible. In this 
regard, compliance with the terms and conditions of the proposed 
exemption will be verifiable and subject to audit.
    44. The Applicants represent that the proposed exemption is in the 
interest of participants and beneficiaries of Client Plans that engage 
in the covered transactions. In this regard, it is represented that the 
proposed exemption will greatly increase the investment opportunities 
and will reduce administrative costs for Client Plans.
    Further, the Applicants represent that the proposed exemption is 
protective of the rights of participants and beneficiaries of affected 
Client Plans. In this regard, the notification provisions and other 
requirements in the proposed exemption are similar to the conditions 
set forth in other exemptions published by the Department in similar 
circumstances.
    45. In summary, it is represented that the proposed transactions 
meet the statutory criteria for an exemption under Section 408(a) of 
the Act and Section 4975(c)(2) of the Code because: (a) The Client 
Plans will gain access to desirable investment opportunities; (b) in 
each offering, an Asset Manager will purchase the securities for its 
Client Plans from an underwriter or broker-dealer other than a Merrill 
Lynch/BlackRock Related Entity; (c) conditions of the proposed 
exemption will restrict the types of securities that may be purchased, 
the types of underwriting or selling syndicates and issuers involved, 
and the price and timing of the purchases; (d) the amount of securities 
that an Asset Manager may purchase on behalf of Client Plans will be 
subject to percentage limitations; (e) a Merrill Lynch/BlackRock 
Related Broker-Dealer will not be permitted to receive, either 
directly, indirectly or through designation, any selling concession 
with respect to the securities sold to an Asset Manager on behalf of an 
account of a Client Plan; (f) prior to any purchase of securities, an 
Asset Manager will make the required disclosures to an Independent 
Fiduciary of each Client Plan and obtain authorization in accordance 
with the procedures in the proposed exemption; (g) an Asset Manager 
will provide regular reporting to an Independent Fiduciary of each 
Client Plan with respect to all securities purchased pursuant to the 
proposed exemption, if granted; (h) each Client Plan will be subject to 
net asset requirements, with certain exceptions for Pooled Funds; and 
(i) an Asset Manager must have total assets under management in excess 
of $5 billion and shareholders' or partners' equity in excess of $1 
million, in addition to qualifying as a QPAM, pursuant to Part V(a) of 
PTE 84-14.

FOR FURTHER INFORMATION CONTACT: Angelena C. LeBlanc of the Department, 
telephone (202) 693-8540. (This is not a toll-free number).

General Information

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

    Signed at Washington, DC, this 30th day of August, 2007.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor.
[FR Doc. E7-17676 Filed 9-7-07; 8:45 am]

BILLING CODE 4510-29-P