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Secretary of Labor Thomas E. Perez
Notice of Proposed Individual Exemption to Amend and Replace Prohibited Transaction Exemption (PTE) 96-14 Involving Morgan Stanley & Co. Incorporated (MS&Co) and Morgan Stanley Trust Company (MSTC), Located in New York, NY [Notices] [01/26/1998]

EBSA (Formerly PWBA) Federal Register Notice

Notice of Proposed Individual Exemption to Amend and Replace Prohibited Transaction Exemption (PTE) 96-14 Involving Morgan Stanley & Co. Incorporated (MS&Co) and Morgan Stanley Trust Company (MSTC), Located in New York, NY [01/26/1998]

[PDF Version]

Volume 63, Number 16, Page 3767-3772

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PENSION AND WELFARE BENEFITS ADMINISTRATION

[Application No. D-10429]

 
Notice of Proposed Individual Exemption to Amend and Replace 
Prohibited Transaction Exemption (PTE) 96-14 Involving Morgan Stanley & 
Co. Incorporated (MS&Co) and Morgan Stanley Trust Company (MSTC), 
Located in New York, NY

AGENCY: Pension and Welfare Benefits Administration, U.S. Department of 
Labor.

ACTION: Notice of proposed individual exemption to modify and replace 
PTE 96-14.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed individual exemption 
which, if granted, would amend and replace PTE 96-14 (61 FR 10032, 
March 12, 1996). PTE 96-14, as clarified by a Notice of Technical 
Correction dated June 4, 1996 (61 FR 28243), permits the lending of 
securities to MS&Co and to any other U.S. registered broker-dealers 
affiliated with MSTC (the Affiliated Broker-Dealers; collectively, the 
MS Broker-Dealers) by employee benefit plans with respect to which the 
MS Broker-Dealer who is borrowing such securities is a party in 
interest or for which MSTC acts as directed trustee or custodian and 
securities lending agent. In addition, PTE 96-14 permits MSTC to 
receive compensation in connection with securities lending 
transactions. These transactions are described in a notice of pendency 
that was published in the Federal Register on August 11, 1995 at 60 FR 
41118. PTE 96-14 is effective as of March 12, 1996.
    If granted, the proposed exemption would replace PTE 96-14 but 
would incorporate by reference the facts, representations and virtually 
all of the conditions that are contained in the notice, the final 
exemption and the technical correction. However, Condition (9) of PTE 
96-14, which has been redesignated herein as Condition (12), would be 
amended. Condition (9) of PTE 96-14 provides that--

Only plans whose total assets have a market value of at least $50 
million will be permitted to lend securities to the MS Broker-
Dealers. In the case of 2 or more plans maintained by a single 
employer or controlled group of employers, the $50 million 
requirement may be met by aggregating the assets of such plans if 
the assets are commingled for investment purposes in a single master 
trust;

    The applicants have requested that this condition be modified to 
allow two or more plans which are maintained by the same employer, 
controlled group of corporations or employee organization (the Related 
Plans) as well as two or more plans which are not maintained by the 
same employer, controlled group of corporations or employee 
organization (the Unrelated Plans), whose assets are invested in a 
single, commingled investment vehicle that is managed by a fiduciary 
which is independent of the MS Broker-Dealers, to aggregate their 
assets within the pooled investment vehicle in order to satisfy the $50 
million investment threshold for lending securities to MS Broker-
Dealers. However, the fiduciary exercising investment discretion over 
the pooled vehicle, particularly if the fiduciary is an outside 
manager, must possess some minimum level of investor sophistication by 
satisfying an ``outside business'' test.
    In addition, the Department has decided to revise certain of the 
conditions contained in PTE 96-14. In this regard, the Department has 
added several new conditions to the pendency notice relating to such 
matters as disclosures, compensation, outside

[[Page 3768]]

borrowers and recordkeeping. The Department has also modified certain 
of the existing conditions and provided definitions of the terms 
``affiliate'' and ``control.''
    The proposed exemption would affect participants and beneficiaries 
of, and fiduciaries with respect to plans engaging in securities 
lending transactions with the MS Broker-Dealers.

EFFECTIVE DATE: If granted, the proposed exemption would be effective 
as of March 12, 1996.

DATES: Written comments and requests for a public hearing should be 
received by the Department on or before March 27, 1998.

ADDRESSES: All written comments and requests for a public hearing 
(preferably, three copies) should be sent to the Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210, Attention: Application No. D-10429. The 
application pertaining to the proposed exemption and the comments 
received will be available for public inspection in the Public 
Documents Room of the Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-5507, 200 Constitution Avenue, NW., 
Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, U.S. 
Department of Labor, telephone (202) 219-8881. (This is not a toll-free 
number.)

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed exemption that would amend and 
replace PTE 96-14. PTE 96-14 provides an exemption from certain 
prohibited transaction restrictions of section 406 of the Employee 
Retirement Income Security Act of 1974 (the Act) and from the sanctions 
resulting from the application of section 4975 of the Internal Revenue 
Code of 1986 (the Code), as amended, by reason of section 4975(c)(1) of 
the Code. The proposed exemption was requested in an application filed 
on behalf of MS&Co and MSTC (collectively, the Applicants) pursuant to 
section 408(a) of the Act and section 4975(c)(2) of the Code, and in 
accordance with the procedures set forth in 29 CFR part 2570, subpart B 
(55 FR 32836, August 10, 1990). Effective December 31, 1978, section 
102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 
1978) transferred the authority of the Secretary of the Treasury to 
issue exemptions of the type requested to the Secretary of Labor. 
Accordingly, this proposed exemption is being issued solely by the 
Department.
    Specifically, PTE 96-14 provides exemptive relief from sections 
406(a)(1)(A) through (D) and 406(b)(1) and (b)(2) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (E) of the Code, with 
respect to the lending of securities to MS&Co and to any other MS 
Broker-Dealers by employee benefit plans with respect to which the MS 
Broker-Dealer who is borrowing such securities is a party in interest 
or for which MSTC acts as a directed trustee or custodian and 
securities lending agent and to the receipt of compensation by MSTC in 
connection with these transactions, provided certain enumerated 
conditions are met.
    Subsequent to the granting of PTE 96-14, the Applicants informed 
the Department that the specific wording of Condition (9) of the 
exemption would preclude master trusts, group trusts, bank collective 
investment funds, insurance company pooled separate accounts and other 
commingled investment vehicles from lending securities to the MS 
Broker-Dealers unless each plan participating therein had assets with 
an aggregate fair market value of at least $50 million. However, the 
Applicants note that Representation 25 of the Summary of Facts and 
Representations of the proposed exemption states that the intent of the 
$50 million restriction is to ensure that any lending to the MS Broker-
Dealers will be monitored by an independent fiduciary of above average 
experience and sophistication in matters relating to securities 
lending. To the extent that the purpose of this restriction is to 
ensure the sophistication of the fiduciary who is making the lending 
decision on behalf of plans, the Applicants believe that the commingled 
investment vehicles whose total assets have an aggregate market value 
of at least $50 million and which are managed by a fiduciary who is 
independent of the MS Broker-Dealers should also be permitted to lend 
securities to such broker-dealers, provided that such commingled 
entities have not been formed for the sole purpose of making loans of 
securities. Although the Department agrees with the Applicant, it has 
proposed certain additional requirements for pooled arrangements 
involving the assets of either Related Plans or Unrelated Plans. These 
additional requirements are as follows:

A. Related Plans

    With respect to two or more plans, which are maintained by the same 
employer, controlled group of corporations or employee organization, 
whose assets are invested in a master trust or any other form of plan 
asset look-through entity, which entity is engaged in securities 
lending arrangements with the MS Broker-Dealers, the Department notes 
that the $50 million threshold may be satisfied by aggregating the 
assets of the investing plans within the pooled vehicle. In this 
regard, the Department also notes that an employer may retain an 
independent investment manager to manage all or a portion of plan 
assets invested in a master trust. Under these circumstances, the 
fiduciary must have total assets under its management and control, 
exclusive of the $50 million threshold amount attributable to plan 
investment in the commingled entity, which are in excess of $100 
million.

B. Unrelated Plans

    For two or more plans which are not maintained by the same 
employer, controlled group of corporations or employee organization, 
whose assets are invested in a group trust or other plan asset look-
through entity, which entity is engaged in securities lending 
arrangements with the MS Broker-Dealers, the $50 million threshold will 
apply to the aggregate assets of such entity so long as the fiduciary 
responsible for making the investment decision on behalf of the group 
trust or other plan assets look-through entity is not the sponsoring 
employer, a member of the controlled group of corporations, the 
employee organization, or an affiliate, and has full investment 
responsibility <SUP>1</SUP> with respect to the plan assets invested 
therein. Also, the fiduciary must have total assets under its 
management and control, exclusive of the $50 million threshold amount 
attributable to plan investment in the commingled entity, which are in 
excess of $100 million.
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    \1\ For purposes of this exemption, the term ``full investment 
responsibility'' means that the fiduciary responsible for making the 
investment decision has and exercises discretionary management 
authority over all of the assets of the group trust or other plan 
assets look-through entity.
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    Accordingly, Condition (9) of PTE 96-14, which has been 
redesignated herein as Condition (12), has been revised to read as 
follows:

    (12) Only plans with total assets having an aggregate market 
value of at least $50 million will be permitted to lend securities 
to the MS Broker-Dealers; provided however that--
    (a) In the case of two or more plans which are maintained by the 
same employer,

[[Page 3769]]

controlled group of corporations or employee organization (the 
Related Plans), whose assets are commingled for investment purposes 
in a single master trust or any other entity the assets of which are 
``plan assets'' under 29 CFR 2510.3-101 (the Plan Asset Regulation), 
which entity is engaged in securities lending arrangements with the 
MS Broker-Dealers, the foregoing $50 million requirement shall be 
deemed satisfied if such trust or other entity has aggregate assets 
which are in excess of $50 million; provided that, if the fiduciary 
responsible for making the investment decision on behalf of such 
master trust or other entity is not the employer or an affiliate of 
the employer, such fiduciary has total assets under its management 
and control, exclusive of the $50 million threshold amount 
attributable to plan investment in the commingled entity, which are 
in excess of $100 million, or
    (b) In the case of two or more plans which are not maintained by 
the same employer, controlled group of corporations or employee 
organization (the Unrelated Plans), whose assets are commingled for 
investment purposes in a group trust or any other form of entity the 
assets of which are ``plan assets'' under the Plan Asset Regulation, 
which entity is engaged in securities lending arrangements with the 
MS Broker-Dealers, the foregoing $50 million requirement shall be 
deemed satisfied if such trust or other entity has aggregate assets 
which are in excess of $50 million; provided that the fiduciary 
responsible for making the investment decision on behalf of such 
group trust or other entity--
    (i) Is neither the sponsoring employer, a member of the 
controlled group of corporations, the employee organization, nor an 
affiliate,
    (ii) Has full investment responsibility with respect to plan 
assets invested therein, and
    (iii) Has total assets under its management and control, 
exclusive of the $50 million threshold amount attributable to plan 
investment in the commingled entity, which are in excess of $100 
million;

    (In addition, none of the entities described above must be 
formed for the sole purpose of making loans of securities.)

    As previously noted, in addition to the foregoing modifications, 
the Department has determined to revise certain of the conditions 
contained in PTE 96-14. In this regard, the Department has revised or 
added new conditions in Section I of the proposal pertaining to (a) The 
arm's length nature of each loan of securities by a client-plan to an 
MS Broker-Dealer (Condition 2); (b) approval of the general terms of 
the securities loan agreement by an independent fiduciary (Condition 
3); (c) disclosures concerning the financial condition of the MS 
Broker-Dealer (Condition 7); (d) the compensation paid to a client-plan 
for lending securities (Condition 8); (e) indemnification and holding 
harmless of the client-plan by the MS Broker-Dealer against all losses, 
damages, liabilities, costs and expenses (Condition 10); (f) a 
requirement that MSTC will not make a securities loan to any MS Broker-
Dealer on any day on which the market value of the securities proposed 
to be loaned, when added to the market value of all client-plan 
securities subject to outstanding loans to MS Broker-Dealers, exceeds 
50 percent of the market value of all client-plan securities that are 
subject to securities loans, including the market value of securities 
proposed to be loaned to the MS Broker-Dealer (Condition 13); (g) the 
receipt of monthly reports by a client-plan's independent fiduciary 
relating to securities lending transactions engaged in by the client-
plan (Condition 16); and (h) a general recordkeeping requirement that 
is to be complied with by MS&Co and its affiliates (Section II). In 
addition, the Department has defined the terms ``affiliate'' and 
``control'' in Section III.
    The new or revised language, which has been incorporated herein, 
appears in the Summary of Facts and Representations underlying PTE 96-
14 as well as in the original exemption application. For language that 
did not appear in these documents, the Department consulted with the 
Applicants before making the revisions. This new or modified language 
is set forth as follows:

Section I. Covered Transactions

(New or Revised Conditions)

    (2) The terms of each loan of securities by a client-plan to the 
MS Broker-Dealer will be at least as favorable to such plan as those 
of a comparable arm's length transaction between unrelated parties;
    (3) Any arrangement for MSTC to lend plan securities to the MS 
Broker-Dealers will be approved in advance by a plan fiduciary who 
is independent of MSTC and the MS Broker-Dealers; (In this regard, 
the independent fiduciary also will approve the general terms of the 
securities loan agreement between the client-plan and the MS Broker-
Dealer, the specific terms of which are negotiated and entered into 
by MSTC which will act as a liaison between the lender and the 
borrower to facilitate the lending transaction.)
    (7) Prior to entering into a loan agreement, the MS Broker-
Dealer will furnish its most recent publicly-available audited and 
unaudited financial statements to MSTC, which, in turn, will provide 
the statements to the client-plan before the plan is asked to 
approve the terms of the loan agreement. The loan agreement will 
contain a requirement that the MS Broker-Dealer must promptly notify 
lenders at the time of a loan of any material adverse changes in its 
financial condition since the date of the most recently furnished 
financial statements. If any such changes have taken place, MSTC 
will not make any further loans to the MS Broker-Dealer unless an 
independent fiduciary of the client-plan approves the loan in view 
of the changed financial condition;
    (8) In return for lending securities, the client-plan either 
will --
    (a) Receive a reasonable fee, which is related to the value of 
the borrowed securities and the duration of the loan, or
    (b) Have the opportunity to derive compensation through the 
investment of cash collateral; (Under such circumstances, the 
client-plan may pay a loan rebate or similar fee to the borrowing MS 
Broker-Dealer, if such fee is not greater than the fee the client-
plan would pay in a comparable arm's length transaction with an 
unrelated party.)
    (10) The MS Broker-Dealer will indemnify and hold harmless each 
lending client-plan against any and all losses, damages, 
liabilities, costs and expenses (including attorney's fees) incurred 
by such plan in connection with the lending of securities to the MS 
Broker-Dealers;
    (13) No loan of securities will be made by MSTC as securities 
lending agent to any MS Broker-Dealer on any day on which the market 
value of the securities proposed to be loaned, when added to the 
market value of all client-plan securities subject to outstanding 
loans to MS Broker-Dealers, exceeds 50 percent of the market value 
of all client-plan securities subject to securities loans, including 
the market value of securities proposed to be loaned to the MS 
Broker-Dealer. (For purposes of this paragraph, market value shall 
be determined in U.S. dollars, based on the last preceding business 
day's closing prices of the securities and the last preceding 
business day's closing foreign exchange rates, if applicable.);
    (16) Each client-plan will receive monthly reports with respect 
to securities lending transactions so that an independent fiduciary 
of a client-plan may monitor such transactions with the MS Broker-
Dealer;

Section II. General Conditions

    (1) The MS Broker-Dealers will maintain, or cause to be 
maintained, for a period of six years from the date of such 
transactions, in a manner that is convenient and accessible for 
audit and examination, such records as are necessary to enable the 
persons described in paragraph (2) to determine whether the 
conditions of the exemption have been met, except that--
    (a) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of the MS 
Broker-Dealers, the records are lost or destroyed prior to the end 
of the six year period, and
    (b) No party in interest other than the MS Broker-Dealers shall 
be subject to the civil penalty that may be assessed under section 
502(i) of the Act, or to the taxes imposed by section 4975(a) and 
(b) of the Code, if the records are not maintained, or are not 
available for examination as required below by paragraph (2);
    (2) Notwithstanding any provisions of subsections (a)(2) and (b) 
of section 504 of the Act, the records referred to in paragraph (1) 
are unconditionally available at their customary location during 
normal business hours by--
    (a) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and 
Exchange Commission (the SEC),

[[Page 3770]]

    (b) Any fiduciary of a participating client-plan or any duly 
authorized representative of such fiduciary, and
    (c) Any contributing employer to any participating client-plan 
or any duly authorized employee representative of such employer;
    (3) None of the persons described above in paragraphs (b)-(c) of 
paragraph (2) are authorized to examine the trade secrets of MS&Co 
or its affiliates or commercial or financial information which is 
privileged or confidential.

Section III. Definitions.

    For purposes of this proposed exemption,
    (1) An ``affiliate'' of a person includes--
    (a) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (b) Any officer, director, or partner, employee or relative (as 
defined in section 3(15) of the Act) of such other person; and
    (c) Any corporation or partnership of which such other person is 
an officer, director or partner.
    (2) The term ``control'' means the power to exercise a 
controlling influence over the management or policies of a person 
other than an individual.

Notice To Interested Persons

    Notice of the proposed exemption will be mailed by first class mail 
to each plan participating in securities lending arrangements with the 
MS Broker-Dealers within 30 days of the publication of the notice of 
pendency in the Federal Register. The notice will contain a copy of the 
notice of proposed exemption as published in the Federal Register and a 
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2). 
The supplemental statement will inform interested persons of their 
right to comment on and/or to request a hearing with respect to the 
pending exemption. Written comments and hearing requests are due within 
60 days of the publication of the proposed exemption the Federal 
Register.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which require, among other things, a fiduciary to 
discharge his or her duties respecting the plan solely in the interest 
of the participants and beneficiaries of the plan and in a prudent 
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it 
affect the requirements of section 401(a) of the Code that the plan 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) The proposed exemption, if granted, will not extend to 
transactions prohibited under section 406(b)(3) of the Act and section 
4975(c)(1)(F) of the Code;
    (3) Before an exemption can be granted under section 408(a) of the 
Act and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interest of the plan 
and of its participants and beneficiaries and protective of the rights 
of participants and beneficiaries of the plan;
    (4) This proposed exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and the Code, 
including statutory or administrative exemptions. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction; and
    (5) This proposed exemption, if granted, is subject to the express 
condition that the Summary of Facts and Representations set forth in 
the notice of proposed exemption relating to PTE 96-14, as amended by 
this notice, accurately describe, where relevant, the material terms of 
the transactions to be consummated pursuant to this exemption.

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a hearing on the pending exemption to the address above, 
within 30 days after the publication of this proposed exemption in the 
Federal Register. All comments will be made a part of the record. 
Comments received will be available for public inspection with the 
referenced applications at the address set forth above.

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting the requested 
exemption under the authority of section 408(a) of the Act and section 
4975(c)(2) of the Code and in accordance with the procedures set forth 
in 29 CFR Part 2570, Subpart B (55 FR 32836, August 10, 1990).

Section I. Covered Transactions

    If the exemption is granted, the restrictions of sections 
406(a)(1)(A) through (D) and 406(b)(1) and (b)(2) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (E) of the Code, shall not 
apply, effective March 12, 1996, to the lending of securities to Morgan 
Stanley & Co. Incorporated (MS&Co) and to any other U.S. registered 
broker-dealers affiliated with Morgan Stanley Trust Company (the 
Affiliated Broker-Dealer; collectively, the MS Broker-Dealers) by 
employee benefit plans with respect to which the MS Broker-Dealer who 
is borrowing such securities is a party in interest or for which Morgan 
Stanley Trust Company (MSTC) acts as directed trustee or custodian and 
securities lending agent and to the receipt of compensation by MSTC in 
connection with these transactions, provided that the following 
conditions are met:
    (1) Neither MS&Co nor MSTC will have any discretionary authority or 
control over a client-plan's assets involved in the transaction or 
renders investment advice (within the meaning of 29 CFR 2510.3-21(c)) 
with respect to those assets;
    (2) The terms of each loan of securities by a client-plan to the MS 
Broker-Dealer will be at least as favorable to such plan as those of a 
comparable arm's length transaction between unrelated parties;
    (3) Any arrangement for MSTC to lend plan securities to the MS 
Broker-Dealers will be approved in advance by a plan fiduciary who is 
independent of MSTC and the MS Broker-Dealers; \2\ (In this regard, the 
independent fiduciary also will approve the general terms of the 
securities loan agreement between the client-plan and the MS Broker-
Dealer, the specific terms of which will be negotiated and entered into 
by MSTC which will act as a liaison between the lender and the borrower 
to facilitate the lending transaction.)
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    \2\ The Department, herein, is not providing exemptive relief 
for securities lending transactions engaged in by primary lending 
agents, other than MSTC, beyond that provided pursuant to Prohibited 
Transaction Exemption (PTE) 81-6 (46 FR 7527, January 23, 1981, as 
amended at 52 FR 18754, May 19, 1987) and PTE 82-63 (47 FR 14804, 
April 6, 1982).
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    (4) A client-plan may terminate the arrangement at any time without 
penalty on five business days notice;
    (5) The client-plans will receive collateral consisting of cash, 
securities issued or guaranteed by the U.S. Government or its agencies 
or instrumentalities, bank letters of credit or other collateral 
permitted under PTE

[[Page 3771]]

81-6 (46 FR 7527, January 23, 1981) or any successor, from the MS 
Broker-Dealers by physical delivery, book entry in a securities 
depository, wire transfer or similar means by the close of business on 
or before the day the loaned securities are delivered to the MS Broker-
Dealers;
    (6) The market value of the collateral will initially equal at 
least 102 percent of the market value of the loaned securities and, if 
the market value of the collateral falls below 100 percent, the MS 
Broker-Dealers will deliver additional collateral on the following day 
such that the market value of the collateral will again equal 102 
percent;
    (7) Prior to entering into a loan agreement, the MS Broker-Dealer 
will furnish its most recent publicly-available audited and unaudited 
financial statements to MSTC, which, in turn, will provide the 
statements to the client-plan before the plan is asked to approve the 
terms of the loan agreement. The loan agreement will contain a 
requirement that the MS Broker-Dealer must promptly notify lenders at 
the time of a loan of any material adverse changes in its financial 
condition since the date of the most recently furnished financial 
statements. If any such changes have taken place, MSTC will not make 
any further loans to the MS Broker-Dealer unless an independent 
fiduciary of the client-plan approves the loan in view of the changed 
financial condition;
    (8) In return for lending securities, the client-plan either will--
    (a) Receive a reasonable fee, which is related to the value of the 
borrowed securities and the duration of the loan, or
    (b) Have the opportunity to derive compensation through the 
investment of cash collateral. (Under such circumstances, the client-
plan may pay a loan rebate or similar fee to the borrowing MS Broker-
Dealer, if such fee is not greater than the fee the Client Plan would 
pay in a comparable arm's length transaction with an unrelated party.)
    (9) All procedures regarding the securities lending activities 
will, at a minimum, conform to the applicable provisions of Prohibited 
Transaction Exemption (PTE) 81-6 and PTE 82-63 (47 FR 14804, April 6, 
1992);
    (10) The MS Broker-Dealer will indemnify and hold harmless each 
lending client-plan against any and all losses, damages, liabilities, 
costs and expenses (including attorney's fees) incurred by such plan in 
connection with the lending of securities to the MS Broker-Dealers;
    (11) The client-plan will receive the equivalent of all 
distributions made to holders of the borrowed securities during the 
term of the loan, including, but not limited to, cash dividends, 
interest payments, shares of stock as a result of stock splits and 
rights to purchase additional securities, or other distributions;
    (12) Only plans with total assets having an aggregate market value 
of at least $50 million will be permitted to lend securities to the MS 
Broker-Dealers; provided, however that--
    (a) In the case of two or more plans which are maintained by the 
same employer, controlled group of corporations or employee 
organization (the Related Plans), whose assets are commingled for 
investment purposes in a single master trust or any other entity the 
assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the Plan 
Asset Regulation), which entity is engaged in securities lending 
arrangements with the MS Broker-Dealers, the foregoing $50 million 
requirement shall be deemed satisfied if such trust or other entity has 
aggregate assets which are in excess of $50 million; provided that, if 
the fiduciary responsible for making the investment decision on behalf 
of such master trust or other entity is not the employer or an 
affiliate of the employer, such fiduciary has total assets under its 
management and control, exclusive of the $50 million threshold amount 
attributable to plan investment in the commingled entity, which are in 
excess of $100 million, or
    (b) In the case of two or more plans which are not maintained by 
the same employer, controlled group of corporations or employee 
organization (the Unrelated Plans), whose assets are commingled for 
investment purposes in a group trust or any other form of entity the 
assets of which are ``plan assets'' under the Plan Asset Regulation, 
which entity is engaged in securities lending arrangements with the MS 
Broker-Dealers, the foregoing $50 million requirement shall be deemed 
satisfied if such trust or other entity has aggregate assets which are 
in excess of $50 million; provided that the fiduciary responsible for 
making the investment decision on behalf of such group trust or other 
entity--
    (i) Is neither the sponsoring employer, a member of the controlled 
group of corporations, the employee organization, nor an affiliate,
    (ii) Has full investment responsibility with respect to plan assets 
invested therein, and
    (iii) Has total assets under its management and control, exclusive 
of the $50 million threshold amount attributable to plan investment in 
the commingled entity, which are in excess of $100 million; (In 
addition, none of the entities described above must be formed for the 
sole purpose of making loans of securities.)
    (13) No loan of securities will be made by MSTC as securities 
lending agent to any MS Broker-Dealer on any day on which the market 
value of the securities proposed to be loaned, when added to the market 
value of all client-plan securities subject to outstanding loans to MS 
Broker-Dealers, exceeds 50 percent of the market value of all client-
plan securities subject to securities loans, including the market value 
of securities proposed to be loaned to the MS Broker-Dealer. (For 
purposes of this paragraph, market value shall be determined in U.S. 
dollars, based on the last preceding business day's closing prices of 
the securities and the last preceding business day's closing foreign 
exchange rates, if applicable.);
    (14) With regard to the ``exclusive borrowing'' agreement, the MS 
Broker-Dealer will directly negotiate the agreement with a plan 
fiduciary who is independent of the MS Broker-Dealers and MSTC, and 
such agreement may be terminated by either party to the agreement at 
any time;
    (15) Prior to any plan's approval of the lending of its securities 
to an MS Broker-Dealer, a copy of this exemption (and the notice of 
pendency) will be provided to the client-plan;
    (16) Each client-plan will receive monthly reports with respect to 
securities lending transactions so that an independent fiduciary of a 
client-plan may monitor such transactions with the MS Broker-Dealer;

Section II. General Conditions

    (1) MS Broker-Dealers will maintain, or cause to be maintained, for 
a period of six years from the date of such transactions, in a manner 
that is convenient and accessible for audit and examination, such 
records as are necessary to enable the persons described in paragraph 
(2) to determine whether the conditions of this exemption have been 
met, except that --
    (a) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of the MS Broker-
Dealers, the records are lost or destroyed prior to the end of the six 
year period, and
    (b) No party in interest other than the MS Broker-Dealers shall be 
subject to the civil penalty that may be assessed under section 502(i) 
of the Act, or to the taxes imposed by section 4975(a) and (b) of the 
Code, if the records are not maintained, or are not available for

[[Page 3772]]

examination as required below by paragraph (2);
    (2) Notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the records referred to in paragraph (1) are 
unconditionally available at their customary location during normal 
business hours by --
    (a) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and Exchange 
Commission (the SEC),
    (b) Any fiduciary of a participating client-plan or any duly 
authorized representative of such fiduciary, and
    (c) Any contributing employer to any participating client-plan or 
any duly authorized employee representative of such employer;
    (3) None of the persons described above in paragraphs (b)-(c) of 
paragraph (2) are authorized to examine the trade secrets of MS&Co or 
its affiliates or commercial or financial information which is 
privileged or confidential.

Section III. Definitions

    For purposes of this proposed exemption,
    (1) An ``affiliate'' of a person includes--
    (a) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (b) Any officer, director, or partner, employee or relative (as 
defined in section 3(15) of the Act) of such other person; and
    (c) Any corporation or partnership of which such other person is an 
officer, director or partner.
    (2) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.

EFFECTIVE DATE: If granted, this proposed exemption will be effective 
as of March 12, 1996.
    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.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant PTE 96-14, refer to the 
proposed exemption, grant notice and technical correction notice which 
are cited above.

    Signed at Washington, D.C., this 21st day of January, 1998.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 98-1789 Filed 1-23-98; 8:45 am]
BILLING CODE 4510-29-P