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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Bankers Trust Company [Notices] [02/19/1998]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Bankers Trust Company [02/19/1998]

[PDF Version]

Volume 63, Number 33, Page 8481-8497

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10213, et al.]

 
Proposed Exemptions; Bankers Trust Company

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request 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 request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 
20210. Attention: Application No. ____________, stated in each Notice 
of Proposed Exemption. The applications for exemption and the comments 
received will be available for public inspection in the Public 
Documents Room of Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-5507, 200 Constitution Avenue, N.W., 
Washington, D.C. 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 (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. 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

[[Page 8482]]

statement of the facts and representations.

Bankers Trust Company (Bankers Trust) Located in New York, New York

[Application No. D-10213]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply, effective February 16, 1996, to the: (1) lending 
of certain securities to BT Securities Corporation, Bankers Trust 
International PLC, and Bankers Trust (Australia) Limited, which are 
affiliates of Bankers Trust, (collectively; the Affiliated Borrowers), 
by certain employee benefit plans (including commingled investment 
funds holding plan assets) (the Client Plans), for which Bankers Trust 
and certain other affiliates (the BT Group) act as the directed trustee 
or custodian and securities lending agent or sub-agent; <SUP>1</SUP> 
and (2) receipt of compensation by the BT Group in connection with 
these transactions; provided that the following conditions are 
satisfied:
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    \1\ The applicant represents that because Bankers Trust may add 
new affiliates, the entities comprising the BT Group may change. 
However, the Affiliated Borrowers will always be BT Securities 
Corporation, Bankers Trust International PLC and Bankers Trust 
(Australia) Limited for purposes of this exemption, if granted.
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    1. Neither the Affiliated Borrowers nor the BT Group has or 
exercises discretionary authority or control with respect to the 
investment of the assets of the Client Plans involved in the 
transaction (other than with respect to the investment of cash 
collateral after securities have been loaned and collateral received), 
or renders investment advice (within the meaning of 29 CFR 2510.3-
21(c)) with respect to those assets, including decisions concerning a 
Client Plan's acquisition and disposition of securities available for 
loan.
    2. Before a Client Plan participates in a securities lending 
program and before any loan of securities to the Affiliated Borrowers 
is affected, a Client Plan fiduciary who is independent of the BT Group 
and the Affiliated Borrowers must have:
    (a) Authorized and approved a securities lending authorization 
agreement with the BT Group (the Lending Authorization), where the BT 
Group is acting as the securities lending agent;
    (b) Authorized and approved the primary securities lending 
authorization agreement (the Primary Lending Agreement) with the 
primary lending agent, where BT Group is lending securities under a 
sub-agency arrangement with the primary lending agent <SUP>2</SUP>;
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    \2\ When the BT Group acts as sub-agent, rather than the primary 
lending agent, the primary lending agent is receiving no section 
406(b) of the Act relief herein. In such situations, the primary 
lending agent may be provided relief by Prohibited Transaction Class 
Exemption (PTE) 81-6 and PTE 82-63. PTE 81-6 was published at 46 FR 
7527, January 23, 1981, as amended at 52 FR 18754, May 19, 1987, and 
PTE 82-63 was published at 47 FR 14804, April 6, 1982.
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    (c) Approved the general terms of the securities loan agreement 
(the Loan Agreement) between such Client Plan and the Affiliated 
Borrowers, the specific terms of which are negotiated and entered into 
by BT Group.
    3. The Client Plan may terminate the agency or sub-agency agreement 
at any time without penalty to such plan on five (5) business days 
notice, whereupon the Affiliated Borrowers shall deliver certificates 
for securities identical to the borrowed securities (or the equivalent 
in the event of reorganization, recapitalization or merger of the 
issuer of the borrowed securities) to the plan within (a) the customary 
delivery period for such securities, (b) five business days, or (c) the 
time negotiated for such delivery by the Client Plan and the Affiliated 
Borrowers, whichever is less.
    4. The Client Plan will receive from the Affiliated Borrowers 
(either by physical delivery or by book entry in a securities 
depository located in the United States, wire transfer or similar 
means) by the close of business on or before the day on which the 
loaned securities are delivered to the Affiliated Borrowers, collateral 
consisting of U.S. currency, securities issued or guaranteed by the 
U.S. Government or its agencies or instrumentalities, or an irrevocable 
bank letter of credit issued by a U.S. bank, which is a person other 
than the Affiliated Borrowers or an affiliate thereof, or any 
combination thereof, or other collateral permitted under Prohibited 
Transaction Exemption (PTE) 81-6 (as amended from time to time or, 
alternatively, any additional or superceding class exemption that may 
be issued to cover securities lending by employee benefit plans), 
having, as of the close of business on the preceding business day, a 
market value (or, in the case of a letter of credit, a stated amount) 
initially equal to at least 102 percent of the market value of the 
loaned securities.
    If the market value of the collateral on the close of trading on a 
business day is less than 100 percent of the market value of the 
borrowed securities at the close of business on that day, the 
Affiliated Borrowers will deliver additional collateral on the 
following day such that the market value of the collateral in the 
aggregate will again equal 102 percent. The Loan Agreement will give 
the Client Plan a continuing security interest in, title to, or the 
rights of a secured creditor with respect to the collateral and a lien 
on the collateral. The BT Group will monitor the level of the 
collateral daily.
    5. When the BT Group lends securities to the Affiliated Borrowers, 
the following conditions must be met:
    (a) The collateral will be maintained in U.S. dollars, U.S. dollar-
denominated securities or letters of credit of U.S. Banks;
    (b) all collateral will be held in the United States;
    (c) the situs of the loan agreement will be maintained in the 
United States; (d) the lending Client Plans will be indemnified by 
Bankers Trust in the United States for any transactions covered by this 
exemption with the foreign Affiliated Borrowers so that the Client 
Plans will not have to litigate in a foreign jurisdiction nor sue the 
foreign Affiliated Borrowers to realize on the indemnification; (e) 
prior to the transaction, the foreign Affiliated Borrowers will enter 
into a written agreement with the Client Plan whereby the Affiliated 
Borrowers consent to the service of process in the United States and to 
the jurisdiction of the courts of the United States with respect to the 
transactions described herein; and (f)(1) Bankers Trust International 
PLC is a deposit taking institution supervised by the Bank of England; 
and (2) Bankers Trust (Australia) Limited is a merchant bank which is 
under the jurisdiction of the Federal Reserve Bank of Australia.
    6. Before entering into the Loan Agreement and before a Client Plan 
lends any securities to the Affiliated Borrowers, the Affiliated 
Borrowers shall have furnished the following items to the Client Plan 
fiduciary: (a) the most recent available audited and unaudited 
statement of the Affiliated Borrowers' financial condition, (b) at the 
time of the loan, the Affiliated Borrowers must give prompt notice to 
the Client Plan fiduciary of any material adverse changes in the 
Affiliated Borrowers' financial condition since the date of the

[[Page 8483]]

most recently financial statement furnished to the Client Plan, and (c) 
in the event of any such changes, the BT Group will request approval of 
the Client Plan to continue lending to the Affiliated Borrowers before 
making any such additional loans. No such new loans will be made until 
approval is received. Each loan shall constitute a representation by 
the Affiliated Borrower that there has been no such material adverse 
change.
    7. The Client Plan: (a) Receives a reasonable fee that is related 
to the value of the borrowed securities and the duration of the loan, 
or (b) has the opportunity to derive compensation through the 
investment of cash collateral. In the case of cash collateral, the 
Client Plan may pay a loan rebate or similar fee to the Affiliated 
Borrower, if such fee is not greater than the fee Client Plan would pay 
an unrelated party in an arm's length transaction.
    8. All procedures regarding the securities lending activities will 
at a minimum conform to the applicable provisions of Prohibited 
Transaction Exemptions (PTEs) 81-6 and 82-63.
    9. In the event Bankers Trust International PLC and/or Bankers 
Trust (Australia) Limited default on a loan, Bankers Trust will 
liquidate the loan collateral to purchase identical securities for the 
Client Plan. If the collateral is insufficient to accomplish such 
purchase, Bankers Trust will indemnify the Client Plan for any 
shortfall in the collateral plus interest on such amount and any 
transaction costs incurred (including attorney's fees of the Client 
Plan for legal actions arising out of the default on the loans or 
failure to properly indemnify under this provision). Alternatively, if 
such identical securities are not available on the market, Bankers 
Trust will pay the Client Plan cash equal to the market value of the 
borrowed securities as of the date they should have been returned to 
the Client Plan plus all the accrued financial benefits derived from 
the beneficial ownership of such loaned securities. The lending Client 
Plans will be indemnified by Bankers Trust in the United States for any 
loans to the foreign Affiliated Borrowers.
    10. In the event BT Securities Corporation, a U.S. registered 
broker-dealer, defaults on a loan, Bankers Trust will liquidate the 
loan collateral to purchase identical securities for the Client Plan. 
If the collateral is insufficient to accomplish such purchase, BT 
Securities Corporation will indemnify the Client Plan for any shortfall 
in the collateral plus interest on such amount and any transaction 
costs incurred (including attorney's fees of the Client Plan for legal 
actions arising out of the default on the loans or failure to properly 
indemnify under this provision).
    11. If the Affiliated Borrowers' default on the securities loan or 
enter bankruptcy, the collateral will not be available to the 
Affiliated Borrowers or their creditors, but is used to make the Client 
Plan whole.
    12. The Client Plans will be entitled to the equivalent of all 
distributions made to holders of the borrowed securities, including all 
interest, dividends and distributions on the loaned securities during 
the loan period.
    13. Only Client Plans with total assets having an aggregate market 
value of at least $50 million will be permitted to lend securities to 
the Affiliated Borrowers.
    14. For purposes of this proposed exemption, the Affiliated 
Borrowers will consist only of BT Securities Corporation, Bankers Trust 
International PLC and Bankers Trust (Australia) Limited.
    15. In any calendar quarter, on average 50 percent or more of the 
outstanding dollar value of securities loans negotiated on behalf of 
the Client Plans by the BT Group in the aggregate will be to borrowers 
who are not affiliated with the BT Group.
    16. The terms of each loan of securities by the Client Plans to any 
of the Affiliated Borrowers will be at market rates and at terms as 
favorable to such plans as if made at the same time and under the same 
circumstances to an unaffiliated party.
    17. Each Client Plan will receive a monthly transaction report, 
including but not limited to the information described in paragraph 24 
of the summary of facts and representations below, so that the 
independent fiduciary of such plan may monitor the securities lending 
transactions with the Affiliated Borrowers.
    18. During the notification of interested persons period, all 
current Client Plans will receive a copy of the notice of pendency. If 
the Department grants the final exemption, current Client Plans will 
receive a copy of the final exemption. Also, Bankers Trust is prepared 
to provide a copy of the final exemption to any new Client Plans.
    19. Bankers Trust or the Affiliated Borrowers maintain or cause to 
be maintained within the United States for a period of six years from 
the date of such transaction such records as are necessary to enable 
the persons described in paragraph (20) below to determine whether the 
conditions of this exemption have been met; except that a party in 
interest with respect to an employee benefit plan, other than Bankers 
Trust or the Affiliated Borrowers, shall not be subject to a civil 
penalty under section 502(i) of the Act or the taxes imposed by section 
4975 (a) or (b) of the Code, if such records are not maintained, or are 
not available for examination as required by this section, and a 
prohibited transaction will not be deemed to have occurred if, due to 
circumstances beyond the control of Bankers Trust or the Affiliated 
Borrowers, such records are lost or destroyed prior to the end of such 
six year period.
    (20)(i) Except as provided in subparagraph (ii) of this paragraph 
(20) and notwithstanding any provisions of subsections (a)(2) and (b) 
of section 504 of the Act, the records referred to in paragraph (19) 
are unconditionally available at their customary location for 
examination during normal business hours by--
    (a) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the Securities and 
Exchange Commission,
    (b) Any fiduciary of a Client Plan or any duly authorized 
representative of such fiduciary,
    (c) Any contributing employer to any Client Plan, or any duly 
authorized employee or representative of such employer, and
    (d) Any participant or beneficiary of any Client Plan, or any duly 
authorized representative of such participant or beneficiary.
    (ii) None of the persons described in subparagraphs (b)-(d) of this 
paragraph (20) shall be authorized to examine trade secrets of Bankers 
Trust or the Affiliated Borrowers, or commercial or financial 
information which is privileged or confidential.

EFFECTIVE DATE: If granted this exemption will be effective as of 
February 16, 1996.

Summary of Facts and Representations

    1. Bankers Trust is a New York banking corporation and a leading 
commercial bank. Bankers Trust is wholly owned by Bankers Trust New 
York Corporation (BTNY), a bank holding company established in 1965 
under the laws of the State of New York. As of December 31, 1995, BTNY 
and its affiliates had consolidated assets of $104,002,000,000 and 
total stockholders equity of $4,984,000,000.
    The BT Group consists of Bankers Trust and certain of its 
affiliates who act as a directed trustee, custodian and securities 
lending agent or sub-agent for clients. The BT Group engages in 
securities lending activities for its own accounts and as an agent for 
Bankers

[[Page 8484]]

Trust Company of California and for Bankers Trust Company of the 
Southwest. The BT Group also provides a wide range of banking, 
fiduciary, recordkeeping, custodial, brokerage and investment services 
to corporations, institutions, governments, employee benefit plans, 
governmental retirement plans and private investors.
    2. The Affiliated Borrowers consist of BT Securities Corporation, 
Bankers Trust International PLC and Bankers Trust (Australia) Limited. 
The exemption, if granted, will be limited to these three entities as 
the Affiliated Borrowers. BT Securities Corporation is a U.S. broker-
dealer affiliated with Bankers Trust with $834 million in capital as of 
December 31, 1995. BT Securities Corporation is registered under the 
1934 Act and its activities are under the jurisdiction of the Federal 
Reserve Board, the Securities and Exchange Commission and the National 
Association of Securities Dealers.
    Bankers Trust International PLC is a wholly owned subsidiary of 
Bankers Trust established under English law and located in England. 
Bankers Trust International PLC is a deposit taking institution 
supervised by the Bank of England.
    Bankers Trust (Australia) Limited is a merchant bank which conducts 
commercial banking business in Australia and is under the jurisdiction 
of the Federal Reserve Bank of Australia. Bankers Trust (Australia) 
Limited is an indirect subsidiary of Bankers Trust.
    3. The Affiliated Borrowers will borrow securities from 
institutions to satisfy their own needs, or they may re-lend these 
securities to brokerage firms and other entities which need a 
particular security for a certain period of time. Bankers Trust 
requests an exemption for the lending of securities owned by the Client 
Plans, for which the BT Group serves as the directed trustee or 
custodian and securities lending agent or sub-agent, <SUP>3</SUP> to 
the Affiliated Borrowers, following disclosure of its affiliation with 
the Affiliated Borrowers to the Independent Fiduciaries of the Client 
Plans, and for the receipt of compensation by the BT Group in 
connection with such transactions.
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    \3\ For the sake of simplicity, future references to the BT 
Group's performance of services as securities lending agent should 
be deemed to include its parallel performance as securities lending 
sub-agent and references to the Client Plans should be deemed to 
refer to plans for which the BT Group is acting as sub-agent with 
respect to securities lending activities, unless otherwise indicated 
specifically or by the context of the reference.
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    Because the BT Group, under the securities lending program, would 
have discretion to lend plan securities to the Affiliated Borrowers, 
and because the Affiliated Borrowers are affiliates of the BT Group, 
the lending of securities to the Affiliated Borrowers by the Client 
Plans for which the BT Group serves as directed trustee or custodian 
and securities lending agent (or sub-agent) may be outside the scope of 
relief provided by Prohibited Transaction Exemption (PTE) 81-6 and PTE 
82-63.<SUP>4</SUP>
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    \4\ PTE 81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR 
18754, May 19, 1987) provides an exemption under certain conditions 
from section 406(a)(1)(A) through (D) of the Act and the 
corresponding provisions of section 4975(c) of the Code for the 
lending of securities that are assets of an employee benefit plan to 
certain broker-dealers or banks which are parties in interest.
    Condition 1 of PTE 81-6 requires, in part, that neither the 
borrower nor an affiliate of the borrower has discretionary 
authority or control with respect to the investment of the plan 
assets involved in the transaction.
    PTE 82-63 (47 FR 14804, April 6, 1982) provides an exemption 
under specified conditions from section 406(b)(1) of the Act and 
section 4975(c)(1)(E) of the Code for the payment of compensation to 
a plan fiduciary for services rendered in connection with loans of 
plan assets that are securities. PTE 82-63 permits the payment of 
compensation to a plan fiduciary for the provision of securities 
lending services only if the loan of securities itself is not 
prohibited under section 406(a) of the Act.
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    Several safeguards, described more fully below, are incorporated 
into the application to ensure the protection of the Client Plans' 
assets involved in the transactions. In addition, the applicants 
represent that the lending program described herein incorporates the 
relevant conditions contained in PTE 81-6 and PTE 82-63.
    4. BT Securities Corporation, a U.S. registered broker-dealer, will 
comply with Federal Reserve Board's Regulation T in its securities 
lending activities. Pursuant to Regulation T, permitted borrowing 
purposes include making delivery of securities in the case of short 
sales, failures of a broker to receive securities it is required to 
deliver or similar situations.
    The Client Plans will also lend securities to the foreign 
Affiliated Borrowers (Foreign Lending) which are Bankers Trust 
International PLC and Bankers Trust (Australia) Limited. The applicant 
represents that Foreign Lending will not expose the Client Plans to 
greater risk. In Foreign Lending, Bankers Trust will comply with the 
following safeguards: (a) The collateral will be maintained in U.S. 
dollars, U.S. dollar-denominated securities or letters of credit of 
U.S. Banks; (b) all collateral will be held in the United States; 
<SUP>5</SUP> (c) the situs of the loan agreement will be maintained in 
the United States; (d) Bankers Trust will indemnify the lending Client 
Plans in the United States for any loans to the foreign Affiliated 
Borrowers so that the Client Plans will not have to litigate in a 
foreign jurisdiction nor sue the foreign Affiliated Borrowers to 
realize on the indemnification; (e) prior to the transaction, the 
foreign Affiliated Borrowers enter into a written agreement with the 
Client Plan whereby the Affiliated Borrowers consent to the 
jurisdiction of the courts of the United States with respect to the 
transactions described herein; and (f)(1) Bankers Trust International 
PLC is a deposit taking institution supervised by the Bank of England; 
and (2) Bankers Trust (Australia) Limited is a merchant bank which is 
under the jurisdiction of the Federal Reserve Bank of Australia.
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    \5\ Under U.K. law, the securities lending agreement between 
Bankers Trust and Bankers Trust International PLC provides, among 
other things, that all rights, title and interest in the loaned 
securities passes to the borrower, and all rights, title and 
interest in the collateral passes to the lending Client Plan.
    The Australian securities lending agreement contains, among 
other things, the following provisions. Specifically, clause 3.4 of 
such agreement states: ``Property in and title to the securities 
delivered under clause 3.1, passes absolutely to the borrower free 
from all liens and encumbrances, and the borrower is not obligated 
to re-deliver the same securities to the lender.'' Clause 3.5 of 
this agreement states: ``Property in and title to all the collateral 
delivered under clause 3.2, passes absolutely to the lender free 
from all liens and encumbrances, and the lender is not obligated 
under the loan to re-deliver the same cash, bonds or securities to 
the borrower (all or part) of the collateral.'' However, as a 
condition of this exemption if granted, and by agreement of the 
parties, the Client Plans will be entitled to the equivalent of all 
interest, dividends and distributions on the loaned securities 
during the loan period.
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    5. Where the BT Group acts as a securities lending agent for the 
Client Plans its essential functions are identifying appropriate 
borrowers of securities and negotiating the terms of the loans to these 
borrowers. As a securities lending agent for the Client Plans, the BT 
Group also provides ancillary services such as monitoring the level of 
collateral and the value of the loaned securities and, when directed by 
a Client Plan, investing the cash collateral received with respect to 
such loans. To protect the Client Plans' assets in these transactions, 
the BT Group's procedures for lending securities comply with the 
applicable conditions of PTE 81-6 and PTE 82-63 (including with respect 
to any commingled funds that may participate in the securities lending 
program).
    6. Under the BT Group's lending program, when a loan is 
collateralized with cash, the BT Group will transfer such cash to a 
trust or other investment vehicle selected by the Client Plan in

[[Page 8485]]

advance.<SUP>6</SUP> The BT Group will rebate a portion of the earnings 
on the cash collateral to the Affiliated Borrowers as agreed to in the 
loan agreement between the BT Group and the Affiliated Borrowers (the 
Loan Agreement). The applicant represents that through its 
authorization of the lending program, the independent fiduciary of the 
Client Plan will approve the terms of the Loan Agreement. The 
Affiliated Borrowers will pay a fee to the Client Plans based on the 
value of the loaned securities where the collateral consists of 
obligations other than cash.
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    \6\ When the Client Plan approves securities lending, it is 
required to designate a short-term investment fund for the 
investment of cash collateral it receives in connection with the 
loaned securities. For example, when the Client Plan selects BT 
Pyramid Funds, which are bank collective funds under IRS Revenue 
Ruling 81-100, as a vehicle for investment of cash collateral, the 
fees for investment management are embedded in that fund. However, 
the applicant represents that selecting a vehicle managed by Bankers 
Trust is strictly optional and within the total discretion of the 
Client Plan. Alternatively, the independent fiduciary of the Client 
Plan may select his own manager, an unrelated mutual or collective 
fund, or another vehicle of his choice. The selected investment 
vehicle must be acceptable to Bankers Trust. Bankers Trust neither 
selects the collateral investment vehicle, nor has any authority or 
responsibility to do so.
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    The fee arrangements between the Client Plan and the BT Group with 
respect to the securities lending program are approved in advance by 
the independent fiduciary of the Client Plan. This fee is calculated as 
a percentage of the income earned on the investment of the cash 
collateral, and will compensate the BT Group for providing lending 
services to the Client Plans. This fee will reduce the income earned by 
the Client Plans from the lending of the securities.
    7. Where BT Group is the securities lending agent, an independent 
fiduciary of the Client Plan who is independent of the BT Group and the 
Affiliated Borrowers, will authorize securities lending (the Lending 
Authorization) before the Client Plan participates in the BT Group's 
securities lending program. The Lending Authorization will include the 
authorization to lend securities, including lending to the Affiliated 
Borrowers, investment direction by the Client Plans of cash collateral, 
and fee arrangements. The Lending Authorization and the enclosed 
additional explanatory materials will describe, among other things, the 
operation of the securities lending program and allow the BT Group to 
lend securities held by the Client Plan to borrowers, including the 
Affiliated Borrowers, as selected by the BT Group, subject to any 
specific restrictions imposed by the Client Plan. The Lending 
Authorization and the explanatory materials also describe the 
securities available for lending, minimum required margin, daily 
marking to market procedures, a list of the affiliates who are 
permissible borrowers under the securities lending program, and the 
basis of the BT Group's compensation for performing the securities 
lending services.
    8. The Lending Authorization and the explanatory materials will 
provide that if one of the Affiliated Borrower's is an approved 
borrower, the BT Group, as agent of the Client Plan, will represent to 
the Client Plan that each loan made to its affiliate on behalf of the 
Client Plan will be at market rates and at terms as favorable to the 
Client Plan as if made at the same time and under the same 
circumstances, to an unaffiliated borrower.
    9. The Lending Authorization will set forth a fee arrangement 
agreed upon by the Client Plan and the BT Group, whereby the BT Group 
will be compensated for its services as the lending agent prior to the 
commencement of any lending activity. The Client Plan will be provided 
with any reasonably available information necessary for the independent 
fiduciary of the Client Plan to determine whether to enter into, or 
continue to participate under the Lending Authorization (or the Primary 
Lending Agreement) and other reasonably available information which the 
independent fiduciary may reasonably request. A Client Plan may 
terminate either the Lending Authorization or the Primary Lending 
Agreement at any time, without penalty, on five business days notice.
    10. Where the BT Group is the securities lending agent, the BT 
Group will enter into the Loan Agreement with the Affiliated Borrower 
on behalf of the Client Plans. The form of the Loan Agreement will be 
substantially similar to loan agreements negotiated with other 
similarly situated borrowers.<SUP>7</SUP> The form of the Loan 
Agreement will also be the industry or the market standard for loans to 
the borrowers in the country (U.S., U.K. and Australia) where the 
borrower is domiciled. It will describe the lenders's rights against 
the borrower in the country of the borrower's domicile (U.S., U.K., and 
Australia), and represent that these rights will be equivalent to those 
under U.S. law. The independent fiduciary for each Client Plan will 
approve the terms of the Loan Agreement through its authorization of 
the lending program, and such fiduciary will be provided a copy of the 
applicable Loan Agreement from the BT Group upon request. The Loan 
Agreement will specify, among other things, the right of the BT Group 
as the lending agent on behalf of the Client Plan to terminate a loan 
at any time on not more than five business days notice, and the lending 
agent's rights in the event of any default by the borrower. The Loan 
Agreement will also require that the Affiliated Borrowers pay all 
transfer fees and transfer taxes related to the security loans. The 
Loan Agreement will describe the basis for compensation to the Client 
Plan for lending securities to the Affiliated Borrowers under each 
category of collateral.
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    \7\ The form of the Loan Agreement between a securities lending 
agent and a foreign Affiliated Borrower differs from the standard 
U.S. loan agreement. Under the U.K. and Australian Loan Agreements, 
the Client Plan receives title to (rather than a pledge of, or a 
security interest in) the collateral.
    Furthermore, the Loan Agreement with the Client plans will 
include specific indemnification provisions as described herein.
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    11. The BT group may also be retained by independent primary 
securities lending agents to render securities lending services in a 
sub-agent capacity. Under these circumstances, the primary lending 
agent, an entity independent of the BT Group and the Affiliated 
Borrower, will enter into a securities lending agency agreement (the 
Primary Lending Agreement) with an independent fiduciary of the Client 
Plan who is independent of the primary lending agent, the BT Group and 
the Affiliated Borrowers, before the Client Plan participates in the 
securities lending program. The BT Group will not enter into a sub-
agent arrangement unless the Primary Lending Agreement contains 
provisions which correspond to those in the Loan Agreement where the BT 
Group is the primary securities lending agent, including a description 
of the lending program's operation, the use of an approved form of the 
loan agreement, the specification of securities which are available to 
be lent, the required margin and daily marking to market, and a list of 
the approved borrowers (including, the Affiliated Borrowers). The 
Primary Lending Agreement will authorize the primary lending agent to 
appoint sub-agents in order to facilitate its performance of securities 
lending agency functions.
    The Primary Lending Agreement will expressly disclose where the BT 
Group will be acting as the securities lending sub-agent. The Primary 
Lending Agreement will also set forth the basis and rate for the 
primary lending agent's compensation from the Client Plan for 
performing securities lending services, and will authorize the primary 
lending agent to pay a portion of its fee, as

[[Page 8486]]

determined by the primary lending agent in its sole discretion, to any 
sub-agent(s) it retains pursuant to the authority granted under such 
Primary Lending Agreement.<SUP>8</SUP>
---------------------------------------------------------------------------

    \8\ The foregoing provisions describe arrangements comparable to 
conditions (c) and (d) of PTE 82-63 which require that the payment 
of compensation to a ``lending fiduciary'' is made under a written 
instrument and is subject to prior written authorization of an 
independent ``authorizing fiduciary.'' In the event that a 
commingled investment fund will participate in the securities 
lending program, the special rule applicable to such funds 
concerning the authorization of the compensation arrangement set 
forth in paragraph (f) of PTE 82-63 will be satisfied.
---------------------------------------------------------------------------

    Pursuant to its authority to appoint sub-agents, the primary 
lending agent will enter into a securities lending sub-agency agreement 
(the Sub-Agency Agreement) with the BT Group, under which the primary 
lending agent will retain and authorize the BT Group, as the sub-agent, 
to lend securities of the primary lending agent's Client Plans, subject 
to the same terms and conditions of the Primary Lending Agreement. 
Thus, the form of the Loan Agreement will be the same as that approved 
by the independent fiduciary in the Primary Lending Agreement, and the 
list of permissible borrowers under the Sub-Agency Agreement (including 
the Affiliated Borrowers), will be limited to those approved borrowers 
listed as such under the Primary Lending Agreement. The Sub-Agency 
Agreement will also contain provisions comparable to those in a Loan 
Agreement where the BT Group is the primary lending agent. The Sub-
Agency Agreement will provide that the BT Group comply with the same 
standard regarding arms-length dealing with the Affiliated Borrowers, 
as when the BT Group is the primary lending agent. The Sub-Agency 
Agreement will also set forth the basis and the rate for the BT Group's 
compensation to be paid by the primary lending agent.
    12. In all cases, the BT Group will maintain transactional and 
market records sufficient to assure compliance with its representations 
that all loans to the Affiliated Borrowers are at arm's-length terms. 
Information will be provided to the independent fiduciary of the Client 
Plan in the manner and format agreed to with the lending agent, without 
charge to the Client Plan.
    13. Before entering into the Loan Agreement, the Affiliated 
Borrowers will furnish its most recent available audited and unaudited 
financial statements to the Client Plan Fiduciary, and each Client Plan 
will be advised in the Lending Authorization that it will be provided 
copies of such statements upon request, and before the Client Plan is 
asked to authorize such lending. The Loan Agreement will contain a 
requirement that the Affiliated Borrowers must give prompt notice at 
the time of the loan, of any material adverse changes in their 
financial condition since the date of the most recently furnished 
financial statements. In the event of any such changes, the BT Group 
will request approval of the Client Plan to continue lending to the 
Affiliated Borrowers before making any such additional loans. No such 
new loans will be made until approval is received. Each loan shall 
constitute a representation by the Affiliated Borrower that there has 
been no such material adverse change.
    14. Each time that a Client Plan loans securities to the Affiliated 
Borrower pursuant to the Loan Agreement, the BT Group will reflect in 
its records the material terms of the loan, including the securities 
loaned, the required level of the collateral, and the fee or rebate 
payable. The terms of each loan will be at least as favorable to the 
Client Plan as those of a comparable arm's-length transaction between 
unrelated parties.
    15. The Loan Agreement will provide that the lending agent may 
terminate any loan at any time. Upon a termination, the Affiliated 
Borrowers will be contractually obligated to return the loaned 
securities to the lending agent within the lesser of: (a) The customary 
delivery period for such securities; (b) five business days of 
notification (or such longer period of time permitted pursuant to a 
class exemption); or (c) the time negotiated for such delivery by the 
lending agent and the borrower. If the Affiliated Borrowers fail to 
return the securities within the designated time, the lending agent 
will have the right under the Loan Agreement to purchase securities 
identical to the borrowed securities, and apply the collateral to the 
payment of the purchase price and any other costs and expenses 
reasonably incurred as a result of such sale and/or purchase.
    16. Further, the Client Plans will be indemnified by Bankers Trust 
or BT Securities Corporation in the event the Affiliated Borrowers fail 
to return the borrowed securities. In the event Bankers Trust 
International PLC and/or Bankers Trust (Australia) Limited default on a 
loan Bankers Trust will liquidate the loan collateral to purchase 
identical securities for the Client Plan. In the event the collateral 
is insufficient to accomplish such purchase, Bankers Trust will 
indemnify the Client Plan for any shortfall in the collateral plus 
interest on such amount and any transaction costs incurred (including 
attorney's fees of the Client Plan for legal actions arising out of the 
default on the loans or failure to properly indemnify under this 
provision). Alternatively, if such identical securities are not 
available on the market, Bankers Trust will pay the Client Plan cash 
equal to the market value of the borrowed securities as of the date 
they should have been returned to the Client Plan plus all the accrued 
financial benefits derived from the beneficial ownership of such loaned 
securities. The lending Client Plans will be indemnified by Bankers 
Trust in the United States for any loans to the foreign Affiliated 
Borrowers.
    When the Affiliated Borrower is BT Securities Corporation, a U.S. 
registered broker-dealer, BT Securities Corporation will indemnify the 
Client Plan against losses.<SUP>9</SUP> Bankers Trust will liquidate 
the loan collateral to purchase identical securities for the Client 
Plan. If the collateral is insufficient to accomplish such purchase, BT 
Securities Corporation will indemnify the Client Plan for any shortfall 
in the collateral plus interest on such amount and any transaction 
costs incurred (including attorney's fees of the Client Plan for legal 
actions arising out of the default on the loans or failure to properly 
indemnify under this provision).
---------------------------------------------------------------------------

    \9\ It is represented that under applicable banking laws BT 
Securities Corporation may not be indemnified by Bankers Trust.
---------------------------------------------------------------------------

    17. The BT Group will establish each day a written schedule of 
lending fees and rebate rates in order to assure uniformity of 
treatment among borrowing brokers and to limit the discretion the BT 
Group would have in negotiating securities loans to the Affiliated 
Borrowers. Loans to the Affiliated Borrowers on any day will be made at 
rates on the daily schedule or at rates which may be more advantageous 
to the Client Plans. In no case will loans be made to the Affiliated 
Borrowers at rates below those on the schedule. The rebate rates which 
are established with respect to cash-collateralized loans, will take 
into account the potential demand for loaned securities, the applicable 
bench-mark cost of funds indices (typically, Federal Funds, overnight 
repo rate or the like) and anticipated investment return on investments 
of cash collateral. The lending fees (in respect of loans made by 
Client Plans collateralized by other than cash) which are established 
will be set daily to reflect conditions as influenced by potential 
market demand.
    18. BT Group will adopt maximum daily rebate rates for cash 
collateral payable to the Affiliated Borrowers on behalf of a lending 
Client Plan. Separate

[[Page 8487]]

maximum daily rebate rates will be established with respect to loans of 
designated classes of securities such as U.S. government securities, 
U.S. equities and corporate bonds, international fixed income 
securities, and international equities. The BT Group will submit the 
terms for determining the maximum daily rebate rates to an independent 
fiduciary of the Client Plan for approval before lending any securities 
to the Affiliated Borrowers on behalf of such plan. With respect to 
each designated class of securities, the maximum daily rebate rate will 
generally be the lower of: (i) The overnight repo rate or Federal Funds 
rate, minus a stated percentage, and (ii) the actual investment rate 
for the relevant cash collateral, minus a stated percentage. Thus, when 
cash is used as collateral, the daily rebate rate should always be 
lower than the rate of return to the Client Plans from authorized 
investments of cash collateral.
    19. BT Group will also adopt minimum daily lending fees for non-
cash collateral payable by the Affiliated Borrowers to the BT Group on 
behalf of the Client Plan. Separate minimum daily lending fees will be 
established with respect to loans of designated classes of securities, 
such as U.S. government securities, U.S. equities and corporate bonds, 
international fixed income securities, and international equities. The 
BT Group will submit the terms for determining such fees to an 
independent fiduciary of the Client Plan for approval before lending 
securities to the Affiliated Borrowers on behalf of such plan. With 
respect to each designated class of securities, the minimum lending fee 
will be a percentage of the principal value of the loaned securities.
    20. For collateral other than cash, the lending fees charged the 
previous day will be reviewed by the BT Group for competitiveness. 
Because 50 percent (50%) or more of securities loans by Client Plans 
will be to unrelated parties, regardless of the type of collateral used 
to secure the loans, the competitiveness of the BT Group's fee schedule 
will be continuously tested in the marketplace. Accordingly, loans to 
the Affiliated Borrowers should result in a competitive rate of income 
to the lending Client Plans. At all times, the BT Group will effect 
loans in a prudent and diversified manner.
    21. Should the BT Group recognize prior to the end of a business 
day that, with respect to new and/or existing loans, it must change the 
rebate rate or lending fee formula in the best interest of Client 
Plans, it may do so with respect to the Affiliated Borrowers.
    If the BT Group reduces the lending fee or increases the rebate 
rate on any outstanding loan to the Affiliated Borrower (except for any 
change resulting from a change in the value of any third party 
independent index with respect to which the fee or rebate is 
calculated), the BT Group, by the close of business on the date of such 
adjustment, shall provide to the independent fiduciary of the Client 
Plan with notice that it has reduced such fee or increased the rebate 
rate to such Affiliated Borrower and that the Client Plan may terminate 
such loan at any time. The BT Group shall provide the independent 
fiduciary with such information as the independent fiduciary may 
reasonably request regarding the adjustment.
    22. BT Group will usually lend securities to requesting borrowers 
on a ``first come, first served'' basis, as a means of assuring 
uniformity of treatment among borrowers. However, in some instances, 
the borrower's credit limit may be reached, and the first in line 
borrower will not be approved as a borrower by the Client Plan. In 
other instances, there may be more than one prospective borrower that 
seeks to borrow a particular security at approximately the same time. 
In these situations, the BT Group will either lend to the next in line 
approved borrower, or allocate the loan equitably among competing 
borrowers, as applicable.
    23. The Client Plan will receive collateral from the Affiliated 
Borrowers 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 Affiliated 
Borrowers. The collateral will consist of cash, securities issued or 
guaranteed by the U.S. Government or its agencies or irrevocable bank 
letters of credit issued by a U.S. bank, which is a person other than 
the Affiliated Borrowers or an affiliate thereof. The market value of 
the collateral on the close of business on the day of, or the business 
day preceding the day of the loan, will be at least 102 percent of the 
market value of the loaned securities. The Loan Agreement involving BT 
Securities Corporation will give the Client Plan a continuing security 
interest in and a lien on the collateral or the equivalent under local 
law. However, under the U.K. and Australian Loan Agreements, the Client 
Plan receives title to (rather than a pledge of, or security interest 
in) the collateral from Bankers Trust International PLC and Bankers 
Trust (Australia) Limited. The BT Group will monitor the level of the 
collateral daily. If the market value of the collateral falls below 100 
percent (or such greater percentage as agreed to by the parties) of the 
loaned securities, the BT Group will require the Affiliated Borrowers 
to deliver by the close of business the next business day sufficient 
additional collateral to bring the level back to at least 102 percent.
    Bankers Trust represents that in the event of the Affiliated 
Borrowers' default or bankruptcy, the collateral is used to make the 
Client Plan whole, and is not available to the Affiliated Borrowers or 
their creditors. The collateral is held for the benefit of the Client 
Plan and is not available to the Affiliated Borrowers until the 
securities loan is terminated, and the loaned securities plus any 
income thereon are returned to the Client Plan. When the Client Plans 
lend securities to foreign Affiliated Borrowers, collateral will be 
maintained pursuant to the relevant conditions contained in paragraph 4 
above.
    24. Each Client Plan participating in the lending program will be 
sent a monthly <SUP>10</SUP> transaction report. This monthly report 
will provide a list of all securities loans outstanding and closed for 
a specified period. The report will identify for each open loan 
position, the securities involved, the value of the securities for 
collateralization purposes, the current value of the collateral, the 
rebate or the loan fee at which the securities are loaned, and the 
number of days the securities have been on loan.
---------------------------------------------------------------------------

    \10\ More frequent reports will be made available at the Client 
Plan's request.
---------------------------------------------------------------------------

    In order to provide the means for monitoring lending activity, 
rates on loans to the Affiliated Borrowers compared with loans to other 
borrowers, and the level of collateral on the loans, it is represented 
that the monthly report will show, on a daily basis, the market value 
of all outstanding security loans to the Affiliated Borrowers and to 
other borrowers. Further, the BT Group will advise the Client Plans 
that upon request, the monthly report will state the daily fees where 
collateral other than cash is utilized and will specify the details 
used to establish the daily rebate payable to all brokers where cash is 
used as collateral. The monthly report also will state, on a daily 
basis, the rates at which securities are loaned to the Affiliated 
Borrowers and those at which securities are loaned to other borrowers.
    25. Only Client Plans with total assets having an aggregate market 
value of at least $50 million will be permitted to lend securities to 
the Affiliated Borrowers. This restriction is intended

[[Page 8488]]

to assure that any lending to the Affiliated Borrowers will be 
monitored by an independent fiduciary who is experienced and 
sophisticated in matters of this kind.
    26. In summary, the applicant represents that the transaction 
satisfies the statutory criteria of section 408(a) of the Act and 
section 4975(c)(2) of the Code because:
    A. Neither the Affiliated Borrowers nor the BT Group has or 
exercises discretionary authority or control with respect to the 
investment of the assets of the Client Plans involved in the 
transaction (other than with respect to the investment of cash 
collateral after securities have been loaned and collateral received), 
or renders investment advice (within the meaning of 29 CFR 2510.3-
21(c)) with respect to those assets, including decisions concerning a 
Client Plan's acquisition and disposition of securities available for 
loan.
    B. Before a Client Plan participates in a securities lending 
program and before any loan of securities to the Affiliated Borrowers 
is affected, a Client Plan fiduciary who is independent of the BT Group 
and the Affiliated Borrowers must have:
    (1) Authorized and approved the Lending Authorization with the BT 
Group, where the BT Group is acting as the securities lending agent;
    (2) Authorized and approved the Primary Lending Agreement with the 
primary lending agent, where BT Group is lending securities under a 
sub-agency arrangement with the primary lending agent; <SUP>11</SUP>
---------------------------------------------------------------------------

    \11\ See Footnote 2, supra.
---------------------------------------------------------------------------

    (3) Approved the general terms of the Loan Agreement between such 
Client Plan and the Affiliated Borrowers, the specific terms of which 
are negotiated and entered into by BT Group.
    C. The Client Plan may terminate the agency or sub-agency agreement 
at any time without penalty to such plan on five (5) business days 
notice, whereupon the Affiliated Borrowers shall deliver certificates 
for securities identical to the borrowed securities (or the equivalent 
in the event of reorganization, recapitalization or merger of the 
issuer of the borrowed securities) to the plan within (1) the customary 
delivery period for such securities, (2) five business days, or (3) the 
time negotiated for such delivery by the Client Plan and the Affiliated 
Borrowers, whichever is less.
    D. The Client Plan will receive from the Affiliated Borrowers 
(either by physical delivery or by book entry in a securities 
depository located in the United States, wire transfer or similar 
means) by the close of business on or before the day on which the 
loaned securities are delivered to the Affiliated Borrowers, collateral 
consisting of U.S. currency, securities issued or guaranteed by the 
U.S. Government or its agencies or instrumentalities, or an irrevocable 
bank letter of credit issued by a U.S. bank, which is a person other 
than the Affiliated Borrowers or an affiliate thereof, or any 
combination thereof, or other collateral permitted under Prohibited 
Transaction Exemption (PTE) 81-6 (as amended from time to time or, 
alternatively, any additional or superceding class exemption that may 
be issued to cover securities lending by employee benefit plans), 
having, as of the close of business on the preceding business day, a 
market value (or, in the case of a letter of credit, a stated amount) 
initially equal to at least 102 percent of the market value of the 
loaned securities.
    If the market value of the collateral on the close of trading on a 
business day is less than 100 percent of the market value of the 
borrowed securities at the close of business on that day, the 
Affiliated Borrowers will deliver additional collateral on the 
following day such that the market value of the collateral in the 
aggregate will again equal 102 percent. The Loan Agreement will give 
the Client Plan a continuing security interest in, title to, or the 
rights of a secured creditor with respect to the collateral and a lien 
on the collateral. The BT Group will monitor the level of the 
collateral daily.
    E. When the BT Group lends securities to the Affiliated Borrowers, 
the following conditions must be met: (1) The collateral will be 
maintained in U.S. dollars, U.S. dollar-denominated securities or 
letters of credit of U.S. Banks; (2) all collateral will be held in the 
United States; (3) the situs of the loan agreement will be maintained 
in the United States; (4) the lending Client Plans will be indemnified 
by Bankers Trust in the United States for any transactions covered by 
this exemption with the foreign Affiliated Borrowers so that the Client 
Plans will not have to litigate in a foreign jurisdiction nor sue the 
foreign Affiliated Borrowers to realize on the indemnification; (5) 
prior to the transaction, the foreign Affiliated Borrowers will enter 
into a written agreement with the Client Plan whereby the Affiliated 
Borrowers consent to the service of process in the United States and to 
the jurisdiction of the courts of the United States with respect to the 
transactions described herein; and (6)(a) Bankers Trust International 
PLC is a deposit taking institution supervised by the Bank of England; 
and (b) Bankers Trust (Australia) Limited is a merchant bank which is 
under the jurisdiction of the Federal Reserve Bank of Australia.
    F. Before entering into the Loan Agreement and before a Client Plan 
lends any securities to an Affiliated Borrower, the Affiliated Borrower 
shall have furnished the following items to the Client Plan fiduciary: 
(1) The most recent available audited and unaudited statement of the 
Affiliated Borrowers' financial condition, (2) at the time of the loan, 
the Affiliated Borrowers must give prompt notice to the Client Plan 
fiduciary of any material adverse changes in the Affiliated Borrowers' 
financial condition since the date of the most recently financial 
statement furnished to the Client Plan, and (3) in the event of any 
such changes, the BT Group will request approval of the Client Plan to 
continue lending to the Affiliated Borrowers before making any such 
additional loans. No such new loans will be made until approval is 
received. Each loan shall constitute a representation by the Affiliated 
Borrower that there has been no such material adverse change.
    G. The Client Plan: (1) Receives a reasonable fee that is related 
to the value of the borrowed securities and the duration of the loan, 
or (2) has the opportunity to derive compensation through the 
investment of cash collateral. In the case of cash collateral, the 
Client Plan may pay a loan rebate or similar fee to the Affiliated 
Borrower, if such fee is not greater than the fee Client Plan would pay 
an unrelated party in an arm's length transaction.
    H. All procedures regarding the securities lending activities will 
at a minimum conform to the applicable provisions of Prohibited 
Transaction Exemptions (PTEs) 81-6 and 82-63.
    I. In the event Bankers Trust International PLC and/or Bankers 
Trust (Australia) Limited default on a loan, Bankers Trust will 
liquidate the loan collateral to purchase identical securities for the 
Client Plan. If the collateral is insufficient to accomplish such 
purchase, Bankers Trust will indemnify the Client Plan for any 
shortfall in the collateral plus interest on such amount and any 
transaction costs incurred (including attorney's fees of the Client 
Plan for legal actions arising out of the default on the loans or 
failure to properly indemnify under this provision). Alternatively, if 
such identical securities are not available on the market, Bankers 
Trust will pay the Client Plan cash equal to the market value of the 
borrowed securities as of the date they should have been returned to 
the Client Plan plus all the accrued

[[Page 8489]]

financial benefits derived from the beneficial ownership of such loaned 
securities. The lending Client Plans will be indemnified by Bankers 
Trust in the United States for any loans to the foreign Affiliated 
Borrowers.
    J. In the event BT Securities Corporation, a U.S. registered 
broker-dealer, defaults on a loan, Bankers Trust will liquidate the 
loan collateral to purchase identical securities for the Client Plan. 
If the collateral is insufficient to accomplish such purchase, BT 
Securities Corporation will indemnify the Client Plan for any shortfall 
in the collateral plus interest on such amount and any transaction 
costs incurred (including attorney's fees of the Client Plan for legal 
actions arising out of the default on the loans or failure to properly 
indemnify under this provision).
    K. If the Affiliated Borrowers' default on the securities loan or 
enter bankruptcy, the collateral will not be available to the 
Affiliated Borrowers or their creditors, but is used to make the Client 
Plan whole.
    L. The Client Plans will be entitled to the equivalent of all 
distributions made to the holders of the borrowed securities, including 
all interest, dividends and distributions on the loaned securities 
during the loan period.
    M. Only Client Plans with total assets having an aggregate market 
value of at least $50 million will be permitted to lend securities to 
the Affiliated Borrowers.
    N. For purposes of this proposed exemption, the Affiliated 
Borrowers will consist only of BT Securities Corporation, Bankers Trust 
International PLC and Bankers Trust (Australia) Limited.
    O. In any calendar quarter, on average 50 percent or more of the 
outstanding dollar value of securities loans negotiated on behalf of 
the Client Plans by the BT Group in the aggregate will be to borrowers 
who are not affiliated with the BT Group.
    P. The terms of each loan of securities by the Client Plans to any 
of the Affiliated Borrowers will be at market rates and at terms as 
favorable to such plans as if made at the same time and under the same 
circumstances to an unaffiliated party.
    Q. Each Client Plan will receive monthly transaction report, 
including but not limited to the information described in paragraph 24 
of the summary of facts and representations above, so that the 
independent fiduciary of such plan may monitor the securities lending 
transactions with the Affiliated Borrowers.
    R. During the notification of interested persons period, all 
current Client Plans will receive a copy of the notice of pendency. If 
the Department grants the final exemption, current Client Plans will 
receive a copy of the final exemption. Also, Bankers Trust is prepared 
to provide a copy of the final exemption to any new Client Plans.

Notice to Interested Persons

    Those persons who may be interested in the pendency of this 
exemption include the named fiduciaries of any affected Client Plan for 
which the BT Group serves as the lending agent. The applicant 
represents that it proposes to notify the interested persons within 
fifteen (15) days of the publication of the notice of the proposed 
exemption in the Federal Register. Such notice will contain a copy of 
the notice of the proposed exemption published in the Federal Register 
and a supplemental statement described at 29 CFR 2570.43 (b)(2) 
advising interested persons of their right to comment and to request a 
hearing on the proposed exemption. Accordingly, comments and hearing 
requests on the proposed exemption are due forty five (45) days after 
the date of publication of this proposed exemption in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan, U.S. Department 
of Labor, telephone (202) 219-8883. (This is not a toll-free number.)

Goldman Sachs & Co. (Goldman Sachs) and The Goldman Sachs Trust Company 
(GSTC) Located in New York, NY

[Application No. D-10306]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a)(1)(A) through (D) and 
406(b)(1) and (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 July 
31, 1996, to the past and continued lending of securities to Goldman 
Sachs International or any other Goldman Sachs affiliate based in the 
United Kingdom (together, GSI), Goldman Sachs, affiliated U.S. 
registered broker-dealers of Goldman Sachs, or Goldman Sachs (Japan), 
Ltd., including any of its affiliates (together, Goldman Sachs 
(Japan),<SUP>12</SUP> by employee benefit plans (the Client Plans), 
including commingled investment funds holding Plan assets, for which 
Goldman Sachs Trust Company (GSTC), an affiliate of Goldman Sachs, acts 
as securities lending agent (or sub-agent) and to the receipt of 
compensation by GSTC in connection with these transactions, provided 
that the following conditions are met:
---------------------------------------------------------------------------

    \12\ Unless otherwise noted, for purposes of this proposed 
exemption, Goldman Sachs, the affiliated U.S. registered broker-
dealers of Goldman Sachs, GSI and Goldman Sachs (Japan) are 
collectively referred to herein as Goldman Sachs.
---------------------------------------------------------------------------

    (a) For each Client Plan, neither GSTC, Goldman Sachs nor an 
affiliate of either has or exercises discretionary authority or control 
with respect to the investment of the Plan assets involved in the 
transaction, or renders investment advice (within the meaning of 29 CFR 
2510.3-21(c)) with respect to those assets.
    (b) Any arrangement for GSTC to lend Plan securities to Goldman 
Sachs in either an agency or sub-agency capacity is approved in advance 
by a Plan fiduciary who is independent of Goldman Sachs and 
GSTC.<SUP>13</SUP> In this regard, the independent Plan fiduciary also 
approves the general terms of the securities loan agreement (the Loan 
Agreement) between the Client Plan and Goldman Sachs, although the 
specific terms of the Loan Agreement are negotiated and entered into by 
GSTC and GSTC acts as a liaison between the lender and the borrower to 
facilitate the lending transaction.
---------------------------------------------------------------------------

    \13\ The Department, herein, is not providing exemptive relief 
for securities lending transactions engaged in by primary lending 
agents, other than GSTC, 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).
---------------------------------------------------------------------------

    (c) The terms of each loan of securities by a Client Plan to 
Goldman Sachs is at least as favorable to such Plans as those of a 
comparable arm's length transaction between unrelated parties.
    (d) A Client Plan may terminate the agency or sub-agency 
arrangement at any time without penalty to such Plan on five business 
days notice.
    (e) The Client Plan receives from Goldman Sachs (either by physical 
delivery or by book entry in a securities depository located in the 
United States, wire transfer or similar means) by the close of business 
on or before the day the loaned securities are delivered to Goldman 
Sachs, collateral consisting of cash, securities issued or guaranteed 
by the United States Government or its agencies or instrumentalities, 
or

[[Page 8490]]

irrevocable United States bank letters of credit issued by a person 
other than Goldman Sachs or an affiliate thereof, or any combination 
thereof, or other collateral permitted under PTE 81-6, as it may be 
amended or superseded.
    (f) As of the close of business on the preceding business day, the 
fair market value of the collateral initially equals at least 102 
percent of the market value of the loaned securities and, if the market 
value of the collateral falls below 100 percent, Goldman Sachs delivers 
additional collateral on the following day such that the market value 
of the collateral again equals 102 percent.
    (g) Prior to entering into the Loan Agreement, Goldman Sachs 
furnishes GSTC its most recently available audited and unaudited 
statements, which is, in turn, provided to a Client Plan, as well as a 
representation by Goldman Sachs, that as of each time it borrows 
securities, there has been no material adverse change in its financial 
condition since the date of the most recently-furnished statement that 
has not been disclosed to such Client Plan; provided, however, that in 
the event of a material adverse change, GSTC does not make any further 
loans to Goldman Sachs unless an independent fiduciary of the Client 
Plan is provided notice of any material adverse change and approves the 
loan in view of the changed financial condition.
    (h) In return for lending securities, the Client Plan either--
    (1) Receives a reasonable fee, which is related to the value of the 
borrowed securities and the duration of the loan; or
    (2) Has the opportunity to derive compensation through the 
investment of cash collateral. (Under such circumstances, the Client 
Plan may pay a loan rebate or similar fee to Goldman Sachs, 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.)
    (i) All procedures regarding the securities lending activities 
conform to the applicable provisions of Prohibited Transaction 
Exemptions PTE 81-6 and PTE 82-63 as well as to applicable securities 
laws of the United States, the United Kingdom or Japan.
    (j) Each Goldman Sachs entity indemnifies and holds harmless each 
lending Client Plan in the United States against any and all losses, 
damages, liabilities, costs and expenses (including attorney's fees) 
which the Client Plan may incur or suffer directly arising out of the 
lending of securities of such Client Plan to such Goldman Sachs entity. 
In the event that GSI or Goldman Sachs (Japan) defaults on a loan, GSTC 
will liquidate the loan collateral to purchase identical securities for 
the Client Plan. If the collateral is insufficient to accomplish such 
purchase, GSTC will indemnify the Client Plan for any shortfall in the 
collateral plus interest on such amount and any transaction costs 
incurred. Alternatively, if such identical securities are not available 
on the market, GSTC will pay the Client Plan cash equal to (1) The 
market value of the borrowed securities as of the date they should have 
been returned to the Client Plan, plus (2) all the accrued financial 
benefits derived from the beneficial ownership of such loaned 
securities as of such date, plus (3) interest from such date to the 
date of payment.
    (k) The Client Plan receives 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.
    (l) Prior to any Client Plan's approval of the lending of its 
securities to Goldman Sachs, a copy of this exemption, if granted, (and 
the notice of pendency) are provided to the Client Plan.
    (m) Each Client Plan receives monthly reports with respect to its 
securities lending transactions, including, but not limited to the 
information described in Representation 31, so that an independent 
fiduciary of the Client Plan may monitor such transactions with Goldman 
Sachs.
    (n) Only Client Plans with total assets having an aggregate market 
value of at least $50 million are permitted to lend securities to 
Goldman Sachs; provided, however, that--
    (1) In the case of two or more Client Plans which are maintained by 
the same employer, controlled group of corporations or employee 
organization (the Related Client 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 Goldman Sachs, 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.
    (2) In the case of two or more Client Plans which are not 
maintained by the same employer, controlled group of corporations or 
employee organization (the Unrelated Client 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 Goldman Sachs, the foregoing $50 million requirement is 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 are formed for the sole 
purpose of making loans of securities.)
    (o) With respect to any calendar quarter, at least 50 percent or 
more of the outstanding dollar value of securities loans negotiated on 
behalf of Client Plans will be to unrelated borrowers.
    (p) In addition to the above, all loans involving GSI and Goldman 
Sachs (Japan), have the following supplemental requirements:
    (1) Such broker-dealer is registered as a broker-dealer with the 
Securities and Futures Authority of the United Kingdom (the SFA) or 
with the Ministry of Finance (the MOF) and the Tokyo Stock Exchange;
    (2) Such broker-dealer is in compliance with all applicable 
provisions of Rule 15a-6 (17 CFR 240.15a-6) under the Securities 
Exchange Act of 1934 (the 1934 Act) which provides for foreign broker-
dealers a limited exemption from United States registration 
requirements;
    (3) All collateral is maintained in United States dollars or 
dollar-denominated securities or letters of credit;
    (4) All collateral is held in the United States and GSTC maintains 
the situs of

[[Page 8491]]

the securities Loan Agreements in the United States under an 
arrangement that complies with the indicia of ownership requirements 
under section 404(b) of the Act and the regulations promulgated under 
29 CFR 2550.404(b)-1; and
    (5) GSI or Goldman Sachs (Japan) provides Goldman Sachs a written 
consent to service of process in the United States for any civil action 
or proceeding brought in respect of the securities lending transaction, 
which consent provides that process may be served on such borrower by 
service on Goldman Sachs.
    (q) Goldman Sachs and its affiliates maintain, or cause to maintain 
within the United States for a period of six years from the date of 
such transaction, in a manner that is convenient and accessible for 
audit and examination, such records as are necessary to enable the 
persons described in paragraph (r)(1) to determine whether the 
conditions of the exemption have been met, except that--
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of Goldman Sachs 
and/or its affiliates, the records are lost or destroyed prior to the 
end of the six year period; and
    (2) No party in interest other than Goldman Sachs 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 (r)(1).
    (r)(1) Except as provided in subparagraph (r)(2) of this paragraph 
and notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the records referred to in paragraph (q) are 
unconditionally available at their customary location during normal 
business hours by:
    (i) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and Exchange 
Commission (the SEC);
    (ii) Any fiduciary of a participating Client Plan or any duly 
authorized representative of such fiduciary;
    (iii) Any contributing employer to any participating Client Plan or 
any duly authorized employee representative of such employer; and
    (iv) Any participant or beneficiary of any participating Client 
Plan, or any duly authorized representative of such participant or 
beneficiary.
    (r)(2) None of the persons described above in paragraphs 
(r)(1)(ii)-(r)(1)(iv) of this paragraph (r)(1) are authorized to 
examine the trade secrets of Goldman Sachs or commercial or financial 
information which is privileged or confidential.

EFFECTIVE DATE: If granted, this proposed exemption will be effective 
as of July 31, 1996.

Summary of Facts and Representations

    1. Goldman Sachs, a New York limited partnership, is the principal 
operating subsidiary of The Goldman Sachs Group, L.P. (the Goldman 
Sachs Group), a Delaware limited partnership. Goldman Sachs is 
currently owned by the Goldman Sachs Group, the individual general 
partners of the Goldman Sachs Group and two institutional limited 
partners. Goldman Sachs is one of the largest full-line investment 
service firms in the United States. It is registered with and regulated 
by the SEC as a broker-dealer, is registered with and regulated by the 
Commodities Futures Trading Commission as a futures commission 
merchant, is a member of the New York Stock Exchange and other 
principal securities exchanges in the United States and is also a 
member of the National Association of Securities Dealers, Inc. As of 
May 30, 1997, Goldman Sachs had approximately $125.2 billion in assets 
and approximately $5.9 billion in consolidated capital (partners' 
capital and subordinated liabilities).
    2. Acting as principal, Goldman Sachs actively engages in the 
borrowing and lending of securities, with daily outstanding loan volume 
averaging several billion dollars. Goldman Sachs utilizes borrowed 
securities to satisfy its trading requirements or to re-lend to other 
broker-dealers and others who need a particular security for various 
periods of time. All borrowings by Goldman Sachs conform to the Federal 
Reserve Board's Regulation T. Pursuant to Regulation T, permitted 
borrowing purposes include making delivery of securities in the case of 
short sales, failures of a broker to receive securities it is required 
to deliver or other similar situations.
    3. GSTC is a wholly owned subsidiary of the Goldman Sachs Group and 
an affiliate of Goldman Sachs. GSTC is organized as a limited purpose 
trust company licensed by the New York State Banking Department in New 
York. GSTC provides a variety of services to its clients, including 
serving as a custodian, clearing agent, corporate trustee and 
(following the acquisition of substantially all of the assets of Boston 
Global Advisors, Inc. on July 31, 1996) a securities lending agent to 
Plans and other entities. As of December 31, 1996, GSTC had total 
assets of approximately $21 million.
    4. GSI, an indirect subsidiary of the Goldman Sachs Group, is an 
English company registered with the Registrar of Companies for England 
and Wales. GSI is also an international investment banking 
organization. As of November 30, 1996, GSI had approximately $44 
billion in total assets.
    5. Goldman Sachs (Japan), another indirect subsidiary of the 
Goldman Sachs Group, is a Japanese company that is subject to 
regulation by the MOF and the Tokyo Stock Exchange. As of May 31, 1997, 
Goldman Sachs (Japan) had total assets of approximately $7.5 billion.
    6. GSI is authorized to conduct an investment business in and from 
the United Kingdom as a broker-dealer regulated by the SFA. Similarly, 
Goldman Sachs (Japan) is authorized to conduct an investment business 
in Japan as a broker-dealer regulated by the MOF and the Tokyo Stock 
Exchange. Although not registered with the United States SEC, GSI is 
governed by the rules, regulations and membership requirements of the 
SFA whereas Goldman Sachs (Japan) is governed by the rules, regulations 
and membership requirements of the MOF and the Tokyo Stock Exchange. In 
this regard, GSI and Goldman Sachs (Japan) are subject to rules 
relating to minimum capitalization, reporting requirements, periodic 
examinations, client money and safe custody rules and books and records 
requirements with respect to client accounts. These rules and 
regulations set forth by the SFA, the MOF, the Tokyo Stock Exchange and 
the SEC share a common objective: the protection of the investor by the 
regulation of the securities industry. The SFA, MOF and the Tokyo Stock 
Exchange rules require each firm which employs registered 
representatives or registered traders to have a positive tangible net 
worth and be able to meet its obligations as they may fall due. In 
addition, the SFA, MOF and the Tokyo Stock Exchange rules set forth 
comprehensive financial resource and reporting/disclosure rules 
regarding capital adequacy. Further, to demonstrate capital adequacy, 
the SFA rules impose reporting/disclosure requirements on broker-
dealers with respect to risk management, internal controls, and 
transaction reporting and recordkeeping requirements to the effect that 
required records must be produced at the request of the SFA, the MOF 
and the Tokyo Stock Exchange at any time. Finally, the rules and 
regulations of the SFA, the MOF and the Tokyo Stock Exchange for 
broker-dealers impose

[[Page 8492]]

potential fines and penalties which establish a comprehensive 
disciplinary system.
    7. Aside from the protections afforded by SFA, MOF and Tokyo Stock 
Exchange regulations, Goldman Sachs represents that GSI and Goldman 
Sachs (Japan) will comply with all applicable provisions of Rule 15a-6 
of the 1934 Act. Rule 15a-6 provides foreign broker-dealers with a 
limited exemption from SEC registration requirements and, as described 
below, offers additional protections. Specifically, Rule 15a-6 provides 
an exemption from U.S. broker-dealer registration for a foreign broker-
dealer that induces or attempts to induce the purchase or sale of any 
security (including over-the-counter equity and debt options) by a 
``U.S. institutional investor'' or a ``U.S. major institutional 
investor,'' provided that the foreign broker-dealer, among other 
things, enters into these transactions through a U.S. registered 
broker-dealer intermediary. The term ``U.S. institutional investor,'' 
as defined in Rule 15a-6(b)(7), includes an employee benefit plan 
within the meaning of the Employee Retirement Income Security Act of 
1974 (the Act) if (a) the investment decision is made by a plan 
fiduciary, as defined in section 3(21) of the Act, which is either a 
bank, savings and loan association, insurance company or registered 
investment adviser, or (b) the employee benefit plan has total assets 
in excess of $5 million, or (c) the employee benefit plan is a self-
directed plan with investment decisions made solely by persons that are 
``accredited investors'' as defined in Rule 501(a)(1) of Regulation D 
of the Securities Exchange Act of 1933, as amended. The term ``U.S. 
major institutional investor'' is defined in Rule 15a-6(b)(4) as a 
person that is a U.S. institutional investor that has total assets in 
excess of $100 million or an investment adviser registered under 
Section 203 of the Investment Advisers Act of 1940 that has total 
assets under management in excess of $100 million.
    8. Goldman Sachs represents that under Rule 15a-6, a foreign 
broker-dealer that induces or attempts to induce the purchase or sale 
of any security by a U.S. institutional or major institutional investor 
must, among other things--

    (a) Consent to service of process for any civil action brought 
by, or proceeding before, the SEC or any self-regulatory 
organization;
    (b) Provide the SEC (upon request or pursuant to agreements 
reached between any foreign securities authority, including any 
foreign government, and the SEC or the U.S. Government) with any 
information or documents within the possession, custody or control 
of the foreign broker-dealer, any testimony of any such foreign 
associated persons, and any assistance in taking the evidence of 
other persons, wherever located, that the SEC requests and that 
relates to transactions effected pursuant to the Rule;
    (c) Rely on the U.S. registered broker-dealer <SUP>14</SUP> 
through which the transactions with the U.S. institutional and major 
institutional investors are effected to (among other things):
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    \14\ GSI and Goldman Sachs (Japan), in lieu of relying on a U.S. 
broker-dealer and to the extent permitted by applicable U.S. 
securities law, may rely on a U.S. bank or trust company, including 
GSTC, to perform this role.
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    (1) Effect the transactions, other than negotiating their terms;
    (2) Issue all required confirmations and statements;
    (3) As between the foreign broker-dealer and the U.S. registered 
broker-dealer, extend or arrange for the extension of credit in 
connection with the transactions;
    (4) Maintain required books and records relating to the 
transactions, including those required by Rules 17a-3 (Records to be 
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved 
by Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
    (5) Receive, deliver and safeguard funds and securities in 
connection with the transactions on behalf of the U.S. institutional 
investor or U.S. major institutional investor in compliance with 
Rule 15c3-3 of the 1934 Act (Customer Protection--Reserves and 
Custody of Securities); and
    (6) Participate in all oral communications (e.g., telephone 
calls) between the foreign associated person and the U.S. 
institutional investor (not the U.S. major institutional investor), 
and accompany the foreign associated person on all visits with both 
U.S. institutional and major institutional investors. By virtue of 
this participation, the U.S. registered broker-dealer would become 
responsible for the content of all these communications.

    9. Since July 31, 1996, GSTC has been providing securities lending 
services, as agent, to institutional clients. GSTC, pursuant to 
authorization from its client, will negotiate the terms of loans with 
borrowers pursuant to a client-approved form of Loan Agreement and will 
act as a liaison between the lender (and its custodian) and the 
borrower to facilitate the lending transaction. No loans of futures 
contracts will be involved. GSTC will have responsibility for 
monitoring receipt of all required collateral and marking such 
collateral to market daily so that adequate levels of collateral are 
maintained. GSTC also will monitor and evaluate on a continuing basis 
the performance and creditworthiness of the borrowers. GSTC may act as 
a custodian with respect to the client's portfolio of securities being 
loaned.<SUP>15</SUP> GSTC may be authorized from time to time by a 
client to receive and hold pledged collateral and invest cash 
collateral pursuant to guidelines established by the client. All of 
GSTC's procedures for lending securities will be designed to comply 
with the applicable conditions of PTEs 81-6 and PTE 82-63.<SUP>16</SUP>
---------------------------------------------------------------------------

    \15\ Goldman Sachs wishes to clarify the fact that an 
independent fiduciary of a Client Plan may appoint GSTC or an 
affiliate of GSTC to manage cash collateral and to receive a 
reasonable and customary investment management fee, provided that 
the Client Plan fiduciary, after receiving full disclosure, approves 
the compensation arrangement, the terms of which will be described 
in a written agreement.
    \16\ PTE 81-6 provides an exemption under certain conditions 
from section 406(a)(1) (A) through (D) of the Act and the 
corresponding provisions of section 4975(c) of the Code for the 
lending of securities that are assets of an employee benefit plan to 
certain broker-dealers or banks which are parties in interest.
    PTE 82-63 provides an exemption under specified conditions from 
section 406(b)(1) of the Act and section 4975(c)(1)(E) of the Code 
for the payment of compensation to a plan fiduciary for services 
rendered in connection with loans of plan assets that are 
securities.
---------------------------------------------------------------------------

    10. GSTC may be retained occasionally by primary securities lending 
agents to provide securities lending services in a sub-agent capacity 
with respect to portfolio securities of clients of such primary lending 
agents. As securities lending sub-agent, GSTC's role under the lending 
transactions (i.e., negotiating the terms of loans with borrowers 
pursuant to a client-approved form of Loan Agreement and monitoring 
receipt of, and marking to market, required collateral) parallels those 
under lending transactions for which GSTC acts as primary lending agent 
on behalf of its clients.<SUP>17</SUP>
---------------------------------------------------------------------------

    \17\ As noted previously, the Department is not providing 
exemptive relief herein for securities lending transactions that are 
engaged in by primary lending agents, other than GSTC, beyond that 
provided by PTEs 81-6 and 82-63.
---------------------------------------------------------------------------

    11. When a loan is collateralized with cash, the cash will be 
invested for the benefit and at the risk of the client, and resulting 
earnings (net of a rebate to the borrower) comprise the compensation to 
the Plan in respect of such loan. Where collateral consists of 
obligations other than cash, the borrower pays a fee (loan premium) 
directly to the lending Plan.
    12. Accordingly, Goldman Sachs and GSTC request an exemption that 
would be effective July 31, 1996 (a) for the lending of securities 
owned by certain pension plans for which GSTC will serve as securities 
lending agent or sub-agent (referred to hereinafter as the Client 
Plans) <SUP>18</SUP> to Goldman Sachs,

[[Page 8493]]

affiliated U.S. registered broker-dealers of Goldman Sachs, GSI and 
Goldman Sachs (Japan), following disclosure of its affiliation with 
Goldman Sachs, and (b) for the receipt of compensation by GSTC in 
connection with such transactions. For each Plan, neither GSTC, Goldman 
Sachs nor any affiliate will have no discretionary authority or control 
or render investment advice over Client Plans' decisions concerning the 
acquisition or disposition of securities available for loan. GSTC's 
discretion will be limited to activities such as negotiating the terms 
of the securities loans with Goldman Sachs and (to the extent granted 
by the Client Plan fiduciary) investing any cash collateral received in 
respect of the loans. Because GSTC, under the proposed arrangement, 
would have discretion to lend Client Plan securities to Goldman Sachs, 
and because Goldman Sachs is an affiliate of GSTC, the lending of 
securities to Goldman Sachs by Client Plans for which GSTC serves as 
securities lending agent (or sub-agent) may be outside the scope of 
relief provided by PTE 81-6 and PTE 82-63. Further, loans to GSI and 
Goldman Sachs (Japan), affiliated foreign broker-dealers of Goldman 
Sachs, would be outside of the relief granted in PTE 81-6. Therefore, 
several safeguards, described more fully below, are incorporated in the 
application in order to ensure the protection of the Plan assets 
involved in the transactions. In addition, the applicants represent 
that the proposed lending program incorporates the conditions contained 
in PTE 81-6 and PTE 82-63 and will be in compliance with all applicable 
securities laws of the United States.
---------------------------------------------------------------------------

    \18\ For the sake of simplicity, future references to GSTC's 
performance of services as securities lending agent should be deemed 
to include its parallel performance as securities lending sub-agent 
and references to Client Plans should be deemed to refer to plans 
for which GSTC is acting as sub-agent with respect to securities 
lending activities, unless otherwise indicated specifically or by 
the context of the reference.
---------------------------------------------------------------------------

    13. Where GSTC is the direct securities lending agent, a fiduciary 
of a Client Plan who is independent of GSTC and Goldman Sachs will sign 
a securities lending agency agreement with GSTC (the Agency Agreement) 
before the Client Plan participates in a securities lending program. 
The Agency Agreement will, among other things, describe the operation 
of the lending program, prescribe the form of securities Loan Agreement 
to be entered into on behalf of the Client Plan with borrowers, specify 
the securities which are available to be lent, required margin and 
daily marking-to-market, and provide a list of permissible borrowers, 
including Goldman Sachs. The Agency Agreement will also set forth the 
basis and rate for GSTC's compensation from the Client Plan for the 
performance of securities lending services.
    14. The Agency Agreement will contain provisions to the effect that 
if Goldman Sachs is designated by the Client Plan as an approved 
borrower (a) the Client Plan will acknowledge that Goldman Sachs is an 
affiliate of GSTC and (b) GSTC will represent to the Client Plan that 
each and every loan made to Goldman Sachs on behalf of the Client Plan 
will be at market rates which are no less favorable to the Client Plan 
than a loan of such securities, made at the same time and under the 
same circumstances, to an unaffiliated borrower.
    15. When GSTC is lending securities under a sub-agency arrangement, 
the primary lending agent will enter into a securities lending agency 
agreement (the Primary Lending Agreement) with a fiduciary of a Client 
Plan who is independent of such primary lending agent, GSTC or Goldman 
Sachs, before the Plan participates in the securities lending program. 
The primary lending agent will be unaffiliated with GSTC or Goldman 
Sachs. GSTC will not enter into a sub-agent arrangement unless the 
Primary Lending Agreement contains substantive provisions akin to those 
in the Agency Agreement relating to the description of the operation of 
the lending program, use of an approved form of Loan Agreement, 
specification of securities which are available to be lent, required 
margin and daily marking-to-market, and provision of a list of approved 
borrowers (which will include Goldman Sachs). The Primary Lending 
Agreement will specifically authorize the primary lending agent to 
appoint sub-agents, to facilitate its performance of securities lending 
agency functions. Where GSTC is to act as such a sub-agent, the Primary 
Lending Agreement will expressly disclose that GSTC is to so act. The 
Primary Lending Agreement will also set forth the basis and rate for 
the primary lending agent's compensation from the Client Plan for the 
performance of securities lending services and will authorize the 
primary lending agent to pay a portion of its fee, as the primary 
lending agent determines in its sole discretion, to any sub-agent(s) it 
retains pursuant to the authority granted under such agreement.
    Pursuant to its authority to appoint sub-agents, the primary 
lending agent will enter into a securities lending sub-agency agreement 
(the Sub-Agency Agreement) with GSTC under which the primary lending 
agent will retain and authorize GSTC, as sub-agent, to lend securities 
of the primary lending agent's Client Plans, subject to the same terms 
and conditions as are specified in the Primary Lending Agreement. Thus, 
for example, the form of Loan Agreement will be the same as that 
approved by the Client Plan fiduciary in the Primary Lending Agreement 
and the list of permissible borrowers under the Sub-Agency Agreement 
(which will include Goldman Sachs) will be limited to those approved 
borrowers listed as such under the Primary Lending Agreement.
    GSTC states that the Sub-Agency Agreement will contain provisions 
which are in substance comparable to those described in Representations 
13 and 14 above, which would appear in an Agency Agreement in 
situations where GSTC is the primary lending agent. In this regard, 
GSTC will make the same representation in the Sub-Agency Agreement as 
described in Representation 9 above with respect to arm's length 
dealing with Goldman Sachs. The Sub-Agency Agreement will also set 
forth the basis and rate for GSTC's compensation to be paid by the 
primary lending agent.
    16. In all cases, GSTC will maintain transactional and market 
records sufficient to assure compliance with its representation that 
all loans to Goldman Sachs are effectively at arm's length terms. Such 
records will be provided to the appropriate Client Plan fiduciary in 
the manner and format agreed to with the lending fiduciary, without 
charge to the Client Plan. A Client Plan may terminate the Agency 
Agreement (or the Primary Lending Agreement) at any time, without 
penalty to the Plan, on five business days notice. In addition, GSTC 
shall make and retain for six months, tape recordings evidencing all 
securities loan transactions with Goldman Sachs.
    17. GSTC will negotiate the Loan Agreement with Goldman Sachs on 
behalf of Client Plans as it does with all other borrowers. An 
independent fiduciary of the Client Plan will approve the terms of the 
Loan Agreement. The Loan Agreement will specify, among other things, 
the right of the Client Plan to terminate a loan at any time and the 
Plan's rights in the event of any default by Goldman Sachs. The Loan 
Agreement will explain the basis for compensation to the Client Plan 
for lending securities to Goldman Sachs under each category of 
collateral. The Loan Agreement also will contain a requirement that 
Goldman Sachs must pay all transfer fees and transfer taxes related to 
the security loans.
    18. Before entering into the Loan Agreement, Goldman Sachs will 
furnish its most recently available audited and unaudited financial 
statements to GSTC, and in turn, such statements will be provided to a 
Client Plan before the Plan is asked to approve the terms of the

[[Page 8494]]

Loan Agreement. The Loan Agreement will contain a requirement that 
Goldman Sachs must give prompt notice 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.<SUP>19</SUP> If any 
such changes have taken place, GSTC will not make any further loans to 
Goldman Sachs unless an independent fiduciary of the Plan has approved 
the loan in view of the changed financial condition. Conversely, if 
Goldman Sachs fails to provide notice of such a change in its financial 
condition, such failure will trigger an event of default under the Loan 
Agreement.
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    19 With respect to capital adequacy rules for brokerage firms 
domiciled in the United States, including Goldman Sachs, it is 
represented that such firms are subject to the capital adequacy 
rules of their respective regulatory agencies, i.e., the SEC, the 
New York Stock Exchange, the National Association of Securities 
Dealers and other self-regulatory authorities. If these brokerage 
firms fail to meet such requirements, they are subject to fines, 
penalties and possibly more stringent sanctions.
    As for GSI and Goldman Sachs (Japan), which are subject to the 
capital adequacy provisions of their respective regulatory 
authorities, it is represented that such rules require GSI and 
Goldman Sachs (Japan) to maintain, at all times, financial resources 
in excess of its financial resources requirement (the Financial 
Resources Requirement). For this purpose, financial resources 
include equity capital, approved subordinated debt and retained 
earnings, less deductions for illiquid assets. The Financial 
Resources Requirement includes capital requirements for market risk, 
credit risk, foreign exchange risk and large exposures. SFA, MOF and 
Tokyo Stock Exchange rules require that if a firm's financial 
resources fall below 120 percent with respect to the SFA and 150 
percent with respect to the MOF and the Tokyo Stock Exchange, of its 
Financial Resources Requirement, the SFA, the MOF or the Tokyo Stock 
Exchange must be notified so that it can examine the terms of the 
firm's financial position and require an infusion of more capital, 
if needed. In addition, a breach of the requirement to maintain 
financial resources in excess of the Financial Resources Requirement 
may lead to sanctions by the SFA, the MOF or the Tokyo Stock 
Exchange. If the breach is not promptly resolved, the SFA, the MOF 
or the Tokyo Stock Exchange may restrict the firm's activities.
---------------------------------------------------------------------------

    19. As noted above, the agreement by GSTC to provide securities 
lending services, as agent, to a Client Plan will be embodied in the 
Agency Agreement. The Client Plan and GSTC will agree to the 
arrangement under which GSTC will be compensated for its services as 
lending agent, including services as custodian and manager of the cash 
collateral received, prior to the commencement of any lending activity. 
Such agreed upon fee arrangement will be set forth in the Agency 
Agreement and thereby will be subject to the prior written approval of 
a fiduciary of the Client Plan who is independent of Goldman Sachs and 
GSTC. Similarly, with respect to arrangements under which GSTC is 
acting as securities lending sub-agent, the agreed upon fee arrangement 
of the primary lending agent will be set forth in the Primary Lending 
Agreement, and such agreement will specifically authorize the primary 
lending agent to pay a portion of such fee, as the primary lending 
agent determines in its sole discretion, to any sub-agent, including 
GSTC, which is to provide securities lending services to the 
Plan.<SUP>20</SUP> The Client Plan will be provided with any reasonably 
available information which is necessary for the Plan fiduciary to make 
a determination whether to enter into or continue to participate under 
the Agency Agreement (or the Primary Lending Agreement) and any other 
reasonably available information which the Plan fiduciary may 
reasonably request.
---------------------------------------------------------------------------

    \20\ The foregoing provisions describe arrangements comparable 
to conditions (c) and (d) of PTE 82-63 which require that the 
payment of compensation to a ``lending fiduciary'' is made under a 
written instrument and is subject to prior written authorization of 
an independent ``authorizing fiduciary.'' In the event that a 
commingled investment fund will participate in the securities 
lending program, the special rule applicable to such funds 
concerning the authorization of the compensation arrangement set 
forth in condition (f) of PTE 82-63 will be satisfied.
---------------------------------------------------------------------------

    20. Each time a Plan lends securities to Goldman Sachs pursuant to 
the Loan Agreement, GSTC will reflect in its records the material terms 
of the loan, including the securities to be loaned, the required level 
of collateral, and the fee or rebate payable. The terms of the fee or 
rebate payable for each loan will be at least as favorable to the 
Client Plan as those of a comparable arm's length transaction between 
unrelated parties.
    21. The Client Plan will be entitled to the equivalent of all 
interest, dividends and distributions on the loaned securities during 
the loan period. The Loan Agreement will provide that the Client Plan 
may terminate any loan at any time. Upon a termination, Goldman Sachs 
will be contractually obligated to return the loaned securities to the 
Client Plan within five business days of notification (or such longer 
period of time permitted pursuant to a class exemption). If Goldman 
Sachs fails to return the securities within the designated time, the 
Client Plan will have the right under the Loan Agreement to purchase 
securities identical to the borrowed securities and apply the 
collateral to payment of the purchase price and any other expenses of 
the Plan associated with the sale and/or purchase.
    22. GSTC will establish each day a written schedule of lending 
fees\21\ and rebate rates \22\ in order to assure uniformity of 
treatment among borrowing brokers and to limit the discretion GSTC 
would have in negotiating securities loans to Goldman Sachs. Loans to 
all borrowers of a given security on that day will be made at rates or 
lending fees on the relevant daily schedules or at rates or lending 
fees which may be more advantageous to the Client Plans. It is 
represented that in no case will loans be made to Goldman Sachs at 
rates or lending fees that are less advantageous to the Client Plans 
than those on the schedule. The daily schedule of rebate rates will be 
based on the current value of the clients' reinvestment vehicles and on 
market conditions, as reflected by demand for securities by borrowers 
other than Goldman Sachs. As with rebate rates, the daily schedule of 
lending fees will also be based on market conditions, as reflected by 
demand for securities by borrowers other than Goldman Sachs, and will 
generally track the rebate rates with respect to the same security or 
class of security.
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    \21\ GSTC will adopt minimum daily lending fees for non-cash 
collateral payable by Goldman Sachs to GSTC on behalf of a Client 
Plan. GSTC will submit the method for determining such minimum daily 
lending fees to an independent fiduciary of the Client Plan for 
approval before initially lending any securities to Goldman Sachs on 
behalf of such Client Plan.
    \22\ GSTC will adopt separate maximum daily rebate rates with 
respect to securities loans collateralized with cash collateral. 
Such rebate rates will be based upon an objective methodology which 
takes into account several factors, including potential demand for 
loaned securities, the applicable benchmark cost of fund indices, 
and anticipated investment return on overnight investments permitted 
by the Client Plan's independent fiduciary. GSTC will submit the 
method for determining such maximum daily rebate rates to such 
fiduciary before initially lending any securities to Goldman Sachs 
on behalf of the Client Plan.
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    23. The rebate rates (in respect of cash-collateralized loans made 
by Client Plans) which are established will also take into account the 
potential demand for loaned securities, the applicable benchmark cost 
of funds indices (typically, Federal Funds, overnight repo rate or the 
like) and anticipated investment return on overnight investments which 
are permitted by the relevant Client Plan fiduciary. Further, the 
lending fees (in respect of loans made by Client Plans collateralized 
by other than cash) which are established will be set daily to reflect 
conditions as influenced by potential market demand.
    24. GSTC will negotiate rebate rates for cash collateral payable to 
each borrower, including Goldman Sachs, on behalf of a Client Plan. 
Where, for example, cash collateral derived from an overnight loan is 
intended to be invested in a generic repurchase

[[Page 8495]]

agreement, any rebate fee determined with respect to an overnight 
repurchase agreement benchmark will be set below the applicable ``ask'' 
quotation therefor. Where cash collateral is derived from a loan with 
an expected maturity date (term loan) and is intended to be invested in 
instruments with similar maturities, the maximum rebate fee will be 
less than the expected investment return (assuming no investment 
default). With respect to any loan to Goldman Sachs, GSTC will never 
negotiate a rebate rate with respect to such loan which would be 
expected to produce a zero or negative return to the Client Plan 
(assuming no default on the investments related to the cash collateral 
from such loan where GSTC has investment discretion over the cash 
collateral). GSTC represents that the written rebate rate established 
daily for cash collateral under loans negotiated with Goldman Sachs 
will not exceed the rebate rate which would be paid to a similarly 
situated unrelated borrower with respect to a comparable securities 
lending transaction. GSTC will disclose the method for determining the 
maximum daily rebate rate as described above to an independent 
fiduciary of a Client Plan for approval before lending any securities 
to Goldman Sachs on behalf of the Plan.
    25. For collateral other than cash, the applicable loan fee in 
respect of any outstanding loan is reviewed daily for competitiveness 
and adjusted, where necessary, to reflect market terms and conditions 
(see Representation 27). With respect to any calendar quarter, at least 
50 percent or more of the outstanding dollar value of securities loans 
negotiated on behalf of Client Plans will be to unrelated borrowers so 
the competitiveness of the loan fee will be tested in the marketplace. 
Accordingly, loans to Goldman Sachs should result in competitive rate 
income to the lending Client Plan. At all times, GSTC will effect loans 
in a prudent and diversified manner. While GSTC will normally lend 
securities to requesting borrowers on a ``first come, first served'' 
basis, as a means of assuring uniformity of treatment among borrowers, 
it should be recognized that in some cases it may not be possible to 
adhere to a ``first come, first served'' allocation. This can occur, 
for instance where (a) the credit limit established for such borrower 
by GSTC and/or the Client Plan has already been satisfied; (b) the 
``first in line'' borrower is not approved as a borrower by the 
particular Client Plan whose securities are sought to be borrowed; and 
(c) the ``first in line'' borrower cannot be ascertained, as an 
operational matter, because several borrowers spoke to different GSTC 
representatives at or about the same time with respect to the same 
security.\23\ In situations (a) and (b), loans would normally be 
effected with the ``second in line.'' In situation (c), securities 
would be allocated equitably among all eligible borrowers.
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    \23\ It is represented that the ``first come, first served'' 
allocation would not apply where GSTC is not acting as a securities 
lending agent, but rather is acting as, for example, a custodian to 
a Client Plan that has entered into an exclusive arrangement with 
the borrower. See PTE 92-78 (57 FR 45837, October 5, 1992) issued to 
Goldman Sachs and GSTC. In that circumstance, Goldman Sachs as 
borrower is choosing from whom to borrow and GSTC has no right or 
obligation to lend Goldman Sachs the securities from other clients 
or lend the securities subject to such exclusive arrangement to 
other borrowers.
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    26. The method of determining the daily securities lending rates 
(fees and rebates), the minimum lending fees payable by Goldman Sachs 
and the maximum rebate payable to Goldman Sachs will be specified in an 
exhibit attached to the Agency Agreement to be executed between the 
independent fiduciary of the Client Plan and GSTC in cases where GSTC 
is the direct securities lending agent.
    27. If GSTC reduces the lending fee or increases the rebate rate on 
any outstanding loan to an affiliated borrower (except for any change 
resulting from a change in the value of any third party independent 
index with respect to which the fee or rebate is calculated), GSTC, by 
the close of business on the date of such adjustment, will provide the 
independent fiduciary of the Client Plan with notice that it has 
reduced such fee or increased the rebate rate to such affiliated 
borrower and that the Client Plan may terminate such loan at any time. 
In addition, GSTC will provide the independent fiduciary of the Client 
Plan with such information as the fiduciary may reasonably request 
regarding such adjustment.
    28. Under the Loan Agreement, Goldman Sachs, as borrower, will 
agree to indemnify and hold harmless the applicable Client Plan 
(including the sponsor and fiduciaries of such Client Plan) from any 
and all reasonably foreseeable damages, losses, liabilities, costs and 
expenses (including attorney's fees) which the Client Plan may incur or 
suffer arising in any way from the use by Goldman Sachs of the loaned 
securities or any failure of Goldman Sachs to deliver loaned securities 
in accordance with the provisions of the Loan Agreement or to otherwise 
comply with the terms of the Loan Agreement except to the extent that 
such losses or damages are caused by the Client Plan's negligence. 
Under certain circumstances, GSTC, as lending agent, also may provide 
customary indemnities to lending Plans respecting loans made by it as 
the securities lending agent or, alternatively, procure such an 
indemnity from another Goldman Sachs affiliate. Further, under certain 
circumstances, a Goldman Sachs affiliate may guarantee the obligations 
of GSTC.
    In the event GSI or Goldman Sachs (Japan) defaults on a loan, GSTC 
will liquidate the loan collateral to purchase identical securities for 
the Client Plan. If the collateral is insufficient to accomplish such 
purchase, GSTC will indemnify the Client Plan for any shortfall in the 
collateral plus interest on such amount and any transaction costs 
incurred. Alternatively, if such identical securities are not available 
on the market, GSTC will pay the Client Plan cash equal to the market 
value \24\ of the borrowed securities as of the date they should have 
been returned to the Client Plan plus all interest and accrued 
financial benefits derived from the beneficial ownership of such loaned 
securities. Under such circumstances, GSTC will pay the Client Plan an 
amount equal to (a) the value of the securities as of the date such 
securities should have been returned to the Client Plan plus (b) all of 
the accrued financial benefits derived from the beneficial ownership of 
such loan securities as of such date, plus (c) interest from such date 
through the date of payment.
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    \24\ For purposes of this proposed exemption, the ``market 
value'' of securities, as of any date, shall be determined on the 
basis of the closing prices therefor as of the trading date (for the 
principal market in which the securities are traded) immediately 
preceding the day of valuation, such determination to be made by the 
independent pricing source identified to Goldman Sachs by the Client 
Plan upon the request of Goldman Sachs. Market value shall include 
accrued interest in the case of debt securities.
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    29. The Client Plan will receive collateral from Goldman Sachs by 
physical delivery, book entry in a U.S. securities depository, wire 
transfer or similar means by the close of business on or before the day 
the loaned securities are delivered to Goldman Sachs. The collateral 
will consist of cash, securities issued or guaranteed by the U.S. 
Government or its agencies or irrevocable U.S. bank letters of credit 
(issued by a person other than Goldman Sachs or its affiliates) or such 
other types of collateral which might be permitted by the Department 
under a class exemption. The market value of the collateral on the 
close of business on the day preceding the day of the loan will be at 
least 102 percent of the market value of the loaned securities. The 
Loan Agreement will give the Client Plan a

[[Page 8496]]

continuing security interest in and a lien on the collateral. GSTC will 
monitor the level of the collateral daily. If the market value of the 
collateral falls below 100 percent (or such greater percentage as 
agreed to by the parties) of that of the loaned securities, GSTC will 
require Goldman Sachs to deliver by the close of business the next day 
sufficient additional collateral to bring the level back to at least 
102 percent.
    30. With respect to loans involving GSI and Goldman Sachs (Japan), 
the following additional conditions will be applicable: (a) all 
collateral will be maintained in United States dollars or dollar-
denominated securities or letters of credit; (b) all collateral is held 
in the United States and GSTC maintains the situs of the securities 
loan agreements in the United States under an arrangement that complies 
with the indicia of ownership requirements under section 404(b) of the 
Act and the regulations promulgated under 29 CFR 2550.404(b)-1; and (c) 
GSI or Goldman Sachs (Japan) provides Goldman Sachs a written consent 
to service of process in the United States for any civil action or 
proceeding brought in respect of the securities lending transaction, 
which consent provides that process may be served on such borrower by 
service on Goldman Sachs.
    31. Each Client Plan participating in the lending program will be 
sent a monthly transaction report. The monthly report will provide a 
list of all security loans outstanding and closed for a specified 
period. The report will identify for each open loan position, the 
securities involved, the value of the security for collateralization 
purposes, the current value of the collateral, the rebate or loan 
premium (as the case may be) at which the security is loaned, and the 
number of days the security has been on loan. In addition, if requested 
by the lending customer, GSTC will provide daily confirmations of 
securities lending transactions, and, with respect to monthly reports, 
if requested by the customer, GSTC will provide weekly or daily 
reports, setting forth for each transaction made or outstanding during 
the relevant reporting period, the loaned securities, the related 
collateral, rebates and loan premiums and such other information in 
such format as shall be agreed to by the parties. Further, prior to a 
Client Plan's approval of a securities lending program, Goldman Sachs 
will provide a Plan fiduciary with copies of the proposed exemption and 
notice granting the exemption.
    32. In order to provide the means for monitoring lending activity, 
the monthly report will compare rates on loans by the Client Plans to 
Goldman Sachs with loans to other brokers as well as the level of 
collateral on the loans. In this regard, the monthly report will show, 
on a daily basis, the market value of all outstanding security loans to 
Goldman Sachs and to other borrowers. In addition, the monthly report 
will state the daily fees where collateral other than cash is utilized 
and will specify the details used to establish the daily rebate payable 
to all brokers where cash is used as collateral. The monthly report 
also will state, on a daily basis, the rates at which securities are 
loaned to Goldman Sachs compared with those at which securities are 
loaned to other brokers. This statement will give an independent 
fiduciary information which can be compared to that contained in the 
daily rate schedule.
    33. Only Client Plans with total assets having an aggregate market 
value of at least $50 million are permitted to lend securities to 
Goldman Sachs. In the case of two or more Client Plans which are 
maintained by the same employer, controlled group of corporations or 
employee organization (i.e., the Related Client 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 the Plan 
Asset Regulation), which entity is engaged in securities lending 
arrangements with Goldman Sachs, the foregoing $50 million requirement 
will be satisfied if such trust or other entity has aggregate assets 
which are in excess of $50 million. However, 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 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.
    In the case of two or more Client Plans which are not maintained by 
the same employer, controlled group of corporations or employee 
organization (i.e., the Unrelated Client 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 Goldman Sachs, the foregoing $50 million requirement will be 
satisfied if such trust or other entity has aggregate assets which are 
in excess of $50 million. However, the fiduciary responsible for making 
the investment decision on behalf of such group trust or other entity 
(a) Must not be the sponsoring employer, a member of the controlled 
group of corporations, the employee organization or an affiliate; (b) 
must have full investment responsibility with respect to plan assets 
invested therein;<SUP>25</SUP> and (c) 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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    \25\ For purposes of this proposed exemption, the term ``full 
investment responsibility'' means that the fiduciary responsible for 
making investment decisions on behalf of the group trust or other 
form of entity, has and exercises discretionary management authority 
over all of the assets of the group trust or other plan assets 
entity.
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    In addition, none of the entities described above must be formed 
for the sole purpose of making loans of securities.
    34. In summary, the applicants represent that the described 
transactions have satisfied or will satisfy the statutory criteria for 
an exemption under section 408(a) of the Act because:
    (a) The form of the Loan Agreement pursuant to which any loan is 
effected has been or will be approved by a fiduciary of the Client Plan 
who is independent of Goldman Sachs and GSTC before a Client Plan lends 
any securities to Goldman Sachs.
    (b) The lending arrangements (1) have permitted or will permit the 
Client Plans to lend to Goldman Sachs, (2) have enabled or will enable 
the Plans to diversify the list of eligible borrowers and earn 
additional income from the loaned securities on a secured basis, while 
continuing to receive any dividends, interest payments and other 
distributions due on those securities.
    (c) The Client Plan have received or will receive sufficient 
information concerning Goldman Sachs's financial condition before the 
Plan lends any securities to Goldman Sachs.
    (d) The collateral on each loan to Goldman Sachs initially has been 
and will be at least 102 percent of the market value of the loaned 
securities, which is in excess of the 100 percent collateral required 
under PTE 81-6, and has been and will be monitored daily by GSTC.
    (e) The Client Plans have received and will receive a monthly 
report which provides an independent fiduciary of the Client Plans with 
information on loan activity, fees, loan return/yield and the rates on 
loans to Goldman Sachs as compared with loans to other brokers and the 
level of collateral on the loans.
    (f) GSTC, Goldman Sachs nor any affiliate has or will have 
discretionary authority or control over the Plan's acquisition or 
disposition of securities available for loan.

[[Page 8497]]

    (g) The terms of the fee or rebate payable for each loan has been 
and will be at least as favorable to the Plans as those of a comparable 
arm's length transaction between unrelated parties.
    (h) All of the procedures under the transactions have conformed or 
will conform to the applicable provisions of PTE 81-6 and PTE 82-63 and 
also have been and will be in compliance with the applicable securities 
laws of the United States, the United Kingdom and Japan.

Notice To Interested Persons

    Notice of the proposed exemption will be provided to interested 
persons within 5 days of the publication of the notice of proposed 
exemption in the Federal Register. Such notice will be given to Plans 
that have outstanding securities loans with Goldman Sachs. The notice 
will include 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 proposed exemption. Written comments and 
hearing requests are due within 35 days of the publication of the 
proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (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 of disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(b) of the act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete, and that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 11th day of February, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration U.S. Department of Labor.
[FR Doc. 98-3987 Filed 2-18-98; 8:45 am]
BILLING CODE 4510-29-P