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Secretary of Labor Thomas E. Perez
Prohibited Transaction Exemption 98-32; Exemption Application No. D-10459, et al.]; Grant of Individual Exemptions; Union Bank of Switzerland [Notices] [07/08/1998]

EBSA (Formerly PWBA) Federal Register Notice

Prohibited Transaction Exemption 98-32; Exemption Application No. D-10459, et al.]; Grant of Individual Exemptions; Union Bank of Switzerland [07/08/1998]

[PDF Version]

Volume 63, Number 130, Page 36958-36963

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

 
Prohibited Transaction Exemption 98-32; Exemption Application No. 
D-10459, et al.]; Grant of Individual Exemptions; Union Bank of 
Switzerland

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of Individual Exemptions.

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SUMMARY: This document contains exemptions issued by the Department of 
Labor (the Department) 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).
    Notices were published in the Federal Register of the pendency 
before the Department of proposals to grant such exemptions. The 
notices set forth a summary of facts and representations contained in 
each application for exemption and referred interested persons to the 
respective applications for a complete statement of the facts and 
representations. The applications have been available for public 
inspection at the Department in Washington, DC. The notices also 
invited interested persons to submit comments on the requested 
exemptions to the Department. In addition the notices stated that any 
interested person might submit a written request that a public hearing 
be held (where appropriate). The applicants have represented that they 
have complied with the requirements of the notification to interested 
persons. No public comments and no requests for a hearing, unless 
otherwise stated, were received by the Department.
    The notices of proposed exemption were issued and the exemptions 
are being granted solely by the Department because, 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 proposed to the Secretary 
of Labor.

Statutory Findings

    In accordance with section 408(a) of the Act and/or section 
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon 
the entire record, the Department makes the following findings:
    (a) The exemptions are administratively feasible;
    (b) They are in the interests of the plans and their participants 
and beneficiaries; and
    (c) They are protective of the rights of the participants and 
beneficiaries of the plans.

Union Bank of Switzerland (UBS/Swiss) and UBS Securities, LLC (UBS 
Securities) Located in Zurich, Switzerland and New York, New York, 
Respectively

[Prohibited Transaction Exemption 98-32; Exemption Application Nos. D-
10459 and D-10460]

Exemption

    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 to the (1) lending of securities to 
UBS/Swiss, UBS Securities, UBS Ltd. (UBS/UK), UBS Securities Limited 
(UBS/Japan) and their successors in interest, which are or will

[[Page 36959]]

be affiliated domestic or foreign broker-dealers of UBS 
Securities,<SUP>1</SUP> by employee benefit plans (the Client Plans or 
Plans), including commingled investment funds holding plan assets, for 
which UBS/Swiss, acting through its New York branch in connection with 
securities lending activities (UBS NY), an affiliate of the proposed 
UBS Borrowers, may serve as a securities lending agent, sub-agent, or 
as a custodian or a directed trustee to Client Plans under either of 
two securities lending arrangements, referred to herein as ``Plan A'' 
or ``Plan B''; and (2) the receipt of compensation by UBS NY in 
connection with these transactions.
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    \1\ For purposes of this exemption, UBS/Swiss, UBS/UK, UBS/Japan 
and their successors in interest are collectively referred to as the 
UBS Foreign Borrowers. In addition, UBS Securities, including its 
successor in interest, and the UBS Foreign Borrowers are together 
referred to herein as the UBS Borrowers or individually as a UBS 
Borrower.
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    This exemption is subject to the following conditions:
    (a) For each Client Plan, neither UBS NY, any of the UBS Borrowers 
nor any affiliate of those entities has 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) With regard to--
    (1) Plan A, under which UBS NY lends securities of a Client Plan to 
any UBS Borrowers in either an agency or sub-agency capacity, such 
arrangement is approved in advance by a Plan fiduciary who is 
independent of UBS NY and the UBS Borrower and is negotiated by UBS NY 
which acts as a liaison between the lender and the borrower to 
facilitate the securities lending transaction.<SUP>2</SUP>
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    \2\ The Department, herein, is not providing exemptive relief 
for securities lending transactions engaged in by primary lending 
agents, other than UBS NY, beyond that provided pursuant to 
Prohibited Transaction Exemption (PTE) 81-6 (46 FR 7527, January 23, 
1981, as amended at 52 FR 18754, May 19, 1987) and PTE 82-63 (47 FR 
14804, April 6, 1982).
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    (2) Plan B, under which the UBS Borrower directly negotiates the 
agreement with the fiduciary of a Client Plan, including a Plan for 
which UBS NY provides services with respect to the portfolio of 
securities to be loaned pursuant to an exclusive borrowing arrangement 
(the Exclusive Borrowing Arrangement), such Client Plan fiduciary is 
independent of both the UBS Borrower and UBS NY, and UBS NY does not 
participate in any such negotiations.
    (c) The independent fiduciary of a Client Plan approves the general 
terms of the securities loan agreement (the Loan Agreement) between the 
Client Plan and the UBS Borrower.
    (d) The terms of each loan of securities by a Client Plan to a UBS 
Borrower are at least as favorable to such Plan as those of a 
comparable arm's length transaction between unrelated parties.
    (e) A Client Plan may terminate the agency or sub-agency 
arrangement under Plan A or an Exclusive Borrowing Agreement under Plan 
B at any time, without penalty, on five business days notice, whereupon 
the UBS Borrowers will deliver certificates for securities identical to 
the borrowed securities (or the equivalent thereof in the event of 
reorganization, recapitalization or merger of the issuer of the 
borrowed securities) to the Client Plan 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 UBS Borrowers, whichever is less.
    (f) The Client Plan or its designee receives from each UBS Borrower 
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 the UBS Borrower, collateral consisting of U.S. currency, 
securities issued or guaranteed by the United States Government or its 
agencies or instrumentalities, or irrevocable bank letters of credit 
issued by a U.S. bank, other than UBS NY or an affiliate thereof, or 
any combination thereof, or other collateral permitted under PTE 81-6 
as it may be amended or superseded.
    (g) The market value (or in the case of a letter of credit, a 
stated amount) of the collateral on the close of business on the day 
preceding the day of the loan is initially at least 102 percent of the 
market value of the loaned securities. The applicable Loan Agreement 
gives the Client Plan a continuing security interest in and a lien on 
the collateral. The level of collateral is monitored daily (either by 
UBS NY under Plan A, or by UBS NY or another designee of the Client 
Plan under Plan B). 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 loaned securities at the close of business on that day, 
the UBS Borrower is required to deliver, by the close of business on 
the next day, sufficient additional collateral to bring the level to at 
least 102 percent.
    (h) Prior to entering into a Loan Agreement, the applicable UBS 
Borrower furnishes each Client Plan its most recently available audited 
and unaudited statements to UBS NY, and in turn, such statements are 
provided to the Client Plan before the Client Plan approves the terms 
of the Loan Agreement. The Loan Agreement contains a requirement that 
the applicable UBS Borrower 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. If any 
such changes have taken place, UBS NY does not make any further loans 
to the UBS Borrower unless an independent fiduciary of the Client Plan 
is provided notice of any material change and approves the loan in view 
of the changed financial condition.
    (i) 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 UBS Borrowers, 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.)
    (j) All procedures regarding the securities lending activities 
will, at a minimum, conform to the applicable provisions of PTEs 81-6 
and 82-63 as well as to applicable securities laws of the United 
States, Switzerland, the United Kingdom or Japan.
    (k) UBS NY agrees to indemnify and hold harmless the Client Plan in 
the United States (including the sponsor and fiduciaries of such Client 
Plan) for any transactions covered by this exemption with a UBS 
Borrower so that the Client Plan does not have to litigate, in the case 
of a UBS Foreign Borrower, in a foreign jurisdiction nor sue the UBS 
Foreign Borrower to realize on the indemnification. Such 
indemnification, by UBS NY, is against any and all reasonably 
foreseeable damages, losses, liabilities, costs and expenses (including 
attorney's fees) which the Client Plan may incur or suffer, arising 
from any impermissible use by the UBS Borrower of the loaned securities 
or from an event of default arising from the UBS Borrower's failing to 
deliver loaned securities in accordance with the applicable Loan 
Agreement or to otherwise comply with the terms of such agreement, 
except to the extent that such losses or damages are caused by the 
Client Plan's own negligence.

[[Page 36960]]

    (1) If any event of default occurs, UBS NY, promptly and at its own 
expense (subject to rights of subrogation in, to the collateral and 
against such borrower), purchases or causes to be purchased, for the 
account of the Client Plan, securities identical to the borrowed 
securities (or their equivalent as discussed above). If the collateral 
is insufficient to accomplish such purchase, UBS NY indemnifies the 
Client Plan for any shortfall in the collateral plus interest, if 
contractually applicable, 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 loans or failure to properly 
indemnify under this provision). Alternatively, if such replacement 
securities cannot be obtained on the open market, UBS NY pays the 
Client Plan the difference in U.S. dollars between the market value of 
the loaned securities and the market value of the related collateral on 
the date of the borrower's breach of its obligation to return the 
loaned securities.
    (2) If, however, the event of default is caused by the UBS 
Borrower's failure to return the securities within the designated time, 
the Client Plan has the right 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.
    (l) The Client Plan receives the equivalent of all distributions 
made to holders of the borrowed securities, including all interest and 
dividends on the loaned securities during the loan period.
    (m) Prior to any Client Plan's approval of the lending of its 
securities to any UBS Borrower, copies of the notice of proposed 
exemption (the Notice) and the final exemption are provided to the 
Client Plan.
    (n) Each Client Plan receives monthly reports with respect to 
securities lending transactions, including, but not limited to, the 
information described in Representation 26 of the Summary of Facts and 
Representations (the Summary) of the Notice, so that an independent 
fiduciary of a Client Plan may monitor such transactions with the UBS 
Borrower.
    (o) Only Client Plans with total assets having an aggregate market 
value of at least $50 million are permitted to lend securities to UBS 
Borrowers; 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 (i.e., the Related Plans), whose assets are commingled for 
investment purposes in a single master trust or any other entity the 
assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the Plan 
Asset Regulation), which entity is engaged in securities lending 
arrangements with UBS Borrowers, the foregoing $50 million requirement 
is deemed satisfied if such trust or other entity has aggregate assets 
which are in excess of $50 million; provided that, if the fiduciary 
responsible for making the investment decision on behalf of such master 
trust or other entity is not the employer or an affiliate of the 
employer, such fiduciary has total assets under its management and 
control, exclusive of the $50 million threshold amount attributable to 
Client 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 (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 UBS Borrowers, the foregoing $50 million requirement 
is deemed satisfied if such trust or other entity has aggregate assets 
which are in excess of $50 million (excluding the assets of any Plan 
with respect to which the fiduciary responsible for making the 
investment decision on behalf of such group trust or other entity or 
any member of the controlled group of corporations including such 
fiduciary is the employer maintaining such Plan or an employee 
organization whose members are covered by such Plan). However, the 
fiduciary responsible for making the investment decision on behalf of 
such group trust or other entity----
    (A) Has full investment responsibility with respect to Client Plan 
assets invested therein; and
    (B) Has total assets under its management and control, exclusive of 
the $50 million threshold amount attributable to Client Plan investment 
in the commingled entity, which are in excess of $100 million.
    (In addition, none of the entities described above must be formed 
for the sole purpose of making loans of securities.)
    (p) 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.
    (q) In addition to the above, all loans involving UBS Foreign 
Borrowers, have the following requirements:
    (1) Such Foreign Borrower is registered as a broker-dealer with the 
Securities and Futures Authority of the United Kingdom in the case of 
UBS/UK, the Swiss Federal Banking Commission in the case of UBS/Swiss, 
and the Ministry of Finance, in the case of UBS/Japan;
    (2) Such Foreign Borrower is in compliance with all applicable 
provisions of Rule 15a-6 (17 CFR 240.15a-6) under the Securities 
Exchange Act of 1934 which provides for foreign broker-dealers a 
limited exemption from United States registration requirements;
    (3) All collateral is maintained in United States dollars or U.S. 
dollar-denominated securities or letters of credit;
    (4) All collateral is held in the United States and the situs of 
the securities lending agreements (either the Loan Agreement under Plan 
A or the Exclusive Borrowing Agreement under Plan B) is maintained 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) Prior to a transaction involving a UBS Foreign Borrower, the 
applicable UBS Foreign Borrower--
    (A) Agrees to submit to the jurisdiction of the United States;
    (B) Agrees to appoint an agent for service of process in the United 
States, which may be an affiliate (the Process Agent);
    (C) Consents to service of process on the Process Agent; and
    (D) Agrees that enforcement by a Client Plan of the indemnity 
provided by UBS New York will occur in the United States courts.
    (r) UBS NY and each UBS Foreign Borrower 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 (s)(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 UBS NY 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 UBS NY or its affiliates shall 
be subject to the civil penalty that may be assessed

[[Page 36961]]

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 (s)(1).
    (s)(1) Except as provided in subparagraph (s)(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 (r) are 
unconditionally available at their customary location during normal 
business hours by --
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and Exchange 
Commission;
    (B) Any fiduciary of a participating Client Plan or any duly 
authorized representative of such fiduciary;
    (C) Any contributing employer to any participating Client Plan or 
any duly authorized employee representative of such employer; and
    (D) Any participant or beneficiary of any participating Client 
Plan, or any duly authorized representative of such participant or 
beneficiary.
    (s)(2) None of the persons described above in paragraphs 
(s)(1)(B)--(s)(1)(D) of this paragraph (s)(1) are authorized to examine 
the trade secrets of UBS NY or its affiliates or commercial or 
financial information which is privileged or confidential.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the Notice published on March 31, 1998 at 63 FR 15452.

Written Comments

    During the comment period, the Department received one written 
comment with respect to the Notice and no requests for a public 
hearing. The comment letter was submitted by UBS/Swiss and UBS 
Securities (together, the Applicants) and is intended to clarify the 
operative language of the Notice and the Summary. Presented below are a 
discussion of the Applicants' comments and the Department's responses.

General Comments

    The Applicants wish to make the following general comments to 
reflect changed circumstances since the original filing of the 
exemption application.
    1. Successors in Interest. The Applicants represent that there is 
currently a pending merger between UBS Swiss and Swiss Bank. The 
transaction, which has not been structured as an asset sale but rather 
as a transfer of stock, would result in the formation of a new entity 
that would be named ``UBS AG.'' In effect, the Applicants state that 
the shareholders of UBS Swiss and Swiss Bank would surrender shares of 
stock in their respective entities in exchange for shares of UBS AG. 
Following the merger, UBS Securities would be renamed ``Warburg Dillon 
Read LLC.'' The names of UBS/UK and UBS/Japan would remain unchanged. 
The Applicants state that they have obtained final regulatory approval 
and anticipate that the merger will be consummated by the end of June 
1998.
    To ensure that the requested exemption will still be effective 
following the merger, the Applicants have requested that it be revised, 
as necessary, to extend to successors in interest to the Applicants and 
their affiliates. Therefore, the Department has revised the operative 
language of the exemption by making it applicable to successors in 
interest to UBS Swiss, UBS Securities and their affiliates, including 
UBS NY and the UBS/UK and UBS/Japan.
    2. Representation 1(b) of the Summary. The last sentence in the 
second paragraph of Representation 1(b) of the Summary states that 
``All borrowings by UBS Securities must conform to applicable 
provisions of the Federal Reserve Board's Regulation T.'' The 
Applicants note that Regulation T has been amended as of April 1, 1998 
and therefore, believe that a representation as to compliance with 
Regulation T should be made only to the extent it is applicable to the 
UBS Borrower and the transaction. Accordingly, the Applicants suggest 
that the last sentence of Representation 1(b) be revised to read as 
follows:

    All borrowings by UBS Securities must conform to applicable 
provisions of the Federal Reserve Board's Regulation T, to the 
extent that such regulation is applicable to UBS Securities and to 
the transaction.

    In concurrence, the Department has made the requested change in 
Representation 1(b) of the Notice.

Specific Comments

    1. Operative Language of the Notice and Representation 8 of the 
Summary. In the operative language of the Notice, the introductory 
paragraph and Representation 8 of the Summary briefly state that UBS NY 
may serve as a securities lending agent, a sub-agent or as a custodian 
or a directed trustee to Client Plans under either of two securities 
lending arrangements, which are referred to therein as ``Plan A'' and 
``Plan B.'' To clarify the statements made in these paragraphs, the 
Applicants point out that when UBS NY effects securities lending 
activities on behalf of a Client Plan, it may be acting as a lending 
agent or a sub-agent pursuant to discrete agency documentation or 
pursuant to authority granted under a trust or custodial agreement with 
the Client Plan which expressly includes the securities lending 
activity.
    The Department has noted the clarification offered by the 
Applicants.
    2. Condition (k) of the Notice and Representations 23 and 38 of the 
Summary. The Applicants suggest that the Department revise Condition 
(k) of the Notice and Representation 23 and 38 of the Summary to 
reflect more accurately the scope of the indemnification given by UBS 
NY to a Client Plan. In this regard, the Applicants recommend that the 
second sentence of Condition (k) and the second sentence of 
Representation 38 be modified by striking the phrase ``the failure of 
the UBS Borrower'' and inserting the phrase ``from an event of default 
arising from the UBS Borrower's failing * * *'' after the word ``or.''
    In response, the Department concurs with the requested 
modifications and has revised the Notice, accordingly. Although 
Representation 23 of the Summary contains language similar to that of 
Condition (k) and Representation 38, the Department has not made a 
corresponding change since the language contained therein already 
appears to embody the Applicants' requested modification.
    3. Condition (k)(1) of the Notice and Representation 23 of the 
Summary. The Applicants note that UBS NY will perform its indemnity 
within one business day of the insolvency event (either by (1) paying 
the Client Plan the difference in U.S. dollars between the market value 
of the loaned securities and the market value of the related collateral 
on the date of the borrower's breach of its obligation to return the 
loaned securities or (2) by purchasing securities identical to the 
borrowed securities and applying the collateral to payment of the 
purchase price and any other expenses of the Client Plan that may be 
associated with the sale and/or purchase. Because UBS NY generally 
performs its indemnity by the next business day, the Applicants 
represent that UBS NY does not pay interest on any shortfall in 
collateral arising from other than reinvestment risk but it does bear 
the transaction costs of performing the indemnity. However, in the 
event UBS NY is ever required to pay interest to a Client Plan, the 
Applicants request that the phrase ``if contractually applicable'' be 
inserted following the reference to ``interest'' in Condition

[[Page 36962]]

(k)(1) and in the second sentence of the second paragraph in 
Representation 23.
    In response, the Department has made the change requested by the 
Applicants.
    4. Condition (o)(2)(A) of the Notice and Representation 28(a) of 
the Summary.
    Condition (o)(2) of the Notice provides that--
    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 UBS Borrowers, the foregoing $50 million requirement is deemed 
satisfied if such trust or other entity has aggregate assets which are 
in excess of $50 million; provided that the fiduciary responsible for 
making the investment decision on behalf of such group trust or other 
entity--
    (A) Is neither the sponsoring employer, a member of the controlled 
group of corporations, the employee organization, nor an affiliate;
    (B) Has full investment responsibility with respect to Client Plan 
assets invested therein; and
    (C) Has total assets under its management and control, exclusive of 
the $50 million threshold amount attributable to Client Plan investment 
in the commingled entity, which are in excess of $100 million.
    Representation 28 of the Summary contains a similar provision. The 
Department believes that subparagraph (A) above and clause (a) of 
Representation 28 unnecessarily limit the ability of a Client Plan to 
effect securities loans under the proposed lending program, 
particularly in a situation where the independent investment manager's 
own in-house plan wishes to invest in the commingled investment 
vehicle. Therefore, the Department has modified the Condition and 
Representation to read as follows:

    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 UBS Borrowers, the foregoing $50 million 
requirement is satisfied if such trust or other entity has aggregate 
assets which are in excess of $50 million (excluding the assets of 
any Plan with respect to which the fiduciary responsible for making 
the investment decision on behalf of such group trust or other 
entity or any member of the controlled group of corporations 
including such fiduciary is the employer maintaining such Plan or an 
employee organization whose members are covered by such Plan). 
However, the fiduciary responsible for making the investment 
decision on behalf of such group trust or other entity--

    (A) Has full investment responsibility with respect to plan assets 
invested therein; and
    (B) Has total assets under its management and control, exclusive of 
the $50 million threshold amount attributable to plan investment in the 
commingled entity, which are in excess of $100 million.
    In effect, the independent investment manager's own plan may 
participate in the commingled investment vehicle but for purposes of 
determining whether the $50 million aggregation requirement is met, the 
assets of the Unrelated Plans must be utilized.
    5. Condition (q)(5)(D) of the Notice and Representations 25(d) and 
32(d) of the Summary. Condition (q) of the Notice sets forth certain 
supplemental requirements for securities loans involving UBS Foreign 
Borrowers. Specifically, subparagraph 5 of Condition (q) describes the 
limited form of indemnity that is to be provided by the UBS Foreign 
Borrower to a Client Plan. For example, prior to a securities lending 
transaction, the UBS Foreign Borrower must (a) agree to submit to the 
jurisdiction of the United States; (b) agree to appoint an agent for 
service of legal process; and (c) consent to service of process on the 
Process Agent.
    The Applicants note, however, that the language of Condition 
(q)(5)(D) of the Notice and Representations 25(d) and 32(d) of the 
Summary appears to have been added in error. These paragraphs state 
that the applicable UBS Foreign Borrower ``agrees to be indemnified in 
the United States for any transaction covered by this exemption.'' 
Because no UBS Borrower will be indemnified under this exemption, the 
Applicants suggest that the language be clarified to state that the 
``UBS Foreign Borrower agrees that enforcement by a Client Plan of the 
indemnity provided by UBS New York will occur in the United States 
courts.''
    In response, the Department concurs with the clarification made by 
the Applicants and has made the requested change.
    6. Representation 11 of the Summary. The Applicants request that 
the second sentence in the second paragraph of Representation 11 of the 
Summary be modified by inserting the phrase ``will be the same as that 
approved by the Client Plan fiduciary in the Primary Lending 
Agreement.'' Therefore, the Department has revised the sentence to read 
as follows:

    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.

    7. Representation 27 of the Summary. Representation 27 of the 
Summary describes the contents of the monthly report that will be given 
to the independent fiduciary of a Client Plan by UBS NY. Among other 
things, the monthly report will enable the Client Plan fiduciary to 
monitor securities lending activity, rates on loans to UBS Borrowers 
compared with loans to other brokers and the level of collateral. The 
Applicants wish to emphasize that while they cannot be required to 
divulge, in the monthly report, confidential information regarding 
securities loans made by outside lenders, they will disclose all of a 
Client Plan's outstanding securities loans that are made to UBS 
Borrowers. Therefore, the Applicants request that Representation 27 be 
revised, in part, as follows:

    In order to provide the means for monitoring lending activity, 
rates on loans to UBS Borrowers compared with loans to other brokers 
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 
of the Client Plan's outstanding securities loans to the UBS 
Borrower and to other borrowers as compared to the total collateral 
held for both categories of loans.

    In response, the Department concurs with the Applicants' 
clarification of the monthly report and has made the requested change.
    For further information regarding the Applicants' comments or other 
matters discussed herein, interested persons are encouraged to obtain 
copies of the exemption application file (Exemption Application Nos. D-
10459 and D-10460) the Department is maintaining in this case. The 
complete application file, as well as all supplemental submissions 
received by the Department, are made available for public inspection in 
the Public Documents Room of the Pension and Welfare Benefits 
Administration, Room N-5638, U.S. Department of Labor, 200 Constitution 
Avenue, NW, Washington, DC 20210.
    Accordingly, after giving full consideration to the entire record, 
including the written comment provided by the Applicants, the 
Department has made the aforementioned changes to the Notice and has 
decided to grant the exemption

[[Page 36963]]

subject to the modifications or clarifications described above.
    For Further Information Contact: Ms. Jan D. Broady of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

Breland Investments, Inc. Profit Sharing Plan and Trust (the Plan) 
Located in Phoenix, Arizona

[Prohibited Transaction Exemption 98-33; Exemption Application No: D-
10529]

Exemption

    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 to (1) the proposed loan (the Loan) by the individually 
directed account (the Account) in the Plan <SUP>3</SUP> of Dr. Albert 
E. Breland (Dr. Breland), to Mesa Scholastic Enterprises, a 
disqualified person with respect to the Plan, and (2) the personal 
guarantee of the Loan by Dr. Breland, a disqualified person with 
respect to the Plan, provided the following conditions are satisfied:
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    \3\ Because Dr. Breland is the only participant in the Plan, 
there is no jurisdiction under 29 CFR 2510.3-3(b). However, there is 
jurisdiction under Title II of the Act pursuant to section 4975 of 
the Code.
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    (a) the terms of the Loan are at least as favorable to the Account 
as those obtainable in an arm's length transaction with an unrelated 
party;
    (b) the amount of the Loan does not exceed 25% of the assets in the 
Account;
    (c) the Loan is secured by a first deed of trust on the commercial 
real property, which has been appraised by a qualified independent 
appraiser to have a fair market value not less than 150% of the 
outstanding balance of the Loan throughout its duration;
    The Department received no comments or requests for a hearing in 
response to the Notice of Proposed Exemption (the Notice) published on 
Friday, May 29, 1998 at 63 FR 29458. However, in the paragraph entitled 
``Notice to Interested Persons'' contained in the Notice, the word 
``Overland'' should be deleted and the word ``Breland'' should be 
inserted in lieu thereof.
    For a more complete statement of the summary of facts and 
representations supporting the Department's decision to grant this 
exemption, refer to the Notice.
    For Further Information Contact: Mr. James Scott Frazier, telephone 
(202) 219-8881. (This is not a toll-free number).

Karen J. Hartley Profit Sharing Plan (P/S Plan) and Karen J. Hartley 
Money Purchase Pension Plan and Trust Agreement (M/P Plan, 
collectively; the Plans) Located in Eugene, Oregon

[Prohibited Transaction Exemption 98-34; Exemption Application Nos. D-
10588 and D-10589]

Exemption

    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 to the loan (the Loan) by the Plans to Karen J. Hartley, the 
trustee and sole participant of the Plans and, a disqualified person 
with respect to the Plans; <SUP>4</SUP> provided that the following 
conditions will be met:
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    \4\ Pursuant to CFR 2510.3-3(b) and (c), the Department has no 
jurisdiction with respect to the Plans under Title I of the Act. 
However, there is jurisdiction under Title II of the Act pursuant to 
section 4975 of the Code.
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    1. The Loan will be structured such that each Plan will lend up to 
25% of its assets. However, the aggregate amount of the Loan will not 
exceed $40,000 at any time;
    2. The outstanding balance of the Loan will at no time exceed 25% 
of the Plans' aggregate assets;
    3. The Plans will bear no expenses with respect to the proposed 
transaction;
    4. The terms and conditions of the Loan will be at least as 
favorable to the Plans as those obtainable in arm's-length transaction 
with an unrelated party; and
    5. The Loan will be adequately secured by collateral, which at all 
times will be equal to 100% of the outstanding principal amount of the 
Loan plus 6 months interest at the Loan's interest rate of 8.2%. In the 
event the collateral amount falls below this required amount, this 
exemption will no longer be available.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption refer to 
the notice of proposed exemption published on May 18, 1998 at 63 FR 
27332.
    For Further Information Contact: Ekaterina A. Uzlyan of the 
Department at (202) 219-8883. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions to which the exemptions do 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) These exemptions are supplemental to and not in derogation of, 
any other provisions of the Act and/or the Code, including statutory or 
administrative exemptions and transactional 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
    (3) The availability of these exemptions is subject to the express 
condition that the material facts and representations contained in each 
application accurately describes all material terms of the transaction 
which is the subject of the exemption.

    Signed at Washington, DC, this 1st day of July 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 98-18010 Filed 7-7-98; 8:45 am]
BILLING CODE 4510-29-P