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Secretary of Labor Thomas E. Perez
Grant of Individual Exemptions; Lehman Brothers Inc. (Lehman) and Lehman Brothers Trust Company and Affiliates (LBTC), et al. [Notices] [08/31/1998]

EBSA (Formerly PWBA) Federal Register Notice

Grant of Individual Exemptions; Lehman Brothers Inc. (Lehman) and Lehman Brothers Trust Company and Affiliates (LBTC), et al. [08/31/1998]

[PDF Version]

Volume 63, Number 168, Page 46238-46241

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 98-41; Exemption Application No. D-
10372, et al.]

 
Grant of Individual Exemptions; Lehman Brothers Inc. (Lehman) and 
Lehman Brothers Trust Company and Affiliates (LBTC), et al.

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, D.C. 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.

Lehman Brothers Inc. (Lehman) and Lehman Brothers Trust Company and 
Affiliates (LBTC), Located in New York, New York

[Prohibited Transaction Exemption 98-41; Exemption Application No. D-
10327]

Exemption

    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 to: (1) the lending of securities to Lehman or to any 
other U.S. registered broker-dealer who is an affiliate of Lehman 
(collectively, Lehman Broker-Dealers) by employee benefit plans, 
including commingled investment funds holding plan assets (the Client 
Plans), with respect to which the Lehman Broker-Dealer is a party in 
interest, or for which LBTC or any other affiliate of Lehman, acts as 
directed trustee or custodian and/or securities lending agent (or sub-
agent) for such Client Plan; and (2) the receipt of compensation by 
LBTC in connection with these transactions, provided that the following 
conditions are met:
    1. Neither the Lehman Broker-Dealers nor LBTC has or exercises 
discretionary authority or control with respect to the investment of 
the assets of Client Plans involved in the transaction (other than with 
respect to the investment of cash collateral after the securities have 
been loaned and collateral received), or renders investment advise 
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those 
assets, including decisions concerning a Client Plan's acquisition or 
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 Lehman Broker-Dealers 
is affected, a Client Plan fiduciary who is independent of LBTC and the 
Lehman Broker-Dealers must have:
    (a) Authorized and approved a securities lending authorization 
agreement with LBTC (the Agency Agreement), where LBTC is acting as the 
direct securities lending agent;
    (b) Authorized and approved the primary securities lending 
authorization agreement (the Primary Lending Agreement) with the 
primary lending agent, where LBTC is lending securities under a sub-
agency arrangement with the primary lending agent;<SUP>1</SUP>
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    \1\ When LBTC 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 Basic Loan Agreement) between such Client Plan and the borrower, 
the Lehman Broker-Dealers, the specific terms of which are negotiated 
and entered into by LBTC;
    3. A Client Plan may terminate the securities lending agency 
agreement at any time without penalty on five (5) business days notice, 
whereupon the Lehman Broker-Dealers shall deliver

[[Page 46239]]

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 (5) business days, or (c) 
the time negotiated for such delivery by the Client Plan and the Lehman 
Broker-Dealers, whichever is less;
    4. LBTC (or another custodian on behalf of the Client Plan) will 
receive from the Lehman Broker-Dealers either by physical delivery, 
book entry in a securities depository, wire transfer or similar means 
collateral consisting of U.S. dollars, securities issued or guaranteed 
by the U.S. Government or its agencies or irrevocable U.S. bank letters 
of credit (issued by an entity other than the Lehman Broker-Dealers) 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) by the close of business on or 
before the day the loaned securities are delivered to the Lehman 
Broker-Dealers;
    5. The market value of the collateral will initially equal 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 falls 
below 100 percent of the market value of the borrowed securities at the 
close of business on that day, the Lehman Broker-Dealers will deliver 
additional collateral on the following day such that the market value 
of the collateral will again equal 102 percent. The Basic Loan 
Agreement will give the Client Plans a continuing security interest in, 
and a lien on, the collateral. LBTC will monitor the level of the 
collateral daily;
    6. All the procedures regarding the securities lending activities 
will at a minimum conform to the applicable provisions of PTE 81-6 and 
PTE 82-63;
    7. In the event the Lehman Broker-Dealer fails to return securities 
within a designated time, the Client Plan will have the right under the 
Basic Loan Agreement to purchase securities identical to the borrowed 
securities and apply the collateral to payment of the purchase price. 
If the collateral is insufficient to satisfy the Lehman Broker-Dealer's 
obligation to return the Client Plan's securities, the Lehman Broker-
Dealer will indemnify the Client Plan with respect to the difference 
between the replacement cost of securities and the market value of the 
collateral on the date the loan is declared in default, together with 
expenses incurred by the Client Plan plus applicable interest at a 
reasonable rate, including any attorneys fees incurred by the Client 
Plan for legal action arising out of default on the loans, or failure 
by the Lehman Broker-Dealer to properly indemnify the Client Plan;
    8. The Client Plan will receive the equivalent of all distributions 
made to the 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;
    9. Only Client Plans with total assets having an aggregate market 
value of at least $50 million are permitted to lend securities to the 
Lehman Broker-Dealers; provided, however, that--
    (a) 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 the Lehman Broker-Dealers, the foregoing $50 million 
requirement shall be deemed satisfied if such trust or other entity has 
aggregate assets which are in excess of $50 million; provided that if 
the fiduciary responsible for making the investment decision on behalf 
of such master trust or other entity is not the employer or an 
affiliate of the employer, such fiduciary has total assets under its 
management and control, exclusive of the $50 million threshold amount 
attributable to plan investment in the commingled entity, which are in 
excess of $100 million.
    (b) 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 the Lehman Broker-Dealers, 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--
    (i) Has full investment responsibility with respect to plan assets 
invested therein; and
    (ii) 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.)
    10. 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.
    11. The terms of each loan of securities by the Client Plans to the 
Lehman Broker-Dealer will be at least as favorable to such plans as 
those terms which would exist in a comparable arm's-length transaction 
between unrelated parties;
    12. Each Client Plan will receive monthly reports on the 
transactions, so that an independent fiduciary of such plan may monitor 
the securities lending transactions with the Lehman Broker-Dealer;
    13. Before entering into the Basic Loan Agreement and before a 
Client Plan lends any securities to the Lehman Broker-Dealer, an 
independent fiduciary of such Client Plan will receive sufficient 
information, concerning the financial condition of the Lehman Broker-
Dealer, including the audited and unaudited financial statements of the 
Lehman Broker-Dealer;
    14. The Lehman Broker-Dealer will provide to a Client Plan prompt 
notice at the time of each loan by such plan of any material adverse 
changes in the Lehman Broker-Dealer's financial condition, since the 
date of the most recently furnished financial statements;
    15. With regard to the ``exclusive borrowing'' agreement (as 
described below), the Lehman Broker-Dealer will directly negotiate the 
agreement with a Client Plan fiduciary who is independent of the Lehman 
Broker-Dealers and LBTC, and such agreement may be terminated by either 
party to the agreement at any time; <SUP>2</SUP>
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    \2\ The termination will be without penalty to the Client Plan, 
except for the return to the Lehman Broker-Dealers of a part of any 
flat fee paid by the Lehman Broker-Dealers to the Client Plan, if 
the Client Plan has terminated its exclusive borrowing agreement 
with the Lehman Broker-Dealers.

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[[Page 46240]]

    16. 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 Lehman Broker-
Dealer, if such fee is not greater than the fee the Client Plan would 
pay an unrelated party in an arm's length transaction;
    17. In the event that a Lehman Broker-Dealer is also the securities 
lending agent for a Client Plan, LBTC shall act as securities lending 
sub-agent in connection with any loan of securities to the Lehman 
Broker-Dealer;
    18. Prior to the Client Plan's approval of the lending of its 
securities to the Lehman Broker-Dealers, a copy of this exemption (and 
a copy of the notice of proposed exemption as published in the Federal 
Register on June 19, 1998 at 63 FR 33717) will be provided to the 
Client Plan; and
    19. Lehman maintains or causes 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 Lehman or the Lehman Broker-Dealers, 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 Lehman or the 
Lehman Broker-Dealers, 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 Lehman 
or the Lehman Broker-Dealers, 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 of proposed exemption (the Notice) published on June 19, 
1998 at 63 FR 33717.

Written Comments

    The Department received one written comment with respect to the 
Notice and no requests for a public hearing. The comment was filed by 
Lehman. The comment concerns footnote 2 of the Notice, which stated 
that:

    The Department notes that this proposed exemption would provide 
relief from the restrictions of section 406(a) as well as section 
406(b)(1) and (b)(2) of the Act, whereas PTE 81-6 provides relief 
only for securities lending transactions which would violate section 
406(a) of the Act. Thus, any amendments that may be made by the 
Department to PTE 81-6 which would permit different types of assets 
to be used as collateral for a securities loan would not allow the 
use of such assets as collateral under this proposed exemption to 
the extent that the transactions covered by this exemption (if 
granted) would require relief from section 406(b) of the Act.

    Lehman requests that this footnote be deleted from the final 
exemption.
    Footnote 2 of the Notice was also included by the Department in the 
written comments contained in PTE 98-23 (63 FR 29435), an individual 
exemption for securities lending transactions by Bankers Trust Company 
and its affiliates (Bankers Trust) published in the Federal Register on 
May 29, 1998.
    However, subsequent comments made to the Department by Bankers 
Trust also requested that the Department withdraw its comments on this 
matter with respect to PTE 98-23. The requests by Bankers Trust and 
Lehman were made with the intent of avoiding possible confusion and 
preserving the availability of relief under the Bankers Trust and 
Lehman individual exemptions when different types of assets are 
permitted to be used as collateral under an amended version of PTE 81-6 
or a superceding class exemption. In this regard, Lehman (and Bankers 
Trust) state that nothing in the record suggests that the type of 
collateral available under the individual exemptions should be 
different in any manner from the collateral requirements of PTE 81-6.
    Upon consideration of these comments, the Department has modified 
the final exemption for Lehman by deleting Footnote 2, as it appeared 
in the Notice. In addition, the Department has indicated to Bankers 
Trust that it should consider the Department's comments on this issue 
withdrawn with respect to PTE 98-23.
    Accordingly, the Department has determined to grant the proposed 
exemption as modified.

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

Van Ness Plastic Molding Co., Inc., Employees' Money Purchase 
Pension Plan (the Plan), Located in Belleville, NJ

[Prohibited Transaction Exemption 98-42; Exemption Application No. D-
10483]

Exemption

    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 to (1) the making to the Plan of a restoration payment 
(the Restoration Payment) with respect to certain defaulted third-party 
notes (Note 1, Note 2 and Note 3; collectively, the Notes) by the Van 
Ness Plastic Molding Co., Inc. (the Employer), a party in interest with 
respect to the Plan; and (2) the potential future receipt by the 
Employer of recapture payments (the Recapture Payments) made to the 
Plan pursuant to bankruptcy proceedings involving the issuer/assignor 
of the Notes.
    This exemption is subject to the following conditions:
    (a) Mr. William Van Ness, the Plan trustee, agrees to have excluded 
from his individual account in the Plan (the Account) any benefit 
attributable to the Restoration Payment, such that the total 
Restoration Payment is allocated to the Accounts of the other Plan 
participants and does not include any portion related to the interest 
of Mr. Van Ness's Account in the Notes.
    (b) The Restoration Payment, which is calculated based upon the 
Account balances in the Plan of participants other than Mr. Van Ness, 
covers--

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    (1) The aggregate unrecovered principal of the Notes plus accrued, 
but unpaid, interest on the Notes as of the dates of default, 
calculated through December 31, 1997;
    (2) An additional amount representing interest on the unrecovered 
principal of Notes 2 and 3, originally scheduled for maturity in 1999, 
from January 1998 until the date the Restoration Payment is made; and
    (3) Lost opportunity costs associated with Note 1, which was 
originally scheduled for maturity in 1997, from January 1998 until the 
date the Restoration Payment is made.
    (c) Any Recapture Payments are restricted solely to the amounts, if 
any, recovered by the Plan with respect to the Notes in litigation or 
otherwise.
    (d) The Restoration Payment is made to resolve potential claims for 
breach of fiduciary duty relating to the management of the Plan.
    (e) The Employer receives a favorable ruling from the Internal 
Revenue Service that the Restoration Payment does not constitute a 
``contribution'' or other payment that will disqualify the Plan.
    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 June 29, 1998 at 63 FR 
35281.

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 or disqualified 
person from certain other provisions to which the exemptions 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) 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 are true and complete and accurately describe all material 
terms of the transaction which is the subject of the exemption. In the 
case of continuing exemption transactions, if any of the material facts 
or representations described in the application change after the 
exemption is granted, the exemption will cease to apply as of the date 
of such change. In the event of any such change, application for a new 
exemption may be made to the Department.

    Signed at Washington, D.C., this 24th day of August, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 98-23283 Filed 8-28-98; 8:45 am]
BILLING CODE 4510-29-P