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Secretary of Labor Thomas E. Perez
Proposed Exemption; Bankers Trust Company, BT Alex Brown Incorporated, and Deutsche Bank AG [Notices] [06/07/1999]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemption; Bankers Trust Company, BT Alex Brown Incorporated, and Deutsche Bank AG [06/07/1999]

[PDF Version]

Volume 64, Number 108, Page 30360-30367

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10747]

 
Proposed Exemption; Bankers Trust Company, BT Alex Brown 
Incorporated, and Deutsche Bank AG

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemption.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed exemption 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 Request

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemption, within 33 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. D-10747. The application 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 exemption will be provided to all interested 
persons in the manner agreed upon by the applicant and the Department 
within 3 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.

SUPPLEMENTARY INFORMATION: The proposed exemption was requested in an 
application 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, this notice of proposed exemption 
is issued solely by the Department.
    The application contains representations with regard to the 
proposed exemption which are summarized below. Interested persons are 
referred to the application on file with the Department for a complete 
statement of the facts and representations.

Bankers Trust Company, New York, New York; BT Alex. Brown 
Incorporated; Deutsche Bank AG

[Application No. D-10747]

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975 of the Code and 
in accordance with the procedures set forth in 29 CFR 2570, subpart B 
(55 FR 32836, 32847, August 10, 1990).

Section I. Bankers Trust Company

    If the exemption is granted, Bankers Trust Company shall not be 
precluded from functioning as a ``qualified professional asset 
manager'' pursuant to Prohibited Transaction Exemption 84-14 (49 FR 
9494, March 13, 1984) (PTE 84-14) for the period beginning on the date 
of sentencing with respect to the charges to which Bankers Trust 
Company pled guilty on March 11, 1999 and ending five years 
<SUP>1</SUP> from the date of publication of the final exemption in the 
Federal Register, solely because of a failure to satisfy section I(g) 
of PTE 84-14 as a result of the conviction of Bankers Trust Company for 
felonies described in the March 11, 1999 felony information (the 
Information) entered in the U.S. District Court for the Southern 
District of New York, provided that:
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    \1\ If granted, this exemption will extend for a period of 
approximately five years. However, Bankers Trust Company may, prior 
to its expiration, apply for an extension of the exemption.
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    (a) this exemption is not applicable if Bankers Trust Company 
becomes affiliated with any person or entity convicted of any of the 
crimes described in section I(g) of PTE 84-14; and
    (b) this exemption is not applicable if Bankers Trust Company is 
convicted of any of the crimes described in section I(g) of PTE 84-14, 
other than those felonies discussed in the Information;
    (c) the custody operations that were part of Bankers Trust Company 
at the time of the March 11, 1999 information, and which have 
subsequently been reorganized as part of Global Institutional Services 
(GIS), are subject to an annual examination of its abandoned property 
and escheatment policies, procedures and practices by an independent 
public accounting firm. The examination required by this condition 
shall determine whether the written procedures adopted by Bankers Trust 
Company are properly designed to assure compliance with the 
requirements of ERISA. The annual examination shall specifically 
require a determination by the auditor as to whether the Bank has 
developed and adopted internal policies and procedures that achieve 
appropriate control objectives and shall include a test of a 
representative sample of transactions, fifty percent of which must 
involve ERISA covered plans, to determine operational compliance with 
such policies and procedures. The auditor shall issue a written report 
describing the steps performed by the auditor during the course of its 
examination. The report shall include the auditor's specific findings 
and recommendations. This requirement shall continue to be applicable 
to the custody operations that were part of Bankers Trust Company as of 
March 11, 1999, notwithstanding any subsequent reorganization of the 
custody operation function during the term of the exemption.
    (d) With respect to the independent audit report described in 
section I(c) above:
    (1) Bankers Trust Company shall provide notice to the Department of 
any instances of the Bank's noncompliance with the written policies and 
procedures reviewed by the auditor within 10 business days after such 
noncompliance is determined by the auditor notwithstanding the fact 
that the examination may not have been

[[Page 30361]]

completed as of that date. Upon request, the auditor shall provide the 
Department with all of the relevant workpapers reflecting the instances 
of noncompliance. The workpapers should identify whether and to what 
extent the assets of ERISA plans were involved in the instances of 
noncompliance, and
    (2) Any information relating to the Bank's noncompliance with the 
written policies and procedures that is required by Federal and/or 
state banking authorities to be reported to the state and/or Federal 
banking agencies shall also be reported by Bankers Trust Company to the 
Department within the same time frames that such information is 
otherwise required to be reported to those agencies.
    (e) the annual examination described in section I(c) above will be 
provided to the Department not later than 90 days following the 12 
month period to which it relates, and will be unconditionally available 
for examination by any duly authorized employee or representative of 
the Department, Internal Revenue Service, Securities and Exchange 
Commission or Department of Justice or other relevant regulators and 
any fiduciary of a plan for which Bankers Trust Company performs 
services.

Section II

    If the exemption is granted, BT Alex. Brown Incorporated and its 
subsidiaries and Deutsche Bank AG shall not be precluded from 
functioning as a ``qualified professional asset manager'' pursuant to 
PTE 84-14 for the period beginning on the date of sentencing with 
respect to the charges to which Bankers Trust Company pled guilty on 
March 11, 1999 and ending ten years from the date of publication of the 
final exemption in the Federal Register, solely because of a failure to 
satisfy section I(g) of PTE 84-14 as a result of an affiliation with 
Bankers Trust Company, provided that:
    (a) this exemption is not applicable if BT Alex. Brown 
Incorporated, its subsidiaries or Deutsche Bank AG becomes affiliated 
with any person or entity convicted of any of the crimes described in 
section I(g) of PTE 84-14; and
    (b) this exemption is not applicable if BT Alex. Brown 
Incorporated, its subsidiaries or Deutsche Bank AG is convicted of any 
of the crimes described in section I(g) of PTE 84-14.

Section III. Definitions

    (a) For purposes of this exemption, the term ``Bankers Trust 
Company'' includes Bankers Trust Company and any entity that was 
affiliated with Bankers Trust Company prior to the date of the 
acquisition of Bankers Trust Corporation by Deutsche Bank AG, other 
than BT Alex. Brown Incorporated and its subsidiaries.
    (b) For purposes of this exemption, ``Deutsche Bank AG'' includes 
Deutsche Bank AG and any entity that was affiliated with Deutsche Bank 
AG prior to the date of the acquisition of Bankers Trust Corporation by 
Deutsche Bank AG, and any future affiliates, other than Bankers Trust 
Company, as defined in subsection (a).
    (c) The term ``affiliate'' of a person means--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person,
    (2) Any director of, relative of, or partner in, any such person,
    (3) Any corporation, partnership, trust or unincorporated 
enterprise of which such person is an officer, director, or a 5 percent 
or more partner or owner, and,
    (4) Any employee or officer of the person who--
    (A) is a highly compensated employee (as defined in section 
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of 
the yearly wages of such person) or,
    (B) has direct or indirect authority, responsibility or control 
regarding the custody, management or disposition of plan assets.
    (d) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
Summary of Facts and Representations
    1. Bankers Trust Company is a New York banking corporation and a 
commercial bank which 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 worldwide. Bankers 
Trust Company is wholly owned by Bankers Trust Corporation, a bank 
holding company established in 1965 under the laws of the State of New 
York. As of December 31, 1997, Bankers Trust Corporation and its 
affiliates had consolidated assets of $140,102,000,000 and total 
stockholders' equity of $5,708,000,000.
    2. The corporate entity known as BT Alex. Brown Incorporated 
resulted from the September 1, 1997 merger of Alex. Brown Incorporated 
with a Bankers Trust Corporation subsidiary (the new entity was renamed 
BT Alex. Brown Holdings Incorporated). Alex. Brown & Sons Incorporated, 
a U.S. registered broker-dealer subsidiary of Alex. Brown Incorporated, 
was merged into BT Securities Corporation (the new entity was renamed 
BT Alex. Brown Incorporated). The merged broker-dealer, BT Alex. Brown 
Incorporated, is a wholly-owned subsidiary of Bankers Trust 
Corporation. Its predecessor, Alex. Brown & Sons Incorporated was not 
affiliated with Bankers Trust Corporation when the conduct which 
resulted in the Plea Agreement took place. BT Securities Corporation 
has never been a subsidiary of Bankers Trust Company.
    3. In the second quarter of 1999, Bankers Trust Company expects 
that Bankers Trust Corporation will be acquired by Deutsche Bank AG, a 
bank organized under the laws of Germany.
    4. On March 11, 1999, the United States Attorney for the Southern 
District of New York filed a three-count felony information (the 
``Information'') in the United States District Court for the Southern 
District of New York (the ``Court'') alleging violations of 18 U.S.C. 
Sec. 1005. The Information charges Bankers Trust Company with making 
false entries on its books and records as a result of the conduct of 
certain employees in 1994-6 in Bankers Trust's processing services 
businesses. The conduct involved the transfer to reserve accounts and 
to income of aged credit items that should have been paid to customers 
or other third parties, or paid to state abandoned property 
authorities. Some of these aged credit items represented assets of 
ERISA covered employee benefit plans. On the same day, Bankers Trust 
Company entered a plea of guilty to the charges in the Information 
pursuant to a written plea agreement (the ``Plea Agreement''). In the 
Plea Agreement, Bankers Trust Company agreed to pay a fine of $60 
million and placed that amount in escrow pending sentencing. The Plea 
Agreement provides that sentencing will be postponed to a date on or 
before June 21, 1999. Bankers Trust Company has cooperated with the 
appropriate authorities in the investigation.
    5. Bankers Trust Company represents that although none of the 
unlawful conduct involved its (or its affiliates) investment management 
activities, the criminal conduct described above would preclude each 
component of Bankers Trust Company, BT Alex. Brown, Bankers Trust 
Australia Funds Limited, and other affiliated investment managers from 
serving as a ``qualified professional asset manager'' (QPAM) pursuant 
to PTE 84-14. PTE 84-14 provides broad relief from the prohibited 
transaction provisions of ERISA and the Code for transactions

[[Page 30362]]

between parties in interest with respect to a plan and an investment 
fund in which the plan has an interest when such fund is managed by a 
QPAM, the QPAM makes the decision to enter into the transaction, and 
the other conditions of the exemption are met. Section I(g) of PTE 84-
14 precludes a person who otherwise qualifies as a QPAM from serving as 
a QPAM if such person or an affiliate \2\ thereof has, within the ten 
years immediately preceding the transaction been either convicted or 
released from imprisonment, whichever is later, as a result of certain 
specified criminal activity.
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    \2\ For purposes of section I(g) of PTE 84-14, an ``affiliate'' 
of a person is defined, in relevant part, as ``any person directly 
or indirectly, through one or more intermediaries, controlling, 
controlled by, or under common control with the person . . .'' (PTE 
84-14, section V(d)). Bankers Trust Corporation, Bankers Trust 
Company, its sister companies, and its subsidiaries would be treated 
as affiliates under this definition. Deutsche Bank AG, and its 
affiliates, will be treated as affiliates under this definition as 
of the effective date of its acquisition of Bankers Trust 
Corporation, the parent of Bankers Trust Company.
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    6. Bankers Trust Company represents that the clientele it serves 
includes large employee benefit plans subject to the Act. They maintain 
that, given the size and number of the plans which Bankers Trust 
Company represents, the large number of financial service providers 
engaged by such plans, the breadth of the definition of party in 
interest under the Act, and the array of services offered by Bankers 
Trust Company, it would not be uncommon for a plan for which Bankers 
Trust Company currently serves as a QPAM to engage in a transaction 
which may involve a party in interest.
    7. Bankers Trust Company states that other statutory and class 
exemptions exist which cover purchases and sales of securities from 
U.S. banks or broker-dealers; securities lending to U.S. banks or 
broker-dealers; mortgage pool investment trusts; investment in short-
term instruments such as repurchase agreements (with a bank supervised 
by a State or by the United States or a broker-dealer registered under 
the Securities Exchange Act of 1934 or a dealer in government 
securities who reports daily to the Federal Reserve Bank of New York), 
bankers' acceptances in banks supervised by a State or by the United 
States, commercial paper or deposits of a bank supervised by a State or 
by the United States. Bankers Trust notes, however, that without the 
relief provided by PTE 84-14, a plan advised by Bankers Trust Company 
or its affiliates would be unable to invest in real estate, mortgages, 
or commodities, to engage in purchases and sales of securities from and 
to foreign banks or broker-dealers, to lend securities to foreign banks 
and broker-dealers, or to invest in deposits of foreign banks, if such 
transactions involve a party in interest.
    8. Bankers Trust Company requests an exemption to enable it and its 
current and future affiliates, to function as QPAMs despite their 
failure to satisfy section I(g) of PTE 84-14 as a result of the 
judgment of conviction to be entered against Bankers Trust Company.\3\ 
The proposed exemption is requested on behalf of Bankers Trust Company 
and its affiliates. The proposed exemption is also requested on behalf 
of such entities that may become affiliated with Bankers Trust Company 
or its corporate successor(s), including but not limited to Deutsche 
Bank AG and its affiliates. The transactions covered by the proposed 
exemption would include the full range of transactions that can be 
executed by investment managers who qualify as QPAMs pursuant to PTE 
84-14 and satisfy the conditions contained therein. Deutsche Bank AG 
represents that, subsequent to the acquisition of Bankers Trust 
Corporation, it will assume responsibility on behalf of Bankers Trust 
Company for compliance with all of the conditions of the proposed 
exemption and all of the commitments contained in the Bankers Trust 
Company exemption application, notwithstanding any subsequent 
reorganization of Bankers Trust Company or Bankers Trust Corporation. 
Thus, for example, Deutsche Bank AG has agreed to ongoing 
responsibility for the annual examination of the custody operations 
that were part of Bankers Trust Company at the time of the March 11, 
1999 information and for any reporting to the Department in connection 
with that examination.
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    \3\ Section I(g) provides that for purposes of that subsection, 
``a person shall be deemed to have been `convicted' from the date of 
the judgement of the trial court, regardless of whether that 
judgement remains under appeal.'' Until an appealable order is 
entered, there is no judgement of conviction under section I(g). 
Bankers Trust represents that an appealable order will be entered at 
sentencing, which is scheduled for June 21, 1999.
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    9. According to Bankers Trust Company, the conduct relating to the 
Plea Agreement was discovered by the Bank itself and brought to the 
attention of the U.S. Attorney and the banking regulators. Bankers 
Trust Company, on its own initiative, engaged Arthur Andersen & Co., 
one of the largest independent accounting firms in the world, with 
substantial experience and expertise with banking and financial 
institutions, to undertake a review of the Client Processing Services 
unit, which has been now reorganized as part of Global Institutional 
Services (``GIS''). Arthur Andersen spent over 100,000 hours on the 
investigation. Arthur Andersen identified transactions which had been 
recorded to income. These transactions have since been reversed. 
Bankers Trust has substantially completed the process of compensating 
any clients or third parties affected by these transactions or 
escheating unidentified funds to the appropriate state as abandoned 
property.
    10. In addition, Bankers Trust Company represents that the law firm 
of Sullivan & Cromwell was engaged to aid in the investigation. The 
Senior Control Officer Group (SCOG) \4\ in consultation with Sullivan & 
Cromwell determined the individuals that would be evaluated for 
potential discipline. This determination was made as a result of a 
review of hundreds of thousands of e-mail messages and transaction 
records and interviews of dozens of Bankers Trust Company employees. 
SCOG and Sullivan and Cromwell met to discuss the issues raised by the 
interviews and documents for each employee and jointly reached a 
recommendation regarding the appropriate discipline for each employee.
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    \4\ Bankers Trust Company states that SCOG is comprised of 
individuals who operate completely independent of any business line, 
including CPS, and had no involvement with the transactions under 
investigation.
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    11. Bankers Trust Company represents that by the end of the 
investigation, 13 employees who were in various ways related to the 
events that were the subject of the Information had resigned and 27 
other employees received other forms of disciplinary action. None of 
the individuals responsible for the action upon which the Information 
is based are currently employed by Bankers Trust Company. In addition 
to asking employees to resign, the disciplinary actions taken were, 
reassignment out of the fiduciary business, compensation penalties, 
reprimand or mandatory retraining. Bankers Trust Company determined the 
level of discipline that was appropriate based on the following 
criteria: the employee's position during the relevant conduct; the 
employee's relevant educational and professional background; the 
employee's degree of involvement with the transaction, and the nature 
of the transaction. Bankers Trust Company believes that it has 
identified and considered all individuals who should have been 
disciplined in this matter.
    Bankers Trust Company represents that it has undertaken to 
appropriately identify and discipline all individuals involved in the 
conduct which gave rise

[[Page 30363]]

to the guilty plea by Bankers Trust Company, and similar conduct not 
covered by the plea, all of which was investigated by Bankers Trust 
Company in 1996 and 1997. This conduct was found by Bankers Trust 
Company to involve taking unclaimed funds into income of Bankers Trust 
Company without adequate documentation that such funds belonged to 
Bankers Trust Company, as well as other accounting practices designed 
to misstate revenue or expenses of Bankers Trust Company for a 
particular time period. In addition to steps already taken, Bankers 
Trust Company agrees that it will, upon request of the Pension and 
Welfare Benefits Administration (PWBA), appoint and compensate a 
Special Master acceptable to PWBA to review the behavior of those 
individuals (and any discipline which has already been imposed on them) 
who remain at the Bankers Trust Company (its successors or assigns), 
when the proceeding by the Special Master commences who fall into any 
of the following categories:
    (1) Persons with respect to whom a presentation was made to a 
disciplinary review committee of Bankers Trust Company based on any 
allegation that an individual was, directly or indirectly, involved in 
claiming funds for Bankers Trust Company without adequate documentation 
that such funds belonged to Bankers Trust Company;
    (2) Persons selected by PWBA who were involved, directly or 
indirectly, in any of the above described misconduct, whether or not 
specifically investigated by Bankers Trust Company;
    (3) Persons selected by PWBA who were involved in conducting, 
implementing, supervising, or overseeing the investigative and 
disciplinary process on behalf of Bankers Trust Company designed: (a) 
to assure that all improper accounting was appropriately corrected; and 
(b) to discipline individuals involved in claiming funds for Bankers 
Trust Company without adequate documentation that such funds belonged 
to Bankers Trust Company or misstating income or expenses of Bankers 
Trust Company; and
    (4) Persons selected by PWBA who were involved in responding to 
inquiries from any governmental agency regarding allegations that 
Bankers Trust Company claimed funds without adequate documentation that 
such funds belonged to Bankers Trust Company, failed to appropriately 
escheat abandoned funds, or misstated income or expenses of Bankers 
Trust Company.
    If a Special Master is requested by PWBA, the Bankers Trust Company 
will submit to PWBA for its approval a proposed engagement letter 
relating to the scope of the review which shall include, at a minimum, 
the following requirements:
    (a) The Special Master shall determine conclusively on behalf of 
Bankers Trust Company, what discipline for each such individual would 
be appropriate, up to and including dismissal to assure that their 
discipline was adequate to deter future misconduct by the individual 
and others in similar positions, and to assure that no such individual, 
found by the Special Master to be untrustworthy, would be involved, 
directly or indirectly, in handling assets subject to the Employee 
Retirement Income Security Act;
    (b) The Special Master shall report to PWBA regarding any 
information that comes to the attention of the Special Master, in the 
course of performing his other duties, which suggests that the 
continued presence of any person as an employee or contractor of 
Bankers Trust Company might imperil the safekeeping or appropriate 
investment of employee benefit plan assets covered by the Act, or any 
other such information which the Special Master, in his discretion, 
believes would be useful to PWBA in performing its mission;
    (c) The Special Master shall, in addition, provide to PWBA, upon 
request, any materials submitted by or on behalf of Bankers Trust 
Company to the Special Master or by the Special Master to Bankers Trust 
Company;
    (d) To the extent permitted by law, Bankers Trust Company shall 
provide the Special Master with all documents concerning the behavior 
of such individuals as the Special Master, in his sole discretion, 
shall deem relevant, and shall require all employees and contractors to 
respond fully and completely to all inquiries by the Special Master as 
a condition of their employment by Bankers Trust Company;
    (e) Bankers Trust Company further will promptly impose any 
discipline found appropriate by the Special Master; and
    (f) The Special Master will use best efforts to complete his 
assignment within a specified period of time, but his failure to do so 
may not be grounds for dismissal or failure by Bankers Trust Company to 
honor all terms of the engagement letter, unless PWBA agrees in writing 
to such dismissal or failure to comply. Bankers Trust Company further 
agrees that any individual who has resigned, been dismissed, or 
transferred following involvement in claiming funds for Bankers Trust 
Company without adequate documentation that such funds belonged to 
Bankers Trust Company or misstating income or expenses of Bankers Trust 
Company, so that they are not presently involved in the handling of 
ERISA covered employee benefit plan assets on behalf of Bankers Trust 
Company, will not in the future be permitted by Bankers Trust Company 
to handle such assets on its behalf as an employee or contractor. 
Similarly, Bankers Trust Company agrees that any individual who was 
disciplined in connection with the conduct described above, but who was 
not, at the time of their discipline, involved in handling employee 
benefit plan assets subject to the Act, will not in the future be 
permitted to handle such assets on behalf of Bankers Trust Company. 
Notwithstanding the agreements in this paragraph, Bankers Trust Company 
may, within 60 days of retaining the Special Master, with notice to 
PWBA, request that the Special Master review the conduct of any 
individual whose involvement with employee benefit plan assets is 
proscribed by this paragraph. Upon request for such review, the Special 
Master shall determine whether the limitations imposed by this 
paragraph should be modified, using the same standards which he would 
use in determining appropriate discipline for an individual described 
in numbered paragraphs (1)-(4). In performing this duty, the Special 
Master shall be given the same cooperation as he would receive in 
reviewing the discipline of an individual described in numbered 
paragraphs (1)-(4).
    12. Bankers Trust Company further represents that substantial 
training has been provided to 2000 employees thus far. The training is 
in the process of being provided to the remainder of GIS employees and 
will be given monthly thereafter for new employees. As part of its 
enhanced process to establish and maintain a proper control 
environment, Bankers Trust represents that it developed a training plan 
to ensure that employees are aware of the important responsibilities 
for the proper handling of client funds. The ``Business Practices'' 
course was developed with Arthur Andersen and taught jointly with them. 
The full day's course presents the legal and regulatory issues and 
responsible business practices for everyday operations, including 
fiduciary requirements of ERISA and the appropriate method for dealing 
with suspected misconduct.
    13. Bankers Trust Company represents that various corrective 
measures have been taken by it to help ensure that conduct such as that

[[Page 30364]]

involved in the Plea Agreement will not recur. New controls have been 
implemented, and a risk management infrastructure has been developed 
with risk managers assigned to each business area reporting directly to 
the Corporate Controller.
    14. Arthur Andersen provided recommendations to the Bank for its 
consideration in augmenting the controls applicable to its processing 
business. In the area of organization, Arthur Andersen recommended that 
controllers for each product line in GIS report to a corporate 
controller, who reports directly to the Chief Financial Officer of the 
Bank. In Arthur Andersen's view, segregation of the accounting control 
function from operations is paramount to a strong control environment. 
Bankers Trust Company agreed, creating controllers for each business in 
GIS, who report to the CFO.
    15. Arthur Andersen also recommended that the Bank adopt a 
centralized escheatment process. In response to this recommendation, a 
separate unit of Arthur Andersen with expertise in abandoned property 
was engaged to assist in assessing the existing control processes 
affecting abandoned property and escheatment. Bankers Trust Company 
represents that as a result of this assessment, controls over aged 
credit items and escheatment procedures have been enhanced. 
Specifically, Bankers Trust Company has created an Abandoned Property 
Officer, who is responsible for the Bank's escheatment filings. The 
Abandoned Property Officer coordinates with the Legal and Compliance 
Department of the Bank to provide guidance to the business lines and to 
provide clear guidelines for administering the escheatment process. 
Arthur Andersen also recommended that each business unit assign an 
individual to be responsible for the escheatment process in their 
respective areas and detail their responsibilities and reporting lines 
with formal procedures established for escheating aged items. Arthur 
Andersen further recommended that enhanced standards be established for 
documenting escheated items and that managers and operations employees 
be trained on internal policy and procedures. Finally, in the area of 
organization, Arthur Andersen recommended that procedures providing for 
proper accounting and disposition of credits be established and that 
training be provided in the accounting for those items. Bankers Trust 
Company represents that it has created an entire manual on escheatment 
policies and procedures, and all employees responsible for making 
decisions on accounting and escheatment have been trained in these 
procedures and will continue to be trained periodically in these areas.
    16. In the area of internal audit, Arthur Andersen recommended that 
audit procedures be revised to ensure that aged items will be formally 
tracked and followed until any of the issues concerning the items are 
resolved properly. Arthur Andersen recommended that internal audit 
employees be formally trained regarding escheatment laws and 
regulations and that internal audit personnel focus on the operational 
controls and proper procedures relating to abandoned property. Bankers 
Trust Company represents that it has created new audit procedures for 
internal audit staff in these areas. Internal audit staff have received 
Certified Trust Audit training from an outside organization and will be 
trained in Bankers Trust Company's abandoned property procedures.
    17. In the area of in-house legal services, Arthur Andersen 
recommended that there be a corporate policy for the escheatment of 
abandoned property which is approved by business operations, corporate 
controllers and the Legal Department before adoption, with procedures 
to provide clear guidance on referral of issues to the Legal Department 
respecting proper treatment and escheatment of aged items. Since these 
recommendations were made, an official ``Abandoned Property Policy'' 
has been adopted, and procedures have been developed on escheatment 
which focus on proper referrals to the Legal Department.
    18. Arthur Andersen also made recommendations regarding the 
function of the controllers group, including the development of a 
reporting mechanism for the aging of debits and credits; the prompt 
return of property to the rightful owners, once identified; and the 
development of more formal procedures for researching debits and 
credits. Bankers Trust Company represents that management information 
systems have been developed in response to these recommendations, which 
allow both the controllers and the business line operations management 
to track the research and identification of debits and credits and 
evaluate the process in terms of age, size and other relevant factors. 
Also in the controllers' area, Arthur Andersen recommended that the 
level of suspense items be reduced and procedures developed to research 
outstanding items. In this connection, Arthur Andersen recommended that 
the Bank improve its tracking and promptness of reconciling items, with 
better descriptions of such items and clear responsibility for 
reconciling these items. In response to this recommendation, Bankers 
Trust Company represents that it has significantly upgraded the level 
and review of operational control indicators. Specifically, key control 
indicators have been defined and developed across all business areas. 
Monthly control management information systems (MIS) packages have been 
developed in each business unit which are reviewed at a monthly control 
meeting chaired by the GIS Business head and attended by business unit 
heads, controllers, compliance and legal personnel and internal audit 
staff.
    19. With respect to ERISA plans, Arthur Andersen recommended that 
procedures and policies be developed concerning checks paid to plan 
participants that have not been cashed by the participant and that an 
independent group, such as compliance, be established to monitor all 
customer complaints on a centralized basis, with a follow-up audit to 
determine whether various aspects of client agreements in connection 
with billing, return of excess funds, etc. are being complied with. 
Bankers Trust Company represents that it has instituted policies to 
insure that assets belonging to employee benefit plans do not reach the 
point of being treated as abandoned property to be escheated. In this 
connection, Bankers Trust Company has promulgated policies and 
procedures for the Retirement Services Group within GIS which, among 
other things, require that plan sponsors receive a monthly list of 
uncashed checks older than 45 days; that plan sponsors are reminded 
that it is the plan sponsor's obligation and responsibility to find 
missing participants, and that plan sponsors are specifically requested 
to provide directions on amounts outstanding for more than one year. 
Check ledgers and class action records are retained by the Bank for 15 
years. Plans which terminate their relationship with Bankers Trust 
Company will have any amounts still outstanding after six months 
forwarded to their successor trustees. With respect to terminated 
plans, Bankers Trust Company will forward any amounts still outstanding 
after six months to the responsible plan fiduciary. In addition, 
Bankers Trust Company represents that it has established policies which 
require complaints to be brought to the attention of a supervisor 
immediately and tracked in an MIS system so that

[[Page 30365]]

management can evaluate the aging and resolution of complaints. The 
policies further require that, if not resolved promptly, the complaint 
must be elevated to a more senior manager, or to Compliance and the 
Legal Department if the issue is out of the ordinary course of daily 
operations.
    20. In the area of ownership and accountability of customer 
accounts, Arthur Andersen recommended that each business area develop a 
chart of accounts, identifying the responsible officer, the proof 
schedule, approval levels for account openings, closings and changes, 
with procedures for maintenance of proper documentation for customer 
and beneficiary amounts and controls on unclaimed amounts. Bankers 
Trust Company represents that it has undergone a comprehensive account 
review. Over 25,000 general ledger accounts have been closed, and new 
procedures and control reports were developed to identify inactive, 
obsolete and erroneous accounts. In addition, a chart of accounts was 
established through the use of a centralized account database. All 
accounts have clear ownership, purpose, and account descriptions. With 
respect to each account, an administrator is responsible for verifying 
on a monthly basis that the account is being used according to its 
official purpose, is being reconciled on a regular basis and is still 
active. On a going-forward basis, senior management receives regular 
MIS reports regarding account activity. In addition, Bankers Trust 
Company represents that procedures are in place to close inactive or 
dormant accounts on a regular basis.
    21. Arthur Andersen recommended better procedures for handling 
class actions and tax refunds, and Bankers Trust Company represents 
that it is enhancing its current policies to establish additional 
procedures for preservation of the names of beneficial holders of 
securities that may result in class action payments, both for existing 
plans and for terminated plan relationships. In addition, Bankers Trust 
Company has revised its procedures to maintain canceled check reports 
and ledgers for 15 years. Bankers Trust Company further represents that 
escheatment records are kept indefinitely.
    22. In addition to the review conducted by Arthur Anderson, Bankers 
Trust Company engaged KPMG, an international accounting firm, who are 
the Bank's auditors, to perform an independent risk assessment and 
controls review across GIS. Bankers Trust Company represents that this 
review had several objectives: (1) to provide an examination of the 
various control enhancement initiatives that were underway (e.g. 
account usage); (2) to provide an assessment of the risk identification 
and control mechanisms across GIS business with, as necessary, control 
improvement recommendations; and to evaluate the control environment 
and risk management strategies including recommendations on risk 
management, legal and compliance structure.
    23. Following this review, several control improvements were 
recommended throughout the various business units. Bankers Trust 
Company represents that detailed plans were established to implement 
the improvements with critical/mandatory improvements implemented by 
year-end 1998. In addition, recommendations to establish a GIS risk 
management function were implemented by the appointment of a GIS risk 
manager. In order to provide for an ongoing self-assessment of the 
control environment, Bankers Trust Company notes that a GIS-wide risk 
database was created. This database houses all key GIS operational 
processes and control points and is maintained and updated by the 
business unit risk managers as operational processes and control points 
are altered or changed.
    24. KPMG has confirmed that based on its involvement over the past 
two years with respect to the GIS business, Bankers Trust Company has 
implemented policies and procedures to address the mandatory gaps 
identified in the risk assessment review performed by KPMG, as well as 
the recommendations made by Arthur Anderson at the conclusion of their 
forensic investigation. KPMG also represents that Bankers Trust Company 
continues to make substantial progress working toward a ``best 
practices'' control environment and that progress regarding remaining 
control enhancement initiatives continues to be closely monitored at 
the monthly control review meetings conducted since October, 1997 which 
all senior management in the GIS business.
    25. Bankers Trust Company is subject to the continuing supervision 
of both the New York State Banking Department and the Federal Reserve 
Bank of New York. The Federal Reserve Bank of New York (FRBNY) and the 
New York Banking Department conduct joint annual examinations of the 
Bank, including its fiduciary operations. As part of its supervision, 
the New York State Department of Banking entered into a settlement 
agreement with Bankers Trust Company, pursuant to which Banker Trust 
Company agreed to pay $3.5 million to the State of New York. It reached 
this agreement based on the fact that Bankers Trust Company had 
retained outside counsel and an independent accounting firm to assist 
the Bank in performing a comprehensive forensic and diagnostic review 
of the activities of its custody and processing businesses during the 
relevant period and based on that review, had taken the following 
remedial steps: (1) the Bank adopted improved policies and procedures 
relating to accounting practices, risk assessment, compliance and 
internal control procedures, and management information reporting; (2) 
the Bank adopted new training programs for its personnel in this area 
with respect to business practices and responsible decision making; (3) 
the Bank replaced and supplemented personnel in this area, including 
the replacement of the head of the business group and the head of the 
areas specifically involved in the offending behavior; (4) the Bank 
created an independent risk management and control function that 
reports outside the business line to the senior management in charge of 
corporate risk management and control; (5) the Bank enhanced its 
internal audit functions including expansion of the audit scope and 
increasing the size of the audit staff; (6) the annual external audit 
of the business was extended to include a review of the improved 
policies and procedures detailed in paragraph one above; and (7) the 
Bank commenced and substantially completed appropriate restitution of 
the amounts involved. In addition to the payment to the State of New 
York, Bankers Trust Company committed to maintaining the new policies, 
procedures and internal audit scope and frequency described above and 
to make no material changes therein without the prior approval of the 
New York State Banking Superintendent and to provide such periodic 
reports to the Superintendent and to the Bank's Board of Directors as 
they may request regarding compliance with the new policies and 
procedures. The New York State Banking Department concluded, in a 
letter dated March 11, 1999 to Frank Newman, Chairman of Board of 
Bankers Trust Company, that based on the actions taken by the Bank to 
date, ``Bankers Trust has put into place the appropriate controls with 
respect to the management of the affected businesses''.
    26. The Federal Reserve Bank of New York also provided information 
in a written submission to assist the Department in its review of 
Bankers Trust Company exemption application. The FRBNY has a statutory 
obligation to

[[Page 30366]]

inspect the books and records of Bankers Trust Company and monitor its 
internal controls to ensure that adequate policies and procedures are 
in place with respect to fiduciary obligations. See 12 U.S.C. 248(a), 
325 and 1831m. The FRBNY carries out its responsibility to examine 
Bankers Trust Company pursuant to delegated authority from the Board, 
and shall continue to do so. Under the Plea Agreement entered in the 
matter of United States v. Bankers Trust Company, 99 Cr. 250 (S.D.N.Y 
Mar 11, 1999), the Bank has submitted to the FRBNY for review and 
approval ``the written internal compliance procedures which the Bank 
has already implemented for the strengthening and maintenance of its 
records, systems and internal audit and controls, in order to ensure 
that such misconduct will not recur in the future.''
    27. As a condition of the proposed exemption, Bankers Trust Company 
has agreed to an annual examination of its custody operations as it 
relates to abandoned property and escheatment matters. The examination 
is to be undertaken by an independent public accounting firm 
<SUP>5</SUP> and will be designed to assist in determining whether the 
written procedures adopted by the Bank are properly designed to assure 
compliance with the requirements of ERISA. The examination will 
specifically require a determination by the auditor as to whether or 
not the Bank has developed adequate internal policies and procedures 
relating to abandoned property and escheatment matters and would 
include a test of a representative sample of transactions to determine 
operational compliance with such policies and procedures, with a 
written report describing the steps performed by the auditor during the 
course of its examination and the auditor's specific findings and 
recommendations. The auditor's report will be delivered to the 
Department within 90 days of the close of the 12 month period to which 
it relates and will be unconditionally available to other government 
regulators and the plan fiduciaries upon request.<SUP>6</SUP> KPMG, an 
international accounting firm, who is the Banks auditor, or other 
successor independent auditors, will perform this annual audit.
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    \5\ In the Department's view, whether an auditor is independent 
for purposes of the proposed exemption would depend on the 
particular facts and circumstances of each case. However, the 
Department would not view an auditor as independent under 
circumstances where the auditor has a financial interest, including 
an ownership interest, in Bankers Trust Company or Deutsche Bank, or 
any affiliates thereof, or otherwise receives more than a de minimis 
amount of its compensation from any of those persons.
    \6\ Bankers Trust Company represents that because its future 
affiliates will have had no affiliation with Bankers Trust Company 
during the period that the conduct that was the subject of the Plea 
Agreement took place, the audit will focus solely on the operations 
that are currently part of the custody operations of Bankers Trust 
Company. Similarly, Alex. Brown Incorporated was not affiliated with 
Banker's Trust Corporation when the conduct identified in the Plea 
Agreement occurred and thus will not be subject to the annual audit 
examination.
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    28. Bankers Trust Company asserts that failure to grant the 
requested exemption will prohibit employee benefit plans for which 
Bankers Trust Company affiliates act as investment managers from 
engaging in transactions with parties in interest that would otherwise 
be permitted under PTE 84-14, and will cause the plans to forego 
attractive investment opportunities. Bankers Trust Company notes that 
many of its current and future affiliates, as well as the Bank itself, 
would be deprived of their abilities to offer and render the full 
panoply of specialized investment advisory services demanded by 
employee benefit plans covered by the Act. Bankers Trust Company 
represents that the conduct referenced in the Plea Agreement did not 
involve the investment management functions of the Bank or its 
investment management affiliates. Bankers Trust Company further 
represents that sufficient changes have been made in the Bank's custody 
and processing business management, procedures and supervision to 
prevent in the future the conduct which gave rise to the Plea 
Agreement, supporting the inclusion of Bankers Trust Company as an 
entity permitted to function as a QPAM.
    29. In summary, Bankers Trust Company represents that the proposed 
exemption satisfies the criteria of section 408(a) of the Act for the 
following reasons: (A) Bankers Trust Company has undertaken substantial 
reforms and adopted procedures designed to prevent any recurrence of 
the criminal activity and escheatment of ERISA funds.; (B) an 
independent audit requirement will further protect plans and help 
assure plan participants that the conduct that was the subject of the 
Plea Agreement will not recur; (C) instances of noncompliance 
discovered during the audit will be reported by Bankers Trust 
Corporation to the Department within ten days of determination by the 
independent auditor; (D) the investment management units that oversee 
the transactions covered by QPAM were not the subject of the Plea 
Agreement; and (E) the other conditions of PTE 84-14, combined with the 
procedures adopted by Bankers Trust Company, afford ample protection of 
the interests of participants and beneficiaries of employee benefit 
plans.

Section 411 Proceeding

    The Department notes that, as a result of Bankers Trust Company's 
conviction for violating 18 U.S.C. Sec. 1005, the Pension and Welfare 
Benefits Administration's (PWBA) Office of Enforcement has undertaken 
an inquiry to determine whether, pursuant to ERISA Sec. 411(a), 29 
U.S.C. Sec. 1111(a), a judicial proceeding should be instituted to bar 
Bankers Trust Company from acting as an administrator, fiduciary, 
officer, trustee, custodian, counsel, agent, or employee of any 
employee benefit plan or from acting as a consultant to any employee 
benefit plan. Information obtained in this inquiry will not be used by 
the Department in its consideration of Bankers Trust Company's 
exemption request unless the Director of the Office of Enforcement 
submits such information, or any portion thereof, in writing, to PWBA's 
Office of Exemption Determinations for inclusion in the public record. 
Neither the Department's consideration of Bankers Trust Company's 
exemption request nor any final decision on such request shall 
foreclose completion of the Department's ERISA Sec. 411 inquiry nor 
preclude any proceeding which may result therefrom seeking to bar 
Bankers Trust Company from acting as an administrator, fiduciary, 
officer, trustee, custodian, counsel, agent, or employee of any 
employee benefit plan or from acting as a consultant to any employee 
benefit plan.

Notice to Interested Persons

    With respect to notification of interested persons, the applicant 
will distribute this notice of proposed exemption by first class mail 
to an independent plan fiduciary for all ERISA pension plans for which 
Bankers Trust Company and its subsidiaries provide fiduciary services, 
including trustee services and/or the provision of investment advice 
and the owner of all IRA accounts to which Bankers Trust Company and 
its subsidiaries provide investment advisory services. The applicant 
will distribute the notice to all participants in its own ERISA pension 
plans, either by return receipt electronic mail or by first class mail. 
All notification will be mailed or electronically mailed within three 
business days after publication of the proposed exemption in the 
Federal Register. The applicant will also use its best efforts to 
notify an independent fiduciary for each former ERISA pension plan 
client of Bankers Trust Company

[[Page 30367]]

and its subsidiaries that has received or may receive additional funds 
stemming from either the CPS inquiry or the Bank's additional efforts 
to find participants with uncashed benefit checks.

FOR FURTHER INFORMATION CONTACT: Ms. Allison Padams LaVigne or James S. 
Frazier of the Department, telephone (202) 219-8194. (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 exemption, 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 exemption, if granted, will be subject to the 
express condition that the material facts and representations contained 
in the application are true and complete, and that the application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 2nd day of June, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 99-14369 Filed 6-4-99; 8:45 am]
BILLING CODE 4510-29-P