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Secretary of Labor Thomas E. Perez
Proposed Exemptions; Bankers Trust Company (BTC) [Notices] [09/24/1999]

Proposed Exemptions; Bankers Trust Company (BTC) [09/24/1999]

[PDF Version]

Volume 64, Number 185, Page 51793-51803

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10688, et al.]

 
Proposed Exemptions; Bankers Trust Company (BTC)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the

[[Page 51794]]

prohibited transaction restrictions of the Employee Retirement Income 
Security Act of 1974 (the Act) and/or the Internal Revenue Code of 1986 
(the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
requests for a hearing should state: (1) The name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing.

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

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of 
the Secretary of the Treasury to issue exemptions of the type requested 
to the Secretary of Labor. Therefore, these notices of proposed 
exemption are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

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

[Application Nos. D-10688 through D-10691]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of section 406(a) 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 (D) of the Code, shall not 
apply to the proposed execution by certain employee benefit plans (the 
Plans) investing in Transwestern Office Partners II, L.P. (the LP) of a 
partner agreement and estoppel (the Estoppel) under which the Plans 
agree to honor capital calls made to the Plans by BTC as the 
representative of certain lenders (the Lenders) that will fund a so-
called ``credit facility'' providing credit to the LP in connection 
with the Plans'' capital commitments to the LP where the LP has granted 
to BTC security interests in the capital commitments, and where the 
Lenders are parties in interest with respect to the Plans; provided 
that (a) the proposed grants and agreements are on terms no less 
favorable to the Plans than those which the Plans could obtain in 
arm's-length transactions with unrelated parties; (b) the decisions on 
behalf of each Plan to invest in the LP and to execute such grants and 
agreements in favor of BTC are made by a fiduciary which is not 
included among, and is independent of and unaffiliated with, the 
Lenders and BTC; (c) with respect to Plans that have invested or may 
invest in the LP in the future, such Plans have or will have assets of 
not less than $100 million and not more than 5% of the assets of any 
such Plan are or will be invested in the LP. For purposes of this 
condition (c), in the case of multiple plans maintained by a single 
employer or single controlled group of employers, the assets of which 
are invested on a commingled basis, (e.g., through a master trust), 
this $100 million threshold will be applied to the aggregate assets of 
all such plans; and d) the general partner of the LP must be 
independent of BTC, the Lenders and the Plans.

Summary of Facts and Representations

    1. The LP is a Delaware limited partnership, the sole general 
partner of which is Transwestern Office GP II, L.L.C. (the General 
Partner), a Delaware limited liability company. The General Partner is 
a separate affiliate of Transwestern Investment Company, L.L.C. (TWIC), 
a Delaware limited liability company. The General Partner is an entity 
unrelated to BTC, the Lenders and the Plans. The LP shall exist for 
five years from the end of its acquisition period (which is expected to 
last up to 30 months), but may be extended for an additional three 
years. The LP was formed by the General Partner (as sole General 
Partner), with the intent of seeking capital commitments from a limited 
number of prospective investors who would become limited partners (the 
Partners) of the LP. There are 17 current and prospective Partners 
having, in the aggregate, irrevocable, unconditional capital 
commitments of at least $150,000,000.
    2. The LP has been organized to establish an integrated, self-
administered and self-managed real estate operating company (see 
paragraph 11, below) to acquire real property assets primarily used for 
office purposes. The LP will make acquisitions and provide leasing and 
property management services. As described in the Private Placement 
Memorandum, the LP believes that significant opportunities exist to 
achieve superior risk-adjusted returns on its investments in excess of 
15% over a five-year period. The LP will identify and commit to all 
investments within thirty months of closing (the Acquisition Period). 
Strategies to maximize proceeds and create liquidity for the LP include 
single asset sales, portfolio transactions, formation and exchange of 
assets for equity and a public market offering.
    3. The LP will distribute to the Partners any revenue that exceeds 
current and anticipated cash needs as determined by the General 
Partner. Proceeds from the sale or financing of properties will 
generally be distributed in this manner. However, invested capital 
returned from investments sold or financed by the LP within 30 months

[[Page 51795]]

of the final closing date will be subject to reinvestment, provided 
that such amounts do not exceed a Partner's capital commitment (as 
discussed below).
    4. The agreement dated May 1, 1997, under which the LP is organized 
(the Agreement) requires each Partner to execute a subscription 
agreement that obligates the Partner to make contributions of capital 
up to a specified maximum. The Agreement requires Partners to make 
capital contributions to fulfill this obligation upon receipt of notice 
from the General Partner. Under the Agreement, the General Partner may 
make calls for cash contributions (Capital Calls) up to the total 
amount of a Partner's capital commitment upon 10 business days' notice, 
subject to certain limitations. The Partners' capital commitments are 
structured as unconditional, binding commitments to contribute capital 
when Capital Calls are made by the General Partner. In the event of a 
default by a Partner, the LP may exercise any of a number of specific 
remedies.
    The Partners constituting over 90% of the equity interests and 
their investments in the LP are:

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                                                              Capital
                     Name of partner                         commitment
                                                             (millions)
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The General Partner......................................         $7.175
The Northwestern Mutual Life Ins. Co.....................         10
ERI Trans Inc............................................         15
Allstate Insurance Company...............................         30
State Street Bank and Trust as Master Trustee of the              20
 Northrop Employees Benefit Plans Master Trust...........
Mayo Foundation..........................................          5
Mayo Foundation Pension Fund.............................          5
Greenwood Properties, Inc................................          7.5
New York Life Insurance Company..........................         15
Pew Memorial Trusts......................................         10.5
J.H. Pew Freedom Trust...................................          2.1
J.N. Pew, Jr. Trust......................................          1.05
Mabel Pew Myrin Trust....................................          1.35
Northwestern Memorial Hospital...........................          1.5
Northwestern Memorial Hospital Employees' Pension Plan             1.5
 Trust...................................................
Fruit of the Loom Pension Trust, for the Benefit of Union          3
 Underwear Pension Plan..................................
Northwestern University..................................         15
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    5. The applicant states that the LP will incur indebtedness in 
connection with many of its investments. In addition to mortgage 
indebtedness, the LP will incur short-term indebtedness for the 
acquisition of particular investments. The indebtedness for the LP will 
be no more than 75% of the acquisition cost of the investments and no 
more than 70%, on a portfolio basis, of the aggregate book value of all 
properties of the LP. This indebtedness will be non-recourse except in 
connection with a Credit Facility, described in representation 6, 
below, secured by, among other things, a pledge and assignment of each 
Partner's capital commitment. This type of facility will allow the LP 
to consummate investments quickly without having to finalize the debt/
equity structure for an investment or having to arrange for interim or 
permanent financing prior to making an investment, and will have 
additional advantages to the Partners and the LP. Under the Agreement, 
the General Partner may encumber Partners' capital commitments, 
including the right to call for capital contributions, to one or more 
financial institutions as security for the Credit Facility. Each of the 
Partners has appointed the General Partner as its attorney-in-fact to 
execute all documents and instruments of transfer necessary to 
implement the provisions of the Agreement. In connection with this 
Credit Facility, each of the Partners is required to execute documents 
customarily required in secured financings, including an agreement to 
honor Capital Calls unconditionally.
    6. BTC will become agent for a group of Lenders providing a
37 revolving Credit Facility to the LP. BTC will also be a 
participating Lender. Some of the Lenders may be parties in interest 
with respect to some of the Plans that invest in the LP by virtue of 
such Lenders' (or their affiliates') provisions of fiduciary or other 
services to such Plans with respect to assets other than the Plans' 
interests in the LP. BTC is requesting an exemption to permit the Plans 
to enter into security agreements with BTC, as the representative of 
the Lenders, whereby such Plans' capital commitments to the LP will be 
used as collateral for loans made under the Credit Facility to the LP, 
when such loans are funded by Lenders who are parties in interest to 
one or more of the Plans. However, BTC represents that neither it nor 
any Lender will act in any fiduciary capacity for the decision made by 
any of the Plans to invest in the LP (as discussed in Paragraph 13, 
below).
    The Credit Facility will be used to provide immediate funds for 
real estate acquisitions made by the LP, as well as for the payment of 
LP expenses. Repayments will be secured generally by the LP from the 
Partners' capital contributions, and Capital Calls on the Partners' 
capital commitments. The Credit Facility is intended to be available 
until November 1, 1999. The LP can use its credit under the Credit 
Facility either by direct or indirect borrowings or by requesting that 
letters of credit be issued. All Lenders will participate on a pro rata 
basis with respect to all cash loans and letters of credit up to the 
maximum of the Lenders' respective commitments. All such loans and 
letters of credit will be issued to the LP or an entity in which the LP 
owns a direct or indirect interest (a Qualified Borrower), and not to 
any individual Partner. All payments of principal and interest made by 
the LP or a Qualified Borrower will be allocated pro rata among all 
Lenders.
    7. The Credit Facility will be a recourse obligation of the LP, the 
repayment of which is secured primarily by the grant of a security 
interest to BTC, as agent under the Credit Facility for the benefit of 
the Lenders, from the LP, in both: (a) The Partners' capital 
commitments and (b) a collateral account (the Borrower Collateral 
Account) under which the LP must deposit all Partners' capital 
contributions when paid. In addition, the LP and the General Partner 
will grant BTC, as agent under the Credit Facility for the benefit of 
the Lenders, a security interest in: (a) The right to call capital 
under the Agreement; (b) Capital Call notices; and (c) the Partners' 
capital commitments. The Borrower Collateral Account will be assigned 
to BTC to secure repayment of the indebtedness incurred under the 
Credit Facility. BTC has the right to apply any or all funds in the 
Borrower Collateral Account toward payment of the indebtedness in any 
manner it may elect. The capital commitments are fully recourse to all 
the Partners and to the General Partner. In the event of default under 
the Credit Facility, the agent (i.e., BTC) has the right to make 
capital calls unilaterally on the Partners to pay their unfunded 
capital commitments, and will apply cash received from such capital 
calls to any outstanding debt.
    8. Under the Credit Facility, each Partner that is a Plan will 
execute an Estoppel pursuant to which it acknowledges that the LP and 
the General Partner have pledged and assigned to BTC, for the benefit 
of each Lender which may be a party in interest (as defined in Act 
section 3(14)) of such Partner, all of their rights under the Agreement 
relating to capital commitments and Capital Call notices. The Estoppel 
will include an acknowledgment and covenant by the Plan that, if an 
event of default exists, such Plan will unconditionally honor

[[Page 51796]]

any capital call made by BTC in accordance with the Agreement up to the 
unfunded capital commitment of such Plan to the LP.
    9. BTC is requesting an exemption to permit each trust to enter 
into an Estoppel under the terms and conditions described herein. The 
trusts which hold assets of the Plans (the Trusts) are Partners in the 
LP and therefore own limited partnership interests. Some of the Lenders 
are parties in interest with respect to some of the Plans in the Trusts 
by virtue of such Lenders' (or their affiliates') provisions of 
fiduciary (or other) services to such Plans. These services are 
provided with respect to Trust assets other than the LP interests. 
Thus, BTC states that there is an immediate need for each Trust to 
enter into the Estoppel under the terms and conditions described 
herein. The Trusts owning limited partnership interests in the LP and 
the extent of their respective capital commitments to the LP are 
described as follows:
    (a) The Northrop Employee Benefit Plans Master Trust (the Northrop 
Trust), Located in New York, New York; State Street Bank and Trust as 
Master Trustee. This Trust holds the assets of nine defined benefit 
plans sponsored by the Northrop Grumman Corporation and two defined 
benefit plans sponsored by Northrop Grumman Norden Systems, Inc. (the 
Northrop Plans), which own interests in the LP. The total number of 
participants in the eleven Northrop Plans is approximately 122,976, and 
the approximate fair market value of the total assets of the Northrop 
Plans held in the Northrop Trust as of December 31, 1997 was $10.25 
billion. The Northrop Trust has made a capital commitment of $20 
million to the LP. The fiduciary responsible for reviewing and 
authorizing the investment in the LP by the Northrop Trust is 
Forstmann-Leff International, Inc. (FLI). FLI was organized in 1968 as 
an investment counseling firm. It is a multi-asset class, global 
investment management firm. FLI manages approximately $7 billion in 
domestic and international equity, fixed income and private markets' 
accounts.
    (b) The Fruit of the Loom Pension Trust (the Fruit of the Loom 
Trust), Located in Chicago, Illinois; The Northern Trust Company, 
Trustee. This Trust holds the assets of one defined benefit plan (the 
Union Underwear Plan), which owns interests in the LP. The total number 
of participants in the Union Underwear Plan is approximately 20,935, 
and the approximate fair market value of the total assets of the Union 
Underwear Plan held in the Fruit of the Loom Trust as of December 31, 
1997 is $161 million. The Fruit of the Loom Trust has made a capital 
commitment of $3 million to the LP. The fiduciary responsible for 
reviewing and authorizing the investment in the LP by the Fruit of the 
Loom Trust is William Farley, Pension Investment Committee of the Fruit 
of the Loom, Inc. Board of Directors.
    (c) The Mayo Foundation Master Retirement Trust (the Mayo Trust), 
Located in New York, New York; BTC, Trustee. This Trust holds the 
assets of one defined benefit plan (the Mayo Plan), which owns 
interests in the LP. The total number of participants in the Mayo Plan 
is approximately 25,028, and the approximate fair market value of the 
total assets of the Mayo Plan held in the Mayo Trust as of December 31, 
1997 is $1.283 billion. The Mayo Trust has made a capital commitment of 
$5 million to the LP. The fiduciary responsible for reviewing and 
authorizing the investment in the LP by the Mayo Plan is John H. 
Herrell, Vice President of the Mayo Foundation.
    (d) The Northwestern Memorial Hospital Employees Pension Plan Trust 
(The Memorial Hospital Trust) holds the assets of one defined benefit 
plan, the Northwestern Memorial Hospital Employees Pension Plan (the 
Memorial Hospital Plan), which owns interests in the LP. The total 
number of participants in the Memorial Hospital Plan is approximately 
7,804, and the approximate fair market value of the total assets of the 
Memorial Hospital Plan held in the Memorial Hospital Trust as of 
December 31, 1997 is $213 million. The Memorial Hospital Trust has made 
a capital commitment of $1.5 million to the LP. The fiduciary 
responsible for reviewing and authorizing the investment in the LP by 
the Memorial Hospital Trust is Thomas M. Satkus, Jr., Assistant 
Treasurer, Northwestern Memorial Hospital.
    10. The applicant represents that the Northrop Plans, the Union 
Underwear Plan, the Mayo Plan and the Memorial Hospital Plan are 
currently the only employee benefit plans subject to the Act that are 
Partners of the LP. However, the applicant states that it is possible 
that one or more other Plans will become Partners of the LP in the 
future. Thus, the applicant requests relief for any such Plan under 
this proposed exemption, provided the Plan meets the standards and 
conditions set forth herein. In this regard, such Plan must be 
represented by a fiduciary independent of the General Partner, the 
Lenders and BTC. Furthermore, the General Partner, who also must be 
independent of the Lenders and BTC, must receive from the Plan one of 
the following:
    (1) A representation letter from the applicable fiduciary with 
respect to such Plan substantially identical to the representation 
letter submitted by the fiduciaries of the Northrop, Fruit of the Loom, 
Mayo and Memorial Hospital Trusts, in which case this proposed 
exemption, if granted, will apply to the investments made by such Plan 
if the conditions required herein are met; or
    (2) Evidence that such Plan and its responsible fiduciaries are 
eligible for relief under Prohibited Transaction Exemption 96-23 (PTE 
96-23, 61 FR 15975, April 10, 1996), the class exemption for 
transactions by a plan with certain parties in interest where such 
plan's assets are managed by an in-house asset manager (INHAM) that has 
total assets under its management, attributable to plans maintained by 
its affiliates, in excess of $50 million (see Part IV(a) of PTE 96-23); 
or
    (3) Evidence that an insurance company which is investing general 
account funds is eligible for relief under Prohibited Transaction 
Exemption 95-60 (PTE 95-60, 60 FR 35925, July 12, 1995), the class 
exemption for insurance companies; or
    (4) Evidence that such Plan is eligible for another class exemption 
<SUP>1</SUP> or has obtained an individual exemption from the 
Department covering the potential prohibited transactions which are the 
subject of this proposed exemption.
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    \1\ For example, PTE 84-14 (49 FR 9497, March 13, 1984) permits, 
under certain conditions, parties in interest to engage in various 
transactions with plans whose assets are managed by a ``qualified 
professional asset manager'' (QPAM) who is independent of the 
parties in interest (with certain limited exceptions) and meets 
specified financial standards.
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    11. BTC represents that the LP will obtain an opinion of counsel 
that the LP will constitute an ``operating company'' under the 
Department's plan asset regulations [see 29 CFR 2510.3-101(c)] if the 
LP is operated in accordance with the Agreement and the private 
placement memorandum distributed in connection with the private 
placement of the LP Partnership interests.<SUP>2</SUP>
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    \2\ The Department notes that the term ``operating company'' as 
used in the Department's plan asset regulation cited above includes 
an entity that is considered a ``real estate operating company'' as 
described therein (see 29 CFR 2510.3-101(e)). However, the 
Department expresses no opinion in this proposed exemption regarding 
whether the LP would be considered either an operating company or a 
real estate operating company under such regulations. In this 
regard, the Department notes that it is providing no relief for 
either internal transactions involving the operation of the LP or 
for transactions involving third parties other than the specific 
relief proposed herein. In addition, the Department encourages 
potential Plan investors and their independent fiduciaries to 
carefully examine all aspects of the LP's proposed real estate 
investment program in order to determine whether the requirements of 
the Department's regulations will be met.

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[[Page 51797]]

    12. BTC represents that the Estoppel constitutes a form of credit 
security which is customary among financing arrangements for real 
estate limited partnerships or limited liability companies, wherein the 
financing institutions do not obtain security interests in the real 
property assets of the partnership or limited liability companies. BTC 
also represents that the obligatory execution of the Estoppel by the 
Partners for the benefit of the Lenders was fully disclosed in the 
Private Placement Memorandum as a requisite condition of investment in 
the LP during the private placement of the Partnership interests. BTC 
represents that the only direct relationship with respect to the LP 
between any of the Partners and any of the Lenders is the execution of 
the Estoppel. All other aspects of the transaction, including the 
negotiation of all terms of the Credit Facility, are exclusively 
between the Lenders and the LP. BTC represents that the proposed 
execution of the Estoppel will not affect the abilities of the Trusts 
to withdraw from investment and participation in the LP.<SUP>3</SUP> 
The only Plan assets to be affected by the proposed transactions are 
any funds which must be contributed to the LP in accordance with 
requirements under the Agreement to make Capital Calls to honor a 
Partner's capital commitments.
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    \3\ In this regard, the Department cautions Plan fiduciaries to 
fully understand all aspects of the Agreement, including the terms 
of the Estoppel, prior to making any capital commitments to the LP. 
The Department notes that section 404(a) of the Act requires, among 
other things, that a fiduciary of a plan act prudently when making 
investment decisions for the plan.
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    13. BTC represents that neither it nor any Lender acts or has acted 
in any fiduciary capacity with respect to any of the Trusts' 
investments in the LP and that BTC is independent of and unrelated to 
those fiduciaries (the Fiduciaries) responsible for authorizing and 
overseeing the Trusts' investments in the LP. Each of the Fiduciaries 
represents independently that its authorization of Trust investments in 
the LP was free of any influence, authority or control by the Lenders, 
including BTC. Each of the Fiduciaries represents that the Trust's 
investments in and capital commitments to the LP were made with the 
knowledge that each Partner would be required subsequently to grant a 
security interest in Capital Calls and capital commitments to the 
Lenders and to honor requests for cash contributions, also known as 
``drawdowns'', made on behalf of the Lenders without recourse to any 
defenses against the General Partner. Each of the Trust Fiduciaries 
individually represents that it is independent of and unrelated to BTC 
and the Lenders and that the investment by the Trust for which that 
Fiduciary is responsible continues to constitute a favorable investment 
for the Plan(s) participating in that Trust and that the execution of 
the Estoppel is in the best interests and protective of the 
participants and beneficiaries of such Plan(s). In the event another 
Plan proposes to become a Partner, the applicant represents that it 
will require similar representations to be made by such Plan's 
independent fiduciary. Any Plan proposing to become a Partner in the 
future and needing to avail itself of the exemption proposed herein 
will have assets of not less than $100 million <SUP>4</SUP>, and not 
more than 5% of the assets of such Plan will be invested in the LP. As 
noted in paragraph 9 above, the Northrop Plans, the Union Underwear 
Plan, the Mayo Plan and the Memorial Hospital Plan all have total 
assets which exceed $100 million and have committed amounts to the LP 
which are less than 5% of their total assets.
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    \4\ In the case of multiple plans maintained by a single 
employer or single controlled group of employers, the assets of 
which are invested on a commingled basis, (e.g., through a master 
trust), this $100 million threshold will be applied to the aggregate 
assets of all such plans.
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    14. In summary, the applicant represents that the proposed 
transactions satisfy the criteria of section 408(a) of the Act for the 
following reasons: (1) The Plans' investments in the LP were authorized 
and are overseen by the Fiduciaries, which are independent of the 
Lenders and BTC, and other Plan investments in the LP from other 
employee benefit plans subject to the Act will be authorized and 
monitored by independent Plan fiduciaries; (2) None of the Lenders 
(including BTC) has any influence, authority or control with respect to 
any of the Trusts' investment in the LP or the Trusts' execution of the 
Estoppel; (3) Each Fiduciary invested in the LP on behalf of a Plan 
with the knowledge that the Estoppel is required of all Partners 
investing in the LP, and all other Plan fiduciaries that invest their 
Plan's assets in the LP will be treated the same as other Partners are 
currently treated with regard to the Estoppel; (4) Any Plan which has 
invested or may invest in the LP in the future, which needs to avail 
itself of the exemption proposed herein, has or will have assets of not 
less than $100 million,<SUP>5</SUP> and not more than 5% of the assets 
of any such Plan are or will be invested in the LP; and (5) the General 
Partner of the LP is independent of BTC, the Lenders and the Plans.
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    \5\ See footnote 4, ibid.
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    For Further Information Contact:  Gary H. Lefkowitz of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

Donaldson, Lufkin & Jenrette Securities Corporation (DLJ), Located 
in New York, NY

    [Exemption Application No. D-10772]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).<SUP>6</SUP>
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    \6\ For purposes of this proposed exemption, reference to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to corresponding provisions of the Code.
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Section I. Covered Transactions

    A. The restrictions of section 406(a)(1))(A) through (D) 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 (D) of the Code, shall 
not apply to any purchase or sale of a security between certain 
affiliates of DLJ which are foreign broker-dealers (the Foreign 
Affiliates, as defined below) and employee benefit plans (the Plans) 
with respect to which the Foreign Affiliates are parties in interest, 
including options written by a Plan, DLJ or a Foreign Affiliate 
provided that the following conditions and the General Conditions of 
Section II, are satisfied:
    (1) The Foreign Affiliate customarily purchases and sells 
securities for its own account in the ordinary course of its business 
as a broker-dealer;
    (2) The terms of any transaction are at least as favorable to the 
Plan as those which the Plan could obtain in a comparable arm's length 
transaction with an unrelated party; and
    (3) Neither the Foreign Affiliate nor an affiliate thereof 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, and the Foreign Affiliate is a party in interest or 
disqualified person with respect to the Plan assets involved in the 
transaction solely by reason of section 3(14)(B) of the Act or section 
4975(e)(2)(B) of the Code, or by reason

[[Page 51798]]

of a relationship to a person described in such sections. For purposes 
of this paragraph, the Foreign Affiliate shall not be deemed to be a 
fiduciary with respect to Plan assets solely by reason of providing 
securities custodial services for a Plan.
    B. The restrictions of sections 406(a)(1)(A) through (D) and 
406(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 
(D) of the Code, shall not apply to any extension of credit to the 
Plans by the Foreign Affiliates to permit the settlement of securities 
transactions, regardless of whether they are effected on an agency or a 
principal basis, or in connection with the writing of options 
contracts, provided that the following conditions and the General 
Conditions of Section II are satisfied:
    (1) The Foreign Affiliate is not a fiduciary with respect to any 
Plan assets involved in the transaction, unless no interest or other 
consideration is received by the Foreign Affiliate or an affiliate 
thereof, in connection with such extension of credit; and
    (2) Any extension of credit would be lawful under the Securities 
Exchange Act of 1934 (the 1934 Act) and any rules or regulations 
thereunder if such Act, rules or regulations were applicable.
    C. The restrictions of section 406(a)(1)(A) through (D) 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 (D) of the Code, shall 
not apply to the lending of securities to the Foreign Affiliates by the 
Plans, provided that the following conditions and the General 
Conditions of Section II are satisfied:
    (1) Neither the Foreign Affiliate nor an affiliate thereof has 
discretionary authority or control with respect to the investment of 
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;
    (2) The Plan receives from the Foreign Affiliate (by physical 
delivery or by book entry in a securities depository, wire transfer, or 
similar means) by the close of business on the day on which the loaned 
securities are delivered to the Foreign Affiliate, collateral 
consisting of cash, securities issued or guaranteed by the U.S. 
Government or its agencies or instrumentalities, or irrevocable U.S. 
bank letters of credit issued by persons other than the Foreign 
Affiliate or an affiliate of the Foreign Affiliate, or any combination 
thereof. All collateral shall be in U.S. dollars, or dollar-denominated 
securities or bank letters of credit, and shall be held in the United 
States;
    (3) The collateral has, as of the close of business on the 
preceding business day, a market value equal to at least 100 percent of 
the then market value of the loaned securities (or, in the case of 
letters of credit, a stated amount equal to same);
    (4) The loan is made pursuant to a written loan agreement (the Loan 
Agreement), which may be in the form of a master agreement covering a 
series of securities lending transactions, and which contains terms at 
least as favorable to the Plan as those the Plan could obtain in an 
arm's length transaction with an unrelated party;
    (5) In return for lending securities, the Plan either (a) receives 
a reasonable fee, which 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 
latter case, the Plan may pay a loan rebate or similar fee to the 
Foreign Affiliate, if such fee is not greater than the Plan would pay 
an unrelated party in a comparable arm's length transaction with an 
unrelated party;
    (6) The Plan receives at least the equivalent of all distributions 
on the borrowed securities made 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 that the Plan would have received (net of tax withholdings) 
<SUP>7</SUP> had it remained the record owner of such securities.
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    \7\ The Department notes the applicant's representation that 
dividends and other distributions on foreign securities payable to a 
lending Plan may be subject to foreign tax withholdings and that the 
Foreign Affiliate will always put the Plan back in at least as good 
a position as it would have been in had it not lent the securities.
---------------------------------------------------------------------------

    (7) If the market value of the collateral as of the close of 
trading on a business day falls below 100 percent of the market value 
of the borrowed securities as of the close of trading on that day, the 
Foreign Affiliate delivers additional collateral, by the close of the 
Plan's business on the following business day, to bring the level of 
the collateral back to at least 100 percent. However, if the market 
value of the collateral exceeds 100 percent of the market value of the 
borrowed securities, the Foreign Affiliate may require the Plan to 
return part of the collateral to reduce the level of the collateral to 
100 percent;
    (8) Before entering into a Loan Agreement, the Foreign Affiliate 
furnishes to the independent Plan fiduciary (a) the most recent 
available audited statement of the Foreign Affiliate's financial 
condition, (b) the most recent available unaudited statement of its 
financial condition (if more recent than the audited statement), and 
(c) a representation that, at the time the loan is negotiated, there 
has been no material adverse change in its financial condition that has 
not been disclosed since the date of the most recent financial 
statement furnished to the independent Plan fiduciary. Such 
representation may be made by the Foreign Affiliate's agreeing that 
each loan of securities shall constitute a representation that there 
has been no such material adverse change;
    (9) The Loan Agreement and/or any securities loan outstanding may 
be terminated by the Plan at any time, whereupon the Foreign Affiliate 
shall 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 Plan within (a) the customary delivery period for such securities, 
(b) five business days, or (c) the time negotiated for such delivery by 
the Plan and the Foreign Affiliate, whichever is least, or, 
alternatively such period as permitted by Prohibited Transaction Class 
Exemption (PTCE) 81-6 (46 FR 7527, January 23, 1981, as amended at 52 
FR 18754, May 19, 1987), as it may be amended or superseded.\8\
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    \8\ PTCE 81-6 provides an exemption under certain conditions 
from section 406(a)(1)(A) through (D) of the Act and the 
corresponding provisions of section 4975(c) of the Code for the 
lending of securities that are assets of an employee benefit plan to 
a U.S. broker-dealer registered under the 1934 Act (or exempted from 
registration under the 1934 Act as a dealer in exempt Government 
securities, as defined therein).
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    (10) In the event that the loan is terminated and the Foreign 
Affiliate fails to return the borrowed securities or the equivalent 
thereof within the time described in paragraph (9), the Plan may 
purchase securities identical to the borrowed securities (or their 
equivalent as described above) and may apply the collateral to the 
payment of the purchase price, any other obligations of the Foreign 
Affiliate under the Loan Agreement, and any expenses associated with 
the sale and/or purchase. The Foreign Affiliate is obligated to pay, 
under the terms of the Loan Agreement, and does pay, to the Plan, the 
amount of any remaining obligations and expenses not covered by the 
collateral, plus interest at a reasonable rate. Notwithstanding the 
foregoing, the Foreign Affiliate may, in the event it fails to return 
borrowed securities as

[[Page 51799]]

described above, replace non-cash collateral with an amount of cash not 
less than the then current market value of the collateral, provided 
that such replacement is approved by the independent Plan fiduciary; 
and
    (11) The independent Plan fiduciary maintains the situs of the Loan 
Agreement in accordance with the indicia of ownership requirements 
under section 404(b) of the Act and the regulations promulgated under 
29 CFR 2550.404b-1. However, in the event that the independent Plan 
fiduciary does not maintain the situs of the Loan Agreement in 
accordance with the indicia of ownership requirements of section 404(b) 
of the Act, the Foreign Affiliate shall not be subject to the civil 
penalty which may be assessed under section 502(i) of the Act, or the 
taxes imposed by section 4975(a) and (b) of the Code.
    If the Foreign Affiliate fails to comply with any condition of this 
exemption in the course of engaging in a securities lending 
transaction, the Plan fiduciary which caused the Plan to engage in such 
transaction shall not be deemed to have caused the Plan to engage in a 
transaction prohibited by section 406(a)(1)(A) through (D) of the Act 
solely by reason of the Foreign Affiliate's failure to comply with the 
conditions of the exemption.
Section II. General Conditions
    A. The Foreign Affiliate is a registered broker-dealer subject to 
regulation by a governmental agency, as described in Section III. B., 
and is in compliance with all applicable rules and regulations thereof 
in connection with any transactions covered by this exemption;
    B. The Foreign Affiliate, in connection with any transactions 
covered by this exemption, is in compliance with the requirements of 
Rule 15a-6 (17 CFR 240.15a-6) of the 1934 Act, and Securities and 
Exchange Commission (the SEC) interpretations thereof, providing for 
foreign affiliates a limited exemption from U.S. broker-dealer 
registration requirements.
    C. Prior to the transaction, the Foreign Affiliate enters into a 
written agreement with the Plan in which the Foreign Affiliate consents 
to the jurisdiction of the courts of the United States for any civil 
action or proceeding brought in respect of the subject transactions.
    D. The Foreign Affiliate maintains, or causes to be maintained, 
within the United States for a period of six years from the date of any 
transaction such records as are necessary to enable the persons 
described in paragraph E to determine whether the conditions of this 
exemption have been met except that--
    (1) A party in interest with respect to a Plan, other than the 
Foreign Affiliate, 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 paragraph E.; and
    (2) A prohibited transaction shall not be deemed to have occurred 
if, due to circumstances beyond the control of the Foreign Affiliate, 
such records are lost or destroyed prior to the end of such six year 
period;
    E. Notwithstanding the provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the Foreign Affiliate makes the records 
referred to above in paragraph D., unconditionally available for 
examination during normal business hours at their customary location to 
the following persons or an authorized representative thereof:
    (1) The Department, the Internal Revenue Service or the SEC;
    (2) Any fiduciary of a Plan;
    (3) Any contributing employer to a Plan;
    (4) Any employee organization any of whose members are covered by a 
Plan; and
    (5) Any participant or beneficiary of a Plan. However, none of the 
persons described above in paragraphs (2)-(5) of this paragraph E. 
shall be authorized to examine trade secrets of the Foreign Affiliate, 
or any commercial or financial information which is privileged or 
confidential.
    F. Prior to any Plan's approval of any transaction with a Foreign 
Affiliate, the Plan is provided copies of the proposed and final 
exemption with respect to the exemptive relief granted herein.
Section III. Definitions
    For purposes of this proposed exemption,
    A. The term ``DLJ'' as referred to in Parts A., B., and C. of 
Section I., means Donaldson, Lufkin & Jenrette Securities Corporation.
    B. The term ``affiliate'' of another person shall include:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (2) Any officer, director, or partner, employee or relative (as 
defined in section 3(15) of the Act) of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner. (For purposes of this definition, the 
term ``control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.)
    C. The term ``Foreign Affiliate,'' shall mean a current or future 
affiliate of DLJ that is subject to regulation as a broker-dealer by--
    (1) The Securities and Futures Authority (the SFA), in the United 
Kingdom; or
    (2) The Australian Securities & Investments Commission (ASIC) in 
Australia.
    C. The term ``security'' shall include equities, fixed income 
securities, options on equity and on fixed income securities, 
government obligations, and any other instrument that constitutes a 
security under U.S. securities laws. The term ``security'' does not 
include swap agreements or other notional principal contracts.

Summary of Facts and Representations

    1. DLJ is a broker-dealer registered with the SEC, a full-line 
investment services firm which is a member of the New York Stock 
Exchange and other principal securities exchanges in the United States, 
and a member of the National Association of Securities Dealers. DLJ is 
one of the largest investment services firms in the United States. DLJ 
is the principal operating subsidiary of Donaldson, Lufkin & Jenrette, 
Inc. (DLJ, Inc.) which is currently owned by The Equitable Companies 
Incorporated as well as public shareholders. As of March 31, 1999, DLJ, 
Inc. had total assets of $90,254,264,000 and $3,069,124,000 in 
stockholders' equity.
    DLJ has several foreign affiliates that are broker-dealers or 
banks. The proposed exemption would cover the Foreign Affiliates listed 
below, any current or future affiliates that meet the requirements of 
the exemption and their respective regulating entities as follows:
    (a) London Global Securities, located in London, England, is 
subject to regulation in the United Kingdom by the SFA; and
    (b) DLJ Australia Pty. Ltd., located in Melbourne, Victoria, 
Australia will be subject to regulation by ASIC.
    DLJ requests an individual exemption to permit the Foreign 
Affiliates identified above, as well as those others which, in the 
future, may be subject to governmental regulation in the United Kingdom 
and Australia,\9\ to engage in

[[Page 51800]]

the securities transactions described below with Plans. The proposed 
exemption is necessary because the Foreign Affiliates may be parties in 
interest with respect to the Plans under the Act, by virtue of being a 
fiduciary (for assets of the Plans other than those involved in the 
transactions) or a service provider to such Plans, or by virtue of a 
relationship to such fiduciary or service provider.
---------------------------------------------------------------------------

    \9\ For a description of the SFA, see Representations 5 and 6 of 
the Notice of Proposed Exemption for Barclays Bank PLC (63 FR 53714, 
53717, October 6, 1998). Similarly, for a description of ASIC, see 
Representation 2 of the Notice of Proposed Exemption for Citibank, 
N.A. and Salomon Smith Barney, Inc. (64 FR 10493, 10496, March 4, 
1999).
---------------------------------------------------------------------------

    2. DLJ represents that the Foreign Affiliates are subject to 
regulation by a governmental agency in the foreign country. DLJ further 
represents that registration of a foreign broker-dealer with the 
governmental agency in these cases addresses regulatory concerns 
similar to those concerns addressed by registration of a broker-dealer 
with the SEC under the 1934 Act. The rules and regulations set forth by 
the above-referenced agencies and the SEC share a common objective: the 
protection of the investor by the regulation of the securities market.
    The United Kingdom and Australia both have comprehensive financial 
resource and reporting/disclosure rules concerning broker-dealers. 
Broker-dealers are required to demonstrate their capital adequacy. The 
reporting/disclosure rules impose requirements on broker-dealers with 
respect to risk management, internal controls and records relating to 
counterparties. All such records must be produced at the request of the 
agency at any time. The agencies' registration requirements for broker-
dealers are enforced by fines and penalties and thus constitute a 
comprehensive disciplinary system for the violation of such rules.
    DLJ represents that in connection with the transactions covered by 
this proposed exemption, the Foreign Affiliates' compliance with any 
applicable requirements of Rule 15a-6 (17 CFR 240.15a-6) of the 1934 
Act (as discussed further in Representation 6, below), and SEC 
interpretations thereof, providing for foreign affiliates a limited 
exemption from U.S. registration requirements, will offer additional 
protections to the Plans.
Principal Transactions
    3. DLJ represents that the Foreign Affiliates operate as traders in 
dealers' markets wherein they customarily purchase and sell securities 
for their own account in the ordinary course of their business as 
broker-dealers and engage in purchases and sales of securities, 
including options on securities, with their clients. Such trades are 
referred to as principal transactions. DLJ represents that the role of 
a broker-dealer in a principal transaction in the subject foreign 
countries is virtually identical to that of a broker-dealer in a 
principal transaction in the United States.
    DLJ requests an individual exemption to permit the Foreign 
Affiliates to engage in principal transactions with the Plans under 
terms and conditions equivalent to those required in PTCE 75-1 (40 FR 
50845, October 31, 1975), Part II.\10\ DLJ states that because PTCE 75-
1 provides an exemption only for U.S. registered broker-dealers, the 
principal transactions at issue would fall outside the scope of relief 
provided by PTCE 75-1.\11\
---------------------------------------------------------------------------

    \10\ PTCE 75-1, Part II, provides an exemption, under certain 
conditions, from section 406(a) of the Act and section 4975(c)(1)(A) 
through (D) of the Code, for principal transactions between employee 
benefit plans and U.S. registered broker-dealers or U.S. banks that 
are parties in interest with respect to such plans.
    \11\ The Department notes that the proposed principal 
transactions are subject to the general fiduciary responsibility 
provisions of Part 4 of Title I of the Act. Section 404(a) of the 
Act requires, among other things, that a fiduciary of a plan act 
prudently and solely in the interest of the plan and its 
participants and beneficiaries, when making investment decisions on 
behalf of the plan.
---------------------------------------------------------------------------

    4. DLJ represents that like the U.S. dealer markets, international 
equity and debt markets, including the options markets, are not less 
dependent on a willingness of dealers to trade as principals. Over the 
past decade, Plans have increasingly invested in foreign equity and 
debt securities, including debt securities issued by foreign 
governments. Thus, Plans seeking to enter into such investments may 
wish to increase the number of trading partners available to them by 
trading with the Foreign Affiliates.
    5. Under the conditions of this proposed exemption, as in PTCE 75-
1, Part II, the Foreign Affiliate must customarily purchase and sell 
securities for its own account in the ordinary course of its business 
as a broker-dealer. The terms of any principal transaction will be at 
least as favorable to the Plan as those the Plan could obtain in a 
comparable arm' length transaction with an unrelated party. Neither the 
Foreign Affiliate nor an affiliate thereof will have discretionary 
authority or control with respect to the investment of the Plan assets 
involved in the principal transaction or render investment advice 
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those 
assets. In addition, the Foreign Affiliate will be a party in interest 
or disqualified person with respect to the Plan assets involved in a 
principal transaction solely by reason of section 3(14)(B) of the Act 
or section 4975(e)(2)(B) of the Code (i.e., a service provider to the 
Plan), or by reason of a relationship to such a person as described in 
such sections.
    6. DLJ represents that Rule 15a-6 of the 1934 Act provides an 
exemption from U.S. registration requirements for a foreign broker-
dealer that induces or attempts to induce the purchase or sale of any 
security (including over-the-counter equity and debt options) by a 
``U.S. institutional investor'' or a ``major U.S. institutional 
investor,'' provided that the foreign broker dealer, among other 
things, enters into these transactions through a U.S. registered broker 
or dealer intermediary.
    The term ``U.S. institutional investor,'' as defined in Rule 15a-
6(b)(7), includes an employee benefit plan within the meaning of the 
Act if:
    (a) The investment decision is made by a plan fiduciary, as defined 
in section 3(21) of the Act, which is either a bank, savings and loan 
association, insurance company or registered investment adviser, or
    (b) The employee benefit plan has total assets in excess of $5 
million, or
    (c) The employee benefit plan is a self-directed plan with 
investment decisions made solely by persons that are ``accredited 
investors'' as defined in Rule 501(a)(1) of Regulation D of the 
Securities Act of 1933, as amended.
    The term ``major U.S. institutional investor,'' as defined in Rule 
15a-6(b)(4), includes a U.S. institutional investor that has total 
assets in excess of $100 million.\12\ DLJ represents that the 
intermediation of the U.S. registered broker-dealer imposes upon the 
foreign broker-dealer the requirement that the securities transaction 
be effected in accordance with a number of U.S. securities laws and 
regulations applicable to U.S. registered broker-dealers.
---------------------------------------------------------------------------

    \12\ Note that a SEC No-Action Letter has expanded the 
categories of entities that qualify as ``major U.S. institutional 
investors.'' See SEC No-Action letter issued to Cleary, Gottlieb, 
Steen & Hamilton on April 9, 1997 (the April 9, 1997 No-Action 
Letter).
---------------------------------------------------------------------------

    DLJ represents that under Rule 15a-6, a foreign broker-dealer that 
induces or attempts to induce the purchase or sale of any security by a 
U.S. institutional or major institutional investor in accordance with 
Rule 15a-6 must, among other things:

    (a) Provide written consent to service of process for any civil 
action brought by or proceeding before the SEC or a self-regulatory 
organization;
    (b) Provide the SEC with any information or documents within its 
possession, custody

[[Page 51801]]

or control, any testimony of any such foreign associated persons, 
and any assistance in taking the evidence of other persons, wherever 
located, that the SEC requests and that relates to transactions 
effected pursuant to the Rule;
    (c) Rely on the U.S. registered broker or dealer through which 
the principal transactions with the U.S. institutional and major 
U.S. institutional investors are effected to (among other things):
    (1) Effecting the transactions, other than negotiating their 
terms;
    (2) Issuing all required confirmations and statements;
    (3) As between the foreign broker-dealer and the U.S. registered 
broker-dealer, extending or arranging for the extension of credit in 
connection with the transactions;
    (4) Maintaining required books and records relating to the 
transactions, including those required by Rules 17a-3 (Records to be 
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved 
by Certain Exchange Members, Brokers and Dealers) of the 1934 Act; 
<SUP>13</SUP>
---------------------------------------------------------------------------

    \13\ DLJ represents that all such requirements relating to 
recordkeeping of principal transactions would be applicable to any 
Foreign Affiliate in a transaction that would be covered by this 
proposed exemption.
---------------------------------------------------------------------------

    (5) Receiving, delivering, and safeguarding funds and securities 
in connection with the transactions on behalf of the U.S. 
institutional investor or the major U.S. institutional investor in 
compliance with Rule 15c3-3 of the 1934 Act (Customer Protection--
Reserves and Custody of Securities); <SUP>14</SUP> and
---------------------------------------------------------------------------

    \14\ Under certain circumstances described in the April 9, 1997 
No-Action Letter (e.g., clearance and settlement transactions), 
there may be direct transfers of funds and securities between a Plan 
and a Foreign Affiliate. Please note that in such situations (as in 
other situations covered by Rule 15a-6), the U.S. registered broker-
dealer will not be acting as a principal with respect to any duties 
it is required to undertake pursuant to Rule 15a-6.
---------------------------------------------------------------------------

    (6) Participating in certain oral communications (e.g., 
telephone calls) between the foreign associated person and the U.S. 
institutional investor (not the major U.S. institutional investor) 
and accompanying the foreign associated person on certain visits 
with both U.S. institutional and major U.S. institutional investors. 
Under certain circumstances, the foreign associated person may have 
direct communications and contact with the U.S. institutional 
investor. (See the April 9, 1997 No-Action Letter).<SUP>15</SUP>
---------------------------------------------------------------------------

    \15\ Under certain circumstances described in the April 9, 1997 
No-Action Letter (e.g., clearance and settlement transactions), 
there may be direct transfers of funds and securities between a Plan 
and a Foreign Affiliate. Please note that in such situations (as in 
other situations covered by Rule 15a-6), the U.S. broker-dealer will 
not be acting as a principal with respect to any duties it is 
required to undertake pursuant to Rule 15a-6.
---------------------------------------------------------------------------

Extensions of Credit
    7. DLJ represents that a normal part of the execution of securities 
transactions by broker-dealers on behalf of clients, including Plans, 
is the extension of credit to clients so as to permit the settlement of 
transactions in the customary settlement period. Such extensions of 
credit are customary in connection with the buying and writing of 
option contracts.
    DLJ requests that the proposed exemption include relief for 
extensions of credit to the Plans by the Foreign Affiliates in the 
ordinary course of their purchases or sales of securities, regardless 
of whether they are effected on an agency or a principal basis, or in 
connection with the writing of options contracts. In this regard, an 
exemption for such extensions of credit is provided under PTCE 75-1, 
Part V, only for transactions between Plans and U.S. registered broker-
dealers and banks.<SUP>16</SUP>
---------------------------------------------------------------------------

    \16\ PTCE 75-1, Part V, provides an exemption, under certain 
conditions, from section 406 of the Act and section 4975(c)(1) of 
the Code, for extensions of credit, in connection with the purchase 
or sale of securities, between employee benefit plans and U.S. 
registered broker-dealers that are parties in interest with respect 
to such plans.
---------------------------------------------------------------------------

    8. Under the conditions of this proposed exemption, as in PTCE 75-
1, Part V, the Foreign Affiliate may not be a fiduciary with respect to 
Plan assets involved in the transaction. However, an exception to such 
condition would be provided herein, as in PTCE 75-1, if no interest or 
other consideration were received by the Foreign Affiliate or an 
affiliate thereof, in connection with any such extension of credit. In 
addition, the extension of credit must be lawful under the 1934 Act and 
any rules or regulations thereunder, if the 1934 Act rules or 
regulations were applicable. If the 1934 Act would not be applicable, 
the extension of credit must still be lawful under applicable foreign 
law, in the country where the particular Foreign Affiliate is 
domiciled.
Securities Lending
    9. The Foreign Affiliates, acting as principals, actively engage in 
the borrowing and lending of securities, typically foreign securities, 
from various institutional investors, including employee benefit plans.
    DLJ requests an exemption for securities lending transactions 
between the Foreign Affiliates and the Plans under terms and conditions 
equivalent to those required in PTCE 81-6 (46 FR 7527, January 23, 
1981, as amended at 52 FR 18754, May 19, 1987).<SUP>17</SUP> Because 
PTCE 81-6 provides an exemption only for U.S. registered broker-dealers 
and U.S. banks, the securities lending transactions at issue would fall 
outside the scope of relief provided by PTCE 81-6.
---------------------------------------------------------------------------

    \17\ PTCE 81-6 provides an exemption under certain conditions 
from section 406(a)(1)(A) through (D) of the Act and the 
corresponding provisions of section 4975(c) of the Code for the 
lending of securities that are assets of an employee benefit plan to 
U.S. registered broker-dealers that are parties in interest with 
respect to such plans.
---------------------------------------------------------------------------

    10. The Foreign Affiliates utilize borrowed securities either to 
satisfy their own trading requirements or to re-lend to other broker-
dealers and entities that need a particular security for a certain 
period of time. As described in the Federal Reserve Board's Regulation 
T, borrowed securities are often used to meet delivery obligations in 
the case of short sales or the failure to receive securities that a 
broker-dealer is required to deliver. DLJ represents that foreign 
broker-dealers are those broker-dealers most likely to seek to borrow 
foreign securities. Thus, the requested exemption will increase the 
lending demand for such securities, providing the Plans with increased 
securities lending opportunities, which will earn such Plans additional 
rates of return on the borrowed securities (as discussed below).
    11. An institutional investor, such as a pension plan, lends 
securities in its portfolio to a broker-dealer in order to earn a fee 
while continuing to enjoy the benefits of owning securities (e.g., from 
the receipt of any interest, dividends or other distributions due on 
those securities and from any appreciation in the value of the 
securities). The lender generally requires that the securities loan be 
fully collateralized, and the collateral usually is in the form of 
cash, irrevocable U.S. bank letters of credit issued by a bank other 
than a Foreign Affiliate, or high quality liquid securities such as 
U.S. Government or Federal Agency obligations.
    12. With respect to the subject securities lending transactions, 
neither the Foreign Affiliate nor an affiliate of the Foreign Affiliate 
will have discretionary authority or control with respect to the 
investment of Plan assets involved in the transaction, or render 
investment advice, within the meaning of 29 CFR 2510.3-21(c) with 
respect to those assets.
    13. By the close of business on the day the loaned securities are 
delivered, the Plan will receive from the Foreign Affiliate (by 
physical delivery, book entry in a U.S. securities depository, wire 
transfer or similar means) collateral consisting of cash, securities 
issued or guaranteed by the U.S. Government or its agencies, 
irrevocable U.S. bank letters of credit issued by persons other than 
the Foreign Affiliate or an affiliate of the Foreign Affiliate, or any 
combination thereof. All collateral will be in U.S. dollars, or dollar-
denominated securities or bank letters of credit, and will be held in 
the United States. The collateral will have, as of the close of 
business on the business day

[[Page 51802]]

preceding the day it is posted by the Foreign Affiliate, a market value 
equal to at least 100 percent of the then market value of the loaned 
securities (or, in the case of letters of credit, a stated amount equal 
to same).
    14. The loan will be made pursuant to a written Loan Agreement, 
which may be in the form of a master agreement covering a series of 
securities lending transactions between the Plan and the Foreign 
Affiliate. The terms of the Loan Agreement will be at least as 
favorable to the Plan as those the Plan could obtain in a comparable 
arm's length transaction with an unrelated party. The Loan Agreement 
will also contain a requirement that the Foreign Affiliate pay all 
transfer fees and transfer taxes relating to the securities loans.
    15. In return for lending securities, the Plan will either (a) 
receive a reasonable fee, which is related to the value of the borrowed 
securities and the duration of the loan, or (b) have the opportunity to 
derive compensation through the investment of cash collateral. In the 
latter case, the Plan may pay a loan rebate or similar fee to the 
Foreign Affiliate if such fee is not greater than what the Plan would 
pay in a comparable arm's length transaction with an unrelated party.
    Earnings generated by non-cash collateral will be returned to the 
Foreign Affiliate. The Plan will be entitled to at least the equivalent 
of all distributions on the borrowed securities made during the term of 
the loan. Such distributions will include cash dividends, interest 
payments, shares of stock as a result of stock splits, and rights to 
purchase additional securities, that the Plan would have received (net 
of tax withholdings) had it remained the record owner of such 
securities.
    16. If the market value of the collateral as of the close of 
trading on a business day falls below 100 percent of the market value 
of the borrowed securities as of the close of trading on that day, the 
Foreign Affiliate will deliver additional collateral, by the close of 
business on the following business day, to bring the level of the 
collateral back to at least 100 percent. However, if the market value 
of the collateral exceeds 100 percent of the market value of the 
borrowed securities, the Foreign Affiliate may require the Plan to 
return part of the collateral to reduce the level of the collateral to 
100 percent.
    17. Before entering a Loan Agreement, the Foreign Affiliate will 
furnish to the independent Plan fiduciary (a) the most recent available 
audited statement of the Foreign Affiliate's financial condition, (b) 
the most recent available unaudited statement of its financial 
condition (if more recent than the audited statement), and (c) a 
representation that, at the time the loan is negotiated, there has been 
no material adverse change in its financial condition since the date of 
the most recent financial statement furnished to the independent Plan 
fiduciary. Such representation may be made by the Foreign Affiliate's 
agreeing that each loan of securities shall constitute a representation 
that there has been no such material adverse change.
    18. The Loan Agreement and/or any securities loan outstanding may 
be terminated by the Plan at any time, whereupon the Foreign Affiliate 
will deliver certificates for securities identical to the borrowed 
securities (or the equivalent thereof in the event of a reorganization, 
recapitalization or merger of the issuer of the borrowed securities) to 
the Plan within (a) the customary delivery period for such securities, 
(b) five business days, or (c) the time negotiated for such delivery by 
the Plan and the Foreign Affiliate, whichever is least, or 
alternatively, such period as permitted by PTCE 81-6, as it may be 
amended or superseded. In the event the Foreign Affiliate fails to 
return the borrowed securities, or the equivalent thereof, within the 
designated time, the Plan will have certain rights under the Loan 
Agreement to realize upon the collateral. The Plan may purchase 
securities identical to the borrowed securities, or the equivalent 
thereof, and may apply the collateral to the payment of the purchase 
price, any other obligations of the Foreign Affiliate under the Loan 
Agreement, and any expenses associated with replacing the borrowed 
securities. The Foreign Affiliate is obligated to pay to the Plan the 
amount of any remaining obligations and expenses not covered by the 
collateral, plus interest at a reasonable rate as determined in 
accordance with an independent market source. Notwithstanding the 
foregoing, the Foreign Affiliate may, in the event it fails to return 
borrowed securities as described above, replace non-cash collateral 
with an amount of cash not less than the then current market value of 
the collateral, provided that such replacement is approved by the 
independent Plan fiduciary.
    19. The independent Plan fiduciary will maintain the situs of the 
Loan Agreement in accordance with the indicia of ownership requirements 
of section 404(b) of the Act and the regulations promulgated under 29 
CFR 2550.404b-1.<SUP>18</SUP>.
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    \18\ Section 404(b) of the Act states that no fiduciary may 
maintain the indicia of ownership of any assets of a plan outside 
the jurisdiction of the district courts of the United States, except 
as authorized by regulation by the Secretary of Labor.
---------------------------------------------------------------------------

    20. In summary, it is represented that the proposed transactions 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act for the following reasons:
    (a) With respect to principal transactions effected by the Foreign 
Affiliates, the proposed exemption will enable Plans to realize the 
same benefits of efficiency and convenience which such Plans could 
derive from principal transactions with U.S. registered broker-dealers 
pursuant to PTCE 75-1, Part II;
    (b) With respect to extensions of credit in connection with 
purchases or sales of securities, the proposed exemption will enable 
the Foreign Affiliates and the Plans to extend credit in the ordinary 
course of the Foreign Affiliate's business to effect agency or 
principal transactions within the customary settlement period, or in 
connection with the writing of options contracts, for transactions 
between plans and broker-dealers, as is possible for U.S. registered 
broker-dealers pursuant to PTCE 75-1, Part V;
    (c) With respect to securities lending transactions effected by the 
Foreign Affiliates, the proposed exemption will enable the Plans to 
realize a low-risk return on securities that otherwise would remain 
idle, as in securities lending transactions executed by Plans and U.S. 
registered broker-dealers or U.S. banks, pursuant to PTCE 81-6; and
    (d) The proposed exemption will provide Plans with virtually the 
same protections and benefits as those provided by PTCE 75-1 and PTCE 
81-6.

Notice to Interested Persons

    The applicant represents that because those Plans that will be 
potentially interested in the transactions cannot be identified at this 
time, the only practical means of notifying Plan fiduciaries is by the 
publication of the notice of proposed exemption in the Federal 
Register. Therefore, comments and requests for a hearing must be 
received by the Department not later than 30 days from the date of the 
publication of this proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section

[[Page 51803]]

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

    Signed at Washington, DC, this 21st day of September 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 99-24940 Filed 9-23-99; 8:45 am]
BILLING CODE 4510-29-P