[Federal Register Volume 59, Number 210 (Tuesday, November 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27056]


[[Page Unknown]]

[Federal Register: November 1, 1994]


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DEPARTMENT OF LABOR
[Application No. D-9718 & D-9719, et al.]

 

Proposed Exemptions; Wells Fargo Bank, N.A. (Wells Fargo) and 
Wells Fargo Institutional Trust Company, N.A. (WFITC)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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

    Unless otherwise stated in the Notice of Proposed Exemption, all 
interested persons are invited to submit written comments, and with 
respect to exemptions involving the fiduciary prohibitions of section 
406(b) of the Act, requests for hearing within 45 days from the date of 
publication of this Federal Register Notice. Comments and request 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. 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 NW., Washington, DC 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 NW., Washington, DC 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.

Wells Fargo Bank, N.A. (Wells Fargo) and Wells Fargo Institutional 
Trust Company, N.A. (WFITC); Located in San Francisco, California

[Application Nos. D-9718 and D-9719]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a)(1) (A) through (D) 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 that are assets 
of an employee benefit plan for which Wells Fargo, WFITC or an 
affiliated company (the Applicants) are fiduciaries, provided that the 
following conditions are met:
    (A) The securities are loaned to a broker-dealer which is 
registered under the Securities Exchange Act of 1934 (the 1934 Act) or 
exempted from registration under section 15(a)(1) of the 1934 Act as a 
dealer in exempted Government Securities (as defined in section 
3(a)(12) of the 1934 Act) or to a bank (A Borrower);
    (B) Neither the Borrower nor an affiliate of the Borrower has 
discretionary authority or control with respect to the investment of 
the plan assets involved in the transaction, or renders investment 
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to 
those assets;
    (C) The lending plan receives from the Borrower (either by physical 
delivery or by book entry in a securities depository) by the close of 
the lending fiduciary's business on the day in which the securities 
lent are delivered to the Borrower, collateral (the Collateral) 
consisting of cash, securities issued or guaranteed by the United 
States Government or its agencies or instrumentalities, or irrevocable 
bank letters of credit issued by a person other than the Borrower or an 
affiliate thereof, or any combination thereof, having, as of the close 
of business on the preceding day, a market value or, in the case of 
letters of credit a stated amount, equal to not less than 102% of the 
then market value of the securities lent;
    (D) Prior to the loan of any securities, the Borrower furnishes the 
Applicants with the most recent available audited statements of the 
Borrower's financial condition and 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 
statements furnished to the plan, that has not been disclosed to the 
Applicants;
    (E) The loan is made pursuant to a written loan agreement, the 
terms of which are at least as favorable to the lending plan as an 
arm's length transaction with an unrelated party would be. Such 
agreement may be in the form of a master agreement covering a series of 
securities lending transactions;
    (F) (1) The lending plan (a) receives a reasonable fee that is 
related to the value of the borrowed securities and the duration of the 
loan, or (b) has the opportunity to derive compensation through the 
investment of cash collateral. Where the plan has that opportunity, the 
plan may pay a loan rebate or similar fee to the Borrower, if such fee 
is not greater than the plan would pay in a comparable transaction with 
an unrelated party;
    (2) The plan receives the equivalent of all distributions made on 
or with respect to the loaned securities during the term of the loan;
    (G) If the market value of the Collateral at the close of trading 
on a business day is less than 102% of the market value of the borrowed 
securities at the close of trading on that day, the Borrower shall 
deliver, by the close of business on the following business day, an 
additional amount of Collateral (as described in paragraph C) the 
market value of which, together with the market value of all previously 
delivered Collateral, equals at least 102% of the market value of all 
the borrowed securities as of such preceding day;
    (H) The trustee of such fund or account may terminate the loan of 
securities at any time. In the event of termination, the Borrower shall 
deliver Replacement Securities, as defined below, to the trustee of the 
lending plan. The Borrower shall deliver Replacement Securities that 
are equivalent in value to the loaned securities within five business 
days of notice of termination by the trustee. For purposes of this 
exemption, the term ``Replacement Securities'' means securities that: 
(a) Are issued by the same agency as the loaned securities, (b) have 
the same coupon as the loaned securities, (c) have a principal amount 
at least equal to but no more than 2% greater than the then current 
principal amount of the loaned securities, (d) are of the same program 
or class as the loaned securities, and (e) either (i) have an aggregate 
weighted average maturity within a 12-month variance of the then 
current aggregate weighted average maturity of the loaned securities, 
but in no case will the variance be more than 10% of such aggregate 
weighted average maturity of the loaned securities, or (ii) meet some 
other comparable objective standard containing a range of variance that 
is no greater than that described in (i) above and that assures that 
the aging of the loaned securities is properly taken into account.
    If the Borrower fails to return the Replacement Securities, the 
trustee may apply the Collateral to purchase other Replacement 
Securities and to pay other expenses associated with the purchase. In 
addition, the Borrower is obligated to pay the amount of any remaining 
obligations and expenses not covered by the Collateral plus interest at 
a reasonable rate.
    For purposes of this exemption the term ``affiliate'' of another 
person shall include: (a) Any person directly or indirectly, through 
one or more intermediaries, controlling, controlled by, or under common 
control with such other person; (b) Any officer, director, or partner, 
employee or relative (as defined in section 3(15) of the Act) of such 
other person; and (c) Any corporation or partnership of which such 
other person is an officer, director, 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.

EFFECTIVE DATE: This exemption, if granted, will be effective May 27, 
1994.

Summary of Facts and Representations

    1. Wells Fargo is the tenth largest commercial bank in the United 
States as measured by assets held on June 30, 1993. Wells Fargo serves 
as trustee for many employee benefit plans, many of which invest in 
certain of its collective investment funds. WFITC is a trust company 
owned 99.9% by Wells Fargo Nikko Investment Advisors (WFNIA). WFNIA is 
a general partnership owned 50% by a wholly owned subsidiary of Wells 
Fargo and 50% by a subsidiary of The Nikko Securities Co., Ltd., a 
Japanese securities firm. Like Wells Fargo, WFITC serves as a fiduciary 
for employee benefit plans, many of which invest in certain of its 
collective investment funds. (The plans for which Wells Fargo, WFITC or 
an affiliated company serves as a fiduciary shall be collectively 
referred to as the Plans.)
    2. WFITC currently maintains the Mortgage-Backed Securities Index 
Fund (the Fund), a collective investment fund maintained pursuant to 
the regulations of the U.S. Comptroller of the Currency. The Fund owns 
as part of its investment portfolio, pass-through certificates issued 
by the Government National Mortgage Association (GNMA), the Federal 
National Mortgage Association (FNMA), or the Federal Home Loan Mortgage 
Corporation (FHLMC) (collectively, the Agency Securities).
    3. The Applicants seek an exemption to permit Wells Fargo, WFITC 
and any affiliated companies to lend these Agency Securities on behalf 
of the Plans.\1\ The Applicants represent that the proposed securities 
lending transactions would comply in all respects with the provisions 
of Prohibited Transaction Exemption (PTE) 81-6\2\ (46 FR 7527, January 
23, 1981, as amended at 52 FR 18754, May 19, 1987) except that, under 
the Applicants' proposed lending program, the Replacement Securities 
that will be returned by the Borrower will not necessarily be identical 
to the loaned securities but must have substantially identical generic 
criteria to the loaned securities. In this regard, the Applicants 
represent that upon termination of the loan, the Borrower is required 
to deliver Agency Securities that (a) are issued by the same issuer as 
the loaned Agency Securities, (b) have the same coupon as the loaned 
Agency Securities, (c) have a principal amount equal to at least 100% 
of the then current principal amount of the loaned Agency Securities 
and no greater than 102% of such amount, (d) are of the same program or 
class as the loaned Agency Securities, and (e) either (i) have an 
aggregate weighted average maturity within a 12-month variance of the 
then current aggregate weighted average maturity of the loaned Agency 
Securities, but in no case will the variance be more than 10% of such 
aggregate weighted average maturity of the loaned Agency Securities, or 
(ii) meet some other comparable objective standard containing a range 
of variance that is no greater than that described in (i) above and 
that assures that the aging of the loaned Agency Securities is properly 
taken into account.\3\ The applicants represent that notification that 
the Replacement Securities will not be identical in all respects to the 
loaned Agency Securities has been provided to all current Plans and 
will be provided to any new Plans.
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    \1\The exemption would cover the lending of Agency Securities 
held in the Fund or in any other fiduciary account for which Wells 
Fargo, WFITC or any affiliated company serves as a fiduciary.
    \2\PTE 81-6 is a class exemption that permits, under certain 
conditions, the lending of securities that are assets of employee 
benefit plans to banks and certain broker-dealers which are parties 
in interest with respect to such plans. The class exemption 
requires, among other conditions, that upon termination of the loan, 
the borrower must deliver to the lending plan certificates for 
securities identical to the borrowed securities.
    \3\The Applicants represent that Agency Securities are primarily 
traded on a generic basis. In other words, the purchaser places an 
order to acquire Agency Securities by specifying certain generic 
criteria and receives specific Agency Securities that satisfy the 
generic criteria in accordance with the Public Securities 
Association Uniform Practices for the Clearance and Settlement of 
Mortgage-Backed Securities and Other Related Securities (the PSA 
Guidelines). The PSA Guidelines provide for delivery of an Agency 
Security that has the same issuer (i.e., GNMA, FNMA, or FHLMC), the 
same coupon, the same program or class of mortgage pools (e.g., 15 
year, 30 year or 5 year balloon) as the traded Agency Security so 
long as the principal amount of the delivered Agency Security is no 
less than 98% of the principal amount of the traded Agency Security 
and no greater than 102% of such amount. The Applicants represent 
that over 95% of the Agency Securities traded in the market are 
effected using this generic trading method and that it would be 
extremely difficult to establish a lending program that did not 
operate on a generic trading basis. The Applicants represent that 
the criteria for the Replacement Securities will at all times be at 
least as restrictive as the PSA Guidelines in effect as of the date 
of the loan.
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    4. The Applicants represent that the proposed transactions would be 
beneficial to the Plans because the lending of Agency Securities 
increases the investment return for Plans participating in the lending 
program without increasing the Plans' level of risk. In addition, the 
Applicants represent that the fees for the securities lending that are 
paid by the Borrowers or the proceeds from investing cash collateral 
supplement the interest, dividends, or other distributions paid on 
those securities. The Applicants assert that the same protections 
afforded to plans relying on PTE 81-6 will be present for the 
participants and beneficiaries of any Plans engaging in the described 
transactions.
    5. In summary, the Applicants represent that the proposed 
transactions will satisfy the criteria of section 408(a) of the Act 
because: (a) All the conditions specified in PTE 81-6 for the 
protection of plans engaging in transactions in reliance on that class 
exemption will be met with regard to the transactions proposed in the 
application; (b) a specific set of criteria will ensure that the 
securities returned to a Plan upon termination of a loan are, in fact, 
substantially identical to the loaned securities in accordance with the 
PSA guidelines for generic trading of Agency Securities; (c) no 
securities will be loaned to any entity which is a Plan fiduciary with 
respect to such securities; (d) the Plans participating in the lending 
program will receive an enhanced return over the level that they would 
have enjoyed had the securities simply been held; and (e) the 
Collateral will be at least 102% of the market value of the loaned 
securities (plus interest) and will be monitored daily by the 
Applicants.

FOR FURTHER INFORMATION CONTACT: Ms. Virginia J. Miller of the 
Department, telephone (202) 219-8971. (This is not a toll-free number.)

The Lubrizol Corporation Employees' Stock Purchase and Savings Plan 
(the Plan); Located in Wickliffe, Ohio

[Application No. D-9770]

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), 406(b)(1) and (b)(2) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to the proposed cash sale by the Plan to the 
Lubrizol Corporation (Lubrizol), the Plan sponsor and a party in 
interest with respect to the Plan, of the Plan's interest (the 
Interest) in certain securities (the Securities) issued by Columbia Gas 
Systems, Inc. (CGS), provided: (a) No commissions or other expenses are 
paid by the Plan in connection with the sale; (b) the Plan will receive 
the greater of $227,158.01 or the fair market value of the Plan's 
Interest in the Securities at the time of the sale as determined by 
Bankers Trust Company (BTC), the Plan's independent fiduciary; and (c) 
BTC has determined that the proposed transaction is appropriate for the 
Plan and in the best interest of the Plan and its participants and 
beneficiaries.

Summary of Facts and Representations

    1. Lubrizol is a leading full-service supplier of performance 
chemicals to diverse markets worldwide. The Plan is a defined 
contribution plan with 2,521 participants. As of May 31, 1994, the Plan 
had assets with an approximate aggregate fair market value of 
$67,061,827.
    2. BTC, a New York banking corporation headquartered in New York 
City, served as trustee of the Plan from April 1, 1986 until October 1, 
1992. In June, 1991, BTC held in one of its collective investment funds 
the Securities, which consisted of: a) CGS Discount Note with a 
maturity date of 8/5/91, acquired 5/9/91, with an interest rate of 
6.28%; b) CGS Discount Note with a maturity date of 8/7/91, acquired 5/
9/91, with an interest rate of 7.04%; and c) CGS Loan Participation due 
6/20/91, acquired 2/22/91, with an interest rate of 6.9%. The Plan's 
original investment for its Interest in the Securities was $181,617.47. 
BTC remains the Plan's independent trustee with respect to the 
Securities.
    3. In June, 1991, CGS made a surprise announcement of financial 
difficulties. CGS suspended its dividend and announced that it faced 
potential charges to income exceeding $1 billion due to adverse prices 
under long-term contracts to purchase natural gas. CGS pursued a 
renegotiation of the gas purchase contracts of its subsidiary Columbia 
Gas Transmission Corp. and certain of its bank credit lines. As part of 
its efforts to renegotiate such gas contracts and credit lines, CGS 
threatened to file for bankruptcy and failed to pay interest and 
principal on its short-term debt obligations. CGS's commercial paper 
and term debt were downgraded on June 19, 1991 from A2 to B1 and 
subsequently further downgraded to D on June 21, 1991. CGS ultimately 
filed for protection under Chapter 11 of the Bankruptcy Code on July 
31, 1991.
    4. Because the Securities remain frozen by the Bankruptcy Court 
with no clear indication as to when CGS will emerge from Chapter 11, 
Lubrizol has offered to purchase the Plan's Interest in the Securities 
from the Plan for cash. The Plan will pay no commissions or expenses in 
connection with the transaction. BTC has determined that the Plan's 
Interest in the Securities had a fair market value of $227,158.01 as of 
May 31, 1994. The purchase price for the Interest will be the greater 
of $227,158.01 or the fair market value of the Interest as of the time 
of the sale as determined by BTC.4 BTC represents that it values 
the Securities on a monthly basis, and the Securities would be valued 
for purposes of this transaction in accordance with the following 
formula: BTC receives the Average Monthly Commercial Paper Rate from 
Merrill Lynch which is used to calculate a projected Weighted Average 
Yield. This Weighted Average Yield is then used to calculate the 
projected price for each of the Securities. BTC represents that as of 
the date the Securities became frozen, June 30, 1991, the Plan's 
Interest in the Securities was $200,000. CGS has not been accruing 
interest past the maturity dates of the Securities. However, BTC 
believes that once CGS emerges from bankruptcy, it will pay post-
bankruptcy petition interest to the date of emergence. BTC uses the 
above-described formula to estimate this post-maturity interest in its 
monthly calculation of the value of the Securities.
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    \4\Lubrizol represents that should the Plan receive greater than 
the fair market value of the Securities, the excess, if treated as a 
contribution to the Plan, would not cause the Plan to violate 
sections 401(a)(4), 404 or 415 of the Code.
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    5. BTC represents that because there is not a regular market for 
the CGS notes and the CGS loan participation does not trade in the 
market, BTC believes that it will be in the best interest of the Plan 
for Lubrizol to purchase the Plan's Interest in the Securities at a 
price determined in accordance with the formula described in rep. 4, 
above. BTC represents that Lubrizol's acquisition of the Plan's 
Interest in the Securities at this time would remove an illiquid asset 
from the Plan and allow for further investment of Plan assets.
    6. In summary, the applicant represents that the proposed 
transaction satisfies the criteria of section 408(a) of the Act 
because: a) the sale would be a one-time transaction for cash, and no 
commissions or other expenses would be paid by the Plan in connection 
with the transaction; b) the sales price would be determined by BTC, 
the Plan's independent fiduciary with respect to the Securities; and c) 
BTC has determined that the proposed transaction is appropriate for the 
Plan and in the best interest of the Plan's participants and 
beneficiaries.

Tax Consequences of Transaction

    The Department of the Treasury has determined that if a transaction 
between a qualified employee benefit plan and its sponsoring employer 
(or affiliate thereof) results in the plan either paying less than or 
receiving more than fair market value, such excess may be considered to 
be a contribution by the sponsoring employer to the plan, and therefore 
must be examined under the applicable provisions of the Internal 
Revenue Code, including sections 401(a)(4), 404 and 415.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

General Information

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

    Signed at Washington, DC, this 27th day of October, 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 94-27056 Filed 10-31-94; 8:45 am]
BILLING CODE 4510-29-P