[Federal Register Volume 63, Number 33 (Thursday, February 19, 1998)]
[Notices]
[Pages 8481-8497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3987]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10213, et al.]
Proposed Exemptions; Bankers Trust Company
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 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
[[Page 8482]]
statement of the facts and representations.
Bankers Trust Company (Bankers Trust) Located in New York, New York
[Application No. D-10213]
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), 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, effective February 16, 1996, to the: (1) lending
of certain securities to BT Securities Corporation, Bankers Trust
International PLC, and Bankers Trust (Australia) Limited, which are
affiliates of Bankers Trust, (collectively; the Affiliated Borrowers),
by certain employee benefit plans (including commingled investment
funds holding plan assets) (the Client Plans), for which Bankers Trust
and certain other affiliates (the BT Group) act as the directed trustee
or custodian and securities lending agent or sub-agent; 1
and (2) receipt of compensation by the BT Group in connection with
these transactions; provided that the following conditions are
satisfied:
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\1\ The applicant represents that because Bankers Trust may add
new affiliates, the entities comprising the BT Group may change.
However, the Affiliated Borrowers will always be BT Securities
Corporation, Bankers Trust International PLC and Bankers Trust
(Australia) Limited for purposes of this exemption, if granted.
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1. Neither the Affiliated Borrowers nor the BT Group has or
exercises discretionary authority or control with respect to the
investment of the assets of the Client Plans involved in the
transaction (other than with respect to the investment of cash
collateral after securities have been loaned and collateral received),
or renders investment advice (within the meaning of 29 CFR 2510.3-
21(c)) with respect to those assets, including decisions concerning a
Client Plan's acquisition and disposition of securities available for
loan.
2. Before a Client Plan participates in a securities lending
program and before any loan of securities to the Affiliated Borrowers
is affected, a Client Plan fiduciary who is independent of the BT Group
and the Affiliated Borrowers must have:
(a) Authorized and approved a securities lending authorization
agreement with the BT Group (the Lending Authorization), where the BT
Group is acting as the securities lending agent;
(b) Authorized and approved the primary securities lending
authorization agreement (the Primary Lending Agreement) with the
primary lending agent, where BT Group is lending securities under a
sub-agency arrangement with the primary lending agent 2;
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\2\ When the BT Group acts as sub-agent, rather than the primary
lending agent, the primary lending agent is receiving no section
406(b) of the Act relief herein. In such situations, the primary
lending agent may be provided relief by Prohibited Transaction Class
Exemption (PTE) 81-6 and PTE 82-63. PTE 81-6 was published at 46 FR
7527, January 23, 1981, as amended at 52 FR 18754, May 19, 1987, and
PTE 82-63 was published at 47 FR 14804, April 6, 1982.
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(c) Approved the general terms of the securities loan agreement
(the Loan Agreement) between such Client Plan and the Affiliated
Borrowers, the specific terms of which are negotiated and entered into
by BT Group.
3. The Client Plan may terminate the agency or sub-agency agreement
at any time without penalty to such plan on five (5) business days
notice, whereupon the Affiliated Borrowers shall deliver certificates
for securities identical to the borrowed securities (or the equivalent
in the event of reorganization, recapitalization or merger of the
issuer of the borrowed securities) to the plan within (a) the customary
delivery period for such securities, (b) five business days, or (c) the
time negotiated for such delivery by the Client Plan and the Affiliated
Borrowers, whichever is less.
4. The Client Plan will receive from the Affiliated Borrowers
(either by physical delivery or by book entry in a securities
depository located in the United States, wire transfer or similar
means) by the close of business on or before the day on which the
loaned securities are delivered to the Affiliated Borrowers, collateral
consisting of U.S. currency, securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, or an irrevocable
bank letter of credit issued by a U.S. bank, which is a person other
than the Affiliated Borrowers or an affiliate thereof, or any
combination thereof, or other collateral permitted under Prohibited
Transaction Exemption (PTE) 81-6 (as amended from time to time or,
alternatively, any additional or superceding class exemption that may
be issued to cover securities lending by employee benefit plans),
having, as of the close of business on the preceding business day, a
market value (or, in the case of a letter of credit, a stated amount)
initially equal to at least 102 percent of the market value of the
loaned securities.
If the market value of the collateral on the close of trading on a
business day is less than 100 percent of the market value of the
borrowed securities at the close of business on that day, the
Affiliated Borrowers will deliver additional collateral on the
following day such that the market value of the collateral in the
aggregate will again equal 102 percent. The Loan Agreement will give
the Client Plan a continuing security interest in, title to, or the
rights of a secured creditor with respect to the collateral and a lien
on the collateral. The BT Group will monitor the level of the
collateral daily.
5. When the BT Group lends securities to the Affiliated Borrowers,
the following conditions must be met:
(a) The collateral will be maintained in U.S. dollars, U.S. dollar-
denominated securities or letters of credit of U.S. Banks;
(b) all collateral will be held in the United States;
(c) the situs of the loan agreement will be maintained in the
United States; (d) the lending Client Plans will be indemnified by
Bankers Trust in the United States for any transactions covered by this
exemption with the foreign Affiliated Borrowers so that the Client
Plans will not have to litigate in a foreign jurisdiction nor sue the
foreign Affiliated Borrowers to realize on the indemnification; (e)
prior to the transaction, the foreign Affiliated Borrowers will enter
into a written agreement with the Client Plan whereby the Affiliated
Borrowers consent to the service of process in the United States and to
the jurisdiction of the courts of the United States with respect to the
transactions described herein; and (f)(1) Bankers Trust International
PLC is a deposit taking institution supervised by the Bank of England;
and (2) Bankers Trust (Australia) Limited is a merchant bank which is
under the jurisdiction of the Federal Reserve Bank of Australia.
6. Before entering into the Loan Agreement and before a Client Plan
lends any securities to the Affiliated Borrowers, the Affiliated
Borrowers shall have furnished the following items to the Client Plan
fiduciary: (a) the most recent available audited and unaudited
statement of the Affiliated Borrowers' financial condition, (b) at the
time of the loan, the Affiliated Borrowers must give prompt notice to
the Client Plan fiduciary of any material adverse changes in the
Affiliated Borrowers' financial condition since the date of the
[[Page 8483]]
most recently financial statement furnished to the Client Plan, and (c)
in the event of any such changes, the BT Group will request approval of
the Client Plan to continue lending to the Affiliated Borrowers before
making any such additional loans. No such new loans will be made until
approval is received. Each loan shall constitute a representation by
the Affiliated Borrower that there has been no such material adverse
change.
7. The Client Plan: (a) Receives a reasonable fee that is related
to the value of the borrowed securities and the duration of the loan,
or (b) has the opportunity to derive compensation through the
investment of cash collateral. In the case of cash collateral, the
Client Plan may pay a loan rebate or similar fee to the Affiliated
Borrower, if such fee is not greater than the fee Client Plan would pay
an unrelated party in an arm's length transaction.
8. All procedures regarding the securities lending activities will
at a minimum conform to the applicable provisions of Prohibited
Transaction Exemptions (PTEs) 81-6 and 82-63.
9. In the event Bankers Trust International PLC and/or Bankers
Trust (Australia) Limited default on a loan, Bankers Trust will
liquidate the loan collateral to purchase identical securities for the
Client Plan. If the collateral is insufficient to accomplish such
purchase, Bankers Trust will indemnify the Client Plan for any
shortfall in the collateral plus interest on such amount and any
transaction costs incurred (including attorney's fees of the Client
Plan for legal actions arising out of the default on the loans or
failure to properly indemnify under this provision). Alternatively, if
such identical securities are not available on the market, Bankers
Trust will pay the Client Plan cash equal to the market value of the
borrowed securities as of the date they should have been returned to
the Client Plan plus all the accrued financial benefits derived from
the beneficial ownership of such loaned securities. The lending Client
Plans will be indemnified by Bankers Trust in the United States for any
loans to the foreign Affiliated Borrowers.
10. In the event BT Securities Corporation, a U.S. registered
broker-dealer, defaults on a loan, Bankers Trust will liquidate the
loan collateral to purchase identical securities for the Client Plan.
If the collateral is insufficient to accomplish such purchase, BT
Securities Corporation will indemnify the Client Plan for any shortfall
in the collateral plus interest on such amount and any transaction
costs incurred (including attorney's fees of the Client Plan for legal
actions arising out of the default on the loans or failure to properly
indemnify under this provision).
11. If the Affiliated Borrowers' default on the securities loan or
enter bankruptcy, the collateral will not be available to the
Affiliated Borrowers or their creditors, but is used to make the Client
Plan whole.
12. The Client Plans will be entitled to the equivalent of all
distributions made to holders of the borrowed securities, including all
interest, dividends and distributions on the loaned securities during
the loan period.
13. Only Client Plans with total assets having an aggregate market
value of at least $50 million will be permitted to lend securities to
the Affiliated Borrowers.
14. For purposes of this proposed exemption, the Affiliated
Borrowers will consist only of BT Securities Corporation, Bankers Trust
International PLC and Bankers Trust (Australia) Limited.
15. In any calendar quarter, on average 50 percent or more of the
outstanding dollar value of securities loans negotiated on behalf of
the Client Plans by the BT Group in the aggregate will be to borrowers
who are not affiliated with the BT Group.
16. The terms of each loan of securities by the Client Plans to any
of the Affiliated Borrowers will be at market rates and at terms as
favorable to such plans as if made at the same time and under the same
circumstances to an unaffiliated party.
17. Each Client Plan will receive a monthly transaction report,
including but not limited to the information described in paragraph 24
of the summary of facts and representations below, so that the
independent fiduciary of such plan may monitor the securities lending
transactions with the Affiliated Borrowers.
18. During the notification of interested persons period, all
current Client Plans will receive a copy of the notice of pendency. If
the Department grants the final exemption, current Client Plans will
receive a copy of the final exemption. Also, Bankers Trust is prepared
to provide a copy of the final exemption to any new Client Plans.
19. Bankers Trust or the Affiliated Borrowers maintain or cause to
be maintained within the United States for a period of six years from
the date of such transaction such records as are necessary to enable
the persons described in paragraph (20) below to determine whether the
conditions of this exemption have been met; except that a party in
interest with respect to an employee benefit plan, other than Bankers
Trust or the Affiliated Borrowers, shall not be subject to a civil
penalty under section 502(i) of the Act or the taxes imposed by section
4975 (a) or (b) of the Code, if such records are not maintained, or are
not available for examination as required by this section, and a
prohibited transaction will not be deemed to have occurred if, due to
circumstances beyond the control of Bankers Trust or the Affiliated
Borrowers, such records are lost or destroyed prior to the end of such
six year period.
(20)(i) Except as provided in subparagraph (ii) of this paragraph
(20) and notwithstanding any provisions of subsections (a)(2) and (b)
of section 504 of the Act, the records referred to in paragraph (19)
are unconditionally available at their customary location for
examination during normal business hours by--
(a) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission,
(b) Any fiduciary of a Client Plan or any duly authorized
representative of such fiduciary,
(c) Any contributing employer to any Client Plan, or any duly
authorized employee or representative of such employer, and
(d) Any participant or beneficiary of any Client Plan, or any duly
authorized representative of such participant or beneficiary.
(ii) None of the persons described in subparagraphs (b)-(d) of this
paragraph (20) shall be authorized to examine trade secrets of Bankers
Trust or the Affiliated Borrowers, or commercial or financial
information which is privileged or confidential.
EFFECTIVE DATE: If granted this exemption will be effective as of
February 16, 1996.
Summary of Facts and Representations
1. Bankers Trust is a New York banking corporation and a leading
commercial bank. Bankers Trust is wholly owned by Bankers Trust New
York Corporation (BTNY), a bank holding company established in 1965
under the laws of the State of New York. As of December 31, 1995, BTNY
and its affiliates had consolidated assets of $104,002,000,000 and
total stockholders equity of $4,984,000,000.
The BT Group consists of Bankers Trust and certain of its
affiliates who act as a directed trustee, custodian and securities
lending agent or sub-agent for clients. The BT Group engages in
securities lending activities for its own accounts and as an agent for
Bankers
[[Page 8484]]
Trust Company of California and for Bankers Trust Company of the
Southwest. The BT Group also provides a wide range of banking,
fiduciary, recordkeeping, custodial, brokerage and investment services
to corporations, institutions, governments, employee benefit plans,
governmental retirement plans and private investors.
2. The Affiliated Borrowers consist of BT Securities Corporation,
Bankers Trust International PLC and Bankers Trust (Australia) Limited.
The exemption, if granted, will be limited to these three entities as
the Affiliated Borrowers. BT Securities Corporation is a U.S. broker-
dealer affiliated with Bankers Trust with $834 million in capital as of
December 31, 1995. BT Securities Corporation is registered under the
1934 Act and its activities are under the jurisdiction of the Federal
Reserve Board, the Securities and Exchange Commission and the National
Association of Securities Dealers.
Bankers Trust International PLC is a wholly owned subsidiary of
Bankers Trust established under English law and located in England.
Bankers Trust International PLC is a deposit taking institution
supervised by the Bank of England.
Bankers Trust (Australia) Limited is a merchant bank which conducts
commercial banking business in Australia and is under the jurisdiction
of the Federal Reserve Bank of Australia. Bankers Trust (Australia)
Limited is an indirect subsidiary of Bankers Trust.
3. The Affiliated Borrowers will borrow securities from
institutions to satisfy their own needs, or they may re-lend these
securities to brokerage firms and other entities which need a
particular security for a certain period of time. Bankers Trust
requests an exemption for the lending of securities owned by the Client
Plans, for which the BT Group serves as the directed trustee or
custodian and securities lending agent or sub-agent, 3 to
the Affiliated Borrowers, following disclosure of its affiliation with
the Affiliated Borrowers to the Independent Fiduciaries of the Client
Plans, and for the receipt of compensation by the BT Group in
connection with such transactions.
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\3\ For the sake of simplicity, future references to the BT
Group's performance of services as securities lending agent should
be deemed to include its parallel performance as securities lending
sub-agent and references to the Client Plans should be deemed to
refer to plans for which the BT Group is acting as sub-agent with
respect to securities lending activities, unless otherwise indicated
specifically or by the context of the reference.
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Because the BT Group, under the securities lending program, would
have discretion to lend plan securities to the Affiliated Borrowers,
and because the Affiliated Borrowers are affiliates of the BT Group,
the lending of securities to the Affiliated Borrowers by the Client
Plans for which the BT Group serves as directed trustee or custodian
and securities lending agent (or sub-agent) may be outside the scope of
relief provided by Prohibited Transaction Exemption (PTE) 81-6 and PTE
82-63.4
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\4\ PTE 81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR
18754, May 19, 1987) 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
certain broker-dealers or banks which are parties in interest.
Condition 1 of PTE 81-6 requires, in part, that 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.
PTE 82-63 (47 FR 14804, April 6, 1982) provides an exemption
under specified conditions from section 406(b)(1) of the Act and
section 4975(c)(1)(E) of the Code for the payment of compensation to
a plan fiduciary for services rendered in connection with loans of
plan assets that are securities. PTE 82-63 permits the payment of
compensation to a plan fiduciary for the provision of securities
lending services only if the loan of securities itself is not
prohibited under section 406(a) of the Act.
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Several safeguards, described more fully below, are incorporated
into the application to ensure the protection of the Client Plans'
assets involved in the transactions. In addition, the applicants
represent that the lending program described herein incorporates the
relevant conditions contained in PTE 81-6 and PTE 82-63.
4. BT Securities Corporation, a U.S. registered broker-dealer, will
comply with Federal Reserve Board's Regulation T in its securities
lending activities. Pursuant to Regulation T, permitted borrowing
purposes include making delivery of securities in the case of short
sales, failures of a broker to receive securities it is required to
deliver or similar situations.
The Client Plans will also lend securities to the foreign
Affiliated Borrowers (Foreign Lending) which are Bankers Trust
International PLC and Bankers Trust (Australia) Limited. The applicant
represents that Foreign Lending will not expose the Client Plans to
greater risk. In Foreign Lending, Bankers Trust will comply with the
following safeguards: (a) The collateral will be maintained in U.S.
dollars, U.S. dollar-denominated securities or letters of credit of
U.S. Banks; (b) all collateral will be held in the United States;
5 (c) the situs of the loan agreement will be maintained in
the United States; (d) Bankers Trust will indemnify the lending Client
Plans in the United States for any loans to the foreign Affiliated
Borrowers so that the Client Plans will not have to litigate in a
foreign jurisdiction nor sue the foreign Affiliated Borrowers to
realize on the indemnification; (e) prior to the transaction, the
foreign Affiliated Borrowers enter into a written agreement with the
Client Plan whereby the Affiliated Borrowers consent to the
jurisdiction of the courts of the United States with respect to the
transactions described herein; and (f)(1) Bankers Trust International
PLC is a deposit taking institution supervised by the Bank of England;
and (2) Bankers Trust (Australia) Limited is a merchant bank which is
under the jurisdiction of the Federal Reserve Bank of Australia.
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\5\ Under U.K. law, the securities lending agreement between
Bankers Trust and Bankers Trust International PLC provides, among
other things, that all rights, title and interest in the loaned
securities passes to the borrower, and all rights, title and
interest in the collateral passes to the lending Client Plan.
The Australian securities lending agreement contains, among
other things, the following provisions. Specifically, clause 3.4 of
such agreement states: ``Property in and title to the securities
delivered under clause 3.1, passes absolutely to the borrower free
from all liens and encumbrances, and the borrower is not obligated
to re-deliver the same securities to the lender.'' Clause 3.5 of
this agreement states: ``Property in and title to all the collateral
delivered under clause 3.2, passes absolutely to the lender free
from all liens and encumbrances, and the lender is not obligated
under the loan to re-deliver the same cash, bonds or securities to
the borrower (all or part) of the collateral.'' However, as a
condition of this exemption if granted, and by agreement of the
parties, the Client Plans will be entitled to the equivalent of all
interest, dividends and distributions on the loaned securities
during the loan period.
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5. Where the BT Group acts as a securities lending agent for the
Client Plans its essential functions are identifying appropriate
borrowers of securities and negotiating the terms of the loans to these
borrowers. As a securities lending agent for the Client Plans, the BT
Group also provides ancillary services such as monitoring the level of
collateral and the value of the loaned securities and, when directed by
a Client Plan, investing the cash collateral received with respect to
such loans. To protect the Client Plans' assets in these transactions,
the BT Group's procedures for lending securities comply with the
applicable conditions of PTE 81-6 and PTE 82-63 (including with respect
to any commingled funds that may participate in the securities lending
program).
6. Under the BT Group's lending program, when a loan is
collateralized with cash, the BT Group will transfer such cash to a
trust or other investment vehicle selected by the Client Plan in
[[Page 8485]]
advance.6 The BT Group will rebate a portion of the earnings
on the cash collateral to the Affiliated Borrowers as agreed to in the
loan agreement between the BT Group and the Affiliated Borrowers (the
Loan Agreement). The applicant represents that through its
authorization of the lending program, the independent fiduciary of the
Client Plan will approve the terms of the Loan Agreement. The
Affiliated Borrowers will pay a fee to the Client Plans based on the
value of the loaned securities where the collateral consists of
obligations other than cash.
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\6\ When the Client Plan approves securities lending, it is
required to designate a short-term investment fund for the
investment of cash collateral it receives in connection with the
loaned securities. For example, when the Client Plan selects BT
Pyramid Funds, which are bank collective funds under IRS Revenue
Ruling 81-100, as a vehicle for investment of cash collateral, the
fees for investment management are embedded in that fund. However,
the applicant represents that selecting a vehicle managed by Bankers
Trust is strictly optional and within the total discretion of the
Client Plan. Alternatively, the independent fiduciary of the Client
Plan may select his own manager, an unrelated mutual or collective
fund, or another vehicle of his choice. The selected investment
vehicle must be acceptable to Bankers Trust. Bankers Trust neither
selects the collateral investment vehicle, nor has any authority or
responsibility to do so.
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The fee arrangements between the Client Plan and the BT Group with
respect to the securities lending program are approved in advance by
the independent fiduciary of the Client Plan. This fee is calculated as
a percentage of the income earned on the investment of the cash
collateral, and will compensate the BT Group for providing lending
services to the Client Plans. This fee will reduce the income earned by
the Client Plans from the lending of the securities.
7. Where BT Group is the securities lending agent, an independent
fiduciary of the Client Plan who is independent of the BT Group and the
Affiliated Borrowers, will authorize securities lending (the Lending
Authorization) before the Client Plan participates in the BT Group's
securities lending program. The Lending Authorization will include the
authorization to lend securities, including lending to the Affiliated
Borrowers, investment direction by the Client Plans of cash collateral,
and fee arrangements. The Lending Authorization and the enclosed
additional explanatory materials will describe, among other things, the
operation of the securities lending program and allow the BT Group to
lend securities held by the Client Plan to borrowers, including the
Affiliated Borrowers, as selected by the BT Group, subject to any
specific restrictions imposed by the Client Plan. The Lending
Authorization and the explanatory materials also describe the
securities available for lending, minimum required margin, daily
marking to market procedures, a list of the affiliates who are
permissible borrowers under the securities lending program, and the
basis of the BT Group's compensation for performing the securities
lending services.
8. The Lending Authorization and the explanatory materials will
provide that if one of the Affiliated Borrower's is an approved
borrower, the BT Group, as agent of the Client Plan, will represent to
the Client Plan that each loan made to its affiliate on behalf of the
Client Plan will be at market rates and at terms as favorable to the
Client Plan as if made at the same time and under the same
circumstances, to an unaffiliated borrower.
9. The Lending Authorization will set forth a fee arrangement
agreed upon by the Client Plan and the BT Group, whereby the BT Group
will be compensated for its services as the lending agent prior to the
commencement of any lending activity. The Client Plan will be provided
with any reasonably available information necessary for the independent
fiduciary of the Client Plan to determine whether to enter into, or
continue to participate under the Lending Authorization (or the Primary
Lending Agreement) and other reasonably available information which the
independent fiduciary may reasonably request. A Client Plan may
terminate either the Lending Authorization or the Primary Lending
Agreement at any time, without penalty, on five business days notice.
10. Where the BT Group is the securities lending agent, the BT
Group will enter into the Loan Agreement with the Affiliated Borrower
on behalf of the Client Plans. The form of the Loan Agreement will be
substantially similar to loan agreements negotiated with other
similarly situated borrowers.7 The form of the Loan
Agreement will also be the industry or the market standard for loans to
the borrowers in the country (U.S., U.K. and Australia) where the
borrower is domiciled. It will describe the lenders's rights against
the borrower in the country of the borrower's domicile (U.S., U.K., and
Australia), and represent that these rights will be equivalent to those
under U.S. law. The independent fiduciary for each Client Plan will
approve the terms of the Loan Agreement through its authorization of
the lending program, and such fiduciary will be provided a copy of the
applicable Loan Agreement from the BT Group upon request. The Loan
Agreement will specify, among other things, the right of the BT Group
as the lending agent on behalf of the Client Plan to terminate a loan
at any time on not more than five business days notice, and the lending
agent's rights in the event of any default by the borrower. The Loan
Agreement will also require that the Affiliated Borrowers pay all
transfer fees and transfer taxes related to the security loans. The
Loan Agreement will describe the basis for compensation to the Client
Plan for lending securities to the Affiliated Borrowers under each
category of collateral.
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\7\ The form of the Loan Agreement between a securities lending
agent and a foreign Affiliated Borrower differs from the standard
U.S. loan agreement. Under the U.K. and Australian Loan Agreements,
the Client Plan receives title to (rather than a pledge of, or a
security interest in) the collateral.
Furthermore, the Loan Agreement with the Client plans will
include specific indemnification provisions as described herein.
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11. The BT group may also be retained by independent primary
securities lending agents to render securities lending services in a
sub-agent capacity. Under these circumstances, the primary lending
agent, an entity independent of the BT Group and the Affiliated
Borrower, will enter into a securities lending agency agreement (the
Primary Lending Agreement) with an independent fiduciary of the Client
Plan who is independent of the primary lending agent, the BT Group and
the Affiliated Borrowers, before the Client Plan participates in the
securities lending program. The BT Group will not enter into a sub-
agent arrangement unless the Primary Lending Agreement contains
provisions which correspond to those in the Loan Agreement where the BT
Group is the primary securities lending agent, including a description
of the lending program's operation, the use of an approved form of the
loan agreement, the specification of securities which are available to
be lent, the required margin and daily marking to market, and a list of
the approved borrowers (including, the Affiliated Borrowers). The
Primary Lending Agreement will authorize the primary lending agent to
appoint sub-agents in order to facilitate its performance of securities
lending agency functions.
The Primary Lending Agreement will expressly disclose where the BT
Group will be acting as the securities lending sub-agent. The Primary
Lending Agreement will also set forth the basis and rate for the
primary lending agent's compensation from the Client Plan for
performing securities lending services, and will authorize the primary
lending agent to pay a portion of its fee, as
[[Page 8486]]
determined by the primary lending agent in its sole discretion, to any
sub-agent(s) it retains pursuant to the authority granted under such
Primary Lending Agreement.8
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\8\ The foregoing provisions describe arrangements comparable to
conditions (c) and (d) of PTE 82-63 which require that the payment
of compensation to a ``lending fiduciary'' is made under a written
instrument and is subject to prior written authorization of an
independent ``authorizing fiduciary.'' In the event that a
commingled investment fund will participate in the securities
lending program, the special rule applicable to such funds
concerning the authorization of the compensation arrangement set
forth in paragraph (f) of PTE 82-63 will be satisfied.
---------------------------------------------------------------------------
Pursuant to its authority to appoint sub-agents, the primary
lending agent will enter into a securities lending sub-agency agreement
(the Sub-Agency Agreement) with the BT Group, under which the primary
lending agent will retain and authorize the BT Group, as the sub-agent,
to lend securities of the primary lending agent's Client Plans, subject
to the same terms and conditions of the Primary Lending Agreement.
Thus, the form of the Loan Agreement will be the same as that approved
by the independent fiduciary in the Primary Lending Agreement, and the
list of permissible borrowers under the Sub-Agency Agreement (including
the Affiliated Borrowers), will be limited to those approved borrowers
listed as such under the Primary Lending Agreement. The Sub-Agency
Agreement will also contain provisions comparable to those in a Loan
Agreement where the BT Group is the primary lending agent. The Sub-
Agency Agreement will provide that the BT Group comply with the same
standard regarding arms-length dealing with the Affiliated Borrowers,
as when the BT Group is the primary lending agent. The Sub-Agency
Agreement will also set forth the basis and the rate for the BT Group's
compensation to be paid by the primary lending agent.
12. In all cases, the BT Group will maintain transactional and
market records sufficient to assure compliance with its representations
that all loans to the Affiliated Borrowers are at arm's-length terms.
Information will be provided to the independent fiduciary of the Client
Plan in the manner and format agreed to with the lending agent, without
charge to the Client Plan.
13. Before entering into the Loan Agreement, the Affiliated
Borrowers will furnish its most recent available audited and unaudited
financial statements to the Client Plan Fiduciary, and each Client Plan
will be advised in the Lending Authorization that it will be provided
copies of such statements upon request, and before the Client Plan is
asked to authorize such lending. The Loan Agreement will contain a
requirement that the Affiliated Borrowers must give prompt notice at
the time of the loan, of any material adverse changes in their
financial condition since the date of the most recently furnished
financial statements. In the event of any such changes, the BT Group
will request approval of the Client Plan to continue lending to the
Affiliated Borrowers before making any such additional loans. No such
new loans will be made until approval is received. Each loan shall
constitute a representation by the Affiliated Borrower that there has
been no such material adverse change.
14. Each time that a Client Plan loans securities to the Affiliated
Borrower pursuant to the Loan Agreement, the BT Group will reflect in
its records the material terms of the loan, including the securities
loaned, the required level of the collateral, and the fee or rebate
payable. The terms of each loan will be at least as favorable to the
Client Plan as those of a comparable arm's-length transaction between
unrelated parties.
15. The Loan Agreement will provide that the lending agent may
terminate any loan at any time. Upon a termination, the Affiliated
Borrowers will be contractually obligated to return the loaned
securities to the lending agent within the lesser of: (a) The customary
delivery period for such securities; (b) five business days of
notification (or such longer period of time permitted pursuant to a
class exemption); or (c) the time negotiated for such delivery by the
lending agent and the borrower. If the Affiliated Borrowers fail to
return the securities within the designated time, the lending agent
will have the right under the Loan Agreement to purchase securities
identical to the borrowed securities, and apply the collateral to the
payment of the purchase price and any other costs and expenses
reasonably incurred as a result of such sale and/or purchase.
16. Further, the Client Plans will be indemnified by Bankers Trust
or BT Securities Corporation in the event the Affiliated Borrowers fail
to return the borrowed securities. In the event Bankers Trust
International PLC and/or Bankers Trust (Australia) Limited default on a
loan Bankers Trust will liquidate the loan collateral to purchase
identical securities for the Client Plan. In the event the collateral
is insufficient to accomplish such purchase, Bankers Trust will
indemnify the Client Plan for any shortfall in the collateral plus
interest on such amount and any transaction costs incurred (including
attorney's fees of the Client Plan for legal actions arising out of the
default on the loans or failure to properly indemnify under this
provision). Alternatively, if such identical securities are not
available on the market, Bankers Trust will pay the Client Plan cash
equal to the market value of the borrowed securities as of the date
they should have been returned to the Client Plan plus all the accrued
financial benefits derived from the beneficial ownership of such loaned
securities. The lending Client Plans will be indemnified by Bankers
Trust in the United States for any loans to the foreign Affiliated
Borrowers.
When the Affiliated Borrower is BT Securities Corporation, a U.S.
registered broker-dealer, BT Securities Corporation will indemnify the
Client Plan against losses.9 Bankers Trust will liquidate
the loan collateral to purchase identical securities for the Client
Plan. If the collateral is insufficient to accomplish such purchase, BT
Securities Corporation will indemnify the Client Plan for any shortfall
in the collateral plus interest on such amount and any transaction
costs incurred (including attorney's fees of the Client Plan for legal
actions arising out of the default on the loans or failure to properly
indemnify under this provision).
---------------------------------------------------------------------------
\9\ It is represented that under applicable banking laws BT
Securities Corporation may not be indemnified by Bankers Trust.
---------------------------------------------------------------------------
17. The BT Group will establish each day a written schedule of
lending fees and rebate rates in order to assure uniformity of
treatment among borrowing brokers and to limit the discretion the BT
Group would have in negotiating securities loans to the Affiliated
Borrowers. Loans to the Affiliated Borrowers on any day will be made at
rates on the daily schedule or at rates which may be more advantageous
to the Client Plans. In no case will loans be made to the Affiliated
Borrowers at rates below those on the schedule. The rebate rates which
are established with respect to cash-collateralized loans, will take
into account the potential demand for loaned securities, the applicable
bench-mark cost of funds indices (typically, Federal Funds, overnight
repo rate or the like) and anticipated investment return on investments
of cash collateral. The lending fees (in respect of loans made by
Client Plans collateralized by other than cash) which are established
will be set daily to reflect conditions as influenced by potential
market demand.
18. BT Group will adopt maximum daily rebate rates for cash
collateral payable to the Affiliated Borrowers on behalf of a lending
Client Plan. Separate
[[Page 8487]]
maximum daily rebate rates will be established with respect to loans of
designated classes of securities such as U.S. government securities,
U.S. equities and corporate bonds, international fixed income
securities, and international equities. The BT Group will submit the
terms for determining the maximum daily rebate rates to an independent
fiduciary of the Client Plan for approval before lending any securities
to the Affiliated Borrowers on behalf of such plan. With respect to
each designated class of securities, the maximum daily rebate rate will
generally be the lower of: (i) The overnight repo rate or Federal Funds
rate, minus a stated percentage, and (ii) the actual investment rate
for the relevant cash collateral, minus a stated percentage. Thus, when
cash is used as collateral, the daily rebate rate should always be
lower than the rate of return to the Client Plans from authorized
investments of cash collateral.
19. BT Group will also adopt minimum daily lending fees for non-
cash collateral payable by the Affiliated Borrowers to the BT Group on
behalf of the Client Plan. Separate minimum daily lending fees will be
established with respect to loans of designated classes of securities,
such as U.S. government securities, U.S. equities and corporate bonds,
international fixed income securities, and international equities. The
BT Group will submit the terms for determining such fees to an
independent fiduciary of the Client Plan for approval before lending
securities to the Affiliated Borrowers on behalf of such plan. With
respect to each designated class of securities, the minimum lending fee
will be a percentage of the principal value of the loaned securities.
20. For collateral other than cash, the lending fees charged the
previous day will be reviewed by the BT Group for competitiveness.
Because 50 percent (50%) or more of securities loans by Client Plans
will be to unrelated parties, regardless of the type of collateral used
to secure the loans, the competitiveness of the BT Group's fee schedule
will be continuously tested in the marketplace. Accordingly, loans to
the Affiliated Borrowers should result in a competitive rate of income
to the lending Client Plans. At all times, the BT Group will effect
loans in a prudent and diversified manner.
21. Should the BT Group recognize prior to the end of a business
day that, with respect to new and/or existing loans, it must change the
rebate rate or lending fee formula in the best interest of Client
Plans, it may do so with respect to the Affiliated Borrowers.
If the BT Group reduces the lending fee or increases the rebate
rate on any outstanding loan to the Affiliated Borrower (except for any
change resulting from a change in the value of any third party
independent index with respect to which the fee or rebate is
calculated), the BT Group, by the close of business on the date of such
adjustment, shall provide to the independent fiduciary of the Client
Plan with notice that it has reduced such fee or increased the rebate
rate to such Affiliated Borrower and that the Client Plan may terminate
such loan at any time. The BT Group shall provide the independent
fiduciary with such information as the independent fiduciary may
reasonably request regarding the adjustment.
22. BT Group will usually lend securities to requesting borrowers
on a ``first come, first served'' basis, as a means of assuring
uniformity of treatment among borrowers. However, in some instances,
the borrower's credit limit may be reached, and the first in line
borrower will not be approved as a borrower by the Client Plan. In
other instances, there may be more than one prospective borrower that
seeks to borrow a particular security at approximately the same time.
In these situations, the BT Group will either lend to the next in line
approved borrower, or allocate the loan equitably among competing
borrowers, as applicable.
23. The Client Plan will receive collateral from the Affiliated
Borrowers by physical delivery, book entry in a securities depository,
wire transfer or similar means, by the close of business on or before
the day the loaned securities are delivered to the Affiliated
Borrowers. The collateral will consist of cash, securities issued or
guaranteed by the U.S. Government or its agencies or irrevocable bank
letters of credit issued by a U.S. bank, which is a person other than
the Affiliated Borrowers or an affiliate thereof. The market value of
the collateral on the close of business on the day of, or the business
day preceding the day of the loan, will be at least 102 percent of the
market value of the loaned securities. The Loan Agreement involving BT
Securities Corporation will give the Client Plan a continuing security
interest in and a lien on the collateral or the equivalent under local
law. However, under the U.K. and Australian Loan Agreements, the Client
Plan receives title to (rather than a pledge of, or security interest
in) the collateral from Bankers Trust International PLC and Bankers
Trust (Australia) Limited. The BT Group will monitor the level of the
collateral daily. If the market value of the collateral falls below 100
percent (or such greater percentage as agreed to by the parties) of the
loaned securities, the BT Group will require the Affiliated Borrowers
to deliver by the close of business the next business day sufficient
additional collateral to bring the level back to at least 102 percent.
Bankers Trust represents that in the event of the Affiliated
Borrowers' default or bankruptcy, the collateral is used to make the
Client Plan whole, and is not available to the Affiliated Borrowers or
their creditors. The collateral is held for the benefit of the Client
Plan and is not available to the Affiliated Borrowers until the
securities loan is terminated, and the loaned securities plus any
income thereon are returned to the Client Plan. When the Client Plans
lend securities to foreign Affiliated Borrowers, collateral will be
maintained pursuant to the relevant conditions contained in paragraph 4
above.
24. Each Client Plan participating in the lending program will be
sent a monthly 10 transaction report. This monthly report
will provide a list of all securities loans outstanding and closed for
a specified period. The report will identify for each open loan
position, the securities involved, the value of the securities for
collateralization purposes, the current value of the collateral, the
rebate or the loan fee at which the securities are loaned, and the
number of days the securities have been on loan.
---------------------------------------------------------------------------
\10\ More frequent reports will be made available at the Client
Plan's request.
---------------------------------------------------------------------------
In order to provide the means for monitoring lending activity,
rates on loans to the Affiliated Borrowers compared with loans to other
borrowers, and the level of collateral on the loans, it is represented
that the monthly report will show, on a daily basis, the market value
of all outstanding security loans to the Affiliated Borrowers and to
other borrowers. Further, the BT Group will advise the Client Plans
that upon request, the monthly report will state the daily fees where
collateral other than cash is utilized and will specify the details
used to establish the daily rebate payable to all brokers where cash is
used as collateral. The monthly report also will state, on a daily
basis, the rates at which securities are loaned to the Affiliated
Borrowers and those at which securities are loaned to other borrowers.
25. Only Client Plans with total assets having an aggregate market
value of at least $50 million will be permitted to lend securities to
the Affiliated Borrowers. This restriction is intended
[[Page 8488]]
to assure that any lending to the Affiliated Borrowers will be
monitored by an independent fiduciary who is experienced and
sophisticated in matters of this kind.
26. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because:
A. Neither the Affiliated Borrowers nor the BT Group has or
exercises discretionary authority or control with respect to the
investment of the assets of the Client Plans involved in the
transaction (other than with respect to the investment of cash
collateral after securities have been loaned and collateral received),
or renders investment advice (within the meaning of 29 CFR 2510.3-
21(c)) with respect to those assets, including decisions concerning a
Client Plan's acquisition and disposition of securities available for
loan.
B. Before a Client Plan participates in a securities lending
program and before any loan of securities to the Affiliated Borrowers
is affected, a Client Plan fiduciary who is independent of the BT Group
and the Affiliated Borrowers must have:
(1) Authorized and approved the Lending Authorization with the BT
Group, where the BT Group is acting as the securities lending agent;
(2) Authorized and approved the Primary Lending Agreement with the
primary lending agent, where BT Group is lending securities under a
sub-agency arrangement with the primary lending agent; 11
---------------------------------------------------------------------------
\11\ See Footnote 2, supra.
---------------------------------------------------------------------------
(3) Approved the general terms of the Loan Agreement between such
Client Plan and the Affiliated Borrowers, the specific terms of which
are negotiated and entered into by BT Group.
C. The Client Plan may terminate the agency or sub-agency agreement
at any time without penalty to such plan on five (5) business days
notice, whereupon the Affiliated Borrowers shall deliver certificates
for securities identical to the borrowed securities (or the equivalent
in the event of reorganization, recapitalization or merger of the
issuer of the borrowed securities) to the plan within (1) the customary
delivery period for such securities, (2) five business days, or (3) the
time negotiated for such delivery by the Client Plan and the Affiliated
Borrowers, whichever is less.
D. The Client Plan will receive from the Affiliated Borrowers
(either by physical delivery or by book entry in a securities
depository located in the United States, wire transfer or similar
means) by the close of business on or before the day on which the
loaned securities are delivered to the Affiliated Borrowers, collateral
consisting of U.S. currency, securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, or an irrevocable
bank letter of credit issued by a U.S. bank, which is a person other
than the Affiliated Borrowers or an affiliate thereof, or any
combination thereof, or other collateral permitted under Prohibited
Transaction Exemption (PTE) 81-6 (as amended from time to time or,
alternatively, any additional or superceding class exemption that may
be issued to cover securities lending by employee benefit plans),
having, as of the close of business on the preceding business day, a
market value (or, in the case of a letter of credit, a stated amount)
initially equal to at least 102 percent of the market value of the
loaned securities.
If the market value of the collateral on the close of trading on a
business day is less than 100 percent of the market value of the
borrowed securities at the close of business on that day, the
Affiliated Borrowers will deliver additional collateral on the
following day such that the market value of the collateral in the
aggregate will again equal 102 percent. The Loan Agreement will give
the Client Plan a continuing security interest in, title to, or the
rights of a secured creditor with respect to the collateral and a lien
on the collateral. The BT Group will monitor the level of the
collateral daily.
E. When the BT Group lends securities to the Affiliated Borrowers,
the following conditions must be met: (1) The collateral will be
maintained in U.S. dollars, U.S. dollar-denominated securities or
letters of credit of U.S. Banks; (2) all collateral will be held in the
United States; (3) the situs of the loan agreement will be maintained
in the United States; (4) the lending Client Plans will be indemnified
by Bankers Trust in the United States for any transactions covered by
this exemption with the foreign Affiliated Borrowers so that the Client
Plans will not have to litigate in a foreign jurisdiction nor sue the
foreign Affiliated Borrowers to realize on the indemnification; (5)
prior to the transaction, the foreign Affiliated Borrowers will enter
into a written agreement with the Client Plan whereby the Affiliated
Borrowers consent to the service of process in the United States and to
the jurisdiction of the courts of the United States with respect to the
transactions described herein; and (6)(a) Bankers Trust International
PLC is a deposit taking institution supervised by the Bank of England;
and (b) Bankers Trust (Australia) Limited is a merchant bank which is
under the jurisdiction of the Federal Reserve Bank of Australia.
F. Before entering into the Loan Agreement and before a Client Plan
lends any securities to an Affiliated Borrower, the Affiliated Borrower
shall have furnished the following items to the Client Plan fiduciary:
(1) The most recent available audited and unaudited statement of the
Affiliated Borrowers' financial condition, (2) at the time of the loan,
the Affiliated Borrowers must give prompt notice to the Client Plan
fiduciary of any material adverse changes in the Affiliated Borrowers'
financial condition since the date of the most recently financial
statement furnished to the Client Plan, and (3) in the event of any
such changes, the BT Group will request approval of the Client Plan to
continue lending to the Affiliated Borrowers before making any such
additional loans. No such new loans will be made until approval is
received. Each loan shall constitute a representation by the Affiliated
Borrower that there has been no such material adverse change.
G. The Client Plan: (1) Receives a reasonable fee that is related
to the value of the borrowed securities and the duration of the loan,
or (2) has the opportunity to derive compensation through the
investment of cash collateral. In the case of cash collateral, the
Client Plan may pay a loan rebate or similar fee to the Affiliated
Borrower, if such fee is not greater than the fee Client Plan would pay
an unrelated party in an arm's length transaction.
H. All procedures regarding the securities lending activities will
at a minimum conform to the applicable provisions of Prohibited
Transaction Exemptions (PTEs) 81-6 and 82-63.
I. In the event Bankers Trust International PLC and/or Bankers
Trust (Australia) Limited default on a loan, Bankers Trust will
liquidate the loan collateral to purchase identical securities for the
Client Plan. If the collateral is insufficient to accomplish such
purchase, Bankers Trust will indemnify the Client Plan for any
shortfall in the collateral plus interest on such amount and any
transaction costs incurred (including attorney's fees of the Client
Plan for legal actions arising out of the default on the loans or
failure to properly indemnify under this provision). Alternatively, if
such identical securities are not available on the market, Bankers
Trust will pay the Client Plan cash equal to the market value of the
borrowed securities as of the date they should have been returned to
the Client Plan plus all the accrued
[[Page 8489]]
financial benefits derived from the beneficial ownership of such loaned
securities. The lending Client Plans will be indemnified by Bankers
Trust in the United States for any loans to the foreign Affiliated
Borrowers.
J. In the event BT Securities Corporation, a U.S. registered
broker-dealer, defaults on a loan, Bankers Trust will liquidate the
loan collateral to purchase identical securities for the Client Plan.
If the collateral is insufficient to accomplish such purchase, BT
Securities Corporation will indemnify the Client Plan for any shortfall
in the collateral plus interest on such amount and any transaction
costs incurred (including attorney's fees of the Client Plan for legal
actions arising out of the default on the loans or failure to properly
indemnify under this provision).
K. If the Affiliated Borrowers' default on the securities loan or
enter bankruptcy, the collateral will not be available to the
Affiliated Borrowers or their creditors, but is used to make the Client
Plan whole.
L. The Client Plans will be entitled to the equivalent of all
distributions made to the holders of the borrowed securities, including
all interest, dividends and distributions on the loaned securities
during the loan period.
M. Only Client Plans with total assets having an aggregate market
value of at least $50 million will be permitted to lend securities to
the Affiliated Borrowers.
N. For purposes of this proposed exemption, the Affiliated
Borrowers will consist only of BT Securities Corporation, Bankers Trust
International PLC and Bankers Trust (Australia) Limited.
O. In any calendar quarter, on average 50 percent or more of the
outstanding dollar value of securities loans negotiated on behalf of
the Client Plans by the BT Group in the aggregate will be to borrowers
who are not affiliated with the BT Group.
P. The terms of each loan of securities by the Client Plans to any
of the Affiliated Borrowers will be at market rates and at terms as
favorable to such plans as if made at the same time and under the same
circumstances to an unaffiliated party.
Q. Each Client Plan will receive monthly transaction report,
including but not limited to the information described in paragraph 24
of the summary of facts and representations above, so that the
independent fiduciary of such plan may monitor the securities lending
transactions with the Affiliated Borrowers.
R. During the notification of interested persons period, all
current Client Plans will receive a copy of the notice of pendency. If
the Department grants the final exemption, current Client Plans will
receive a copy of the final exemption. Also, Bankers Trust is prepared
to provide a copy of the final exemption to any new Client Plans.
Notice to Interested Persons
Those persons who may be interested in the pendency of this
exemption include the named fiduciaries of any affected Client Plan for
which the BT Group serves as the lending agent. The applicant
represents that it proposes to notify the interested persons within
fifteen (15) days of the publication of the notice of the proposed
exemption in the Federal Register. Such notice will contain a copy of
the notice of the proposed exemption published in the Federal Register
and a supplemental statement described at 29 CFR 2570.43 (b)(2)
advising interested persons of their right to comment and to request a
hearing on the proposed exemption. Accordingly, comments and hearing
requests on the proposed exemption are due forty five (45) days after
the date of publication of this proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan, U.S. Department
of Labor, telephone (202) 219-8883. (This is not a toll-free number.)
Goldman Sachs & Co. (Goldman Sachs) and The Goldman Sachs Trust Company
(GSTC) Located in New York, NY
[Application No. D-10306]
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) and
406(b)(1) and (2) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply, effective July
31, 1996, to the past and continued lending of securities to Goldman
Sachs International or any other Goldman Sachs affiliate based in the
United Kingdom (together, GSI), Goldman Sachs, affiliated U.S.
registered broker-dealers of Goldman Sachs, or Goldman Sachs (Japan),
Ltd., including any of its affiliates (together, Goldman Sachs
(Japan),12 by employee benefit plans (the Client Plans),
including commingled investment funds holding Plan assets, for which
Goldman Sachs Trust Company (GSTC), an affiliate of Goldman Sachs, acts
as securities lending agent (or sub-agent) and to the receipt of
compensation by GSTC in connection with these transactions, provided
that the following conditions are met:
---------------------------------------------------------------------------
\12\ Unless otherwise noted, for purposes of this proposed
exemption, Goldman Sachs, the affiliated U.S. registered broker-
dealers of Goldman Sachs, GSI and Goldman Sachs (Japan) are
collectively referred to herein as Goldman Sachs.
---------------------------------------------------------------------------
(a) For each Client Plan, neither GSTC, Goldman Sachs nor an
affiliate of either has or exercises discretionary authority or control
with respect to the investment of the Plan assets involved in the
transaction, or renders investment advice (within the meaning of 29 CFR
2510.3-21(c)) with respect to those assets.
(b) Any arrangement for GSTC to lend Plan securities to Goldman
Sachs in either an agency or sub-agency capacity is approved in advance
by a Plan fiduciary who is independent of Goldman Sachs and
GSTC.13 In this regard, the independent Plan fiduciary also
approves the general terms of the securities loan agreement (the Loan
Agreement) between the Client Plan and Goldman Sachs, although the
specific terms of the Loan Agreement are negotiated and entered into by
GSTC and GSTC acts as a liaison between the lender and the borrower to
facilitate the lending transaction.
---------------------------------------------------------------------------
\13\ The Department, herein, is not providing exemptive relief
for securities lending transactions engaged in by primary lending
agents, other than GSTC, beyond that provided pursuant to Prohibited
Transaction Exemption (PTE) 81-6 (46 FR 7527, January 23, 1981, as
amended at 52 FR 18754, May 19, 1987) and PTE 82-63 (47 FR 14804,
April 6, 1982).
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(c) The terms of each loan of securities by a Client Plan to
Goldman Sachs is at least as favorable to such Plans as those of a
comparable arm's length transaction between unrelated parties.
(d) A Client Plan may terminate the agency or sub-agency
arrangement at any time without penalty to such Plan on five business
days notice.
(e) The Client Plan receives from Goldman Sachs (either by physical
delivery or by book entry in a securities depository located in the
United States, wire transfer or similar means) by the close of business
on or before the day the loaned securities are delivered to Goldman
Sachs, collateral consisting of cash, securities issued or guaranteed
by the United States Government or its agencies or instrumentalities,
or
[[Page 8490]]
irrevocable United States bank letters of credit issued by a person
other than Goldman Sachs or an affiliate thereof, or any combination
thereof, or other collateral permitted under PTE 81-6, as it may be
amended or superseded.
(f) As of the close of business on the preceding business day, the
fair market value of the collateral initially equals at least 102
percent of the market value of the loaned securities and, if the market
value of the collateral falls below 100 percent, Goldman Sachs delivers
additional collateral on the following day such that the market value
of the collateral again equals 102 percent.
(g) Prior to entering into the Loan Agreement, Goldman Sachs
furnishes GSTC its most recently available audited and unaudited
statements, which is, in turn, provided to a Client Plan, as well as a
representation by Goldman Sachs, that as of each time it borrows
securities, there has been no material adverse change in its financial
condition since the date of the most recently-furnished statement that
has not been disclosed to such Client Plan; provided, however, that in
the event of a material adverse change, GSTC does not make any further
loans to Goldman Sachs unless an independent fiduciary of the Client
Plan is provided notice of any material adverse change and approves the
loan in view of the changed financial condition.
(h) In return for lending securities, the Client Plan either--
(1) Receives a reasonable fee, which is related to the value of the
borrowed securities and the duration of the loan; or
(2) Has the opportunity to derive compensation through the
investment of cash collateral. (Under such circumstances, the Client
Plan may pay a loan rebate or similar fee to Goldman Sachs, if such fee
is not greater than the fee the Client Plan would pay in a comparable
arm's length transaction with an unrelated party.)
(i) All procedures regarding the securities lending activities
conform to the applicable provisions of Prohibited Transaction
Exemptions PTE 81-6 and PTE 82-63 as well as to applicable securities
laws of the United States, the United Kingdom or Japan.
(j) Each Goldman Sachs entity indemnifies and holds harmless each
lending Client Plan in the United States against any and all losses,
damages, liabilities, costs and expenses (including attorney's fees)
which the Client Plan may incur or suffer directly arising out of the
lending of securities of such Client Plan to such Goldman Sachs entity.
In the event that GSI or Goldman Sachs (Japan) defaults on a loan, GSTC
will liquidate the loan collateral to purchase identical securities for
the Client Plan. If the collateral is insufficient to accomplish such
purchase, GSTC will indemnify the Client Plan for any shortfall in the
collateral plus interest on such amount and any transaction costs
incurred. Alternatively, if such identical securities are not available
on the market, GSTC will pay the Client Plan cash equal to (1) The
market value of the borrowed securities as of the date they should have
been returned to the Client Plan, plus (2) all the accrued financial
benefits derived from the beneficial ownership of such loaned
securities as of such date, plus (3) interest from such date to the
date of payment.
(k) The Client Plan receives the equivalent of all distributions
made to holders of the borrowed securities during the term of the loan,
including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to purchase
additional securities, or other distributions.
(l) Prior to any Client Plan's approval of the lending of its
securities to Goldman Sachs, a copy of this exemption, if granted, (and
the notice of pendency) are provided to the Client Plan.
(m) Each Client Plan receives monthly reports with respect to its
securities lending transactions, including, but not limited to the
information described in Representation 31, so that an independent
fiduciary of the Client Plan may monitor such transactions with Goldman
Sachs.
(n) Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to
Goldman Sachs; provided, however, that--
(1) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization (the Related Client Plans), whose assets are commingled
for investment purposes in a single master trust or any other entity
the assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the
Plan Asset Regulation), which entity is engaged in securities lending
arrangements with Goldman Sachs, the foregoing $50 million requirement
shall be deemed satisfied if such trust or other entity has aggregate
assets which are in excess of $50 million; provided that if the
fiduciary responsible for making the investment decision on behalf of
such master trust or other entity is not the employer or an affiliate
of the employer, such fiduciary has total assets under its management
and control, exclusive of the $50 million threshold amount attributable
to plan investment in the commingled entity, which are in excess of
$100 million.
(2) In the case of two or more Client Plans which are not
maintained by the same employer, controlled group of corporations or
employee organization (the Unrelated Client Plans), whose assets are
commingled for investment purposes in a group trust or any other form
of entity the assets of which are ``plan assets'' under the Plan Asset
Regulation, which entity is engaged in securities lending arrangements
with Goldman Sachs, the foregoing $50 million requirement is satisfied
if such trust or other entity has aggregate assets which are in excess
of $50 million; provided that the fiduciary responsible for making the
investment decision on behalf of such group trust or other entity--
(i) Is neither the sponsoring employer, a member of the controlled
group of corporations, the employee organization nor an affiliate;
(ii) Has full investment responsibility with respect to plan assets
invested therein; and
(iii) Has total assets under its management and control, exclusive
of the $50 million threshold amount attributable to plan investment in
the commingled entity, which are in excess of $100 million. (In
addition, none of the entities described above are formed for the sole
purpose of making loans of securities.)
(o) With respect to any calendar quarter, at least 50 percent or
more of the outstanding dollar value of securities loans negotiated on
behalf of Client Plans will be to unrelated borrowers.
(p) In addition to the above, all loans involving GSI and Goldman
Sachs (Japan), have the following supplemental requirements:
(1) Such broker-dealer is registered as a broker-dealer with the
Securities and Futures Authority of the United Kingdom (the SFA) or
with the Ministry of Finance (the MOF) and the Tokyo Stock Exchange;
(2) Such broker-dealer is in compliance with all applicable
provisions of Rule 15a-6 (17 CFR 240.15a-6) under the Securities
Exchange Act of 1934 (the 1934 Act) which provides for foreign broker-
dealers a limited exemption from United States registration
requirements;
(3) All collateral is maintained in United States dollars or
dollar-denominated securities or letters of credit;
(4) All collateral is held in the United States and GSTC maintains
the situs of
[[Page 8491]]
the securities Loan Agreements in the United States under an
arrangement that complies with the indicia of ownership requirements
under section 404(b) of the Act and the regulations promulgated under
29 CFR 2550.404(b)-1; and
(5) GSI or Goldman Sachs (Japan) provides Goldman Sachs a written
consent to service of process in the United States for any civil action
or proceeding brought in respect of the securities lending transaction,
which consent provides that process may be served on such borrower by
service on Goldman Sachs.
(q) Goldman Sachs and its affiliates maintain, or cause to maintain
within the United States for a period of six years from the date of
such transaction, in a manner that is convenient and accessible for
audit and examination, such records as are necessary to enable the
persons described in paragraph (r)(1) to determine whether the
conditions of the exemption have been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Goldman Sachs
and/or its affiliates, the records are lost or destroyed prior to the
end of the six year period; and
(2) No party in interest other than Goldman Sachs shall be subject
to the civil penalty that may be assessed under section 502(i) of the
Act, or to the taxes imposed by section 4975 (a) and (b) of the Code,
if the records are not maintained, or are not available for examination
as required below by paragraph (r)(1).
(r)(1) Except as provided in subparagraph (r)(2) of this paragraph
and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (q) are
unconditionally available at their customary location during normal
business hours by:
(i) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission (the SEC);
(ii) Any fiduciary of a participating Client Plan or any duly
authorized representative of such fiduciary;
(iii) Any contributing employer to any participating Client Plan or
any duly authorized employee representative of such employer; and
(iv) Any participant or beneficiary of any participating Client
Plan, or any duly authorized representative of such participant or
beneficiary.
(r)(2) None of the persons described above in paragraphs
(r)(1)(ii)-(r)(1)(iv) of this paragraph (r)(1) are authorized to
examine the trade secrets of Goldman Sachs or commercial or financial
information which is privileged or confidential.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of July 31, 1996.
Summary of Facts and Representations
1. Goldman Sachs, a New York limited partnership, is the principal
operating subsidiary of The Goldman Sachs Group, L.P. (the Goldman
Sachs Group), a Delaware limited partnership. Goldman Sachs is
currently owned by the Goldman Sachs Group, the individual general
partners of the Goldman Sachs Group and two institutional limited
partners. Goldman Sachs is one of the largest full-line investment
service firms in the United States. It is registered with and regulated
by the SEC as a broker-dealer, is registered with and regulated by the
Commodities Futures Trading Commission as a futures commission
merchant, is a member of the New York Stock Exchange and other
principal securities exchanges in the United States and is also a
member of the National Association of Securities Dealers, Inc. As of
May 30, 1997, Goldman Sachs had approximately $125.2 billion in assets
and approximately $5.9 billion in consolidated capital (partners'
capital and subordinated liabilities).
2. Acting as principal, Goldman Sachs actively engages in the
borrowing and lending of securities, with daily outstanding loan volume
averaging several billion dollars. Goldman Sachs utilizes borrowed
securities to satisfy its trading requirements or to re-lend to other
broker-dealers and others who need a particular security for various
periods of time. All borrowings by Goldman Sachs conform to the Federal
Reserve Board's Regulation T. Pursuant to Regulation T, permitted
borrowing purposes include making delivery of securities in the case of
short sales, failures of a broker to receive securities it is required
to deliver or other similar situations.
3. GSTC is a wholly owned subsidiary of the Goldman Sachs Group and
an affiliate of Goldman Sachs. GSTC is organized as a limited purpose
trust company licensed by the New York State Banking Department in New
York. GSTC provides a variety of services to its clients, including
serving as a custodian, clearing agent, corporate trustee and
(following the acquisition of substantially all of the assets of Boston
Global Advisors, Inc. on July 31, 1996) a securities lending agent to
Plans and other entities. As of December 31, 1996, GSTC had total
assets of approximately $21 million.
4. GSI, an indirect subsidiary of the Goldman Sachs Group, is an
English company registered with the Registrar of Companies for England
and Wales. GSI is also an international investment banking
organization. As of November 30, 1996, GSI had approximately $44
billion in total assets.
5. Goldman Sachs (Japan), another indirect subsidiary of the
Goldman Sachs Group, is a Japanese company that is subject to
regulation by the MOF and the Tokyo Stock Exchange. As of May 31, 1997,
Goldman Sachs (Japan) had total assets of approximately $7.5 billion.
6. GSI is authorized to conduct an investment business in and from
the United Kingdom as a broker-dealer regulated by the SFA. Similarly,
Goldman Sachs (Japan) is authorized to conduct an investment business
in Japan as a broker-dealer regulated by the MOF and the Tokyo Stock
Exchange. Although not registered with the United States SEC, GSI is
governed by the rules, regulations and membership requirements of the
SFA whereas Goldman Sachs (Japan) is governed by the rules, regulations
and membership requirements of the MOF and the Tokyo Stock Exchange. In
this regard, GSI and Goldman Sachs (Japan) are subject to rules
relating to minimum capitalization, reporting requirements, periodic
examinations, client money and safe custody rules and books and records
requirements with respect to client accounts. These rules and
regulations set forth by the SFA, the MOF, the Tokyo Stock Exchange and
the SEC share a common objective: the protection of the investor by the
regulation of the securities industry. The SFA, MOF and the Tokyo Stock
Exchange rules require each firm which employs registered
representatives or registered traders to have a positive tangible net
worth and be able to meet its obligations as they may fall due. In
addition, the SFA, MOF and the Tokyo Stock Exchange rules set forth
comprehensive financial resource and reporting/disclosure rules
regarding capital adequacy. Further, to demonstrate capital adequacy,
the SFA rules impose reporting/disclosure requirements on broker-
dealers with respect to risk management, internal controls, and
transaction reporting and recordkeeping requirements to the effect that
required records must be produced at the request of the SFA, the MOF
and the Tokyo Stock Exchange at any time. Finally, the rules and
regulations of the SFA, the MOF and the Tokyo Stock Exchange for
broker-dealers impose
[[Page 8492]]
potential fines and penalties which establish a comprehensive
disciplinary system.
7. Aside from the protections afforded by SFA, MOF and Tokyo Stock
Exchange regulations, Goldman Sachs represents that GSI and Goldman
Sachs (Japan) will comply with all applicable provisions of Rule 15a-6
of the 1934 Act. Rule 15a-6 provides foreign broker-dealers with a
limited exemption from SEC registration requirements and, as described
below, offers additional protections. Specifically, Rule 15a-6 provides
an exemption from U.S. broker-dealer registration 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 ``U.S. major institutional
investor,'' provided that the foreign broker-dealer, among other
things, enters into these transactions through a U.S. registered
broker-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 Employee Retirement Income Security Act of
1974 (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 Exchange Act of 1933, as amended. The term ``U.S.
major institutional investor'' is defined in Rule 15a-6(b)(4) as a
person that is a U.S. institutional investor that has total assets in
excess of $100 million or an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940 that has total
assets under management in excess of $100 million.
8. Goldman Sachs 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
must, among other things--
(a) Consent to service of process for any civil action brought
by, or proceeding before, the SEC or any self-regulatory
organization;
(b) Provide the SEC (upon request or pursuant to agreements
reached between any foreign securities authority, including any
foreign government, and the SEC or the U.S. Government) with any
information or documents within the possession, custody or control
of the foreign broker-dealer, 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-dealer 14
through which the transactions with the U.S. institutional and major
institutional investors are effected to (among other things):
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\14\ GSI and Goldman Sachs (Japan), in lieu of relying on a U.S.
broker-dealer and to the extent permitted by applicable U.S.
securities law, may rely on a U.S. bank or trust company, including
GSTC, to perform this role.
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(1) Effect the transactions, other than negotiating their terms;
(2) Issue all required confirmations and statements;
(3) As between the foreign broker-dealer and the U.S. registered
broker-dealer, extend or arrange for the extension of credit in
connection with the transactions;
(4) Maintain 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;
(5) Receive, deliver and safeguard funds and securities in
connection with the transactions on behalf of the U.S. institutional
investor or U.S. major institutional investor in compliance with
Rule 15c3-3 of the 1934 Act (Customer Protection--Reserves and
Custody of Securities); and
(6) Participate in all oral communications (e.g., telephone
calls) between the foreign associated person and the U.S.
institutional investor (not the U.S. major institutional investor),
and accompany the foreign associated person on all visits with both
U.S. institutional and major institutional investors. By virtue of
this participation, the U.S. registered broker-dealer would become
responsible for the content of all these communications.
9. Since July 31, 1996, GSTC has been providing securities lending
services, as agent, to institutional clients. GSTC, pursuant to
authorization from its client, will negotiate the terms of loans with
borrowers pursuant to a client-approved form of Loan Agreement and will
act as a liaison between the lender (and its custodian) and the
borrower to facilitate the lending transaction. No loans of futures
contracts will be involved. GSTC will have responsibility for
monitoring receipt of all required collateral and marking such
collateral to market daily so that adequate levels of collateral are
maintained. GSTC also will monitor and evaluate on a continuing basis
the performance and creditworthiness of the borrowers. GSTC may act as
a custodian with respect to the client's portfolio of securities being
loaned.15 GSTC may be authorized from time to time by a
client to receive and hold pledged collateral and invest cash
collateral pursuant to guidelines established by the client. All of
GSTC's procedures for lending securities will be designed to comply
with the applicable conditions of PTEs 81-6 and PTE 82-63.16
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\15\ Goldman Sachs wishes to clarify the fact that an
independent fiduciary of a Client Plan may appoint GSTC or an
affiliate of GSTC to manage cash collateral and to receive a
reasonable and customary investment management fee, provided that
the Client Plan fiduciary, after receiving full disclosure, approves
the compensation arrangement, the terms of which will be described
in a written agreement.
\16\ PTE 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
certain broker-dealers or banks which are parties in interest.
PTE 82-63 provides an exemption under specified conditions from
section 406(b)(1) of the Act and section 4975(c)(1)(E) of the Code
for the payment of compensation to a plan fiduciary for services
rendered in connection with loans of plan assets that are
securities.
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10. GSTC may be retained occasionally by primary securities lending
agents to provide securities lending services in a sub-agent capacity
with respect to portfolio securities of clients of such primary lending
agents. As securities lending sub-agent, GSTC's role under the lending
transactions (i.e., negotiating the terms of loans with borrowers
pursuant to a client-approved form of Loan Agreement and monitoring
receipt of, and marking to market, required collateral) parallels those
under lending transactions for which GSTC acts as primary lending agent
on behalf of its clients.17
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\17\ As noted previously, the Department is not providing
exemptive relief herein for securities lending transactions that are
engaged in by primary lending agents, other than GSTC, beyond that
provided by PTEs 81-6 and 82-63.
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11. When a loan is collateralized with cash, the cash will be
invested for the benefit and at the risk of the client, and resulting
earnings (net of a rebate to the borrower) comprise the compensation to
the Plan in respect of such loan. Where collateral consists of
obligations other than cash, the borrower pays a fee (loan premium)
directly to the lending Plan.
12. Accordingly, Goldman Sachs and GSTC request an exemption that
would be effective July 31, 1996 (a) for the lending of securities
owned by certain pension plans for which GSTC will serve as securities
lending agent or sub-agent (referred to hereinafter as the Client
Plans) 18 to Goldman Sachs,
[[Page 8493]]
affiliated U.S. registered broker-dealers of Goldman Sachs, GSI and
Goldman Sachs (Japan), following disclosure of its affiliation with
Goldman Sachs, and (b) for the receipt of compensation by GSTC in
connection with such transactions. For each Plan, neither GSTC, Goldman
Sachs nor any affiliate will have no discretionary authority or control
or render investment advice over Client Plans' decisions concerning the
acquisition or disposition of securities available for loan. GSTC's
discretion will be limited to activities such as negotiating the terms
of the securities loans with Goldman Sachs and (to the extent granted
by the Client Plan fiduciary) investing any cash collateral received in
respect of the loans. Because GSTC, under the proposed arrangement,
would have discretion to lend Client Plan securities to Goldman Sachs,
and because Goldman Sachs is an affiliate of GSTC, the lending of
securities to Goldman Sachs by Client Plans for which GSTC serves as
securities lending agent (or sub-agent) may be outside the scope of
relief provided by PTE 81-6 and PTE 82-63. Further, loans to GSI and
Goldman Sachs (Japan), affiliated foreign broker-dealers of Goldman
Sachs, would be outside of the relief granted in PTE 81-6. Therefore,
several safeguards, described more fully below, are incorporated in the
application in order to ensure the protection of the Plan assets
involved in the transactions. In addition, the applicants represent
that the proposed lending program incorporates the conditions contained
in PTE 81-6 and PTE 82-63 and will be in compliance with all applicable
securities laws of the United States.
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\18\ For the sake of simplicity, future references to GSTC's
performance of services as securities lending agent should be deemed
to include its parallel performance as securities lending sub-agent
and references to Client Plans should be deemed to refer to plans
for which GSTC is acting as sub-agent with respect to securities
lending activities, unless otherwise indicated specifically or by
the context of the reference.
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13. Where GSTC is the direct securities lending agent, a fiduciary
of a Client Plan who is independent of GSTC and Goldman Sachs will sign
a securities lending agency agreement with GSTC (the Agency Agreement)
before the Client Plan participates in a securities lending program.
The Agency Agreement will, among other things, describe the operation
of the lending program, prescribe the form of securities Loan Agreement
to be entered into on behalf of the Client Plan with borrowers, specify
the securities which are available to be lent, required margin and
daily marking-to-market, and provide a list of permissible borrowers,
including Goldman Sachs. The Agency Agreement will also set forth the
basis and rate for GSTC's compensation from the Client Plan for the
performance of securities lending services.
14. The Agency Agreement will contain provisions to the effect that
if Goldman Sachs is designated by the Client Plan as an approved
borrower (a) the Client Plan will acknowledge that Goldman Sachs is an
affiliate of GSTC and (b) GSTC will represent to the Client Plan that
each and every loan made to Goldman Sachs on behalf of the Client Plan
will be at market rates which are no less favorable to the Client Plan
than a loan of such securities, made at the same time and under the
same circumstances, to an unaffiliated borrower.
15. When GSTC is lending securities under a sub-agency arrangement,
the primary lending agent will enter into a securities lending agency
agreement (the Primary Lending Agreement) with a fiduciary of a Client
Plan who is independent of such primary lending agent, GSTC or Goldman
Sachs, before the Plan participates in the securities lending program.
The primary lending agent will be unaffiliated with GSTC or Goldman
Sachs. GSTC will not enter into a sub-agent arrangement unless the
Primary Lending Agreement contains substantive provisions akin to those
in the Agency Agreement relating to the description of the operation of
the lending program, use of an approved form of Loan Agreement,
specification of securities which are available to be lent, required
margin and daily marking-to-market, and provision of a list of approved
borrowers (which will include Goldman Sachs). The Primary Lending
Agreement will specifically authorize the primary lending agent to
appoint sub-agents, to facilitate its performance of securities lending
agency functions. Where GSTC is to act as such a sub-agent, the Primary
Lending Agreement will expressly disclose that GSTC is to so act. The
Primary Lending Agreement will also set forth the basis and rate for
the primary lending agent's compensation from the Client Plan for the
performance of securities lending services and will authorize the
primary lending agent to pay a portion of its fee, as the primary
lending agent determines in its sole discretion, to any sub-agent(s) it
retains pursuant to the authority granted under such agreement.
Pursuant to its authority to appoint sub-agents, the primary
lending agent will enter into a securities lending sub-agency agreement
(the Sub-Agency Agreement) with GSTC under which the primary lending
agent will retain and authorize GSTC, as sub-agent, to lend securities
of the primary lending agent's Client Plans, subject to the same terms
and conditions as are specified in the Primary Lending Agreement. Thus,
for example, the form of Loan Agreement will be the same as that
approved by the Client Plan fiduciary in the Primary Lending Agreement
and the list of permissible borrowers under the Sub-Agency Agreement
(which will include Goldman Sachs) will be limited to those approved
borrowers listed as such under the Primary Lending Agreement.
GSTC states that the Sub-Agency Agreement will contain provisions
which are in substance comparable to those described in Representations
13 and 14 above, which would appear in an Agency Agreement in
situations where GSTC is the primary lending agent. In this regard,
GSTC will make the same representation in the Sub-Agency Agreement as
described in Representation 9 above with respect to arm's length
dealing with Goldman Sachs. The Sub-Agency Agreement will also set
forth the basis and rate for GSTC's compensation to be paid by the
primary lending agent.
16. In all cases, GSTC will maintain transactional and market
records sufficient to assure compliance with its representation that
all loans to Goldman Sachs are effectively at arm's length terms. Such
records will be provided to the appropriate Client Plan fiduciary in
the manner and format agreed to with the lending fiduciary, without
charge to the Client Plan. A Client Plan may terminate the Agency
Agreement (or the Primary Lending Agreement) at any time, without
penalty to the Plan, on five business days notice. In addition, GSTC
shall make and retain for six months, tape recordings evidencing all
securities loan transactions with Goldman Sachs.
17. GSTC will negotiate the Loan Agreement with Goldman Sachs on
behalf of Client Plans as it does with all other borrowers. An
independent fiduciary of the Client Plan will approve the terms of the
Loan Agreement. The Loan Agreement will specify, among other things,
the right of the Client Plan to terminate a loan at any time and the
Plan's rights in the event of any default by Goldman Sachs. The Loan
Agreement will explain the basis for compensation to the Client Plan
for lending securities to Goldman Sachs under each category of
collateral. The Loan Agreement also will contain a requirement that
Goldman Sachs must pay all transfer fees and transfer taxes related to
the security loans.
18. Before entering into the Loan Agreement, Goldman Sachs will
furnish its most recently available audited and unaudited financial
statements to GSTC, and in turn, such statements will be provided to a
Client Plan before the Plan is asked to approve the terms of the
[[Page 8494]]
Loan Agreement. The Loan Agreement will contain a requirement that
Goldman Sachs must give prompt notice at the time of a loan of any
material adverse changes in its financial condition since the date of
the most recently furnished financial statements.19 If any
such changes have taken place, GSTC will not make any further loans to
Goldman Sachs unless an independent fiduciary of the Plan has approved
the loan in view of the changed financial condition. Conversely, if
Goldman Sachs fails to provide notice of such a change in its financial
condition, such failure will trigger an event of default under the Loan
Agreement.
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19 With respect to capital adequacy rules for brokerage firms
domiciled in the United States, including Goldman Sachs, it is
represented that such firms are subject to the capital adequacy
rules of their respective regulatory agencies, i.e., the SEC, the
New York Stock Exchange, the National Association of Securities
Dealers and other self-regulatory authorities. If these brokerage
firms fail to meet such requirements, they are subject to fines,
penalties and possibly more stringent sanctions.
As for GSI and Goldman Sachs (Japan), which are subject to the
capital adequacy provisions of their respective regulatory
authorities, it is represented that such rules require GSI and
Goldman Sachs (Japan) to maintain, at all times, financial resources
in excess of its financial resources requirement (the Financial
Resources Requirement). For this purpose, financial resources
include equity capital, approved subordinated debt and retained
earnings, less deductions for illiquid assets. The Financial
Resources Requirement includes capital requirements for market risk,
credit risk, foreign exchange risk and large exposures. SFA, MOF and
Tokyo Stock Exchange rules require that if a firm's financial
resources fall below 120 percent with respect to the SFA and 150
percent with respect to the MOF and the Tokyo Stock Exchange, of its
Financial Resources Requirement, the SFA, the MOF or the Tokyo Stock
Exchange must be notified so that it can examine the terms of the
firm's financial position and require an infusion of more capital,
if needed. In addition, a breach of the requirement to maintain
financial resources in excess of the Financial Resources Requirement
may lead to sanctions by the SFA, the MOF or the Tokyo Stock
Exchange. If the breach is not promptly resolved, the SFA, the MOF
or the Tokyo Stock Exchange may restrict the firm's activities.
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19. As noted above, the agreement by GSTC to provide securities
lending services, as agent, to a Client Plan will be embodied in the
Agency Agreement. The Client Plan and GSTC will agree to the
arrangement under which GSTC will be compensated for its services as
lending agent, including services as custodian and manager of the cash
collateral received, prior to the commencement of any lending activity.
Such agreed upon fee arrangement will be set forth in the Agency
Agreement and thereby will be subject to the prior written approval of
a fiduciary of the Client Plan who is independent of Goldman Sachs and
GSTC. Similarly, with respect to arrangements under which GSTC is
acting as securities lending sub-agent, the agreed upon fee arrangement
of the primary lending agent will be set forth in the Primary Lending
Agreement, and such agreement will specifically authorize the primary
lending agent to pay a portion of such fee, as the primary lending
agent determines in its sole discretion, to any sub-agent, including
GSTC, which is to provide securities lending services to the
Plan.20 The Client Plan will be provided with any reasonably
available information which is necessary for the Plan fiduciary to make
a determination whether to enter into or continue to participate under
the Agency Agreement (or the Primary Lending Agreement) and any other
reasonably available information which the Plan fiduciary may
reasonably request.
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\20\ The foregoing provisions describe arrangements comparable
to conditions (c) and (d) of PTE 82-63 which require that the
payment of compensation to a ``lending fiduciary'' is made under a
written instrument and is subject to prior written authorization of
an independent ``authorizing fiduciary.'' In the event that a
commingled investment fund will participate in the securities
lending program, the special rule applicable to such funds
concerning the authorization of the compensation arrangement set
forth in condition (f) of PTE 82-63 will be satisfied.
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20. Each time a Plan lends securities to Goldman Sachs pursuant to
the Loan Agreement, GSTC will reflect in its records the material terms
of the loan, including the securities to be loaned, the required level
of collateral, and the fee or rebate payable. The terms of the fee or
rebate payable for each loan will be at least as favorable to the
Client Plan as those of a comparable arm's length transaction between
unrelated parties.
21. The Client Plan will be entitled to the equivalent of all
interest, dividends and distributions on the loaned securities during
the loan period. The Loan Agreement will provide that the Client Plan
may terminate any loan at any time. Upon a termination, Goldman Sachs
will be contractually obligated to return the loaned securities to the
Client Plan within five business days of notification (or such longer
period of time permitted pursuant to a class exemption). If Goldman
Sachs fails to return the securities within the designated time, the
Client Plan will have the right under the Loan Agreement to purchase
securities identical to the borrowed securities and apply the
collateral to payment of the purchase price and any other expenses of
the Plan associated with the sale and/or purchase.
22. GSTC will establish each day a written schedule of lending
fees\21\ and rebate rates \22\ in order to assure uniformity of
treatment among borrowing brokers and to limit the discretion GSTC
would have in negotiating securities loans to Goldman Sachs. Loans to
all borrowers of a given security on that day will be made at rates or
lending fees on the relevant daily schedules or at rates or lending
fees which may be more advantageous to the Client Plans. It is
represented that in no case will loans be made to Goldman Sachs at
rates or lending fees that are less advantageous to the Client Plans
than those on the schedule. The daily schedule of rebate rates will be
based on the current value of the clients' reinvestment vehicles and on
market conditions, as reflected by demand for securities by borrowers
other than Goldman Sachs. As with rebate rates, the daily schedule of
lending fees will also be based on market conditions, as reflected by
demand for securities by borrowers other than Goldman Sachs, and will
generally track the rebate rates with respect to the same security or
class of security.
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\21\ GSTC will adopt minimum daily lending fees for non-cash
collateral payable by Goldman Sachs to GSTC on behalf of a Client
Plan. GSTC will submit the method for determining such minimum daily
lending fees to an independent fiduciary of the Client Plan for
approval before initially lending any securities to Goldman Sachs on
behalf of such Client Plan.
\22\ GSTC will adopt separate maximum daily rebate rates with
respect to securities loans collateralized with cash collateral.
Such rebate rates will be based upon an objective methodology which
takes into account several factors, including potential demand for
loaned securities, the applicable benchmark cost of fund indices,
and anticipated investment return on overnight investments permitted
by the Client Plan's independent fiduciary. GSTC will submit the
method for determining such maximum daily rebate rates to such
fiduciary before initially lending any securities to Goldman Sachs
on behalf of the Client Plan.
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23. The rebate rates (in respect of cash-collateralized loans made
by Client Plans) which are established will also take into account the
potential demand for loaned securities, the applicable benchmark cost
of funds indices (typically, Federal Funds, overnight repo rate or the
like) and anticipated investment return on overnight investments which
are permitted by the relevant Client Plan fiduciary. Further, the
lending fees (in respect of loans made by Client Plans collateralized
by other than cash) which are established will be set daily to reflect
conditions as influenced by potential market demand.
24. GSTC will negotiate rebate rates for cash collateral payable to
each borrower, including Goldman Sachs, on behalf of a Client Plan.
Where, for example, cash collateral derived from an overnight loan is
intended to be invested in a generic repurchase
[[Page 8495]]
agreement, any rebate fee determined with respect to an overnight
repurchase agreement benchmark will be set below the applicable ``ask''
quotation therefor. Where cash collateral is derived from a loan with
an expected maturity date (term loan) and is intended to be invested in
instruments with similar maturities, the maximum rebate fee will be
less than the expected investment return (assuming no investment
default). With respect to any loan to Goldman Sachs, GSTC will never
negotiate a rebate rate with respect to such loan which would be
expected to produce a zero or negative return to the Client Plan
(assuming no default on the investments related to the cash collateral
from such loan where GSTC has investment discretion over the cash
collateral). GSTC represents that the written rebate rate established
daily for cash collateral under loans negotiated with Goldman Sachs
will not exceed the rebate rate which would be paid to a similarly
situated unrelated borrower with respect to a comparable securities
lending transaction. GSTC will disclose the method for determining the
maximum daily rebate rate as described above to an independent
fiduciary of a Client Plan for approval before lending any securities
to Goldman Sachs on behalf of the Plan.
25. For collateral other than cash, the applicable loan fee in
respect of any outstanding loan is reviewed daily for competitiveness
and adjusted, where necessary, to reflect market terms and conditions
(see Representation 27). With respect to any calendar quarter, at least
50 percent or more of the outstanding dollar value of securities loans
negotiated on behalf of Client Plans will be to unrelated borrowers so
the competitiveness of the loan fee will be tested in the marketplace.
Accordingly, loans to Goldman Sachs should result in competitive rate
income to the lending Client Plan. At all times, GSTC will effect loans
in a prudent and diversified manner. While GSTC will normally lend
securities to requesting borrowers on a ``first come, first served''
basis, as a means of assuring uniformity of treatment among borrowers,
it should be recognized that in some cases it may not be possible to
adhere to a ``first come, first served'' allocation. This can occur,
for instance where (a) the credit limit established for such borrower
by GSTC and/or the Client Plan has already been satisfied; (b) the
``first in line'' borrower is not approved as a borrower by the
particular Client Plan whose securities are sought to be borrowed; and
(c) the ``first in line'' borrower cannot be ascertained, as an
operational matter, because several borrowers spoke to different GSTC
representatives at or about the same time with respect to the same
security.\23\ In situations (a) and (b), loans would normally be
effected with the ``second in line.'' In situation (c), securities
would be allocated equitably among all eligible borrowers.
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\23\ It is represented that the ``first come, first served''
allocation would not apply where GSTC is not acting as a securities
lending agent, but rather is acting as, for example, a custodian to
a Client Plan that has entered into an exclusive arrangement with
the borrower. See PTE 92-78 (57 FR 45837, October 5, 1992) issued to
Goldman Sachs and GSTC. In that circumstance, Goldman Sachs as
borrower is choosing from whom to borrow and GSTC has no right or
obligation to lend Goldman Sachs the securities from other clients
or lend the securities subject to such exclusive arrangement to
other borrowers.
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26. The method of determining the daily securities lending rates
(fees and rebates), the minimum lending fees payable by Goldman Sachs
and the maximum rebate payable to Goldman Sachs will be specified in an
exhibit attached to the Agency Agreement to be executed between the
independent fiduciary of the Client Plan and GSTC in cases where GSTC
is the direct securities lending agent.
27. If GSTC reduces the lending fee or increases the rebate rate on
any outstanding loan to an affiliated borrower (except for any change
resulting from a change in the value of any third party independent
index with respect to which the fee or rebate is calculated), GSTC, by
the close of business on the date of such adjustment, will provide the
independent fiduciary of the Client Plan with notice that it has
reduced such fee or increased the rebate rate to such affiliated
borrower and that the Client Plan may terminate such loan at any time.
In addition, GSTC will provide the independent fiduciary of the Client
Plan with such information as the fiduciary may reasonably request
regarding such adjustment.
28. Under the Loan Agreement, Goldman Sachs, as borrower, will
agree to indemnify and hold harmless the applicable Client Plan
(including the sponsor and fiduciaries of such Client Plan) from any
and all reasonably foreseeable damages, losses, liabilities, costs and
expenses (including attorney's fees) which the Client Plan may incur or
suffer arising in any way from the use by Goldman Sachs of the loaned
securities or any failure of Goldman Sachs to deliver loaned securities
in accordance with the provisions of the Loan Agreement or to otherwise
comply with the terms of the Loan Agreement except to the extent that
such losses or damages are caused by the Client Plan's negligence.
Under certain circumstances, GSTC, as lending agent, also may provide
customary indemnities to lending Plans respecting loans made by it as
the securities lending agent or, alternatively, procure such an
indemnity from another Goldman Sachs affiliate. Further, under certain
circumstances, a Goldman Sachs affiliate may guarantee the obligations
of GSTC.
In the event GSI or Goldman Sachs (Japan) defaults on a loan, GSTC
will liquidate the loan collateral to purchase identical securities for
the Client Plan. If the collateral is insufficient to accomplish such
purchase, GSTC will indemnify the Client Plan for any shortfall in the
collateral plus interest on such amount and any transaction costs
incurred. Alternatively, if such identical securities are not available
on the market, GSTC will pay the Client Plan cash equal to the market
value \24\ of the borrowed securities as of the date they should have
been returned to the Client Plan plus all interest and accrued
financial benefits derived from the beneficial ownership of such loaned
securities. Under such circumstances, GSTC will pay the Client Plan an
amount equal to (a) the value of the securities as of the date such
securities should have been returned to the Client Plan plus (b) all of
the accrued financial benefits derived from the beneficial ownership of
such loan securities as of such date, plus (c) interest from such date
through the date of payment.
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\24\ For purposes of this proposed exemption, the ``market
value'' of securities, as of any date, shall be determined on the
basis of the closing prices therefor as of the trading date (for the
principal market in which the securities are traded) immediately
preceding the day of valuation, such determination to be made by the
independent pricing source identified to Goldman Sachs by the Client
Plan upon the request of Goldman Sachs. Market value shall include
accrued interest in the case of debt securities.
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29. The Client Plan will receive collateral from Goldman Sachs by
physical delivery, book entry in a U.S. securities depository, wire
transfer or similar means by the close of business on or before the day
the loaned securities are delivered to Goldman Sachs. The collateral
will consist of cash, securities issued or guaranteed by the U.S.
Government or its agencies or irrevocable U.S. bank letters of credit
(issued by a person other than Goldman Sachs or its affiliates) or such
other types of collateral which might be permitted by the Department
under a class exemption. The market value of the collateral on the
close of business on the day preceding the day of the loan will be at
least 102 percent of the market value of the loaned securities. The
Loan Agreement will give the Client Plan a
[[Page 8496]]
continuing security interest in and a lien on the collateral. GSTC will
monitor the level of the collateral daily. If the market value of the
collateral falls below 100 percent (or such greater percentage as
agreed to by the parties) of that of the loaned securities, GSTC will
require Goldman Sachs to deliver by the close of business the next day
sufficient additional collateral to bring the level back to at least
102 percent.
30. With respect to loans involving GSI and Goldman Sachs (Japan),
the following additional conditions will be applicable: (a) all
collateral will be maintained in United States dollars or dollar-
denominated securities or letters of credit; (b) all collateral is held
in the United States and GSTC maintains the situs of the securities
loan agreements in the United States under an arrangement that complies
with the indicia of ownership requirements under section 404(b) of the
Act and the regulations promulgated under 29 CFR 2550.404(b)-1; and (c)
GSI or Goldman Sachs (Japan) provides Goldman Sachs a written consent
to service of process in the United States for any civil action or
proceeding brought in respect of the securities lending transaction,
which consent provides that process may be served on such borrower by
service on Goldman Sachs.
31. Each Client Plan participating in the lending program will be
sent a monthly transaction report. The monthly report will provide a
list of all security loans outstanding and closed for a specified
period. The report will identify for each open loan position, the
securities involved, the value of the security for collateralization
purposes, the current value of the collateral, the rebate or loan
premium (as the case may be) at which the security is loaned, and the
number of days the security has been on loan. In addition, if requested
by the lending customer, GSTC will provide daily confirmations of
securities lending transactions, and, with respect to monthly reports,
if requested by the customer, GSTC will provide weekly or daily
reports, setting forth for each transaction made or outstanding during
the relevant reporting period, the loaned securities, the related
collateral, rebates and loan premiums and such other information in
such format as shall be agreed to by the parties. Further, prior to a
Client Plan's approval of a securities lending program, Goldman Sachs
will provide a Plan fiduciary with copies of the proposed exemption and
notice granting the exemption.
32. In order to provide the means for monitoring lending activity,
the monthly report will compare rates on loans by the Client Plans to
Goldman Sachs with loans to other brokers as well as the level of
collateral on the loans. In this regard, the monthly report will show,
on a daily basis, the market value of all outstanding security loans to
Goldman Sachs and to other borrowers. In addition, the monthly report
will state the daily fees where collateral other than cash is utilized
and will specify the details used to establish the daily rebate payable
to all brokers where cash is used as collateral. The monthly report
also will state, on a daily basis, the rates at which securities are
loaned to Goldman Sachs compared with those at which securities are
loaned to other brokers. This statement will give an independent
fiduciary information which can be compared to that contained in the
daily rate schedule.
33. Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to
Goldman Sachs. In the case of two or more Client Plans which are
maintained by the same employer, controlled group of corporations or
employee organization (i.e., the Related Client Plans), whose assets
are commingled for investment purposes in a single master trust or any
other entity the assets of which are ``plan assets'' under the Plan
Asset Regulation), which entity is engaged in securities lending
arrangements with Goldman Sachs, the foregoing $50 million requirement
will be satisfied if such trust or other entity has aggregate assets
which are in excess of $50 million. However, if the fiduciary
responsible for making the investment decision on behalf of such master
trust or other entity is not the employer or an affiliate of the
employer, such fiduciary must have total assets under its management
and control, exclusive of the $50 million threshold amount attributable
to plan investment in the commingled entity, which are in excess of
$100 million.
In the case of two or more Client Plans which are not maintained by
the same employer, controlled group of corporations or employee
organization (i.e., the Unrelated Client Plans), whose assets are
commingled for investment purposes in a group trust or any other form
of entity the assets of which are ``plan assets'' under the Plan Asset
Regulation, which entity is engaged in securities lending arrangements
with Goldman Sachs, the foregoing $50 million requirement will be
satisfied if such trust or other entity has aggregate assets which are
in excess of $50 million. However, the fiduciary responsible for making
the investment decision on behalf of such group trust or other entity
(a) Must not be the sponsoring employer, a member of the controlled
group of corporations, the employee organization or an affiliate; (b)
must have full investment responsibility with respect to plan assets
invested therein;25 and (c) must have total assets under its
management and control, exclusive of the $50 million threshold amount
attributable to plan investment in the commingled entity, which are in
excess of $100 million.
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\25\ For purposes of this proposed exemption, the term ``full
investment responsibility'' means that the fiduciary responsible for
making investment decisions on behalf of the group trust or other
form of entity, has and exercises discretionary management authority
over all of the assets of the group trust or other plan assets
entity.
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In addition, none of the entities described above must be formed
for the sole purpose of making loans of securities.
34. In summary, the applicants represent that the described
transactions have satisfied or will satisfy the statutory criteria for
an exemption under section 408(a) of the Act because:
(a) The form of the Loan Agreement pursuant to which any loan is
effected has been or will be approved by a fiduciary of the Client Plan
who is independent of Goldman Sachs and GSTC before a Client Plan lends
any securities to Goldman Sachs.
(b) The lending arrangements (1) have permitted or will permit the
Client Plans to lend to Goldman Sachs, (2) have enabled or will enable
the Plans to diversify the list of eligible borrowers and earn
additional income from the loaned securities on a secured basis, while
continuing to receive any dividends, interest payments and other
distributions due on those securities.
(c) The Client Plan have received or will receive sufficient
information concerning Goldman Sachs's financial condition before the
Plan lends any securities to Goldman Sachs.
(d) The collateral on each loan to Goldman Sachs initially has been
and will be at least 102 percent of the market value of the loaned
securities, which is in excess of the 100 percent collateral required
under PTE 81-6, and has been and will be monitored daily by GSTC.
(e) The Client Plans have received and will receive a monthly
report which provides an independent fiduciary of the Client Plans with
information on loan activity, fees, loan return/yield and the rates on
loans to Goldman Sachs as compared with loans to other brokers and the
level of collateral on the loans.
(f) GSTC, Goldman Sachs nor any affiliate has or will have
discretionary authority or control over the Plan's acquisition or
disposition of securities available for loan.
[[Page 8497]]
(g) The terms of the fee or rebate payable for each loan has been
and will be at least as favorable to the Plans as those of a comparable
arm's length transaction between unrelated parties.
(h) All of the procedures under the transactions have conformed or
will conform to the applicable provisions of PTE 81-6 and PTE 82-63 and
also have been and will be in compliance with the applicable securities
laws of the United States, the United Kingdom and Japan.
Notice To Interested Persons
Notice of the proposed exemption will be provided to interested
persons within 5 days of the publication of the notice of proposed
exemption in the Federal Register. Such notice will be given to Plans
that have outstanding securities loans with Goldman Sachs. The notice
will include a copy of the notice of proposed exemption as published in
the Federal Register and a supplemental statement, as required pursuant
to 29 CFR 2570.43(b)(2). The supplemental statement will inform
interested persons of their right to comment on and/or to request a
hearing with respect to the proposed exemption. Written comments and
hearing requests are due within 35 days of the publication of the
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 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 11th day of February, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration U.S. Department of Labor.
[FR Doc. 98-3987 Filed 2-18-98; 8:45 am]
BILLING CODE 4510-29-P