[Federal Register Volume 63, Number 61 (Tuesday, March 31, 1998)]
[Notices]
[Pages 15443-15464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8197]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. L-09583, et al.]
Proposed Exemptions; U S West, Inc.
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, on or before May 15, 1998.
Comments and requests for a hearing should state: (1) The name,
address, and telephone number of the person making the comment or
request, and (2) the nature of the person's interest in the exemption
and the manner in which the person would be adversely affected by the
exemption. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. ________, stated in each Notice of
Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
U S WEST, Inc. Located in Englewood, Colorado
[Application No. L-09583]
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).
Section I--Transactions Involving Contributions In-Kind
If the exemption is granted, effective March 31, 1994, the
restrictions of sections 406(a)(1)(E), 407(a)(2), 406(b)(1), and
406(b)(2) of the Act shall not apply to voluntary contributions in-kind
by U S WEST, Inc. and/or its affiliates (U S WEST) of certain shares of
publicly traded common stock of U S WEST (the Stock) and/or any
replacement publicly traded shares of such Stock to certain trusts (the
Trusts or Trust) for the purpose of pre-funding post-retirement welfare
benefits under one or more employee welfare benefit plans (the Plan or
Plans) maintained by U S WEST, provided that:
(a) the Plan provisions explicitly authorize U S WEST to pre-fund
benefits through in-kind contributions of Stock, and all contributions
of Stock have been and will be made in conformity with such Plan
provisions;
(b) neither the Plans nor the Trusts have paid nor will pay,
whether in cash or in other property or in a diminution
[[Page 15444]]
of any funding obligation of U S WEST, any consideration for Stock
contributed in-kind by U S WEST;
(c) U S WEST has no obligation to pre-fund welfare benefits
provided to participants under any of the Plans, either pursuant to the
plan documents, the terms of any collective bargaining agreement, or
the provisions of the Act;
(d) none of the Plans have ceded, nor will cede, any right to
receive cash contributions from U S WEST;
(e) none of the Plans or Trusts have paid, nor will pay, any
commissions in connection with the contribution in-kind of Stock by U S
WEST; and
(f) each of the conditions, as set forth below in Section III, have
been satisfied and at all times will be satisfied.
Section II--Transactions Involving Purchases of Stock in Connection
With Rebalancing of a Trust's Holding of Stock
If the exemption is granted, the restrictions of sections
406(a)(1)(E), 407(a)(2), 406(b)(1), and 406(b)(2) of the Act shall not
apply to purchases of classes of Stock by any of the Trusts with all or
part of (but no more than) the cash proceeds from prior sales of such
Stock; provided that:
(a) all such purchases of Stock will occur in connection with
rebalancing of a Trust's holding of Stock as part of the active
management of such Stock by an independent, qualified fiduciary
(the I/F);
(b) all sales and subsequent purchases of Stock in connection with
rebalancing of a Trust's holding of Stock will occur in ``blind''
transactions with unrelated third parties on the open market at the
fair market value of such Stock on the date of such transactions, or
where appropriate to minimize any adverse market impact on the value of
the Stock remaining in such Trust, in private transactions with persons
who are not ``parties in interest,'' as defined in section 3(14) of the
Act, at the fair market value of such Stock on the date of such
transactions; and
(c) each of the conditions, as set forth in Section III, below, at
all times will be satisfied.
Section III--Conditions
The exemption is conditioned upon the adherence by U S WEST to the
material facts and representations described in this notice of proposed
exemption (the Notice) and upon satisfaction of the following
requirements:
(a) all Stock contributed in-kind by U S WEST to any of the Trusts
or acquired by such Trusts, as a result of the recapitalization of U S
WEST constituted qualifying employer securities (QES), as defined in
section 407(d)(5) of the Act; and all Stock contributed in-kind in the
future, any replacement publicly traded shares of such Stock, or any
Stock acquired as a result of purchases in connection with rebalancing
of a Trust's holding of Stock will constitute QES;
(b) stock contributed in-kind by U S WEST or acquired, as a result
of the recapitalization of U S WEST have been held in Trusts, which are
qualified under section 501(c)(9) of the Code, and which are
established for the purpose of funding life, sickness, accident, and
other welfare benefits for the participants and beneficiaries of the
Plans, and all stock contributed in-kind in the future, any replacement
publicly traded shares of such Stock, or any Stock acquired as a result
of purchases in connection with rebalancing will be held in such
Trusts;
(c) all Stock contributed in-kind by U S WEST to any Trust or
acquired by any Trust as a result of the recapitalization of U S WEST
has been held in a separate account (the Account or Accounts) under
such Trust, and all Stock contributed in-kind in the future, any
replacement publicly traded shares of such Stock, or any Stock acquired
as a result of purchases in connection with rebalancing of the holding
of Stock by a Trust will be held in an Account under such Trust. Such
Accounts under a Trust have been and will be managed by an I/F, who is
an independent, qualified investment manager, or any successor
independent, qualified investment manager, and who has represented and
will represent the interests of the Plans which are funded by such
Trusts for all purposes with respect to the Stock for the duration of
the Trust's holding of any of such Stock;
(d) the I/F of the Accounts in the Trusts which fund any welfare
plan benefits, has accepted Stock from U S WEST through in-kind
contributions and recapitalization of U S WEST, and will accept Stock
through future in-kind contributions, through any replacement publicly
traded shares of such Stock, or through purchases of Stock in
connection with rebalancing of a Trust's holding of Stock, only after
such I/F determines at the time of the transactions that such
transactions are feasible, in the interest of, and protective of
participants and beneficiaries of the Plans funded by such Trusts;
(e) the I/F has had sole responsibility and, at all times will have
sole responsibility for the ongoing management of the Accounts under
the Trusts which hold the Stock and has taken and will take whatever
action is necessary to protect the rights of the Plans funded by such
Trusts, including but not limited to all decisions regarding the
acceptance of contributions in-kind by U S WEST, the sale or retention
of such Stock, the exercise of voting rights of such Stock, any
purchases of such Stock in connection with rebalancing of a Trust's
holding of Stock, and any other acquisition or dispositions of such
Stock;
(f) any contributions in-kind of Stock made by U S WEST to any
Trust, any acquisitions of Stock in connection with the
recapitalization of U S WEST, did not cause immediately after each such
transaction, and in the future any contributions in-kind of Stock, any
replacement publicly traded shares of such Stock, or any Stock
purchases in connection with rebalancing of a Trust's holding of Stock
will not cause immediately after each such transaction the aggregate
fair market value of such Stock, plus the fair market value of all
qualifying employer real property (QERP), as defined by section
407(d)(4) of the Act, and the fair market value of all other QES held
by such Trust to exceed 25 percent (25%) of the fair market value of
the assets of such Trust as determined on the date of each such
transaction;
(g) the percentage limitations, as set forth above in paragraph (f)
of this Section III, have been and will be applied without regard to
amounts of securities issued by U S WEST that may be held by an
unrelated common or collective trust fund maintained by an independent
manager in which any of the Plans through the Trusts may have invested
or may invest, provided that the fair market value of the securities
issued by U S WEST and held in such unrelated common or collective
trust fund does not exceed 5 percent (5%) of the fair market value of
each such common or collective trust fund; and provided further that
the conditions of Prohibited Transaction Class Exemption 91-38 (PTCE
91-38) 1 are satisfied, including the requirement that the
interests of the Plans in such unrelated common or collective trust
fund does not exceed 10 percent (10%) of the total of all assets in
such common or collective trust fund;
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\1\ The Notice of Proposed Exemption for exemption application
number D-8414 was published at 56 FR 4856 on February 6, 1991. PTCE
91-38 was granted at 56 FR 31966 on July 12, 1991.
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(h) nothing in the conditions, as set forth above in paragraph (f)
of this Section III, shall preclude, the holding by any Trust of Stock,
any other QES
[[Page 15445]]
and QERP, in amounts in excess of 25 percent (25%) of the assets of
such Trust, if the aggregate fair market value of such Stock, other QES
and QERP exceeds 25 percent (25%) of the value of the assets of such
Trust solely by reason of:
(1) a greater rate of appreciation to the value of such Stock,
other QES and QERP relative to the rate of appreciation to the value of
the assets in such Trust, other than the Stock, other QES and QERP; or
(2) a greater decline in the value of the other assets of the Trust
relative to that of such Stock, other QES and QERP;
(i) none of the assets of any of the Trusts have reverted, nor at
any time will any of the assets of such Trusts revert to the use or
benefit of U S WEST.
Summary of Facts and Representations
1. U S WEST is a diversified, global telecommunications company
with offices located in Englewood Colorado. As of December 31, 1995, it
is represented that U S WEST had assets of approximately $25.2 billion,
and annual revenues of nearly $10.7 billion. The domestic and
international business activities of U S WEST are focused primarily in
communications, data solutions, marketing services, and financial
services. In this regard, a subsidiary of U S WEST provides
communications and data services to more than twenty-five million
residential and business customers in fourteen (14) western and mid-
western states. Other subsidiaries are engaged in marketing activities,
directory publishing, direct-mail listings, cellular mobile
communications, paging, cable television, and financial services.
2. It is represented that the proposed exemption would affect a
number of employee benefit plans sponsored by U S WEST providing
current and post-retirement welfare benefits, including life insurance
and health insurance, to employees and retirees of U S WEST.
2 It is represented that the manner in which welfare
benefits are provided to U S WEST's current and former employees is
subject to periodic restructuring. Thus, the particular Plans affected
by this exemption may be amended or terminated from time to time and
new Plans may be added. Although U S WEST has reserved the right to
amend, modify, or terminate any of the Plans, U S WEST has represented
that it intends to provide benefits to employees and retirees under the
Plans indefinitely.
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\2\ As of November 15, 1993, the list of the Plans sponsored by
U S West included: (a) U S WEST Group Life Insurance Plan; (b) U S
WEST Retiree Health Care Medical Plan 1; (c) U S WEST Disability
Benefit Plan; (d) U S WEST Retiree Health Care Medical Plan 2; (e) U
S WEST Retiree Health Care Medical Plan 3; (f) U S WEST Retiree
Health Care Medical Plan; (g) U S WEST Retiree Health Care Dental
Plan 1; (h) U S WEST Retiree Health Care Dental Plan 2; (i) U S WEST
Retiree Health Care Dental Plan 3; (j) U S WEST Retiree Health Care
Dental Plan 4; (k) U S WEST Retiree Health Care Dental Plan 5; (l) U
S WEST Business Travel Accident Plan No. 532; (m) U S WEST Business
Travel Accident Plan No. 533; (n) U S WEST Health Care Plan; (o) U S
WEST Enterprises, Inc, Sickness and Accident Disability Benefit Plan
for Non-Salaried Employees. It is represented that the health plans
sponsored by U S WEST were merged in December 1993, into a single
plan, the U S WEST Health Care Plan, Plan Number 537 (the Health
Plan).
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It is represented that U S WEST serves as the plan administrator
for each of the Plans. In this regard, the Board of Directors of U S
WEST has delegated the administrative responsibilities of U S WEST to
the U S WEST Employees' Benefit Committee, which has authority to
establish and administer the Plans.
None of the Plans or applicable collective bargaining agreements
require U S WEST to pre-fund the benefits provided by the Plans, nor
does the Act require that the Plans be funded. However, effective on
January 1, 1994, amendments to the Plans authorized U S WEST to pre-
fund benefits with contributions, including contributions of QES, to
one or more trusts that may be established by U S WEST for the benefit
of the Plans. In this regard, U S WEST established the following Trusts
to pre-fund a portion of the welfare benefits under the Plans: (1) the
U S WEST Benefit Assurance Trust (the Assurance Trust); (2) U S WEST
Management Benefit Assurance Trust (the Management Trust); and (3) U S
WEST Life Insurance and Welfare Trust (the Life Insurance Trust).
It is represented that these three Trusts are voluntary employees'
beneficiary associations which are tax-qualified under section
501(c)(9) of the Code. The trust agreement for each of these Trusts
provides that such Trust will be administered by U S WEST. U S WEST
also has sole responsibility for the investment or reinvestment of the
assets of the Trusts, and authority to appoint one or more investment
managers to manage any part of the assets of each of the Trusts. The
Board of Directors of U S WEST has appointed a Trust Investment
Committee to exercise general oversight of the Trusts.
It is represented that no assets of any of the Trusts may be used
except for the exclusive purpose of providing life, sickness, accident,
and other covered benefits to U S WEST employees, retirees, and their
dependents and beneficiaries and for reasonable expenses. It is
represented that the trust agreements for all of these Trusts
specifically prohibit U S WEST from obtaining any reversion of the
assets of the Trusts.
As of December 31, 1992, the Assurance Trust has funded post-
retirement medical and dental benefits for approximately 62,300
employees and retirees of U S WEST covered by collective bargaining
agreements under various Plans providing medical and dental benefits to
employees and retirees of U S WEST. As of the same date, the Management
Trust has funded post-retirement medical and dental benefits to
approximately 37,700 employees and retirees of U S WEST not covered by
collective bargaining agreements under various medical and dental
benefits plans for all employees and retirees of U S WEST. As of
November 15, 1993, the Life Insurance Trust has funded life insurance
benefits for approximately 100,000 current and former employees of U S
WEST. It was further represented that the total number of participants
covered by these three Trusts, as of December 12, 1996, had not changed
materially since the application for exemption was filed.
As of November 30, 1996, the Assurance Trust and the Management
Trust, respectively, held assets with a fair market value of
approximately $1.4 billion and $200 million. As of November 30, 1996,
the Life Insurance Trust held total assets with a fair market value of
approximately $529 million. It is represented that none of the assets
of any of these Trusts are invested in any leases or loans to U S WEST.
However, a small percentage of the assets of each of these Trusts is
invested either directly or through certain index funds in securities
of U S WEST which are represented to constitute QES. U S WEST maintains
that the acquisition and holding of such securities by these Trusts is
permitted by section 407(a) of the Act and the statutory exemption
provided under section 408(e) of the Act.3
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\3\ The Department expresses no opinion as to whether the
securities of U S WEST held by these three Trusts are qualifying
employer securities, as defined by section 407(d)(5) of the Act,
whether the acquisition or holding of such securities was permitted
by 407(a), or whether acquisition or holding was covered by the
statutory exemption provided by section 408(e) of the Act. Further,
the Department, herein, is offering no relief for transactions other
than those proposed.
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3. It is represented that the competitive environment in the
telecommunications industry has reduced the cash available to U S WEST
for discretionary expenditures. Accordingly, U S WEST does not
anticipate at any time in the foreseeable
[[Page 15446]]
future pre-funding welfare benefits by making substantial cash
contributions to its Plans. Instead, U S WEST has made in the past and
proposes in the future to make in-kind contributions to the Trusts of
shares of stock issued by U S WEST. U S WEST believes that such in-kind
contributions offer a practical means of pre-funding the welfare
benefits under the Plans.
4. It is represented that on March 31, 1994, U S WEST contributed
in-kind approximately 4.6 million shares of the Stock to the Assurance
Trust that funds part of the benefits provided under the Health Plan.
It is represented that, as of the date of the contribution, such shares
have been held in an Account under the Assurance Trust. It is
represented that at the time of the in-kind contribution the Stock was
valued on a per share basis at $39.875 and that the aggregate fair
market value for such shares totaled $183,425,000. It is further
represented that immediately after such in-kind contribution the
aggregate fair market value of such shares constituted 23.71% of the
assets of the Health Plan.4
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\4\ The applicant has represented that the assets of the
Assurance Trust have been reported as assets of the Health Plan and
that such assets have been held solely for the purpose of pre-
funding post-retirement health benefits under the Health Plan. For
this reason, the representation that the fair market value of the
Stock contributed in-kind by U S WEST did not comprise more than 25
percent (25%) of the assets of the Health Plan immediately following
each contribution is essentially correct. However, in light of the
fact that the assets of the Assurance Trust could be used to fund
benefits for any welfare plan established by U S WEST under a
collective bargaining agreement, the Department has determined for
the purpose of this exemption to apply the 25 percent limitation on
the trust level, rather than to a particular welfare plan.
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Subsequently, on or before March 31, 1995, U S WEST made a second
contribution in-kind (the Second Contribution) to the Assurance Trust
of approximately 1.5 million shares of the Stock. It is represented
that at the time of the Second Contribution the Stock was valued on a
per share basis at $40.50 and that the aggregate fair market value of
the shares contributed totaled $60,750,000. It is further represented
that both contributions in-kind by U S WEST totaled 6.1 million shares
with an aggregate value of $244,175,000. It is represented that these
shares also have been in an Account under the Assurance Trust. It is
further represented that, immediately following the Second Contribution
in-kind, no more than 22.8 percent (22.8%) of the aggregate fair market
value of the assets of the Assurance Trust were invested in employer
securities of any kind. It is further represented that other than the
two in-kind contributions to the Assurance Trust described above, U S
WEST has made no additional contributions of Stock or other non-cash
assets to the Assurance Trust or to any other trust. As of November 30,
1996, it is represented that the Stock comprised approximately 19.5
percent (19.5%) of the total assets of the Assurance Trust. It is
further represented that, as of March 9, 1998, the Assurance Trust no
longer holds any of the Stock contributed by U S WEST.
The Stock, at the time of each in-kind contribution and at all
times thereafter, has been widely held and publicly traded on the New
York Stock Exchange (NYSE) and on other major exchanges throughout the
world. It is further represented that such Stock, at the time of each
in-kind contribution and at all times thereafter, has been an
``employer security,'' as defined by section 407(d)(1) of the
Act,5 which has satisfied each of the requirements for a
``qualifying employer security,'' as defined by section 407(d)(5) of
the Act,6 and also has satisfied the requirements of section
407(f)(1) of the Act.7 It is represented that approximately
89 percent (89%) of such Stock has been and is held by persons who are
independent of U S WEST.
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\5\ Pursuant to section 407(d)(1) of the Act, an employer
security means a security issued by an employer of employees covered
by the plan, or by an affiliate of such employer.
\6\ Section 407(d)(5) of the Act provides that the term
qualifying employer security means an employer security which is
stock or a marketable obligation (as defined in subsection (e)).
After December 17, 1987, in the case of a plan other than an
eligible individual account plan, stock shall be considered a
qualifying employer security only if such stock satisfies the
requirements of subsection 407(f)(1).
\7\ Pursuant to section 407(f)(1) of the Act, stock satisfies
such requirements if, immediately following the acquisition of such
stock--(A) no more than 25 percent of the aggregate amount of stock
of the same class issued and outstanding at the time of acquisition
is held by the plan, and (B) at least 50 percent of the aggregate
amount referred to in subparagraph (A) is held by persons
independent of the issuer.
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5. Subsequent to the in-kind contributions made by U S WEST in
March of 1994 and 1995, U S WEST shareholders voted on October 31,
1995, in favor of a proposal to create two classes of U S WEST
securities. Accordingly, effective November 1, 1995, each share of
Stock that had been contributed to the Assurance Trust was replaced
with two shares which are targeted to specific areas of U S WEST's
business (the Targeted Shares). The Targeted Shares are designated: (1)
``C'' shares (NYSE symbol USW); and (2) ``M'' shares (NYSE symbol UMG).
Specifically, the ``C'' shares represent an interest in U S WEST
Communications Group and reflect the business of U S WEST, primarily in
its present 14-state region, involving integrated communications,
entertainment, information, and transaction services. The ``M'' shares
represent an interest in U S WEST Media Group and reflect U S WEST
businesses involving cable, wireless, directory, interactive, and
international services. The ``M'' shares are not expected to pay
dividends, but are anticipated to be growth securities that will be
attractive to investors seeking capital appreciation.
6. As described above, U S WEST on two occasions in the past has
made voluntary contributions in-kind of Stock to the Assurance Trust
the value of which did not exceed 25 percent (25%) of the assets of the
Assurance Trust at the time of such contributions. Subsequently,
pursuant to the recapitalization of U S WEST, the Assurance Trust
acquired ``C'' shares and the ``M'' shares in exchange for Stock
previously contributed in-kind by U S WEST. Further, subject to the
conditions set forth in this exemption, U S WEST anticipates in the
future making additional in-kind contributions to any of the Trusts of
Stock which will be held in Accounts under such Trusts.
With regard to any past and future in-kind contribution of Stock by
U S WEST to the Trusts, it is represented that the I/F has and will be
responsible for actively managing of any such Stock. In this regard, it
is anticipated that from time to time a Trust may wish to rebalance its
holding of Stock. Such ``rebalancing,'' would entail a Trust selling
all or a portion of the ``C'' shares and/or the ``M'' shares in its
portfolio to unrelated third parties in ``blind'' transactions on the
open market at the fair market value of such Stock on the date of such
sale. In the alternative, where appropriate to minimize any adverse
market impact on the value of the Stock remaining in a Trust, such
Trust may sell such Stock in private transactions with persons who are
not ``parties in interest'' at the fair market value of such Stock on
the date of such transactions. Thereafter, an I/F with all or part of
(but no more than) the cash proceeds from such prior sales of Stock,
may purchase ``C'' shares and/or ``M'' shares at fair market value in
subsequent ``blind'' transactions on the open market or in subsequent
private transactions with persons who are not ``parties in interest''
at the fair market value of such Stock on the date of such
transactions.
In the opinion of U S WEST each of the two prior in-kind
contribution of Stock to the Assurance Trust may have resulted or any
future contribution in-kind of Stock to any of the Trusts may result in
an acquisition of QES where
[[Page 15447]]
immediately after such acquisition, the aggregate fair market value of
the Stock, any other QES or QERP held by such Trust, exceeds 10 percent
(10%) of the fair market value of the assets of such Trust. In order
for U S WEST and the I/F to engage in contributions in-kind of Stock to
the extent that such transactions have caused or will cause an
acquisition of QES in the form of Stock the value of which exceeds the
10 percent (10%) limitation, as set forth under section 407(a)(2) of
the Act, U S WEST has requested exemptive relief from the provisions of
section 406(a)(1)(E) and 407(a)(2) of the Act. Because immediately
after the first in-kind contribution of Stock to the Assurance Trust on
March 31, 1994, the fair market value of such Stock constituted more
than 10 percent (10%) of the assets of the Assurance Trust, U S WEST
has requested retroactive exemptive relief, effective as of March 31,
1994. In addition, to the extent the 10 percent (10%) limit was
exceeded as a result of: (1) The recapitalization of U S WEST; and/or
(2) the Second Contribution of Stock to the Assurance Trust, U S WEST
has also requested relief. Further, to the extent the 10 percent (10%)
limit will be exceeded, U S WEST has requested relief: (1) for any
future contributions of Stock to any Trust, any replacement publicly
traded shares; and (2) for any purchases of Stock in connection with
rebalancing of such Trust's holding of ``C'' shares and ``M'' shares.
In addition, in the opinion of U S WEST the contributions of QES in
the form of Stock to any of the Trusts may be prohibited by section
406(b). Specifically, U S WEST, as the sponsoring employer of Plans, is
a fiduciary to such Plans, pursuant to section 3(21) of the Act.
Section 406(b)(1) of the Act prohibits a plan fiduciary from dealing
with the assets of a plan in his own interest or for his own account.
Section 406(b)(2) of the Act prohibits a plan fiduciary from acting in
a transaction involving a plan on behalf of a party whose interests may
be adverse to the interests of such plan, including such plan
fiduciary's own interests. Thus, in the view of U S WEST, any
transaction between it and any of the Plans may be deemed to involve
self-dealing or a conflict of interest prohibited by section 406(b)(1)
and 406(b)(2) for which relief has been requested.
7. With regard to the past two contributions in-kind, U S WEST
represents that the aggregate fair market value of all Stock
contributed by U S WEST to the Assurance Trust, or acquired as a result
of the recapitalization of U S WEST, plus the fair market value of all
Stock, other QES and QERP held by the Assurance Trust did not exceed 25
percent (25%) of the fair market value of the assets of the Assurance
Trust immediately after such transactions. Further, U S WEST proposes
that it be permitted in the future to contribute amounts of Stock to
any of the Trusts; provided that the aggregate fair market value of all
Stock contributed by U S WEST, and/or acquired as a result of the
replacement of such Stock or of purchases of Stock in connection with
rebalancing of a Trust's holding of Stock, plus the fair market value
of all Stock, other QES and QERP held by such Trust, does not exceed 25
percent (25%) of the fair market value of the assets of such Trust
immediately after such transactions.
A Trust may hold Stock, other QES, and QERP in amounts above 25
percent (25%), if the aggregate fair market value of such Stock and
other QES, and QERP exceeds 25 percent (25%) of the assets of such
Trust solely by reason of: (1) A greater rate of appreciation to the
value of such Stock, other QES and QERP relative to that of assets in
that Trust other than such Stock and other QES and QERP; or (2) a
greater decline in the value of the other assets of such Trust relative
to that of such Stock, other QES, and QERP.
In addition, U S WEST represents that some or all of the Plans may
have invested or may invest in one or more unrelated common or
collective trust funds which are maintained by independent managers. As
it is possible that securities issued by U S WEST, including the Stock,
may be held in such funds (particularly in index-type passively managed
funds), U S WEST wishes to ensure that the percentage limitations, as
set forth in Section III(f) of the exemption, will be applied without
regard to amounts of U S WEST securities that may be held by such funds
in which a Plan may invest. In this regard, U S WEST estimates that the
market value of the securities issued by U S WEST and held in such
funds does not exceed 5 percent (5%) of the fair market value of each
such fund and that no more than 10 percent (10%) of all interests in
each such fund are held by Plans maintained by U S WEST. Further, U S
WEST represents that the conditions of PTCE 91-38 have been and will at
all times be satisfied. In the opinion of U S WEST, the limited nature
of the investment by Plans in such funds demonstrates that the amount
of U S WEST securities held by such funds, if any, is not subject to
influence by U S WEST or the I/F of the Plans, as appears to be the
intent in section I(a)(1)(A) of PTCE 91-38. Accordingly, paragraph (g)
of Section III of this exemption provides that the percentage
limitations, as set forth above in paragraph (f) of Section III, will
be applied without regard to amounts of securities issued by U S WEST
that may be held by unrelated common or collective trust funds which
are maintained by independent managers and in which any of the Plans
may have invested or may invest, provided that the fair market value of
the securities issued by U S WEST and held in each such fund does not
exceed 5 percent (5%) of the fair market value of such fund; that the
interests of Plans maintained by U S WEST in each such fund does not
exceed 10 percent (10%) of the total of all assets in such fund; and
that the remaining conditions of PTCE 91-38 are satisfied.
8. U S WEST maintains that specific safeguards included in this
exemption ensure that the rights of the participants and beneficiaries
of the Plans have been and will be fully protected with respect to the
transactions. In this regard, neither the Plans nor the Trusts have
paid or will pay any consideration for the contributions in-kind of the
Stock, either in cash, in other property, or in any diminution of a
mandatory funding obligation of U S WEST. Further, neither the Plans
nor the Trusts have paid any commissions, nor will the Plans or the
Trusts pay any commissions with respect to such in-kind contributions.
However, it is represented that the costs of preparing and filing the
application for exemption were and will be allocated to the Plans, and
the fees of the I/F of such Plans have been and will be borne by the
Trusts.
9. U S WEST maintains that the transactions have been and will be
administratively feasible and the level of oversight required by the
Department has been and will be minimal. In this regard, it is
represented that the Guidelines for the Trusts, the documents of the
Plans, and the financial statements of the Trusts and of the Plans are
readily available for inspection and have been and will be subject to
the audit requirements of section 103(a)(3)(A) of the Act. Further, U S
WEST represents that the transactions are in the interest of the Plans,
as growth in the telecommunications industry will cause any Stock
contributed to the Trusts to appreciate in value. For this reason, U S
WEST believes the Stock to be a highly desirable investment. Further, U
S WEST represents that the exemption is protective of the participants
and beneficiaries, in that the transactions
[[Page 15448]]
also provide security regarding the continuation of benefits to current
and former employees of U S WEST.
10. It is represented that acceptance of the past contributions of
Stock on March 31, 1994, and on March 31, 1995, by U S WEST to the
Assurance Trust was approved by an I/F. Further, it is represented that
an I/F will approve any future in-kind contribution of such Stock into
any of the Trusts.
In this regard, U S WEST appointed United States Trust Company of
New York (U.S. Trust) to serve as I/F and as equity investment manager
of the Account in the Assurance Trust which held the Stock contributed
in-kind by U S WEST. U.S. Trust is a bank and trust company organized
under the laws of New York. U.S. Trust represents that as an
experienced employee benefits trust fiduciary with a large professional
staff, it is qualified to serve as independent fiduciary. As of May 12,
1994, U.S. Trust had approximately $393 billion of assets in custody
and, as of June 19, 1995, had approximately $40 billion in assets under
discretionary management. U.S. Trust is independent in that it is
totally unrelated to U S WEST and does not have any directors in
common. Further, U.S. Trust represents that it receives less than one
percent (1%) of its income from U S WEST.
It is represented that in its capacity as independent investment
manager of the Accounts under the Assurance Trust, U.S. Trust acted as
a fiduciary with responsibility: (1) For evaluating the appropriateness
of accepting any contribution in-kind of Stock; (2) for establishing
the value of such Stock contributions; and (3) for managing the
Accounts on an ongoing basis, including making all decisions regarding
acquisition, retention, or sale of the Stock contributed by U S WEST,
including exercising any and all voting rights appurtenant to the Stock
in accordance with the U S WEST Trust Investment Proxy Voting Policy.
It is represented that U.S. Trust retained the right to delegate these
responsibilities to its affiliate, U.S. Trust Company of California,
N.A., a national financial institution providing specialized fiduciary
services primarily to plans covered by the Act.
It is represented that after its appointment U.S. Trust had full
discretion to manage the Accounts, subject to specific investment
guidelines (the Guidelines), as mutually agreed between U S WEST and
U.S. Trust, which were reevaluated at least annually by both parties.
Such Guidelines specify that there would be no short sales, trading on
margin, or lending of securities without the prior approval of U S
WEST. Further, the Guidelines specify that there are no requirements
for or restrictions against realization of net investment gains or
losses during the calendar year. It is represented that U.S. Trust has
engaged in all transactions on behalf of the Trusts on an agency,
rather than principal, basis.
The Guidelines specify that the assets in the Accounts are invested
solely in QES, cash, cash equivalents, and/or other derivative
financial investments to hedge the Accounts consistent with the
Guidelines. In this regard, it is represented that cash equivalents are
held for transactional purposes only and average no more than 5% of the
portfolio of any of the Accounts. It is anticipated that the Stock will
be held in the Accounts for long-term income or appreciation, unless
U.S. Trust or its successor deems it imprudent to do so.8
---------------------------------------------------------------------------
\8\ Notwithstanding the fact that U.S. Trust and U S WEST have
adopted a long term performance policy for the assets in the
Accounts, U.S. Trust and any successor I/F remains subject to the
fiduciary responsibility provisions of section 404 of the Act. In
this regard, the Department expects that U.S. Trust and any
successor I/F will use its authority to dispose of as much of the
Stock as is necessary to comply with its fiduciary responsibilities
at the appropriate time regardless of the policy that the assets of
the Accounts be held for long term appreciation.
---------------------------------------------------------------------------
It is represented that the emphasis in measurement under the
Guidelines is on long-term performance. U.S. Trust or its successor is
responsible for achieving a higher return over time than an appropriate
market index chosen by U S WEST.9
---------------------------------------------------------------------------
\9\ The Department, herein, is not opining on the
appropriateness of the index selected by U.S. Trust to evaluate the
long term performance of the Accounts under the Guidelines.
---------------------------------------------------------------------------
Specifically, the Guidelines state that the ten (10) year average
annual returns are expected to meet or exceed the return of U.S.
Treasury Bills, plus five (5) percentage points per year. It is
represented that returns are measured net of fees and have been and
will be reported periodically by Boston Safe Deposit and Trust Company,
as trustee of the Assurance Trust. In addition, regularly scheduled
meetings between U.S. Trust and U S WEST have been held and information
regarding investment results, strategies, and holdings have been
reviewed quarterly.
It is represented that U.S. Trust began the process of determining
whether and under what circumstances the Assurance Trust should accept
the Stock contributed in-kind, by analyzing the investment needs of the
Health Plan and the nature of the contribution.10 With
respect to the investment needs of the Health Plan, it is represented
that U.S. Trust in its capacity as I/F: (1) Reviewed the investment
allocation policy and investment guidelines of the Health Plan; (2)
determined that it was appropriate to rely on such guidelines with
respect to the percentage to be committed to the Stock; (3) determined
the value of the assets of the Health Plan committed to equities at
that time; and (4) determined that the Health Plan could accept the
contribution of Stock without exceeding the guidelines relating to
equity investments. In this regard, U.S. Trust determined: (1) that the
allocation policy and investment guidelines of the Health Plan relating
to investments in employer securities were appropriate; (2) that
acceptance of the contribution in-kind of the Stock was within such
allocation policy and investment guidelines; (3) that the contribution
in-kind was not accepted in lieu of any other assets or cash
contributions; (4) the contribution was accepted as part of an
investment portfolio structured to meet the Health Plan's liquidity
needs; and (5) the in-kind contribution of the Stock had no detrimental
effect on the ability of the Health Plan to meet its liquidity needs.
---------------------------------------------------------------------------
\10\ At the time U.S. Trust rendered its opinion the assets in
the Assurance Trust were being used solely for the purpose of pre-
funding post-retirement health benefits under the Health Plan.
---------------------------------------------------------------------------
With respect to the nature of the contribution in-kind, U.S. Trust
represents that it undertook to perform an analysis of the Stock and of
U S WEST, to value such Stock, and to analyze the acquisition of such
Stock in light of the overall portfolio of the Assurance Trust. In
making these analyses, U.S. Trust represents that it had access to all
information on U S WEST that it reasonably required, including
financial statements, annual reports, materials filed with the
Securities and Exchange Commission, and independent research and
reports. Based on this information, U.S. Trust concluded that U S WEST
will remain a major player in the emerging telecommunications industry
and that the near term prospects for the company remain favorable. U.S.
Trust stated that the financial performance of U S WEST is likely to
continue to improve in light of strong regional demand and the
commitment of U S WEST to increasing internal efficiencies.
Accordingly, in the opinion of U.S. Trust, the Stock offers good total
return potential in a long-term investment horizon.
With respect to the fair market value of the Stock, U.S. Trust
noted that such Stock is traded on the NYSE, and like other publicly
traded shares, is subject to price fluctuations. In this regard, in
order to establish the fair market value of the Stock and to ensure
that the value of the Stock contributed on March 31,
[[Page 15449]]
1994, did not exceed 25 percent (25%) of the assets of the Health Plan,
U.S. Trust determined to accept the value of the Stock at its closing
price, as of the previous day, March 30, 1994. It is represented that
the price utilized by U.S. Trust in valuing the Stock is verifiable by
the publicly disclosed trading prices of such Stock on March 30, 1994.
U.S. Trust believes that this method of determining the fair market
value of such Stock was reasonable and appropriate.
U.S. Trust determined not to discount the value of the Stock,
because the Stock comprised only slightly more than one percent (1%) of
the issued and outstanding Stock. As such, in the opinion of U.S. Trust
the amount of Stock contributed did not represent such a large block
that it would not be possible to dispose of such Stock within a
reasonable period of time. It is represented that the 4.6 million
shares contributed by U S WEST constituted approximately five (5) days
of normal trading volume of such Stock. Given the fluctuation in
trading volume of such Stock from day to day, U.S. Trust concluded that
a purchase or sale of this amount of Stock over a two to three week
period would have little effect on the market price of such Stock.
Prior to the contribution in-kind of the Stock by U S WEST on March
31, 1994, it is represented that U.S. Trust was granted full authority
to accept or reject any part of the in-kind contribution of Stock. In
this regard, U.S. Trust analyzed the impact of the contribution in-kind
on the risk and return characteristics of the Assurance Trust
portfolio. In analyzing such impact, U.S. Trust reviewed: (1) The
expected return of the portfolio; (2) the overall volatility of the
portfolio; (3) the beta risk level or market risk of the portfolio. In
addition, U.S. Trust compared the performance of five (5) modeled
portfolios that included the Stock with the performance of comparable
portfolios which excluded such Stock. Based on the results of its
analysis, U.S. Trust concluded that by accepting the in-kind
contribution of Stock, the risk/return tradeoff using traditional
portfolio analysis was at least as favorable, and possibly more so, to
the Health Plan than it would have been without such contribution of
such Stock.
U.S. Trust concluded that the contribution in-kind of Stock
satisfied two of the three conditions, as set forth in section 408(e)
of the Act. Specifically, no commission was charged to the Health Plan
or the Assurance Trust as a result of the contribution in-kind of the
Stock that occurred on March 31, 1994. Further, the Health Plan did not
pay more than ``adequate consideration'' for such Stock, since no Plan
or Trust has paid or will pay any consideration for the contribution,
either in cash or other property, or in any diminution of a mandatory
funding obligation of U S WEST. Moreover, as discussed above, U.S.
Trust ensured that the value assigned to the Stock was the fair market
value on the date of the contribution and that such amount represented
less than 25 percent (25%) of the assets of the Health Plan, based on a
valuation of the assets of the Health Plan performed by Boston Safe
Deposit and Trust Company, as trustee of the Assurance Trust.
U.S. Trust also concluded that acquisition of Stock by the Health
Plan on March 31, 1994, was not inconsistent with the diversification
requirements of section 404(a)(1) of the Act, even though the value of
such Stock contributed on March 31, 1994, represented approximately 25
percent (25%) of the assets of the Health Plan on that date. In the
opinion of U.S. Trust, the ability of the Health Plan to pay benefits
and expenses when due were not impaired by the acquisition of the Stock
contributed in-kind on March 31, 1994. It is represented that U.S.
Trust reached such conclusion mindful of the fact that U S WEST has no
statutory or contractual obligation to pre-fund any of the benefits
provided by the Health Plan and that pre-funding through the in-kind
contribution of Stock necessarily provides better security to
participants and beneficiaries of the Health Plan than would otherwise
be required.
Based on its review and examination, it is the conclusion of U.S.
Trust that it was in the interest of the Health Plan and protective of
the participants and beneficiaries of the Health Plan to accept the
contribution in-kind of Stock on March 31, 1994, at a total value of
$183,425,000 for the following reasons: (1) The Health Plan did not
give up any rights to cash or other property in connection with its
acceptance of the contribution of such Stock; (2) the contribution of
such Stock will increase the assets available to pay benefits under the
Health Plan at no cost to such plan; (3) the I/F is authorized to sell
such Stock at any time; (4) as the Stock contributed on March 31, 1994,
represents only slightly more than one percent (1%) of the total
outstanding shares, such that if cash were needed to pay benefits under
the Health Plan, the Stock could be liquidated over a relatively short
period of time without adversely impacting the market price; (5) the
Health Plan and the Assurance Trust paid no commission in connection
with the acquisition of the Stock; (6) the Stock was transferred to the
Assurance Trust at fair market value as of the date of the
contribution; and (7) the transaction was at least as favorable to the
Health Plan as an arm's length transaction with an unrelated third
party.
With respect to the Second Contribution of shares of Stock by U S
WEST on March 31, 1995, U.S. Trust, in its capacity as independent
fiduciary, evaluated the appropriateness of accepting such additional
contribution of Stock and assessed the value of such Stock. It is
represented that U.S. Trust began the process of determining whether
and under what circumstances to accept the Second Contribution by: (1)
Reviewing the terms of the Health Plan and the circumstances under
which U S WEST made the first contribution in-kind; (2) reviewing the
asset allocation policies and investment guidelines of the Health Plan
and determining that acceptance of the Second Contribution by the
Health Plan did not violate the terms and restrictions of such policies
and guidelines; (3) verifying that the Second Contribution consisted of
``qualifying employer securities,'' as defined by the Act; and (4)
analyzing the value of the Stock. In fulfilling its responsibility,
U.S. Trust represented that it had access to all information about U S
WEST that it reasonably required and had sufficient information
relating to the Stock to make an appropriate analysis. It was
represented that given U S WEST's favorable operating environment, pro-
active competitive posture and future growth prospects, combined with
its solid earnings base from the regional telephone business, in the
opinion of U.S. Trust, the Stock offers good total return potential in
a long-term investment horizon.
In order to establish the current fair market value of the Stock
contributed on March 31, 1995, and to ensure that the value assigned to
such Stock would comprise no more than 25 percent (25%) of the assets
of the Assurance Trust, as of the date of the Second Contribution, U.S.
Trust determined to accept the value of the Stock at its closing price
on the NYSE, as of March 30, 1995, the day before the Second
Contribution. U.S. Trust represented that this method of determining
the fair market value of the Stock was reasonable and appropriate. It
is represented that the price utilized by U.S. Trust in valuing the
Stock is verifiable by the publicly disclosed trading prices of such
Stock on March 30, 1995.
[[Page 15450]]
U.S. Trust determined not to apply a discount to the value of the
Stock contributed on March 31, 1995. In this regard, U.S. Trust
determined that no minority interest discount was necessary, because
such Stock was already valued on a minority interest basis. A
marketability discount was not applicable, in the opinion of U.S.
Trust, because the Stock is registered and fully tradeable. Further,
all of the Stock acquired in both contributions in-kind on March 31,
1994, and March 31, 1995, constituted less than 1.3 percent (1.3%) of
the outstanding Stock. In the opinion of U.S. Trust the entire holding
of Stock (totaling 6.1 million shares after completion of the Second
Contribution) does not represent such a large block that it would not
be possible to dispose of such Stock within a reasonable period of
time. It is represented that the 6.1 million shares contributed by U S
WEST represent approximately nine (9) days of normal trading volume of
such Stock. Given the fluctuation in trading volume of the Stock from
day to day, U.S. Trust concluded that a purchase or sale of this amount
of Stock over a two to three week period would have little effect on
the market price of such Stock.
With respect to the liquidity of the Health Plan, U.S. Trust
determined that the ability of the Health Plan to pay benefits and
expenses when due will not be impaired by the acceptance of the Second
Contribution. With respect to diversification, U.S. Trust confirmed
that the fair market value of the Stock contributed in-kind on March
31, 1995, comprised 22.8 percent (22.8%) of the assets of the Health
Plan, as of that date.11
---------------------------------------------------------------------------
\11\ See footnote 4.
---------------------------------------------------------------------------
Upon completion of its review of the Second Contribution, U.S.
Trust concluded that it would be in the interest of the Health Plan and
its participants and beneficiaries to accept the contribution of 1.5
million shares of Stock valued on a per share basis of $40.50 and
valued in the aggregate at $60,750,000. In support of its conclusion,
U.S. Trust gave the following reasons: (1) The Health Plan did not give
up any rights to cash or other property in connection with its
acceptance of the Second Contribution; (2) the Second Contribution will
increase the assets available to pay benefits under the Health Plan at
no cost to such plan; (2) there is no guarantee that U S WEST will make
additional attempts to pre-fund the Health Plan in the future; (3) the
I/F is authorized to sell the Stock at any time; (4) the combined
holdings of the Assurance Trust represent only 1.3 percent (1.3%) of
the total outstanding Stock; (5) the Stock could be liquidated over a
relatively short period of time if needed to pay benefits under the
Health Plan without adversely impacting the market price of such Stock;
(6) the Health Plan and the Assurance Trust paid no commissions in
connection with the acquisition of the Stock; (7) acceptance of the
Stock is consistent with the guidelines and the asset allocation policy
applicable to the Assurance Trust; (8) the Stock was transferred to the
Assurance Trust at fair market value, as of the date of the Second
Contribution; (9) the Second Contribution was at least as favorable to
the Health Plan as an arm's length transaction with an unrelated third
party.
11. U.S. Trust served as the I/F with respect to the transactions
which are the subject of this exemption and investment manager of the
assets in the Account in the Assurance Trust from March 31, 1994,
through October 31, 1995. However, it is represented that U.S. Trust
was replaced by State Street Bank and Trust Company (State Street),
headquartered in Boston, Massachusetts. In this regard, it is
represented that the replacement of U.S. Trust did not create a gap in
independent fiduciary oversight of the Assurance Trust and did not
result from any dissatisfaction with the services provided by U.S.
Trust. Rather, following its recapitalization, U S WEST made a
determination to retain State Street as an independent fiduciary to
undertake responsibility for the active management of employer
securities in the portfolios of several U S WEST plans, including the
Health Plan. U S WEST represents that as a result of the selection of
State Street these Plans would receive at more competitive fees the
sophisticated analytical ability and experience of State Street in
managing employer securities portfolios.
Further, effective November 1, 1995, U S WEST retained State Street
to act as the investment manager with respect to the active management
of the assets held in the Assurance Trust including the Stock,
consisting of the ``C'' shares and the ``M'' shares. As investment
manager, State Street is responsible for all decisions regarding
acquisitions, voting, tenders, conversions, exchanges, sales, and
generally for the exercise of all rights, powers, and privileges with
respect to the employer securities held by the Assurance Trust. State
Street has represented that it understands and acknowledges its duties
and responsibilities under the Act as a fiduciary in performing these
services with respect to the Assurance Trust.
It is represented that in managing the portfolio of the Assurance
Trust of ``C'' shares and ``M'' shares, State Street has utilized and
will utilize an active management strategy as opposed to a more passive
strategy generally utilized in stock accounts consisting of a single
employer security. It is represented that the active management
approach enables State Street to maximize value while attempting to
minimize risk.
In general with regard to its active management strategy, State
Street attempts to identify the difference between the underlying value
of each stock compared to its market price. Using extensive market
analysis tools, research and in-house investment expertise, State
Street attempts to take advantage of market opportunities considering
the projected growth, financial strength, and the future stream of
earnings and dividends of such stock while carefully considering the
volatility of each stock and the overall risk associated with the
holding of such stock.
The application of the active management strategy would allow State
Street to vary the relative mix of ``C'' shares and ``M'' shares in the
portfolio. The change in the mix is accomplished either by selling
``C'' shares and reinvesting all or part of (but no more than) the cash
proceeds from such sale in ``M'' shares, or selling ``M'' shares and
reinvesting all or part of (but no more than) the cash proceeds from
such sale in ``C'' shares. For example, if the market price of the
``M'' shares at a particular time is viewed as over-valued, and the
market price of the ``C'' shares at that time is viewed as under-
valued, State Street would sell a portion of the ``M'' shares and
reinvest the proceeds in ``C'' shares thereby taking advantage of a
market opportunity.
It is represented that to accomplish this active management
strategy, a communication analyst at State Street monitors daily and
analyzes the ``C'' shares, and a media analyst monitors daily and
analyzes the ``M'' shares to evaluate the performance of each
investment, identify any value opportunities, and determine the
prudence of those shares as an investment. It is represented that these
analysts will compare their conclusions, jointly evaluate the
portfolio, present the portfolio performance, and recommend changes to
the State Street Trust Investment Committee which in turn reports to
the State Street Retirement Investment Services Fiduciary Committee for
a final determination.
It is represented that as of March 9, 1998, the Assurance Trust no
longer
[[Page 15451]]
holds any of the shares of Stock contributed in-kind by U S WEST. As of
the same date, U S WEST confirms that State Street has not engaged in
any ``rebalancing'' transactions involving the repurchase of Stock.
However, with regard to any shares of Stock which may in the future be
contributed in-kind by U S WEST to any of the Trusts, it is anticipated
that State Street may engage in ``rebalancing'' transactions for the
benefit of such trust. In this regard, it is represented that all sales
and subsequent purchases of Stock in connection with rebalancing of the
holding of Stock by such Trusts will occur in ``blind'' transactions on
the open market and that all Stock acquired in such transactions will
be ``qualifying employer securities'' within the meaning of section
407(d)(5) of the Act. Further, in accordance with the condition of this
exemption, as set forth in Section III(f) above, any acquisition of
Stock, including any rebalancing of the holding of Stock by a Trust,
must not cause immediately after such acquisition the fair market value
of such Stock, plus the fair market value of all Stock and other QERP
and QES held by such Trust to exceed 25 percent (25%) of the fair
market value of its assets, on the date of such transaction.
It is represented that before accepting any future in-kind
contributions of Stock from U S WEST, State Street will identify the
other holdings in the Assurance Trust and review asset allocation for
such trust as determined by U S WEST. In addition, State Street will
review the structural process that U S WEST has in place to monitor the
overall investment mix, the manner by which asset allocation
determinations are made, and any changes or shifts in the asset
allocation policy of U S WEST. Further, State Street will evaluate the
Stock being contributed to determine if such contribution is prudent
and will evaluate the effect of such contribution on the portfolio of
the Assurance Trust. Specifically, State Street will review the impact
such contributions have on the volatility of such portfolio and will
make any necessary adjustments. It is represented that State Street
will monitor the holding of the Stock in the Assurance Trust and will
continue to hold the Stock only if such holding continues to be in the
best interest of the Assurance Trust.
State Street represents that it is qualified to act as I/F and
investment manager with respect to the assets held in the Assurance
Trust (consisting of the ``C'' shares and the ``M'' shares) in that it
has been in the business of serving as a discretionary fiduciary with
respect to employer securities since 1985, and in the past two years
has created two business units dedicated exclusively to independent
fiduciary transactions and the management of employer securities. The
experience of State Street includes acting as discretionary fiduciary
for more than $30 billion in employer securities held in approximately
ninety (90) qualified retirement plans. Further, State Street, as an
independent fiduciary, has represented the interests of retirement plan
participants in over eighty (80) transactions involving employer
securities.
Although State Street currently provides administrative and
investment management services to other plans sponsored by U S WEST,
State Street represents that it is sufficiently independent of U S WEST
to serve as I/F and investment manager for the Assurance Trust with
respect to the management of the ``C'' shares and the ``M'' shares. In
this regard, the total revenue received by State Street from U S WEST
and its plans constitutes less than one-tenth of one percent (.1%) of
the annual revenues of State Street.
12. In summary, the applicant represents that the proposed
transactions meet the statutory criteria for an exemption under section
408(a) of the Act because:
(a) all Stock contributed in-kind by U S WEST to any of the Trusts
or acquired by such Trusts, as a result of the recapitalization of U S
WEST constituted QES; and all Stock contributed in-kind in the future,
any replacement publicly traded shares of such Stock, or any Stock
acquired as a result of purchases in connection with rebalancing of a
Trust's holding of Stock will constitute QES;
(b) all purchases of Stock will only occur in connection with
rebalancing of a Trust's holding of Stock and in connection with the
active management of the Stock by an I/F;
(c) all sales and subsequent purchases of Stock in connection with
rebalancing of a Trust's holding of Stock will occur in ``blind''
transactions with unrelated third parties on the open market at the
fair market value of such Stock on the date of such transactions, or
where appropriate to minimize any adverse market impact on the value of
the Stock remaining in any Trust, will occur in private transactions
with persons who are not ``parties in interest'' at the fair market
value of such Stock on the date of such transactions;
(d) the Plan provisions explicitly authorize U S WEST to pre-fund
benefits through in-kind contributions of Stock, and all contributions
of Stock were, and will be made in conformity with such Plan
provisions;
(e) Stock contributed in-kind by U S WEST or acquired as a result
of the recapitalization of U S WEST has been held by Trusts which are
qualified under section 501(c)(9) of the Code, and which are
established for the purpose of funding life, sickness, accident, and
other welfare benefits for the participants and beneficiaries of the
Plans; and all Stock contributed in the future, any replacement
publicly traded shares of such Stock, or any Stock acquired as a result
of purchases in connection with rebalancing will be held in such
Trusts;
(f) all Stock contributed in-kind by U S WEST to any Trust or
acquired by any Trust as a result of the recapitalization of U S WEST
has been held in separate Accounts under such Trusts and all Stock
contributed in-kind in the future, any replacement publicly traded
shares of such Stock, or any Stock acquired as a result of purchases in
connection with rebalancing of a Trust's holding of Stock will be held
in separate Accounts under such Trusts;
(g) the Accounts in such Trusts have been and will be managed by an
I/F who is an independent, qualified investment manager, or a successor
independent, qualified investment manager and who has represented and
has represented and will represent the interests of the Plans which are
funded by such Trusts for all purposes with respect to the Stock for
the duration of the Trust's holding of any of such Stock;
(h) the I/F for the Accounts in any Trust which fund welfare plan
benefits, has accepted and will accept contributions in-kind of Stock
by U S WEST to any of the Trusts and has accepted acquisitions of Stock
in connection with the recapitalization of U S WEST and will accept
through future in-kind contributions, through any replacement publicly
traded shares of such Stock, or through purchases of such Stock in
connection with rebalancing of such Trust's holding of Stock, only
after such I/F determines that such transactions are feasible, in the
interest of, and protective of participants and beneficiaries of the
Plans which are funded by such Trusts;
(i) an I/F has had sole responsibility and at all times will have
sole responsibility for the ongoing management of the Accounts under
the Trusts which hold the Stock has taken and will take whatever action
is necessary to protect the rights of the Plans which are funded by
such Trusts;
(j) any contributions in-kind of Stock by U S WEST to any Trust or
acquisitions of Stock in connection with the recapitalization of U S
WEST did not cause immediately after such
[[Page 15452]]
transactions the aggregate fair market value of such Stock, plus the
fair market value of all other QERP and QES held by such Trust to
exceed 25 percent (25%) of the fair market value of the assets of such
Trust on the date of such transaction; and any future contributions in-
kind of Stock by U S WEST to any Trust, any replacement publicly traded
shares of such Stock, or any purchases of Stock in connection with
rebalancing of any Trust's holding of Stock will not cause immediately
after such transactions the aggregate fair market value of such Stock,
plus the fair market value of all other QERP and QES held by such Trust
to exceed 25 percent (25%) of the fair market value of the assets of
such Trust on the date of such transaction;
(k) none of the assets of the Trust have reverted nor will revert
to the use or benefit of U S WEST;
(l) neither the Plans nor the Trusts have paid nor will pay,
whether in cash or in other property or in a diminution of any funding
obligation of U S WEST, any consideration for Stock contributed in-kind
by U S WEST;
(m) none of the Plans have ceded nor will cede any right to receive
cash contributions from U S WEST;
(n) none of the Plans or the Trusts have paid nor will pay any
commissions in connection with the contribution in-kind of Stock by U S
WEST; and
(o) U S WEST has no obligation to pre-fund welfare benefits
provided to participants under any of the Plans, either pursuant to the
plan documents, the terms of any collective bargaining agreement, or
the provisions of the Act.
Notice to Interested Persons
Those persons who may be interested in the pendency of the
requested exemption include all active employees of U S WEST and all
retirees. It is represented that these two classes of interested
persons will be notified through different methods.
In this regard, it is represented that notice will be provided,
within sixty (60) calendar days of the date of publication of the
Notice in the Federal Register, to all active employees of U S WEST by
posting at those locations within the principal places of employment of
U S WEST which are customarily used for notices regarding labor-
management matters for review. Such posting will contain a copy of the
Notice, as it appears in the Federal Register on the date of
publication, plus a copy of the supplemental statement (the
Supplemental Statement), as required, pursuant to 29 CFR 2570.43(b)(2),
which will advise such interested persons of their right to comment and
to request a hearing.
It is represented that notice will be provided to all retirees who
participate in the Plans by mailing first class a retiree newsletter
within sixty (60) calendar days of the date of publication of the
Notice. Such newsletter will contain a copy of the Notice, as it
appears in the Federal Register on the date of publication, plus a copy
of the Supplemental Statement, as required, pursuant to 29 CFR
2570.43(b)(2), which will advise such interested persons of their right
to comment and to request a hearing. It is represented that the
newsletter containing the Notice and the Supplemental Statement will be
enclosed with the monthly retirement benefit checks to retirees.
It is represented that notice will be provided to all terminated
participants in the Plans who are not yet receiving retirement benefits
by mailing bulk rate mail within sixty (60) calendar days from the date
of publication of the Notice, a copy of the Notice, as it appears in
the Federal Register on the date of publication, plus a copy of the
Supplemental Statement, as required, pursuant to 29 CFR 2570.43(b)(2),
which will advise such interested persons of their right to comment and
to request a hearing.
All written comments and requests for a hearing must be received by
the Department no later than thirty (30) days from the date such
interested persons receive a copy of the Notice and the Supplemental
Statement.
For Further Information Contact: Angelena C. Le Blanc of the
Department, telephone (202) 219-8883 (This is not a toll-free number.)
Union Bank of Switzerland (UBS/Swiss) and UBS Securities, LLC (UBS
Securities) Located in Zurich, Switzerland and New York, New York,
Respectively
[Exemption Application Nos. D-10459 and D-10460]
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 to the proposed
(1) lending of securities to UBS/Swiss, UBS Securities, UBS Ltd. (UBS/
UK), and UBS Securities Limited (UBS/Japan), which are affiliated
domestic or foreign broker-dealers of UBS Securities,12 by
employee benefit plans (the Client Plans or Plans), including
commingled investment funds holding plan assets, for which UBS/Swiss,
acting through its New York branch in connection with securities
lending activities (UBS NY), an affiliate of the proposed UBS
Borrowers, may serve as a securities lending agent, sub-agent, or as a
custodian or a directed trustee to Client Plans under either of two
securities lending arrangements, referred to herein as ``Plan A'' or
``Plan B''; and (2) the receipt of compensation by UBS NY in connection
with these transactions.
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\12\ For purposes of this proposed exemption, UBS/Swiss, UBS/UK
and UBS/Japan are collectively referred to as the UBS Foreign
Borrowers. In addition, UBS Securities and the UBS Foreign Borrowers
are together referred to herein as the UBS Borrowers or individually
as a UBS Borrower.
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This proposed exemption is subject to the following conditions:
(a) For each Client Plan, neither UBS NY, any of the UBS Borrowers
nor any affiliate of those entities has discretionary authority or
control with respect to the investment of the Plan assets involved in
the transaction, or renders investment advice (within the meaning of 29
CFR 2510.3-21(c)) with respect to those assets.
(b) With regard to--
(1) Plan A, under which UBS NY lends securities of a Client Plan to
any UBS Borrowers in either an agency or sub-agency capacity, such
arrangement is approved in advance by a Plan fiduciary who is
independent of UBS NY and the UBS Borrower and is negotiated by UBS NY
which acts as a liaison between the lender and the borrower to
facilitate the securities lending transaction.13
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\13\ The Department, herein, is not providing exemptive relief
for securities lending transactions engaged in by primary lending
agents, other than UBS NY, 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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(2) Plan B, under which the UBS Borrower directly negotiates the
agreement with the fiduciary of a Client Plan, including a Plan for
which UBS NY provides services with respect to the portfolio of
securities to be loaned pursuant to an exclusive borrowing arrangement
(the Exclusive Borrowing Arrangement), such Client Plan fiduciary is
independent of both the UBS Borrower and UBS NY, and UBS NY does not
participate in any such negotiations.
[[Page 15453]]
(c) The independent fiduciary of a Client Plan approves the general
terms of the securities loan agreement (the Loan Agreement) between the
Client Plan and the UBS Borrower.
(d) The terms of each loan of securities by a Client Plan to a UBS
Borrower are at least as favorable to such Plan as those of a
comparable arm's length transaction between unrelated parties.
(e) A Client Plan may terminate the agency or sub-agency
arrangement under Plan A or an Exclusive Borrowing Agreement under Plan
B at any time, without penalty, on five business days notice, whereupon
the UBS Borrowers will deliver certificates for securities identical to
the borrowed securities (or the equivalent thereof in the event of
reorganization, recapitalization or merger of the issuer of the
borrowed securities) to the Client 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 UBS Borrowers, whichever is less.
(f) The Client Plan or its designee receives from each UBS Borrower
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 the UBS Borrower, collateral consisting of U.S. currency,
securities issued or guaranteed by the United States Government or its
agencies or instrumentalities, or irrevocable bank letters of credit
issued by a U.S. bank, other than UBS NY or an affiliate thereof, or
any combination thereof, or other collateral permitted under Prohibited
Transaction Exemption (PTE) 81-6 (46 FR 7527, January 23, 1981) as it
may be amended or superseded.
(g) The market value (or in the case of a letter of credit, a
stated amount) of the collateral on the close of business on the day
preceding the day of the loan is initially at least 102 percent of the
market value of the loaned securities. The applicable Loan Agreement
gives the Client Plan a continuing security interest in and a lien on
the collateral. The level of collateral is monitored daily (either by
UBS NY under Plan A, or by UBS NY or another designee of the Client
Plan under Plan B). 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 loaned securities at the close of business on that day,
the UBS Borrower is required to deliver, by the close of business on
the next day, sufficient additional collateral to bring the level to at
least 102 percent.
(h) Prior to entering into a Loan Agreement, the applicable UBS
Borrower furnishes each Client Plan its most recently available audited
and unaudited statements to UBS NY, and in turn, such statements are
provided to the Client Plan before the Client Plan approves the terms
of the Loan Agreement. The Loan Agreement contains a requirement that
the applicable UBS Borrower 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. If any
such changes have taken place, UBS NY does not make any further loans
to the UBS Borrower unless an independent fiduciary of the Client Plan
is provided notice of any material change and approves the loan in view
of the changed financial condition.
(i) 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 UBS Borrowers, 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.)
(j) All procedures regarding the securities lending activities
will, at a minimum, conform to the applicable provisions of PTEs 81-6
and 82-63 as well as to applicable securities laws of the United
States, Switzerland, the United Kingdom or Japan.
(k) UBS NY agrees to indemnify and hold harmless the Client Plan in
the United States (including the sponsor and fiduciaries of such Client
Plan) for any transactions covered by this exemption with a UBS
Borrower so that the Client Plan does not have to litigate, in the case
of a UBS Foreign Borrower, in a foreign jurisdiction nor sue the UBS
Foreign Borrower to realize on the indemnification. Such
indemnification, by UBS NY, is against any and all reasonably
foreseeable damages, losses, liabilities, costs and expenses (including
attorney's fees) which the Client Plan may incur or suffer, arising
from any impermissible use by the UBS Borrower of the loaned securities
or the failure of the UBS Borrower to deliver loaned securities in
accordance with the applicable Loan Agreement or to otherwise comply
with the terms of such agreement, except to the extent that such losses
or damages are caused by the Client Plan's own negligence.
(1) If any event of default occurs, UBS NY, promptly and at its own
expense (subject to rights of subrogation in, to the collateral and
against such borrower), purchases or causes to be purchased, for the
account of the Client Plan, securities identical to the borrowed
securities (or their equivalent as discussed above). If the collateral
is insufficient to accomplish such purchase, UBS NY indemnifies 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 loans
or failure to properly indemnify under this provision). Alternatively,
if such replacement securities cannot be obtained on the open market,
UBS NY pays the Client Plan the difference in U.S. dollars between the
market value of the loaned securities and the market value of the
related collateral on the date of the borrower's breach of its
obligation to return the loaned securities.
(2) If, however, the event of default is caused by the UBS
Borrower's failure to return the securities within the designated time,
the Client Plan has the right 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.
(l) The Client Plan receives the equivalent of all distributions
made to holders of the borrowed securities, including all interest and
dividends on the loaned securities during the loan period.
(m) Prior to any Client Plan's approval of the lending of its
securities to any UBS Borrower, a copy of this exemption, if granted,
(and the notice of pendency) are provided to the Client Plan.
(n) Each Client Plan receives monthly reports with respect to
securities lending transactions, including, but not limited to, the
information described in Representation 26, so that an independent
fiduciary of a Client Plan may monitor such transactions with the UBS
Borrower.
(o) Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to UBS
Borrowers; 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
[[Page 15454]]
(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 UBS Borrowers, the foregoing $50 million requirement is 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 Client 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 UBS Borrowers, the foregoing $50 million requirement is deemed
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
(A) Is neither the sponsoring employer, a member of the controlled
group of corporations, the employee organization, nor an affiliate;
(B) Has full investment responsibility with respect to Client Plan
assets invested therein; and
(C) Has total assets under its management and control, exclusive of
the $50 million threshold amount attributable to Client Plan investment
in the commingled entity, which are in excess of $100 million. (In
addition, none of the entities described above must be formed for the
sole purpose of making loans of securities.)
(p) 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.
(q) In addition to the above, all loans involving UBS Foreign
Borrowers, have the following requirements:
(1) Such Foreign Borrower is registered as a broker-dealer with the
Securities and Futures Authority of the United Kingdom (the SFA) in the
case of UBS/UK, the Swiss Federal (the Swiss Banking Commission) in the
case of UBS/Swiss, and the Ministry of Finance (the MOF), in the case
of UBS/Japan;
(2) Such Foreign Borrower 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 U.S.
dollar-denominated securities or letters of credit;
(4) All collateral is held in the United States and the situs of
the securities lending agreements (either the Loan Agreement under Plan
A or the Exclusive Borrowing Agreement under Plan B) is maintained 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) Prior to a transaction involving a UBS Foreign Borrower, the
applicable UBS Foreign Borrower to--
(A) Agrees to submit to the jurisdiction of the United States;
(B) Agrees to appoint an agent for service of process in the United
States, which may be an affiliate, (the Process Agent);
(C) Consents to service of process on the Process Agent; and
(D) Agrees to be indemnified in the United States for any
transactions covered by this exemption.
(r) UBS NY and each UBS Foreign Borrower 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 (s)(1) to determine whether the
conditions of the exemption have been met this 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 UBS NY 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 UBS NY or its affiliates 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 (s)(1).
(s)(1) Except as provided in subparagraph (s)(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 (r) are
unconditionally available at their customary location 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 (the SEC);
(B) Any fiduciary of a participating Client Plan or any duly
authorized representative of such fiduciary;
(C) Any contributing employer to any participating Client Plan or
any duly authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Client
Plan, or any duly authorized representative of such participant or
beneficiary.
(s)(2) None of the persons described above in paragraphs (s)(1)(B)-
(s)(1)(D) of this paragraph (s)(1) are authorized to examine the trade
secrets of UBS NY or its affiliates or commercial or financial
information which is privileged or confidential.
Summary of Facts and Representations
Parties to the Proposed Transactions
1. UBS/Swiss and UBS Securities (together, the Applicants), UBS NY,
UBS/UK and UBS/Japan, all of which are the parties to the proposed
transactions, are described as follows:
(a) UBS/Swiss, a banking organization formed under Swiss law in
1912, is a major global bank. Headquartered in Zurich, Switzerland, an
Organization for Economic Cooperation and Development (OECD) member
country,14 UBS/Swiss is subject to regulatory oversight by
the Swiss Banking Commission, the Federal Reserve Board and the New
York Superintendent of Banking. As of December 31, 1996, UBS/Swiss had
total assets that were in excess of $324 billion.
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\14\ According to the Applicants, an OECD member country is
generally viewed as having a stable and regulated financial market.
---------------------------------------------------------------------------
(b) UBS Securities, an affiliate of UBS/Swiss, is a New York
limited liability company. UBS Securities is registered with and
regulated by the SEC as a broker-dealer and by the Commodity Futures
Trading Commission as a futures commission merchant. UBS Securities is
a member of the New York Stock Exchange, other principal securities
exchanges in the United
[[Page 15455]]
States and the National Association of Securities Dealers. As of June
30, 1997, UBS Securities had total assets of approximately $65.3
billion.
Acting as principal, UBS Securities actively engages in the
borrowing and lending of securities, with daily outstanding loan volume
averaging several billion dollars. UBS Securities uses 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 UBS Securities must conform to
applicable provisions of the Federal Reserve Board's Regulation
T.15
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\15\ Under Regulation T (12 CFR 220.6(h)), permitted borrowing
purposes include making delivery of securities in the case of short
sales or failures of a broker to receive securities it is required
to deliver.
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(c) UBS NY is the New York-based affiliate of UBS/Swiss. UBS NY is
subject to regulatory oversight by the Federal Reserve Board and the
Superintendent of Banking in New York State. It provides a variety of
banking services to its clients and it may serve as custodian, clearing
agent or as a directed trustee. As of June 30, 1997, UBS NY had total
assets of approximately $19.75 billion.
(d) UBS/UK, an affiliate of UBS Securities and a wholly owned
subsidiary of UBS/Swiss, is located in the United Kingdom, another OECD
member country. UBS/UK is regulated by the SFA and is registered
thereunder as a broker-dealer. As of June 30, 1997, UBS/UK had total
assets of approximately $26.5 billion.
(e) UBS/Japan, an affiliate of UBS Securities and a wholly owned
subsidiary of UBS/Swiss, is located in Tokyo, Japan, an OECD-member
country. UBS/Japan is regulated by the MOF and is registered as a
broker-dealer. As of June 30, 1997, UBS/Japan had total assets of
approximately $11.6 billion.
Regulation of UBS Foreign Borrowers
2. UBS/UK is authorized to conduct an investment business in and
from the United Kingdom as a broker-dealer regulated by the SFA.
Although not registered with the SEC, UBS/UK is governed by the rules,
regulations and membership requirements of the SFA. In this regard,
UBS/UK is 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, share a
common objective: the protection of the investor by the regulation of
the securities industry. The SFA 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 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 at any time. Finally, the rules and
regulations of the SFA for broker-dealers impose potential fines and
penalties which establish a comprehensive disciplinary system.
3. Similarly, UBS/Swiss is regulated by the Swiss Banking
Commission whose powers include licensing banks, issuing directives to
address violations by or irregularities involving banks, requiring
information from a bank or its auditor regarding supervisory matters
and revoking bank licenses. The Swiss Banking Commission exercises
oversight over Swiss banks such as UBS/Swiss, through independent
auditors known as ``Recognized Auditors'' which act on behalf of the
Commission under detailed statutory provisions. Each Swiss bank,
including UBS/Swiss, must appoint a Recognized Auditor and notify the
Swiss Banking Commission of an intent to change its auditor. The
Recognized Auditor may take action within a bank as deemed necessary or
as instructed by the Swiss Banking Commission and must inform the Swiss
Banking Commission of supervisory matters.
The Swiss Banking Commission ensures that UBS/Swiss has procedures
for monitoring and controlling its worldwide activities through various
statutory and regulatory standards. Among these standards are
requirements for adequate internal controls, oversight, administration
and financial resources. The Swiss Banking Commission reviews
compliance with these limitations on operations and internal control
requirements through an annual audit performed by the Recognized
Auditor.
The Swiss Banking Commission obtains information on the condition
of UBS/Swiss and its foreign offices and subsidiaries, by requiring
submission of periodic, consolidated financial reports and through a
mandatory annual report prepared by the Recognized Auditor. The Swiss
Banking Commission also receives information regarding capital
adequacy, country risk exposure and foreign exchange exposures from
UBS/Swiss.
Swiss banking law mandates penalties to ensure correct reporting to
the Swiss Banking Commission. Recognized Auditors face penalties for
gross violations of their duties in auditing, for reporting misleading
information, omitting essential information from the audit report,
failing to request pertinent information or failing to report to the
Swiss Banking Commission.
In addition to regulation by the Swiss Banking Commission, the
Applicants note that in approving UBS/Swiss' establishment of UBS NY,
the Federal Reserve Board has concluded that UBS/Swiss is subject to
comprehensive supervision and regulation by its home country
supervisors. In making this determination, the Applicants represent
that the Federal Reserve Board has considered, among other factors, the
extent to which the country supervisors have (a) ensured that the bank
has adequate procedures for monitoring and controlling its activities,
worldwide; (b) obtained information on the condition of the bank and
its subsidiaries and offices through regular examination reports, audit
reports or otherwise; (c) obtained information on the dealings with and
relationship between the bank and its affiliates, both foreign and
domestic; (d) received from the bank financial reports that are
consolidated on a worldwide basis, or comparable information that
permits analysis of the bank's financial condition on a worldwide
consolidated basis; and (e) evaluated prudential standards, such as
capital adequacy and risk asset exposure, on a worldwide basis.
4. UBS/Japan is regulated by the MOF which has regulatory authority
over both broker-dealers and banks in Japan. In applying the same
analysis as that employed with Swiss regulatory authorities, the
Applicants represent that the Federal Reserve Board has concluded that
the MOF provides comprehensive supervision and regulation through (a)
periodic examinations and inspections which focus on capital adequacy,
asset quality, management, earnings, liquidity, compliance with
applicable laws and risk management; (b) financial reporting
requirements; and (c) the use of administrative sanctions to ensure
compliance with applicable law or regulations.
5. In addition to the protections afforded by the SFA, the Swiss
Banking Commission, the MOF, or for that matter, the Federal Reserve
Board, UBS/UK and UBS/Japan will comply with all
[[Page 15456]]
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 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.
6. The Applicants represent 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 with any information or documents within its
possession, custody or control, any testimony of any such foreign
associated persons, and any assistance in taking the evidence of other
persons, wherever located, that the SEC requests and that relates to
transactions effected pursuant to Rule 15a-6; and
(c) Rely on the U.S. registered broker-dealer through which the
transactions with the U.S. institutional and major institutional
investors are effected to (among other things):
(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.
Securities Lending, Generally
7. As with UBS Securities, UBS/UK, UBS Japan and UBS/Swiss (i.e.,
the UBS Foreign Borrowers), acting as principals, actively engage in
the borrowing and lending of securities, with daily outstanding loan
volume averaging several billion United States dollars. The UBS Foreign
Borrowers utilize borrowed securities to satisfy their trading
requirements, or to re-lend to other broker-dealers and banks who need
a particular security for various periods of time.
An institutional investor, such as a pension plan, lends securities
in its portfolio to a broker-dealer or bank in order to earn a fee in
addition to interest, dividends or other distributions paid on these
securities. The lender generally requires that the security loans be
fully collateralized and the collateral usually is in the form of cash
or high quality liquid securities such as U.S. Government or Federal
Agency obligations or certain bank letters of credit. When cash is the
collateral, the lender generally invests the cash and rebates a portion
of the earnings on the collateral to the borrower. The ``fee'' received
by the lender will be the difference between the earnings on the
collateral and the amount of rebate paid to the borrower. When a loan
of securities is collateralized with securities, a fee is paid directly
by the borrower to the lender. Institutional investors often utilize
the services of an agent in the performance of their securities lending
transactions. The lending agent is paid a fee for its services which
may be calculated as a percentage of the income earned by the investor
from its securities lending activity. The Applicants believe that the
essential functions which define a securities lending agent are the
identification of appropriate borrowers of securities and the
negotiation of the terms of a loan to the borrowers. There are services
ancillary to securities lending which may include acting as custodian
or directed trustee of the securities being loaned, monitoring the
level of collateral and the value of the loaned securities and
investing the collateral in some instances.
Request for Exemptive Relief
8. UBS/Swiss and UBS Securities request an exemption for the
lending of securities to Client Plans under either of two distinct
arrangements--Plan A (permitting UBS Borrowers to borrow securities
from those Client Plans for which UBS NY will act as primary lending
agent or sub-agent) 16 or Plan B (permitting UBS Borrowers
to enter into Exclusive Borrowing Agreements with Client Plans),
following disclosure of the relationship between UBS/Swiss and UBS NY
as well as UBS NY's affiliation with the UBS Borrowers. In addition,
the Applicants request exemptive relief from the Department to allow
UBS NY to receive compensation in connection with these transactions.
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\16\ For the sake of simplicity, future references to UBS NY'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 also refer to
those Client Plans for which UBS NY 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 UBS NY is a branch of UBS/Swiss, an intended borrower, and
because each of the other UBS Borrowers is an affiliate of UBS/Swiss,
the lending of securities to UBS Borrowers by Plans for which UBS NY
serves as securities lending agent (or may otherwise be a service
provider to the Plans) could be deemed to be prohibited under the Act.
Further, because UBS NY, under Plan A, would have discretion to lend
Plan securities to UBS Borrowers and receive a fee, and because, under
Plan B, the Client Plan
[[Page 15457]]
will receive a fee for the Exclusive Borrowing Agreement with the UBS
Borrower (which may not necessarily be related to the value of the
borrowed securities and the duration of the loan) 17, and
because all UBS Borrowers are not registered under the 1934 Act, the
lending of securities to UBS Borrowers by Client Plans may be outside
of the scope of relief provided by PTE 81-6 and PTE 82-63.
18
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\17\ The Applicants note that in an exclusive borrowing
arrangement, the fee paid by a borrower need not necessarily be
computed in the same manner as under a non-exclusive or Plan A
arrangement. This is because there is additional value to a borrower
in having an assured access to a supply of securities. Accordingly,
the lender is able to exact different consideration, be it a
premium, some form of a guaranteed return or otherwise.
\18\ 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. 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 is not prohibited under section 406(a) of the
Act.
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Plan A
9. When acting as securities lending agent, UBS NY, pursuant to
authorization from its client, will negotiate the terms of loans with
borrowers and otherwise act as a liaison between the lender (and its
custodian) and the borrower to facilitate the lending transaction. As
securities lending agent, UBS NY will also have responsibility for
monitoring receipt of all required collateral, marking such collateral
to market daily so that adequate levels of collateral can be
maintained, monitoring and evaluating on a continuing basis the
performance and creditworthiness of the borrowers, and if authorized by
the client, holding and investing cash collateral pursuant to
investment guidelines established by the client. UBS NY may also act as
a custodian or directed trustee for the Client Plan's portfolio of
securities available to be lent. All procedures for lending securities
will be designed to comply with applicable conditions of PTEs 81-6 and
82-63.
UBS NY may also be retained from time to time by primary 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, UBS NY's role under the
lending transactions would parallel its role under lending transactions
for which it acts as a primary lending agent on behalf of its clients.
10. Where UBS NY is the direct securities lending agent, a
fiduciary of a Client Plan who is independent of UBS NY and UBS
Borrowers, will sign a securities lending agency agreement with UBS NY
(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, specify the required margin and required daily marking-to-
market, and provide a list of permissible borrowers, including UBS
Borrowers. The Agency Agreement will also set forth the basis and rate
for UBS NY's compensation from the Client Plan for the performance of
securities lending services.
The Agency Agreement will contain provisions to the effect that if
any UBS Borrower is designated by the Client Plan as an approved
borrower (a) the Client Plan will acknowledge the relationship between
the UBS Borrower and UBS NY and (b) UBS NY will represent to the Client
Plan that each and every loan made to the UBS Borrower 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 unrelated borrower.
11. When UBS NY is lending securities under a sub-agency
arrangement, before the Client Plan participates in the securities
program, the primary lending agent will enter into a securities lending
agreement (the Primary Lending Agreement) with a fiduciary of a Client
Plan who is independent of such primary lending agent, UBS NY and UBS
Borrowers. The primary lending agent will be unrelated to UBS NY and
UBS Borrowers. The Primary Lending Agreement will contain substantive
provisions akin to those in the Agency Agreement relating to the
description of the lending program, use of an approved form of Loan
Agreement, specification of securities which are available to be lent,
specification of the required margin and the requirement of daily
marking-to-market, and provision of a list of approved borrowers (which
will include one or more UBS Borrowers). In addition, the Primary
Lending Agreement will specifically authorize the primary lending agent
to appoint sub-agents (which may include UBS NY), to facilitate its
performance of securities lending agency functions. Under such
circumstances, sub-agents may be appointed if the primary lending agent
does not have the expertise or adequate systems to conduct securities
lending activities or where the Client Plan desires to diversify
lending responsibility among multiple entities. If UBS NY is to act as
a sub-agent, the Primary Lending Agreement will expressly disclose that
UBS NY is to so act. Further, the Primary Lending Agreement will 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 (including UBS NY) 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 UBS NY under which the primary lending
agent will retain and authorize UBS NY, 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 and the list
of permissible borrowers under the Sub-Agency Agreement (which will
include one or more UBS Borrowers) will be limited to those approved
borrowers listed as such under the Primary Lending Agreement.
UBS NY represents that the Sub-Agency Agreement will contain
provisions which are in substance comparable to those described above
in connection with an Agency Agreement in situations where UBS NY is
the primary lending agent. In this regard, UBS NY will make the same
representation in the Sub-Agency Agreement as described above with
respect to arm's length dealing with UBS Borrowers. The Sub-Agency
Agreement will also set forth the basis and rate for UBS NY's
compensation to be paid by the primary lending agent.
12. In all cases, UBS NY will maintain, in the United States for a
period of six years, such records as necessary to assure compliance
with its representations that all loans to UBS Borrowers 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.
[[Page 15458]]
In addition, UBS NY shall retain for six months tape recordings
evidencing all securities loan transactions with UBS Borrowers. This
will enable Client Plans and the Department to review UBS NY's
adherence to its representation that all loans to UBS Borrowers are at
arm's length.
13. 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 whereupon the UBS Borrowers will 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 Client 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 UBS Borrowers, whichever is less.
14. UBS NY will enter into the same form of Loan Agreement with the
applicable UBS Borrower 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
a UBS Borrower. The Loan Agreement will explain the basis for
compensation to the Client Plan for lending securities to the UBS
Borrower under each category of collateral. The Loan Agreement also
will contain a requirement that the UBS Borrower must pay all transfer
fees and transfer taxes related to the security loans.
However, before entering into the Loan Agreement, the applicable
UBS Borrower will furnish each Client Plan its most recently available
audited and unaudited statements to UBS NY, and in turn, such
statements are provided to the Client Plan before the Client Plan
approves the terms of the Loan Agreement. The Loan Agreement will
contain a requirement that the applicable UBS Borrower 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, UBS NY will not make any further loans to the UBS Borrower
unless an independent fiduciary of the Client Plan approves the loan in
view of the changed financial condition. Conversely, if the UBS
Borrower 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, it is represented
that UBS NY monitors the creditworthiness of all borrowers and
adjusts exposure limits to such UBS Borrowers where necessary. Under
the Loan Agreement, the UBS Borrower represents that it will comply,
at all times, with all applicable laws and regulations of applicable
regulatory and self-regulatory organizations. Noncompliance with
required capitalization levels would constitute an event of default
under the Loan Agreement, thereby enabling a Client Plan to exercise
remedies by terminating the loans, liquidating the collateral and
applying the collateral against the purchase of replacement
securities.
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15. As noted above, the agreement by UBS NY to provide securities
lending services, as agent, to a Client Plan will be embodied in the
Agency Agreement. The Client Plan and UBS NY will agree to the
arrangement under which UBS NY will be compensated for its services as
lending agent. This fee arrangement will generally be a percentage of
either the return earned on cash collateral by the Client Plan or, in
the case of non-cash collateralized loans, a percentage of the fee paid
to the Client Plan by the UBS Borrower. Several factors may impact the
fee structures, such as industry practices and changes in the market,
as well as the types of securities being lent (e.g., domestic versus
foreign securities). 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 the UBS Borrower and UBS NY. In any event, the securities lending
fee to be paid to UBS NY will, at all times, comply with PTE 82-
63.20 In addition, an independent fiduciary of the Client
Plan may authorize UBS NY to act as custodian or directed trustee of
the Client Plan's portfolio of securities available for lending and to
receive a reasonable and customary fee for such services.
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\20\ Conditions (c) and (d) of PTE 82-63 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.
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Similarly, with respect to arrangements under which UBS NY 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 its fee (the portion to be determined
by the primary lending agent, in its sole discretion) to any sub-agent,
including UBS NY, which is to provide securities lending services to
the Client Plan. 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.
16. Each time a Client Plan lends securities to a UBS Borrower
pursuant to the Loan Agreement, UBS NY 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.
17. The Client Plan will be entitled to the equivalent of all
distributions made to holders of the borrowed securities, including
interest and dividends during the loan period.21 The Loan
Agreement will provide that the Client Plan may terminate any loan at
any time. Upon a termination, the UBS Borrower will be contractually
obligated to return securities identical to the borrowed securities (or
the equivalent thereof in the event of reorganization, recapitalization
or merger of the issuer of the borrowed securities) to the Client Plan
within five business days of written notification of termination or, if
sooner, within the normal settlement period in the principal market in
which the loaned securities are traded (unless a longer period of time
permitted pursuant to an applicable Department exemption). The Loan
Agreement will give the Client Plan a continuing security interest in
and a lien on the collateral. If the UBS Borrower 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.
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\21\ The Applicants represent that dividends and other
distributions on foreign securities payable to a lending Client Plan
are subject to foreign tax withholdings. Under these circumstances,
the applicable UBS Borrower, where necessary, will gross-up the in-
lieu-of-payment (in respect of such dividend or distribution it
makes) to the Client Plan so that the Client Plan will receive back
what it otherwise would have received (by way of dividend or
distribution) had it not loaned the securities.
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[[Page 15459]]
18. UBS NY will establish each day a written schedule of lending
fees 22 and rebate rates 23 with respect to new
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, in order to assure
uniformity of treatment among borrowing brokers and to limit the
discretion UBS NY would have in negotiating securities loans to UBS
Borrowers. 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 UBS
Borrowers at rates or lending fees that are less advantageous to the
Client Plans than those on the schedule. In addition, it is represented
that the method of determining the daily securities lending rates (fees
and rebates), the minimum lending fees payable by UBS Borrowers and the
maximum rebate payable to UBS Borrowers will be specified in an exhibit
attached to the Agency Agreement to be executed between the independent
fiduciary of the Client Plan and UBS NY in cases where UBS NY is the
direct securities lending agent.
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\22\ UBS NY will adopt minimum daily lending fees for non-cash
collateral payable by UBS Borrowers to UBS NY on behalf of a Client
Plan. Separate minimum daily lending fees will be established with
respect to loans of designated classes of securities, such as those
identified above. With respect to each designated class of
securities, the minimum lending fee will be stated as a percentage
of the principal value of the loaned securities. UBS NY will submit
such minimum daily lending fees to an independent fiduciary of the
Client Plan for approval before initially lending any securities to
UBS Borrowers on behalf of such Client Plan.
\23\ Separate maximum daily rebate rates will be established
with respect to loans of securities within the designated classes
identified above.
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19. The rebate rates with respect to cash-collateralized loans made
by Client Plans 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 with respect to loans made by Client Plans collateralized by other
than cash will be set daily to reflect conditions as influenced by
potential market demand.
20. UBS NY will negotiate rebate rates for cash collateral payable
to each borrower, including UBS Borrowers, on behalf of a Client Plan.
Where cash collateral is derived from a loan with an expected maturity
date (i.e., a term loan) and is intended to be invested in instruments
with maturities corresponding generally to the maturity of the term
loan, the aggregate rebate over the life of the loan will be less than
the total investment return (assuming no investment default). Where
cash collateral is derived from a loan with an overnight maturity or an
open maturity (i.e., no specified maturity date), the aggregate rebate
will be less than the total investment return (assuming no investment
default) for the period during which the securities were outstanding on
loan. For example, where cash collateral derived from an overnight loan
is intended to be invested in a generic repurchase agreement, any
rebate determined with respect to an overnight purchase agreement
benchmark will be set below the ``ask'' quotation therefor.
With respect to any loan to a UBS Borrower, UBS NY, at the
inception of such loan, will not negotiate and agree to a rebate rate
with respect to such loan which would produce a zero or negative return
to the Client Plan over the life of the loan (assuming no default on
the investments made by UBS NY where it has investment discretion over
the cash collateral or on investments expected to be made by the Client
Plan's designee, where UBS NY does not have investment discretion). In
this regard, with respect to each designated class of securities, the
maximum daily rebate rate will generally be the lower of (a) the
overnight repo rate or Federal Funds rate, minus a stated percentage
and (b) the actual investment rate for the relevant cash collateral,
minus a stated percentage. As noted above, UBS NY will disclose the
formula for determining the maximum daily rebate rate to an independent
fiduciary of a Client Plan for approval before lending any securities
to UBS Borrowers on behalf of the Plan.
21. If UBS NY 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), UBS NY, 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, UBS NY will provide the independent
fiduciary of the Client Plan with such information as the fiduciary may
reasonably request regarding such adjustment.
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. Thus, the
competitiveness of the loan fee will be continuously tested in the
marketplace. Accordingly, the Applicants believe that loans to UBS
Borrowers should result in competitive rate income to the lending
Client Plan.
22. At all times, UBS NY will effect loans in a prudent and
diversified manner. While UBS NY 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 UBS NY 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; or (c) the ``first in
line'' borrower cannot be ascertained, as an operational matter,
because several borrowers spoke to different UBS NY representatives at
or about the same time with respect to the same security. 24
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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\24\ According to the Applicants, the ``first come, first
served'' allocation would not apply where UBS NY is not acting as a
securities lending agent, but rather is acting as, for example, a
custodian or directed trustee to a Client Plan that has entered into
an exclusive arrangement with the borrower as described under Plan
B. In such a situation, the Applicants note that the UBS Borrower
would be choosing from whom to borrow and UBS NY has no right or
obligation to lend to the UBS Borrower the securities from other
clients or lend the securities which are subject to such Exclusive
Borrowing Agreements.
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23. UBS NY agrees to indemnify and hold harmless the applicable
Client Plan (including the sponsor and fiduciaries of such Client Plan)
in the United States for any transactions covered by this exemption
with the UBS Borrower so that the Client Plan does not have to
litigate, in the case of a UBS Foreign Borrower, in a foreign
jurisdiction nor sue the UBS Foreign Borrower to realize on the
indemnification. Such indemnification by UBS NY will be against any and
all reasonably foreseeable damages, losses, liabilities, costs and
expenses (including attorney's fees) which the Client Plan may incur or
suffer arising from any impermissible use by the UBS Borrower of the
loaned securities. The applicable UBS Borrower
[[Page 15460]]
will also be liable to the Client Plan for breach of contract for any
failure by such UBS Borrower to deliver loaned securities when due in
accordance with the provisions of the Loan Agreement or to otherwise
comply with the terms of the Loan Agreement.
If any event of default occurs, UBS NY, promptly and at its own
expense, will purchase, or cause to be purchased on the open market,
for the account of the Client Plan securities identical to the borrowed
securities (or their equivalent as discussed above). If the collateral
is insufficient to accomplish such purchase, UBS NY 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 indemnify properly under this provision).
Alternatively, if such replacement securities cannot be obtained on the
open market, UBS NY will pay the Client Plan the difference in dollars
between the market value 25 of the loaned securities and the
market value of the collateral on the date of the borrower's breach of
its obligation to return the loaned securities.
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\25\ In relevant part, the ``market value'' of any securities
listed on a national securities exchange in the U.S. will be the
last sales price on such exchange on the preceding business day (the
Business Day) or, if there is no sale on that day, the last sale
price on the next preceding Business Day on which there is a sale on
such exchange, as quoted on the consolidated tape (the Consolidated
Tape). If the principal market for securities to be valued is the
over-the-counter market, their market value will be the closing sale
price as quoted on the National Association of Securities Dealers
Automated Quotation System (NASDAQ) on the preceding Business Day or
the closing price on such Business Day if the securities are issues
for which last sale prices are not quoted on NASDAQ. If the
securities to be valued are not quoted on NASDAQ, their market value
shall be the highest bid quotation appearing in The Wall Street
Journal, National Quotation Bureau pink sheets, Salomon Brothers
quotation sheets, quotation sheets of registered market makers and,
if necessary, dealers' telephone quotations on the preceding
Business Day. (In each case, if the relevant quotation does not
exist on such day, then the relevant quotation on the next preceding
Business Day in which there is such a quotation would be the market
value.)
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If, however, as noted in Representation 17, the event of default is
caused by the UBS Borrower's failure to return the securities within
the designated time, the Client Plan will have the right 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.
24. The Client Plan, or its designee, will receive collateral from
each UBS Borrower 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 the UBS
Borrower. All collateral will be received by the Client Plan, or its
designee, in the United States. The collateral will consist of U.S.
currency, securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, or irrevocable bank letters of credit
issued by a U.S. bank other than UBS NY or an affiliate thereof, or any
combination thereof, or other collateral permitted under PTE 81-6, as
amended, modified, supplemented or superseded by Department exemption
or promulgation.
The market value (or, in the case of a letter of credit, a stated
amount) 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
continuing security interest in and a lien on the collateral. UBS NY
will monitor the level of the collateral daily. If the market value of
the collateral, on the close of trading on a business day, is less than
100 percent (or such greater percentage as agreed to by the parties) of
the loaned securities at the close of business on that day, UBS NY will
require the UBS Borrowers to deliver by the close of business on the
next day sufficient additional collateral to bring the level back to at
least 102 percent.
25. UBS NY will maintain the situs of the Loan Agreements
(evidencing the Client Plan's right to return of the loaned securities
and the Plan's continuing interest in and lien on the collateral) in
the United States and, prior to a transaction involving a UBS Foreign
Borrower, the applicable UBS Foreign Borrower will (a) agree to submit
to the jurisdiction of the courts of the United States; (b) agree to
appoint a Process Agent for service of process in the United States,
which may be an affiliate; (c) consent to service of process on the
Process Agent; and (d) agree to be indemnified in the United States for
any transaction covered by this exemption.
26. Unless otherwise agreed, each Client Plan participating in the
lending program will be sent a monthly transaction report. Such 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 my 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, UBS NY will provide
daily confirmations of securities lending transactions and weekly
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, UBS NY will
provide a Plan fiduciary with copies of the proposed exemption and
notice granting the exemption.
27. In order to provide the means for monitoring lending activity,
rates on loans to UBS Borrowers compared with loans to other brokers
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 UBS Borrowers and to other borrowers as
compared to the total collateral held for both categories of loans.
Further, 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 UBS Borrowers 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.
28. To ensure that any lending of securities to a UBS Borrower will
be monitored by an independent fiduciary of above average experience
and sophistication in matters of this kind, only Client Plans with
total assets having an aggregate market value of at least $50 million
are permitted to lend securities to UBS Borrowers. However, 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 UBS Borrowers, the
foregoing $50 million requirement will be deemed 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
[[Page 15461]]
or other entity is not the employer or an affiliate of the employer,
such fiduciary will be required to have total assets under its
management and control, exclusive of the $50 million threshold amount
attributable to Client 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 UBS Borrowers, the foregoing $50 million requirement will be
deemed 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; and (c) must have total assets under its
management and control, exclusive of the $50 million threshold amount
attributable to Client Plan investment in the commingled entity, which
are in excess of $100 million.
In addition, none of the entities described above must be formed
for the sole purpose of making loans of securities.
29. The Applicants represent that the conditions set forth in this
proposed exemption will subject UBS NY and UBS Borrowers to all of the
conditions imposed on broker-dealers under PTE 81-6, other than
registration under the 1934 Act with respect to the UBS Foreign
Borrowers. The Applicants note that such conditions in PTE 81-6 include
requirements relating to daily marking to market, setting collateral at
100 percent of the market value of the securities, the rules for
termination of the loan and the return of the borrowed securities.
Plan B
30. UBS Borrowers may directly negotiate Exclusive Borrowing
Agreements with fiduciaries of Client Plans, including Plans for which
UBS NY will serve as custodian or directed trustee or provide other
related services with respect to the portfolio of securities to be
loaned, where such fiduciary is independent of the UBS Borrowers and
UBS NY. Under such an Agreement, UBS Borrowers will have exclusive
access for a specified period of time to borrow certain securities of
the Client Plan pursuant to certain conditions. UBS NY will not
participate in the negotiation of the Exclusive Borrowing Agreement.
The involvement of UBS NY, if any, will be limited to such activities
as holding securities available for lending, handling the movement of
borrowed securities and collateral and investing or depositing any cash
collateral and supplying the Client Plan with certain reports. The
Applicants represent that, under the Exclusive Borrowing Agreement,
neither UBS NY nor UBS Borrowers will perform for Client Plans, the
functions which constitute the essential functions of a securities
lending agent.
31. On or prior to delivery of loaned securities to a UBS Borrower,
the Client Plan or its designee, will receive from the UBS Borrower by
physical delivery, book entry in a securities depository, wire transfer
or similar means. The collateral will consist of those types of
collateral permitted under PTE 81-6, as amended, modified, supplemented
or superseded by Department exemption or promulgation.
The market value of the collateral on the day the loan settles will
be at least 102 percent of the market value of the loaned securities.
The Exclusive Borrowing Agreement will give the Client Plan a
continuing security interest in and a lien on the collateral. UBS NY,
or another designee of the Client Plan, will monitor the level of the
collateral daily and, if its market value falls below 100 percent, the
UBS Borrower will deliver sufficient additional collateral by the
following day such that the market value of all collateral will equal
at least 102 percent of market value of the loaned securities.
32. The UBS Borrower will maintain, or cause to be maintained, the
situs of the Exclusive Borrowing Agreement (evidencing the Client
Plan's right to return the loan securities and the Plan's continuing
interest in and lien on the collateral) in the United States, and prior
to a transaction involving a UBS Foreign Borrower, the applicable UBS
Foreign Borrower will (a) agree to submit to the jurisdiction of the
courts of the United States; (b) agree to appoint a Process Agent for
service of process in the United States, which may be an affiliate; (c)
consent to service of process on the Process Agent; and (d) agree to be
indemnified in the United States for any transaction covered by this
exemption.
33. Before entering into an Exclusive Borrowing Agreement, the UBS
Borrower will furnish to the Client Plan the most recent publicly-
available audited and unaudited statements of its financial condition.
The Exclusive Borrowing Agreement will also contain a representation by
the UBS Borrower that, as of each time it borrows securities, there
have been no material adverse changes in its financial condition.
Further, all procedures under the Exclusive Borrowing Agreement will,
at a minimum, conform to the applicable provisions of PTE 81-6 and PTE
82-63 (except as otherwise noted herein).
Unless otherwise agreed, the UBS Borrower or, in the case of some
Client Plans, UBS NY, will provide a monthly report to the Client Plan
showing, on a daily basis, the aggregate market value of all
outstanding security loans to each UBS Borrower and the aggregate
market value of the collateral.
34. With regard to those Client Plans for which UBS NY provides
custodial, trustee, clearing and/or reporting functions relative to
securities loans, an independent Plan fiduciary shall review and
approve any fees which may be paid to UBS NY for such services. Any
such fee would be in addition to any fee UBS NY has negotiated to
receive from any such Client Plan for standard custodial or other
services unrelated to the securities lending activity. The arrangement
to have UBS NY provide such services relative to securities loans to a
UBS Borrower under an Exclusive Borrowing Agreement will be terminable
by the Client Plan within five business days of receipt of written
notice, without penalty to the Client Plan, other than any return to
the UBS Borrower of the portion of the fee paid by the UBS Borrower to
the Client Plan if the Client Plan also terminates its Agreement with
the UBS Borrower. Procedures similar to those described under Plan A
(see Representation 13) will be followed.
Before entering into or renewing an Exclusive Borrowing Agreement
with a Client Plan to provide such administrative services relative to
securities loans to UBS Borrowers, UBS NY will furnish to the Client
Plan any publicly available information which it believes is necessary
for the Client Plan to determine whether to enter into or renew the
Agreement.
35. In exchange for the exclusive right to borrow certain
securities from a Client Plan, the UBS Borrower will pay the Client
Plan either a flat fee, or a minimum flat fee plus a percentage (to be
negotiated at the time the Exclusive Borrowing Agreement is entered
into) of the total balance outstanding of borrowed securities, or a
percentage of
[[Page 15462]]
the total balance outstanding without any flat fee. In light of this
arrangement, all earnings generated by cash collateral will be returned
to the UBS Borrower.
36. As under Plan A, the Client Plan will be entitled, under Plan
B, to the equivalent of all interest, dividends or other distributions
on any borrowed securities that the Client Plan would have received had
it remained the record owner of the securities (see Representation 17
as well as the representations regarding foreign tax withholdings). In
addition, as under Plan A, the same asset limitations and investor
sophistication requirements that are set forth in Representation 28 as
well as the conditions of PTE 81-6, except as otherwise noted herein,
will be applicable.
37. The Exclusive Borrowing Agreement may be terminated by either
party to the agreement at any time. Each UBS Borrower will agree that
upon termination, it will deliver any borrowed securities back to the
Client Plan within five business days of written notification of
termination or, if sooner, within the normal settlement period in the
principal market in which the loaned securities are traded (unless a
longer period is permitted pursuant to an applicable Department
exemption). If the UBS Borrower fails to return the securities or the
equivalent thereof, the Client Plan will have certain rights under the
Agreement to realize upon the collateral.
38. Under the Exclusive Borrowing Agreement, UBS NY will indemnify
and hold harmless the Client Plan in the United States (including the
sponsor and fiduciaries of such Client Plan) for any transactions
covered by this exemption with a UBS Borrower so that the Client Plan
does not have to litigate, in the case of a UBS Foreign Borrower, in a
foreign jurisdiction nor sue the UBS Foreign Borrower to realize on the
indemnification. Such indemnification, by UBS NY, will be against any
and all reasonably foreseeable damages, losses, liabilities, costs and
expenses (including attorney's fees) which the Client Plan may incur or
suffer, arising from any impermissible use by the UBS Borrower of the
loaned securities or the failure of the UBS Borrower to deliver loaned
securities in accordance with the applicable Loan Agreement or to
otherwise comply with the terms of such agreement, except to the extent
that such losses or damages are caused by the Client Plan's own
negligence. In the event any default occurs with respect to the
borrowed securities, UBS NY will follow the procedures described above
in Representation 23.
39. In summary, the Applicants represent that the proposed
transactions will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) Plan A requires that the form of the Loan Agreement pursuant to
which any loan is effected will be approved by a fiduciary of the
Client Plan who is independent of UBS NY and UBS Borrowers before a
Client Plan lends any securities to UBS Borrowers, while under Plan B,
UBS Borrowers will directly negotiate Exclusive Borrowing Agreements
with a Client Plan, the fiduciary of which is also independent of UBS
NY and the UBS Borrowers.
(b) The lending arrangements under both Plan A and Plan B will
permit Client Plans to lend to UBS Borrowers and will enable such Plans
to diversify the list of eligible borrowers and earn additional income
from the loaned securities on a secured basis, while continuing to
receive dividends, interest payments and other distributions due on
those securities.
(c) With respect to securities lending transactions in which a UBS
Foreign Borrower is the borrower, the proposed exemption will enable
Client Plans to realize low-risk returns on securities that otherwise
would remain idle, as in securities lending transactions executed
pursuant to PTE 81-6, by broker-dealers registered in the United
States, and the proposed exemption generally imposes terms and
conditions upon transactions entered into by UBS Foreign Borrowers
which are the same as or comparable to those imposed on U.S. borrowers
under PTE 81-6, except as otherwise noted herein.
(d) Under both Plan A and Plan B, the Client Plan will receive
sufficient information concerning each UBS Borrower's financial
condition before the Client Plan lends any securities to such UBS
Borrower.
(e) Under both Plan A and Plan B, the collateral on each loan to a
UBS Borrower initially 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 the collateral levels will be
monitored daily by UBS NY under Plan A and by UBS NY or another
custodian under Plan B.
(f) Under both Plan A and Plan B, the Client Plans will receive
agreed upon periodic reports (prepared no less frequently than monthly)
containing information on loan activity, fees, the level of the
collateral and loan return/yield.
(g) Under both Plan A and Plan B, UBS NY and UBS Borrowers will
have no discretionary authority or control over the Client Plan's
acquisition or disposition of securities available for loan.
(h) Under both Plan A and Plan B, the applicable fee or rebate
payable for each loan and other terms of the loan will be at least as
favorable to the Client Plans as those of a comparable arm's length
transaction between unrelated parties.
(i) Under both Plan A and Plan B, all of the procedures under the
proposed transactions will, at a minimum, conform to the applicable
provisions of PTE 81-6, PTE 82-63 and Rule 15a-6, except as otherwise
noted herein, and also will be in compliance with the applicable
securities laws of the United States, the United Kingdom, Switzerland
and Japan.
Notice to Interested Persons
Notice of the proposed exemption will be provided to interested
persons by UBS NY within five (5) days of the publication of the notice
of proposed exemption in the Federal Register. Such notice will be
provided to appropriate trustees or fiduciaries of Client Plans which
have an interest in lending securities to UBS Borrowers by first-class
mail or by hand delivery. 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
pending exemption. Written comments and hearing requests are due within
thirty-five (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.)
Beer Nuts, Inc. Profit Sharing Plan (the Plan) Located in Bloomington,
Illinois
[Exemption Application No. D-10531]
Proposed Exemption
The Department is considering granting a retroactive exemption
under the authority of section 408(a) of the Act and 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 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 to the sale (the Sale) by the Plan of certain
limited partnership interests (the
[[Page 15463]]
Interests) to Beer Nuts, Inc. (Beer Nuts), a party in interest and a
disqualified person with respect to the Plan, provided that the
following conditions were satisfied:
(a) the terms of the Sale were at least as favorable to the Plan as
those obtainable in an arm's length transaction with an unrelated
party;
(b) the Sale was a one-time transaction for cash;
(c) the Plan paid no commissions or other expenses relating to the
Sale; and
(d) The Sale price was not less than the fair market value of the
Interests as determined by a qualified independent appraiser.
Effective Date: If granted, the proposed exemption will be
effective as of December 30, 1996.
Summary of Facts and Representations
1. The Plan is a profit sharing plan with 59 participants. The Plan
is sponsored and administered by Beer Nuts, manufacturer of a specialty
line of snack nuts. The trustees (the Trustees) of the Plan are Mr.
James A. Shirk, President and CEO of Beer Nuts, and Mr. Russell O.
Shirk, Chairman of the Board of Directors for Beer Nuts. As of December
31, 1996, the Plan held assets valued at $5,413,988.
2. Beer Nuts seeks a retroactive exemption for its December 30,
1996 purchase of the Interests from the Plan. The Interests consisted
of 100 units of the Balcor Equity Pension Investors I (Balcor I)
limited partnership and 200 units of the Balcor Pension Investors VI
(Balcor VI) limited partnership. The limited partnerships, established
in and subject to the laws of the State of Illinois, were designed to
invest in real estate. The general partner is the Balcor Company of
Deerfield, Illinois.
According to the applicant, the Plan originally purchased the
Balcor I units in 1983 for $50,000, or $500 per unit. While holding the
units, the Plan received $37,347, or $373.47 per unit, in total
distributions. On December 30, 1996, Beer Nuts purchased the Balcor I
units from the Plan for $32,067, or $320.67 per unit. Thus, the Plan
received a total of $69,414 ($694.14 per unit) on an investment of
$50,000.
The Plan also purchased the 200 Balcor VI units in 1983, paying a
total of $50,000, or $250 per unit. While holding these units, the Plan
received $48,072, or $240.36 per unit, in total distributions. The Plan
sold the Balcor VI units to Beer Nuts on December 30, 1996 for $19,100,
or $95.50 per unit. Therefore, the plan received a total of $67,172
($335.86 per unit) on an investment of $50,000.
3. The Plan's need to sell the Interests arose primarily out of the
decision by the Trustees to transfer the Plan's administrative duties
to the Principal Mutual Life Insurance Company (the Principal), and to
purchase a group annuity contract therefrom. The Interests could not be
held under the group annuity contract, but would instead be considered
``outside assets'' by the Principal, resulting in additional expenses
related thereto. Furthermore, the Trustees wanted to liquidate
underperforming assets and reinvest in an asset providing for a higher
rate of return.
Acting on the advice of their insurance agent, the Trustees decided
to obtain an appraisal for the Interests and then purchase them
directly from the Plan. Accordingly, the Trustees consulted the
September 30, 1996 appraisal which was jointly performed by two firms,
Valuation Counselors Group, Inc. and Darby and Associates (VCG-Darby).
Each firm has had extensive experience in valuing partnership interests
and was independent of Beer Nuts. VCG-Darby had been hired by the
Balcor Company to value, on an ongoing basis, partnership interests
issued by 16 of the Balcor Company's partnerships, including Balcor I
and Balcor VI.
Adjusted for the October 1996 distributions,26 the
Balcor I units had a net value of $320.67 per unit, and the Balcor VI
units had a net value of $95.50 per unit. Before undertaking the
transaction, however, the Plan received an unsolicited offer for the
Balcor I units on December 2, 1996 from an unrelated third party, the
First Trust Company, LP (First Trust). First Trust offered to purchase
up to 4.9% of the limited partnership interests in Balcor I at a price
of $200 per unit. Because the amount of the offer was significantly
lower than the VCG-Darby valuation, Beer Nuts opted to purchase the
Interests from the Plan using VCG-Darby's figures.
---------------------------------------------------------------------------
\26\ According to documents submitted by the applicant, the
unadjusted September 30, 1996 VCG-Darby valuation for the Interests
was $366 per unit for the Balcor I units and $122 per unit for the
Balcor VI units. However, adjustments were made for subsequent
distributions from the partnership of $45.33 per Balcor I unit and
$26.50 per Balcor VI unit.
---------------------------------------------------------------------------
In further support of its claim that it acted in good faith, the
applicant points to three subsequent offers for the Interests. On
January 1, 1997, First Trust submitted an unsolicited offer to buy up
to 4.9% of the Balcor VI units for $61 per unit. On March 6, 1997,
Madison Partnership Liquidity Investors CC, LLC (Madison) offered to
purchase up to 4.9% of the Balcor I units for $110 per unit, and up to
4.9% of the Balcor VI units for $36 per unit. Beer Nuts believes that
the fact it paid an amount significantly in excess of the First Trust
and Madison offers demonstrates that it conducted the transaction in a
manner designed to protect the interests of the Plan and those of the
participants and beneficiaries.
4. According to the applicant, neither the Trustees of the Plan nor
the officers of Beer Nuts involved in the transaction were aware of the
prohibited nature of the transaction until contacting their accountant,
Mr. Bruce Breitweiser, in early 1997 about changing the Plan year to a
calendar year in conjunction with the transfer of the Plan's assets to
the Principal. While reviewing the Plan's records, Mr. Breitweiser
discovered the prohibited transaction. Upon informing the applicant,
Mr. Breitweiser learned that the Trustees engaged in the transaction on
the advice of their insurance agent. Soon thereafter, he contacted the
legal department at the Principal, which agreed with his conclusion as
to the prohibited nature of the transaction. At this point, Mr.
Breitweiser began obtaining all of the documentation from Beer Nuts and
the Principal pertaining to the transaction. After doing so, he
contacted the Department about securing retroactive exemptive relief.
5. The applicant represents that the transaction was
administratively feasible in that it was a one-time transaction for
cash. Furthermore, the applicant states that the transaction was in the
interests of the Plan and its participants and beneficiaries because it
provided for the consolidation of the Plan's assets, reduced record-
keeping costs, ensured that the Plan received a return on the Interests
in excess of its original investment, and disposed of illiquid and
underperforming assets facilitating the investment of the proceeds in
an asset better suited to the needs of the Plan and its participants
and beneficiaries. Finally, the applicant represents that the
transaction was protective of the rights of the participants and
beneficiaries because the Plan received for the Interests an amount
determined by a qualified, independent appraiser.
6. In summary, the applicant represents that the subject
transaction satisfied the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (a) the terms of
the Sale were at least as favorable to the Plan as those obtainable in
an arm's-length transaction with an unrelated party; (b) the Sale was a
one-time transaction for cash; (c) the Plan
[[Page 15464]]
paid no commissions or other expenses relating to the Sale; and (d) the
Sale price was not less than the fair market value of the Interests as
determined by a qualified, independent appraiser.
Notice to Interested Persons
Notice of the proposed exemption shall be given 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 pendency of the exemption
as published in the Federal Register and shall inform interested
persons of their right to comment and request a hearing with respect to
the proposed exemption. Comments and requests for a hearing are due on
or before May 15, 1998.
For Further Information Contact: Mr. James Scott Frazier of the
Department, telephone (202) 219-8891 (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 25th day of March 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 98-8197 Filed 3-30-98; 8:45 am]
BILLING CODE 4510-29-P