[Federal Register Volume 63, Number 118 (Friday, June 19, 1998)]
[Notices]
[Pages 33716-33727]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16335]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10327, et al.]
Proposed Exemptions; Lehman Brothers, 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, within 45 days from the date of publication of this Federal
Register Notice. Comments and requests for a hearing should state: (1)
the name, address, and telephone number of the person making the
comment or request, and (2) the nature of the person's interest in the
exemption and the manner in which the person would be adversely
affected by the exemption. A request for a hearing must also state the
issues to be addressed and include a general description of the
evidence to be presented at the hearing.
ADDRESS: 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.
[[Page 33717]]
Lehman Brothers Inc. (Lehman) and Lehman Brothers Trust Company and
Affiliates (LBTC) Located in New York, New York
[Application No. D-10327]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to: (1) the lending of securities to Lehman or to
any other U.S. registered broker-dealer who is an affiliate of Lehman
(collectively, Lehman Broker-Dealers) by employee benefit plans,
including commingled investment funds holding plan assets (the Client
Plans), with respect to which the Lehman Broker-Dealer is a party in
interest, or for which LBTC or any other affiliate of Lehman, acts as
directed trustee or custodian and/or securities lending agent (or sub-
agent) for such Client Plan; and (2) the receipt of compensation by
LBTC in connection with these transactions, provided that the following
conditions are met:
1. Neither the Lehman Broker-Dealers nor LBTC has or exercises
discretionary authority or control with respect to the investment of
the assets of Client Plans involved in the transaction (other than with
respect to the investment of cash collateral after the securities have
been loaned and collateral received), or renders investment advise
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those
assets, including decisions concerning a Client Plan's acquisition or
disposition of securities available for loan;
2. Before a Client Plan participates in a securities lending
program and before any loan of securities to the Lehman Broker-Dealers
is affected, a Client Plan fiduciary who is independent of LBTC and the
Lehman Broker-Dealers must have:
(a) Authorized and approved a securities lending authorization
agreement with LBTC (the Agency Agreement), where LBTC is acting as the
direct securities lending agent;
(b) Authorized and approved the primary securities lending
authorization agreement (the Primary Lending Agreement) with the
primary lending agent, where LBTC is lending securities under a sub-
agency arrangement with the primary lending agent;1
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\1\ When LBTC acts as sub-agent, rather than the primary lending
agent, the primary lending agent is receiving no section 406(b) of
the Act relief herein. In such situations, the primary lending agent
may be provided relief by Prohibited Transaction Class Exemption
(PTE) 81-6 and PTE 82-63. PTE 81-6 was published at 46 FR 7527,
January 23, 1981, as amended at 52 FR 18754, May 19, 1987, and PTE
82-63 was published at 47 FR 14804, April 6, 1982.
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(c) Approved the general terms of the securities loan agreement
(the Basic Loan Agreement) between such Client Plan and the borrower,
the Lehman Broker-Dealers, the specific terms of which are negotiated
and entered into by LBTC;
3. A Client Plan may terminate the securities lending agency
agreement at any time without penalty on five (5) business days notice,
whereupon the Lehman Broker-Dealers shall deliver securities identical
to the borrowed securities (or the equivalent in the event of
reorganization, recapitalization or merger of the issuer of the
borrowed securities) to the plan within (a) the customary delivery
period for such securities, (b) five (5) business days, or (c) the time
negotiated for such delivery by the Client Plan and the Lehman Broker-
Dealers, whichever is less;
4. LBTC (or another custodian on behalf of the Client Plan) will
receive from the Lehman Broker-Dealers either by physical delivery,
book entry in a securities depository, wire transfer or similar means
collateral consisting of U.S. dollars, securities issued or guaranteed
by the U.S. Government or its agencies or irrevocable U.S. bank letters
of credit (issued by an entity other than the Lehman Broker-Dealers) or
other collateral permitted under Prohibited Transaction Exemption (PTE)
81-6 (as amended from time to time or, alternatively, any additional or
superceding class exemption that may be issued to cover securities
lending by employee benefit plans) 2 by the close of
business on or before the day the loaned securities are delivered to
the Lehman Broker-Dealers;
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\2\ The Department notes that this proposed exemption would
provide relief from the restrictions of section 406(a) as well as
section 406(b)(1) and (b)(2) of the Act, whereas PTE 81-6 provides
relief only for securities lending transactions which would violate
section 406(a) of the Act. Thus, any amendments that may be made by
the Department to PTE 81-6 which would permit different types of
assets to be used as collateral for a securities loan would not
allow the use of such assets as collateral under this proposed
exemption to the extent that the transactions covered by this
exemption (if granted) would require relief from section 406(b) of
the Act.
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5. The market value of the collateral will initially equal at least
102 percent of the market value of the loaned securities. If the market
value of the collateral on the close of trading on a business day falls
below 100 percent of the market value of the borrowed securities at the
close of business on that day, the Lehman Broker-Dealers will deliver
additional collateral on the following day such that the market value
of the collateral will again equal 102 percent. The Basic Loan
Agreement will give the Client Plans a continuing security interest in,
and a lien on, the collateral. LBTC will monitor the level of the
collateral daily;
6. All the procedures regarding the securities lending activities
will at a minimum conform to the applicable provisions of PTE 81-6 and
PTE 82-63;
7. In the event the Lehman Broker-Dealer fails to return securities
within a designated time, the Client Plan will have the right under the
Basic Loan Agreement to purchase securities identical to the borrowed
securities and apply the collateral to payment of the purchase price.
If the collateral is insufficient to satisfy the Lehman Broker-Dealer's
obligation to return the Client Plan's securities, the Lehman Broker-
Dealer will indemnify the Client Plan with respect to the difference
between the replacement cost of securities and the market value of the
collateral on the date the loan is declared in default, together with
expenses incurred by the Client Plan plus applicable interest at a
reasonable rate, including any attorneys fees incurred by the Client
Plan for legal action arising out of default on the loans, or failure
by the Lehman Broker-Dealer to properly indemnify the Client Plan;
8. The Client Plan will receive the equivalent of all distributions
made to the holders of the borrowed securities during the term of the
loan, including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to purchase
additional securities, or other distributions;
9. Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to the
Lehman Broker-Dealers; provided, however, that--
(a) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization (the Related Client Plans), whose assets are commingled
for investment purposes in a single master trust or any other entity
the assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the
Plan Asset Regulation), which entity is engaged in securities lending
arrangements with the Lehman Broker-Dealers, the foregoing $50 million
[[Page 33718]]
requirement shall be deemed satisfied if such trust or other entity has
aggregate assets which are in excess of $50 million; provided that if
the fiduciary responsible for making the investment decision on behalf
of such master trust or other entity is not the employer or an
affiliate of the employer, such fiduciary has total assets under its
management and control, exclusive of the $50 million threshold amount
attributable to plan investment in the commingled entity, which are in
excess of $100 million.
(b) 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 the Lehman Broker-Dealers, the foregoing $50 million requirement
is satisfied if such trust or other entity has aggregate assets which
are in excess of $50 million (excluding the assets of any Plan with
respect to which the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity or any member of
the controlled group of corporations including such fiduciary is the
employer maintaining such Plan or an employee organization whose
members are covered by such Plan). However, the fiduciary responsible
for making the investment decision on behalf of such group trust or
other entity--
(i) Has full investment responsibility with respect to plan assets
invested therein; and
(ii) Has total assets under its management and control, exclusive
of the $50 million threshold amount attributable to plan investment in
the commingled entity, which are in excess of $100 million.
(In addition, none of the entities described above are formed for the
sole purpose of making loans of securities.)
10. 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.
11. The terms of each loan of securities by the Client Plans to the
Lehman Broker-Dealer will be at least as favorable to such plans as
those terms which would exist in a comparable arm's-length transaction
between unrelated parties;
12. Each Client Plan will receive monthly reports on the
transactions, so that an independent fiduciary of such plan may monitor
the securities lending transactions with the Lehman Broker-Dealer;
13. Before entering into the Basic Loan Agreement and before a
Client Plan lends any securities to the Lehman Broker-Dealer, an
independent fiduciary of such Client Plan will receive sufficient
information, concerning the financial condition of the Lehman Broker-
Dealer, including the audited and unaudited financial statements of the
Lehman Broker-Dealer;
14. The Lehman Broker-Dealer will provide to a Client Plan prompt
notice at the time of each loan by such plan of any material adverse
changes in the Lehman Broker-Dealer's financial condition, since the
date of the most recently furnished financial statements;
15. With regard to the ``exclusive borrowing'' agreement (as
described below), the Lehman Broker-Dealer will directly negotiate the
agreement with a Client Plan fiduciary who is independent of the Lehman
Broker-Dealers and LBTC, and such agreement may be terminated by either
party to the agreement at any time; 3
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\3\ The termination will be without penalty to the Client Plan,
except for the return to the Lehman Broker-Dealers of a part of any
flat fee paid by the Lehman Broker-Dealers to the Client Plan, if
the Client Plan has terminated its exclusive borrowing agreement
with the Lehman Broker-Dealers.
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16. The Client Plan: (a) receives a reasonable fee that is related
to the value of the borrowed securities and the duration of the loan,
or (b) has the opportunity to derive compensation through the
investment of cash collateral. In the case of cash collateral, the
Client Plan may pay a loan rebate or similar fee to the Lehman Broker-
Dealer, if such fee is not greater than the fee the Client Plan would
pay an unrelated party in an arm's length transaction;
17. In the event that a Lehman Broker-Dealer is also the securities
lending agent for a Client Plan, LBTC shall act as securities lending
sub-agent in connection with any loan of securities to the Lehman
Broker-Dealer;
18. Prior to the Client Plan's approval of the lending of its
securities to the Lehman Broker-Dealers, a copy of the exemption, if
granted, (and this notice of pendency) will be provided to the Client
Plan; and
19. Lehman maintains or causes to be maintained within the United
States for a period of six years from the date of such transaction such
records as are necessary to enable the persons described in paragraph
(20) below to determine whether the conditions of this exemption have
been met; except that a party in interest with respect to an employee
benefit plan, other than Lehman or the Lehman Broker-Dealers, shall not
be subject to a civil penalty under section 502(i) of the Act or the
taxes imposed by section 4975 (a) or (b) of the Code, if such records
are not maintained, or are not available for examination as required by
this section, and a prohibited transaction will not be deemed to have
occurred if, due to circumstances beyond the control of Lehman or the
Lehman Broker-Dealers, such records are lost or destroyed prior to the
end of such six year period;
20. (i) Except as provided in subparagraph (ii) of this paragraph
(20) and notwithstanding any provisions of subsections (a)(2) and (b)
of section 504 of the Act, the records referred to in paragraph (19)
are unconditionally available at their customary location for
examination during normal business hours by--
(a) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission,
(b) Any fiduciary of a Client Plan or any duly authorized
representative of such fiduciary,
(c) Any contributing employer to any Client Plan, or any duly
authorized employee or representative of such employer, and
(d) Any participant or beneficiary of any Client Plan, or any duly
authorized representative of such participant or beneficiary.
(ii) None of the persons described in subparagraphs (b)-(d) of this
paragraph (20) shall be authorized to examine trade secrets of Lehman
or the Lehman Broker-Dealers, or commercial or financial information
which is privileged or confidential.
Summary of Facts and Representations
1. Lehman, a Delaware corporation, is the principal operating
subsidiary of Lehman Brothers Holdings Inc. (LB Holdings), also a
Delaware corporation. Lehman is one of the largest full-line investment
service firms in the United States, and is registered with and
regulated by the Securities and Exchange Commission (SEC). Lehman is a
member of the New York Stock Exchange and other principal securities
exchanges in the United States, and is also a member of the National
Association of Securities Dealers, Inc. As of November 30, 1995, Lehman
had $82.6 billion in assets.
2. Lehman and the Lehman Broker-Dealers acting as principals,
borrow securities from institutions and either utilize such securities
to satisfy their own needs, or re-lend these securities to borrowing
brokerage firms and other
[[Page 33719]]
entities which need a particular security for certain periods of time.
Borrowers often need securities to satisfy deliveries in cases of short
sales, or where a broker fails to receive securities it is required to
deliver. Lehman Broker-Dealers borrow and lend approximately $50
billion of securities on an average daily basis, and are among the
largest institutional securities borrowers and lenders in the United
States. In making such loans, the Lehman Broker-Dealers carefully
review the credit-worthiness of its counterparties.
3. LBTC is an affiliate of Lehman, and is a wholly owned
subsidiary, organized and chartered by LB Holdings as a limited purpose
trust company under the laws of the State of New York. LBTC has its
principal executive offices in New York, New York. LBTC provides a
variety of services to its clients, including custodial services and
securities lending services as a direct securities lending agent. LBTC
may also be retained from time to time by primary securities lending
agents to provide securities lending services in a sub-agent capacity
with respect to portfolio securities of clients of such primary
securities lending agents. As a securities lending sub-agent, LBTC's
role (i.e., negotiating the terms of the loans with borrowers pursuant
to a client-approved form of a loan agreement, and monitoring receipt
of, and marking-to-market, the required collateral) parallels those
under the lending transactions for which LBTC acts as a primary lending
agent on behalf of its clients.
4. An institutional investor, such as a pension fund, lends
securities in its portfolio to a broker-dealer or a bank to earn a fee
in addition to any interest, dividends, or other distributions paid on
the loaned securities. The lender generally requires that the security
loans be fully collateralized, and the collateral usually is cash or
high quality liquid securities issued by the U.S. Government, or
Federal Agency obligations or certain bank letters of credit. When the
collateral is cash, the lender generally invests the cash and rebates a
portion of the earnings on such collateral to the borrower. The fee
received by the lender is the difference between the earnings on the
collateral and the amount of the rebate that is paid to the borrower.
When a securities loan is collateralized with U.S. Government or
Federal Agency securities or with letters of credit issued by a bank,
the fee is paid directly by the borrower to the lender.
Institutional investors often utilize the services of an agent in
performing securities lending transactions. The lending agent is paid a
fee for its services which may be a percentage of the income earned by
the investor from lending its securities. The applicants represent that
the essential functions which define a securities lending agent are
identifying appropriate borrowers of securities and negotiating loan
terms to the borrowers. Certain services which are ancillary to
securities lending include monitoring the level of collateral, the
value of loaned securities, and in some instances, investing the
collateral.
5. LBTC and Lehman request an exemption for the lending of
securities owned by the Client Plans, with respect to which the Lehman
Broker-Dealer is a party in interest, or for which LBTC will serve as
directed trustee or custodian and/or securities lending agent (or sub-
agent),4 following disclosure to the Client Plans of LBTC's
affiliation with the Lehman Broker-Dealer, under either of the two
arrangements described as Plan A and Plan B, and for receipt of
compensation by LBTC in connection with such transactions. Neither LBTC
nor the Lehman Broker-Dealers will have discretionary authority or
control over the Client Plans' decisions concerning the acquisition or
disposition of securities available for lending. However, because LBTC
under the Plan A arrangement and the Lehman Broker-Dealers under the
Plan B arrangement (as discussed further below), will have discretion
with respect to whether there is a loan of the Client Plan securities
to the Lehman Broker-Dealers, the lending of securities to the Lehman
Broker-Dealers under such arrangements may be outside the scope of
relief provided by PTE 81-6 and PTE 82-63.5
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\4\ Future references to LBTC's performance of services as
securities lending agent should be deemed to include its parallel
performance as a securities lending sub-agent, and references to the
Client Plans should be deemed to include those plans for which LBTC
is acting as a sub-agent with respect to securities lending
activities, unless otherwise specifically indicated or by the
context of reference.
\5\ PTE 81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR
18754, May 19, 1987) provides an exemption under certain conditions
from section 406(a)(1)(A) through (D) of the Act and the
corresponding provisions of section 4975(c) of the Code for the
lending of securities that are assets of an employee benefit plan to
certain broker-dealers or banks which are parties in interest.
However, condition 1 of PTE 81-6 requires, in part, that neither the
borrower nor an affiliate of the borrower has discretionary
authority or control with respect to the investment of the plan
assets involved in the transaction.
PTE 82-63 (47 FR 14804, April 6, 1982) provides an exemption
under specified conditions from section 406(b)(1) of the Act and
section 4975(c)(1)(E) of the Code for the payment of compensation to
a plan fiduciary for services rendered in connection with loans of
plan assets that are securities. PTE 82-63 permits the payment of
compensation to a plan fiduciary for the provision of securities
lending services only if the loan of securities itself is not
prohibited under section 406(a) of the Act.
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6. When a loan of securities by a Client Plan is collateralized
with cash, LBTC, at the Client Plan's direction, will either transfer
such cash collateral to the Client Plan or its designated agent for
investment. Alternatively, LBTC may invest the cash in short-term
securities or interest-bearing accounts. In either case, LBTC will
rebate a portion of the earnings on the cash collateral to the Lehman
Broker-Dealers on behalf of the Client Plan. The Lehman Broker-Dealers
will pay a fee to the Client Plan based on the value of the loaned
securities where the collateral consists of obligations other than
cash. Under the Plan A arrangement and, in some instances, under the
Plan B arrangement (see paragraph 24 for the types of lending services
which may be provided to the Client Plans by LBTC under Plan B
arrangement), the Client Plan will pay a fee to LBTC for providing
lending services to the Client Plan, which will reduce the income
earned by the Client Plan from lending its securities to the Lehman
Broker-Dealers. The Client Plan and LBTC will agree in advance to this
fee, which will represent a percentage of the income the Client Plan
earns from its lending activities.
Several safeguards, described more fully below, are incorporated
into the application to ensure the protection of the Client Plans'
assets involved in these securities lending transactions. In addition,
the applicants represent that both the Plan A and Plan B arrangements
described herein incorporate the relevant conditions contained in PTE
81-6 and PTE 82-63.
7. Plan A. Where LBTC is the direct securities lending agent, a
fiduciary of a Client Plan who is independent of LBTC and the Lehman
Broker-Dealers will sign a securities lending agency agreement (the
Agency Agreement) with LBTC before the Client Plan participates in the
LBTC securities lending program. The Agency Agreement will, among other
things, describe the operation of the lending program, prescribe the
form of the securities loan agreement to be entered into on behalf of
the Client Plan with the borrowers, identify the securities which are
available to be lent, required collateral and daily marking-to-market,
and provide the list of permissible borrowers, including the Lehman
Broker-Dealers. The Agency Agreement will also set forth the basis and
rate for LBTC's compensation from the Client Plan for the performance
of securities lending services. The Client
[[Page 33720]]
Plan may terminate the Agency Agreement at any time, without penalty,
on no more than five business days' notice.
8. The Agency Agreement will contain provisions regarding
designation by the Client Plan of the Lehman Broker-Dealer as an
approved borrower. Specifically, the Client Plan will acknowledge that
the Lehman Broker-Dealer is an affiliate of LBTC. Pursuant to the
Agency Agreement, LBTC will represent to the Client Plan that each loan
made to the Lehman Broker-Dealer on behalf of the Client Plan will be
at market rates, and in no event less favorable to the Client Plan than
a loan of such securities, made at the same time and under the same
circumstances, to an unaffiliated borrower.
9. When LBTC is lending securities under a sub-agency arrangement,
the primary lending agent will enter into a securities lending agency
agreement (the Primary Lending Agreement) with a fiduciary of the
Client Plan, who is independent of such primary lending agent, LBTC and
the Lehman Broker-Dealers, before the Client Plan participates in the
securities lending program. Except as set forth in paragraph 10 below,
the primary lending agent will be unaffiliated with LBTC and the Lehman
Broker-Dealers. The Primary Lending Agreement will contain substantive
provisions akin to those in the Agency Agreement described above,
relating to the description of the operation of the lending program,
use of an approved form of securities loan agreement, identification of
securities which are available to be lent, required collateral and
daily marking-to-market, and provision of a list of approved borrowers
(which will include the Lehman Broker-Dealers). The Primary Lending
Agreement will specifically authorize the primary lending agent to
appoint sub-agents, including LBTC, to facilitate its performance of
securities lending agency functions. Where LBTC is to act as a sub-
agent, the Primary Lending Agreement will expressly disclose that LBTC
is to so act. The Primary Lending Agreement will also set forth the
basis and rate for the primary lending agent's compensation from the
Client Plan for the performance of securities lending services, and
will authorize the primary lending agent to pay a portion of its fee,
as the primary lending agent determines in its sole discretion, to any
sub-agent(s) it retains pursuant to the authority granted under such
agreement. The Client Plan may terminate the Primary Lending Agreement
at any time, without penalty, on no more than five business days'
notice.
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 LBTC under which the primary lending
agent will retain and authorize LBTC, as sub-agent, to lend securities
of the primary lending agent's clients, subject to the same terms and
conditions as are specified in the Primary Lending Agreement. Thus, for
example, the form of basic loan agreement (described in paragraph 12
below) will be the same as that approved by the Client Plan fiduciary
in the Primary Lending Agreement, and the list of permissible borrowers
under the Sub-Agency Agreement (which will include the Lehman Broker-
Dealers) will be limited to those approved borrowers listed as such
under the Primary Lending Agreement.
The Sub-Agency Agreement will contain provisions which are in
substance comparable to those described in paragraphs 7 and 8 above,
which would appear in the Agency Agreement in situations where LBTC is
the primary lending agent. In this regard, LBTC will make the same
representation in the Sub-Agency Agreement as described in paragraph 8
above with respect to arm's-length dealings with the Lehman Broker-
Dealers. The Sub-Agency Agreement will also set forth the basis and
rate for LBTC's compensation to be paid by the primary lending agent.
10. Lehman has been informed that some Client Plans will not be
able to hire LBTC as direct securities lending agent, because under the
provisions of that Plan any such agent for such Client Plans is
required to be registered as a broker-dealer with the Securities and
Exchange Commission (SEC). In these cases, the applicants propose that
a Lehman Broker-Dealer, which is registered as a broker-dealer with the
SEC, will act as a primary lending agent and LBTC will act as sub-
agent. In other respects the sub-agency relationship will operate as
set forth in paragraph (9) above.
11. In all cases, LBTC will maintain transactional and market
records sufficient to assure compliance with its representation that
all loans to the Lehman Broker-Dealers are effectively at arms-length
terms. Such records will be provided to the Client Plan fiduciary, who
is independent of LBTC and the Lehman Broker-Dealers, in the manner and
format agreed to by the Client Plan fiduciary and LBTC, without charge
to the Client Plan.
12. LBTC, under the Agency Agreement, as securities lending agent
for the Client Plans, will negotiate a master securities borrowing
agreement with a schedule of modifications attached thereto (the Basic
Loan Agreement) with the Lehman Broker-Dealers on behalf of the Client
Plans. An independent fiduciary of the Client Plan will approve the
form of the Basic Loan Agreement before such fiduciary executes the
Agency Agreement. The Basic Loan Agreement will specify, among other
things, the right of the Client Plan to terminate a loan at any time
and the Client Plan's rights in the event of any default by the Lehman
Broker-Dealers. The Basic Loan Agreement will set forth the basis for
compensation to the Client Plan for lending securities to the Lehman
Broker-Dealers under each category of collateral. The Basic Loan
Agreement will also contain a requirement that the Lehman Broker-
Dealers must pay all transfer fees and transfer taxes related to the
security loans.
13. Prior to making any loans under the Basic Loan Agreement, the
Lehman Broker-Dealers will furnish its most recent available audited
and unaudited financial statements to LBTC (assuming LBTC does not
already possess such statements), which, in turn, will provide such
statements to the Client Plan before the independent fiduciary of the
Client Plan is asked to approve the terms of the Basic Loan Agreement.
The terms of the Basic Loan Agreement will contain a requirement that
the Lehman Broker-Dealer must give prompt notice at the time of the
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, LBTC will request that the independent
fiduciary of the Client Plan approve the loan in view of the changed
financial condition.
14. As noted above, the agreement by LBTC to provide securities
lending services, as agent, to a Client Plan will be embodied in the
Agency Agreement. The Client Plan and LBTC will agree to an arrangement
under which LBTC will be compensated for its services as the lending
agent prior to the commencement of any lending activity. Similarly,
with respect to arrangements under which LBTC is acting as securities
lending sub-agent, the agreed upon fee arrangement of the primary
lending agent will be set forth in the Primary Lending Agreement, and
such agreement will specifically authorize the primary lending agent to
pay a portion of such fee, as the primary lending agent determines in
its sole
[[Page 33721]]
discretion, to any sub-agent, including LBTC, which is to provide
securities lending services to the plan.6
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\6\ The foregoing provisions describe arrangements comparable to
conditions (c) and (d) of PTE 82-63 which require that the payment
of compensation to a ``lending fiduciary'' is made under a written
instrument and is subject to prior written authorization of an
independent ``authorizing fiduciary.'' In the event that a
commingled investment fund will participate in the securities
lending program, the special rule applicable to such funds
concerning the authorization of the compensation arrangement set
forth in paragraph (f) of PTE 82-63 will be satisfied.
---------------------------------------------------------------------------
15. Each time a Client Plan loans securities to the Lehman Broker-
Dealers pursuant to the Basic Loan Agreement, the Lehman Broker-Dealers
will execute a designation letter specifying the material terms of the
loan, including the securities to be loaned, the required level of
collateral, and the fee or rebate payable, and any special delivery
instructions. The terms of each loan will be at least as favorable to
the Client Plan as those of a comparable arm's-length transaction
between unrelated parties.
16. LBTC will establish each day a written schedule of lending fees
7 and rebate rates 8 to assure uniformity of
treatment among borrowing brokers and to limit the discretion LBTC
would have in negotiating securities loans to the Lehman Broker-
Dealers. Loans to the Lehman Broker-Dealers on any day will be made at
rates on the daily schedule or at rates which may be more advantageous
to the Client Plans. In no case will the loans be made to the Lehman
Broker-Dealers at rates or lending fees less advantageous to the Client
Plan than those on the schedule.
---------------------------------------------------------------------------
\7\ LBTC will adopt minimum daily lending fees for non-cash
collateral payable by the Lehman Broker-Dealer to LBTC on behalf of
the Client Plans. LBTC will submit the method for determining such
minimum daily lending fees to an independent fiduciary of the Client
Plan for approval before initially lending any securities to a
Lehman Broker-Dealer on behalf of a Client Plan.
\8\ LBTC will adopt maximum daily rebate rates with respect to
securities loans collateralized with cash collateral. LBTC will
submit the method for determining such maximum daily rebate rates to
an independent fiduciary of a Client Plan for approval before
initially lending any securities to the Lehman Broker-Dealer on
behalf of such Client Plan.
---------------------------------------------------------------------------
The rebate rates, which are established for cash collateral loans
made by the Client Plans, will take into account the potential demand
for the loaned securities, the applicable benchmark cost of funds
indices [typically, the U.S. Federal Funds Rate established by the
Federal Reserve System (Federal Funds), the overnight ``REPO''
9 rate, or the like] and the anticipated investment return
on overnight investments which are permitted by the Client Plan
Fiduciary. The lending fees, which are established with respect of
loans made by the Client Plans collateralized by other than cash, will
be set daily to reflect conditions as influenced by potential market
demand.
---------------------------------------------------------------------------
\9\ An overnight ``REPO'' is an overnight repurchase agreement
which is an arrangement whereby securities dealers and banks finance
their inventories of Treasury bills, notes, and bonds. The dealer or
bank sells securities to an investor with a temporary surplus of
cash, agreeing to buy them back the next day. Such transactions are
settled in immediately available Federal Funds, usually at a rate
below the Federal Funds rate (the rate charged by the banks lending
funds to each other). See Barron's Dictionary of Finance and
Investment Terms, 2nd Edition (New York, 1987).
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LBTC will negotiate rebate rates for cash collateral payable to
each borrower, including the Lehman Broker-Dealers, on behalf of a
Client Plan. Where, for example, cash collateral derived from an
overnight loan is intended to be invested in a generic repurchase
agreement, any rebate fee determined with respect to an overnight
repurchase agreement benchmark will be set below the applicable ``ask''
quotation therefor. Where cash collateral is derived from a loan with
an expected maturity date (term loan) and is intended to be invested in
instruments with similar maturities, the maximum rebate fee will be
less than the investment return (assuming no investment default). With
respect to any loan to the Lehman Broker-Dealers, LBTC will not
knowingly negotiate a rebate rate with respect to such loan which over
the anticipated term of the loan would produce a zero or negative
return to the Client Plan (assuming no default on the investments
related to the cash collateral from such loan where LBTC has investment
discretion over the cash collateral). LBTC represents that the written
rebate rate established daily for cash collateral under loans
negotiated with the Lehman Broker-Dealers will not exceed the rebate
rate which would be paid to a similarly situated unrelated borrower
with respect to a comparable securities lending transaction. LBTC will
disclose the method for determining the maximum daily rebate rate as
described above to an independent fiduciary of the Client Plan for
approval before lending any securities to the Lehman Broker-Dealers on
behalf of the Client Plan.
17. For collateral other than cash, the applicable lending fee in
respect of any outstanding loan will be reviewed daily by LBTC for
competitiveness and adjusted, where necessary, to reflect market terms
and conditions. With respect to any calendar quarter, at least 50
percent of the securities loans negotiated on behalf of the Client
Plans will be to borrowers not affiliated with LBTC, and so the
competitiveness of the loan fee will be tested in the marketplace.
Accordingly, the applicants state that loans to the Lehman Broker-
Dealers should result in a competitive rate of income to the lending
Client Plan. At all times, LBTC will effect loans in a prudent and
diversified manner.
The method of determining the actual daily securities lending rates
(fees and rebates), the minimum lending fees payable by the Lehman
Broker-Dealers and the maximum rebate payable to the Lehman Broker-
Dealers, will be specified in an exhibit attached to the Agency
Agreement to be executed between the independent fiduciary of the
Client Plan and LBTC in cases where LBTC is the direct securities
lending agent. These methods of determination need not be formulative,
but may consist of a description of the process involved in determining
rebate rates and lending fees.
18. If LBTC 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 index with respect to which
the fee or rebate is calculated), LBTC, by the close of business on the
date of such adjustment, shall provide the independent fiduciary of the
Client Plan with notice that it has adjusted such fee or rebate to such
affiliated borrower, and that the Client Plan may terminate such loan
at any time. LBTC shall provide the independent fiduciary with such
information as the independent fiduciary may reasonably request
regarding such adjustment.
19. While LBTC will normally lend securities to requesting
borrowers on a first come, first served basis, as a means of assuring
uniformity of treatment among borrowing brokers, in some cases it may
not be possible to adhere to first come, first served allocation. This
can occur in instances where (a) the credit limit established for such
``first in line'' borrower by LBTC and/or the Plan has already been
satisfied; (b) the ``first in line'' borrower is not approved as a
borrower by a 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
representatives of LBTC at or about the same time with respect to the
same security. In situations (a) and (b), loans would normally be
effected with the ``second in line'' borrower. In situation (c),
securities would be allocated as equitably as practicable among all
eligible requesting borrowers.
[[Page 33722]]
20. LBTC on behalf of the Client Plan will receive collateral from
Lehman Broker-Dealers by physical delivery, book entry in a securities
depository, wire transfer or similar means by the close of business on
or before the day the loaned securities are delivered to the Lehman
Broker-Dealers. The collateral will consist of U.S. dollars, securities
issued or guaranteed by the U.S. Government or its agencies or
irrevocable U.S. bank letters of credit (issued by a person other than
the Lehman Broker-Dealers or any affiliates thereof) or such other
types of collateral which might be permitted by the Department under
PTE 81-6 or any successor.10 The market value of the
collateral on the close of business on the business day preceding the
day the loaned securities are delivered to the Lehman Broker-Dealers
will be at least 102 percent of the then market value of the loaned
securities. The Basic Loan Agreement will give the Client Plan a
continuing security interest in and a lien on the collateral. LBTC will
monitor the level of the collateral daily. If the market value of the
collateral falls below 100 percent, LBTC will require the Lehman
Broker-Dealers to deliver by the close of business the next day
sufficient additional collateral to bring the level back to at least
102 percent.
---------------------------------------------------------------------------
\10\ See Footnote 2 above regarding the scope of relief that may
be provided by the Department in any successor class exemption and
the type of assets that may be used as collateral for a securities
loan.
---------------------------------------------------------------------------
21. Subject to the terms and conditions of the Agency Agreement (or
the Primary Lending Agreement), LBTC will invest and reinvest all or
substantially all cash collateral in approved investments designated by
the applicable Client Plan and identified on a schedule attached to the
relevant agreement. All approved investments made by LBTC will be for
the sole account and risk of the applicable Client Plan. These approved
investments shall not include securities, instruments, transactions and
investments issued by LBTC or any of its affiliates. From time to time,
the Client Plan may instruct LBTC in writing not to make any approved
investment with a certain counterparty, or through a particular
financial institution or intermediary. Alternatively, the Client Plan
may also retain the right to directly control the reinvestment of the
cash collateral.
22. Each Client Plan participating in the lending program will be
sent a monthly transaction report. The monthly report will provide a
list of all security loans outstanding and closed for a specified
period. The report will identify for each open loan position, the
securities involved, the value of the security for collateralization
purposes, the current value of the collateral, the rebate or loan
premium (as the case may be) at which the security is loaned, and the
number of days the security has been on loan. At the request of the
Client Plan, such a report will be provided on a weekly or daily basis,
rather than a monthly basis. Also, upon request of the Client Plan,
LBTC will also provide the Client Plan with daily confirmations of
securities lending transactions.
In order to provide the means for monitoring lending activity,
rates on loans to the Lehman Broker-Dealers 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 the Lehman Broker-
Dealers and to other borrowers. 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
the Lehman Broker-Dealers compared with those at which securities are
loaned to other brokers. This statement will give an independent Client
Plan fiduciary information which can be compared to that contained in
the daily rate schedule.
23. Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to the
Lehman Broker-Dealers; provided, however, that--
(a) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization (the Related Client Plans), whose assets are commingled
for investment purposes in a single master trust or any other entity
the assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the
Plan Asset Regulation), which entity is engaged in securities lending
arrangements with the Lehman Broker-Dealers, the foregoing $50 million
requirement shall be deemed satisfied if such trust or other entity has
aggregate assets which are in excess of $50 million; provided that if
the fiduciary responsible for making the investment decision on behalf
of such master trust or other entity is not the employer or an
affiliate of the employer, such fiduciary has total assets under its
management and control, exclusive of the $50 million threshold amount
attributable to plan investment in the commingled entity, which are in
excess of $100 million.
(b) 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 the Lehman Broker-Dealers, the foregoing $50 million requirement
is satisfied if such trust or other entity has aggregate assets which
are in excess of $50 million (excluding the assets of any Plan with
respect to which the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity or any member of
the controlled group of corporations including such fiduciary is the
employer maintaining such Plan or an employee organization whose
members are covered by such Plan). However, the fiduciary responsible
for making the investment decision on behalf of such group trust or
other entity--
(i) Has full investment responsibility with respect to plan assets
invested therein; and
(ii) Has total assets under its management and control, exclusive
of the $50 million threshold amount attributable to plan investment in
the commingled entity, which are in excess of $100 million.
(In addition, none of the entities described above are formed for the
sole purpose of making loans of securities.)
24. Plan B. The Lehman Broker-Dealers will directly negotiate
``exclusive borrowing'' agreements with fiduciaries of Client Plans,
including Client Plans for which LBTC serves as directed trustee or
custodian, where such fiduciary is independent of the Lehman Broker-
Dealers and LBTC. Under the exclusive borrowing agreement, the Lehman
Broker-Dealer will have exclusive access for a specified period of time
to borrow securities of the Client Plan pursuant to certain conditions.
LBTC will not participate in the negotiation of the exclusive borrowing
agreement. The involvement of LBTC, 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 Plans with
certain reports. The applicants represent that, under the exclusive
borrowing agreement, neither the Lehman Broker-Dealer nor LBTC will
perform for the Client Plans the functions which
[[Page 33723]]
constitute the essential functions of a securities lending agent.
25. Upon delivery of loaned securities to the Lehman Broker-Dealer,
LBTC, or another custodian on behalf of the Client Plan, will receive
from the Lehman Broker-Dealer the same day by physical delivery, book
entry in a securities depository, wire transfer, or similar means
collateral consisting of U.S. dollars, securities issued or guaranteed
by the U.S. Government or its agencies or irrevocable U.S. bank letters
of credit (issued by a person other than a Lehman Broker-Dealer or any
affiliate thereof) or other non-cash collateral permitted under PTE 81-
6 or any successor. The market value of the collateral at the close of
business on the business day preceding the day the loaned securities
are delivered to the Lehman Broker-Dealer will be at least 102 percent
of the then market value of the loaned securities. LBTC or such other
custodian, will monitor the level of the collateral daily. If the
market value of the collateral falls below 100 percent of that of the
loaned securities, the Lehman Broker-Dealer will deliver sufficient
additional collateral on the following day such that the market value
of all collateral will equal at least 102 percent of the market value
of the loaned securities. The Lehman Broker-Dealer or, in the case of
some Client-Plans, LBTC, will provide a weekly report to the Client
Plan showing, on a daily basis, the aggregate market value of all
outstanding security loans to the Lehman Broker-Dealer, and the
aggregate market value of the collateral.
26. Before entering into an exclusive borrowing agreement, the
Lehman Broker-Dealer will furnish to the Client Plan, if it does not
already possess such statements, the most recent publicly available
audited and unaudited statements of its financial condition, as well as
any other publicly available information which it believes is necessary
for the Client Plan to determine whether to enter into or renew the
agreement, and a copy of the final exemption, if granted, together with
this proposed exemption. The agreement will contain a representation by
the Lehman Broker-Dealer that, as of each time it borrows securities,
there has been no material adverse changes in its financial condition.
All the procedures under the agreement will, at a minimum, conform to
the applicable provisions of PTE 81-6 and PTE 82-63.
27. In exchange for the exclusive right to borrow certain
securities from the Client Plan, the Lehman Broker-Dealer will pay the
Client Plan either a flat fee, or a minimum flat fee plus a percentage
(negotiated at the time the exclusive borrowing agreement is entered
into) of the total balance outstanding of borrowed securities, or a
percentage of the total balance outstanding without any flat fee. A
percentage may be established by reference to an objective formula. The
Lehman Broker-Dealer and the independent fiduciary of the Client Plan
may agree that different fee arrangements will apply to different
securities or different groups of securities. Any change in the rate
paid to the Client Plan will require written consent of the Client Plan
independent fiduciary. However, such Client Plan's consent will be
presumed where the rate changes pursuant to an objective formula. In
such instances, an independent fiduciary of the Client Plan must be
notified at least 24 hours in advance of the rate change, and the
independent fiduciary must not object in writing to such change, prior
to the effective date of the change. Under this fee arrangement, all
earnings generated by the cash collateral will be returned to the
Lehman Broker-Dealer. The Client Plan will receive credit for all
interest, dividends or other distributions on any borrowed securities.
In addition, under some arrangements, the earnings on the collateral
due to the Lehman Broker-Dealer, and the dividends, interest, and other
distributions on the borrowed securities payable to the Client Plan may
be offset against each other, so that only a net amount will be
returned to the Lehman Broker-Dealer.
28. The exclusive borrowing agreement and/or any securities loan
outstanding may be terminated by either party at any time. Upon
termination of any securities loan, the Lehman Broker-Dealer will
deliver any borrowed securities back to the Client Plan within five
business days of written notice of termination. If the Lehman Broker-
Dealer fails to return the loaned securities or the equivalent thereof,
the Client Plan will have the right under the 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 Client Plan associated with the sale and/or purchase. Pursuant to
the terms of the exclusive borrowing agreement, if the collateral is
insufficient to satisfy the Lehman Broker-Dealer's obligation to return
the Client Plan's securities, the Lehman Broker-Dealer will indemnify
the Client Plan with respect to the difference between the replacement
cost of the securities and the market value of the collateral on the
date a loan is declared to be in default together with expenses not
covered by the collateral, plus applicable interest at a reasonable
rate.
29. With regard to those Client Plans for which LBTC provides
custodial, clearing and/or reporting functions relative to securities
loans, LBTC and a Client Plan fiduciary independent of LBTC and the
Lehman Broker-Dealers, will agree in advance and in writing to any fee
that LBTC is to receive for such services. Such fees, if any, would be
fixed fees (e.g., LBTC might negotiate to receive a fixed percentage of
the value of the assets with respect to which it performs these
services, or to receive a stated dollar amount) and any such fee would
be in addition to any fee LBTC has negotiated to receive from any such
Client Plan for standard custodial or other services unrelated to the
securities lending activity. The arrangement for LBTC to provide such
functions relative to securities loans to the Lehman Broker-Dealer will
be terminable by the Client Plan within five business days of receipt
of written notice without penalty to the Client Plan, except for the
return to the Lehman Broker-Dealer of a part of any flat fee paid by
the Lehman Broker-Dealer to the Client Plan, if the Client Plan has
also terminated its exclusive borrowing agreement with the Lehman
Broker-Dealer. Before entering into an agreement with the Client Plan
to provide such functions relative to securities loans to the Lehman
Broker-Dealer, LBTC 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 exclusive
borrowing agreement.
30. In summary, the applicant represents that the subject
transactions will satisfy the statutory criteria of section 408(a) of
the Act and section 4975(c)(2) of the Code because:
A. Plan A requires approval of the terms of the Basic Loan
Agreement and the execution of the Agency Agreement (or the Primary
Lending Agreement) by a Client Plan fiduciary independent of the Lehman
Broker-Dealers and LBTC before a Client Plan lends any securities to
the Lehman Broker-Dealers;
B. Under Plan B, the Lehman Broker-Dealers will directly negotiate
exclusive borrowing agreement with the Client Plan;
C. The lending arrangements will permit the Client Plans to lend
securities to the Lehman Broker-Dealers, which have a substantial
market position as securities lenders, and will enable the Client Plans
to earn additional income from the loaned securities while continuing
to receive any dividends, interest payments and other distributions on
those securities;
[[Page 33724]]
D. Neither the Lehman Broker-Dealers nor LBTC has or exercises
discretionary authority or control with respect to the investment of
the assets of Client Plans involved in the transaction (other than with
respect to the investment of cash collateral after the securities have
been loaned and collateral received, or renders investment advice
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those
assets, including decisions concerning a Client Plan's acquisition or
disposition of securities available for loan;
E. Before a Client Plan participates in a securities lending
program and before any loan of securities to the Lehman Broker-Dealers
is affected, a Client Plan fiduciary who is independent of LBTC and the
Lehman Broker-Dealers must have:
(i) Authorized and approved a securities lending authorization
agreement with LBTC (i.e., the Agency Agreement) with LBTC, where LBTC
is acting as the direct securities lending agent;
(ii) Authorized and approved the primary securities lending
authorization agreement (i.e., the Primary Lending Agreement) with the
primary lending agent, where LBTC is lending securities under a sub-
agency arrangement with the primary lending agent;
(iii) Approved the general terms of the securities loan agreement
(i.e., the Basic Loan Agreement) between such Client Plan and the
borrower, the Lehman Broker-Dealers, the specific terms of which are
negotiated and entered into by LBTC;
F. A Client Plan may terminate any securities lending agency
agreement at any time without penalty on five (5) business days'
notice;
G. LBTC (or another custodian on behalf of the Client Plan) will
receive from the Lehman Broker-Dealers either by physical delivery,
book entry in a securities depository, wire transfer or similar means
collateral consisting of U.S. dollars, securities issued or guaranteed
by the U.S. Government or its agencies or irrevocable U.S. bank letters
of credit (issued by an entity other than the Lehman Broker-Dealers) or
other collateral permitted under PTE 81-6 (as amended from time to time
or, alternatively, any additional or superceding class exemption that
may be issued to cover securities lending by employee benefit plans) by
the close of business on or before the day the loaned securities are
delivered to the Lehman Broker-Dealers;
H. The market value of the collateral will initially equal at least
102 percent of the market value of the loaned securities. If the market
value of the collateral falls below 100 percent, the Lehman Broker-
Dealers will deliver additional collateral on the following day such
that the market value of the collateral will again equal 102 percent.
The Basic Loan Agreement will give the Client Plans a continuing
security interest in, and a lien, on the collateral. LBTC will monitor
the level of the collateral daily;
I. All the procedures regarding the securities lending activities
will at a minimum conform to the applicable provisions of PTE 81-6 and
PTE 82-63;
J. In the event the Lehman Broker-Dealer fails to return securities
within a designated time, the Client Plan will have the right under the
Basic Loan Agreement to purchase securities identical to the borrowed
securities and apply the collateral to payment of the purchase price.
If the collateral is insufficient to satisfy the Lehman Broker-Dealer's
obligation to return the Client Plan's securities, the Lehman Broker-
Dealer will indemnify the Client Plan with respect to the difference
between the replacement cost of securities and the market value of the
collateral on the date the loan is declared in default, together with
expenses incurred by the Client Plan plus applicable interest at a
reasonable rate, including any attorneys fees incurred by the Client
Plan for legal action arising out of default on the loans, or failure
by the Lehman Broker-Dealer to properly indemnify the Client Plan;
K. The Client Plan will receive the equivalent of all distributions
made to the holders of the borrowed securities during the term of the
loan, including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to purchase
additional securities, or other distributions;
L. Only those Client Plans which have assets with an aggregate
market value of at least $50 million (except for certain Related Client
Plans or Unrelated Client Plans whose assets are commingled in a group
trust under the conditions discussed herein) will be permitted to lend
securities to the Lehman Broker-Dealers;
M. 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;
N. The terms of each loan of securities by the Client Plans to the
Lehman Broker-Dealer will be at least as favorable to such plans as
those of a comparable arm's-length transaction between unrelated
parties;
O. Each Client Plan will receive monthly reports on the
transactions, including but not limited to the information described in
paragraph 22 above, so that an independent fiduciary of such plan may
monitor the securities lending transactions with the Lehman Broker-
Dealer;
P. Before entering into the Basic Loan Agreement and before a
Client Plan lends any securities to the Lehman Broker-Dealer, an
independent fiduciary of such Client Plan will receive sufficient
information, concerning the financial condition of the Lehman Broker-
Dealer, including the audited and unaudited financial statements of the
Lehman Broker-Dealer;
Q. The Lehman Broker-Dealer will provide to a Client Plan prompt
notice at the time of each loan by such plan of any material adverse
changes in LBTC's financial condition, since the date of the most
recently furnished financial statements;
R. With regard to the ``exclusive borrowing'' agreement, the Lehman
Broker-Dealer will directly negotiate the agreement with a Client Plan
fiduciary who is independent of the Lehman Broker-Dealers and LBTC, and
such agreement may be terminated by either party to the agreement at
any time;
S. The Client Plan: (a) receives a reasonable fee that is related
to the value of the borrowed securities and the duration of the loan,
or (b) has the opportunity to derive compensation through the
investment of cash collateral. In the case of cash collateral, the
Client Plan may pay a loan rebate or similar fee to the Lehman Broker-
Dealer, if such fee is not greater than the fee the Client Plan would
pay an unrelated party in an arm's length transaction;
T. In the event that a Lehman Broker-Dealer is also the securities
lending agent for a Client Plan, LBTC shall act as securities lending
sub-agent in connection with any loan of securities to the Lehman
Broker-Dealer; and
U. Prior to the Client Plan's approval of the lending of its
securities to the Lehman Broker-Dealers, a copy of the final exemption,
if granted, (and this notice of pendency) will be provided to the
Client Plan.
For Further Information Contact: Ekaterina A. Uzlyan of the
Department, telephone (202) 219-8883. (This is not a toll-free number.)
[[Page 33725]]
Individual Retirement Accounts (the IRAs) for Roark Young, Russell
Rice, Mary J. Rice, Bruce Lamchick, Steven McKean and David McKean, and
Burton Young (Collectively, the Participants) Located in Miami, Florida
[Application No. D-10558-10561, 10565-10566, 10568]
Proposed Exemption
The Department is considering granting an exemption under the
authority of 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,
August 10, 1990). If the exemption is granted, 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 cash
sales (the Sales) of certain stock (the Stock) by the IRAs
11 to the Applicants, disqualified persons with respect to
the IRAs, provided that the following conditions were met:
---------------------------------------------------------------------------
\11\ Because each IRA has only one Participant, there is no
jurisdiction under 29 CFR Sec. 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
---------------------------------------------------------------------------
(a) The terms and conditions of the Sales were at least as
favorable to each IRA as those obtainable in an arm's length
transaction with an unrelated party;
(b) The Sale of Stock by each IRA was a one-time transaction for
cash;
(c) Each IRA received the fair market value of the Stock as
established by a qualified, independent appraiser; and
(d) Each IRA was not required to pay any commissions, costs or
other expenses in connection with each Sale.
Effective Date: These proposed exemptions, if granted, will be
effective as of March 30, 1998.
Summary of Facts and Representations
1. The IRAs are individual retirement accounts, as described in
Section 408(a) of the Code. Among the assets of each IRA were shares of
closely-held stock in Turnberry Financial Services, Inc. (Turnberry), a
unitary savings and loan holding company located in Aventura, Florida.
The primary asset held by Turnberry is the Turnberry Bank (the Bank),
also of Aventura, Florida.
The applicants describe the Participants, the IRAs, and their
former holdings of the Stock as follows:
(a) The IRA of Roark Young, Chairman and CEO of Turnberry and the
Bank, and majority shareholder in Turnberry, currently holds assets of
approximately $260,141 which, prior to the Sale, included 6,400 shares
of the Stock. The IRA acquired most of the Stock from the issuer, at
various times and various prices, from the period between 1993 and
1995.
(b) The IRA of Russell Rice, President of Turnberry, Executive Vice
President of the Bank, and Director of both, currently holds total
assets of approximately $22,000 which, prior to the Sale, included 700
shares of the Stock. The IRA acquired the Stock from other shareholders
during 1997 at a price of $25, the fair market value at the time of
purchase.
(c) The IRA of Mary J. Rice, wife of Russell Rice, currently holds
total assets of approximately $9,600 which, prior to the Sale, included
300 shares of the Stock. The IRA acquired the Stock during 1997 at a
price of $25, the fair market value of the Stock at the time of
purchase.
(d) The IRA of Burton Young, Director of the Bank, currently holds
total assets of approximately $1,563,039 which, prior to the Sale,
included 4,567 shares of the Stock. The IRA acquired all of the Stock
from the issuer in October of 1995.
(e) The IRA of David McKean currently holds total assets of
approximately $14,000 which, prior to the Sale, included 380 shares of
the Stock. The IRA acquired most of the Stock from the issuer at
various times and prices during the period from 1990 to 1997.
(f) The IRA of Steven McKean currently holds total assets of
approximately $20,000 which, prior to the Sale, included 715 shares of
the Stock. The IRA acquired most of the Stock from the issuer at
various times and various prices during the period of 1990 to 1997.
(g) The IRA of Bruce Lamchick currently holds total assets of
approximately $320,000, which, prior to the Sale, included 700 shares
of the Stock. The IRA acquired the Stock from other shareholders in
October 1995 for its fair market value.
2. The applicants request an exemption for the Sale of the Stock by
each individual IRA to its respective Participant. Business and income
tax considerations have recently caused Turnberry to elect to be taxed
as a Subchapter S corporation pursuant to the Code, effective the close
of business on March 31, 1998. However, section 1361 of the Code only
permits eligible shareholders to hold stock in a Subchapter S
corporation. Because the IRAs are not eligible shareholders for
purposes of the Code, the applicants wished to purchase the Stock from
their IRAs. The applicants represent that the acquisition of the Stock
by each IRA was done for investment purposes and that, in fact, each
IRA made a profit on its original investment.12 Furthermore,
the applicants represent that the Stock held by the IRAs only
represented a small portion of the 296,300 shares outstanding.
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\12\ The Department notes that the Internal Revenue Service has
taken the position that a lack of diversification of investments may
raise questions in regard to the exclusive benefit rule under
section 401(a) of the Code. See, e.g. Rev. Rul. 73-532, 1973-2 C.B.
128. The Department further notes that section 408(a) of the Code,
which describes the tax qualification provisions for IRAs, mandates
that the trust be created for the exclusive benefit of an individual
or his beneficiaries. However, the Department is expressing no
opinion in this proposed exemption regarding whether violations of
the Code have taken place with respect to the purchase and
subsequent retention of the Stock by some of the Applicants.
Further, to the extent that Turnberry or the other sellers were
not disqualified persons with respect to the IRAs under section
4975(e)(2), the purchase of the Stock would not have constituted a
prohibited transaction under section 4975(c)(1)(A) of the Code.
However, the purchase and holding of the Stock by the IRAs of
officers and directors of Turnberry and/or the Bank raises questions
under section 4975(c)(1)(D) and (E) depending on the degree (if any)
of the IRA Participant's interest in the transaction. Section
4975(c)(1)(D) and (E) of the Code prohibits the use by or for the
benefit of a disqualified person of the assets of a plan and
prohibits a fiduciary from dealing with the assets of a plan in his
own interest or for his own account. The IRA Participants, as
officers and directors of Turnberry and/or the Bank, may have
interests in the proposed transactions which may affect their best
judgment as fiduciaries of their IRAs. In such circumstances, the
transactions may violate 4975(c)(1)(D) and (E) of the Code. See
Advisory Opinion 90-20A (June 15, 1990). Accordingly, to the extent
there were violations of section 4975(c)(1)(D) and (E) of the Code
with respect to the purchases and holdings of the Stock by the IRAs,
the Department is extending no relief for these transactions herein.
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3. Mr. David A. Harris (Mr. Harris) and Mr. Douglas K. Southard
(Mr. Southard), both accredited appraisers with Southard Financial,
located in Memphis, Tennessee, appraised the Stock on July 14, 1997.
Both Mr. Harris and Mr. Southard represent that they are full-time,
qualified appraisers, as demonstrated by the fact that they both are
currently Senior Members of the American Society of Appraisers. In
addition, Mr. Harris and Mr. Southard represent that they and their
firm are independent of the Participants. After analyzing the Stock, on
a marketable minority interest basis which they believed appropriate
for this transaction, Southard and Mr. Harris concluded that the fair
market value of the Stock was $30 per share.
In reaching their conclusion as to the value of the Stock, Mr.
Harris and Mr. Southard took the weighted average of the asset-based
approach, the income approach, the market approach using price/book
value, and the market approach using prior transactions, and arrived at
a per share value of $29.98.
[[Page 33726]]
After obtaining this number, they rounded the fair market value to
reflect what they believe is the imprecision inherent in the various
assumptions used in the fair market value determination.
4. The applicants represent that the transactions were feasible in
that each was a one-time transaction for cash. Furthermore, the
applicants state that the transactions were in the best interest of the
IRAs because they provided each IRA with the opportunity to dispose of
the Stock for cash at the fair market value, thus allowing for
diversification and enhancing liquidity so as to facilitate future
distributions. Finally, the applicants represent that the transactions
were protective of the rights of the Participants and beneficiaries
because each IRA received the fair market value of the Stock, as
determined by a qualified, independent appraiser, and incurred no
commissions, costs, or other expenses as a result of each Sale.
5. In summary, the applicants represent that the proposed
transactions satisfy the statutory criteria of section 4975(c)(2) of
the Code because: (a) the terms and conditions of the Sales were at
least as favorable to each IRA as those obtainable in an arm's length
transaction with an unrelated party; (b) the Sale of Stock by each IRA
was a one-time transaction for cash; (c) each IRA received the fair
market value of the Stock, as established by a qualified, independent
appraiser; and (d) each IRA was not required to pay any commissions,
costs or other expenses in connection with each Sale.
Notice to Interested Persons: Because the applicants are the only
participants in the IRAS, it has been determined that there is no need
to distribute the notice of proposed exemption (the Notice) to
interested persons. Comments and requests for a hearing are due thirty
(30) days after publication of the Notice in the Federal Register.
For Further Information Contact: Mr. James Scott Frazier, telephone
(202) 219-8881. (This is not a toll-free number).
Service Employees International Union Local 252 Welfare Fund (the Fund)
Located in Wynnewood, Pennsylvania
[Application No. L-10595]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act in accordance with the
procedures set forth in 29 C.F.R. 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 shall not apply to the
proposed sale (the Sale) of certain improved real property located in
Wynnewood, Pennsylvania (the Property) to the Service Employees
International Union Local 252 (Local 252), a party in interest with
respect to the Fund, provided the parties adhere to the following
conditions:
(a) The Sale is a one-time transaction for cash;
(b) The terms and conditions of the Sale are at least as favorable
to the Fund as those obtainable in an arm's length transaction with an
unrelated party;
(c) The Sales price is an amount which represents the greater of:
(1) the total cost to the Fund of acquiring the Property; or (2) the
fair market value of the Property on the date of Sale as determined by
a qualified, independent appraiser;
(d) The Fund does not incur any expenses with respect to the Sale.
Summary of Facts and Representations
1. The Fund is a welfare plan providing medical, hospital, and
disability benefits to approximately 900 health care workers currently
affiliated with Local 252, a 4000 member labor organization based in
Wynnewood, Pennsylvania. The Fund was created and is maintained
pursuant to collective bargaining agreements between Local 252 and
employers in and around the Philadelphia, Pennsylvania area. The Local
252 trustee for the Fund is Anthony L. Teti, and the employer trustee
is Zelick Kaplan. As of April 30, 1997, the Fund held net assets of
$4,745,862.
2. Among the assets of the Fund is the Property, a parcel of
improved real property located at 3 East Wynnewood Road in Wynnewood,
Pennsylvania. Purchased for $725,000 in July 1994 from an unrelated
third party, the Property consists of 8,490 square feet of land
improved with a 5,360 square foot, two-story plus basement office
building (the Building). The first floor of the Building consists
primarily of office space with the second floor containing additional
office space and a meeting room. Currently, the Fund and Local 252
occupy the Building, the latter leasing the space for its principal
office.13
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\13\ The Fund and Local 252 represent that the lease satisfies
the requirements of Prohibited Transaction Class Exemption 76-1 (PTE
76-1, 41 FR 12740, March 26, 1976) and Prohibited Transaction Class
Exemption 77-10 (PTE 77-10, 42 FR 33918, July 1, 1977), relating to,
among other things, the leasing of office space by a multiemployer
plan to a participating employee organization. The Department
expresses no opinion as to whether the lease satisfies the
conditions of PTE 76-1 or PTE 77-10.
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3. The Fund's need to sell the Property arises out of a recent
restructuring imposed by the Service Employees International Union (the
International). According to the applicant, the International has
ordered the approximately 900 health care workers affiliated with Local
252 to transfer their membership to two other local organizations whose
membership also consists of workers in the health care industry.
Pursuant to the agreement between Local 252 and the International, the
Fund will be terminated and the assets currently held therein
transferred to the International's welfare fund. As a result of this
transfer, the International plans to dispose of the Property. Because
the Building currently serves as Local 252's principal office, and
fearing that the Fund faces taking a substantial loss on the sale of
the Property to an unrelated third party, Local 252 wishes to purchase
the Property from the Fund.
4. Paul J. Leis (Mr. Leis), an accredited appraiser with Hayden
Real Estate, Inc., located in Conshohocken, Pennsylvania, appraised the
Property on January 21, 1998. Mr. Leis states that he is a qualified
appraiser, as demonstrated by his status as a Member of the Appraisal
Institute and a Certified Pennsylvania General Appraiser. In addition,
Mr. Leis represents that both he and Hayden Real Estate, Inc. are
independent of the International, Local 252, and the Trustees. After
inspecting the Property, Mr. Leis determined a fee simple interest in
the Property is worth $550,000.
As noted above, the Fund originally paid $725,000 for the Property.
In light of the fact that this amount exceeds the fair market value
determined pursuant to Mr. Leis's appraisal, Local 252 represents that
it will pay $725,000 to the Fund for the Property. Local 252 has
determined that paying the Fund an amount equal to the Property's
acquisition price would be in the best interest of the Fund and its
participants and beneficiaries as it would enable the Fund to recoup
its original investment.
5. The applicant represents that the proposed transaction would be
feasible in that it would be a one-time transaction for cash.
Furthermore, the applicant states that the transaction would be in the
best interests of the Fund because the price offered by Local 252
exceeds that obtainable in a sale to an unrelated third party and
because it will allow the Fund to recoup its original investment.
Finally, the applicant asserts that the transaction
[[Page 33727]]
will be protective of the rights of the participants and beneficiaries
because the Fund will receive a purchase price which is an amount
representing the greater of: (1) the total cost to the Fund of
acquiring the Property; or (2) the fair market value of the Property on
the date of Sale as determined by a qualified, independent appraiser.
6. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act for the
following reasons: (a) the Sale is a one-time transaction for cash; (b)
the terms and conditions are at least as favorable to the Fund as those
obtainable in an arm's length transaction with an unrelated party; (c)
the Sales price is an amount which represents the greater of: (1) the
total cost to the Fund of acquiring the Property; or (2) the fair
market value of the Property on the date of Sale as determined by a
qualified, independent appraiser; and (d) the Fund does not incur any
expenses with respect to the Sale.
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 ____.
For Further Information Contact: Mr. James Scott Frazier, telephone
(202) 219-8881. (This is not a toll-free number).
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 16th day of June, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-16335 Filed 6-18-98; 8:45 am]
BILLING CODE 4510-29-P