[Federal Register Volume 63, Number 193 (Tuesday, October 6, 1998)]
[Notices]
[Pages 53703-53722]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26621]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10288, et al.]
Proposed Exemptions; Salomon 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
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and 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, NW, Washington, DC 20210.
Attention: Application No. stated in each Notice of Proposed Exemption.
The applications for exemption and the comments received will be
available for public inspection in the Public Documents Room of Pension
and Welfare Benefits Administration, U.S. Department of Labor, Room N-
5507, 200 Constitution Avenue, NW, Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Salomon Brothers Inc., Located in New York, New York
[Application No. D-10288]
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
A. The restrictions of section 406(a)(1)(A) through (D) of the Act
and the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (D) of the Code, shall
not apply to any purchase or sale of securities, including options on
securities, between certain affiliates of Salomon Brothers Inc.
(Salomon Bros.) which are foreign broker-dealers or banks (the Foreign
[[Page 53704]]
Affiliates, as defined below) and employee benefit plans (the Plans)
with respect to which the Foreign Affiliates are parties in interest,
provided that the following conditions, and the General Conditions of
Section II, are satisfied:
(1) The Foreign Affiliate customarily purchases and sells
securities for its own account in the ordinary course of its business
as a broker-dealer or bank;
(2) The terms of any transaction are at least as favorable to the
Plan as those the Plan could obtain in a comparable arm's length
transaction with an unrelated party; and
(3) Neither the Foreign Affiliate nor an affiliate thereof has
discretionary authority or control with respect to the investment of
the Plan assets involved in the transaction, or renders investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets, and the Foreign Affiliate is a party in interest or
disqualified person with respect to the Plan assets involved in the
transaction solely by reason of section 3(14)(B) of the Act or section
4975(e)(2)(B) of the Code, or by reason of a relationship to a person
described in such sections.
B. The restrictions of sections 406(a)(1)(A) through (D) and
406(b)(2) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(D) of the Code, shall not apply to any extension of credit to the
Plans by the Foreign Affiliates to permit the settlement of securities
transactions, regardless of whether they are effected on an agency or a
principal basis, or in connection with the writing of options
contracts, provided that the following conditions and the General
Conditions of Section II, are satisfied:
(1) The Foreign Affiliate is not a fiduciary with respect to the
Plan assets involved in the transaction, unless no interest or other
consideration is received by the Foreign Affiliate or an affiliate
thereof, in connection with any extension of credit; and
(2) Any extension of credit would be lawful under the Securities
Exchange Act of 1934 (the 1934 Act) and any rules or regulations
thereunder, if the 1934 Act, rules, or regulations were applicable.
C. The restrictions of section 406(a)(1)(A) through (D) of the Act
and the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (D) of the Code, shall
not apply to the lending of securities to the Foreign Affiliates by the
Plans, provided that the following conditions, and the General
Conditions of Section II, are satisfied:
(1) Neither the Foreign Affiliate nor an affiliate thereof has
discretionary authority or control with respect to the investment of
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;
(2) The Plan receives from the Foreign Affiliate (by physical
delivery, by book entry in a securities depository, wire transfer, or
similar means) by the close of business on the day the loaned
securities are delivered to the Foreign Affiliate, collateral
consisting of cash, securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable U.S. bank
letters of credit issued by persons other than the Foreign Affiliate or
an affiliate of the Foreign Affiliate, or any combination thereof. All
collateral shall be in U.S. dollars, or dollar-denominated securities
or bank letters of credit, and shall be held in the United States;
(3) The collateral has, as of the close of business on the
preceding business day, a market value equal to at least 100 percent of
the then market value of the loaned securities (or, in the case of
letters of credit, a stated amount equal to same);
(4) The loan is made pursuant to a written loan agreement (the Loan
Agreement), which may be in the form of a master agreement covering a
series of securities lending transactions, and which contains terms at
least as favorable to the Plan as those the Plan could obtain in a
comparable arm's length transaction with an unrelated party;
(5) In return for lending securities, the Plan either (a) receives
a reasonable fee, which is related to the value of the borrowed
securities and the duration of the loan, or (b) has the opportunity to
derive compensation through the investment of cash collateral. In the
latter case, the Plan may pay a loan rebate or similar fee to the
Foreign Affiliate, if such fee is not greater than what the Plan would
pay in a comparable arm's length transaction with an unrelated party;
(6) The Plan receives at least the equivalent of all distributions
on the borrowed securities made during the term of the loan, including,
but not limited to, cash dividends, interest payments, shares of stock
as a result of stock splits, and rights to purchase additional
securities, that the Plan would have received (net of applicable tax
withholdings) 1 had it remained the record owner of such
securities;
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\1\ The Department notes the applicant's representation that
dividends and other distributions on foreign securities payable to a
lending Plan may be subject to foreign tax withholdings and that the
Foreign Affiliate will always put the Plan back in at least as good
a position as it would have been in had it not loaned the
securities.
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(7) If the market value of the collateral as of the close of
trading on a business day falls below 100 percent of the market value
of the borrowed securities as of the close of trading on that day, the
Foreign Affiliate delivers additional collateral, by the close of the
Plan's business on the following business day, to bring the level of
the collateral back to at least 100 percent. However, if the market
value of the collateral exceeds 100 percent of the market value of the
borrowed securities, the Foreign Affiliate may require the Plan to
return part of the collateral to reduce the level of the collateral to
100 percent;
(8) Before entering into a Loan Agreement, the Foreign Affiliate
furnishes to the independent Plan fiduciary (a) the most recent
available audited statement of the Foreign Affiliate's financial
condition, (b) the most recent available unaudited statement of its
financial condition (if more recent than the audited statement), and
(c) a representation that, at the time the loan is negotiated, there
has been no material adverse change in its financial condition that has
not been disclosed since the date of the most recent financial
statement furnished to the independent Plan fiduciary. Such
representation may be made by the Foreign Affiliate's agreeing that
each loan of securities shall constitute a representation that there
has been no such material adverse change.
(9) The Loan Agreement and/or any securities loan outstanding may
be terminated by the Plan at any time, whereupon the Foreign Affiliate
shall deliver certificates for securities identical to the borrowed
securities (or the equivalent thereof in the event of reorganization,
recapitalization, or merger of the issuer of the borrowed securities)
to the Plan within (a) the customary delivery period for such
securities, (b) five business days, or (c) the time negotiated for such
delivery by the Plan and the Foreign Affiliate, whichever is least;
(10) In the event that the loan is terminated and the Foreign
Affiliate fails to return the borrowed securities, or the equivalent
thereof, within the time described in paragraph 9, the Plan may
purchase securities identical to the borrowed securities (or their
equivalent
[[Page 53705]]
as described above) and may apply the collateral to the payment of the
purchase price, any other obligations of the Foreign Affiliate under
the Loan Agreement, and any expenses associated with the sale and/or
purchase. The Foreign Affiliate is obligated to pay, under the terms of
the Loan Agreement, and does pay, to the Plan the amount of any
remaining obligations and expenses not covered by the collateral, plus
interest at a reasonable rate. Notwithstanding the foregoing, the
Foreign Affiliate may, in the event it fails to return borrowed
securities as described above, replace non-cash collateral with an
amount of cash not less than the then current market value of the
collateral, provided that such replacement is approved by the
independent Plan fiduciary; and
(11) The independent Plan fiduciary maintains the situs of the Loan
Agreement in accordance with the indicia of ownership requirements
under section 404(b) of the Act and the regulations promulgated under
29 CFR 2550.404(b)-1.
If the Foreign Affiliate fails to comply with any condition of the
exemption in the course of engaging in a securities lending
transaction, the Plan fiduciary who caused the Plan to engage in such
transaction shall not be deemed to have caused the Plan to engage in a
transaction prohibited by section 406(a)(1)(A) through (D) of the Act
solely by reason of the Foreign Affiliate's failure to comply with the
conditions of the exemption.
Section II--General Conditions
A. The Foreign Affiliate is a registered broker-dealer or bank
subject to regulation by a governmental agency, as described in Section
III.B, and is in compliance with all applicable rules and regulations
thereof in connection with any transactions covered by this exemption;
B. The Foreign Affiliate, in connection with any transactions
covered by this exemption, is in compliance with the requirements of
Rule 15a-6 (17 CFR 240.15a-6) of the 1934 Act, and Securities and
Exchange Commission (S.E.C.) interpretations thereof, providing for
foreign affiliates a limited exemption from U.S. broker-dealer
registration requirements;
C. Prior to any transaction, the Foreign Affiliate enters into a
written agreement with the Plan in which the Foreign Affiliate consents
to the jurisdiction of the courts of the United States for any civil
action or proceeding brought in respect of the subject transactions;
D. The Foreign Affiliate maintains, or causes to be maintained,
within the United States for a period of six years from the date of any
transaction such records as are necessary to enable the persons
described in paragraph E to determine whether the conditions of the
exemption have been met, except that --
(1) a party in interest with respect to a Plan, other than the
Foreign Affiliate, shall not be subject to a civil penalty under
section 502(i) of the Act or the taxes imposed by section 4975 (a) and
(b) of the Code, if such records are not maintained, or not available
for examination, as required by paragraph E; and
(2) a prohibited transaction shall not be deemed to have occurred
if, due to circumstances beyond the Foreign Affiliate's control, such
records are lost or destroyed prior to the end of the six year period;
E. Notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the Foreign Affiliate makes the records
referred to in paragraph (d) unconditionally available during normal
business hours at their customary location to the following persons or
a duly authorized representative thereof: (1) the Department, the
Internal Revenue Service, or the S.E.C.; (2) any fiduciary of a Plan;
(3) any contributing employer to a Plan; (4) any employee organization
any of whose members are covered by a Plan; and (5) any participant or
beneficiary of a Plan. However, none of the persons described in (2)
through (5) of this subsection are authorized to examine the trade
secrets of the Foreign Affiliate or commercial or financial information
which is privileged or confidential.
Section III--Definitions
A. The term ``affiliate'' of another person shall include: (1) any
person directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with such other
person; (2) any officer, director, or partner, employee or relative (as
defined in section 3(15) of the Act) of such other person; and (3) any
corporation or partnership of which such other person is an officer,
director or partner. For purposes of this definition, the term
``control'' means the power to exercise a controlling influence over
the management or policies of a person other than an individual;
B. The term ``Foreign Affiliate'' shall mean an affiliate of
Salomon Brothers Inc. that is subject to regulation as a broker-dealer
or bank by (1) the Ontario Securities Commission and the Investment
Dealers Association in Canada; (2) the Securities and Futures Authority
in the United Kingdom; (3) the Deutsche Bundesbank and the Federal
Banking Supervisory Authority, i.e., der Bundesaufsichtsamt fuer das
Kreditwesen (the BAK) in Germany; or (4) the Ministry of Finance and
the Tokyo Stock Exchange in Japan;
C. The term ``security'' shall include equities, fixed income
securities, options on equity and on fixed income securities,
government obligations, and any other instrument that constitutes a
security under U.S. securities laws. The term ``security'' does not
include swap agreements or other notional principal contracts.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
as of June 7, 1996.
Summary of Facts and Representations
1. Salomon Bros., a broker-dealer registered with the S.E.C., is a
full-line investment services firm which is a member of the New York
Stock Exchange and other principal securities exchanges in the United
States and a member of the National Association of Securities Dealers.
Salomon Bros. is one of the largest investment services firms in the
United States. Salomon Inc., the parent corporation of Salomon Bros.,
had approximately $194.88 billion in assets and $4.86 billion in
stockholders' equity, as of December 31, 1996.
On November 28, 1997, Salomon Inc., merged with a wholly owned
subsidiary of Travelers Group Inc. (Travelers). Travelers, a
diversified financial services holding company, had approximately $387
billion in assets and $21 billion in stockholders' equity at the time
of the merger. Salomon Inc. was the surviving corporation of this
merger and was renamed Salomon Smith Barney Holdings Inc. (Salomon
Smith Barney). Immediately thereafter, Smith Barney Holdings Inc.,
another wholly owned subsidiary of Travelers, was merged into Salomon
Smith Barney.
Salomon Bros., which will be merged in the future with another
Smith Barney affiliate of Travelers, has several foreign affiliates
which are broker-dealers or banks. Those covered by the proposed
exemption (i.e., the Foreign Affiliates), and their respective
regulating entities, are as follows:
(a) Salomon Bros. Canada Inc., located in Toronto, is subject to
regulation in Canada by the Ontario Securities Commission, as well as
the Investment Dealers Association, a self-regulatory organization.
(b) Salomon Bros. U.K. Limited, Salomon Bros. U.K. Equity Limited,
and Salomon Bros. International Limited, all located in London, are
subject to
[[Page 53706]]
regulation in the United Kingdom by the Securities and Futures
Authority.
(c) Salomon Bros. AG, located in Frankfurt, is subject to
regulation in Germany by the Deutsche Bundesbank and the
Bundesaufsichtsamt fuer das Kreditwesen (i.e., the BAK).
(d) Salomon Bros. Asia Limited branch, located in Tokyo, is subject
to regulation in Japan by the Ministry of Finance and the Tokyo Stock
Exchange.
Salomon Bros. requests an individual exemption to permit the
Foreign Affiliates identified above, as well as those others who, in
the future, may be subject to governmental regulation in Canada, the
United Kingdom, Germany, or Japan, to engage in the securities
transactions described below with employee benefit plans (i.e., the
Plans). The proposed exemption is necessary because the Foreign
Affiliates may be parties in interest with respect to the Plans under
the Act, by virtue of being a fiduciary (for assets of the Plans other
than those involved in the transactions) or a service provider to such
Plans, or by virtue of a relationship to such fiduciary or service
provider.
2. Salomon Bros. represents that the Foreign Affiliates are subject
to regulation by a governmental agency in the foreign country. Salomon
Bros. further represents that registration of a foreign broker-dealer
or bank with the governmental agency in these cases addresses
regulatory concerns similar to those concerns addressed by registration
of a broker-dealer with the S.E.C. under the 1934 Act. The rules and
regulations set forth by the above-referenced agencies and the S.E.C.
share a common objective: the protection of the investor by the
regulation of securities markets.
Canada, the United Kingdom, and Japan all have comprehensive
financial resource and reporting/disclosure rules concerning broker-
dealers. Broker-dealers are required to demonstrate their capital
adequacy. The reporting/disclosure rules impose requirements on broker-
dealers with respect to risk management, internal controls, and records
relating to counterparties. All such records must be produced at the
request of the agency at any time. The agencies' registration
requirements for broker-dealers are enforced by fines and penalties and
thus constitute a comprehensive disciplinary system for the violation
of such rules.
With respect to Germany, the BAK, an independent federal
institution with ultimate responsibility to the Ministry of Finance, in
cooperation with the Deutsche Bundesbank, the central bank of the
German banking system, provides extensive regulation of the banking
sector. The BAK insures that Salomon Bros. AG has procedures for
monitoring and controlling its worldwide activities through various
statutory and regulatory standards, such as requirements regarding
adequate internal controls, oversight, administration and financial
resources. The BAK reviews compliance with these limitations on
operations and internal control requirements through an annual audit
performed by the year-end auditor and through special audits, e.g., on
specific sections of the Banking Act, as ordered by the BAK and the
respective State Central Bank auditors. The BAK obtains information on
the condition of Salomon Bros. AG, and its branches in Tokyo and Milan,
by requiring submission of periodic, consolidated financial reports and
through a mandatory annual report prepared by the auditor. The BAK also
receives information regarding capital adequacy, country risk exposure,
and foreign exchange exposure from Salomon Bros. AG. German banking law
mandates penalties to insure correct reporting to the BAK. The auditors
face penalties for gross violation 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 BAK.
Salomon Bros. represents that, in connection with the transactions
covered by this proposed exemption, the Foreign Affiliates' compliance
with any applicable requirements of Rule 15a-6 (17 CFR 240.15a-6) of
the 1934 Act (as discussed further in Paragraph 6, below), and S.E.C.
interpretations thereof, providing for foreign affiliates a limited
exemption from U.S. registration requirements, will offer additional
protections to the Plans.
Principal Transactions
3. Salomon Bros. represents that the Foreign Affiliates operate as
traders in dealers' markets wherein they customarily purchase and sell
securities for their own account in the ordinary course of their
business as broker-dealers or banks and engage in purchases and sales
of securities, including options on securities, with their clients.
Such trades are referred to as principal transactions. Salomon Bros.
represents that the role of a broker-dealer in a principal transaction
in the subject foreign countries is virtually identical to that of a
broker-dealer in a principal transaction in the United States.
Salomon Bros. requests an individual exemption to permit the
Foreign Affiliates to engage in principal transactions with the Plans
under terms and conditions equivalent to those required in Prohibited
Transaction Class Exemption 75-1 (PTCE 75-1, 40 FR 50845, October 31,
1975), Part II.2 Salomon Bros. states that because PTCE 75-1
provides an exemption only for U.S. registered broker-dealers and U.S.
banks, the principal transactions at issue would fall outside the scope
of relief provided by PTCE 75-1.3
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\2\ The Department notes that the proposed principal
transactions are subject to the general fiduciary responsibility
provisions of Part 4 of Title I in the Act. Section 404(a) of the
Act requires, among other things, that a fiduciary of a plan act
prudently and solely in the interest of the plan and its
participants and beneficiaries, when making investment decisions on
behalf of the plan.
\3\ PTCE 75-1, Part II, provides an exemption, under certain
conditions, from section 406(a) of the Act and section 4975(c)(1)(A)
through (D) of the Code, for principal transactions between employee
benefit plans and U.S. registered broker-dealers or U.S. banks that
are parties in interest with respect to such plans.
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4. Salomon Bros. represents that like the U.S. dealer markets,
international equity and debt markets, including the options markets,
are no less dependent on a willingness of dealers to trade as
principals. Over the past decade, Plans have increasingly invested in
foreign equity and debt securities, including debt securities issued by
foreign governments. Thus, Plans seeking to enter into such investments
may wish to increase the number of trading partners available to them
by trading with the Foreign Affiliates.
5. Under the conditions of this proposed exemption, as in PTCE 75-
1, Part II, the Foreign Affiliate must customarily purchase and sell
securities for its own account in the ordinary course of its business
as a broker-dealer or bank. The terms of any principal transaction will
be at least as favorable to the Plan as those the Plan could obtain in
a comparable arm's length transaction with an unrelated party. Neither
the Foreign Affiliate nor an affiliate thereof will have discretionary
authority or control with respect to the investment of the Plan assets
involved in the principal transaction, or render investment advice
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those
assets. In addition, the Foreign Affiliate will be a party in interest
or disqualified person with respect to the Plan assets involved in the
principal transaction solely by reason of section 3(14)(B) of the Act
or section 4975(e)(2)(B) of the Code (i.e., a service provider to the
Plan), or by reason of a relationship to such a person as described in
such sections.
6. Salomon Bros. represents that Rule 15a-6 of the 1934 Act
provides an exemption from U.S. registration
[[Page 53707]]
requirements for a foreign broker-dealer that induces or attempts to
induce the purchase or sale of any security (including over-the-counter
equity and debt options) by a ``U.S. institutional investor'' or a
``U.S. major institutional investor,'' provided that the foreign
broker-dealer, among other things, enters into these principal
transactions through a U.S. registered broker or dealer intermediary.
The term ``U.S. institutional investor,'' as defined in Rule 15a-
6(b)(7), includes an employee benefit plan within the meaning of the
Act if:
(a) The investment decision is made by a plan fiduciary, as defined
in section 3(21) of the Act, which is either a bank, savings and loan
association, insurance company or registered investment adviser, or
(b) The employee benefit plan has total assets in excess of $5
million, or
(c) The employee benefit plan is a self-directed plan with
investment decisions made solely by persons that are ``accredited
investors,'' as defined in Rule 501(a)(1) of Regulation D of the
Securities Act of 1933, as amended.
The term ``U.S. major institutional investor,'' as defined in Rule
15a-6(b)(4), includes a U.S. institutional investor that has total
assets in excess of $100 million. Salomon Bros. represents that the
intermediation of the U.S. registered broker or dealer imposes upon the
foreign broker-dealer the requirement that the securities transaction
be effected in accordance with a number of U.S. securities laws and
regulations applicable to U.S. registered broker-dealers.
Salomon Bros. represents that under Rule 15a-6, a foreign broker-
dealer that induces or attempts to induce the purchase or sale of any
security by a U.S. institutional or major institutional investor in
accordance with Rule 15a-6 must, among other things:
(a) Provide written consent to service of process for any civil
action brought by or proceeding before the S.E.C. or a self-regulatory
organization;
(b) Provide the S.E.C. with any information or documents within its
possession, custody or control, any testimony of foreign associated
persons, and any assistance in taking the evidence of other persons,
wherever located, that the S.E.C. requests and that relates to
transactions effected pursuant to the Rule;
(c) Rely on the U.S. registered broker or dealer through which the
principal transactions with the U.S. institutional and major
institutional investors are effected, among other things, for:
(1) effecting the transactions, other than negotiating their terms;
(2) issuing all required confirmations and statements;
(3) as between the foreign broker-dealer and the U.S. registered
broker or dealer, extending or arranging for the extension of any
credit in connection with the transactions;
(4) maintaining required books and records relating to the
transactions, including those required by Rules 17a-3 (Records to be
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved by
Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
4
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\4\ Salomon Bros. represents that all such requirements relating
to record-keeping of principal transactions would be applicable to
any Foreign Affiliate in a transaction that would be covered by this
proposed exemption.
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(5) receiving, delivering, and safeguarding 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 (Customer Protection--Reserves and Custody of Securities) of the
1934 Act; and
(6) Participating in all oral communications (e.g., telephone
calls) between the foreign associated person and the U.S. institutional
investor, other than a U.S. major institutional investor.
Extensions of Credit
7. Salomon Bros. represents that a normal part of the execution of
securities transactions by broker-dealers on behalf of clients,
including employee benefit plans, is the extension of credit to clients
so as to permit the settlement of transactions in the customary three-
day settlement period. Such extensions of credit are also customary in
connection with the writing of option contracts.
Salomon Bros. requests that the proposed exemption include relief
for extensions of credit to the Plans by the Foreign Affiliates in the
ordinary course of their purchases or sales of securities, regardless
of whether they are effected on an agency or a principal basis, or in
connection with the writing of options contracts. In this regard, an
exemption for such extensions of credit is provided under PTCE 75-1,
Part V, only for transactions between plans and U.S. registered broker-
dealers and U.S. banks.5
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\5\ PTCE 75-1, Part V, provides an exemption, under certain
conditions, from section 406 of the Act and section 4975(c)(1) of
the Code, for extensions of credit, in connection with the purchase
or sale of securities, between employee benefit plans and U.S.
registered broker-dealers or U.S. banks that are parties in interest
with respect to such plans.
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8. Under the conditions of this proposed exemption, as in PTCE 75-
1, Part V, the Foreign Affiliate may not be a fiduciary with respect to
the Plan assets involved in the transaction. However, an exception to
such condition would be provided herein, as in PTCE 75-1, if no
interest or other consideration is received by the Foreign Affiliate or
an affiliate thereof, in connection with any such extension of credit.
In addition, the extension of credit must be lawful under the 1934 Act
and any rules or regulations thereunder, if the 1934 Act rules or
regulations were applicable. If the 1934 Act would not be applicable,
the extension of credit must still be lawful under applicable foreign
law, in the country where the particular Foreign Affiliate is
domiciled.
Securities Lending
9. The Foreign Affiliates, acting as principals, actively engage in
the borrowing and lending of securities, typically foreign securities,
from various institutional investors, including employee benefit plans.
Salomon Bros. requests an exemption for securities lending
transactions between the Foreign Affiliates and the Plans under terms
and conditions equivalent to those required in Prohibited Transaction
Class Exemption 81-6 (PTCE 81-6, 46 FR 7527, January 23, 1981, as
amended at 52 FR 18754, May 19, 1987).6 Because PTCE 81-6
provides an exemption only for U.S. registered broker-dealers and U.S.
banks, the securities lending transactions at issue would fall outside
the scope of relief provided by PTCE 81-6.
---------------------------------------------------------------------------
\6\ PTCE 81-6 provides an exemption under certain conditions
from section 406(a)(1)(A) through (D) of the Act and the
corresponding provisions of section 4975(c) of the Code for the
lending of securities that are assets of an employee benefit plan to
U.S. registered broker-dealers and U.S. banks that are parties in
interest with respect to such plans.
---------------------------------------------------------------------------
10. The Foreign Affiliates utilize borrowed securities either to
satisfy their own trading requirements or to re-lend to other broker-
dealers and entities which need a particular security for a certain
period of time. As described in the Federal Reserve Board's Regulation
T, borrowed securities are often used to meet delivery obligations in
the case of short sales or the failure to receive securities that a
broker-dealer is required to deliver. Salomon Bros. represents that
foreign broker-dealers are those broker-dealers most likely to seek to
borrow foreign securities. Thus, the requested exemption will increase
the lending demand for such securities, providing the Plans with
increased securities lending opportunities, which will earn such Plans
additional rates of
[[Page 53708]]
return on the borrowed securities (as discussed below).
11. An institutional investor, such as a pension fund, lends
securities in its portfolio to a broker-dealer or bank in order to earn
a fee while continuing to enjoy the benefits of owning the securities,
(e.g., from the receipt of any interest, dividends, or other
distributions due on those securities and from any appreciation in the
value of the securities). The lender generally requires that the
securities loan be fully collateralized, and the collateral usually is
in the form of cash, irrevocable bank letters of credit, or high
quality liquid securities, such as U.S. Government or Federal Agency
obligations.
12. With respect to the subject securities lending transactions,
neither the Foreign Affiliate nor an affiliate of the Foreign Affiliate
will have discretionary authority or control with respect to the
investment of the Plan assets involved in the transaction, or render
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to those assets.
13. By the close of business on the day the loaned securities are
delivered, the Plan will receive from the Foreign Affiliate (by
physical delivery, book entry in a securities depository, wire
transfer, or similar means) collateral consisting of cash, securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, irrevocable U.S. bank letters of credit issued by
persons other than the Foreign Affiliate or an affiliate of the Foreign
Affiliate, or any combination thereof. All collateral will be in U.S.
dollars, or dollar-denominated securities or bank letters of credit,
and will be held in the United States. The collateral will have, as of
the close of business on the business day preceding the day it is
posted by the Foreign Affiliate, a market value equal to at least 100
percent of the then market value of the loaned securities (or, in the
case of letters of credit, a stated amount equal to same).
14. The loan will be made pursuant to a written Loan Agreement,
which may be in the form of a master agreement covering a series of
securities lending transactions between the Plan and the Foreign
Affiliate. The terms of the Loan Agreement will be at least as
favorable to the Plan as those the Plan could obtain in a comparable
arm's length transaction with an unrelated party. The Loan Agreement
will also contain a requirement that the Foreign Affiliate pay all
transfer fees and transfer taxes relating to the securities loans.
15. In return for lending securities, the Plan will either (a)
receive a reasonable fee, which is related to the value of the borrowed
securities and the duration of the loan, or (b) have the opportunity to
derive compensation through the investment of cash collateral. In the
latter case, the Plan may pay a loan rebate or similar fee to the
Foreign Affiliate, if such fee is not greater than what the Plan would
pay in a comparable arm's length transaction with an unrelated party.
Earnings generated by non-cash collateral will be returned to the
Foreign Affiliate. The Plan will be entitled to at least the equivalent
of all distributions on the borrowed securities made during the term of
the loan. Such distributions will include cash dividends, interest
payments, shares of stock as a result of stock splits, and rights to
purchase additional securities, that the Plan would have received (net
of any applicable tax withholdings) had it remained the record owner of
such securities.
16. If the market value of the collateral as of the close of
trading on a business day falls below 100 percent of the market value
of the borrowed securities as of the close of trading on that day, the
Foreign Affiliate will deliver additional collateral, by the close of
the Plan's business on the following business day, to bring the level
of the collateral back to at least 100 percent. However, if the market
value of the collateral exceeds 100 percent of the market value of the
borrowed securities, the Foreign Affiliate may require the Plan to
return part of the collateral to reduce the level of the collateral to
100 percent.
17. Before entering into a Loan Agreement, the Foreign Affiliate
will furnish to the independent Plan fiduciary (a) the most recent
available audited statement of the Foreign Affiliate's financial
condition, (b) the most recent available unaudited statement of its
financial condition (if more recent than the audited statement), and
(c) a representation that, at the time the loan is negotiated, there
has been no material adverse change in its financial condition that has
not been disclosed since the date of the most recent financial
statement furnished to the independent Plan fiduciary. Such
representation may be made by the Foreign Affiliate's agreeing that
each loan of securities shall constitute a representation that there
has been no such material adverse change.
18. The Loan Agreement and/or any securities loan outstanding may
be terminated by the Plan at any time, whereupon the Foreign Affiliate
will deliver certificates for securities identical to the borrowed
securities (or the equivalent thereof in the event of reorganization,
recapitalization, or merger of the issuer of the borrowed securities)
to the Plan within (a) the customary delivery period for such
securities, (b) five business days, or (c) the time negotiated for such
delivery by the Plan and the Foreign Affiliate, whichever is least. In
the event that the Foreign Affiliate fails to return the securities, or
the equivalent thereof, within the designated time, the Plan will have
certain rights under the Loan Agreement to realize upon the collateral.
The Plan may purchase securities identical to the borrowed securities,
or the equivalent thereof, and may apply the collateral to the payment
of the purchase price, any other obligations of the Foreign Affiliate
under the Loan Agreement, and any expenses associated with replacing
the borrowed securities. The Foreign Affiliate is obligated to pay to
the Plan the amount of any remaining obligations and expenses not
covered by the collateral, plus interest at a reasonable rate as
determined in accordance with an independent market source.
Notwithstanding the foregoing, the Foreign Affiliate may, in the event
it fails to return borrowed securities as described above, replace non-
cash collateral with an amount of cash not less than the then current
market value of the collateral, provided that such replacement is
approved by the independent Plan fiduciary.
19. The independent Plan fiduciary will maintain the situs of the
Loan Agreement in accordance with the indicia of ownership requirements
under section 404(b) of the Act 7 and the regulations
promulgated under 29 CFR 2550.404(b)-1.
---------------------------------------------------------------------------
\7\ Section 404(b) of the Act states that no fiduciary may
maintain the indicia of ownership of any assets of a plan outside
the jurisdiction of the district courts of the United States, except
as authorized by regulation by the Secretary of Labor.
---------------------------------------------------------------------------
20. In summary, the applicant represents that the subject
transactions will satisfy the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons:
(a) With respect to the principal transactions effected by the
Foreign Affiliates, the proposed exemption will enable the Plans to
realize the same benefits of efficiency and convenience which such
Plans could derive from principal transactions with U.S. registered
broker-dealers or U.S. banks, pursuant to PTCE 75-1, Part II;
(b) With respect to extensions of credit in connection with
purchases or sales of securities, the proposed exemption will enable
the Foreign Affiliates and the Plans to extend credit in the ordinary
course of the Foreign
[[Page 53709]]
Affiliate's business to effect agency or principal transactions within
the customary three-day settlement period, or in connection with the
writing of option contracts, for transactions between plans and U.S.
registered broker-dealers or U.S. banks, pursuant to PTCE 75-1, Part V;
(c) With respect to securities lending transactions effected by the
Foreign Affiliates, the proposed exemption will enable the Plans to
realize a low-risk return on securities that otherwise would remain
idle, as in securities lending transactions between plans and U.S.
registered broker-dealers or U.S. banks, pursuant to PTCE 81-6; and
(d) The proposed exemption will provide the Plans with virtually
the same protections as those provided by PTCE 75-1 and PTCE 81-6.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Citizens Bank New Hampshire Located in Manchester, New Hampshire
[Application No. D-10352]
Proposed Exemption
Based on the facts and representations set forth in the
application, 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--Exemption for In-Kind Transfers of CIF Assets
If this exemption is granted, the restrictions of sections 406(a)
and 406(b) of ERISA and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(F) of the Code, shall not apply, effective October 11, 1996, to the
past in-kind transfer of assets of employee benefit plans (the Client
Plans) for which Citizens Bank New Hampshire (the Bank) serves as
fiduciary, other than plans established and maintained by the Bank,
that are held in a portfolio of a collective investment fund maintained
by the Bank (the CIF), in exchange for shares of the Berger/BIAM
International Institutional Fund (the B/B Fund), an open-end investment
company registered under the Investment Company Act of 1940 (the 1940
Act), the investment adviser and investment sub-adviser of which are
BBOI Worldwide LLC (BBOI) and Bank of Ireland Asset Management Limited
(BIAM), respectively, which are related to the Bank; provided the
following conditions and the general conditions of Section III below
are met:
(A) No sales commissions or other fees were paid by the Client
Plans in connection with the purchase of B/B Fund shares through the
in-kind transfer of CIF assets and no redemption fees are paid in
connection with the sale of such shares by the Client Plans to the B/B
Fund;
(B) Each Client Plan received shares of the B/B Fund which had a
total net asset value that is equal to the value of the Client Plans'
pro rata share of the assets of the CIF on the date of the transfer, as
determined in a single valuation performed in the same manner at the
close of the same business day, using an independent source in
accordance with Rule 17a-7(b) issued by the Securities and Exchange
Commission under the 1940 Act and the procedures established by the B/B
Fund pursuant to Rule 17a-7(b) for the valuation of such assets. Such
procedures must require that all securities for which a current market
price cannot be obtained by reference to the last sale price for
transactions reported on a recognized securities exchange or NASDAQ be
valued based on the current market value of the assets of the CIF, as
objectively determined by an independent principal pricing service (the
Principal Pricing Service).
(C) A second fiduciary who is independent of and unrelated to the
Bank (the Second Fiduciary) received advance written notice of the in-
kind transfer of assets of the CIF and full written disclosure of
information concerning the B/B Fund and, on the basis of such
information, authorized in writing the in-kind transfer of the Client
Plan's CIF assets to the B/B Fund in exchange for shares of the B/B
Fund. The full written disclosure referred to in this paragraph (C) of
Section I included the following information:
(1) A current prospectus for the B/B Fund;
(2) A description of the fees for investment advisory or similar
services that are to be paid (directly or indirectly) by the B/B Fund
to BBOI and BIAM, the fees paid to the Bank for Secondary Services, as
defined in Section IV below, and all other fees to be charged to or
paid by the Client Plan and the B/B Fund directly or indirectly to
BBOI, BIAM, the Bank, or unrelated third parties, including the nature
and extent of any differential between the rates of the fees;
(3) The reasons for the Bank's determination that the Client Plan's
investment in the B/B Fund is appropriate;
(4) A statement describing whether there are any limitations
applicable to the Bank with respect to which assets of the Client Plan
may be invested in the B/B Fund and, if so, the nature of such
limitations;
(D) On the basis of the information described in paragraph (C) of
this Section III, the Second Fiduciary authorized in writing the
investment of assets of the Client Plans in shares of the Fund and the
fees received by the Advisers in connection with their services to the
B/B Fund. Such authorization by the Second Fiduciary is consistent with
the responsibilities, obligations, and duties imposed on fiduciaries by
Part 4 of Title I of the Act;
(D) The Bank sent by regular mail to the Second Fiduciary no later
than 150 days after the completion of the transfer a written
confirmation that contained the following information:
(a) the identity of each security that was valued for purposes of
the transaction in accordance with Rule 17a-7(b)(4);
(b) the price of each such security involved in the transaction;
(c) the identity of the pricing service consulted in determining
the value of such securities;
(d) the number of CIF units held by the Client Plan immediately
before the transfer, the related per-unit value, and the total dollar
amount of such CIF units; and
(e) the numbers of shares in the B/B Fund that are held by the
Client Plan following the transfer, the related per-share net asset
value, and the total dollar amount of such shares.
(E) The Bank did not and will not receive any fees payable pursuant
to Rule 12b-1 under the 1940 Act in connection with the transactions.
(F) On an ongoing basis, for the duration of a Client Plan's
investment in the B/B Fund, the Bank provides the Second Fiduciary with
the following information:
(1) At least annually, a copy of an updated prospectus of the B/B
Fund; and
(2) Upon request, a report or statement containing a description of
all fees paid to the Bank, BBOI, BIAM, and their affiliates by the B/B
Fund and the Berger/BIAM International Portfolio, the master fund with
respect to the B/B Fund pursuant to a ``master/feeder'' structure.
(G) Neither the Bank nor the Advisers nor any affiliate thereof,
including any officer or director thereof, purchases shares of the B/B
Fund from any of the Client Plans for its own account or sells shares
of the B/B Fund to any of the Client Plans from its own account.
[[Page 53710]]
(H) The requirements of Section II of this exemption are met with
respect to all arrangements under which investment advisory fees are
paid by Client Plans to the Bank and any other party in interest with
respect to the Client Plans in connection with Client Plan assets
invested in the B/B Fund.
Section II--Exemption for Receipt of Fees from Funds
The restrictions of section 406(a) of the Act and section 406(b) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(D) through (F) of the
Code, shall not apply, effective October 11, 1996, to the receipt of
fees from the B/B Fund and/or the B/B Portfolio by the Bank, BBOI
Worldwide LLC (BBOI) and Bank of Ireland Asset Management (U.S.)
Limited (BIAM; collectively, the Advisers) for acting as the investment
adviser, subadviser, custodian, subadministrator, or provider of other
services which are not investment advisory services (Secondary
Services) for the B/B Fund in connection with the investment in the B/B
Fund by employee benefit plans (the Client Plans) for which the Bank
acts as a fiduciary, provided the following conditions and the general
conditions of Section III below are met:
(A) No sales commissions are paid by the Client Plans in connection
with purchases or sales of shares of the B/B Fund and no redemption
fees are paid in connection with the sale of such shares by the Client
Plans to the B/B Fund;
(B) The price paid or received by the Client Plans for shares in
the B/B Fund is the net asset value per share, as defined in paragraph
(E) of Section IV, at the time of the transaction and is the same price
which would have been paid or received for the shares by any other
investor at that time;
(C) Neither the Advisers nor the Bank nor an affiliate thereof,
including any officer or director thereof, purchases from or sells to
any of the Client Plans shares of the B/B Fund or the B/B Portfolio;
(D) As to each individual Plan, the combined total of all fees
received by the Advisers for the provision of services to the Plan, and
in connection with the provision of services to the B/B Fund and the B/
B Portfolio with respect to the Plan's investment in the B/B Fund, is
not in excess of ``reasonable compensation'' within the meaning of
section 408(b)(2) of the Act;
(E) The Advisers do not receive any fees payable pursuant to Rule
12b-1 under the 1940 Act in connection with the transactions;
(F) The Client Plans are not sponsored by the Advisers;
(G) A Second Fiduciary who is acting on behalf of each Plan and who
is independent of and unrelated to the Advisers, as defined in
paragraph (H) of Section IV below, receives in advance of the
investment by the Plan in the B/B Fund a full and detailed written
disclosure of information concerning the B/B Fund (including, but not
limited to, a current prospectus for the B/B Fund in which such Plan's
assets will be invested and a statement describing the fee structure
and, upon request by the Second Fiduciary, a copy of the proposed
exemption and/or a copy of the final exemption, once such documents
become available);
(H) On the basis of the information described in paragraph (G) of
this Section II, the Second Fiduciary authorizes in writing the
investment of assets of the Client Plans in shares of the Fund and the
fees received by the Advisers in connection with their services to the
B/B Fund. Such authorization by the Second Fiduciary will be consistent
with the responsibilities, obligations, and duties imposed on
fiduciaries by Part 4 of Title I of the Act;
(I) The authorization described in paragraph (H) of this Section II
is terminable at will by the Second Fiduciary of a Plan, without
penalty to such Plan. Such termination will be effected within one
business day following receipt by the Bank, either by mail, hand
delivery, facsimile, or other available means at the option of the
Second Fiduciary, of written notice of termination; provided that if,
due to circumstances beyond the control of the Bank, the sale cannot be
executed within one business day, the Bank shall have one additional
business day to complete such redemption;
(J) Client Plans do not pay any Plan-level investment management
fees, investment advisory fees, or similar fees to the Bank with
respect to any of the assets of such Client Plans which are invested in
shares of the B/B Fund. This condition does not preclude the payment of
investment advisory fees or similar fees by the B/B Fund or the B/B
Portfolio to the Advisers under the terms of an investment advisory
agreement adopted in accordance with section 15 of the 1940 Act or
other agreement between the Advisers and the B/B Fund or the B/B
Portfolio;
(K) In the event of an increase in the rate of any fees paid by the
B/B Fund or the B/B Portfolio to any of the Advisers regarding any
investment management services, investment advisory services, or fees
for other services that any of the Advisers provide to the B/B Fund or
the B/B Portfolio over an existing rate for such services that had been
authorized by a Second Fiduciary, in accordance with paragraph (H) of
this Section II, the Second Fiduciary is provided, at least 30 days in
advance of the implementation of such increase, a written notice (which
may take the form of a proxy statement, letter or similar communication
that is separate from the prospectus of the B/B Fund and which explains
the nature and amount of the increase in fees), and approves in writing
the continued holding of B/B Fund shares acquired prior to such change
(Such approval may be limited solely to the investment advisory and
other fees paid by the BB/Fund in relation to the fees paid by the plan
and need not relate to any other aspects of such investment);
(L) With respect to the B/B Fund, the Bank will provide the Second
Fiduciary of each Plan:
(a) At least annually with a copy of an updated prospectus of the
B/B Fund and the B/B Portfolio; and
(b) Upon the request of such Second Fiduciary, with a report or
statement (which may take the form of the most recent financial report,
the current statement of additional information, or some other written
statement) which contains a description of all fees paid by the B/B
Fund and the B/B Portfolio to the Advisers;
(M) All dealings between the Client Plans and the B/B Fund are on a
basis no less favorable to such Client Plans than dealings between the
Funds and other shareholders holding the same class of shares as the
Client Plans.
Section III--General Conditions
(A) The Bank maintains for a period of six years the records
necessary to enable the persons described below in paragraph (B) to
determine whether the conditions of 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 the Bank, the
records are lost or destroyed prior to the end of the six-year period,
and (2) no party in interest other than the Bank 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 by paragraph (B) below.
(B)(1) Except as provided in paragraph (B)(2) and notwithstanding
[[Page 53711]]
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (A) are unconditionally available at their
customary location for examination during normal business hours by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(ii) Any fiduciary of a Client Plan who has authority to acquire or
dispose of shares of the B/B Fund owned by the Client Plan, or any duly
authorized employee or representative of such fiduciary, and
(iii) Any participant or beneficiary of a Client Plan or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraph (B)(1)(ii) and (iii)
shall be authorized to examine trade secrets of the Advisers, or
commercial or financial information which is privileged or
confidential.
Section IV--Definitions
For purposes of this exemption:
(A)(1) The term ``Bank'' means Citizens Bank New Hampshire;
(2) The term ``BIAM'' means Bank of Ireland Asset Management;
(3) The term ``BBOI'' means BBOI Worldwide LLC;
(B) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(C) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(D)(1) The terms ``Fund'' and ``B/B Fund'' mean the Berger/BIAM
International Institutional Fund, an open-end investment company
registered under the 1940 Act, one of a series of investment portfolios
which are distinct investment vehicles referred to as ``feeder'' funds,
with respect to which BBOI and BIAM may provide Secondary Services.
(2) The terms ``Portfolio'' and ``B/B Portfolio'' mean the Berger/
BIAM International Portfolio, an open-end investment company registered
under the 1940 Act, the master fund with respect to the B/B Fund
pursuant to a ``master/feeder'' arrangement, with respect to which BBOI
and BIAM serve as investment adviser and investment sub-adviser,
respectively.
(E) The term ``net asset value'' means the amount for purposes of
pricing all purchases, sales and redemptions of shares of the Berger/
BIAM International Institutional Fund (the B/B Fund) calculated by
dividing the total value of such Fund's assets, determined by a method
set forth in the B/B Fund's prospectus and statement of additional
information, less the liabilities chargeable to the B/B Fund, by the
number of outstanding shares.
(F) The term ``Principal Pricing Service'' means an independent,
recognized pricing service that has determined the aggregate dollar
value of marketable securities involved in the transfer of CIF assets.
(G) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or sister.
(H) The term ``Second Fiduciary'' means a fiduciary of a Plan who
is independent of and unrelated to the Bank, BIAM and BBOI. For
purposes of this exemption, the Second Fiduciary will not be deemed to
be independent of and unrelated to the Bank, BIAM and BBOI if:
(1) Such Second Fiduciary directly or indirectly controls, is
controlled by, or is under common control with the Bank, BIAM or BBOI;
(2) Such Second Fiduciary, or any officer, director, partner,
employee, or relative of such Second Fiduciary, is an officer,
director, partner or employee of the Bank, BIAM or BBOI (or is a
relative of such persons); or
(3) Such Second Fiduciary directly or indirectly receives any
compensation or other consideration for his or her own personal account
in connection with any transaction described in this proposed
exemption.
If an officer, director, partner or employee of the Bank, BIAM or BBOI
(or relative of such persons) is a director of such Second Fiduciary,
and if he or she abstains from participation in the choice of a Plan's
investment adviser, the approval of any such purchase or sale between a
Plan and the B/B Fund, the approval of any change of fees charged to or
paid by the Plan, the B/B Fund or the B/B Portfolio, and the
transactions described in Sections I and II above, then paragraph
(H)(2) of this section shall not apply.
(I) The term ``Secondary Service'' means a service, other than
investment advisory or similar service, which is provided by the Bank,
BIAM or BBOI to the B/B Fund.
EFFECTIVE DATE: This exemption, if granted, will be effective as of
October 11, 1996.
Summary of Facts and Representations
1. The Bank, formerly named First NH Bank and the successor by
merger to First NH Investment Services Corp., is a New Hampshire
guaranty savings bank with its principal offices in Manchester, New
Hampshire. The Bank is wholly owned by Citizens Financial Group, Inc.,
which is 23\1/2\ percent owned by the Bank of Ireland (BI), a publicly
traded, diversified financial services group managing assets in excess
of $16 billion worldwide. The Bank represents that it serves a number
of employee benefit plan clients (the Plans) in the capacity of
trustee, investment adviser, and/or custodian. At least a portion of
the assets of the Plans are invested in the NH Pooled Employee Benefit
Trust (the CIF), a collective investment fund organized as a group
trust pursuant to Internal Revenue Service Revenue Ruling 81-100 (1981-
1 C.B. 326) established and trusteed by the Bank. One of the investment
portfolios of the CIF is the First International Equity Fund (the FIEF
Portfolio), which is the subject of this proposed exemption. As of
August 31, 1996, the Bank had approximately $6 million of Plans assets
under management in the FIEF Portfolio. The Bank is the investment
adviser of the FIEF Portfolio, and the sub-adviser is Bank of Ireland
Asset Management (U.S.) Limited (BIAM), which is a second-tier
subsidiary of BI.
2. The Bank represents that in some cases it has full or joint
investment discretion over the assets of a Plan, and in other cases the
Plan's participants direct the Bank as to which portfolios in the CIF
their accounts are to be invested in. With respect to some Plans for
which the Bank holds investment discretion, the Bank has chosen to
invest a portion of such Plans' assets in the FIEF Portfolio. With
respect to Plans providing for participant-directed investment of
individual accounts, some participants in the Plans have chosen to
direct the Bank to invest a portion of their accounts in the FIEF
Portfolio. The Bank states that in either case it is more than merely a
nondiscretionary fiduciary of the Plan since it has responsibility for
the management of the Plan's assets that are invested in the FIEF
Portfolio (hereinafter, Plans with assets invested in the FIEF
Portfolio are referred to as Client Plans). As investment sub-adviser
to the FIEF
[[Page 53712]]
Portfolio, BIAM is also a fiduciary with respect to Client Plans.
3. The B/B Fund is the Berger/BIAM International Institutional
Fund, a no-load, open-end management investment company organized as a
diversified series of a trust known as the Berger/BIAM Worldwide Funds
Trust. The B/B Fund invests all of its assets which are available for
investment in the Berger/BIAM International Portfolio (the B/B
Portfolio) as part of a so-called ``master-feeder'' structure, under
which the B/B Portfolio is the master fund and the B/B Fund is the
feeder fund. The B/B Portfolio is an open-end management investment
company organized as a diversified series of a trust known as the
Berger/BIAM Worldwide Portfolios Trust. The investment adviser of the
B/B Portfolio is BBOI Worldwide LLC, which is 50 percent owned by a
wholly-owned subsidiary of BI. The investment sub-adviser of the B/B
Portfolio is Bank of Ireland Asset Management (BIAM), a wholly-owned
subsidiary of BI.8
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\8\ The Bank represents that a master-feeder structure is a two-
tiered fund structure in which all the assets of two or more feeder
funds are invested in a single master fund, which has an identical
investment objective and identical policies and limitations as the
investing feeder funds. Shares of the feeder funds are offered to
investors in the target market for which the feeder fund and its fee
structure are designed (for example, the retail market or the
institutional market). Interests in the master fund are sold only to
feeder funds. Feeder funds may be mutual funds, bank collective
trusts or common trusts, or other types of investing entities.
Advisory services are rendered at the master level, while
shareholder services and administrative services are rendered
largely at the feeder level. In this regard, the Bank represents
that the fees paid at the master fund and feeder fund levels are
paid for separate, specific services provided to the respective
fund, and that any such payment does not result in the double
payment of fee for the same service by any shareholder. The Bank
represents that the master-feeder structure is aimed at achieving
economies of scale and lower overall expense ratios not generally
achievable in a traditional, single-tier structure.
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4. The Bank represents that it determined in 1996 to convert the
FIEF Portfolio into shares of the B/B Fund. In this regard, on October
11, 1996, the Bank accomplished this conversion by means of the in-kind
transfer of Client Plans' assets to the B/B Fund in exchange for the
Client Plans' receipt of shares of the B/B Fund. The Bank represents
that it determined to cause the Client Plans to transfer securities to
the B/B Fund, rather than cash, in order to avoid the additional costs
and risks to the Client Plans of disposing of and reacquiring
securities through the open securities markets. For this past in-kind
transfer of Client Plans' assets to the B/B Fund in exchange for shares
of the B/B Fund, the Bank is requesting an exemption under the terms
and conditions described herein.
5. The Bank represents that the Client Plans consist of pension and
profit-sharing plans, including plans with cash or deferred
arrangements under section 401(k) of the Internal Revenue Code of 1986,
as amended (the Code), and that some of the Client Plans are
participant-directed individual account plans. The Bank states that as
a custodian or participant-directed trustee of a plan, it has custody
of the plan's assets and is responsible for collecting all income,
performing bookkeeping and accounting, generating periodic statements
of account activity and other reports, and making payments or
distributions from the plan as directed. When serving as a custodian or
directed trustee, the Bank represents that it has no investment
discretion over the assets involved and no duty to review investments
or make investment recommendations, acting only as directed by plan
participants. However, some participants in such plans have directed
the Bank to invest at least a portion of their accounts in the FIEF
Portfolio. With respect to these Client Plans, the Bank is a fiduciary
with investment discretion over plan assets to the extent the Bank is
investment adviser of the FIEF Portfolio. With respect to plans for
which the Bank serves as a discretionary trustee or investment manager,
the Bank represents that it generally invests the assets of such plans
in the CIF, and within the CIF, the Bank invests some of the assets of
such plans in the FIEF Portfolio.
6. The Bank represents that it determined that it would be in the
best interests and protective of the participants and beneficiaries of
the Client Plans to convert such Plans' interests in the FIEF Portfolio
entirely to shares of the B/B Fund for the following reasons:
(a) As an open-end investment management company, the B/B Fund's
registration with the SEC requires greater participant disclosure than
that required by bank regulators and provides an enhanced mechanism for
review of disclosure documentation;
(b) Sponsors and directing participants of Client Plans will be
able to monitor more easily the performance of their investment since
it is anticipated that information concerning the investment
performance of the B/B Fund will be available in daily newspapers of
general circulation, upon the achievement of certain size requirements;
(c) The B/B Fund will be valued on a daily basis, whereas the FIEF
Portfolio has been valued only monthly. The daily valuation permits (i)
immediate investment of Plan contributions in the B/B Fund, (ii)
greater flexibility in transferring assets from the B/B Fund to another
type of investment, and (iii) daily redemption of investments in the B/
B Fund for purposes of making distributions; and
(d) Unlike investments in the FIEF Portfolio, shares of the B/B
Fund can be given directly to plan participants in benefit
distributions, thus avoiding the expense and delay of liquidating plan
investments and facilitating rollovers into individual retirement
accounts.
7. The Bank represents that the securities held in the FIEF
Portfolio on behalf of the Client Plans were transferred to the B/B
Fund in kind in order to preserve the values of the Client Plans'
interests in the FIEF Portfolio and to avoid potentially large
transaction costs and market risks that would be incurred by the Client
Plans in a total liquidation of the securities and by the B/B Fund in
reacquisition of the securities in the open market. The Bank states
that the conversion of the FIEF Portfolio occurred as follows: After
receipt of the appropriate approvals, discussed below, the Bank
transferred the FIEF Portfolio assets to the B/B Fund, pursuant to an
asset transfer procedure discussed below, and, in exchange, the B/B
Fund transferred to the FIEF Portfolio an appropriate number of shares
of the B/B Fund. The Bank represents that these B/B Fund shares had an
aggregate value equal to the aggregate value of the assets of the FIEF
Portfolio that were transferred. After the transfer, the Bank dissolved
the FIEF Portfolio and distributed the newly-acquired B/B Fund shares
pro rata to the Client Plans.
8. Prior to the conversion of the FIEF Portfolio into shares of the
B/B Fund, the Bank obtained the affirmative written approval of an
independent second fiduciary of each Invested Plan (the Second
Fiduciary), who generally was the Plan's named fiduciary, trustee
(other than the Bank), or sponsoring employer. The Bank provided each
Second Fiduciary with a prospectus for the B/B Fund and a written
statement giving full disclosure of the information required under
Prohibited Transaction Class Exemption 77-4 (PTE 77-4, 42 FR 18732,
April 8, 1977), including an explanation of why the Bank believed that
the investment of a portion of the assets of the Plan in the B/B Fund
was appropriate. On the basis of such information, the proposed
conversion of the Plan's investment in the FIEF Portfolio to investment
in the B/B Fund
[[Page 53713]]
was submitted for approval by the Second Fiduciary.
9. Asset transfer procedure: After the Second Fiduciary of each
Invested Plan approved the Invested Plan's participation in the
conversion of the FIEF Portfolio to shares in the B/B Fund, the asset
transfer procedure began. The transfer occurred on October 11, 1996,
and the following steps constituted the procedure utilized by the Bank
in effecting the conversion:
(A) Shortly prior to the transfer, the assets of the FIEF Portfolio
were reviewed to determine whether they were appropriate investments
for the B/B Fund, consistent with the B/B Fund's investment objective
and policies and the applicable requirements under the Investment
Company Act of 1940 (the 1940 Act) and the Code. Assets that were not
appropriate investments for the B/B Fund were liquidated prior to the
transfer date in the open market, without the involvement of any broker
affiliated with the Bank.
(B) For purposes of the transfer, the values of the FIEF Portfolio
assets were determined on the basis of market values as of the close of
business on the day of the transfer. Values were determined in a single
valuation using the valuation procedures described in Rule 17a-7(b)
under the Investment Company Act (17 CFR Sec. 270.17a-7(b)), as such
rule has been interpreted by the Securities and Exchange Commission.
Specifically, the securities in the FIEF Portfolio were valued as
follows:
(1) The securities valued were ones for which market quotations are
readily available.
(2) The values of the securities were the ``independent current
market prices'' of the securities, as required by Rule 17a-7(b), as of
close of business on the day of the transfer, which was a Friday. The
Bank states that Rule 17a-7(b) specifically defines ``current market
price'' for different types of securities that were in the FIEF
Portfolio:
(a) If the security was a ``reported security'' as defined in Rule
11Aa3-1 under the Securities Exchange Act of 1934 (the 1934 Act), the
last sale price with respect to such security reported in the
consolidated transaction reporting system for that day, or the average
of the highest independent bid and lowest independent offer for such
security (reported pursuant to Rule 11Ac1-1 under the 1934 Act) as of
the close of business on that day if there are no reported transactions
in the consolidated system on that day; or
(b) If the security was not a reported security, and the principal
market for such security is an exchange, then the last sale on such
exchange on that day or the average of the highest independent bid and
lowest independent offer on such exchange as of the close of business
on that day if there are no reported transactions on such exchange on
that day; or
(c) If the security is not a reported security and is quoted in the
NASDAQ system, then the average of the highest independent bid and
lowest independent offer reported on Level 1 of NASDAQ as of the close
of business on that day; 9 or
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\9\ The applicant represents that Level 1 of NASDAQ provides the
best bid-and-ask quotations for each NASDAQ security that has a
minimum of two registered market makers providing quotations. Level
2 provides the current bid-and-ask prices for each market maker in
any available NASDAQ security, not only the best prices. Level 3
allows for market makers instantaneously to insert new quotations
into the system, and is generally only used by market makers and
traders.
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(d) For all other securities, the average of the highest
independent bid and lowest independent offer, as of the close of
business on the same day, determined on the basis of reasonable inquiry
from at least three sources that are either broker-dealers or pricing
services independent of the Bank.
(C) After approval by the Second Fiduciaries of the transfer and
conversion, the securities and cash in the FIEF Portfolio were
transferred to the B/B Fund in exchange for shares of the B/B Fund. The
FIEF Portfolio assets transferred to the B/B Fund were in turn
transferred by the B/B Fund, as a feeder fund, to the B/B Portfolio
master fund. The Bank represents that the in-kind purchase of B/B Fund
shares was effected in accordance with the procedures described in the
prospectus for the B/B Fund, which provide that the securities being
transferred to the B/B Fund need to be eligible for purchase by the B/B
Portfolio (consistent with the investment policies and restrictions of
the B/B Fund and the B/B Portfolio) and must have a readily
ascertainable market value.
(D) The Bank represents that the securities received by the B/B
Fund were valued by the B/B Fund for purposes of the transfer
transaction in the same manner as the assets were valued by the FIEF
Portfolio, and the per-share value of the B/B Fund shares issued were
based on the B/B Fund's then-current net asset value. Accordingly, the
Bank states that the value of a Plan's investment in the B/B Fund as of
the start of business on the Monday following the Friday transfer was
the same as the value of its investment in the FIEF Portfolio as of the
close of business on the Friday of the transfer.
No brokerage commission or other fee or expense was charged to the
FIEF Portfolio or the B/B Fund in the transfer of assets from the FIEF
Portfolio to the B/B Fund. The Bank represents that the transfer
transactions were in fact ministerial actions, performed in accordance
with prescribed, objective procedures. The Bank represents that the
pricing of the securities transferred was accomplished by reference to
independent sources, and the Client Plans, following the transfer
transactions, hold B/B Fund shares of value equal to that of their
former units in the FIEF Portfolio.
10. Paragraph (D) of Section I of the exemption describes certain
information which the Bank provided to the Second Fiduciary of each
Client Plan no later than 150 days after the completion of the transfer
transactions. The Bank represents, however, that prior to the Bank's
provision of these detailed disclosures, each Second Fiduciary was
notified shortly after the October 11, 1996 conversion that the
transfer transactions had occurred, with a statement indicating the
transaction, the account(s) affected, the date of the trade, the dollar
amount of the transaction, the B/B Fund share price, and the total
number of shares acquired. The Bank states that this confirmation
notice was sent to the Client Plans at various times, depending on the
particular plan's reporting cycle: Some of the Client Plans received
the confirmation as early as seven to ten days after the end of October
1996, some seven to ten days after the end of November 1996, and others
seven to ten days after the end of December 1996.
11. Fee arrangements: The Client Plans pay fees to the Bank in
accordance with fee schedules negotiated with the Bank. The Bank
represents that individual schedules vary depending on the particular
arrangements between the Bank and the Plan fiduciary, the competitive
forces in the market and the desires of the Plan sponsor. The Bank
states that the annual charge for accounts for which Plan assets are
invested in the CIF is based on a percentage of the aggregate market
value of the Plan's assets. All fees are charged at least annually, and
may be billed as frequently as monthly or quarterly.
BBOI charges an investment advisory fee to the B/B Portfolio in
accordance with an investment advisory agreement between the B/B
Portfolio and BBOI. This fee is borne indirectly by the B/B Fund as a
feeder fund in the master/feeder structure. BBOI in turn contracts with
BIAM for investment sub-advisory
[[Page 53714]]
services.10 BBOI has also entered into an administrative
services agreement with the B/B Fund under which it is responsible for
administering all aspects of the B/B Fund's day-to-day operations.
Accordingly, BBOI is responsible for furnishing all administrative
services reasonably necessary for the operation of the B/B Fund,
including recordkeeping and pricing services, custodian services,
transfer agency and dividend distribution services, tax and audit
services, legal services, insurance, communications, and other
administrative and recordkeeping services.
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\10\ The Bank represents that because BI, the parent corporation
of BBOI and BIAM, has only a 23.3% ownership interest in the Bank,
BBOI and BIAM do not appear to be ``affiliates'' of the Bank for
purposes of Prohibited Transaction Exemption 77-4 (PTE 77-4, 42 FR
18732, April 8, 1977) and, accordingly, the exemption provided by
PTE 77-4 does not appear to be available with respect to fees paid
by the B/B Fund to BBOI and BIAM. For this reason, the Bank has
requested that the exemption proposed herein include exemptive
relief for the payment of investment advisory fees, as well as fees
for any Secondary Service, to BBOI and BIAM for such services to the
B/B Fund, under conditions which are virtually identical to those
contained in PTE 77-4.
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The Bank has entered into an administrative services agreement with
the Berger/BIAM Worldwide Funds Trust and BBOI, as administrator of the
B/B Fund, under which the Bank will perform various administrative
services for the B/B Fund in return for a fee payable by BBOI. Those
services will include providing necessary personnel and facilities to
establish and maintain certain shareholder accounts and records;
assisting in processing purchase and redemption requests from Client
Plans or their participants; aggregating and processing purchase and
redemption requests from Client Plans or their participants and placing
net purchase and redemption orders with the B/B Fund's transfer agent;
transmitting and receiving funds in connection with Plan orders to
purchase or redeem shares; providing information periodically to Client
Plans or their participants indicating their balance in shares of the
B/B Fund, share prices, dividends paid, and/or dividend payment dates;
responding to inquiries from the Plans or their participants relating
to the B/B Fund, the services performed by the Bank, or the account
balances of the Client Plans or their participants; providing
subaccounting with respect to shares of the B/B Fund beneficially owned
by Client Plans or their participants; forwarding shareholder
communications from the B/B Fund (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend and
distributions notices) to Client Plans or their participants; and
providing such other similar services as BBOI or the Berger/BIAM
Worldwide Funds Trust may reasonably request, in accordance with
applicable statutes, rules and regulations.
The Bank states that it receives a bundled fee from the Plans for
its administrative and investment management services to the Plans. The
Bank represents that it has determined, and that the Second Fiduciary
of each Invested Plan has agreed, that one-third of this bundled fee is
attributable to the investment management services provided by the
Bank. The Bank has amended it bundled fee arrangement so that with
respect to the Plan assets invested in the B/B Fund shares, one-third
of the bundled fee will not be charged. Accordingly, the Bank
represents that pursuant to the requirements of PTE 77-4, the Bank will
not receive any investment management fee for the portion of a Plan's
assets that are invested in the B/B Fund.
12. In summary, the Bank represents that the in-kind transfer
transaction described herein satisfies the criteria of section 408(a)
of the Act for the following reasons:
(a) On behalf of each Client Plan a Second Fiduciary authorized in
writing such in-kind transfer prior to the transaction and only after
such Second Fiduciary received full written disclosure of information
concerning the B/B Fund.
(b) Each Client Plan received shares of the B/B Fund in connection
with the in-kind transfer of assets from the FIEF Portfolio to the B/B
Fund which were equal in value to the Plan's allocable share of assets
that had been invested in the FIEF Portfolio on the date of the
transfer as determined in a single valuation performed in the same
manner and at the close of the business day, using independent sources
in accordance with procedures established by the B/B Fund which
complied with Rule 17a-7(b) of the 1940 Act, as amended, and the
procedures established by the B/B Fund pursuant to Rule 17a-7 for the
valuation of such assets.
(c) Following the completion of the in-kind transfer transaction,
the Bank provided the Second Fiduciary of each Client Plan with written
confirmation containing (1) the identity of the security that was
valued for purposes of the transaction in accordance with Rule 17a-
7(b)(4) of the 1940 Act, (2) the price of the security involved in the
transaction; (3) the identity of the pricing service consulted in
determining the value of such securities; (4) the number of FIEF
Portfolio units held by the Plan immediately before the transfer, and
the related per unit value and total dollar amount of such FIEF
Portfolio units; and (5) the number of shares in the B/B Fund held by
the Plan following the purchase and the liquidation of the FIEF
Portfolio, and the related per share net asset value and total dollar
amount of such shares.
(d) As to each Invested Plan, no investment management fee is or
will be paid to the Bank with respect to Plan assets invested in shares
of the B/B Fund.
(e) No sales commissions were paid by an Invested Plan in
connection with the acquisition of shares in the B/B Fund.
(f) With respect to investments in the B/B Fund by the Client
Plans, each Second Fiduciary received full and detailed written
disclosure of information concerning the B/B Fund, including a current
prospectus and a statement describing the fee structure, and such
Second Fiduciary authorized, in writing, the investment of the Plan's
assets in the B/B Fund and the fees payable to the Bank; and
(g) The Bank will provide ongoing disclosures to Second Fiduciaries
of Client Plans to verify the fees charged to the Bank by the B/B Fund.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Barclays Bank PLC (Barclays) Located in London, England
[Application No. D-10486]
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).11
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\11\ For purposes of this proposed exemption, reference to
provisions of Title I of the Act, unless otherwise specified, refer
also to corresponding provisions of the Code.
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Section I. Covered Transactions
A. The restrictions of section 406(a)(1)) (A) through (D) of the
Act and the sanctions resulting from the application of section 4975 of
the Code, by reason of section 4975(c)(1)(A) through (D) of the Code,
shall not apply, effective July 31, 1997, to any purchase or sale of a
security between Barclays or any affiliate of Barclays which is a bank
or a broker-dealer subject to British law (the Foreign Affiliate), and
employee
[[Page 53715]]
benefit plans (the Plans) with respect to which Barclays or the Foreign
Affiliate is a party in interest, including options on securities
written by the Plan, Barclays or the Foreign Affiliate, provided that
the following conditions and the General Conditions of Section II, are
satisfied:
(1) Barclays or the Foreign Affiliate customarily purchases and
sells securities for its own account in the ordinary course of its
business as a broker-dealer.
(2) The terms of any transaction are at least as favorable to the
Plan as those which the Plan could obtain in a comparable arm's length
transaction with an unrelated party.
(3) Neither Barclays, the Foreign Affiliate, nor any of their
affiliates thereof has discretionary authority or control with respect
to the investment of the Plan assets involved in the transaction, or
renders investment advice [within the meaning of 29 CFR 2510.3-21(c)]
with respect to those assets, and Barclays or the Foreign Affiliate is
a party in interest or disqualified person with respect to the Plan
assets involved in the transaction solely by reason of section 3(14)(B)
of the Act or section 4975(e)(2)(B) of the Code, or by reason of a
relationship to a person described in such sections. For purposes of
this paragraph, Barclays or the Foreign Affiliate shall not be deemed
to be a fiduciary with respect to Plan assets solely by reason of
providing securities custodial services for a Plan.
B. The restrictions of sections 406(a)(1) (A) through (D) and
406(b)(2) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1) (A)
through (D) of the Code, shall not apply, effective July 31, 1997, to
any extension of credit to a Plan by Barclays or the Foreign Affiliate
to permit the settlement of securities transactions or in connection
with the writing of options contracts or the purchase or sale of
securities, provided that the following conditions and the General
Conditions of Section II are satisfied:
(1) Barclays or the Foreign Affiliate is not a fiduciary with
respect to any Plan assets, unless no interest or other consideration
is received by Barclays, the Foreign Affiliate, or any of their
affiliates in connection with such extension of credit.
(2) Any extension of credit would be lawful under the Securities
Exchange Act of 1934 (the 1934 Act) and any rules or regulations
thereunder if such Act, rules or regulations were applicable and would
be lawful under applicable foreign law.
C. The restrictions of section 406(a)(1)(A) through (D) of the Act
and the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (D) of the Code, shall
not apply, effective July 31, 1997, to the lending of securities that
are assets of a Plan to Barclays or the Foreign Affiliate, provided
that the following conditions and the General Conditions of Section II
are satisfied:
(1) Neither Barclays, the Foreign Affiliate nor any of their
affiliates thereof has discretionary authority or control with respect
to the investment of Plan assets involved in the transaction, or
renders investment advice [within the meaning of 29 CFR 2510.3-21(c)]
with respect to those assets.
(2) The Plan receives from Barclays or the Foreign Affiliate,
either by physical delivery or by book entry in a securities depository
located in the United States, by the close of business on the day on
which the securities lent are delivered to Barclays or the Foreign
Affiliate, collateral consisting of U.S. currency, securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities, or irrevocable United States bank letters of credit
issued by persons other than Barclays or the Foreign Affiliate (or any
of their affiliates), or any combination thereof, having, as of the
close of business on the preceding business day, a market value (or, in
the case of letters of credit, a stated amount) equal to not less than
100 percent of the then market value of the securities lent. (The
collateral referred to in this Section I(c)(2) must be in U.S. dollars
or dollar-denominated securities or United States bank letters of
credit and must be held in the United States.)
(3) The loan is made pursuant to a written loan agreement (the Loan
Agreement), which may be in the form of a master agreement covering a
series of securities lending transactions, and which contains terms at
least as favorable to the Plan as those the Plan could obtain in an
arm's length transaction with an unrelated party.
(4) In return for lending securities, the Plan either (i) receives
a reasonable fee which is related to the value of the borrowed
securities and the duration of the loan, or (ii) has the opportunity to
derive compensation through the investment of cash collateral. In the
latter case, the Plan may pay a loan rebate or similar fee to Barclays
or the Foreign Affiliate, if such fee is not greater than the Plan
would pay an unrelated party in a comparable arm's length transaction
with an unrelated party.
(5) The Plan receives at least the equivalent of all distributions
made to holders of the borrowed securities during the term of the loan,
including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to purchase
additional securities that the Plan would have received (net of tax
withholdings) 12 had it remained the record owner of such
securities.
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\12\ The Department notes the applicant's representation that
dividends and other distributions on foreign securities payable to a
lending Plan may be subject to foreign tax withholdings and that
Barclays or the Foreign Affiliate will always put the Plan back in
at least as good a position as it would have been in had it not lent
the securities.
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(6) 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 trading on that day, Barclays or
the Foreign Affiliate delivers additional collateral, by the close of
business on the following business day, to bring the level of the
collateral back to at least 100 percent of the market value of all the
borrowed securities as of such preceding day. Notwithstanding the
foregoing, part of the collateral may be returned to Barclays or the
Foreign Affiliate if the market value of the collateral exceeds 100
percent of the market value of the borrowed securities, as long as the
market value of the remaining collateral equals at least 100 percent of
the market value of the borrowed securities.
(7) Prior to the making of any securities loan, Barclays or the
Foreign Affiliate furnishes to the independent fiduciary for the Plan
who is making decisions on behalf of the Plan with respect to the
lending of securities: (i) the most recently available audited and
unaudited statements of its financial condition; and (ii) a
representation by Barclays or the Foreign Affiliate that, as of each
time it borrows securities, there has been no material adverse change
in its financial condition since the date of the most recently
furnished financial statement that has not been disclosed to the Plan
fiduciary.
(8) The Loan Agreement and/or any securities loan outstanding may
be terminated by the Plan at any time, whereupon Barclays or the
Foreign Affiliate delivers certificates for securities identical to the
borrowed securities (or the equivalent thereof in the event of
reorganization, recapitalization or merger of the issuer of the
borrowed securities) to the Plan within (i) the customary delivery
period for such securities; (ii) five business days; or (iii) the time
negotiated for such
[[Page 53716]]
delivery by the Plan and Barclays (or the Plan and the Foreign
Affiliate), whichever is lesser, or, alternatively such period as
permitted by Prohibited Transaction Exemption (PTE) 81-6 (43 FR 7527,
January 23, 1981) as it may be amended.
(9) In the event that the loan is terminated and Barclays or the
Foreign Affiliate fails to return the borrowed securities or the
equivalent thereof within the time described in paragraph (8) above,
then the Plan may purchase securities identical to the borrowed
securities (or their equivalent as described above) and may apply the
collateral to the payment of the purchase price, any other obligations
of Barclays or the Foreign Affiliate under the Loan Agreement, and any
expenses associated with the sale and/or purchase. Barclays or the
Foreign Affiliate shall indemnify the Plan with respect to the
difference, if any, between the replacement cost of the borrowed
securities and the market value of the collateral on the date the loan
is declared in default, together with expenses not covered by the
collateral plus applicable interest at a reasonable rate.
(10) The Plan maintains the situs of the Loan Agreement in
accordance with the indicia of ownership requirements under section
404(b) of the Act and the regulations promulgated under 29 CFR
2550.404(b)-1. However, Barclays or the Foreign Affiliate shall not be
subject to the civil penalty which 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 Plan fails to comply with the requirements of 29 CFR
2550.404(b)-1.
If Barclays or the Foreign Affiliate fails to comply with any
condition of this exemption in the course of engaging in a securities
lending transaction, the Plan fiduciary which caused the Plan to engage
in such transaction shall not be deemed to have caused the Plan to
engage in a transaction prohibited by section 406(a)(1)(A) through (D)
of the Act solely by reason of the failure on the part of Barclays or
the Foreign Affiliate to comply with the conditions of the exemption.
Section II. General Conditions
(a) Barclays is subject to regulation by the Bank of England.
(b) The Foreign Affiliate--
(1) Is subject to regulation by the Bank of England, or
(2) Is a registered broker-dealer subject to regulation by the
Securities and Futures Authority of the United Kingdom (the UK SFA) and
is in compliance with all applicable rules and regulations thereof.
(c) Barclays and the Foreign Affiliate are in compliance with all
requirements of Rule 15a-6 (17 CFR 240.15a-6), which provides foreign
broker-dealers a limited exemption from U.S. broker-dealer registration
requirements, and Securities and Exchange Commission (the SEC)
interpretations and amendments thereof to Rule 15a-6 under the 1934
Act, to the extent applicable.
(d) Prior to the transaction, Barclays or the Foreign Affiliate
enters into a written agreement with the Plan in which Barclays or the
Foreign Affiliate consents to the jurisdiction of the courts of the
United States for any civil action or proceeding brought in respect of
the subject transactions.
(e) Barclays or the Foreign Affiliate 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 (f) of this Section II to determine
whether the conditions of this exemption have been met except that--
(1) A party in interest with respect to a Plan, other than Barclays
or the Foreign Affiliate, shall not be subject to a civil penalty under
section 502(i) of the Act or the taxes imposed by section 4975(a) or
(b) of the Code, if such records are not maintained, or are not
available for examination as required by paragraph (e) of this Section
II; and
(2) A prohibited transaction will not be deemed to have occurred
if, due to circumstances beyond the control of Barclays or the Foreign
Affiliate, such records are lost or destroyed prior to the end of such
six year period.
(f) Notwithstanding the provisions of subsections (a)(2) and (b) of
section 504 of the Act, Barclays or the Foreign Affiliate makes the
records referred to above in paragraph (e) of this Section II,
unconditionally available for examination during normal business hours
at their customary location to the following persons or an authorized
representative thereof:
(1) The Department, the Internal Revenue Service or the SEC;
(2) Any fiduciary of a participating Plan;
(3) Any contributing employer to a Plan;
(4) Any employee organization any of whose members are covered by a
Plan; and
(5) Any participant or beneficiary of a Plan. However, none of the
persons described above in paragraphs (f)(2)-(f)(5) of this Section II
shall be authorized to examine trade secrets of Barclays or the Foreign
Affiliate, or any commercial or financial information which is
privileged or confidential.
(g) Prior to any Plan's approval of any transaction with Barclays
or the Foreign Affiliate, the Plan is provided copies of the proposed
and final exemptions covering the exemptive relief described herein.
Section III. Definitions
For purposes of this proposed exemption,
(a) The term ``Barclays,'' means ``Barclays Bank PLC'' which is
subject to regulation by the Bank of England.
(b) The term ``Foreign Affiliate'' means any affiliate of Barclays
which is subject to regulation by the Bank of England or the UK SFA.
(c) The term ``affiliate'' of another person shall include:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, or partner, employee or relative (as
defined in section 3(15) of the Act) of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner. (For purposes of this definition, the
term ``control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.)
(d) The term ``security'' includes equities, fixed income
securities, options on equity and on fixed income securities,
government obligations, and any other instrument that constitutes a
security under U.S. securities laws. The term ``security'' does not
include swap agreements or other notional principal contracts.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of July 31, 1997.
Summary of Facts and Representations
1. Barclays, one of the largest full-line investment service firms
in the world, is an authorized institution under the Banking Act of
1987 of the United Kingdom and is regulated by the Bank of England. As
of June 30, 1998, Barclays had approximately 249 billion
($405.9 billion) in assets and 7.9 billion ($12.9 billion)
in stockholder's equity.13
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\13\ A conversion ratio of $1.63 per British Pound Sterling was
used to determine the applicable dollar amounts.
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2. Barclays Capital Securities Limited (BCSL) is a foreign broker-
dealer
[[Page 53717]]
affiliate of Barclays. Located in London, BCSL is subject to regulation
in the United Kingdom by the UK SFA. As of December 31, 1997, BCSL had
total assets of $36.5 billion.
3. Barclays requests exemptive relief from the Department to permit
it and any Foreign Affiliate that is subject to British law, to engage
in (a) purchases and sales of securities and (b) extensions of credit
in connection with such purchases and sales. Such transactions are
currently being executed between a Plan and Barclays or a Plan and the
Foreign Affiliate in transactions which generally meet the applicable
requirements of PTE 75-1, Part II (involving Principal Transactions)
and Part V (involving Extensions of Credit) (40 FR 50845, October 31,
1975). However, unlike PTE 75-1, the parties in interest involved in
the Principal Transactions that are described herein are not broker-
dealers registered under the 1934 Act, reporting dealers which make
primary markets in securities of the United States Government and
report daily to the Federal Reserve Bank its positions with respect to
Government securities and borrowings thereon, or banks supervised by
the United States or a State. Similarly, with respect to Extensions of
Credit Transactions that are described herein, the parties in interest
involved in this proposed exemption are not brokers or dealers
registered under the 1934 Act.
Further, Barclays requests exemptive relief with respect to the
lending of securities that are assets of a Plan to it or to the Foreign
Affiliate. While such transactions would generally meet the applicable
requirements of PTE 81-6, as amended, supplemented or superseded, in
the present case, again the parties in interest involved herein are not
broker-dealers registered under the 1934 Act or exempted from
registration under section 15(a)(1) of the 1934 Act as dealers in
exempted Government securities, as defined in section 3(a)(12) of the
1934 Act or U.S. banks.
Finally, Barclays requests that the exemptive relief described
above apply to its other Foreign Affiliates which, may in the future,
be subject to similar regulation by the Bank of England or the UK SFA.
If granted, the exemption will be effective as of July 31, 1997.
4. Barclays represents that it is regulated by the Bank of England
whose powers include licensing banks in the United Kingdom, issuing
directives to address violations by or irregularities involving such
banks, requiring information from a bank or its auditor regarding
supervisory matters and revoking bank licenses. Barclays also states
that the Bank of England ensures that it 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. Barclays further states that it is required to provide the
Bank of England on a recurring basis with information regarding capital
adequacy, country risk exposure and foreign exchange exposures as well
as periodic, consolidated financial reports on the financial condition
of Barclays and its affiliates.
5. Barclays represents that although the Foreign Affiliate will not
be registered with the SEC, its activities are governed by the rules,
regulations and membership requirements of the UK SFA. In this regard,
Barclays states that the Foreign Affiliate is subject to the UK SFA
rules relating to, among other things, minimum capitalization,
reporting requirements, periodic examinations, client money and safe
custody rules, and books and records requirements with respect to
client accounts. Barclays represents that the rules and regulations set
forth by the UK SFA and the SEC share a common objective: the
protection of the investor by the regulation of the securities
industry. Barclays notes that the UK SFA rules require each firm which
employs registered representatives or registered traders to have
positive tangible net worth and to be able to meet its obligations as
they may fall due, and that the UK SFA rules set forth comprehensive
financial resource and reporting/disclosure rules regarding capital
adequacy. In addition, to demonstrate capital adequacy, Barclays states
that the UK SFA rules impose reporting/disclosure requirements on
broker-dealers with respect to risk management, internal controls, and
transaction reporting and recordkeeping requirements. In this regard,
required records must be produced at the request of the UK SFA at any
time. Barclays further states that the rules and regulations of the UK
SFA for broker-dealers are backed up by potential fines and penalties
as well as rules which establish a comprehensive disciplinary system.
6. Barclays represents that in addition to the protections afforded
by the Bank of England and the UK SFA, compliance by it and the Foreign
Affiliate with the requirements of Rule 15a-6 (and the amendments and
interpretations thereof) will offer further protections to
Plans.14 Rule 15a-6 provides an exemption from U.S.
registration requirements for a foreign broker-dealer that induces or
attempts to induce the purchase or sale of any security (including
over-the-counter equity and debt options) by a ``U.S. institutional
investor'' or a ``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 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 advisor, or (b)
the employee benefit plan has total assets in excess of $5 million, or
(c) the employee benefit plan is a self-directed plan with investment
decisions made solely by persons that are ``accredited investors'' as
defined in Rule 501(a)(1) of Regulation D of the Securities Exchange
Act of 1933, as amended. The term ``U.S. major institutional investor''
is defined as a person that is a U.S. institutional investor that has
total assets in excess of $100 million or accounts managed by 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.15 Barclays represents that the
intermediation of the U.S. registered broker-dealer imposes upon the
foreign broker-dealer the requirement that the securities
[[Page 53718]]
transaction be effected in accordance with a number of U.S. securities
laws and regulations applicable to U.S. registered broker-dealers.
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\14\ According to Barclays, section 3(a)(4) of the 1934 Act
defines ``broker'' to mean ``any person engaged in the business of
effecting transactions in securities for the account of others, but
it does not include a bank.'' Section 3(a)(5) of the 1934 Act
provides a similar exclusion for ``banks'' in the definition of the
term ``dealer.'' However, section 3(a)(6) of the 1934 Act defines
``bank'' to mean a banking institution organized under the laws of
the United States or a State of the United States. Further, Rule
15(a)(6)(b)(2) provides that the term ``foreign broker or dealer''
means ``any non-U.S. resident person * * * whose securities
activities, if conducted in the United States, would be described by
the definition of ``broker'' or ``dealer'' in sections 3(a)(4) or
3(a)(5) of the [1934] Act.'' Therefore, the test of whether an
entity is a ``foreign broker'' or ``dealer'' is based on the nature
of such foreign entity's activities and, with certain exceptions,
only banks that are regulated by either the United States or a State
of the United States are excluded from the definition of the term
``broker'' or ``dealer.'' Thus, for purposes of this exemption
request, Barclays is willing to represent that it will comply with
the applicable provisions and relevant SEC interpretations and
amendments of Rule 15a-6.
\15\ See SEC No-Action Letter issued to Cleary, Gottlieb, Steen
& Hamilton on April 9, 1997, expanding the definition of ``Major
U.S. Institutional Investor'' (the April 9, 1997 No-Action Letter).
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Barclays represents that under Rule 15a-6, a foreign broker-dealer
that induces or attempts to induce the purchase or sale of any security
by a U.S. institutional or major institutional investor in accordance
with Rule 15a-6 16 must, among other things:
\16\ If it is determined that applicable regulation under the
1934 Act does not require Barclays or the Foreign Affiliate to
comply with Rule 15a-6, both entities will, nevertheless, comply
with paragraphs (a) and (b) above.
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(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 the Rule;
(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); 17 and
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\17\ Under certain circumstances described in the April 9, 1997
No-Action Letter (e.g., clearance and settlement transactions),
there may be direct transfers of funds and securities between a Plan
and Barclays or between a Plan and the Foreign Affiliate. Barclays
notes that in such situations, the U.S. registered broker-dealer
will not be acting as a principal with respect to any duties it is
required to undertake pursuant to Rule 15a-6.
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(6) Participate in certain 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 certain visits with
both U.S. institutional and major institutional investors. Under
certain circumstances, the foreign associated person may have direct
communications and contact with the U.S. Institutional Investor.
(See April 9, 1997 SEC No-Action Letter.)
7. In addition to the protections cited above, Barclays represents
that prior to a transaction described herein, it or the Foreign
Affiliate will enter into a written agreement with the Plan whereby it
or the Foreign Affiliate will consent to the jurisdiction of the courts
of the United States for any civil action or proceeding brought in
respect of such transaction. Further, Barclays or the Foreign Affiliate
will maintain, or cause to be maintained, within the United States for
a period of six years, from the date of a transaction such records as
are necessary to enable the Department and others to determine whether
the conditions of the exemption have been met.
Principal Transactions
8. Barclays represents that both it and the Foreign Affiliate
operate as traders in dealers' markets wherein they customarily
purchase and sell securities for their own account in the ordinary
course of their business and engage in purchases and sales of
securities, including options on securities written by the Plan,
Barclays or the Foreign Affiliate with their clients. Such trades are
referred to as principal transactions. Barclays states that the role of
a bank or a broker-dealer engaged in a principal transaction in the
subject foreign countries is virtually identical to that of a bank or a
broker-dealer engaged in a principal transaction in the United States.
Therefore as noted above, Barclays requests an individual exemption,
effective July 31, 1997, to permit it and Foreign Affiliate to engage
in principal transactions with the Plans under the terms and conditions
equivalent to those of Part II of PTE 75-1. As previously stated,
because PTE 75-1 provides an exemption for U.S. registered broker-
dealers and U.S. banks, the principal transactions may fall outside the
scope of relief provided therein.
9. Barclays represents that like the U.S. dealer markets,
international equity and debt markets, including the options markets,
are no less dependent on a willingness of dealers to trade as
principals. Over the past decade, Plans have increasingly invested in
foreign equity and debt securities, including foreign government
securities. Thus, Barclays notes that Plans seeking to enter into such
investments may wish to increase the number of trading partners
available to them by trading with it or the Foreign Affiliate.
10. Barclays represents that the terms of any principal transaction
will be at least as favorable to the Plan as those the Plan could
obtain in a comparable arm' length transaction with an unrelated party.
In addition, Barclays states that neither it, the Foreign Affiliate nor
any of their affiliates thereof will have discretionary authority or
control with respect to the investment of the Plan assets involved in
the principal transaction or render investment advice [within the
meaning of 29 CFR 2510.3-21(c)] with respect to those assets. Further,
Barclays represents that it or the Foreign Affiliate will be a party in
interest with respect to those Plan involved in a principal transaction
by reason of providing services to a Plan under section 3(14) of the
Act or by reason of a relationship to such service provider. However,
Barclays maintains that it or the Foreign Affiliate will not be deemed
to be a fiduciary with respect to Plan assets solely by reason of
providing securities custodial services for a Plan.
Extensions of Credit
11. Barclays represents that a normal part of the execution of
securities transactions by broker-dealers on behalf of customers,
including Plans, is the extension of credit to customers so as to
permit the settlement of transactions in the customary settlement
period. Such extensions of credit are customary in connection with the
buying and writing of option contracts. Therefore, Barclays requests,
effective July 31, 1997, exemptive relief for extensions of credit
between it and a Plan or between the Foreign Affiliate and a Plan in
the ordinary course of their purchases or sales of securities,
regardless of whether they are effected on an agency or a principal
basis. Although an exemption for such extensions of credit is provided
under Part V of PTE 75-1 for U.S. registered broker-dealers, it is not
available for Barclays or for the Foreign Affiliate which are or will
be domiciled in the United Kingdom.
12. As in PTE 75-1, Barclays or the Foreign Affiliate may not be a
fiduciary with respect to Plan assets involved in the transaction
unless no interest or other consideration is received by Barclays, the
Foreign Affiliate or any of their affiliates thereof, in connection
with any extension of credit. The extension of credit also must be
lawful under applicable foreign law.
Securities Lending
13. In addition to exemptive relief for principal transactions and
extensions of credit in connection with the purchase or sale of
securities, Barclays requests exemptive relief, effective July 31,
1997, for the lending of securities, equivalent to that provided under
the terms and conditions of PTE 81-6, a class exemption to permit
certain loans of
[[Page 53719]]
securities by employee benefit plans. Under such circumstances,
Barclays or the Foreign Affiliate, acting as principals, actively
engage in the borrowing and lending of securities, typically foreign
securities from institutions, including employee benefit plans. Because
PTE 81-6 provides an exemption for U.S. registered broker-dealers and
U.S. banks, the securities lending transactions at issue herein may, as
briefly noted above, fall outside the scope of relief provided by PTE
81-6.
14. It is represented that Barclays and the Foreign Affiliate
utilize borrowed securities to satisfy their own trading requirements
or to re-lend to other affiliates and entities which need a particular
security for a certain period of time. As described in the Federal
Reserve Board's Regulation T, borrowed securities are often used to
meet delivery obligations in the case of short sales or the failure to
receive securities that Barclays or the Foreign Affiliate is required
to deliver. Barclays also represents that foreign broker-dealers are
the most likely entities that seek to borrow foreign securities. Thus,
the exemption will increase the lending demand for such securities and
provide the Plans with increased securities lending opportunities.
15. It is represented that an institutional investor, such as a
pension plan, lends securities in its portfolio to Barclays or the
Foreign Affiliate in order to earn a fee while continuing to enjoy the
benefits of owning securities (e.g., from the receipt of any interest,
dividends or other distributions due on those securities and from any
appreciation in the value of the securities). The lender generally
requires that the securities loan be fully collateralized and the
collateral usually is in the form of U.S. currency, irrevocable U.S.
bank letters of credit issued by a bank other than Barclays, or high-
quality liquid securities such as U.S. Government or Federal Agency
obligations. When cash is the collateral, the lender invests the cash
and rebates a previously-agreed upon amount to Barclays or the Foreign
Affiliate. The ``fee'' received by the lender as compensation for the
loan of its securities then consists of the excess, if any, of the
earnings on the collateral over the amount of the rebate. When the
collateral consists of obligations other than cash, Barclays or the
Foreign Affiliate pays a fee directly to the lender.
16. Neither Barclays, the Foreign Affiliate nor any of their
affiliates thereof will have discretionary authority or control with
respect to the investment of Plan assets involved in the transaction or
render investment advice, within the meaning of 29 CFR 2510.3-21(c)
with respect to those assets.
17. By the close of business on the day the loaned securities are
delivered to Barclays or the Foreign Affiliate, the Plan will receive,
from Barclays or the Foreign Affiliate, (by physical delivery, book
entry in a U.S. securities depository, wire transfer or similar means)
collateral consisting of U.S. currency, securities issued or guaranteed
by the U.S. Government or its agencies, irrevocable U.S. bank letters
of credit issued by persons other than Barclays, the Foreign Affiliate,
or any of their affiliates, or any combination thereof, having, as of
the close of trading on the preceding business day, a market value
equal to at least 100 percent of the then market value of the loaned
securities (or, in the case of letters of credit, a stated amount equal
to same). All collateral posted by Barclays or the Foreign Affiliate
will be in U.S. dollars or dollar-denominated securities or U.S. bank
irrevocable letters of credit and will be held in the United States.
18. The loan will be made pursuant to a written Loan Agreement
which may be in the form of a master agreement covering a series of
securities lending transactions. The terms of the Loan Agreement will
be at least as favorable to the Plan as those the Plan could obtain in
a comparable arm's length transaction with an unrelated party. The Loan
Agreement will also contain a requirement that the Barclays or the
Foreign Affiliate pay all transfer fees and transfer taxes relating to
the securities loans.
19. In return for lending securities, the Plan will either (a)
receive a reasonable fee which is related to the value of the borrowed
securities and the duration of the loan or (b) have the opportunity to
derive compensation through the investment of cash collateral. In the
latter case, the Plan may pay a loan rebate or similar fee to Barclays
or the Foreign Affiliate if such fee is not greater than what the Plan
would pay in a comparable arm's length transaction with an unrelated
party.
Under this fee arrangement, earnings generated by non-cash
collateral will be returned to Barclays or the Foreign Affiliate. The
Plan will be entitled to at least the equivalent of all distributions
on the borrowed securities made during the term of the loan, including,
but not limited to, cash dividends, interest payments, shares of stock
as a result of stock splits and rights to purchase additional
securities that the Plan would have received (net of tax withholdings)
had it remained the record owner of such securities.
20. If the market value of the collateral as of the close of
trading on a business day falls below 100 percent of the market value
of the borrowed securities as of the close of trading on that day,
Barclays or the Foreign Affiliate will deliver additional collateral,
by the close of business on the following business day, to bring the
level of the collateral back to at least 100 percent. Notwithstanding
the foregoing, part of the collateral may be returned to Barclays or
the Foreign Affiliate if the market value of the collateral exceeds 100
percent of the market value of the borrowed securities, as long as the
market value of the remaining collateral equals at least 100 percent of
the market value of the borrowed securities. Matters relating to the
return of the collateral, the substitution of collateral or the
termination of loans, will be determined by applicable provisions of
the Loan Agreement.
21. Before entering a Loan Agreement, Barclays or the Foreign
Affiliate will furnish to the Plan the most recently available audited
and unaudited statements of such entity's financial condition. In
addition, Barclays or the Foreign Affiliate will represent that as of
each time such entity borrows securities there has been no material
change in the financial condition of such entity since the date of the
most recently-furnished financial statement that has not been disclosed
to the Plan.
22. The Loan Agreement and/or any securities loan outstanding may
be terminated by the Plan at any time, whereupon Barclays or the
Foreign Affiliate will deliver certificates for securities identical to
the borrowed securities (or the equivalent thereof in the event of a
reorganization, recapitalization or merger of the issuer of the
borrowed securities) to the Plan within the time period specified by
PTE 81-6 as it may be amended. In the event that Barclays or the
Foreign Affiliate fails to return the borrowed securities, or the
equivalent thereof, within the designated time, the Plan will have
certain rights under the Loan Agreement to realize upon the collateral.
The Plan may purchase securities identical to the borrowed securities,
or the equivalent thereof, and may apply the collateral to the payment
of the purchase price, any other obligations of Barclays or the Foreign
Affiliate under the Loan Agreement and any expenses associated with
replacing the borrowed securities. Barclays or the Foreign Affiliate
will indemnify the Plan with respect to the difference, if any, between
the
[[Page 53720]]
replacement cost of the borrowed securities and the market value of the
collateral on the date the loan is declared in default, together with
expenses not covered by the collateral plus applicable interest at a
reasonable rate. If replacement securities are not available, Barclays
or the Foreign Affiliate will pay the Plan an amount equal to (a) the
value of the securities as of the date such securities should have been
returned to the Plan plus (b) all the accrued financial benefits
derived from the beneficial ownership of such loan securities as of
such date, plus (c) interest from such date through the date of
payment.
23. The Plan will maintain the situs of the Loan Agreement in
accordance with the indicia of ownership requirements of section 404(b)
of the Act and the regulations promulgated under 29 CFR 2550.404(b)-1.
However, Barclays or the Foreign Affiliate will not be subject to the
civil penalty which 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
Plan fails to comply with the requirements of 29 CFR 2550.404(b)-1.
24. In summary, it is represented that the proposed transactions
have satisfied and will satisfy the statutory criteria for an exemption
under section 408(a) of the Act for the following reasons:
(a) With respect to principal transactions effected by Barclays or
the Foreign Affiliate, the exemption has enabled and will enable Plans
to realize the same benefits of efficiency and convenience which derive
from principal transactions executed pursuant to Part II of PTE 75-1 by
U.S. registered broker-dealers and U.S. banks.
(b) With respect to extensions of credit by Barclays and the
Foreign Affiliate in connection with purchases or sales of securities,
the exemption has enabled and will enable the Plans and Barclays or the
Plans and the Foreign Affiliate to extend credit in the ordinary course
of Barclays's or the Foreign Affiliate's business so as to effect the
transactions within the customary settlement period or in connection
with the buying and writing of options contracts or in connection with
short sales, as permitted by Part V of PTE 75-1, for U.S. registered
broker-dealers.
(c) With respect to securities lending transactions effected by
Barclays or the Foreign Affiliate, the exemption has enabled and will
enable Plans to realize a low-risk return on securities that otherwise
would remain idle, as in securities lending transactions executed
pursuant to PTE 81-6 by U.S. registered broker-dealers and U.S. banks.
(d) The proposed exemption will provide Plans with virtually the
same protections and benefits as those provided by PTE 75-1 and PTE 81-
6.
Notice to Interested Persons
The applicant represents that because those Plans that will be
potentially interested in the transactions cannot be identified at this
time, the only practical means of notifying Plan fiduciaries is by the
publication of the notice of proposed exemption in the Federal
Register. Therefore, comments and requests for a hearing must be
received by the Department not later than 30 days from the date of the
publication of this proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
The Millcraft Industries Salaried Employees Pension Plan (the
Salaried Plan) and The Millcraft Products, Inc. Hourly Employees
Pension Plan and Trust Agreement (the Hourly Plan) (collectively,
the Plans) Located in Canonsburg, PA
[Exemption Application Numbers D-10608 and D-10609]
Proposed Exemption
The Department is considering granting an 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 three cash sales (the Sales) of certain shares of stock
(the Stock) by the Plans to Millcraft Industries, Inc. (Millcraft
Industries), a party in interest and disqualified person with respect
to the Plans, provided the following conditions were met:
(a) The terms of the Sales were at least as favorable to the Plans
as those obtainable in an arm's length transaction with an unrelated
party;
(b) The Sales were one-time transactions for cash;
(c) The Plans paid no commissions or expenses relating to the
Sales; and
(d) The Sales were for no less than the fair market value of the
Stock as determined by a qualified, independent appraiser.
Effective Date: If granted, the proposed exemption will be
effective as of November 15, 1996.
Summary of Facts and Representations
1. The applicant describes the Plans as follows:
a. The Salaried Plan was originally established by Millcraft
Industries on August 28, 1972 and has since been amended and restated
effective November 1, 1989. At the time of the transactions, the
Salaried Plan had 86 participants and held assets valued at
approximately $1.8 million.
b. The Hourly Plan was originally established by Millcraft
Products, Inc. (Millcraft Products) on November 1, 1963 and has since
been amended and restated effective November 1, 1989. At the time of
the transactions, the Hourly Plan had 216 participants and held assets
valued at approximately $1.95 million.
At all times relevant to the transactions in question, Jack B.
Piatt, Jack B. Piatt, II, Rodney L. Piatt, and Charles D. Boehm served
as trustees (the Trustees) for the Plans, and Merrill Lynch, Pierce,
Fenner & Smith, Incorporated (Merrill Lynch) served as broker for both
Plans.
2. Millcraft Industries, the sponsor and administrator of the
Salaried Plan, is a Pennsylvania corporation located at 400 Southpointe
Boulevard, Suite 400, Canonsburg, Pennsylvania. Millcraft Industries is
a holding and management corporation engaged, through subsidiaries, in
the manufacturing and marketing of specialized equipment for the steel-
making industry and the development of real estate.
Millcraft Products, sponsor and administrator of the Hourly Plan,
is a wholly-owned subsidiary of Millcraft Industries that is also
located in Pennsylvania. Millcraft Products is a manufacturing,
continuous caster repair, machinery, and fabricating company that
provides parts, services, and equipment for the steel-making industry.
3. Among the assets of the Plans are certain shares of Stock in the
Community Bank, NA, (the Bank) a publicly traded corporation located in
Pennsylvania. Except for approximately 3.3% of the outstanding Stock of
the Bank held by the Plans and approximately 4.4% of the outstanding
Stock of the Bank held by Millcraft Industries at the time of the
transaction, the Bank was otherwise unrelated to Millcraft Industries,
Millcraft Products and the Plans.
The Stock is a thinly-traded security with quotes available only
via the National Quotation Bureau's ``pink
[[Page 53721]]
sheets.'' From 1985 through 1989, the Hourly Plan purchased 2,926
shares of the Stock from the Bank. The purchase price of these shares
varied between $53 and $65 per share. As the result of a two-for-one
stock split on April 10, 1986, and a four-for-one stock split on May 1,
1994, the Hourly Plan obtained an additional 12,778 shares of the
Stock.
From 1988 through 1993, the Salaried Plan purchased 2,300 shares of
the Stock from the Bank. The purchase price of these shares varied
between $47 and $53 per share. The Salaried Plan obtained an additional
6,900 shares of Stock as a result of the May 1, 1994 stock split.
4. According to the applicant, the Trustees originally purchased
the Stock on behalf of the Plans in the mid-1980's in response to the
increasing number of bank mergers in western Pennsylvania and in
anticipation that this trend would continue.
However, in the months preceding the consummation of the
transactions, the Trustees concluded that the period of speculation on
local bank mergers had ended. The Trustees decided that the assets of
the Plans would have greater long-term profit potential if they were
placed with a professional asset management company.
When Millcraft Industries expressed interest in purchasing the
Stock, the Trustees decided to sell the shares at the prevailing market
value. Accordingly, on November 15, 1996, the Trustees authorized
Merrill Lynch to sell 1,200 shares of the Stock from the Salaried Plan
to Millcraft Industries for $30,900, or $25.75 per share. Then, on
November 20, 1996, the Trustees authorized Merrill Lynch to sell an
additional 8,000 shares of the Stock to Millcraft Industries from the
Salaried Plan for $206,000, or $25.75 per share. Finally, also on
November 20, 1996 the Trustees authorized Merrill Lynch to sell 15,704
shares of the Stock to Millcraft Industries from the Hourly Plan for
$404,378, or $25.75 per share.
As of November 20, 1996, the Plans had sold a total of 24,904
shares of the Stock to Millcraft Industries at $25.75 per share.
According to the applicant, the Salaried Plan earned a profit of
$116,800, or an average of $12.70 per share, and the Hourly Plan earned
a profit of $237,300, or an average of $15.11 per share. In addition,
the applicant represents that the Plans incurred no brokerage
commissions or other charges as a result of the above transactions.
5. The applicant requests retroactive relief for the aforementioned
transactions involving the Sales of stock from the Plans. The applicant
represents that at the time of the transactions, the Trustees and
Millcraft Industries were not aware that the transactions were
prohibited under ERISA and the Code and that they would not have
engaged in these transactions had they been aware of this fact.
6. Prior to executing these transactions, Millcraft Industries
employed Parker/Hunter, Inc. (Parker/Hunter), a market maker in the
Stock, to ascertain the fair market value of the shares. Parker/Hunter,
a member of the New York Stock Exchange and the Securities Investors
Protection Corporation, is a full service brokerage and investment
banking firm headquartered in Pittsburgh, Pennsylvania with 300
employees in 21 offices throughout Pennsylvania, Ohio and West
Virginia. The firm is independent of the Plans, Millcraft Industries
and Millcraft Products. In providing the pricing information to
Millcraft Industries, Parker/Hunter used data from the most recent
sales of the Stock to determine that the fair market value of the Stock
on November 15, 1996 and November 20, 1996 was $25.75 per share.
7. Upon discovering in August 1997 that its purchases of the Stock
from the Plans were prohibited, Millcraft Industries promptly sought
legal advice as to the steps needed to correct these violations. On
October 31, 1997, Millcraft Industries represents that it reversed the
transactions in accordance with 26 CFR 53.4941(e)-1(c) of the Treasury
Department Regulations by instructing Merrill Lynch to transfer 9,200
shares of the Stock to the Salaried Plan and transfer 15,704 shares of
Stock to the Hourly Plan.18 At the same time, the Trustees
instructed the Plans' broker to transfer $236,900, or $25.75 per share,
from the Salaried Plan to Millcraft Industries and $404,378, or $25.75
per share, from the Hourly Plan to Millcraft Industries.19
The applicant represents that no commissions were charged with respect
to the correction.20
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\18\ The Department expresses no opinion regarding whether the
corrective actions taken by the applicant were done in accordance
with 26 CFR 53.4941(e)-1(c) of the Treasury Regulations.
\19\ Prior to reversing the transactions, Millcraft consulted
Parker/Hunter to determine the fair market value of the Stock.
Parker/Hunter determined that the fair market value of the Stock as
of October 31, 1997 would be in excess of $25.75 per share. Merrill
Lynch account statements for October 1997 confirm that the estimated
market price of the Stock was $31.50 per share at the time of the
reversal transaction.
\20\ The applicant also wishes to note that while holding the
Stock, Millcraft Industries received $12,950.08 in dividends.
Pursuant to 26 CFR 53.4941(e)-1(c)(2) of the Treasury Regulations, a
disqualified person must pay to the plan any income derived by him
from the property he received from the original prohibited sale to
the extent such income exceeds the income derived by the plan from
the cash which the disqualified person originally paid to the plan.
The applicant represents that the Plans invested the $641,278
received from Millcraft Industries in the transactions, and on these
various investments earned an estimated $125,000. Because this
amount substantially exceeds the $12.950.08 in dividends received by
Millcraft Industries while in possession of the Stock, Millcraft
Industries determined that it was not required to remit an amount
equal to the dividends to the Plans.
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8. The applicant represents that the Sales were administratively
feasible in that each involved a one-time transaction for cash.
Furthermore, the applicant states that the transactions were in the
interests of the Plans and their participants and beneficiaries because
the Stock was sold in an attempt to facilitate investment in assets
achieving a higher a rate of return, and were conducted in such a
manner as to ensure that the Plans received a return on the Stock in
excess of their original investment. Finally, the applicant represents
that the transactions were protective of the rights of the participants
and beneficiaries because the Plans received the fair market value of
the Stock as determined by a qualified, independent appraiser.
9. In summary, the applicant represents that the subject
transaction satisfied the statutory criteria for an exemption under
section 408(a) of the Act and section 4975(c)(2) of the Code for the
following reasons: (a) The terms of the Sales were at least as
favorable to the Plans as those obtainable in an arm's length
transaction with an unrelated party; (b) The Sales were one-time
transactions for cash; (c) The Plans paid no commissions or expenses
relating to the Sales; and (d) The Sales were for no less than the fair
market value of the Stock 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 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 November 20, 1998.
FOR FURTHER INFORMATION CONTACT: Mr. James Scott Frazier of the
Department, telephone (202) 219-8881 (this is not a toll-free number).
[[Page 53722]]
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 30th day of September, 1998.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-26621 Filed 10-5-98; 8:45 am]
BILLING CODE 4510-29-P