[Federal Register Volume 63, Number 247 (Thursday, December 24, 1998)]
[Notices]
[Pages 71301-71311]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34109]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 98-60; Exemption Application No. D-
10352, et al.]
Grant of Individual Exemptions; Citizens Bank New Hampshire
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of individual exemptions.
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SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) 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).
Notices were published in the Federal Register of the pendency
before the Department of proposals to grant such exemptions. The
notices set forth a summary of facts and representations contained in
each application for exemption and referred interested persons to the
respective applications for a complete statement of the facts and
representations. The applications have been available for public
inspection at the Department in Washington, DC. The notices also
invited interested persons to submit comments on the requested
exemptions to the Department. In addition the notices stated that any
interested person might submit a written request that a public hearing
be held (where appropriate). The applicants have represented that they
have complied with the requirements of the notification to interested
persons. No public comments and no requests for a hearing, unless
otherwise stated, were received by the Department.
The notices of proposed exemption were issued and the exemptions
are being granted solely by the Department because, 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 proposed to the Secretary
of Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants
and beneficiaries; and
(c) They are protective of the rights of the participants and
beneficiaries of the plans.
Citizens Bank New Hampshire, Located in Manchester, New Hampshire
[Prohibited Transaction Exemption 98-60; Exemption Application No. D-
10352]
Section I--Exemption for In-Kind Transfers of CIF Assets
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 were 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),1 the
investment adviser and investment sub-adviser of which were 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:
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\1\ In this regard, the Bank represents that any further in-kind
transfers of CIF assets to the B/B Fund will comply with the
conditions of Prohibited Transaction Exemption (PTE) 97-41 (62 FR
42830, August 8, 1997). PTE 97-41 permits the purchase by employee
benefit plans (i.e. the Client Plans) of shares of one or more open-
ended management investment companies (i.e. mutual funds) registered
under the 1940 Act in exchange for assets of the Client Plans
transferred in-kind to the mutual fund from a collective investment
fund (i.e. the CIF) maintained by a bank or a plan adviser, where
the bank or plan adviser is the investment adviser to the mutual
fund and also a fiduciary to the Client Plans, if the conditions of
the exemption are met. However, as noted further below, the Bank
distributed written confirmation to the Client Plans regarding the
in-kind transfer of CIF assets made to the Funds within 150 days,
rather than within the 105-day period required by Section I(g) of
PTE 97-41. Thus, an individual exemption to cover these specific CIF
conversions is necessary to provide the appropriate retroactive
relief.
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(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) The transferred assets constituted the Client Plans' pro rata
portion of all assets that were held by the CIF immediately prior to
the transfer;
(C) 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);
(D) 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 (D) 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
[[Page 71302]]
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;
(E) On the basis of the information described in paragraph (D) 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 BBOI, BIAM or the Bank 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;
(F) The Bank sent by regular mail to the Second Fiduciary no later
than 150 days 2 after the completion of the transfer a
written confirmation that contained the following information:
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\2\ See Footnote 1 Above.
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(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;
(G) 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;
(H) 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;
(I) Neither the Bank, BBOI, BIAM 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; and
(J) 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) and 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, as
well as for acting as a 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
[[Page 71303]]
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 B/B 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
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; and
(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 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
[[Page 71304]]
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 is effective as of October 11, 1996.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption (the Notice) published on October 6,
1998, at 63 FR 53709.
Modifications: The Department, with the consent of the applicant's
representative, has made certain modifications to the conditions
contained in Section I of the Notice.
First, a new condition (B) has been added to Section I of this
exemption which requires that the transferred assets must have
constituted the Client Plan's pro rata portion of all assets that were
held by the CIF immediately prior to the transfer.
Second, a footnote has been added to the operative language in
Section I to clarify that any future in-kind transfers of CIF assets to
the Funds will comply with the conditions of PTE 97-41 (62 FR 42830,
August 8, 1997), a class exemption granted by the Department which
covers such transactions if the conditions of the exemption are met.
No other written comments, and no requests for a hearing, were
received by the Department.
Accordingly, the Department has determined to grant the proposed
exemption, as modified herein.
FOR FURTHER INFORMATION CONTACT: Mr. Christopher J. Motta of the
Department, telephone (202) 219-8883 (This is not a toll-free number).
John Hancock Mutual Life Insurance Company (JHMLIC), Located in
Boston, Massachusetts
[Prohibited Transaction Exemption 98-61; Application No. D-10484]
Exemption
The restrictions of section 406(b)(2) of the Act shall not apply to
the proposed purchases and sales of Timber Assets between various
Accounts that are managed by Hancock Natural Resource Group, Inc.
(HNRG), John Hancock Timber Resource Corporation (JHTRC), or another
Affiliate of JHMLIC.
Conditions and Definitions
This exemption is subject to the following conditions:
1. ERISA-Covered Plans may participate in the proposed transactions
only if they have total assets in excess of $100 million.
2. At least 30 days prior to the proposed transaction, each
affected Customer invested in the Accounts participating in the
transaction will be provided with information regarding the Timber
Assets involved and the terms of the transaction, including the
purchase price and how the transaction would meet the goals and
investment policies of the Customer. Notice of any change in the
purchase price will be provided to the Customer at least 30 days prior
to the consummation of the transaction.
3. An Independent Fiduciary will be appointed by JHMLIC or an
Affiliate as follows:
(a) Where the proposed transaction involves an ERISA-Covered Plan
(including a Pooled Separate Account or other Account holding ``plan
assets'' subject to the Act)3 and a Non-ERISA Plan or other
Non-ERISA Customer, an Independent Fiduciary will be appointed to
represent the Account in which the ERISA-Covered Plan is invested,
whether that Account is the buyer or the seller of the Timber Assets in
the proposed transaction;
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\3\ See 29 CFR 2510.3-101 for the Department's definition of
``plan assets'' relating to plan investments.
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(b) Where the proposed transaction involves two ERISA-Covered Plans
(or Pooled Separate Accounts or other Accounts holding ``plan assets''
subject to the Act) and the decision to liquidate the Timber Asset is
the result of one or more ``triggering events'' described below, an
Independent Fiduciary will be appointed by JHMLIC or an Affiliate to
represent the purchasing plan (or Pooled Separate Account or other
Account holding ``plan assets'')--i.e. the Buying Account. A
``triggering event'' will exist whenever:
(i) JHMLIC or an Affiliate receives a direction from the Customer
to liquidate all of the Customer's Account or interest in an Account,
and the decision to select any particular Timber Asset to be sold is
outside of the control of JHMLIC and its Affiliates;
(ii) JHMLIC or an Affiliate receives a request by the Customer to
liquidate a specified timber property held in the Customer's Account,
and the decision to liquidate the Timber Asset is outside of the
control of JHMLIC and its Affiliates; or
(iii) a liquidation of all of the assets held in the Selling
Account, or a particular property held by such Account, is required
under the terms of the investment contract, insurance contract or
investment guidelines governing the Account, and the decision to select
any particular Timber Asset to be sold is outside of the control of
JHMLIC and its Affiliates; and
(c) Where the proposed transaction involves two ERISA-Covered Plans
(or Pooled Separate Accounts or other Accounts holding ``plan assets''
subject to the Act) and there is no ``triggering event'' as described
above in Condition 3(b), or where a Pooled Separate Account in which a
Hancock Plan participates is the Selling Account, an Independent
Fiduciary will be appointed by JHMLIC or an Affiliate for each Account
involved in the transaction.
4. With respect to each transaction requiring the participation of
an Independent Fiduciary (as described in Condition 3 above), the
purchase and sale of a Timber Asset shall not be consummated unless the
Independent Fiduciary determines that the transaction, including the
price to be paid or received for the property, would be in the best
interest of the particular Account involved based on the investment
policies and objectives of such Account.
5. Each Account which buys or sells a particular Timber Asset pays
no more than or receives no less than the fair market value of the
Timber Asset at the time of the transaction, as determined by a
qualified independent real estate appraiser experienced with the
valuation of timber properties similar to the type involved in the
transaction.
6. Each purchase or sale of a Timber Asset between Accounts is a
one-time cash transaction.
7. Each Account involved in the purchase or sale of a Timber Asset
pays no real estate commissions or brokerage fees relating to the
transaction.
8. JHMLIC or an Affiliate acts as a discretionary investment
manager for the assets of the Accounts involved in each transaction,
provided that this condition will not fail to have been met solely
because the Customer retains the right to veto or approve the purchase
or sale of Timber Assets.
9. An Account does not participate in a covered transaction if the
assets of any Hancock Plan(s) in the Account exceed 20 percent of the
total assets of the Account.
10. No purchase or sale transaction is designed to benefit the
interests of one particular Account over another.
11. For purposes of this exemption:
(a) ``Account'' means a Separate Account as defined below,
including a ``Non-Pooled Separate Account'' or a ``Pooled Separate
Account,'' as well as a limited partnership or limited liability
company for which JHMLIC or an
[[Page 71305]]
Affiliate serves as general partner, investment manager or adviser.
(b) ``Timber Asset'' means a fee simple in timberland (and
appurtenant rights), as well as a timber lease or timber deed, provided
that, with respect to any timber lease or timber deed: (i) the
underlying fee simple is owned by a person other than JHMLIC, its
Affiliates, or any Account at the time of sale; and (ii) the entire
deed or lease originally acquired by the Selling Account is sold to the
Buying Account.
(c) ``ERISA-Covered Plan'' is an employee benefit plan as defined
under section 3(3) of the Act;
(d) ``Non-ERISA Plan'' or ``Non-ERISA Customer'' means an entity or
investor not covered by the provisions of Title I of the Act, such as a
governmental plan, a university endowment fund, a charitable foundation
fund or other institutional investor, whose assets are managed in an
Account for which JHMLIC or an Affiliate acts as investment manager;
(e) ``Affiliate'' means any person directly or indirectly through
one or more intermediaries, controlling, controlled by, or under common
control with JHMLIC;
(f) ``Buying Account'' means the Account which seeks to purchase
Timber Assets from another Account;
(g) ``Selling Account'' means the Account which seeks to sell
Timber Assets to another Account;
(h) ``Independent Fiduciary'' means a person or entity with
authority to both review the appropriateness of the proposed
transaction for an Account, that is considered to hold ``plan assets''
subject to the fiduciary responsibility provisions of the Act, based on
the investment policy established for that Account, and to negotiate
the terms of the transaction, including the price to be paid for the
Timber Asset. An individual or firm selected to serve as an Independent
Fiduciary shall meet the following criteria:
(1) The individual or firm may have no current employment
relationship with JHMLIC or an Affiliate, although a prior employment
relationship would not disqualify the individual or firm;
(2) No individual or firm may serve as an Independent Fiduciary
during any year in which gross receipts received from business with
JHMLIC and its Affiliates for that year exceed five (5) percent of such
individual's or firm's gross receipts from all sources for the prior
year;
(3) The individual or firm must be an expert with respect to
timberland valuations;
(4) The individual or firm must have the ability to access (itself
or through persons engaged by it) appropriate timberland sales
comparison data and make appropriate adjustments to the subject
property; and
(5) The individual or firm must not have a criminal record
involving fraud, fiduciary standards, or securities laws violations;
(i) ``Separate Account'' means a segregated asset Account which
receives premiums or contributions from customers, including employee
benefit plans subject to the Act, in connection with group annuity
contracts and funding agreements, with investments held in the name of
JHMLIC, but where the value of the contract or agreement to the
Customer (contractholder) fluctuates with the value of the investment
associated with such Account;
(j) ``Non-Pooled Separate Account'' or ``Non-Pooled Account'' means
a Separate Account established to back a single contract issued to one
Customer, which may be an employee benefit plan subject to the Act;
(k) ``Pooled Separate Account'' or ``Pooled Account'' means a
Separate Account established to back a group of substantially identical
contracts issued to a number of unrelated Customers, including employee
benefits plans subject to the Act; and
(l) ``Customer'' means a person or entity that acts as the
authorized representative for the investor in an Account involved in a
proposed purchase or sale of Timber Assets, that is independent of
JHMLIC and its Affiliates, provided, however, that for any Hancock Plan
(as defined in Paragraph 11(m) below), a ``Customer'' shall mean the
Plan Investment Advisory Committee of JHMLIC.
(m) ``Hancock Plan'' means an employee benefit plan sponsored by
JHMLIC or an Affiliate which invests in an Account.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on June 29, 1998, at 63 FR
35284.
WRITTEN COMMENTS: The applicant (i.e. JHMLIC) submitted a number of
comments on the notice of proposed exemption (the Notice). These
comments, and the modifications to the Notice made by the Department in
response thereto, are discussed below.
First, with respect to the scope of the exemption, JHMLIC requests
that the term ``Account,'' as defined in Paragraph 10 of the Notice, be
expanded to include limited liability companies (LLCs). JHMLIC
represents that LLCs offer several advantages over limited
partnerships, which make LLCs an increasingly popular form of ownership
of investment property. These advantages include more flexibility in
the management of the business than exists with partnerships and more
liquidity in the transferability of an interest in an LLC than in a
limited partnership. JHMLIC states that LLCs would be subject to the
same conditions and safeguards in the requested exemption as
partnerships. For example, the role of the Independent Fiduciary of the
LLC would be the same as its role with respect to a partnership.
Thus, JHMLIC proposes that the Department redefine the term
``Account'' in Paragraph 10(a) of the Notice to include both limited
partnerships and LLCs, and to delete the separate definition of the
term ``Partnership'' contained in Paragraph 10(b) of the Notice.
The Department has modified the definition of the term ``Account''
(see Paragraph 11(a) of this exemption) to reflect the changes
requested by JHMLIC.
Second, with respect to the use of the term ``timber property'' in
the operative language and conditions contained in the Notice, JHMLIC
requests that the relief provided by the exemption cover purchases and
sales of ``Timber Assets'' and that such term should be separately
defined to include both fee simple interests in timber properties and
timber-related assets, such as timber leases and timber deeds.
JHMLIC represents that timber investments often involve the
acquisition and holding of property rights other than fees simple. For
example, timber portfolios routinely include such valuable assets as
timber leases and timber deeds. A timber lease is a contract between a
landowner (the lessor) and another party (the lessee) under which the
lessee is granted the right to use the land for the production of
timber for a specified period of time. Timber leases typically specify
how the land is to be managed and the condition in which the land must
be returned to the lessor at the end of the lease. Timber lessees have
significant rights, including the right to plant, grow and harvest
timber. A timber deed is a contract under which the landowner grants to
a third party the right to harvest existing timber. Typically, the deed
holder is not required to harvest all or any portion of the timber and
its right to do so will be forfeited after a specified period of time.
Timber deeds do not generally involve replanting by the deed holder
either for the benefit of the landowner or the deed holder.
JHMLIC states that timber leases and timber deeds may be bought and
sold
[[Page 71306]]
independently of the underlying fee simple. For example, while an
Account may not own a fee simple on a particular timber property it may
have the contractual right to harvest the timber on that property. The
management and valuation of timber deeds and leases are the province of
the same managers and appraisers who manage and value timberland fees
simple. JHLMIC represents that when an Account invests in timber leases
or deeds, the fee simple interest is held by an unrelated party, not by
another Account or by JHMLIC or an Affiliate. Thus, where an Account
owns the underlying fee simple in a timber property, rather than a
timber lease or timber deed, it retains the right to harvest the timber
and does not assign that right to any other party, including another
Account. In addition, JHMLIC states that if a timber deed or timber
lease is owned by an Account as a Timber Asset, and that deed or lease
is sold to another Account under the conditions of this exemption, the
entire deed or lease originally acquired by the Selling Account will be
sold to the Buying Account. This condition will prevent these timber
deeds and leases from being ``parcelized'' between the various
Accounts.
JHLMIC states further that other property rights, including mineral
rights, easements and recreational leases, are rights that are
appurtenant to the fee simple interest in a timber property. Such
rights are bought and sold, and appraised, as part of the fee. These
rights are currently contemplated by use of the term ``timber
property'' in the Notice. JHMLIC states that it is not seeking to have
the exemption cover the transfer of these rights apart from the
underlying fee simple.
Thus, JHMLIC proposes to add the term ``Timber Asset'' to the
exemption and to define such term to mean a fee simple in timberland
(and appurtenant rights), as well as a timber lease or timber deed,
provided that, with respect to any timber lease or timber deed: (i) the
underlying fee simple is owned by a person other than JHMLIC, its
Affiliates, or any Account at the time of sale; and (ii) the entire
deed or lease originally acquired by the Selling Account is sold to the
Buying Account.
The Department has modified the definitions contained in the
exemption by adding the term ``Timber Asset'' to such definitions,
which is included as the new Paragraph 11(b) above.
Third, with respect to the definition of the term ``Customer'' in
Paragraph 10(l) of the Notice, JHMLIC states that plans sponsored by
JHMLIC and its affiliates (i.e., Hancock Plans) also invest in Timber
Assets through Pooled Separate Accounts maintained by HNRG, JHTRC or
another Affiliate of JHMLIC. Currently, the John Hancock Pension Plan
has interests in three pooled accounts. These interests constitute
15.6%, 10% and 9.9%, respectively, of these Accounts.
JHMLIC states that the Notice, as drafted, would make the exemption
unavailable to these Pooled Separate Accounts merely because a Hancock
Plan has an interest in them. This result occurs because the term
``Customer'' in Paragraph 10(l) of the Notice requires that disclosures
regarding a covered transaction be provided to a person that is
independent of JHMLIC and its Affiliates. In this regard, JHMLIC states
that it is not appropriate to deny an entire Pooled Separate Account
access to the cost savings associated with the covered transactions
merely because a Hancock Plan participates in the Account. JHMLIC
states that the terms and conditions of the exemption, including the
requirements for either a ``triggering event'' (as described in
Condition 3(b) above) or an Independent Fiduciary to act on behalf of
the Account, will address potential conflicts of interest that could be
deemed to exist by virtue of the participation of the Hancock Plans as
investors in such Accounts.
Thus, JHMLIC proposes to redefine the term ``Customer'' to permit
that term to include the Plan Investment Advisory Committee of JHMLIC
for purposes of interests held in an Account by a Hancock Plan. In this
regard, JHMLIC represents that the interests of any Hancock Plan(s) in
such Accounts will not exceed 20 percent of that Account.
As a further safeguard to avoid potential conflicts of interest in
transactions between an Account in which a Hancock Plan participates
and other Accounts, JHMLIC proposes that Paragraph 3(c) of the
exemption require that an Independent Fiduciary be appointed to
represent any Selling Account in which a Hancock Plan participates,
whether or not there exists a ``triggering event'' for the sale of the
Timber Asset by that Account.
Therefore, the Department has modified the definition of the term
``Customer'' (see Paragraph 11(l) above) to allow the Plan Investment
Advisory Committee of JHMLIC to come within the meaning of that term
for purposes of the exemption. In addition, the Department has added
``Hancock Plan'' as a new term which is defined in Paragraph 11(m)
above. The Department has also added a new Paragraph 9 to the exemption
(as discussed further below) which requires that any Hancock Plan
covered under the exemption must be an investor which has interests in
an Account which, when combined with the interests of any other Hancock
Plan, do not exceed 20 percent of that Account. Finally, the Department
has modified the conditions relating to the appointment of an
Independent Fiduciary, as stated in Paragraph 3, to require that an
Independent Fiduciary represent any Selling Account in which a Hancock
Plan participates regardless of whether the sale of a Timber Asset by
that Account results from a ``triggering event''.
Fourth, with respect to the role of an Independent Fiduciary,
JHMLIC represents that in Paragraph 3 of the Notice, the flush language
suggests that in all cases when an Independent Fiduciary is appointed,
the Independent Fiduciary will represent the interests of the ERISA-
Covered Plans. JHMLIC wishes to clarify that in the case of a Pooled
Separate Account the Independent Fiduciary will represent the interests
of the Account, and therefore all of its participating plans--whether
ERISA-Covered Plans or other types of plans. In this regard, the
Department also received two comment letters from the Fire and Police
Pension Association of Colorado, a client of HTRG, requesting that the
role of the Independent Fiduciary for such an Account be clarified in
order to refer to non-ERISA plans.
Thus, JHMLIC proposes that the phrase ``* * * to represent the
interests of the ERISA-Covered Plans'' be deleted from the flush
language of Paragraph 3 of the exemption, noting that the remaining
language, plus subparagraphs (a), (b) and (c) of Paragraph 3, would
then adequately address the role of the Independent Fiduciary for all
investors in an Account.
The Department has modified the language of Paragraph 3 of the
exemption by making the deletion requested by JHMLIC.
Fifth, with respect to an independent appraisal of a timber
property to establish its fair market value, Paragraph 5 of the Notice
requires that the price used for a covered transaction be established
by an ``independent real estate appraiser.'' In this regard, JHMLIC
proposes that the qualifications for the Independent Fiduciary, as
stated in Paragraph 10(h) of the Notice, be modified so that the
Independent Fiduciary is not required to be a qualified appraiser.
JHMLIC states that while the Independent Fiduciary selected may perform
appraisals in the ordinary course of its business, JHMLIC would like to
have the flexibility to engage a fiduciary who is not
[[Page 71307]]
necessarily a qualified appraiser of timber assets. In such instances,
the appraisal required by the exemption (see Paragraph 5 above) would
be obtained by the Independent Fiduciary from another person who is an
independent qualified appraiser.
Thus, JHMLIC proposes that modifications to the definition of the
term ``Independent Fiduciary'' be made to recognize that although the
fiduciary chosen for an Account will be an expert in timberland
valuations (e.g., a forestry consultant), the person chosen may not be
a qualified independent timberland appraiser.
The Department has modified the definition of ``Independent
Fiduciary'' in the exemption in response to JHMLIC's comments. Under
the new definition, the language that was contained in Paragraph
10(h)(3) and (4) of the Notice has been changed to require that an
Independent Fiduciary be an expert in timberland valuations, and have
the ability to access (itself or through persons engaged by it)
appropriate timberland sales comparison data. In addition, the
requirements relating to an Independent Fiduciary being a qualified
independent real estate appraiser who is proficient in timberland
appraisal work (as described in Paragraph 10(h)(3) thru (5) of the
Notice) have been deleted.
In response to further discussions with and comments from JHMLIC,
the Department has also modified the criteria for an individual or firm
to serve as an Independent Fiduciary when that individual or firm
receives a significant amount of compensation from JHMLIC and its
Affiliates for business with those entities during the current calendar
year. Paragraph 10(h)(2) of the Notice stated that the individual or
firm must not have received more than five (5) percent of its annual
gross receipts during the preceding calendar year from business with
JHMLIC and its Affiliates. Under the new definition of ``Independent
Fiduciary'' in Paragraph 11(h)(2) of this exemption, no individual or
firm may serve as an Independent Fiduciary during any year in which
gross receipts received from business with JHMLIC and its Affiliates
for that year exceed five (5) percent of such individual's or firm's
gross receipts from all sources for the prior year.
Sixth, Paragraph 8 of the Notice limits the relief that would be
provided under the exemption to those Accounts over which JHMLIC or an
Affiliate is a ``discretionary investment manager.'' JHMLIC states that
in a few situations involving timber assets managed through entities
other than Separate Accounts, JHMLIC or an Affiliate has discretion to
perform day-to-day management of the assets held in an Account but must
obtain the Customer's approval for the purchase and sale of timber
assets. JHMLIC notes that if the relief requested under the exemption
is limited to Accounts over which JHMLIC has discretionary management
authority, it will not be clear whether the exemption would cover
purchases or sales of Timber Assets held in an Account for which JHMLIC
must obtain the Customer's approval for such transactions.
In response to this comment, the Department has modified Paragraph
8 of the exemption as follows:
* * * JHMLIC or an Affiliate acts as a discretionary investment
manager for the assets of the Accounts involved in each transaction,
provided that this condition will not fail to have been met solely
because the Customer retains the right to veto or approve the
purchase or sale of Timber Assets. [emphasis added]
No other comments, and no requests for a hearing, were received by
the Department.
Accordingly, the Department has determined to grant the exemption
as modified herein.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
Barclays Bank PLC (Barclays) Located in London, England
[Prohibited Transaction Exemption 98-62; Exemption Application No. D-
10486]
Exemption
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 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 or bank.
(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 the Plan assets involved in the transaction, or 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
[[Page 71308]]
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, wire transfer or similar means, 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) 4 had it remained the record owner of such
securities.
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\4\ 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 the 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 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.
Notwithstanding the foregoing, Barclays or the Foreign Affiliate may,
in the event they fail 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.
(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
[[Page 71309]]
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) Upon request, notice of the proposed exemption and the final
exemption, when available, is provided to any Plan which proposes to
engage in transactions to which the exemptive relief described herein
would apply.
Section III. Definitions
For purposes of this 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: This exemption is effective as of July 31, 1997.
For a more complete statement of the facts and representations
supporting this exemption, refer to the notice of proposed exemption
(the Notice) published on October 6, 1998 at 63 FR 53714.
Written Comments
The Department received one written comment with respect to the
Notice. The comment, which was submitted by Barclays suggested
modifications to the conditional language of the Notice as well as to
the Summary of Facts and Representations (the Summary). These changes
are discussed below.
Consistency With Recent Securities Lending Exemptions
1. Section I.C., Condition (9). In Section I.C. of the Notice,
Condition (9) (at 53716) provides that if a securities loan is
terminated and Barclays or the Foreign Affiliate fails to return such
securities or the equivalent thereof, then the Plan may purchase
securities that are identical to the borrowed securities. In addition,
Barclays or the Foreign Affiliate is required to 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.
To make the provisions of Condition (9) consistent with the
securities lending exemptions granted to Morgan Stanley & Co., (PTE 97-
08, 62 FR 4811, January 31, 1997) and to NatWest Securities Corporation
(PTE 97-57, 62 FR 56203, October 29, 1997), Barclays suggests that the
following sentence be inserted at the end of Condition (9) of Section
I.C.:
Notwithstanding the foregoing, Barclays or the Foreign Affiliate
may, in the event they fail 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.
Barclays notes that the foregoing provision appears in PTE 97-08 at
4812 and in PTE 97-57 at 56204.
2. Representation 10. The third sentence in Representation 10 of
the Summary (at 53718) states that Barclays or the Foreign Affiliate
will be a party in interest with respect to a Plan involved in a
principal transaction by reason of providing services to the Plan or by
reason of a relationship to such service provider. To make this
sentence consistent with PTE 97-8 (at 4811) and PTE 97-57 (at 56204)
Barclays requests that the Department delete this sentence and replace
it with the following:
Further, Barclays represents that it or the Foreign Affiliate
will be a party in interest or disqualified person with respect to
the plan 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 a person described in such sections.
Barclays notes that this change is consistent with PTEs 97-08 (at 4811)
and PTE 97-57 (at 56204) and Section I.A., Condition (3) of the Notice
(at 53715).
3. Section II(g). Section II(g) of the Notice (at 53716) requires
that prior to any Plan's approval of any transaction, the Plan will be
provided with copies of the Notice as proposed and as adopted in final
form. However, Barclays states that neither PTE 97-08 nor PTE 97-57
[[Page 71310]]
contain a similar provision. Therefore, Barclays represents that it
wishes to provide such communications upon request. Accordingly,
Barclays proposes that Section II(g) be deleted and replaced with the
following language:
Upon request, notice of the proposed exemption and the final
exemption, when available, is provided to any Plan which proposes to
engage in transactions to which the exemptive relief described
herein would apply.
Other Clarifications
In addition to the foregoing changes, Barclays requests the
following clarifications to the Notice and the Summary:
1. Section I.A., Condition (1). In Section I.A. of the Notice,
Condition (1) (at 53715) states that Barclays or the Foreign Affiliate
customarily purchases or sells securities in the ordinary course of its
business as a ``broker-dealer.'' Because it is a ``bank,'' Barclays has
requested that the phrase ``or bank'' be inserted at the end of
Condition (1). In addition, Barclays notes that this change is
consistent with Representation 8 of the Summary (at 53718).
2. Section I.B., Condition (1). In Section I.B. of the Notice,
Condition (1) (at 53715) requires that Barclays or the Foreign
Affiliate not be 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.
Barclays requests that this condition be replaced with the
following language which will make it consistent with Representation 12
of the Summary (at 57318):
Barclays or the Foreign Affiliate is not a fiduciary with
respect to the Plan assets involved in the transaction, or no
interest or other consideration is received by Barclays, the Foreign
Affiliate or any of their affiliates in connection with such
extension of credit.
3. Section I.C., Condition (2). In Section I.C. of the Notice
Condition (2) (at 53715) describes the collateralization requirements
with respect to securities loans that are made by a Plan to Barclays or
the Foreign Affiliate. In pertinent part, the condition states that the
Plan may receive securities loan collateral from Barclays or the
Foreign Affiliate, either by physical delivery or by book entry in a
securities depository located in the United States. To make this
language consistent with Representation 17 of the Summary (at 53719),
Barclays requests that the Department revise the language at the
beginning of Condition (2) to read as follows:
The Plan receives from Barclays or the Foreign Affiliate, either
by physical delivery, book entry in a securities depository located
in the United States, wire transfer or similar means * * *.
4. Representation 3. The second sentence of representation 3 of the
Summary (at 53717) discusses principal and extension of credit
transactions engaged in by Barclays and the Foreign Affiliate. It
states that ``such transactions are currently being executed between a
Plan and Barclays or a Plan and a 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).''
To avoid ambiguity, Barclays proposes that this sentence be deleted
and replaced with the following language:
Barclays and the Foreign Affiliate currently engage in the purchase
or sale of securities and extensions of credit in connection with such
purchases and sales of securities in the normal course of their
business as broker-dealers or banks.
5. Representation 6. Representation 6 of the Summary (at 53717-18)
describes Rule 15a-6 of the 1934 Act and its applicability to and
compliance by Barclays and the Foreign Affiliate with the Rule's
requirements. Barclays requests that references to the term ``U.S.
major institutional investor'' and references to the term ``major
institutional investor'' be changed to ``major U.S. institutional
investor'' in order to be consistent with Rule 15a-6.
In addition, for purposes of clarification, Barclays requests that
the following sentence be inserted at the beginning of Footnote 15 of
the Summary (at 53717):
Note that the categories of entities that qualify as ``major
U.S. institutional investors'' has been expanded by a Securities and
Exchange Commission No-Action letter.
Further, to avoid ambiguity, Barclays proposes that the reference
to ``paragraphs (a) and (b)'' above referred to in Footnote 16 of the
Summary (at 53718) be changed to read ``subparagraphs (a) and (b) of
Representation 6.''
The Department concurs with the modifications and clarifications to
the Notice that have been suggested by Barclays and has, therefore,
made all of the requested changes. For further information regarding
Barclays's comment or other matters discussed herein, interested
persons are encouraged to obtain copies of the exemption application
file (Exemption Application No. D-10486) the Department is maintaining
in this case. The complete application file, as well as all
supplemental submissions received by the Department, are made available
for public inspection in the Public Documents Room of the Pension and
Welfare Benefits Administration, Room N-5638, U.S. Department of Labor,
200 Constitution Avenue, NW, Washington, DC 20210.
Accordingly, after giving full consideration to the entire record,
including the written comment provided by the Barclays, the Department
has made the aforementioned changes to the Notice and has decided to
grant the exemption subject to the modifications or clarifications
described above.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions to which the exemptions 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) These exemptions are supplemental to and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional 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
(3) The availability of these exemptions is subject to the express
condition that the material facts and representations contained in each
application accurately describes all material terms of the transaction
which is the subject of the exemption.
[[Page 71311]]
Signed at Washington, D.C., this 21st day of December, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-34109 Filed 12-23-98; 8:45 am]
BILLING CODE 4510-29-P