[Federal Register Volume 64, Number 122 (Friday, June 25, 1999)]
[Notices]
[Pages 34281-34293]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16215]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10694, et al.]


Proposed Exemptions; The Chase Manhattan Bank (CMB)

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.

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, 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.

The Chase Manhattan Bank (CMB); Located in New York, NY

[Application No. D-10694]

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 1 and in accordance with the procedures set forth in 29 
CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
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    \1\ For purposes of this proposed exemption, references to 
specific provisions of Title I of the Act, unless otherwise 
specified, refer also to the corresponding provisions of the Code.
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Section I. Covered Transactions
    If the exemption is granted, the restrictions of sections 
406(a)(1)(A) through (D) and 406(b)(1) and (2) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (E) of the Code, shall not 
apply to the lending of securities to affiliates of The Chase Manhattan 
Corporation (CMC), which are engaged in CMC's capital markets line of 
business (Global Capital Markets), by employee benefit plans (the 
Client Plans), including commingled investment funds holding Client 
Plan assets, for which CMC, through its Global Investor Services line 
of Business, as operated through CMB and its affiliates (GIS), acts as 
directed trustee or custodian, and for which CMC through its Global 
Securities Lending Division or any other similar division of CMB or a 
U.S. affiliate of CMC (collectively, GSL) acts as securities lending 
agent or sub-agent and (2) to the receipt of compensation by GSL in 
connection with the proposed transactions, provided the general 
conditions set forth below in Section II are met.
Section II. General Conditions
    (a) This exemption applies to loans of securities to Global Capital 
Markets, as operated through CMB in the United States (Global Capital 
Markets/U.S. or the U.S. Affiliated Borrower) and in the following 
foreign countries: the United Kingdom (Global Capital Markets/U.K.), 
Canada (Global Capital Markets/Canada), Australia (Global Capital 
Markets/Australia), Japan (Global Capital Markets/Japan) (collectively, 
the Foreign Affiliated Borrowers). Global Capital Markets will also 
include other companies or their successors which are affiliated with 
either CMB or CMC within these countries. 2
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    \2\ Unless otherwise noted, Global Capital Markets will consist 
collectively of the above referenced entities.
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    (b) For each Client Plan, neither GIS, Global Capital Markets, GSL, 
nor any other division or affiliate of CMC has or exercises 
discretionary authority or control with respect to the investment of 
the assets of Client Plans involved in the transaction (other than with 
respect to the lending of securities designated by an independent 
fiduciary of a Client Plan as being available to lend and the 
investment of cash collateral after securities have been loaned and

[[Page 34282]]

collateral received), or renders investment advice (within the meaning 
of 29 CFR 2510.3-21(c)) with respect to those assets, including 
decisions concerning a Client Plan's acquisition and disposition of 
securities available for loan.
    (c) Before a Client Plan participates in a securities lending 
program and before any loan of securities to Global Capital Markets is 
effected, a Client Plan fiduciary which is independent of Global 
Capital Markets must have--
    (1) Authorized and approved a securities lending authorization 
agreement (the Agency Agreement) with GSL, where GSL is acting as the 
securities lending agent;
    (2) Authorized and approved the primary securities lending 
authorization agreement (the Primary Lending Agreement) with the 
primary lending agent where GSL is lending securities under a sub-
agency agreement (the Sub-Agency Agreement) with the primary lending 
agent; 3 and
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    \3\ The Department, herein, is not providing exemptive relief 
for securities lending transactions engaged in by primary lending 
agents, other than GSL, beyond that provided pursuant to Exemption 
(PTE) 81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR 18754, 
May 19, 1987) and PTE 82-63 (47 FR 14804, April 6, 1982).
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    (3) Approved the general terms of the securities loan agreement 
(the Loan Agreement) between such Client Plan and Global Capital 
Markets, the specific terms of which are negotiated and entered into by 
GSL.
    (d) Each loan of securities by a Client Plan to Global Capital 
Markets is at market rates and terms which are at least as favorable to 
such Client Plan as if made at the same time and under the same 
circumstances to an unrelated party.
    (e) The Client Plan may terminate the agency or sub-agency 
arrangement at any time without penalty to such Client Plan on five 
business days notice whereupon Global Capital Markets delivers 
securities identical to the borrowed securities (or the equivalent in 
the event of reorganization, recapitalization or merger of the issuer 
of the borrowed securities) to the Client Plan within--
    (1) The customary delivery period for such securities;
    (2) Five business days; or
    (3) The time negotiated for such delivery by the Client Plan and 
Global Capital Markets, whichever is less.
    (f) The Client Plan receives from Global Capital Markets (either by 
physical delivery or by book entry in a securities depository located 
in the United States, wire transfer or similar means) by the close of 
business on or before the day the loaned securities are delivered to 
Global Capital Markets, collateral consisting of cash, securities 
issued or guaranteed by the United States Government or its agencies or 
instrumentalities, or irrevocable United States bank letters of credit 
issued by a U.S. bank, which is a person other than Global Capital 
Markets or an affiliate thereof, or any combination thereof, or other 
collateral permitted under PTE 81-6 (as amended from time to time or, 
alternatively, any additional or superseding class exemption that may 
be issued to cover securities lending by employee benefit plans), 
having, as of the close of business on the preceding business day, a 
market value (or, in the case of a letter of credit, a stated amount) 
initially equal to at least 102 percent of the market value of the 
loaned securities.
    (g) If the market value of the collateral on the close of trading 
on a business day is less than 100 percent of the market value of the 
borrowed securities at the close of business on that day, Global 
Capital Markets delivers additional collateral on the following day 
such that the market value of the collateral again equals 102 percent.
    (h) The Loan Agreement gives the Client Plan a continuing security 
interest in, title to, or the rights of a secured creditor with respect 
to the collateral and a lien on the collateral and GSL monitors the 
level of the collateral daily.
    (i) Before entering into a Loan Agreement, Global Capital Markets 
furnishes GSL the most recently available audited and unaudited 
statements of the financial condition of the applicable borrower within 
Global Capital Markets. Such statements are, in turn, provided by GSL 
to the Client Plan. At the time of the loan, Global Capital Markets 
gives prompt notice to the Client Plan fiduciary of any material 
adverse change in the borrower's financial condition since the date of 
the most recent financial statement furnished to the Client Plan. In 
the event of any such changes, GSL requests approval of the Client Plan 
to continue lending to Global Capital Markets before making any such 
additional loans. No new securities loans will be made until approval 
is received and each loan constitutes a representation by Global 
Capital Markets that there has been no such material adverse change.
    (j) In return for lending securities, the Client Plan either--
    (1) Receives a reasonable fee, which is related to the value of the 
borrowed securities and the duration of the loan; or
    (2) Has the opportunity to derive compensation through the 
investment of cash collateral. (In the case of cash collateral, the 
Client Plan may pay a loan rebate or similar fee to Global Capital 
Markets if such fee is not greater than the fee the Client Plan would 
pay an unrelated party in a comparable arm's length transaction.)
    (k) All procedures regarding the securities lending activities 
conform to the applicable provisions of PTEs 81-6 and PTE 82-63 (as 
amended from time, or alternatively, any additional or superseding 
class exemption that may be issued to cover securities lending by 
employee benefit plans).
    (l) If Global Capital Markets defaults on the securities loan or 
enters bankruptcy, the collateral will not be available to Global 
Capital Markets or its creditors, but will be used to make the Client 
Plan whole. In this regard,
    (1) In the event a Foreign Affiliated Borrower defaults on a loan, 
CMB will liquidate the loan collateral to purchase identical securities 
for the Client Plan. If the collateral is insufficient to accomplish 
such purchase, CMB will indemnify the Client Plan for any shortfall in 
the collateral plus interest on such amount and any transaction costs 
incurred (including attorney's fees of the Client Plan for legal 
actions arising out of the default on the loans or failure to indemnify 
properly under this provision). Alternatively, if such identical 
securities are not available on the market, the GSL will pay the Client 
Plan cash equal to--
    (i) The market value of the borrowed securities as of the date they 
should have been returned to the Client Plan, plus
    (ii) All the accrued financial benefits derived from the beneficial 
ownership of such loaned securities as of such date, plus;
    (iii) Interest from such date to the date of payment. The lending 
Client Plans will be indemnified in the United States for any loans to 
the Foreign Affiliated Borrowers.
    (2) In the event the U.S. Affiliated Borrower defaults on a loan, 
CMB will liquidate the loan collateral to purchase identical securities 
for the Client Plan. If the collateral is insufficient to accomplish 
such purchase, either CMB or the U.S. Affiliated Borrower will 
indemnify the Client Plan for any shortfall in the collateral plus 
interest on such amount and any transaction costs incurred (including 
attorney's fees of the Client Plan for legal actions arising out of the 
default on the loans or failure to indemnify property under this 
provision).

[[Page 34283]]

    (m) The Client Plan receives the equivalent of all distributions 
made to holders of the borrowed securities during the term of the loan, 
including all interest, dividends and distributions on the loaned 
securities during the loan period.
    (n) Prior to any Client Plan's approval of the lending of its 
securities to Global Capital Markets, copies of the notice of proposed 
exemption and the final exemption, if granted, are provided to the 
Client Plan.
    (o) Each Client Plan receives a monthly report with respect to its 
securities lending transactions, including but not limited to the 
information described in Representation 24 of the proposed exemption, 
so that an independent fiduciary of the Client Plan may monitor the 
securities lending transactions with Global Capital Markets.
    (p) Only Client Plans with total assets having an aggregate market 
value of at least $50 million are permitted to lend securities to 
Global Capital Markets; provided, however, that--
    (1) In the case of two or more Client Plans which are maintained by 
the same employer, controlled group of corporations or employee 
organization (the Related Client Plans), whose assets are commingled 
for investment purposes in a single master trust or any other entity 
the assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the 
Plan Asset Regulation), which entity is engaged in securities lending 
arrangements with Global Capital Markets, the foregoing $50 million 
requirement shall be deemed satisfied if such trust or other entity has 
aggregate assets which are in excess of $50 million; provided that if 
the fiduciary responsible for making the investment decision on behalf 
of such master trust or other entity is not the employer or an 
affiliate of the employer, such fiduciary has total assets under its 
management and control, exclusive of the $50 million threshold amount 
attributable to plan investment in the commingled entity, which are in 
excess of $100 million.
    (2) In the case of two or more Client Plans which are not 
maintained by the same employer, controlled group of corporations or 
employee organization (the Unrelated Client Plans), whose assets are 
commingled for investment purposes in a group trust or any other form 
of entity the assets of which are ``plan assets'' under the Plan Asset 
Regulation, which entity is engaged in securities lending arrangements 
with Global Capital Markets, the foregoing $50 million requirement is 
satisfied if such trust or other entity has aggregate assets which are 
in excess of $50 million (excluding the assets of any Client Plan with 
respect to which the fiduciary responsible for making the investment 
decision on behalf of such group trust or other entity or any member of 
the controlled group of corporations including such fiduciary is the 
employer maintaining such Plan or an employee organization whose 
members are covered by such Plan). However, the fiduciary responsible 
for making the investment decision on behalf of such group trust or 
other entity--
    (i) Has full investment responsibility with respect to plan assets 
invested therein; and
    (ii) Has total assets under its management and control, exclusive 
of the $50 million threshold amount attributable to plan investment in 
the commingled entity, which are in excess of $100 million.
    (In addition, none of the entities described above are formed for 
the sole purpose of making loans of securities.)
    (q) With respect to each successive two week period, on average, at 
least 50 percent or more of the outstanding dollar value of securities 
loans negotiated on behalf of Client Plans by GSL, in the aggregate, 
will be to unrelated borrowers.
    (r) In addition to the above, all loans involving Foreign 
Affiliated Borrowers within Global Capital Markets have the following 
supplemental requirements:
    (1) Such Foreign Affiliated Borrower is registered as a bank or 
broker-dealer with--
    (i) The Financial Services Authority or the Securities and Futures 
Authority, in the case of Global Capital Markets/U.K.;
    (ii) The Office of the Superintendent of Financial Institutions 
(OSFI), or the Ontario Securities Commission and/or the Investment 
Dealers Association, in the case of Global Capital Markets/Canada;
    (iii) The Australian Prudential Regulation Authority (APRA), or the 
Australian Securities & Investments Commission and/or the Australian 
Stock Exchange Limited, in the case of Global Capital Markets/
Australia; and
    (iv) The Ministry of Finance and/or the Tokyo Stock Exchange, in 
the case of Global Capital Markets/Japan.
    (2) Such broker-dealer or bank is in compliance with all applicable 
provisions of Rule 15a-6 (17 CFR 240.15a-6) under the Securities 
Exchange Act of 1934 (the 1934 Act) which provides for foreign broker-
dealers a limited exemption from United States registration 
requirements;
    (3) All collateral is maintained in United States dollars or 
dollar-denominated securities or letters of credit of U.S. banks or any 
combination thereof, or other collateral permitted under PTE 81-6 (as 
amended from time to time, or alternatively, any additional or 
superseding class exemption that may be issued to cover securities 
lending by employee benefit plans);
    (4) All collateral is held in the United States;
    (5) The situs of the Loan Agreement is maintained in the United 
States;
    (6) The lending Client Plans are indemnified by CMB in the United 
States for any transactions covered by this exemption with the Foreign 
Affiliated Borrower so that the Client Plans do not have to litigate in 
a foreign jurisdiction nor sue the Foreign Affiliated Borrower to 
realize on the indemnification; and
    (7) Prior to the transaction, each Foreign Affiliated Borrower 
enters into a written agreement with GSL on behalf of the Client Plan 
whereby the Foreign Affiliated Borrower consents to service of process 
in the United States and to the jurisdiction of the courts of the 
United States with respect to the transactions described herein.
    (s) CMB or Chase Securities Inc. (CSI) maintains, or causes to be 
maintained within the United States for a period of six years from the 
date of such transaction, in a manner that is convenient and accessible 
for audit and examination, such records as are necessary to enable the 
persons described in paragraph (t)(1) to determine whether the 
conditions of the exemption have been met, except that--
    (1) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of CMB or CSI, the 
records are lost or destroyed prior to the end of the six year period; 
and
    (2) No party in interest other than CMB or CSI shall be subject to 
the civil penalty that may be assessed under section 502(i) of the Act, 
or to the taxes imposed by section 4975(a) and (b) of the Code, if the 
records are not maintained, or are not available for examination as 
required below by paragraph (t)(1).
    (t)(1) Except as provided in subparagraph (t)(2) of this paragraph 
and notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the records referred to in paragraph (s) are 
unconditionally available at their customary location during normal 
business hours by:
    (i) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service or the Securities and Exchange 
Commission (the SEC);

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    (ii) Any fiduciary of a participating Client Plan or any duly 
authorized representative of such fiduciary;
    (iii) Any contributing employer to any participating Client Plan or 
any duly authorized employee representative of such employer; and
    (iv) Any participant or beneficiary of any participating Client 
Plan, or any duly authorized representative of such participant or 
beneficiary.
    (t)(2) None of the persons described above in paragraphs 
(t)(1)(ii)-(t)(1)(iv) of this paragraph (t)(1) are authorized to 
examine the trade secrets of CMB, the U.S. Affiliated Borrowers, or the 
Foreign Affiliated Borrowers or commercial or financial information 
which is privileged or confidential.
III. Definitions
    For purposes of this proposed exemption,
    (a) The terms ``CMB'' and ``CMC'' as referred to herein in Sections 
I and II, refer to The Chase Manhattan Bank and its parent, The Chase 
Manhattan Corporation.
    (b) The term ``affiliate'' means any entity now or in the future, 
directly or indirectly, controlling, controlled by, or under common 
control with CMC or its successors. (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.)
    (c) The term ``U.S. Affiliated Borrower'' means an affiliate of CMC 
that is a bank supervised by the United States or a State, or a broker-
dealer registered under the 1934 Act.
    (d) The term ``Foreign Affiliated Borrower'' means an affiliate of 
CMC that is a bank or a broker-dealer which is supervised by--
    (1) The Financial Services Authority or the Securities and Futures 
Authority in the United Kingdom;
    (2) OSFI, or the Ontario Securities Commission and/or the 
Investment Dealers Association in Canada;
    (3) APRA, or the Australian Securities & Investments commission 
and/or the Australian Stock Exchange in Australia; and
    (4) The Ministry of Finance and/or the Tokyo Stock Exchange in 
Japan.

Summary of Facts and Representations

    1. CMB is a wholly owned subsidiary of CMC, a bank holding company 
organized under the laws of the State of Delaware. As a New York bank 
and a member of the Federal Reserve System, CMB is a ``bank'' as 
defined in both section 202(a)(2) of the Investment Advisers Act of 
1940 (the Advisers Act) and section 581 of the Code.4 As of 
March 31, 1998, CMB's total assets were $299 billion, of which $93.5 
billion (or 31 percent) represented investment securities and money 
market assets and $125 billion (or 42 percent) represented loans.
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    \4\ In relevant part, section 202(a)(2) of the Advisers Act and 
section 581 of the Code state that a ``bank'' is a banking 
institution, bank or trust company incorporated and doing business 
under the laws of the United States.
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    2. GIS, the investor services line of business of CMC, as operated 
through CMB and certain of its affiliates, provides custodial services, 
trustee and related services to its customers. In this regard, GIS had 
more than $4.45 trillion of assets under custody and directed 
trusteeship as of December 31, 1997. As directed trustee or custodian, 
GIS services $412 billion of assets for U.S. pension plans, government 
plans, endowments and foundations. In addition, GIS currently acts as 
custodian for $751 billion of mutual fund assets.
    3. GSL, which is comprised collectively of similar divisions of CMB 
or U.S. affiliates of CMC, is the securities lending line of business 
of CMC. It provides securities lending services to many of CMB's 
institutional clients. In this regard, GSL, on behalf of CMB's 
securities lending agents, negotiates the terms of loans with borrowers 
pursuant to a client-approved form of loan agreement, the terms of 
which may be modified from time to time with the approval of the 
client, and otherwise acts as a liaison between the lender and the 
borrower to facilitate the lending transaction. As securities lending 
agent, GSL has responsibility for monitoring receipt of all required 
collateral and for marking such collateral to market daily so that 
adequate levels of collateral are maintained. Further, to the extent 
agreed upon with the client, GSL is responsible for investing the cash 
collateral after securities have been loaned and cash collateral 
received. Finally, GSL monitors and evaluates, on a continuing basis, 
the performance and creditworthiness of the borrowers of securities.
    In addition, GSL may be retained from time to time by other primary 
securities lending agents to provide securities lending services in a 
sub-agency capacity with respect to portfolio securities of the clients 
of such primary lending agents. As securities lending agent, GSL's role 
in the lending transaction (i.e., negotiating the terms of loans with 
borrowers pursuant to a client-approved form of loan agreement, the 
terms of which may be modified from time to time with the approval of 
the client, monitoring receipt of collateral, marking to market 
required collateral, and investing cash collateral) parallels the role 
under lending transactions in which GSL acts as primary lending agent 
on behalf of its clients.5
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    \5\ As noted previously, the Department is not providing 
exemptive relief herein for securities lending transactions that are 
engaged in by primary lending agents, other than GSL and its 
affiliates beyond that provided by PTEs 81-6 and 82-63.
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    The borrowers with whom GSL usually transacts business as agent for 
the lender are typically U.S. broker-dealers who use borrowed 
securities to satisfy their trading requirements or to ``re-lend'' 
securities to other broker-dealers and others who need a particular 
security for various periods of time. All such borrowings by U.S. 
broker-dealers are required to conform to the Federal Reserve Board's 
Regulation T, to the extent applicable.
    4. Global Capital Markets is one of the principal lines of business 
of CMC and its affiliates. Global Capital Markets acts through CMB and 
certain of its affiliates located in the United States as well as 
through certain Foreign Affiliated Borrowers that are located abroad. 
In other words, Global Capital Markets conducts its business through 
these different legal entities depending upon the jurisdiction and the 
specific product being sold. The entities currently comprising Global 
Capital Markets are Global Capital Markets/U.S., Global Capital 
Markets/U.K., Global Capital Markets/Canada, Global Capital Markets/
Australia and Global Capital Markets/Japan. A description of each of 
these entities is presented below.
    (a) Global Capital Markets/U.S. currently includes CMB and CSI, a 
U.S. broker-dealer registered with the SEC and located in New York, New 
York. However, in the future, it may include other broker-dealer 
entities that Global Capital Markets has established or acquired in the 
United States and operates as separate companies.
    (b) Global Capital Markets/U.K. currently consists of Chase 
Manhattan International Limited (CMIL) and CMB's London branch (CMB/
London). CMIL is a merchant bank based in London, England and it is 
supervised by the Financial Services Authority. CMIL is also a member 
of the Securities and Futures Authority and is subject to regulation by 
this organization with respect to its broker-dealer activities.
    CMB/London is an office of CMB which was authorized by the former 
Bank of England to accept deposits in the United Kingdom. CMB/London is 
a listed institution under Section 43 of the Financial Services Act, 
the Money

[[Page 34285]]

Market Regulations. In addition, CMB/London is regulated by the 
Securities and Futures Authority in the conduct of investment business 
in the United Kingdom. In mid-1997, the Financial Services Authority 
took over the supervision of banks in the United Kingdom including the 
Money Market Regulations. CMB/London is also subject to annual 
examination by bank examiners from the Federal Reserve Bank of New York 
and the State of New York.
    (c) Global Capital Markets/Canada currently consists of Chase 
Securities Canada Inc. (CSCI), a broker-dealer located in Toronto. This 
entity is subject to regulation by the Ontario Securities Commission 
and the Investment Dealers Association.6 In the future, 
Global Capital Markets Canada may be expanded to include CMB's banking 
affiliates that are based in Canada. These entities are subject to 
regulation in Canada by OSFI.
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    \6\ CMB represents that Chase Securities Canada Inc., which is 
currently inactive, is the likely Canadian vehicle to participate in 
Global Capital Markets if it resumes business in Canada.
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    (d) Global Capital Markets/Australia currently consists of Chase 
Securities Australia, Limited (CSA), which is a broker-dealer located 
in Sydney. CSA holds a dealers license and is regulated by the 
Australian Securities & Investments Commission. In the future, Global 
Capital Markets/Australia may be expanded to include CMB's banking 
affiliates that are based in Australia. These entities will be subject 
to regulation by APRA.
    (e) Global Capital Markets/Japan currently consists of Chase 
Securities Japan Limited (CSJL), a broker-dealer based in Tokyo, Japan. 
CSJL is subject to regulation by Japan's Ministry of Finance and the 
Tokyo Stock Exchange. In the future, Global Capital Markets/Japan may 
be expanded to include CMB's banking affiliates that are based in 
Japan. These entities will be subject to regulation by the Ministry of 
Finance.
    Global Capital Markets also is a borrower of securities and acts in 
this capacity after full disclosure and consent with respect to many of 
its institutional clients that included public pension plans which are 
not covered by the Act. Global Capital Markets, as borrower, uses 
borrowed securities to meet its obligations to deliver securities in 
connection with its short sales, trade fails 7 or other 
similar situations and to engage in repurchase transactions with third 
parties. Acting as principal, Global Capital Markets actively engages 
in the borrowing and lending of securities with an outstanding loan 
volume of $48 billion as of May 31, 1998.
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    \7\ According to CMB, a trade fail occurs when the seller of a 
security is unable to deliver the security to the buyer on the 
settlement date. Typically, this may occur when a security being 
sold is on loan or held by another custodian at the time a sale is 
executed and cannot be delivered to the seller before the settlement 
date. Under these circumstances, it is common for the seller of the 
security to borrow the security being sold in order to avoid a 
breach of its obligation to deliver securities to the buyer on the 
settlement date.
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    GSL currently does not lend to Global Capital Markets the 
securities of any of CMB's trust or custody clients covered under the 
Act. Although as noted above, after full disclosure and consent, GSL 
does lend securities to Global Capital Markets for certain of its 
clients which are not covered by the Act. Global Capital Markets and 
GSL have each developed an accounting system and safeguards to service 
the needs of their respective client bases. Whenever trades are 
effected between GSL, acting as securities lending agent, and Global 
Capital Markets, as borrower, such trades are accomplished in the same 
manner as between non-affiliated, independent third parties. In this 
regard, such trades take place pursuant to an established protocol, 
primarily over the telephone and through computer trading screens used 
by all participants in the industry in accordance with established 
protocol.8
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    \8\ In this regard, CMB maintains a set of procedures and 
policies designed to eliminate any sharing of client portfolio 
information between the personnel in its commercial banking and 
trust departments.
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    5. GSL would like to offer employee benefit plans that are covered 
under the provisions of the Act and for which GSL serves as securities 
lending agent (i.e., the Client Plans) 9 the opportunity to 
participate in a securities lending program including Global Capital 
Markets as a potential borrower. In addition, CMB proposes that GSL and 
Global Capital Markets receive compensation in connection with such 
securities lending transactions. In this regard, CMB would like to 
offer Client Plans the opportunity to add as potential borrowers Global 
Capital Markets/U.S., Global Capital Markets/U.K., Global Capital 
Markets/Canada, Global Capital Markets/Australia and Global Capital 
Markets/Japan.
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    \9\ For the sake of simplicity, future references to GSL's 
performance of services as securities lending agent should be deemed 
to include its activities as securities lending sub-agent and 
references to Client Plans should be deemed to refer to plans for 
which GSL is acting as sub-agent.
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    For each Client Plan, neither CMB, Global Capital Markets, GSL nor 
any other division or affiliate of CMB will have or exercise 
discretionary authority or control with respect to the investment of 
Client Plan assets in the transaction (other than with respect to the 
investment of cash collateral after securities have been loaned and 
collateral received) or render investment advice [within the meaning of 
29 CFR 2510.3-12(c)] with respect to those assets, including decisions 
concerning a Client Plan's acquisition or disposition of securities 
available for loan. Accordingly, GSL will not be in a position to 
influence the portfolio holdings of Client Plans in a manner that might 
increase or decrease the securities available for lending to Global 
Capital Markets (or any other borrower). Thus, GSL's discretion will be 
limited to activities such as negotiating the terms of the securities 
loans with Global Capital Markets and (to the extent granted by the 
Client Plan fiduciary) investing any cash collateral received in 
respect of the loans.
    Because, under the proposed arrangement, GSL would have discretion 
to lend Client Plan securities to Global Capital Markets, and because 
both GSL and parts of Global Capital Markets are divisions of CMB, the 
lending of securities to Global Capital Markets by a Client Plan for 
which GSL serves as securities lending agent (or sub-agent) may be 
outside the scope of relief provided by PTE 81-6 and PTE 82-
63.10 Further, loans to Foreign Affiliated Borrowers within 
Global Capital Markets would be outside of the relief granted in PTE 
81-6.
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    \10\ PTE 81-6 provides an exemption under certain conditions 
from section 406(a)(1)(A) through (D) of the Act and the 
corresponding provisions of section 4975(c) of the Code for the 
lending of securities that are assets of an employee benefit plan to 
certain broker-dealers or banks which are parties in interest.
    PTE 82-63 provides an exemption under specified conditions from 
section 406(b)(1) of the Act and section 4975(c)(1)(E) of the Code 
for the payment of compensation to a plan fiduciary for services 
rendered in connection with loans of plan assets that are 
securities.
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    Therefore, several safeguards, described more fully below, are 
incorporated in the application in order to ensure the protection of 
the Client Plan assets involved in the transactions. In addition, the 
applicants represent that the proposed lending program incorporates the 
conditions contained in PTE 81-6 and PTE 82-63 and will be in 
compliance with all applicable securities laws of the United States.
    6. Although not registered with the United States SEC as broker-
dealers, the Foreign Affiliated Borrowers within Global Capital Markets 
are subject to the rules, regulations and membership requirements of 
their respective regulatory entities identified above. For example, 
CMIL, the broker-dealer entity within Global Capital Markets/U.K. is

[[Page 34286]]

subject to the rules, regulations and membership requirements of the 
Securities and Futures Authority. CSCI, the broker-dealer entity within 
Global Capital Markets/Canada is governed by the rules, regulations and 
membership requirements of the Ontario Securities Commission and the 
Investment Dealers Association. CSA, the broker-dealer entity within 
Global Capital Markets/Australia is governed by the licensing 
requirements of the Australian Securities & Investments Commission. 
CSJL, the broker-dealer entity within Global Capital Markets/Japan is 
governed by the rules, regulations and membership requirements of the 
Ministry of Finance and the Tokyo Stock Exchange.11
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    \11\ The Securities and Futures Authority, the Ministry of 
Finance, the Tokyo Stock Exchange, the Australian Securities & 
Investments Commission, the Australian Stock Exchange Limited, the 
Ontario Securities Commission and the Investment Dealers Association 
are collectively referred to herein as the Foreign Broker-Dealer 
Regulatory Entities.
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    The Foreign Affiliated Borrowers within Global Capital Markets 
which are broker-dealers are subject to rules relating to minimum 
capitalization, reporting requirements, periodic examinations, client 
money and safe custody rules and books and records requirements with 
respect to client accounts. These rules and regulations set forth by 
the Foreign Broker-Dealer Regulatory Entities and the SEC share a 
common objective: The protection of the investor by the regulation of 
the securities industry. The rules promulgated by the Foreign Broker-
Dealer Regulatory Entities require each firm which employs registered 
representatives or registered traders to have a positive tangible net 
worth and be able to meet its obligations as they may fall due. In 
addition, the rules of the Foreign Broker-Dealer Regulatory Entities 
set forth comprehensive financial resource and reporting/disclosure 
rules regarding capital adequacy. Further, to demonstrate capital 
adequacy, the rules of the Foreign Broker-Dealer Regulatory Entities 
impose reporting/disclosure requirements on broker-dealers with respect 
to risk management, internal controls, and transaction reporting and 
recordkeeping requirements to the effect that required records must be 
produced at the request of the Foreign Broker-Dealer Regulatory 
Entities. Finally, the rules and regulations of the Foreign Broker-
Dealer Regulatory Entities impose potential fines and penalties on 
broker-dealers which establish a comprehensive disciplinary system.
    7. Similarly, Global Capital Markets/U.K. is also subject to 
regulation in the United Kingdom by the Financial Services Authority, 
the successor regulator to the Bank of England. The Financial Services 
Authority issues licenses to banks in the United Kingdom, issues 
directives to address violations by or irregularities involving such 
banks, requires information from a bank or its auditor regarding 
supervisory matters and revokes bank licenses. The Financial Services 
Authority has established procedures for monitoring the activities of 
CMB in the United Kingdom through various statutory and regulatory 
standards. Among these standards are requirements for adequate internal 
controls, oversight and administration. On a recurring basis, CMB will 
be required to provide the Financial Services Authority with 
information regarding its activities in the United Kingdom, profit and 
loss, balance sheet, large exposures, foreign exchange exposures and 
country risk exposure. The regulator responsible for CMB's capital 
adequacy is the Board of Governors of the Federal Reserve System (the 
Board).
    In addition, banks which may comprise Global Capital Markets/Canada 
will be subject to the rules of OSFI, an entity that licenses and 
regulates banks established in Canada as deposit-taking subsidiaries. 
OSFI licenses banks, issues directives to address violations by or 
irregularities involving a bank, requires information from the bank or 
its auditors regarding supervisory matters and revokes bank licenses.
    Moreover, OSFI has established procedures for monitoring the 
activities of Canadian banks through various statutory and regulatory 
standards. Among those standards are requirements for capital adequacy, 
adequate internal controls, oversight and administration. On a 
recurring basis, a bank comprising Global Capital Markets/Canada will 
be required to provide OSFI with information regarding its activities 
in Canada, profit and loss, balance sheet, large exposures and foreign 
exchange exposures.
    Legislation is pending in Canada which would permit a foreign bank 
to establish a branch in Canada. Under the proposed rule, the Minister 
of Finance would authorize the establishment of the branch and OSFI 
would license the bank branch to carry on business and may revoke the 
license. The bank branch would be required to have a minimum amount of 
unencumbered assets in Canada equal to a percentage of branch 
liabilities and must satisfy capital adequacy rules. Branches accepting 
deposits would be subject to a yearly audit by an external auditor and 
examination by OSFI.
    APRA, which has taken over the bank supervisory duties of the 
Reserve Bank of Australia, will license and regulate banks comprising 
Global Capital Markets/Australia. APRA has the power to issue and 
revoke bank licenses. In addition, APRA may issue directives to address 
violations by or irregularities involving banks and it requires 
information from a bank or its auditors regarding supervisory matters. 
APRA has established procedures for monitoring the activities of banks 
that will comprise Global Capital Markets/Australia through various 
statutory and regulatory standards. Among those standards are 
requirements for capital adequacy, internal controls, oversight and 
administration. On a recurring basis, banks comprising Global Capital 
Markets/Australia will be required to provide APRA with information 
regarding their activities in Australia, profit and loss, balance 
sheets and large exposures.
    APRA's licensing and supervision of Global Capital Markets/
Australia foreign bank branches is similar to that of locally-
incorporated banks. While APRA monitors credit risk concentrations of 
foreign bank branches, endowed capital in Australia and capital-based 
large risk exposure limits are the responsibility of the home 
supervisor which is the Board.12
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    \12\ For a description of the Ministry of Finance, which 
regulates both banks and broker-dealers in Japan, see 
Representations 3 and 4 of the Notice of Proposed Exemption for the 
Union Bank of Switzerland and UBS Securities, LLC (63 FR 15452, 
15455, March 31, 1998).
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    8. Aside from the protections afforded by the Foreign Broker-Dealer 
Regulatory Entities and in the case of Global Capital Markets/U.K., the 
Financial Services Authority, CMB represents that the Foreign 
Affiliated Borrowers will comply with all applicable provisions of Rule 
15a-6 of the 1934 Act. Rule 15a-6 provides foreign broker-dealers with 
a limited exemption from SEC registration requirements and, as 
described below, offers additional protections.13

[[Page 34287]]

Specifically, Rule 15a-6 provides an exemption from U.S. broker-dealer 
registration for a foreign broker-dealer that induces or attempts to 
induce the purchase or sale of any security (including over-the-counter 
equity and debt options) by a ``U.S. institutional investor'' or a 
``major U.S. 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 adviser, or (b) the employee 
benefit plan has total assets in excess of $5 million, or (c) the 
employee benefit plan is a self-directed plan with investment decisions 
made solely by persons that are ``accredited investors'' as defined in 
Rule 501(a)(1) of Regulation D of the Securities Exchange Act of 1933, 
as amended. The term ``major U.S. institutional investor'' is defined 
in Rule 15a-6(b)(4) as a person that is a U.S. institutional investor 
that has total assets in excess of $100 million or an investment 
adviser registered under Section 203 of the Investment Advisers Act of 
1940 that has total assets under management in excess of $100 
million.14
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    \13\ According to the applicants, 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, the applicants are willing to represent that they will 
comply with the applicable provisions and relevant SEC 
interpretations and amendments of Rule 15a-6.
    \14\ See also SEC No-Action Letter issued to Cleary, Gottlieb, 
Steen & Hamilton on April 9, 1997 (hereinafter, the April 9, No-
Action Letter), expanding the definition of the term ``Major U.S. 
Institutional Investor.''
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    9. CMB 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 a major U.S. institutional investor must, 
among other things--

    (a) Consent to service of process for any civil action brought 
by, or proceeding before, the SEC or any self-regulatory 
organization;
    (b) Provide the SEC (upon request or pursuant to agreements 
reached between any foreign securities authority, including any 
foreign government, and the SEC or the U.S. Government) with any 
information or documents within the possession, custody or control 
of the foreign broker-dealer, any testimony of any such foreign 
associated persons, and any assistance in taking the evidence of 
other persons, wherever located, that the SEC requests and that 
relates to transactions effected pursuant to the Rule;
    (c) Rely on the U.S. registered broker-dealer 15 
through which the transactions with the U.S. institutional and major 
U.S. institutional investors are effected to (among other things):
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    \15\ The Foreign Affiliated Borrowers, in lieu of relying on a 
U.S. broker-dealer and to the extent permitted by applicable U.S. 
securities law, may rely on a U.S. bank or trust company, including 
GSL, to perform this role.
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    (1) Effect the transactions, other than negotiating their terms;
    (2) Issue all required confirmations and statements;
    (3) As between the foreign broker-dealer and the U.S. registered 
broker-dealer, extend or arrange for the extension of credit in 
connection with the transactions;
    (4) Maintain required books and records relating to the 
transactions, including those required by Rules 17a-3 (Records to be 
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved 
by Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
    (5) Receive, deliver and safeguard funds and securities in 
connection with the transactions on behalf of the U.S. institutional 
investor or major U.S. institutional investor in compliance with 
Rule 15c3-3 of the 1934 Act (Customer Protection--Reserves and 
Custody of Securities); 16 and
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    \16\ 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 the 
Client Plan and a Foreign Affiliated Borrower. CMB 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 major U.S. institutional investor), 
and accompany the foreign associated person on certain visits with 
both U.S. institutional and major U.S. institutional investors. By 
virtue of this participation, the U.S. registered broker-dealer 
would become responsible for the content of all these 
communications. 17

    \17\ Under certain circumstances, the foreign associated person 
may have direct communications and contact with the U.S. 
Institutional Investor. See April 9 SEC No-Action Letter.
---------------------------------------------------------------------------

    10. Where GSL is the direct securities lending agent, a fiduciary 
of a Client Plan which is independent of CMB, GSL, Global Capital 
Markets, and any other division or affiliate of CMB will sign a 
securities lending authorization agreement with GSL (i.e., the Agency 
Agreement) before that Client Plan participates in a securities lending 
program. The Agency Agreement will, among other things, describe the 
operation of the lending program, prescribe the form of securities Loan 
Agreement to be entered into on behalf of the Client Plan with 
borrowers, specify the securities which are available to be loaned and 
prescribe that a borrower (including Global Capital Markets) is 
required to deliver collateral having a value in excess of the value of 
the loaned securities (i.e., not less than 102 percent or, in some 
cases, a higher agreed-upon percentage). In addition, the Agency 
Agreement will provide that the securities will be marked to market 
daily and incorporate a list of permissible borrowers, including the 
specified legal entities within Global Capital Markets.
    The Agency Agreement will also set forth the basis and rate for 
GSL's compensation from a Client Plan for the performance of securities 
lending services. As set forth more fully below, in the case of loans 
secured by cash collateral, the basis for GSL's compensation will be an 
agreed-upon fixed percentage share of return, if any on cash collateral 
plus an investment management fee for investing the cash collateral. 
The actual income that will be divided between the Client Plan and GSL 
will vary each day according to the investment performance from each 
loan of securities. With respect to loans secured by non-cash 
collateral, GSL's compensation will be an agreed-upon fixed percentage 
share of the securities lending fee. GSL's share of the return on cash 
collateral and the securities lending fees with respect to any Client 
Plan will be negotiated with that Client Plan and thereafter set forth 
in the Agency Agreement on the date such agreement is executed.
    The Agency Agreement will contain provisions to the effect that if 
Global Capital Markets is designated by a Client Plan as an approved 
borrower (a) the Client Plan will acknowledge that certain segments of 
Global Capital Markets, GSL and GIS are, or may be deemed to be, the 
same legal entity, and (b) GSL will represent to the Client Plan that 
each and every loan made to Global Capital Markets on behalf of such 
Client Plan will be at market rates and will, in no event, be less 
favorable to the Client Plan than a loan of such securities, made at 
the same time and under the same circumstances, to an unaffiliated 
borrower.
    A Client Plan may terminate the Agency Agreement at any time, 
without penalty to such plan, on five business days' 
notice.18
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    \18\ CMB represents that if investments of cash collateral must 
be terminated or liquidated prematurely due to a Client Plan's 
termination of the Agency Agreement, penalties might be chargeable 
by issuers of the investments (or counterparties on the investments) 
in accordance with the investment terms.

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[[Page 34288]]

    11. When GSL is lending securities under a sub-agency arrangement, 
the primary lending agent will enter into a Primary Lending Agreement 
with a fiduciary of a Client Plan that is independent of such primary 
lending agent, GSL or Global Capital Markets, before the Client Plan 
participates in the securities lending program. Under the terms of the 
sub-agency arrangement, it is the responsibility of the primary lending 
agent to obtain the approval of the fiduciary of the Client Plan to 
such Primary Lending Agreement. The primary lending agent will be 
independent of GSL and Global Capital Markets. As CMB will not be a 
party to the Primary Lending Agreement, the sub-agency arrangement 
between GSL and the primary lending agent will obligate the primary 
lending agent to provide assurance that the primary lending agent was 
independent of the fiduciary of the Client Plan.
    The Primary Lending Agreement will contain substantive provisions 
akin to those in the Agency Agreement relating to the description of 
the operation of the lending program, use of an approved form of Loan 
Agreement, specification of securities which are available to be 
loaned, prescription that a borrower is required to deliver collateral 
having a specified value in excess of the value of the loaned 
securities and a list of approved borrowers (including the various 
legal entities comprising Global Capital Markets). The Primary Lending 
Agreement will specifically authorize the primary lending agent to 
appoint sub-agents, including GSL, to facilitate the performance of 
securities lending agency functions. Where GSL is appointed to act as a 
sub-agent, GSL will require that the primary lending agent represent to 
GSL that the primary lending agent has received prior approval of, or 
has the authority to make the decision to hire GSL.
    The Primary Lending Agreement also will set forth the basis and the 
method for the primary lending agent's compensation from the Client 
Plan for the performance of securities lending services and will 
authorize the primary lending agent to pay a portion of its fee, as the 
primary lending agent determines in its sole discretion, to any sub-
agent(s) it retains pursuant to the authority granted under such 
agreement. Each Primary Lending Agreement will be subject to a 
termination provision similar to that contained in the Agency Agreement 
if the primary lending agent is relying on PTE 81-6.
    Pursuant to its authority to appoint sub-agents, the primary 
lending agent will enter into a securities lending sub-agency agreement 
(i.e., the Sub-Agency Agreement) with GSL under which the primary 
lending agent will retain and authorize GSL, as sub-agent, to lend 
securities of the primary lending agent's Client Plans, in a manner 
consistent with the terms and conditions as specified in the Primary 
Lending Agreement. The Primary Lending Agreement and the Sub-Agency 
Agreement will not necessarily have identical terms because the 
procedures that CMB uses in operating its lending program will be 
spelled out in its form agreement and these may not be identical to how 
the primary lending agent operates its own program. For example, CMB 
may require that its Sub-Agency Agreement contain certain specific 
provisions which the primary lending agent may not have requested from 
the Client Plan. One such requirement is that the collateral initially 
equal 102 percent of the value of the loaned securities, whereas the 
primary lending agent may have been authorized to make loans of 
securities at less than 102 percent collateral. CMB may also require 
recordkeeping in addition to that specified in the Primary Lending 
Agreement and may require different notice provisions.
    Each Sub-Agency Agreement will contain provisions which are in 
substance comparable to those described above, which would appear in an 
Agency Agreement in situations where GSL is the primary lending agent. 
In this regard, GSL will make the same representation in the Sub-Agency 
Agreement, as described above, with respect to arm's length dealings 
with Global Capital Markets. The Sub-Agency Agreement will also set 
forth the basis and rate for GSL's compensation to be paid by the 
primary lending agent.
    12. GSL, on behalf of the Client Plans, will enter into a Loan 
Agreement with each applicable entity within Global Capital Markets 
that is in substantially similar form to the one used from time to time 
with all other borrowers. The Loan Agreement will not be identical to 
that used with an unrelated party, in part, because special disclosures 
must be made to the Client Plans regarding the relationship between GSL 
and certain parts of Global Capital Markets and GIS. However, the 
economic terms and procedures required by the Loan Agreement will be 
identical to those negotiated with unrelated borrowers.
    The form of the Loan Agreement also will be the industry or the 
market standard for loans to the borrowers in the country where the 
borrower is domiciled. It will describe the lender's rights against the 
borrower in the country of the borrower's domicile and represent that 
these rights will be equivalent under U.S. law.19 The 
independent fiduciary for each Client Plan will approve the terms of 
the Loan Agreement through its authorization of the lending program and 
such fiduciary will be provided a copy of the applicable Loan Agreement 
from GSL upon request.
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    \19\ For example, the form of Loan Agreement between GSL and a 
Foreign Affiliated Borrower differs from the standard U.S. loan 
agreement. Under the Global Capital Markets/U.K. Loan Agreement, the 
Client Plan receives title to (rather than a pledge of or a security 
interest in) the collateral.
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    The Loan Agreement will specify, among other things, the right of 
GSL, as lending agent on behalf of the Client Plan, to terminate a loan 
at any time on not more than five business days' notice and the lending 
agent's rights in the event of any default by the borrower. In 
addition, the Loan Agreement will contain a requirement that Global 
Capital Markets must pay all transfer fees and transfer taxes related 
to loans of securities. Further, the Loan Agreement will describe the 
basis for compensation to the Client Plan for lending securities to 
Global Capital Markets under each category of collateral.
    Before entering into the Loan Agreement, Global Capital Markets 
will furnish GSL the most recently available audited and unaudited 
statements of the financial condition of the applicable borrower within 
Global Capital Markets. In turn, such statements will be provided by 
GSL to the Client Plan before such plan is asked to approve the terms 
of the Loan Agreement. The Loan Agreement will contain a requirement 
that Global Capital Markets must provide to the Client Plan prompt 
notice, at the time of a loan by such Client Plan, of any material 
adverse changes in the borrower's financial condition since the date of 
the most recently furnished financial statements.20 If any 
such changes have

[[Page 34289]]

taken place, GSL will not make any further loans to Global Capital 
Markets unless an independent fiduciary of that Client Plan has 
approved the loan in view of the changed financial condition. 
Conversely, if the borrower within Global Capital Markets fails to 
provide notice of such a change in its financial condition, such 
failure will trigger an event of default under the Loan Agreement.
---------------------------------------------------------------------------

    \20\ Like broker-dealers registered with the SEC, the broker-
dealer entities within Global Capital Markets/U.K., Global Capital 
Markets/Japan and Global Capital Markets/Australia will be subject 
to capital adequacy provisions of their respective regulatory 
entities. It is represented that such rules require the Foreign 
Affiliated Borrowers to maintain, at all times, financial resources 
in excess of its financial resources requirement (the Financial 
Resources Requirement). For this purpose, financial resources 
include equity capital, approved subordinated debt and retained 
earnings, less deductions for illiquid assets. The Financial 
Resources Requirement includes capital requirements for market risk, 
credit risk, foreign exchange risk and large exposures. The rules of 
each applicable Foreign Broker-Dealer Regulatory Entity, require 
that if a firm's financial resources fall below a certain percentage 
(e.g., 120 percent with respect to the Securities and Futures 
Authority and 140 percent with respect to the Ministry of Finance 
and the Tokyo Stock Exchange) of its Financial Resources 
Requirement, the Foreign Broker-Dealer Regulatory Entity must be 
notified so that it can examine the terms of the firm's financial 
position and require an infusion of more capital, if needed. In 
addition, a breach of the requirement to maintain financial 
resources in excess of the Financial Resources Requirement may lead 
to sanctions by the applicable Foreign Broker-Dealer Regulatory 
Entity. If the breach is not promptly resolved, such Foreign Broker-
Dealer Regulatory Entity may restrict the firm's activities.
---------------------------------------------------------------------------

    13. As noted above, the agreement by GSL to provide securities 
lending services, as agent, to a Client Plan will be embodied in the 
Agency Agreement. The Client Plan and GSL will, prior to the 
commencement of any lending activity, agree to the arrangement, as 
described above, under which GSL will be compensated for its services 
as lending agent. The agreed-upon fee arrangement will be set forth in 
the Agency Agreement and thereby will be subject to the prior written 
approval of a fiduciary of the Client Plan which is independent of 
Global Capital Markets and GSL.
    Similarly, with respect to arrangements under which GSL is acting 
as securities lending sub-agent, the agreed upon fee arrangement of the 
primary lending agent will be set forth in the Primary Lending 
Agreement, and such agreement will specifically authorize the primary 
lending agent to pay a portion of such fee, as the primary lending 
agent determines in its sole discretion, to any sub-agent, including 
GSL, which is to provide securities lending services to the Client 
Plans.21 A Client Plan will be provided with any reasonably 
available information which is necessary for the Client Plan's 
independent fiduciary to make a determination whether to enter into or 
continue to participate under the Agency Agreement (or the Primary 
Lending Agreement) and any other reasonably available information which 
such fiduciary may reasonably request.
---------------------------------------------------------------------------

    \21\ The foregoing provisions describe arrangements comparable 
to conditions (c) and (d) of PTE 82-63 which require that the 
payment of compensation to a ``lending fiduciary'' is made under a 
written instrument and is subject to prior written authorization of 
an independent ``authorizing fiduciary.'' In the event that a 
commingled investment fund will participate in the securities 
lending program, the special rule applicable to such funds 
concerning the authorization of the compensation arrangement set 
forth in condition (f) of PTE 82-63 will be satisfied.
---------------------------------------------------------------------------

    14. Each time a Client Plan lends securities to Global Capital 
Markets pursuant to the Loan Agreement, GSL will reflect in its 
records, the material terms of the loan, including the securities to be 
loaned, the required level of collateral and the fee receivable or 
rebate payable. When a loan is collateralized with cash, the cash will 
be invested for the benefit of and at the risk of the Client Plan, and 
resulting earnings (net of a rebate to the borrower and the fee to the 
lending agent) comprise the compensation to the Client Plan with 
respect to such loan. Where collateral consists of obligations other 
than cash, the borrower will pay a fee (loan premium) directly to the 
lending Client Plan, which fee will be shared with GSL as agreed under 
the Agency Agreement. The terms of each loan will be at least as 
favorable to the Client Plan as those of a comparable arm's length 
transaction between unrelated parties.
    15. The Client Plan will receive the equivalent of all 
distributions made to holders of the borrowed securities during the 
term of any loan, including, but not limited to, cash dividends, 
interest payments, shares of stock as a result of stock splits and 
rights to purchase additional securities or other distributions. The 
Loan Agreement will provide that the Client Plan may terminate any loan 
at any time. Upon a termination, Global Capital Markets will be 
contractually obligated to return the loaned securities to the Client 
Plan within five business days of notification (or such longer period 
of time permitted under PTE 81-6, as amended or superseded). If Global 
Capital Markets fails to return the securities within the designated 
time, the Client Plan will have the right under the Loan Agreement to 
purchase securities identical to the borrowed securities and apply the 
collateral to payment of the purchase price and any other expenses of 
the Client Plan associated with the sale and/or purchase.
    16. The Client Plan will receive collateral from Global Capital 
Markets (by physical delivery, book entry in a U.S. securities 
depository, wire transfer or similar means) by the close of business on 
or before the day the loaned securities are delivered to Global Capital 
Markets. The collateral will consist of cash, securities issued or 
guaranteed by the U.S. Government or its agencies or irrevocable U.S. 
bank letters of credit (issued by a person other than CMB or its 
affiliates) or any combination thereof, of such other types of 
collateral which might be permitted by the Department under PTE 81-6, 
as amended or superseded, relating to securities lending activities. 
The market value of the collateral on the close of business on the day 
preceding the day of the loan will be at least 102 percent of the 
market value of the loaned securities. The Loan Agreement will give the 
Client Plan a continuing security interest in, title to, or the rights 
of a secured creditor with respect to the collateral and a lien on the 
collateral. GSL will monitor the level of the collateral daily. If the 
market value of the collateral falls below 100 percent (or such greater 
percentage as agreed to by the parties) of that of the loaned 
securities, GSL will require Global Capital Markets to deliver by the 
close of business the next day sufficient additional collateral to 
bring the level back to at least 102 percent.
    17. As securities lending agent for the Client Plans, GSL also 
provides ancillary services such as investing the cash collateral 
received with respect to such securities loans. Such investment 
management services can be provided on a separate account basis or 
through CMB's commingled funds. For these services, GSL is paid an 
investment management fee by the Client Plans, either through a direct 
charge to the Client Plan for individually-managed accounts and some 
commingled funds, or, in the case of other commingled funds, through an 
investment management fee charged against the commingled fund's assets. 
Retaining GSL to provide such investment management services is 
optional and within the total discretion of the Client Plan. 
Alternatively, the independent fiduciary of the Client Plan may select 
its own manager, an unrelated mutual or collective fund, or another 
vehicle of his choice. The selected investment vehicle must be 
acceptable to GSL. GSL neither selects the collateral investment 
vehicle nor has any authority or responsibility to do so. To further 
protect the Client Plans' assets in these transactions, GSL's 
procedures for lending securities will comply with the applicable 
conditions of PTE 81-6 and PTE 82-63 (including with respect to any 
commingled funds that may participate in the securities lending 
program).
    18. GSL will establish each day separate written schedules of 
lending fees and rebate rates to assure uniformity of treatment among 
borrowing brokers and to limit the discretion that GSL would have in 
negotiating securities loans to Global Capital Markets. Comparable 
loans to all borrowers of a given security on that day will be made at 
rates or lending fees

[[Page 34290]]

on the relevant daily schedules or at rates or lending fees which may 
be more advantageous to the Client Plans. In no case will loans be made 
to Global Capital Markets at rates or lending fees that are less 
advantageous to the Client Plans than those on the schedule. The daily 
schedule of rebate rates will be based on the current value of the 
clients' reinvestment vehicles and on market conditions, as reflected 
by demand for securities by borrowers other than Global Capital 
Markets. As with rebate rates, the daily schedule of lending fees will 
also be based on market conditions, as reflected by demand for 
securities by borrowers other than Global Capital Markets, and will 
generally track the rebate rates with respect to the same security or 
class of security.
    GSL will adopt maximum daily rebate rates for cash collateral 
payable to Global Capital Markets on behalf of a lending Client Plan. 
Separate maximum daily rebate rates will be established with respect to 
securities loans of designated securities classes of securities such as 
U.S. Government securities, U.S. equities and corporate bonds, 
international fixed income securities and international equities. With 
respect to each designated class of securities, the maximum rebate rate 
will be the lower of (a) a rate based upon an agreed-upon interest rate 
index (such as one month LIBOR for Fed funds) and (b) the client's 
initial or expected reinvestment rate for the relevant cash collateral, 
minus a stated percentage of such reinvestment rate, as pre-approved by 
the independent fiduciary of the Client Plan. Thus, when cash is used 
as collateral, at least initially, the daily rebate rate will always be 
lower than the rate of return to the Client Plans from authorized 
investments for cash collateral by such stated percentage as shall be 
pre-approved by the independent fiduciary. GSL will submit the formula 
for determining the maximum daily rebate rate to an independent 
fiduciary of the Client Plan for approval before lending any securities 
to Global Capital Markets on behalf of such plan.
    GSL will also adopt minimum daily lending fees for non-cash 
collateral payable by Global Capital Markets to GSL on behalf of the 
Client Plan and GSL. Separate minimum daily gross lending fees will be 
established with respect to loans of designated classes of securities 
such as U.S. Government securities, U.S. equities and corporate bonds, 
international fixed income securities and international equities. With 
respect to each designated class of securities, the minimum lending fee 
will be stated as a percentage of the principal value of the loaned 
securities. GSL will submit such gross minimum daily lending fees to an 
independent fiduciary of a Client Plan for approval before initially 
lending any securities to Global Capital Markets on behalf of such 
Client Plan.
    19. For collateral other than cash, the lending fees charged the 
previous day will be reviewed by GSL for competitiveness. Based on the 
demand of the marketplace, this daily fee historically has remained 
relatively constant although it may be subject to fluctuation due to 
market conditions. 22 Because during any successive two week 
period, on average, at least 50 percent or more of securities loans 
negotiated on behalf of Client Plans, in the aggregate, will be to 
unrelated brokers or dealers, the competitiveness of GSL's fee schedule 
will be continuously tested in the marketplace. 23 
Accordingly, loans to Global Capital Markets should result in 
competitive rate income to the lending Client Plan.
---------------------------------------------------------------------------

    \22\ With respect to domestic securities and international debt 
securities the daily lending fee is currently at least \1/20\th of 
one percent of the principal value of the loaned securities. With 
respect to international equity securities, the daily fee is 
currently \1/5\th of one percent of the principal value of the 
loaned securities.
    \23\ This 50 percent requirement will apply regardless of the 
type of collateral used to secure the loan.
---------------------------------------------------------------------------

    20. The method of determining the daily securities lending rates 
(fees and rebates), the minimum lending fees payable by Global Capital 
Markets and the maximum rebate payable to Global Capital Markets will 
be specified in an exhibit attached to the Agency Agreement to be 
executed between the independent fiduciary of the Client Plan and GSL 
in cases where GSL is the direct securities lending agent.
    21. Should GSL recognize prior to the end of a business day that, 
with respect to new and/or existing loans, it must change the rebate 
rate or lending fee formula in the best interest of the Client Plans, 
it may do so with respect to Global Capital Markets. 24 If 
GSL changes the lending fee formula or the rebate rate formula on any 
outstanding loan to Global Capital Markets (except for any change 
resulting from a change in the value of any third party independent 
index with respect to which the fee or rebate is calculated, or if the 
formula will always be beneficial to the Client Plan), GSL, by the 
close of business on the date of such adjustment, will provide the 
independent fiduciary of the Client Plan with notice that it has 
changed such fee formula or rebate rate formula with respect to such 
loan and that the Client Plan may terminate such loan at any time. 
Allowing GSL to request a modification to the lending fee or the rebate 
rate formula with respect to an existing loan to Global Capital Markets 
when market conditions change will be beneficial to the Client Plans. 
In the absence of the ability to make such modification, Global Capital 
Markets may be forced by market conditions to terminate the loan and 
seek better terms elsewhere. Such termination may then force the Client 
Plan to seek new borrowers for its securities who, in light of the 
changed market conditions, are likely to negotiate for the lending fee 
or rebate rate which Global Capital Markets would have received or paid 
had GSL had the written authority from the independent fiduciary of the 
Client Plan to decrease the lending fee or increase the rebate rate.
---------------------------------------------------------------------------

    \24\ GSL will not initiate any modification in such rates or 
fees which would be detrimental to Client Plans.
---------------------------------------------------------------------------

    22. Although GSL will normally lend securities to requesting 
borrowers and include for these purposes Global Capital Markets on a 
``first come, first served'' basis as a means of assuring uniformity of 
treatment among borrowers, the applicants recognize that, in some 
cases, it may not be possible to adhere to a ``first come, first 
served'' allocation. This can occur, for instance where (a) the credit 
limit established for such borrower by GSL and/or the Client Plan has 
already been satisfied; (b) the ``first in line'' borrower is not 
approved as a borrower by the particular Client Plan whose securities 
are sought to be borrowed; and (c) the ``first in line'' borrower 
cannot be ascertained, as an operational matter, because several 
borrowers spoke to different GSL representatives at or about the same 
time with respect to the same security. In situations (a) and (b), 
loans would normally be effected with the ``second in line.'' In 
situation (c), securities would be allocated equitably among all 
eligible borrowers.
    23. The Client Plans will be indemnified by CMB or CSI in the event 
Global Capital Markets fails to return borrowed securities. In the 
event a Foreign Affiliated Borrower within Global Capital Markets 
defaults on a loan, CMB will liquidate the loan collateral to purchase 
identical securities for the Client Plan. In the event the collateral 
is insufficient to accomplish such purchase, CMB will indemnify the 
Client Plan for any shortfall in the collateral plus interest on such 
amount and any transaction costs incurred (including attorney's fees of 
the Client Plan for legal actions arising out of the default on the 
loans or failure to indemnify properly under this

[[Page 34291]]

provision). Alternatively, if such identical securities are not 
available on the market, CMB will pay the Client Plan cash equal to the 
market value of the borrowed securities as of the date they would have 
been returned to the Client Plan plus all the accrued financial 
benefits derived from the beneficial ownership of such loaned 
securities. The lending Client Plans will be indemnified by CMB in the 
United States for any loans to the Foreign Affiliated Borrower.
    When the U.S. Affiliated Borrower is CSI, a U.S. registered broker-
dealer, either CMB or CSI will indemnify the Client Plan against 
losses. CMB will liquidate the loan collateral to purchase identical 
securities for the Client Plan. If the collateral is insufficient to 
accomplish such purchase, either CMB or CSI will indemnify the Client 
Plan for any shortfall in the collateral plus interest on such amount 
and any transaction costs incurred (including attorney's fees of the 
Client Plan for legal actions arising out of the default on the loans 
or failure to indemnify properly under this provision.)
    24. Each Client Plan participating in the lending program will be 
sent a monthly transaction report which will provide a list of all 
security loans outstanding and closed for a specified period. The 
report will identify for each open loan position, the securities 
involved, the value of the security for collateralization purposes, the 
current value of the collateral, the rebate or loan premium (as the 
case may be) at which the security is loaned, and the number of days 
the security has been on loan. In order to provide the means for 
monitoring lending activity, rates on loans to Global Capital Markets 
compared with loans to other brokers and the level of collateral on the 
loans, the monthly report will show, on a daily basis, the market value 
of all outstanding securities loans to Global Capital Markets and to 
other borrowers as compared to the total collateral held for both 
categories of loans. In addition, the monthly report will state the 
daily fees where collateral other than cash is utilized and will 
specify the details used to establish the daily rebate payable to all 
brokers where cash is used as collateral. Further, the monthly report 
will state, on a daily basis, the rates at which securities are loaned 
to Global Capital Markets as compared with those at which securities 
are loaned to other brokers. This statement will give the Client Plan's 
independent fiduciary information which can be compared to that 
contained in the daily rebate schedule.
    25. In all cases, GSL will maintain records sufficient to assure 
compliance with its representation that all loans to Global Capital 
Markets are effectively at arm's length terms. These records will be 
provided to the appropriate independent fiduciary of a Client Plan in 
the manner and format agreed to with such fiduciary and without charge 
to that Client Plan. With respect to the proposed transactions, GSL 
will make and retain for six months, tape recordings evidencing all 
securities loan transactions with Global Capital Markets. Also, if 
requested by the lending customer, GSL will provide daily confirmations 
of securities lending transactions. Further, if requested by the 
customer, GSL will provide weekly or daily reports setting forth for 
each transaction made or outstanding during the relevant reporting 
period the following information: The loaned securities, the related 
collateral, the rebates and loan premiums and such other information in 
such format as is agreed to by the parties. Finally, prior to a Client 
Plan's approval of a securities lending program, GSL will provide a 
Client Plan fiduciary with a copy of the proposed exemption and the 
notice granting the exemption.
    26. Only Client Plans with total assets having an aggregate market 
value of at least $50 million are permitted to lend securities to 
Global Capital Markets. In the case of two or more Client Plans which 
are maintained by the same employer, controlled group of corporations 
or employee organization (i.e., the Related Client Plans), whose assets 
are commingled for investment purposes in a single master trust or any 
other entity the assets of which are ``plan assets'' under the Plan 
Asset Regulation), which entity is engaged in securities lending 
arrangements with Global Capital Markets, the foregoing $50 million 
requirement will be satisfied if such trust or other entity has 
aggregate assets which are in excess of $50 million. However, if the 
fiduciary responsible for making the investment decision on behalf of 
such master trust or other entity is not the employer or an affiliate 
of the employer, such fiduciary must have total assets under its 
management and control, exclusive of the $50 million threshold amount 
attributable to plan investment in the commingled entity, which are in 
excess of $100 million.
    In the case of two or more Client Plans which are not maintained by 
the same employer, controlled group of corporations or employee 
organization (i.e., the Unrelated Client Plans), whose assets are 
commingled for investment purposes in a group trust or any other form 
of entity the assets of which are ``plan assets'' under the Plan Asset 
Regulation, which entity is engaged in securities lending arrangements 
with Global Capital Markets, the foregoing $50 million requirement will 
be satisfied if such trust or other entity has aggregate assets which 
are in excess of $50 million (excluding the assets of any Client Plan 
with respect to which the fiduciary responsible for making the 
investment decision on behalf of such group trust or other entity or 
any member of the controlled group of corporations including such 
fiduciary is the employer maintaining such Client Plan or an employee 
organization whose members are covered by such Client Plan). However, 
the fiduciary responsible for making the investment decision on behalf 
of such group trust or other entity (a) must have full investment 
responsibility with respect to plan assets invested therein 
25; and (b) must have total assets under its management and 
control, exclusive of the $50 million threshold amount attributable to 
plan investment in the commingled entity, which are in excess of $100 
million.
---------------------------------------------------------------------------

    \25\ For purposes of this proposed exemption, the term ``full 
investment responsibility'' means that the fudiciary responsible for 
making investment decisions on behalf of the group trust or other 
form of entity, has and exercises discretionary management authority 
over all of the assets of the group trust or other plan assets 
entity.
---------------------------------------------------------------------------

    In addition, none of the entities described above must be formed 
for the sole purpose of making loans of securities.
    27. With respect to loans involving the Foreign Affiliated 
Borrowers within Global Capital Markets, the following additional 
safeguards will be applicable: (a) All collateral will be maintained in 
U.S. dollars, U.S. dollar-denominated securities or letters of credit 
of U.S. banks; (b) all collateral will be held in the United States; 
26 (c) the situs of the Loan Agreement will be maintained in 
the United States; and (d) CMB will indemnify the lending Client Plan 
in the United States for any loans to a Foreign Affiliated Borrower so 
that the Client Plan will not have to litigate in a foreign 
jurisdiction nor sue the Foreign Affiliated Borrower to realize on the 
indemnification; (e) prior to the transaction, the Foreign Affiliated 
Borrower will enter into a written agreement with GSL on behalf of the 
Client Plan whereby the Foreign Affiliated Borrower consents to the

[[Page 34292]]

jurisdiction of the courts of the United States with respect to the 
transactions described herein; and (f) each Foreign Affiliated Borrower 
will be (1)(i) a deposit taking or merchant banking institution 
supervised by the banking authorities of the jurisdiction in which it 
is located; or (ii) a broker-dealer supervised by a regulatory 
authority in the country in which it is located; and (2) in compliance 
with all applicable provisions of Rule 15a-6 under the 1934 Act.
---------------------------------------------------------------------------

    \26\ Under United Kingdom law, the securities lending agreement 
between GSL and CMIL provides, among other things, that all title 
and interest in the loaned securities passes to the borrower and all 
rights, title and interest in the collateral passes to the lending 
Client Plan.
---------------------------------------------------------------------------

    28. In summary, it is represented that the proposed transactions 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) The form of the Loan Agreement pursuant to which any securities 
loan is effected will be approved by a fiduciary of the Client Plan 
which is independent of GSL before a Client Plan lends any securities 
to Global Capital Markets.
    (b) The lending arrangements (1) will permit the Client Plans to 
lend to Global Capital Markets and (2) will enable the Client Plans to 
diversify the list of eligible borrowers and earn additional income 
from the loaned securities on a secured basis, while continuing to 
receive any dividends, interest payments and other distributions due on 
those securities.
    (c) The Client Plans will receive sufficient information concerning 
the financial condition of the borrowers within Global Capital Markets 
before the Client Plan lends any securities to any of those entities.
    (d) The collateral on each loan to Global Capital Markets initially 
will be at least 102 percent of the market value of the loaned 
securities, which is in excess of the 100 percent collateral required 
under PTE 81-6, and will be monitored daily by GSL.
    (e) The Client Plans will receive a monthly report which provides 
an independent fiduciary of the Client Plans with information on loan 
activity, fees, loan return/yield and the rates on loans to Global 
Capital Markets as compared with loans to other brokers and the level 
of collateral on the loans.
    (f) Neither GSL, GIS, Global Capital Markets nor any other division 
or affiliate of CMC will have discretionary authority or control over a 
Client Plan's assets, including the acquisition or disposition of 
securities available for loan.
    (g) The terms of each loan will be at least as favorable to a 
Client Plan as those of a comparable arm's length transaction with an 
unrelated party.
    (h) The fee payable by Global Capital Markets to the Client Plan 
for the use of the securities (or the loan rebate fee payable by the 
Client Plan to Global Capital Markets if the loan is collateralized 
with cash) will be set forth in the applicable report provided to the 
independent fiduciary of the Client Plan.
    (i) The Client Plan will be able to terminate the lending 
arrangement without penalty within five business days after providing 
written notice of termination to GSL.
    (j) All of the procedures under the transactions will conform to 
the applicable provisions of PTE 81-6 and PTE 82-63 and also will be in 
compliance with the applicable banking or securities laws of the United 
States, the United Kingdom, Canada, Australia and Japan.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Henry H. Borland III and Pat Borland; Located in Downers Grove, IL

[Exemption Application No. D-10707]

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 32826, 32847, August 10, 1990). If the exemption 
is granted, the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to the proposed sale (the Sale) of certain 
improved real property (the Property) by the H.H. Borland, Inc. Profit 
Sharing Plan (the Plan) to the trustees of the Plan, Henry H. Borland 
III (Mr. Borland) and Pat Borland (collectively, the Trustees), 
disqualified persons with respect to the Plan, 27 provided 
that the following conditions are met:
---------------------------------------------------------------------------

    \27\ Since Mr. Borland is the sole owner of the Plan sponsor and 
the only participant in the Plan, there is no jurisdiction under 
Title I of the Act pursuant to 29 CFR Sec. 2510.3(b). However, there 
is jurisdiction under Title II of the Act pursuant to section 4975 
of the Code.
---------------------------------------------------------------------------

    (a) The terms and conditions of the Sale are at least as favorable 
to the Plan as those obtainable in an arm's length transaction with an 
unrelated party;
    (b) The Trustees will purchase the Property from the Plan for the 
greater of $200,000 or the fair market value of the Property as of the 
date of the transaction as determined by a qualified, independent 
appraiser;
    (c) The Sale will be a one-time transaction for cash; and
    (d) The Plan will pay no fees or commissions in connection with the 
Sale.

Summary of Facts and Representations

    1. H.H. Borland, Inc. (H.H. Borland) is an Illinois corporation 
engaged in the purchase and sale of real estate. H.H. Borland is the 
sponsor of the Plan which is a defined contribution profit sharing plan 
located in Downers Grove, Illinois. The Plan had one participant, Mr. 
Borland, and approximately $1,100,000 in total assets as of November 
21, 1998. The trustees of the Plan are Mr. Borland and Pat Borland 
(collectively, the Trustees). Among the Plan's assets is the Property 
which is a single family residence located at 1213 Red Silver Court, 
Downers Grove, Illinois. The Property was acquired by the Plan from the 
estate of Wilma L. Winterfield, a party unrelated to the Plan, for 
$160,875 on January 30, 1991.
    2. The applicants represent that, since its acquisition, the 
Property has generated rental income (the Rental Income) for the Plan. 
In this regard, the applicants represent that the Plan rented the 
Property to unrelated third parties from January 30, 1991 until 
November 30, 1998 and received rental income (the Rental Income) 
totaling $132,404.25. The applicants represent that from November 30, 
1998 to present, the Plan has not rented the Property and the Property 
has not generated any income for the Plan. The applicants additionally 
represent that at no time have the Trustees occupied or otherwise 
benefitted from the Plan's ownership of the Property.
    3. The applicants represent that the Plan has incurred certain 
expenses (the Expenses) as a result of the Plan's ownership of the 
Property. In this regard, the applicants represent that the Plan has 
incurred a total of $47,648.72 in real estate taxes and insurance costs 
associated with the Plan's ownership of the Property. The applicants 
represent that, after deducting the Expenses from the Rental Income, 
the Plan has received an annual yield of 6.6% relative to the 
Property's acquisition price due to the Plan's ownership of the 
Property.
    3. The Property was appraised on January 25, 1999 by David M. 
Benacke (Mr. Benacke) for Appraisal Resources, Ltd., an appraisal 
company independent of the Plan and the Trustees. Mr. Benacke, an 
Illinois certified real estate appraiser, used the sales comparison 
approach to evaluate the fair market value of the Property. Mr. Benacke 
represents that he compared the Property to three similar properties 
which were the subject of recent sales. Based on these comparisons, Mr.

[[Page 34293]]

Benacke represents that the fair market value of the Property was 
$200,000, as of January 25, 1999.
    4. The applicants propose a sale of the Property (i.e., the Sale) 
by the Plan to the Trustees for $200,000, the Property's current fair 
market value. The applicants represent that the Sale is 
administratively feasible in that it will be a one-time transaction for 
cash in which the Plan will pay no fees or commissions. The applicants 
also represent that the Sale is in the best interest of the Plan since 
the Property is currently vacant and any future rental of the Property 
to unrelated parties will require substantial Plan expenditures for 
renovations. In addition, the applicants represent that the Sale is 
protective of the Plan since the Plan will receive cash for the 
Property which the Plan can invest in assets appropriate for the Plan's 
sole participant.
    5. In summary, the applicant represent that the proposed 
transaction satisfies the criteria of section 408(a) of the Act 
because:
    (a) The terms and conditions of the Sale are at least as favorable 
to the Plan as those obtainable in an arm's length transaction with an 
unrelated party;
    (b) The Trustees will purchase the Property from the Plan for the 
greater of $200,000 or the fair market value of the Property as of the 
date of the transaction as determined by a qualified, independent 
appraiser;
    (c) The Sale will be a one-time transaction for cash; and
    (d) The Plan will pay no fees or commissions in connection with the 
Sale.

For Further Information Contact: Christopher J. Motta of the 
Department, telephone (202) 219-8883 (This is not a toll free number).

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest of disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(b) of the act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete and 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 22nd day of June 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 99-16215 Filed 6-24-99; 8:45 am]
BILLING CODE 4510-29-P