[Federal Register Volume 64, Number 204 (Friday, October 22, 1999)]
[Notices]
[Pages 57129-57154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27520]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10706 et al.]
Proposed Exemptions; Allfirst Bank, et al.
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, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Allfirst Bank, Located in Baltimore, Maryland
[Application No. D-10706]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, August 10, 1990).
Section I--Proposed Exemption for Receipt of Fees
If the exemption is granted, the restrictions of section 406(a) and
406(b) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(F) of the Code, shall not apply as of November 13, 1998, to the
proposed receipt of fees by Allfirst from the ARK Funds, an open-end
investment company registered under the Investment Company Act of 1940
(the 1940 Act), for acting as an investment adviser for such Funds, as
well as for providing other services to the ARK Funds which are
``Secondary Services'' as defined in Section III(i), in connection with
the investment by plans for which Allfirst serves as a fiduciary (the
Client Plans) in shares of the ARK Funds, provided that the following
conditions and the general conditions of Section II are met:
(a) Each Client Plan satisfies either (but not both) of the
following:
(1) The Client Plan receives a cash credit of such Plan's
proportionate share of all fees charged to the Funds by Allfirst for
investment advisory services, including any investment advisory fees
paid by Allfirst to third party sub-advisers, no later than the same
day as the receipt of such fees by Allfirst. The crediting of all such
fees to the Client Plans by Allfirst is audited by an independent
accounting firm on at least an annual basis to verify the proper
crediting of the fees to each Plan.
(2) The Client Plan does not pay any Plan-level investment
management fees, investment advisory fees, or similar fees to Allfirst
with respect to any of the assets of such Plan which are invested in
shares of any of the ARK Funds. This
[[Page 57130]]
condition does not preclude the payment of investment advisory or
similar fees by the ARK Funds to Allfirst under the terms of an
investment management agreement adopted in accordance with section 15
of the 1940 Act, nor does it preclude the payment of fees for Secondary
Services to Allfirst pursuant to a duly adopted agreement between
Allfirst and the ARK Funds.
(b) The price paid or received by a Client Plan for shares in a
Fund is the net asset value per share at the time of the transaction,
as defined in Section III(f), and is the same price which would have
been paid or received for the shares by any other investor at that
time.
(c) Allfirst, including any officer or director of Allfirst, does
not purchase or sell shares of the ARK Funds from or to any Client
Plan.
(d) No sales commissions are paid by the Client Plans in connection
with the purchase or sale of shares of the ARK Funds, and no redemption
fees are paid in connection with the sale of shares by the Client Plans
to the ARK Funds.
(e) For each Client Plan, the combined total of all fees received
by Allfirst for the provision of services to a Client Plan, and in
connection with the provision of services to the ARK Funds in which the
Client Plan may invest, are not in excess of ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act.
(f) Allfirst does not receive any fees payable pursuant to Rule
12b-1 under the 1940 Act in connection with the transactions.
(g) The Client Plans are not employee benefit plans sponsored or
maintained by Allfirst.
(h) The Second Fiduciary receives, in advance of any initial
investment by the Client Plan in a Fund, full and detailed written
disclosure of information concerning the ARK Funds, including but not
limited to:
(1) A current prospectus for each Fund in which a Client Plan is
considering investing;
(2) A statement describing the fees for investment advisory or
similar services, any secondary services as defined in Section III(i),
and all other fees to be charged to or paid by the Client Plan and by
the ARK Funds, including the nature and extent of any differential
between the rates of such fees;
(3) The reasons why Allfirst may consider such investment to be
appropriate for the Client Plan;
(4) A statement describing whether there are any limitations
applicable to Allfirst with respect to which assets of a Client Plan
may be invested in the ARK Funds, and if so, the nature of such
limitations; and
(5) Upon request of the Second Fiduciary, a copy of the proposed
exemption and/or a copy of the final exemption, if granted, once such
documents are published in the Federal Register.
(i) After consideration of the information described above in
paragraph (h), the Second Fiduciary authorizes in writing the
investment of assets of the Client Plan in each particular Fund and the
fees to be paid by such ARK Funds to Allfirst.
(j) All authorizations made by a Second Fiduciary regarding
investments in a Fund and the fees paid to Allfirst are subject to an
annual reauthorization wherein any such prior authorization referred to
in paragraph (i) shall be terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by Allfirst of written
notice of termination. A form expressly providing an election to
terminate the authorization described in paragraph (i) above (the
Termination Form) with instructions on the use of the form must be
supplied to the Second Fiduciary no less than annually--provided that
the Termination Form need not be supplied to the Second Fiduciary
pursuant to this paragraph sooner than six months after such
Termination Form is supplied pursuant to paragraph (l) below, except to
the extent required by such paragraph in order to disclose an
additional service or fee increase. The instructions for the
Termination Form must include the following information:
(1) The authorization is terminable at will by the Client Plan,
without penalty to the Client Plan, upon receipt by Allfirst of written
notice from the Second Fiduciary; and
(2) Failure to return the Termination Form will result in continued
authorization of Allfirst to engage in the transactions described in
paragraph (i) on behalf of the Client Plan.
(k) For each Client Plan using the fee structure described in
paragraph (a)(1) above with respect to investments in a particular
Fund, the Second Fiduciary of the Client Plan receives full written
disclosure in a Fund prospectus or otherwise of any increases in the
rates of fees charged by Allfirst to the ARK Funds for investment
advisory services.
(l)(1) For each Client Plan using the fee structure described in
paragraph (a)(2) above with respect to investments in a particular
Fund, an increase in the rate of fees paid by the Fund to Allfirst
regarding any investment management services, investment advisory
services, or similar services that Allfirst provides to the Fund over
an existing rate for such services that had been authorized by a Second
Fiduciary in accordance with paragraph (i) above; or
(2) For any Client Plan under this proposed exemption, an addition
of a Secondary Service (as defined in Section III(i) below) provided by
Allfirst to the Fund for which a fee is charged, or an increase in the
rate of any fee paid by the ARK Funds to Allfirst for any Secondary
Service that results either from an increase in the rate of such fee or
from the decrease in the number of kind of services performed by
Allfirst for such fee over an existing rate for such Secondary Service
which had been authorized by the Second Fiduciary of a Client Plan in
accordance with paragraph (i) above;
Allfirst will, at least 30 days in advance of the implementation of
such additional service for which a fee is charged or fee increase,
provide a written notice (which may take the form of a proxy statement,
letter, or similar communication that is separate from the prospectus
of the Fund and that explains the nature and amount of the additional
service for which a fee is charged or of the increase in fees) to the
Second Fiduciary of the Client Plan. Such notice shall be accompanied
by a Termination Form with instructions as described in paragraph (i)
above.
(m) On an annual basis, Allfirst provides the Second Fiduciary of a
Client Plan investing in the ARK Funds with:
(1) A copy of the current prospectus for the ARK Funds in which the
Client Plan invests and, upon such fiduciary's request, a copy of the
Statement of Additional Information for such ARK Funds which contains a
description of all fees paid by the ARK Funds to Allfirst;
(2) A copy of the annual financial disclosure report prepared by
Allfirst which includes information about the Fund portfolios as well
as audit findings of an independent auditor within 60 days of the
preparation of the report; and
(3) Oral or written responses to inquiries of the Second Fiduciary
as they arise.
(n) With respect to each of the ARK Funds in which a Client Plan
invests, in the event such Fund places brokerage transactions with
Allfirst, Allfirst will provide the Second Fiduciary of such Plan at
least annually with a statement specifying:
(1) The total, expressed in dollars, of brokerage commissions of
each Fund that are paid to Allfirst by such Fund;
(2) The total, expressed in dollars, of brokerage commissions of
each Fund
[[Page 57131]]
that are paid by such Fund to brokerage firms unrelated to Allfirst;
(3) The average brokerage commissions per share, expressed as cents
per share, paid to Allfirst by each Fund; and
(4) The average brokerage commissions per share, expressed as cents
per share, paid by each Fund to brokerage firms unrelated to Allfirst.
(o) All dealings between the Client Plans and the ARK Funds are on
a basis no less favorable to the Plans than dealings with other
shareholders of the ARK Funds.
Section II--General Conditions
(a) Allfirst maintains for a period of six years the records
necessary to enable the persons described below in paragraph (b) to
determine whether the conditions of this exemption have been met,
except that (1) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Allfirst, the
records are lost or destroyed prior to the end of the six-year period,
and (2) no party in interest other than Allfirst shall be subject to
the civil penalty that may be assessed under section 502(i) of the Act
or to the taxes imposed by section 4975(a) and (b) of the Code if the
records are not maintained or are not available for examination as
required by paragraph (b) below.
(b)(1) Except as provided below in paragraph (b)(2) and
notwithstanding any provisions of section 504(a)(2) of the Act, the
records referred to in paragraph (a) are unconditionally available at
their customary location for examination during normal business hours
by--
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(ii) Any fiduciary of the Client Plans who has authority to acquire
or dispose of shares of the ARK Funds owned by the Client Plans, or any
duly authorized employee or representative of such fiduciary, and
(iii) Any participant or beneficiary of the Client Plans or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in paragraph (b)(1)(ii) and (iii)
shall be authorized to examine trade secrets of Allfirst, or commercial
or financial information which is privileged or confidential.
Section III--Definitions
For purposes of this proposed exemption:
(a) The term ``Allfirst'' means Allfirst Bank, and any affiliate
thereof as defined below in paragraph (c)(1) of this section, effective
as of June 28, 1999, the date the First National Bank of Maryland
(First Maryland) changed its name to Allfirst Bank.
(b) The term ``First Maryland'' refers to First National Bank of
Maryland, and any affiliate thereof as defined below in paragraph
(c)(1) of this section, prior to June 28, 1999.
(c) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(d) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(e) The term ``Fund'' or ``ARK Funds'' shall include the ARK Funds,
Inc. or any other diversified open-end investment company or companies
registered under the 1940 Act for which Allfirst serves as an
investment adviser and may also serve as a custodian, dividend
disbursing agent, shareholder servicing agent, transfer agent, Fund
accountant, or provide some other ``Secondary Service'' (as defined
below in paragraph (i) of this Section) which has been approved by such
ARK Funds.
(f) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales calculated by dividing the value of all
securities, determined by a method as set forth in the Fund's
prospectus and Statement of Additional Information, and other assets
belonging to the Fund or portfolio of the Fund, less the liabilities
charged to each such portfolio or Fund, by the number of outstanding
shares.
(g) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(h) The term ``Second Fiduciary'' means a fiduciary of a Client
Plan who is independent of and unrelated to Allfirst. For purposes of
this exemption, the Second Fiduciary will not be deemed to be
independent of and unrelated to Allfirst if:
(1) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with Allfirst;
(2) Such fiduciary, or any officer, director, partner, employee, or
relative of the fiduciary is an officer, director, partner or employee
of Allfirst (or is a relative of such persons);
(3) Such fiduciary directly or indirectly receives any compensation
or other consideration for his or her own personal account in
connection with any transaction described in this proposed exemption.
If an officer, director, partner or employee of Allfirst (or
relative of such persons), is a director of such Second Fiduciary, and
if he or she abstains from participation in (i) the choice of the
Client Plan's investment adviser, (ii) the approval of any such
purchase or sale between the Client Plan and the ARK Funds, and (iii)
the approval of any change in fees charged to or paid by the Client
Plan in connection with any of the transactions described in Section I
above, then paragraph (h)(2) of this section shall not apply.
(i) The term ``Secondary Service'' means a service other than an
investment management, investment advisory, or similar service, which
is provided by Allfirst to the ARK Funds, including but not limited to
custodial, accounting, brokerage, administrative, or any other service.
(j) The term ``Termination Form'' means the form supplied to the
Second Fiduciary which expressly provides an election to the Second
Fiduciary to terminate on behalf of a Client Plan the authorization
described in paragraph (i) of Section I. Such Termination Form may be
used at will by the Second Fiduciary to terminate an authorization
without penalty to the Client Plan and to notify Allfirst in writing to
effect a termination by selling the shares of the ARK Funds held by the
Client Plan requesting such termination within one business day
following receipt by Allfirst of the form; provided that if, due to
circumstances beyond the control of Allfirst, the sale cannot be
executed within one business day, Allfirst shall have one additional
business day to complete such sale.
EFFECTIVE DATE: The proposed exemption, if granted, will be effective
as of November 13, 1998, the date that Dauphin Deposit Bank and Trust
Company ceased to exist as a separate bank as a result of its
acquisition by First Maryland.
Summary of Facts and Representations
1. Allfirst is currently a subsidiary of First Maryland Bancorp, a
Maryland corporation and bank holding company registered under the Bank
Holding Company Act of 1956. Prior to June 28, 1999, Allfirst was doing
business under the name ``First National Bank of Maryland'' (i.e.,
First Maryland). The
[[Page 57132]]
applicant represents that First Maryland changed its name to ``Allfirst
Bank'' effective June 28, 1999. The applicant states that as of
September 21, 1999, there have been no further name changes. Thus, all
representations made by Allfirst are meant to apply to First Maryland
for the period from November 13, 1998, the effective date of this
proposed exemption, until June 28, 1999.
First Maryland Bancorp serves, through its banking, trust company
and investment management affiliates, as trustee, investment manager
and/or custodian to employee benefit plans. As of December 31, 1997,
these affiliates collectively provided trust services to approximately
800 employee benefit trusts, and had total assets under management of
approximately $16 billion. As of that date, First Maryland Bancorp had
consolidated total assets of $17.8 billion.
Prior to November 13, 1998, First Maryland Bancorp wholly-owned the
following banks and trust companies: (i) The York Bank & Trust Company
(a Pennsylvania-chartered bank, referred to hereafter as York Bank);
(ii) First Omni Bank, N.A. (a national banking association); (iii)
First National Bank of Maryland (a national banking association); (iv)
Dauphin Deposit Bank & Trust Company (a Pennsylvania-chartered bank,
acquired July 8, 1997, referred to hereafter as ``Dauphin''); and (v)
FMB Trust Company, N.A. (a non-depository trust company wholly-owned by
First Maryland).
Effective November 13, 1998, Dauphin and York Bank were merged into
First Maryland. Following this merger, the trust and investment
advisory business formerly conducted by Dauphin was conducted by First
Maryland and its trust and investment advisory subsidiaries.
First Maryland (i.e., Allfirst, as of June 28, 1999) also owns
First Maryland Brokerage Corp., a brokerage firm, and Allied Investment
Advisors, Inc. (Allied), a registered investment adviser that serves as
investment adviser to the ARK Funds. As of June 30, 1998, Allied had
assets under management of approximately $11.1 billion.
First Maryland Bancorp is controlled by Allied Irish Banks, p.l.c.,
which owns 100% of First Maryland Bancorp's outstanding common stock.
2. In 1996, Dauphin obtained a prohibited transaction exemption
from the Department (see Prohibited Transaction Exemption (PTE) 96-45
(61 FR 28244, June 4, 1996). Section I of PTE 96-45 permits the in-kind
transfer of assets of plans for which Dauphin acted as a fiduciary (the
Client Plans), other than plans established and maintained by Dauphin
(Bank Plans), that were held in certain collective investment funds
(CIFs) maintained by Dauphin, in exchange for shares of the Marketvest
Funds, open-end investment companies registered under the 1940 Act, in
situations where Dauphin acted as investment advisor for such Funds, as
well as for providing certain ``secondary services'' to such Funds (as
defined therein), in connection with the termination of such CIFs.
Section II of PTE 96-45 permits the receipt of fees by Dauphin from the
Marketvest Funds, or any other diversified open-end investment company
registered under the 1940 Act for which Dauphin serves as an investment
adviser, for acting as an investment adviser for such Funds as well as
for providing other services to the Funds which are ``secondary
services'' (as defined therein), in connection with the investment by
the Client Plans in shares of such Funds.
In July 1997, Dauphin became a subsidiary of First Maryland, and in
March 1998, the Marketvest Funds were merged into First Maryland's
family of mutual funds. Dauphin ceased to exist as a separate bank as
of November 13, 1998. Therefore, First Maryland requested a new
exemption to enable it to obtain exemptive relief similar to the relief
granted by the Department to Dauphin in Section II of PTE 96-45 for the
receipt of fees by Dauphin from the Marketvest Funds. With respect to
the relief provided to Dauphin in Section I of PTE 96-45, it should be
noted that the Department granted a class exemption in August 1997 for
collective investment fund conversion transactions (see PTE 97-41, 62
FR 42830, August 8, 1997). Thus, the relief provided to Dauphin in PTE
96-45, Section I, for in-kind transfers of CIF assets to Funds, would
be available under PTE 97-41 to First Maryland as of November 13, 1998,
and is available to Allfirst as of June 28, 1999, if the conditions of
that class exemption are met.
However, First Maryland (i.e., Allfirst), like Dauphin and as the
acquirer of Dauphin's business, serves a number of employee benefit
plan clients in the capacity of trustee, investment manager, and/or
custodian. The assets of some of these plans are investment in the ARK
Funds, a series of mutual fund portfolios advised by an affiliate of
Allfirst, as discussed further below. As a result, this proposed
exemption concerns the relief needed by First Maryland, as of November
13, 1998, and Allfirst, as of June 28, 1999, for the receipt of fees by
such entities from the ARK Funds for investment advisory and other
services to such Funds.
3. As noted above, Allfirst acts as a trustee, directed trustee,
investment manager, and/or custodian for a number of plans (referred to
herein as ``the Client Plans''). The Client Plans may include various
pension, profit sharing, and stock bonus plans, as well as voluntary
employees' beneficiary associations, supplemental unemployment benefit
plans, simplified employee benefit plans, retirement plans for self-
employed individuals (i.e. Keogh Plans) and individual retirement
accounts (IRAs). Some of the Client Plans may be participant-directed
individual account plans.
As custodian of a Client Plan, Allfirst is responsible for
maintaining custody over all or a portion of the Client Plan's assets,
for providing trust accounting and valuation services, for asset and
transaction reporting, and for execution and settlement of directed
transactions. Where Allfirst serves as trustee or directed trustee, it
is responsible for ownership of the assets of the Client Plan, and may
provide additional trust services such as benefit payments, loan
processing, and participant accounting. Where Allfirst is also acting
as the investment manager, Allfirst has investment discretion over the
Client Plan's assets and is responsible for implementing the Plan's
funding policies and investment objectives, executing transactions, and
periodic performance measurements.
The Client Plans pay fees in accordance with fee schedules
negotiated with Allfirst. Fees vary from fixed amounts to asset-based
amounts, depending on the level of services provided, and may include
further charges for additional trust services such as processing
benefit payments.
The specific Client Plans of Allfirst to which this proposed
exemption, if granted, would apply are those whose assets were invested
in the ARK Funds as of November 13, 1998, those whose assets have been
invested in such Funds since that date, and those whose assets will be
invested in such Funds in the future. However, Allfirst does not seek
relief for investments in the Funds by any employee benefit plans
established and maintained by Allfirst for its own employees (Allfirst
Plans).1
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\1\ Allfirst represents that it will comply with the
requirements of Prohibited Transaction Exemption (PTE) 77-3, 42 FR
18734 (April 8, 1977), with respect to any investments in the Funds
made by the Allfirst Plans. PTE 77-3 permits the acquisition or sale
of shares of a registered, open-end investment company by an
employee benefit plan covering only employees of such investment
company, employees of the investment adviser or principal
underwriter for such investment company, or employees of any
affiliated person (as defined therein) of such investment adviser or
principal underwriter, provided certain conditions are met. The
Department is expressing no opinion in this proposed exemption
regarding whether any of the transactions with the Funds by the
Allfirst Plans would be covered by PTE 77-3.
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[[Page 57133]]
4. The ARK Funds are registered as an open-end investment company
with the SEC under the 1940 Act. The ARK Funds consist of a series of
investment portfolios (each a ``Fund'') representing distinct
investment vehicles. Each ARK Fund will have its own prospectus or a
joint prospectus with one or more other ARK Fund(s). The shares of each
ARK Fund will represent a proportionate interest in the assets of that
Fund.
The overall management of the ARK Funds, including the negotiation
of investment advisory contracts, will rest with each Fund's Board of
Directors, more than a majority of whose members will be independent of
Allfirst. The Board of Directors will be elected by the shareholders of
the Funds. Allied, which is a wholly-owned subsidiary of Allfirst,
serves as the investment adviser to each ARK Fund and will receive
investment advisory fees from each Fund that will vary between 0.20%
and 1.00% of the Fund's average net assets on an annual basis,
depending on the particular Fund. However, these fees will be subject
to voluntary waivers by Allfirst and initially will be no more than
0.87% of the Fund's average net assets. FMB Trust Company, another
First Maryland subsidiary, serves as custodian of the ARK Funds, for
which it receives a custodial services fee and also provides sub-
administration services for a fee.
The other service-providers to the Funds will be independent of and
unaffiliated with Allfirst. Such service-providers currently will
include: (i) The Fund Administrator, SEI Investments Mutual Fund
Services; (ii) the Fund Distributor, SEI Investments Distribution Co.;
and (iii) the Transfer Agent, SEI Investments Management Corporation.
The ARK Funds also may pay shareholder servicing fees of up to 0.15% on
certain classes of shares.
The Funds will be able to charge a distribution fee of 0.25% of a
Fund's average net assets, pursuant to Rule 12b-1 under the 1940 Act,
for certain classes of shares. However, Allfirst represents that such
12b-1 fees will not be charged to any class of shares invested in by
the Client Plans. Therefore, Allfirst will not receive any fees payable
pursuant to Rule 12b-1 under the 1940 Act in connection with the
transactions covered by this proposed exemption.
5. Allfirst is making the ARK Funds available to the Client Plans
because it believes that there are material advantages to the Client
Plans from the use of the ARK Funds, and Allfirst's customers are
interested in having mutual funds available as investment vehicles for
their employee benefit plan trust accounts. The ARK Funds are valued on
a daily basis, which permits: (i) Immediate investment of Plan
contributions in varied types of investments; (ii) greater flexibility
in transferring assets from one type of investment to another; and
(iii) daily redemption of investments for purposes of making
distributions. In addition, information concerning the investment
performance of the ARK Funds is available each day in newspapers of
general circulation, which allow Client Plan sponsors and participants
to monitor the performance of their investments on a daily basis.
Furthermore, shares of the ARK Funds can be given to Client Plan
participants in plan distributions, thus avoiding the expense and delay
of liquidating plan investments and facilitating roll-overs into IRAs.
At the present time, Allfirst expects that the Client Plans will be
able to continue making direct purchases of ARK Fund shares for cash on
an ongoing basis.
Allfirst states that the price that will be paid or received by a
Client Plan for shares in a Fund will be the net asset value per share
at the time of the transaction, as defined in Section III(f), and will
be the same price which will be paid or received for the shares by any
other investor at that time. In addition, Allfirst states that no sales
commissions or redemption fees will be charged in connection with the
purchase or sale of Fund shares by the Client Plans.
6. Prior to investing any Client Plan's assets in an ARK Fund,
Allfirst will obtain the approval of a Second Fiduciary acting for the
Client Plan. The Second Fiduciary generally will be the Client Plan's
named fiduciary, trustee (if other than Allfirst), or the sponsoring
employer. Allfirst will provide the Second Fiduciary with a current
prospectus for the Fund and a written statement giving full disclosure
of the fee structure under which either Allfirst's investment advisory
and other fees will be credited back to the Client Plan or the Plan-
level investment management fees will be waived. The disclosure
statement and the letter that precedes the disclosure statement will
describe why Allfirst believes the investment of a Client Plan's assets
in the ARK Funds may be appropriate. Allfirst states that these
disclosures will be based on the requirements of PTE 77-4 (42 FR 18732,
April 8, 1977).2
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\2\ PTE 77-4, in pertinent part, permits the purchase and sale
by an employee benefit plan of shares of a registered, open-end
investment company when a fiduciary with respect to the plan is also
the investment adviser for the investment company, provided that,
among other things, the plan does not pay an investment management,
investment advisory, or similar fee with respect to the plan assets
invested in such shares for the entire period of such investment.
Section II(c) of PTE 77-4 states that this condition does not
preclude the payment of investment advisory fees by the investment
company under the terms of an investment advisory agreement adopted
in accordance with section 15 of the Investment Company Act of 1940.
Section II(c) states further that this condition does not preclude
payment of an investment advisory fee by the plan based on total
plan assets from which a credit has been subtracted representing the
plan's pro rata share of investment advisory fees paid by the
investment company.
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On the basis of such information, the Second Fiduciary will
authorize Allfirst to invest the Client Plan's assets in the ARK Funds
and to receive fees from the ARK Funds.
7. Allfirst will charge investment advisory fees to the ARK Funds
in accordance with the investment advisory agreements between Allfirst
and the ARK Funds. These agreements will be approved by the independent
members of the Board of Directors of the ARK Funds, in accordance with
the applicable provisions of the 1940 Act, and any subsequent changes
in the fees will have to be approved by such Directors. These fees also
will not be increased without the approval of the shareholders of the
affected ARK Funds. The fees will be paid monthly by the ARK Funds. In
addition, FMB Trust Company, an affiliate of Allfirst, will charge fees
for custody services, or other services, it will provide to the ARK
Funds in accordance with a custodial services agreement and other
agreements negotiated with the ARK Funds.
Allfirst will avoid charging the Client Plans duplicative
investment management fees by either: (a) Crediting the Client Plan's
pro rata share of the Fund advisory fees back to the Client Plan; or
(b) waiving any investment management fee for the Client Plan at the
Plan-level.
The ``crediting'' fee structure will be designed to preserve the
negotiated fee rates of the Client Plans so as to minimize the impact
of the change to the ARK Funds on a Client Plan's fees. Allfirst will
charge a Client Plan its standard fees as applicable to the particular
Client Plan for serving as trustee, directed trustee, investment
manager, or custodian. At the beginning of each month, and in no event
later than the same day as the payment of investment advisory fees by
the ARK
[[Page 57134]]
Funds to Allfirst for the previous month, Allfirst will credit to each
Client Plan in cash its proportionate share of all investment advisory
fees charged by Allfirst to the ARK Funds for the previous month. The
credit will include the Client Plan's share of any investment advisory
fees paid by Allfirst to third party sub-advisors.
Allfirst states that the credit will not include the custodial fees
payable by the ARK Funds to FMB Trust Company, or any other affiliate
of Allfirst who may serve in that capacity in the future, because
custodial services rendered at the Fund-level will not be duplicative
of any services provided directly to the Client Plan. The custodial
services to the Fund will involve maintaining custody and providing
reporting relative to the individual securities owned by the Fund. The
services to the Client Plan will involve maintaining custody over all
or a portion of the Client Plan's assets (which may include Fund
shares, but not the assets underlying the Fund shares), providing trust
accounting and participant accounting (if applicable), providing asset
and transaction reporting, execution and settlement of directed
transactions, processing benefit payments and loans, maintaining
participant accounts, valuing plan assets, conducting non-
discrimination testing, preparing Forms 5500 and other required
filings, and producing statements and reports regarding overall plan
and individual participant holdings. Allfirst states that these trust
services will be necessary regardless of whether the Client Plan's
assets are invested in the ARK Funds. Thus, Allfirst represents that
its proposed receipt of fees for both secondary services at the Fund-
level and trustee services at the Plan-level will not involve the
receipt of ``double fees'' for duplicative services to the Client Plans
because a Fund will be charged for custody and other services relative
to the individual securities owned by the Fund, while a Client Plan
will charged for the maintenance of Plan accounts reflecting ownership
of the Fund shares and other assets.3
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\3\ The Department notes that although certain transactions and
fee arrangements are the subject of an administrative exemption, a
Client Plan fiduciary must still adhere to the general fiduciary
responsibility provisions of section 404 of the Act. Thus, the
Department cautions the fiduciaries of the Client Plans investing in
the ARK Funds that they will have an ongoing duty under section 404
of the Act to monitor the services provided to the Client Plans to
ensure that the fees paid by the Client Plans for such services are
reasonable in relation to the value of the services provided. Such
responsibilities will include determinations that the services
provided are not duplicative and that the fees are reasonable in
light of the level of services provided.
The Department also notes that Allfirst, as a trustee and
investment manager for a Client Plan in connection with the decision
to invest Client Plan assets in the ARK Funds, will have a fiduciary
duty to monitor all fees paid by a Fund to Allfirst, its affiliates,
and third parties for services provided to the Fund to ensure that
the totality of such fees will be reasonable and will not involve
the payment of any ``double'' fees for duplicative services to the
Fund by such parties.
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Allfirst represents that for each Client Plan, the combined total
of all fees it will receive directly and indirectly from the Client
Plans for the provision of services to the Plans and/or to the ARK
Funds will not be in excess of ``reasonable compensation'' within the
meaning of section 408(b)(2) of the Act.4
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\4\ The Department is expressing no opinion in this proposed
exemption as to whether the fee arrangements discussed herein will
comply with section 408(b)(2) of the Act and the regulations
thereunder (see 29 CFR 2550.408b-2).
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8. Allfirst will maintain a system of internal accounting controls
for the crediting of all fees to the Client Plans. In addition,
Allfirst has retained the services of PricewaterhouseCoopers LLP (the
Auditor), an independent accounting firm, to audit annually the
crediting of fees to the Client Plans under this program. Such audits
will provide independent verification of the proper crediting to the
Client Plans.
In its annual audit of the credit program, the Auditor will: (i)
Review and test compliance with the specific operational controls and
procedures established by Allfirst for making the credits; (ii) verify
on a test basis the monthly credit factors transmitted to Allfirst by
the ARK Funds; (iii) verify on a test basis the proper assignment of
identification fields to the Client Plans; (iv) verify on a test basis
the credits paid in total to the sum of all credits paid to each Client
Plan; and (v) recompute, on a test basis, the amount of the credit
determined for selected Client Plans and verify that the credit was
made to the proper Client Plan account.
In the event either the internal audit by Allfirst or the
independent audit by the Auditor identifies an error made in the
crediting of fees to the Client Plans, Allfirst will correct the error.
With respect to any shortfall in credited fees to a Client Plan,
Allfirst will make a cash payment to the Client Plan equal to the
amount of the error plus interest paid at money market rates offered by
Allfirst for the period involved. Any excess credits made to a Client
Plan will be corrected by an appropriate deduction from the Client Plan
account or reallocation of cash during the next payment period after
discovery of the error to reflect accurately the amount of total
credits due to the Client Plan for the period involved.
9. Allfirst represents that the use of the ``crediting'' fee
structure will be available for any investments made by Client Plans in
the ARK Funds. The use of this fee structure must be approved prior to
the Client Plan's initial investment in the ARK Funds by a Second
Fiduciary acting for the Client Plan. The Second Fiduciary will receive
full and detailed written disclosure of information concerning the ARK
Funds in advance of any investment by the Client Plan in the ARK Funds,
including the Fund prospectuses as well as a separate statement
describing the crediting fee structure.
After consideration of such information, the Second Fiduciary will
authorize in writing the investment of assets of the Client Plan in one
or more specified ARK Funds and the fees to be paid by the ARK Funds to
Allfirst. In addition, the Second Fiduciary of each Client Plan
invested in a particular Fund will receive full written disclosure, in
a statement separate from the Fund prospectus, of any proposed
increases in the rates of fees charged by Allfirst to the ARK Funds for
secondary services which are above the rates reflected in the Fund
prospectuses, at least thirty (30) days prior to the effective date of
such increase.
In the event that Allfirst provides an additional secondary service
for which a fee is charged or there is an increase in the rate of fees
paid by the ARK Funds to Allfirst for any secondary service, including
any increase resulting from a decrease in the number or kind of
services performed by Allfirst for such fees in connection with a
previously authorized secondary service, Allfirst will, at least 30
days in advance of the implementation of such additional service or fee
increase, provide written notice to the Second Fiduciary explaining the
nature and the amount of the additional service for which a fee will be
charged or the nature and amount of the increase in fees of the
affected Fund.5 Such notice
[[Page 57135]]
will be made separate from the Fund prospectus and will be accompanied
by a Termination Form. The Second Fiduciary also will receive full
written disclosure in a Fund prospectus or otherwise of any increases
in the rate of fees charged by Allfirst to the ARK Funds for investment
advisory services, even though such fees will be credited to the
investing Client Plans.
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\5\ With respect to increases in fees, the Department notes that
an increase in the amount of a fee for an existing secondary service
(other than through an increase in the value of the underlying
assets in the ARK Funds), or the imposition of a fee for a newly-
established secondary service, shall be considered an increase in
the rate of such fees. However, in the event a secondary service fee
has already been described in writing to the Second Fiduciary and
the Second Fiduciary has provided authorization for the fee, and
such fee was temporarily waived, no further action by Allfirst would
be required in order for the Bank to receive such fee at a later
time. Thus, for example, no further disclosure would be necessary if
Allfirst had received authorization for a fee for custodial services
from Plan investors and subsequently determined to waive the fee for
a period of time in order to attract new investors but later charged
the fee.
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The authorizations made by a Second Fiduciary of any Client Plan
will be terminable at will, without penalty to the Client Plan, upon
receipt by Allfirst of written notice of termination. A form (the
Termination Form) expressly providing an election to terminate the
authorization, with instructions on the use of the form, will be
supplied to the Second Fiduciary no less than annually. However, the
Termination Form will not need to be supplied to the Second Fiduciary
for an annual reauthorization sooner than six months after such
Termination Form is supplied for an additional service or for an
increase in fees (as discussed above), unless another Termination Form
is required to disclose additional services or fee increases. The
Termination Form will instruct the Second Fiduciary that the
authorization is terminable at will by the Client Plan, without penalty
to the Client Plan, upon receipt by Allfirst of written notice from the
Second Fiduciary, and that failure to return the Termination Form will
result in the continued authorization of Allfirst to engage in the
subject transactions on behalf of the Client Plan.
The Termination Form will be used to notify Allfirst in writing to
effect a termination by selling the shares of the ARK Funds held by the
Client Plan, requesting such termination within one business day
following receipt by Allfirst of the form. If, due to circumstances
beyond the control of Allfirst, the sale cannot be executed within one
business day, Allfirst will be obligated to complete the sale within
the next business day.
10. Allfirst represents that for smaller Client Plans, the Fund-
level investment advisory fees generally do not exceed the Plan-level
investment management fees, so that the Client Plan will not benefit
from a Fund-level fee credit. In these cases, if the Second Fiduciary
authorizes the fee structure, Allfirst will waive the Plan-level
investment management fees that would otherwise be charged for the
Client Plan's assets invested in the ARK Funds, so that the Plan-level
fees will be offset and the Client Plan will pay only one investment
management fee for those assets, at the Fund-level. This fee structure,
which is one of the fee structures described in PTE 77-4, will ensure
that Allfirst does not receive any additional investment management,
advisory or similar fee as a result of investments in the ARK Funds by
the Client Plans.
Disclosures, approvals, and notifications with regard to any
changes in fees or secondary services will be handled in the same
manner as for the fee structure described in paragraph 10 above, with
one exception. The exception is that notifications with regard to
increases in rates of investment advisory fees for the ARK Funds will
conform to the procedures for increases in rates of secondary service
fees as described above. Therefore, in such instances, there will be
prior written notification of the fee increase to the Second Fiduciary
for the Client Plan and a Termination Form will be provided. The reason
for the exception is that the total fees paid by the Client Plan, under
this fee structure, will be directly affected by any increases in Fund-
level investment advisory fees because such fees will not be credited
back to the Client Plan.
11. Allfirst states that a Second Fiduciary will always receive a
written statement giving full disclosure of the fee structures prior to
any investment in the ARK Funds. The disclosure statement will explain
why Allfirst believes that the investment of assets of the Client Plan
in the ARK Funds may be appropriate. The disclosure statement also will
describe whether there are any limitations on Allfirst with respect to
which Client Plan assets may be invested in shares of the ARK Funds
and, if so, the nature of such limitations.6
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\6\ See section II(d) of PTE 77-4 which requires, in pertinent
part, that an independent plan fiduciary receive a current
prospectus issued by the investment company and a full and detailed
written disclosure of the investment advisory and other fees charged
to or paid by the plan and the investment company, including a
discussion of whether there are any limitations on the fiduciary/
investment adviser with respect to which plan assets may be invested
in shares of the investment company and, if so, the nature of such
limitations.
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12. On an annual basis, the Second Fiduciary of a Client Plan
investing in the ARK Funds will receive copies of the current Fund
prospectuses and, upon such fiduciary's request, a copy of the
Statement of Additional Information for such ARK Funds, as well as
copies of the annual financial disclosure reports containing
information about the Fund and independent auditor findings.
In addition, if the ARK Funds obtain brokerage services in the
future from any broker-dealers that are affiliates of Allfirst,
Allfirst will provide at least annually to the Second Fiduciary of
Client Plans investing in the ARK Funds written disclosures indicating
the following: (i) The total, expressed in dollars, of brokerage
commissions of each Fund that are paid to Allfirst by such Fund; (ii)
the total, expressed in dollars, of brokerage commissions of each Fund
that are paid by such Fund to brokerage firms unrelated to Allfirst;
(iii) the average brokerage commissions per share, expressed as cents
per share, paid to Allfirst by each Fund portfolio; and (iv) the
average brokerage commissions per share, expressed as cents per share,
paid by each Fund portfolio to brokerage firms unrelated to Allfirst.
All such brokerage services would be provided in accordance with
section 17(e) of the 1940 Act and Rule 17e-1 thereunder. Such
provisions require, among other things, that the commissions, fees, or
other remuneration for any brokerage services provided by an affiliate
of an investment company's investment adviser be reasonable and fair
compared to what other brokers receive for comparable transactions
involving similar securities.
13. No sales commissions will be paid by the Client Plans in
connection with the purchase or sale of shares of the ARK Funds. In
addition, no redemption fees will be paid in connection with the sale
of shares by the Client Plans to the ARK Funds. Allfirst states that it
will not receive any fees payable pursuant to Rule 12b-1 under the 1940
Act in connection with the transactions. Allfirst states further that
all other dealings between the Client Plans and the ARK Funds will be
on a basis no less favorable to the Client Plans than such dealings
will be with the other shareholders of the ARK Funds.
14. In summary, Allfirst represents that the transactions described
herein will satisfy the statutory criteria of section 408(a) of the Act
because: (a) The ARK Funds will provide the Client Plans with a more
effective investment vehicle than collective investment ARK Funds
maintained by Allfirst without any increase in investment management,
advisory, or similar fees paid to Allfirst; (b) Allfirst will require
annual audits by an independent accounting firm to verify the proper
crediting to the Client Plans of investment advisory fees charged by
Allfirst to the ARK Funds; (c) with respect to any investments in a
Fund by the Client Plans and the payment of any fees by the Fund to
Allfirst, a Second Fiduciary will receive full written disclosure of
information concerning the Fund, including a current prospectus and a
statement describing the fee structure, and will authorize in writing
the investment of the Client
[[Page 57136]]
Plan's assets in the Fund and the fees paid by the Fund to Allfirst;
(d) any authorizations made by a Client Plan regarding investments in a
Fund and fees to be paid to Allfirst, or any increases in the rates of
fees for secondary services which will be retained by Allfirst, will be
terminable at will by the Client Plan, without penalty to the Client
Plan, upon receipt by Allfirst of written notice of termination from
the Second Fiduciary; (e) no commissions or redemption fees will be
paid by the Client Plan in connection with either the acquisition of
Fund shares or the sale of Fund shares; (f) Allfirst will not receive
any fees payable pursuant to Rule 12b-1 under the 1940 Act in
connection with the transactions; and (g) all dealings between the
Client Plans and the ARK Funds will be on a basis which is at least as
favorable to the Client Plans as such dealings are with other
shareholders of the ARK Funds.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams or Ms. Karin Weng of
the Department, telephone (202) 219-8194 or 219-8881, respectively.
(These are not toll-free numbers.)
John Hancock Mutual Life Insurance Company (John Hancock), Located
in Boston, Masachusetts
[Application No. D-10718]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990).7
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\7\ For purposes of this proposed exemption, reference to
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 section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the
Code, shall not apply to: (1) The receipt of common stock of John
Hancock Financial Services, Inc., the holding company for John Hancock
(the Holding Company); or (2) the receipt of cash or policy credits, by
or on behalf of any eligible policyholder (the Eligible Policyholder)
of John Hancock which is an employee benefit plan (the Plan), subject
to applicable provisions of the Act and/or the Code, other than certain
Eligible Policyholders which are Plans maintained by John Hancock or an
affiliate for their own employees (the John Hancock Plans), in exchange
for such Eligible Policyholder's membership interest in John Hancock,
in accordance with the terms of a plan of reorganization (the Plan of
Reorganization) adopted by John Hancock and implemented pursuant to
Chapter 175 of the Massachusetts General Laws.
In addition, the restrictions of section 406(a)(1)(E) and (a)(2)
and section 407(a)(2) of the Act shall not apply to the receipt or
holding, by the John Hancock Plans, of employer securities in the form
of excess Holding Company stock, in accordance with the terms of the
Plan of Reorganization.
This proposed exemption is subject to the conditions set forth
below in Section II.
Section II--General Conditions
(a) The Plan of Reorganization is implemented in accordance with
procedural and substantive safeguards that are imposed under
Massachusetts Insurance Law and is subject to review and supervision by
the Massachusetts Commissioner of Insurance (the Commissioner).
(b) The Commissioner reviews the terms of the options that are
provided to Eligible Policyholders of John Hancock as part of such
Commissioner's review of the Plan of Reorganization, and the
Superintendent only approves the Plan of Reorganization following a
determination that such Plan of Reorganization is fair and equitable to
all Eligible Policyholders and is not detrimental to the public.
(c) Both the Commissioner and the Superintendent concur on the
terms of the Plan of Reorganization.
(d) Each Eligible Policyholder has an opportunity to vote to
approve the Plan of Reorganization after full written disclosure is
given to the Eligible Policyholder by John Hancock.
(e) One or more independent fiduciaries of a Plan that is an
Eligible Policyholder receives Holding Company stock, cash or policy
credits pursuant to the terms of the Plan of Reorganization and neither
John Hancock nor any of its affiliates exercises any discretion or
provides ``investment advice,'' as that term is defined in 29 CFR
2510.3-21(c), with respect to such acquisition.
(f) After each Eligible Policyholder is allocated 17 shares of
Holding Company stock, additional consideration is allocated to
Eligible Policyholders who own participating policies based on
actuarial formulas that take into account each participating policy's
contribution to the surplus of John Hancock which formulas have been
approved by the Commissioner.
(g) With respect to a John Hancock Plan, where the consideration
may be in the form of Holding Company stock an independent Plan
fiduciary --
(1) Determines whether the Plan of Reorganization is in the best
interest of the John Hancock Plans and their participants and
beneficiaries.
(2) Votes at the special meeting of Eligible Policyholders on the
proposal to approve or not to approve the Plan of Reorganization.
(3) If the vote is to approve the Plan or Reorganization,
(i) Decides whether the affected John Hancock Plan should receive
Holding Company stock or cash (should the latter option be available)
and receives such consideration on behalf of the affected John Hancock
Plan;
(ii) Monitors, on behalf of the affected John Hancock Plan, the
acquisition and holding of the shares of any Holding Company stock
received;
(iii) Makes determinations on behalf of the John Hancock Plan with
respect to voting and the continued holding of the shares of Holding
Company stock received by such Plan; and
(iv) Disposes of any Holding Company stock held by the John Hancock
Plan which exceeds the limitation of section 407(a)(2) of the Act as
reasonably as practicable but in no event later than six months year
following the effective date of the demutualization;
(v) Takes all actions that are necessary and appropriate to
safeguard the interests of the John Hancock Plans; and
(vi) Provides the Department with a complete and detailed final
report as it relates to the John Hancock Plans prior to the effective
date of the demutualization.
(h) All Eligible Policyholders that are Plans participate in the
transactions on the same basis within their class groupings as other
Eligible Policyholders that are not Plans.
(i) No Eligible Policyholder pays any brokerage commissions or fees
in connection with their receipt of Holding Company stock or in
connection with the implementation of the commission-free sales and
purchase programs.
(j) All of John Hancock's policyholder obligations remain in force
and are not affected by the Plan of Reorganization.
Section III--Definitions
For purposes of this proposed exemption:
(a) The term ``John Hancock'' means The John Hancock Mutual Life
Insurance Company and any affiliate of John Hancock as defined in
paragraph (b) of this Section III.
[[Page 57137]]
(b) An ``affiliate'' of John Hancock includes --
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with John Hancock (For purposes of this paragraph, the term ``control''
means the power to exercise a controlling influence over the management
or policies of a person other than an individual.);
(2) Any officer, director or partner in such person; and
(3) Any corporation or partnership of which such person is an
officer, director or a 5 percent partner or owner.
(c) The term ``Eligible Policyholder'' means a policyholder whose
name appears on the conversion date on John Hancock's records as the
owner of a policy under which there is a right to vote and which, on
both the December 31 immediately preceding the conversion date and the
date the John Hancock's Board of Directors first votes to convert to
stock form, is in full force for its full basic benefits with no unpaid
premiums or consideration at the expiration of any applicable grace
period, or which is being continued under a nonforfeiture benefit and
continues to be eligible for participation in John Hancock's annual
distribution of divisible surplus.
(d) The term ``policy credit'' means: (1) For an individual or
joint ordinary life insurance policy, an increase to the paid-up
dividend addition value; and (2) for all other individual or joint life
policies and annuities, (i) if the policy or contract has a defined
account value, an increase in the account value, or (ii) if the policy
or contract does not have a defined account value, an increase to the
dividend accumulation fund.
Summary of Facts and Representations
1. John Hancock is a mutual life insurance company organized under
the laws of the Commonwealth of Massachusetts on April 18, 1862. As of
December 31, 1998, John Hancock and its subsidiaries had total assets
in excess of $76 billion and had approximately $310 billion of
individual life insurance in force.
John Hancock has a number of subsidiaries and affiliates that
provide a variety of financial services, including investment
management and brokerage services. John Hancock and its investment
management subsidiaries had approximately $124.4 billion in assets
under management as of December 31, 1998. As a mutual life insurance
company, John Hancock has no stockholders. Instead, policyholders of
John Hancock are ``members'' of the company and in that capacity, they
are entitled to vote to elect the directors of the company and would be
entitled to share in the assets of the company if it were liquidated.
2. John Hancock and its affiliates provide a variety of fiduciary
and other services to employee benefit plans covered under relevant
provisions of the Act and the Code. By providing these services John
Hancock may be considered a party in interest with respect to such
Plans under section 3(14)(A) and (B) of the Act or the related
derivative provisions. The services provided by John Hancock and its
affiliates to Plans include plan administration, investment management
and related services. Many of the Plans to which John Hancock provides
services are also John Hancock policyholders. As of December 31, 1997
(the most recent date such information is available), John Hancock had
issued over 27,000 outstanding policies and contracts to employee
pension and welfare benefit plans. These Plans include defined benefit
pension plans, defined contribution plans (such as section 401(k)
plans), and welfare benefit plans providing welfare benefit plan
coverage such as group life, short- and long-term disability,
accidental death and dismemberment and group health coverage.
3. John Hancock and its affiliates also sponsor the following
Plans, which are collectively referred to herein as ``the John Hancock
Plans'':
(a) The John Hancock Mutual Life Insurance Company Pension Plan
(the Pension Plan) is a defined benefit pension plan that benefits the
home office and the field employees of the company as well as its
unionized managerial agents and employees of most of John Hancock's
domestic subsidiaries. The trustee of the Pension Plan is Investors
Bank & Trust Company (Investors). Investment decisions for the Pension
Plan are made by either of two internal committees within John Hancock,
i.e., the Directors' Employee Benefits Plan Committee or the Plan
Investment Advisory Committee. As of December 31, 1998, the Pension
Plan had approximately 26,818 participants and total assets of
$2,056,832,491.
(b) The Pension Plan for Personnel in the General Agencies of John
Hancock Mutual Life Insurance Company (the GA Pension Plan) is a
multiple employer, defined benefit pension plan that covers statutory
employees of John Hancock's general agencies. The trustee of the GA
Pension Plan is Investors. The decisionmakers with respect to
investments for the GA Pension Plan are the two internal committees
identified above in paragraph 3(a). As of December 31, 1997 (the most
recent date such information is available), the GA Pension Plan had
4,668 participants and total assets of $186,343,278.
(c) The Investment-Incentive Plan for John Hancock Employees (TIP)
is a section 401(k) profit sharing plan covering home office employees
of John Hancock as well as certain domestic subsidiaries. The trustee
of TIP is Investors. Because TIP is participant-directed and intended
to qualify under section 404(c) of the Act, its investment options are
selected by two internal committees within John Hancock. They are the
Directors' Employee Benefits Plan Committee and the Savings Plan
Investment Committee. As of December 31, 1998, TIP had 8,655
participants and total assets of $848,545,190.
(d) The John Hancock Savings and Investment Plan (SIP) is a section
401(k) profit sharing plan covering unionized managerial agents of John
Hancock as well as certain other employees in the managerial agency
system. SIP shares the same trustee and decision-making committees as
TIP. As of December 31, 1998, SIP had 2,145 participants and total
assets of $135,847,910.
(e) The John Hancock Mutual Life Insurance Company Employee Welfare
Plan (the Employee Welfare Plan) is a welfare benefit plan maintained
by John Hancock and its employees and those of its domestic
subsidiaries. The Employee Welfare Plan provides health, life
insurance, dental, vision, temporary and long-term disability, and
long-term care coverage. The Employee Welfare Plan has 3 trustees, each
of whom is an officer of John Hancock. Investment decisions for the
non-insurance plan assets of the Employee Welfare Plan are made by the
same investment committees as the Pension Plan described above in
paragraph 3(a). As of December 31, 1997, the Employee Welfare Plan had
17,148 participants (including beneficiaries of deceased participants)
and total assets of $87,066,100.
(f) The GA Association Employee Welfare Plan (the GA Employee
Welfare Plan is a multiple employer welfare benefit plan maintained by
John Hancock to enable General Agents who are members of the John
Hancock General Agency Association to provide benefits to personnel who
are common law or statutory employees of the general agencies. The GA
Employee Welfare Plan, which provides health, life, long-term
disability and voluntary accidental death and dismemberment benefits,
is a fully-insured arrangement. As of December 31, 1998, the GA
Employee Welfare Plan had 3,595 participants.
[[Page 57138]]
(g) The John Hancock Funds 401(k) Plan (the 401(k) Plan). The John
Hancock 401(k) Plan is maintained by the Berkeley Financial Group which
consists of a group of companies that operate John Hancock's mutual
fund business. The John Hancock 401(k) Plan covers employees of that
group. The John Hancock 401(k) Plan, which provides for a cash and
deferred compensation arrangement, has 3 trustees. Investment decisions
for the John Hancock 401(k) Plan are made by the participants. As of
December 31, 1998, the John Hancock 401(k) Plan had 792 participants
and total assets of $26,590,219.
(h) The John Hancock Property & Casualty Money Purchase Pension
Plan (the Property & Casualty Plan). John Hancock holds a small
guaranteed investment contract on behalf of the Property & Casualty
Plan which was established for its former property and casualty
subsidiary. The Property & Casualty Plan, which formerly provided
retirement benefits until it was frozen, has one trustee who is
responsible for making investment decisions affecting such Plan. As of
December 31, 1998, the Property & Casualty Plan had 1,311 participants
and total assets of $670,147.
In addition to the above, John Hancock holds a group life policy on
behalf of certain retirees of Unigard Property and Casualty Company.
Although this company was sold recently, John Hancock retains certain
benefit responsibilities with respect to its retiree population.
3. John Hancock's Board of Directors authorized its management to
develop a plan of demutualization (i.e., the Plan of Reorganization)
pursuant to which John Hancock would be converted from a mutual life
insurance company to a stock life insurance company. On August 31,
1999, John Hancock's Board of Directors formally adopted the Plan of
Reorganization.
In order to implement the Plan of Reorganization, John Hancock
requests an individual exemption from the Department that would cover
the receipt of Holding Company stock, cash or policy credits by
Eligible Policyholders that are Plans in exchange for their existing
membership interests in John Hancock. Although John Hancock is not
requesting an exemption for distributions of Holding Company stock to
the Pension Plan, the GA Pension Plan, TIP, SIP, the 401(k) Plan and
the Property & Casualty Plan because it believes such stock would
constitute ``qualifying employer securities'' within the meaning of
section 407(d)(5) of the Act and that section 408(e) would apply to
such distributions,8 it is nevertheless requesting exemptive
relief from the Department to the extent that John Hancock Plans, such
as the Employee Welfare Plan and the GA Employee Welfare Plan, receive
Holding Company stock which results in violations of section
406(a)(1)(E) and (a)(2) of the Act and section 407(a)(2) of the
Act.9 Since the Holding Company stock that will be held by
these John Hancock Plans will exceed 10 percent of the fair market
value of the assets of such Plans, John Hancock has retained U.S. Trust
Company, N.A. (U.S. Trust) to serve as the independent fiduciary for
these Plans as well as for any other John Hancock Plan whose Holding
Company Stock exceeds 10 percent of such Plan's assets.
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\8\ The Department expresses no opinion herein on whether the
Holding Company stock will constitute qualifying employer securities
and whether such distributions will satisfy the terms and conditions
of section 408(e) of the Act.
\9\ Section 406(a)(1)(E) of the Act prohibits the acquisition by
a plan of any employer security which would be in violation of
section 407(a) of the Act. Section 406(a)(2) of the Act states that
no fiduciary who has authority or discretion to control the assets
of a plan shall permit the plan to hold any employer security if he
[or she] knows that holding such security would violate section
407(a) of the Act. Section 407(a)(1) of the Act prohibits the
acquisition by a plan of any employer security which is not a
qualifying employer security. Section 407(a)(2) of the Act provides
that a plan may not acquire any qualifying employer security, if
immediately after such acquisition, the aggregate fair market value
of such securities exceeds 10 percent of the fair market value of
the plan's assets.
In addition to the above, section 407(f) of the Act, which is
applicable to the holding of a qualifying employer security by a
plan other than an eligible individual account plan, requires that:
(a) Immediately following its acquisition by a plan, no more than 25
percent of the aggregate amount of stock of the same class issued
and outstanding at the time of acquisition is held by the plan; and
(b) at least 50 percent of the stock be held by persons who are
independent of the issuer. John Hancock notes, however, that the
holding by the John Hancock Plans of shares of Holding Company stock
will not violate the provisions of section 407(f) of the Act.
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4. John Hancock proposes to convert from a mutual life insurance
company to a stock life insurance company under Massachusetts Insurance
Law. The principal purposes for the reorganization are to enhance John
Hancock's access to capital markets and raise capital that would permit
it and the Holding Company to expand their existing business and
develop new business opportunities in the insurance and financial
services industries. Growth will enable John Hancock to reduce its unit
expenses through economies of scale. This growth will be facilitated by
John Hancock's ability to acquire other companies using its own stock
as acquisition currency. Additionally, access to capital markets will
enable John Hancock to invest in new technology, improved customer
service, new products and channels of distribution. John Hancock will
also obtain more financial flexibility with which to maintain its
ratings and financial stability.
In addition, the reorganization of John Hancock pursuant to the
Plan of Reorganization will provide Eligible Policyholders with shares
of common stock of the Holding Company, cash or policy credits in
exchange for their illiquid membership interests. Thus, Eligible
Policyholders will realize economic value from their membership
interests that is otherwise unavailable to them. However, the
demutualization will not, in any way, reduce the benefits, values,
guarantees or dividend eligibility of existing policies or contracts
issued by John Hancock.
As part of the reorganization, the Holding Company will be
established and will become the stock holding company for John Hancock
and its subsidiaries. Therefore, after the reorganization, John
Hancock, as a stock insurer and a subsidiary of the Holding Company,
will have access through the Holding Company to the capital markets,
enabling John Hancock to obtain capital from a variety of sources. The
Holding Company will also own 100 percent of two new holding companies
being established to own existing Canadian subsidiaries of John Hancock
and most other foreign insurance subsidiaries, respectively. Most
foreign operations are being separated from the domestic operations of
John Hancock to achieve improved financial ratios for John Hancock and
maximize performance results for policyholders and shareholders.
John Hancock's management believes that the holding company
structure will provide several benefits to John Hancock. In this
regard, this structure will afford increased flexibility in raising
additional capital in the form of debt and equity financings and in
pursuing growth in John Hancock's current and future insurance and non-
insurance business. The new organization will benefit from increased
flexibility in allocating capital and resources among the various
subsidiaries of John Hancock. Further, the transfer of the
international subsidiaries to the Holding Company will provide a
distinct focus for the foreign operations of John Hancock while also
improving its risk-based capital ratio.
5. The terms of the Plan of Reorganization are subject to the
approval of the Commissioner of Insurance of the Commonwealth of
[[Page 57139]]
Massachusetts. However, market conditions, regulatory requirements and
business considerations may also influence the final sequence of
events. Subject to the foregoing, under John Hancock's internal working
proposal for carrying out the demutualization, it is currently expected
that the following steps will occur pursuant to the Plan of
Demutualization:
(a) Formation of a Stock Life Insurance Company. John Hancock will
demutualize and become a stock life insurance company by operation of
section 19E of Chapter 175 of the General Laws of the Commonwealth of
Massachusetts. Under the Plan of Reorganization, each policyholder's
membership interest in John Hancock will be extinguished. As
compensation for their membership interests, Eligible Policyholders
will receive shares of Holding Company stock, cash or policy credits.
John Hancock will become a stock company and a wholly owned subsidiary
of the Holding Company. The Holding Company will also own the
outstanding shares of two newly-formed holding companies which will own
John Hancock's Canadian business and most of its international
businesses, respectively.
(b) Initial Public Offering (the IPO). The Holding Company will
sell new Holding Company shares in an underwritten IPO, on the date of
the demutualization of John Hancock. It is expected that the
demutualization will occur during early February 2000. However, the
effective date may be extended for a period of up to six months if
requested by John Hancock subject to approval by the Commissioner. At
present, the size of the IPO is not known.
(c) Contribution to the Capital of John Hancock. Following the
transactions described above, the Holding Company will contribute cash
raised in the IPO (after the payment of transaction expenses) to John
Hancock in an amount at least equal to the amount required for John
Hancock to maintain a risk-based capital ratio of not less than 200
percent following the payment and crediting of cash and establishment
of reserves for policy credits called for by the Plan of Reorganization
and the payment of expenses resulting from the transactions
contemplated by the Plan of Reorganization.
6. In addition to providing enhanced capital markets, it is
anticipated that the demutualization will provide the flexibility to
cause John Hancock's non-insurance operations to become direct holdings
of an ``upstream'' holding company. Further, the conversion will enable
John Hancock to use stock options or other equity-based compensation
arrangements in order to attract and retain talented employees.
John Hancock believes these consequences of the conversion will
benefit all of its policyholders. John Hancock further explains that
its insurance policies will remain in force and policyholders will be
entitled to receive the benefits under their policies and contracts to
which they would have been entitled if the Plan of Reorganization had
not been adopted.
7. As noted above, John Hancock will demutualize under
Massachusetts Insurance Law. Section 19E of the Massachusetts
demutualization law establishes an approval process for the
demutualization of a life insurance company organized under
Massachusetts law. Specifically, Section 19E requires that the
demutualization plan be filed with, and approved by, the Massachusetts
Commissioner of Insurance. The Commissioner may approve the
demutalization plan only after notice is given to the insurer, its
directors, officers, employees and policyholders and a hearing on such
plan is held. All persons to whom notice is given have the right to
appear and be heard at the hearing and to present oral or written
comments.10
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\10\ Final approval by the Commissioner is expected to occur on
or about January 15, 2000. The public hearing regarding the proposed
Plan of Reorganization is expected to occur around November 25,
1999.
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After the hearing, John Hancock explains that the Commissioner will
approve the demutualization plan if she determines that the plan is not
prejudicial to the insurer's policyholders or to the ``insuring
public.'' The Commissioner must also determine that the demutualization
plan conforms to the provisions of Section 19E. In pertinent part,
Section 19E requires--
(a) that reasonable notice of and the procedure for vote of the
policyholders have been provided;
(b) that the plan gives each eligible policyholder, in exchange
for his or her membership interests in the insurer, appropriate
consideration determined under a fair and reasonable formula, which
is based upon the insurer's entire surplus as adjusted according to
paragraph 3 of section 19E;
(c) that, subject to certain exceptions, the plan gives each
eligible policyholder a preemptive right to acquire his or her
proportionate part of all of the proposed capital stock of the
insurer within a reasonable time period, and to apply the amount of
his or her consideration to the purchase of such stock, provided
that, under certain circumstances, the Commissioner has the power to
approve a plan which does not include preemptive rights;
(d) that if, applicable, shares are offered to policyholders at
a price not greater than they are offered under the plan to others;
(e) that the plan provides for the payment to each policyholder
of consideration which may consist of cash, securities, a
certificate of contribution, additional life insurance or annuity
benefits, increased dividends or other consideration or any
combination of such forms of consideration;
(f) that the plan, when completed, shall provide for the
converted insurer's paid-in capital stock to be in an amount not
less than the minimum paid-in capital stock and the net cash surplus
required of a new domestic stock insurer upon initial authorization
to transact like kinds of insurance;
(g) that the insurer's management has not, through reduction in
volume of new business written, or cancellation or through any other
means, sought to reduce, limit or affect the number or identity of
the insurer's policyholders to be entitled to participate in the
demutualization plan, or to otherwise secure for individuals
comprising management any unfair advantage through such
demutualization plan; and
(h) if applicable, that the classifications of management and
employee groups to be offered shares not subscribed for by
policyholders in the preemptive offering are reasonable.
Section 19E permits the Commissioner to employ staff personnel and
to engage outside consultants to assist her in determining whether a
demutualization plan meets the requirements of section 19E and any
other relevant provisions of chapter 175 of Massachusetts General Laws.
A decision by the Commissioner to approve a demutualization plan under
section 19E is subject to judicial review in the Massachusetts courts.
In addition to being approved by the Commissioner, John Hancock
represents that the demutualization plan must be approved by the
policyholders of the insurer. In this regard, under section 19E,
policyholders must be provided with notice of a meeting convened for
the purpose of voting on whether to approve the demutualization plan.
Moreover, the demutalization plan must be approved by a vote of not
less than two-thirds of the votes of approximately 3 million
policyholders who may vote in person, by proxy or by mail.11
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11 The notice of the policyholder meeting were mailed during the
week of September 13, 1999. The policyholder meeting is scheduled to
be convened on or about November 30, 1999.
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8. John Hancock represents that it is licensed to transact business
in all fifty states. However, only the State of New York requires that
a foreign insurance company that is planning to demutualize file a copy
of its demutualization plan with state insurance authorities. In this
regard, John Hancock explains that section 1106(i) of the New York
Insurance Law
[[Page 57140]]
[Section 1106(i)] authorizes the Superintendent to review the
demutualization plan of a foreign life insurer licensed in New York and
to specify the conditions that the Superintendent would impose in order
for the foreign insurer to retain its New York license following its
demutualization. Specifically, Section 1106(i) requires that a foreign
life insurer licensed in New York file with the Superintendent a copy
of the demutualization plan at least 90 days prior to the earlier of
(a) the date of any public hearing required to be held on the plan of
reorganization by the insurer's state of domicile and (b) the proposed
date of the demutualization.
If, after examining the plan of reorganization, the Superintendent
finds that the plan is not fair or equitable to the New York
policyholders of the insurer, the Superintendent must set forth the
reasons for his findings. In addition, the Superintendent must notify
the insurer and its domestic state insurance regulator of his findings
and his reasons for such findings and advise of any requirements he
considers necessary for the protection of current New York
policyholders in order to permit the insurer to continue to conduct
business in New York as a stock life insurer after the demutualization.
In the event the Superintendent has any objections to the Plan of
Reorganization, John Hancock represents that it will amend the Plan so
that it will meet the approval of the Superintendent or otherwise, work
out a satisfactory solution with the Superintendent.
9. John Hancock's Plan of Reorganization will provide for Eligible
Policyholders to receive common stock of the Holding Company, cash or
policy credits as consideration for the termination of their membership
interests in the mutual company, which interests will be extinguished
as a result of the demutualization. For this purpose, an Eligible
Policyholder is essentially a policyholder whose name appears on the
conversion date on the insurer's records as owner of a policy under
which there is a right to vote. On both the December 31 immediately
preceding the conversion date and the date the insurer's board of
directors first votes to convert to stock form, the policy must be in
full force for its full basic benefits with no unpaid premiums or
consideration at the expiration of any applicable grace period.
Alternatively, the policy must be continued under a nonforfeiture
benefit. In any event, the insurance policy must continue to be
eligible for participation in the insurer's annual distribution of
divisible surplus.
Solely for purposes of calculating the amount of Holding Company
stock, cash or policy credits that will be given to an Eligible
Policyholder in exchange for his or her membership interest, John
Hancock will allocate to each Eligible Policyholder (but not
necessarily issue) shares of Holding Company stock equal to the sum of:
(a) A fixed component of consideration consisting of 17 shares of
Holding Company stock; and (b) if applicable, a variable component of
consideration based on the contributions to surplus made by the
Eligible Policyholder's in-force policies. The allocation methodology
must be fair and reasonable, a finding that the Commissioner is
required to make after the hearing. The allocation formulas are also
subject to review by the Superintendent.
10. Section 7.3 of John Hancock's Plan of Reorganization provides
that an Eligible Policyholder will be entitled to receive Holding
Company stock if such Policyholder affirmatively elects, on a form
provided to such Eligible Policyholder that has been properly completed
and received by John Hancock prior to the date of the special
policyholder meeting, a preference to receive stock. Holding Company
stock will also be issued to an Eligible Policyholder, regardless of
such Policyholder's election, to the extent funds available are
inadequate to pay cash to all such Eligible Policyholders who will be
receiving the same number of shares.12
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\12\ John Hancock's Plan of Reorganization provides that, as an
optional method, each non-trusteed, qualified pension or profit
sharing plan that is entitled to receive Holding Company stock may
direct John Hancock to place the stock received as a result of the
demutualization in a master trust (the Master Trust) established by
John Hancock for this express purpose. It is represented that the
John Hancock Plans will not participate in the Master Trust because
they will have their own trusts in place.
The Master Trust, which will be incorporated through the
Adoption Agreement as part of each participating Plan, will have an
indefinite duration. The trustee (the Trustee) of the Master Trust
will be independent of John Hancock. The Trustee will hold the
shares of Holding Company stock for the benefit of the participating
Plan. The stock will remain in the Master Trust until the Plan
fiduciary instructs the Trustee either to sell the stock on the open
market or to distribute the stock to the Plan. A participating Plan
may, under no circumstances, direct the Trustee to sell its shares
of Holding Company stock to the Holding Company. Each Plan will be
responsible for its share of the fees and expenses of the Master
Trust as well as for the payment of brokerage commissions incurred
in connection with the sale of Holding Company Stock after the
termination of the commission-free sales program described in
Representation 13 provided such program has been available to the
Plan.
It is anticipated that all stock dividends that are received by
a Plan will be held in the Master Trust subject to withdrawal by the
Plan at any time. However, cash dividends will be paid by the
Trustee to the applicable Plan. It is also anticipated that all
voting rights will be passed through to the participating Plans.
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In addition, Section 7.3 of John Hancock's Plan of Reorganization
states that an Eligible Policyholder will be entitled to receive cash
in lieu of allocable Holding Company stock where such Eligible
Policyholder's address for mailing purposes, as shown on John Hancock's
records: (a) Is an address where mail is undeliverable or is deemed to
be undeliverable in accordance with guidelines approved by the
Commissioner; or (b) is located outside of the United States. Further,
an Eligible Policyholder will be entitled to receive cash instead of
allocable Holding Company stock to the extent that his or her insurance
policy is subject to a lien or bankruptcy proceeding.
Finally, Section 7.3 of John Hancock's Plan of Reorganization
provides that an Eligible Policyholder will receive policy credits
instead of allocable Holding Company stock with respect to any policy
that is: (a) An individual retirement annuity contract within the
meaning of section 408(b) of the Code or a taxsheltered annuity
contract within the meaning of section 403(b) of the Code; (b) an
individual annuity contract that has been issued pursuant to a plan
qualified plan under section 401(a) of the Code directly to the plan
participant; or (c) an individual life insurance policy that has been
issued pursuant to a plan qualified under section 401(a) of the Code
directly to the plan participant.
The cash or policy credits will have a value equal the greater of
the price per share of Common Stock in the IPO, which will occur at the
time of the demutualization or the average closing price of the Common
Stock as reflected on the New York Stock Exchange for the first twenty
days of trading, subject to a maximum of 120 percent of the initial
stock price.13 This will ensure that
[[Page 57141]]
Eligible Policyholders who receive cash or policy credits will have an
opportunity to benefit from any potential appreciation in the stock
price during the initial trading period.
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\13\ John Hancock represents that under paragraph 5 of Section
19E of Massachusetts Insurance Law, the policyholder eligible to
participate in the distribution of Holding Company stock, cash or
policy credits resulting from the Plan of Reorganization is ``the
person whose name appears * * * on the insurer's records as owner''
of the policy. John Hancock further represents that an insurance or
annuity policy that provides benefits under an employee benefit
plan, typically designates the employer that sponsors the plan, or a
trustee acting on behalf of the plan, as the owner of the policy. In
regard to insurance or annuity policies that designate the employer
or trustee as owner of the policy, John Hancock represents that it
is required under the foregoing provisions of Massachusetts
Insurance Law and the Plan of Reorganization to make distributions
resulting from such Plan to the employer or trustee as owner of the
policy, except as provided below.
Notwithstanding the foregoing, John Hancock's Plan of
Reorganization provides a special rule applicable to an insurance
policy issued to a trust established by John Hancock. This rule
applies whether or not the trust, or any arrangement established by
any employer participating in the trust, constitutes an employee
benefit plan subject to the Act. Under this special rule, the holder
of each individual ``certificate'' issued in connection with the
insurance policy is treated as the policyholder and owner for all
purposes under the Plan of Reorganization, including voting rights
and the distribution of consideration. The trustee of any such trust
established by John Hancock will not be considered a policyholder or
owner and will not be eligible to vote or receive consideration.
In general, it is the Department's view that, if an insurance
policy (including an annuity contract) is purchased with assets of
an employee benefit plan, including participant contributions, and
if there exist any participants covered under the plan (as defined
at 29 CFR 2510.3-3) at the time when John Hancock incurs the
obligation to distribute Holding Company stock, cash or policy
credits, then such consideration would constitute an asset of such
plan. Under these circumstances, the appropriate plan fiduciaries
must take all necessary steps to safeguard the assets of the plan in
order to avoid engaging in a violation of the fiduciary
responsibility provisions of the Act.
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One or more fiduciaries of a Plan which is independent of John
Hancock will receive the consideration and neither John Hancock nor any
of its affiliates will exercise discretion or provide ``investment
advice,'' as that term is defined in 29 CFR 2510.3-21(c) with respect
to any such acquisition. Further, no Eligible Policyholder will pay
brokerage commissions or fees in connection with the receipt of Holding
Company stock.
11. As noted above, in the case of the John Hancock Plans, U.S.
Trust will represent their interests. U.S. Trust will determine whether
the Plan of Reorganization is in the best interest of such Plan and
their participants and beneficiaries; vote at the special meeting of
Eligible Policyholders on the proposal to approve or not to approve the
Plan of Reorganization. If the vote is to approve the Plan of
Reorganization, U.S. Trust will decide whether the affected John
Hancock Plan should receive Holding Company stock or cash (should the
latter option be available) and receives such consideration on behalf
of the affected John Hancock Plan; monitor, on behalf of the affected
John Hancock Plan, the acquisition and holding of the shares of any
Holding Company stock received; make determinations on behalf of the
John Hancock Plan with respect to voting and the continued holding of
the shares of Holding Company stock received by such Plan; dispose of
any Holding Company stock held by the John Hancock Plan which exceeds
the limitation of section 407(a)(2) of the Act as reasonably as
practicable but in no event later than six months following the
effective date of the demutualization; and take all actions that are
necessary and appropriate to safeguard the interests of the John
Hancock Plans. Further, U.S Trust will provide the Department with a
complete and detailed final report as it relates to the John Hancock
Plans prior to the effective date of the demutualization. Finally, U.S.
Trust states that it has conducted a preliminary review of John
Hancock's Plan of Reorganization and it sees nothing in the Plan that
would preclude the Department of Labor from proposing the requested
exemption.
12. The Plan of Reorganization also provides for the establishment
of a commission-free sales program whereby Eligible Policyholders who
receive between 99 or fewer shares of Holding Company stock will be
given the opportunity to sell, at prevailing market prices, all of
their Holding Company stock received without the payment of any
brokerage commissions. The commission-free sales program will
concurrently offer Eligible Policyholders the opportunity to purchase
an additional number of shares necessary to bring their respective
total number of shares up to 100. Again, Eligible Policyholders will
not be required to pay any brokerage commissions or similar fees to
John Hancock. Moreover, John Hancock and its affiliates will not
provide ``investment advice'' as described in 29 CFR 2510.3-21(c) with
regard to the operation of the program. The commission-free sales
program will commence on the first business day after the six month
anniversary of the effective date of the reorganization and will
continue for 90 days thereafter. Such program may be extended with the
approval of the Commissioner if the Board of Directors of the Holding
Company determines such extension would be appropriate and in the best
interest of the Holding Company and its stockholders.
13. 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 Plan of Reorganization will be implemented in accordance
with stringent procedural and substantive safeguards that are being
imposed under Massachusetts law and will be subject to the review and
supervision of the Commissioner.
(b) The Commissioner will review the terms of the options that are
provided to Eligible Policyholders of John Hancock as part of such
Commissioner's review of the Plan of Reorganization following a
determination that such Plan of Reorganization is not prejudicial to
all Eligible Policyholders.
(c) The Plan of Reorganization will be filed with the New York
Superintendent who will determine whether the Plan of Reorganization is
fair and equitable to Eligible Policyholders from New York.
(d) The Plan of Reorganization will receive the concurrence of both
the Commissioner and the Superintendent before it is implemented.
(e) One or more independent Plan fiduciaries will have an
opportunity to determine whether to vote to approve the terms of the
Plan of Reorganization and will be solely responsible for all such
decisions after receiving full and complete disclosure.
(f) The proposed exemption will allow Eligible Policyholders that
are Plans to acquire Holding Company stock, cash or policy credits in
exchange for their membership interests in John Hancock and neither
John Hancock nor its affiliates will exercise any discretion or provide
``investment advice,'' as that term is defined in 29 CFR 2510.3-21(c)
with respect to such acquisition.
(g) No Eligible Policyholder will pay any brokerage commissions or
fees in connection with such Eligible Policyholder's receipt of Holding
Company stock or with respect to the implementation of the commission-
free sales and purchase programs.
(h) The Plan of Reorganization will not change premiums or reduce
policy benefits, values, guarantees or other policy obligations of John
Hancock to its policyholders and contractholders.
Notice to Interested Persons
John Hancock will provide notice of the proposed exemption to
Eligible Policyholders that are Plans within 14 days of the publication
of the notice of pendency in the Federal Register. Such notice will be
provided to interested persons by first class mail and will include a
copy of the notice of proposed exemption as published in the Federal
Register as well as a supplemental statement, as required pursuant to
29 CFR 2570.43(b)(2), which shall inform interested persons of their
right to comment on the proposed exemption. Comments with respect to
the notice of proposed exemption are due within 44 days of the
publication of this pendency notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
[[Page 57142]]
Bankers Trust Company (BT), Located in New York, NY
[Application No. D-10756]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Section I.--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: (1) The lending of securities to affiliates of BT, a wholly
owned subsidiary of Deutsche Bank AG (DB), which are: (i) Either banks,
supervised by the United States or by a State within the United States,
or broker-dealers registered under the Securities Exchange Act of 1934
(the 1934 Act); or (ii) certain foreign affiliates (the Foreign
Affiliates) of BT and DB which are broker-dealers or banks in
jurisdictions specified in this proposed exemption (collectively, the
Affiliated Borrowers), by employee benefit plans (the Client Plans),
including commingled investment funds holding Client Plan assets, for
which BT, DB, or either of their current or future affiliates or
successors acts as securities lending agent (or sub-agent) (the DB
Lending Agent); and (2) the receipt of compensation by the DB Lending
Agent in connection with these transactions, provided the general
conditions set forth below in Section II are met.
Section II.--General Conditions
(a) For each Client Plan, neither the DB Lending Agent nor an
Affiliated Borrower, nor an affiliate of either, has or exercises
discretionary authority or control with respect to the investment of
Client Plan assets involved in the transaction, or renders investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets.
(b) Any arrangement for a DB Lending Agent to lend Client Plan
securities to an Affiliated Borrower in either an agency or sub-agency
capacity is approved in advance by a Client Plan fiduciary who is
independent of the DB Lending Agent.14 In this regard, the
independent Client Plan fiduciary also approves the general terms of
the securities loan agreement (the Loan Agreement) between the Client
Plan and the Affiliated Borrowers, although the specific terms of the
Loan Agreement are negotiated and entered into by the DB Lending Agent
and the DB Lending Agent acts as a liaison between the lender and the
borrower to facilitate the lending transaction.
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\14\ The Department, herein, is not providing exemptive relief
for securities lending transactions engaged in by primary lending
agents, other than the DB Lending Agent, beyond that provided
pursuant to Prohibited Transaction Exemption (PTE) 81-6 (46 FR 7527,
January 23, 1981, as amended at 52 FR 18754, May 19, 1987) and PTE
82-63 (47 FR 14804, April 6, 1982).
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(c) The terms of each loan of securities by a Client Plan to the
Affiliated Borrowers is at least as favorable to such Client Plans as
those of a comparable arm's length transaction between unrelated
parties.
(d) A 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 the Affiliated Borrowers will deliver
securities identical to the borrowed securities (or the equivalent in
the event of reorganization, recapitalization or merger of the issuer
of the borrowed securities) to the Client Plan within: (1) The
customary delivery period for such securities; (2) five business days;
or (3) the time negotiated for such delivery of by the Client Plan and
the Affiliated Borrowers, whichever is less.
(e) The Client Plan receives from the Affiliated Borrower (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 the Affiliated Borrower, 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 person other than the DB Lending Agent or
an affiliate thereof, or any combination thereof, or other collateral
permitted under PTE 81-6, as it may be amended or superseded.
(f) As of the close of business on the preceding business day, the
fair market value of the collateral initially equals at least 102
percent of the market value of the loaned securities and, if the market
value of the collateral falls below 100 percent, the applicable
Affiliated Borrower delivers additional collateral on the following day
such that the market value of the collateral again at least equal to
102 percent.
(g) Prior to entering into the lending program, the Affiliated
Borrower furnishes the DB Lending Agent its most recently available
audited and unaudited statements, which are, in turn, provided to a
Client Plan, as well as a representation by such Affiliated Borrower,
that as of each time it borrows securities, there has been no material
adverse change in its financial condition since the date of the most
recently-furnished statement that has been disclosed to such Client
Plan; provided, however, that in the event of a material adverse
change, the DB Lending Agent does not make any further loans to such
Affiliated Borrower unless an independent fiduciary of the Client Plan
is provided notice of any material adverse change and approves the loan
in view of the changed financial condition.
(h) In return for lending securities, the Client Plan either --
(1) Receives a reasonable fee, which is related to the value of the
borrowed securities and the duration of the loan; or
(2) Has the opportunity to derive compensation through the
investment of cash collateral. (Under such circumstances, the Client
Plan may pay a loan rebate or similar fee to an Affiliated Borrower, if
such fee is not greater than the fee the Client Plan would pay in a
comparable arm's length transaction with an unrelated party.)
(i) All procedures regarding the securities lending activities
conform to the applicable provisions of PTE 81-6 and PTE 82-63 as such
class exemptions may be amended or superseded as well as to applicable
securities laws of the United States or the jurisdiction in which the
Foreign Affiliate is domiciled, as appropriate.
(j) The DB Lending Agent or an affiliate which is domiciled in the
United States will indemnify and hold harmless each lending Client Plan
in the United States against any shortfall in the collateral, as set
forth in the applicable lending agreement (the Loan Agreement), plus
interest and any transaction costs incurred (including attorney's fees
of the Client Plan arising out of the default on the loans or the
failure to indemnify properly under this provision) which the Client
Plan may incur or suffer directly arising out of the lending of
securities of such Client Plan to such Affiliated Borrower, to the
extent permitted by law.15 In the event that an Affiliated
Borrower defaults on a loan, the DB Lending Agent will liquidate the
loan collateral to purchase identical securities for the Client Plan.
If the collateral is insufficient to
[[Page 57143]]
accomplish such purchase, the DB Lending Agent or the applicable
affiliate will indemnify the Client Plan for any shortfall in the
collateral, as set forth in the Loan Agreement, plus interest on such
amount and any transaction costs incurred (including attorney's fees of
the Client Plan arising out of the default on the loans or the failure
to indemnify properly under this provision). Alternatively, if such
identical securities are not available on the market, the DB Lending
Agent or the applicable affiliate will pay the Client Plan cash equal
to: (1) The market value of the borrowed securities as of the date they
should have been returned to the Client Plan, plus (2) all the accrued
financial benefits derived from the beneficial ownership of such loaned
securities as of such date, plus (3) interest from such date to the
date of payment.
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\15\ Where the law prohibits such indemnification by the DB
Lending Agent, the Affiliated Borrower will provide the identical
indemnification.
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(k) The Client Plan receives the equivalent of all distributions
made to holders of the borrowed securities during the term of the loan,
including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to purchase
additional securities, or other distributions.
(l) The DB Lending Agent provides to Client Plans, prior to any
Client Plan's approval of the lending of its securities to an
Affiliated Borrower, copies of the notice of proposed exemption (the
Notice) and the final exemption.
(m) Each Client Plan receives monthly reports with respect to its
securities lending transactions, including, but not limited to, the
information described in Representation 31 of the Notice, so that an
independent fiduciary of the Client Plan may monitor such transactions
with Affiliated Borrowers.
(n) Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to
Affiliated Borrowers; provided, however, that--
(1) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization (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 a DB Lending Agent, 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 a DB Lending Agent, 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.
(o) 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 will be to unrelated
borrowers.
(p) In addition to the above, all loans involving a Foreign
Affiliate have the following supplemental requirements:
(1) As applicable, such Foreign Affiliate is registered as a
broker-dealer or bank with--
(i) The Securities and Futures Authority (the SFA) or the Financial
Services Authority (the FSA) in the United Kingdom;
(ii) The Deutsche Bundesbank and/or the Federal Banking Supervisory
Authority, i.e., der Bundesaufsichsamt fuer das Kreditwesen (the BAK)
or the Bundesaufsichtsamt fur den Wertpapierhandel (the BAWe) in
Germany;
(iii) The Ministry of Finance (the MOF) and/or the Tokyo Stock
Exchange in Japan;
(iv) The Ontario Securities Commission (the OSC) and/or the
Investment Dealers Association (the IDA), or the Office of the
Superintendent of Financial Institutions (the OSFI) in Canada;
(v) The Swiss Federal Banking Commission in Switzerland; and
(vi) The Australian Prudential Regulation Authority (APRA) or the
Australian Securities and Investments Commission (ASIC), and/or the
Australian Stock Exchange Limited (ASEL) in Australia.
(2) Such broker-dealer or bank is in compliance with all applicable
provisions of Rule 15a-6 (17 CFR 240.15a-6) under 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 (unless an
applicable exemption provides otherwise);
(4) All collateral is held in the United States (unless an
applicable exemption provides otherwise) and the situs of the
securities Loan Agreements are maintained in the United States under an
arrangement that complies with the indicia of ownership requirements
under section 404(b) of the Act and the regulations promulgated under
29 CFR 2550.404(b)-1; and
(5) Each Foreign Affiliate provides the DB Lending Agent a written
consent to service of process in the United States and to the
jurisdiction of the courts of the United States for any civil action or
proceeding brought in respect of the securities lending transaction,
which consent provides that process may be served on such borrower by
service on the DB Lending Agent.
(q) The DB Lending Agent and its affiliates maintain, or cause 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 (r)(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 the DB Lending
Agent and/or its affiliates, the records are lost or
[[Page 57144]]
destroyed prior to the end of the six year period; and
(2) No party in interest other than the DB Lending Agent and/or its
affiliates shall be subject to the civil penalty that may be assessed
under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are
not available for examination as required below by paragraph (r)(1).
(r)(1) Except as provided in subparagraph (r)(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 (q) 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);
(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.
(r)(2) None of the persons described above in paragraphs
(r)(1)(ii)-(r)(1)(iv) of this paragraph (r)(1) are authorized to
examine the trade secrets of the DB Lending Agent or commercial or
financial information which is privileged or confidential.
III--Definitions
For purposes of this proposed exemption,
(a) The term ``affiliate'' means any entity now or in the future,
directly or indirectly controlling, controlled by or under common
control with BT, DB or their successors.
(b) The term ``Affiliated Borrower'' means an affiliate of BT or DB
that is a bank, as defined in section 202(a)(2) of the Investment
Advisers Act of 1940 (the Advisers Act), that is supervised by the
United States or a State, or a broker-dealer registered under the 1934
Act, or any Foreign Affiliate.
(c) The term ``Foreign Affiliate'' means an affiliate of BT or DB
that is a broker-dealer or bank that is supervised by: (1) The SFA or
the FSA in the United Kingdom; (2) the Deutsche Bundesbank and/or the
BAK, or the BAWe in Germany; (3) the MOF and/or the Tokyo Stock
Exchange in Japan; (4) the OSC, the IDA, and/or OSFI in Canada; (5) the
Swiss Federal Banking Commission in Switzerland; and (6) APRA, ASIC,
and/or ASEL in Australia.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of April 9, 1999.
Summary of Facts and Representations
1. BT (also referred to herein as ``the Applicant'') is a New York
banking corporation and a leading commercial bank, whose parent,
Bankers Trust Corporation, is wholly owned by DB, a banking corporation
organized under the laws of the Federal Republic of Germany and the
largest banking institution in the world, based on assets.
2. The Applicant provides a wide variety of banking, fiduciary,
recordkeeping, custodial, brokerage and investment services to
corporations, institutions, governments, employee benefit plans,
governmental retirement plans and private investors. Its affiliates
actively engage in the borrowing of securities. All borrowings by U.S.
broker-dealer affiliates from pension plans conform to the Federal
Reserve Board's Regulation T. Since its merger with DB, the Applicant
has Foreign Affiliates worldwide that are engaged in the business of
trading securities. Among the Applicant's current affiliated banks and
broker-dealers are Foreign Affiliates based in--
(a) The United Kingdom (Affiliated Borrower/U.K.), which includes,
but is not be limited to, Bankers Trust International PLC and the
London Branch of Deutsche Bank;
(b) Japan (Affiliated Borrower/Japan), which includes, but is not
be limited to, Japan Bankers Trust Ltd. and the Tokyo Branch of
Deutsche Bank;
(c) Germany (Affiliated Borrower/Germany), which includes, but is
not limited to, Deutsche Bank;
(d) Australia (Affiliated Borrower/Australia), which includes, but
is not limited to, BT Australia Limited and the Sydney Branch of
Deutsche Bank;
(e) Canada (Affiliated Borrower/Canada), which includes, but is not
limited to, Deutsche Bank Canada and Deutsche Bank Securities Limited;
and
(f) Switzerland (Affiliated Borrower/Switzerland), which includes,
but is not limited to, Deutsche Bank (Suisse) S.A.
3. The Applicant and its affiliates actively engage in the
borrowing and lending of securities, with daily outstanding loan volume
averaging billions of dollars. The Affiliated Borrowers utilize
borrowed securities to satisfy their trading requirements or to re-lend
to other broker-dealers and others who need a particular security for
various periods of time.
4. The Applicant's U.S. affiliates are either U.S. registered
broker-dealers or banks supervised by the U.S. or a State. Affiliated
Borrower/U.K. is either authorized to conduct an investment business in
and from the United Kingdom as a broker-dealer regulated by the SFA or
as a deposit-taking institution or merchant bank regulated by the FSA.
Affiliated Borrower/Japan is authorized to conduct an investment
business in Japan as a broker-dealer or bank regulated by the MOF and/
or the Tokyo Stock Exchange. Affiliated Borrower/Switzerland is
authorized to conduct an investment business as a broker-dealer or bank
in Switzerland by the Swiss Federal Banking Commission. Affiliated
Borrower/Germany is authorized to conduct business in Germany as a bank
or broker-dealer by the Deutsche Bundesbank and/or the BAK, or the
BAWe.16 Affiliated Borrower/Australia is either authorized
to conduct an investment business in Australia as a bank or broker-
dealer by the APRA, the ASIC and/or the Australian Stock Exchange
Limited. Affiliated Borrower/Canada is authorized to conduct an
investment business in Canada as a bank or broker-dealer by the OSC
and/or the IDA or the OSFI.
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\16\ The BAWe is a German federal agency that enforces German
securities laws. Each German state has a state government agency
which regulates broker-dealers operating in that state. All broker-
dealers report directly to the appropriate state agency by filing,
within four months after the end of the fiscal year, audited
financial statements supplemented by quarterly earnings reports. In
addition, each German stock exchange admits broker-dealers to
membership and may revoke such membership. The stock exchanges limit
broker-dealer member transactions based on core capital or the
equivalent thereof, and additional security provided, based on their
exposure to risk from transactions on the exchange. Any change in
core capital having the effect of reducing the transaction limit
must be reported to the stock exchange immediately.
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5. Although not registered with the United States SEC as broker-
dealers, the Foreign Affiliates that are broker-dealers are subject to
the rules, regulations and membership requirements of their respective
governmental regulators and/or the self-regulatory organizations listed
above, 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 share a common objective: the protection of the
investor by the regulation of the securities industry. While these
rules and regulations vary from country to country, they require each
firm which employs registered representatives or registered traders to
have a tangible net worth and be able to meet their obligations as they
may fall
[[Page 57145]]
due. In addition, these rules and regulations set forth comprehensive
financial resource and reporting/disclosure rules regarding capital
adequacy. Further, to demonstrate capital adequacy, the rules may
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 respective regulators at any time.
Finally, these rules and regulations impose potential fines and
penalties on broker-dealers which establish a comprehensive
disciplinary system.
6. Similarly, the banks comprising the Foreign Affiliates are
subject to rules and regulations of their respective governmental
regulators. For example, Affiliated Borrower/U.K. banks are subject to
regulation in the United Kingdom by the FSA, the successor to the Bank
of England. The FSA issues licenses to banks in the United Kingdom,
issues directives to address violations by or irregularities involving
banks, requires information from a bank or its auditors regarding
supervisory matters and revokes bank licenses. In addition, the FSA has
established procedures for monitoring the activities of the DB Lending
Agent and its affiliates in the United Kingdom through various
regulatory standards. Among those standards are requirements for
adequate internal controls, oversight and administration. On a
recurring basis, the DB Lending Agent and its affiliates will be
required to provide the FSA with information regarding its activities
in the United Kingdom, profit and loss, balance sheet, large exposures,
foreign exchange exposures and country risk exposures. The Board of
Directors of the Federal Reserve System in the United States or the BAK
in Germany supervises the DB Lending Agent and its affiliates with
respect to capital adequacy.
In addition, the APRA, which has taken over the bank supervisory
duties of the Reserve Bank of Australia, licenses and regulates
Affiliated Borrower/Australia locally-incorporated banks. The APRA has
the power to issue and revoke bank licenses. In addition, the 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. The APRA has established procedures for monitoring
the activities of Affiliated Borrower/Australia banks in Australia
through various statutory and regulatory standards. Among those
standards are requirements for capital adequacy, internal controls,
oversight and administration. On a recurring basis, Affiliated
Borrower/Australia banks that are locally-incorporated will be required
to provide the APRA with information regarding its activities in
Australia, profit and loss, balance sheets and large exposures.
The APRA's licensing and supervision of Affiliated Borrower/
Australia foreign bank branches is similar to that of locally-
incorporated banks. While the 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 either the Board of Governors of the Federal
Reserve System in the United States or the BAK in Germany.
Further, banks comprising Affiliated Borrower/Canada are subject to
the rules of the OSFI, an entity that licenses and regulates Affiliated
Borrower/Canada banks established in Canada as deposit-taking
subsidiaries. The OSFI licenses banks, issues directives to address
violations by or irregularities involving the bank, requires
information from the bank or its auditors regarding supervisory matters
and revokes bank licenses.
In addition, the OSFI has established procedures for monitoring the
activities of Affiliated Borrower/Canada banks in Canada through
various statutory and regulatory standards. Among those standards are
requirements for capital adequacy, adequate internal controls,
oversight and administration. On a recurring basis, Affiliated
Borrower/Canada banks will be required to provide the OSFI with
information regarding its activities in Canada, profit and loss,
balance sheet, large exposures and foreign exchange exposures.
Where a foreign bank establishes a branch in Canada, the Minister
of Finance authorizes the establishment of the branch and the OSFI
licenses the bank branch to carry on business and may revoke the
license. The bank branch must 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 are subject
to a yearly audit by an external auditor and examination by the
OSFI.17
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\17\ For a description of the Bundesbank and BAK regime of
regulation applicable to banks comprising Affiliated Borrower/
Germany, refer to Representation 2 of the Summary of Facts and
Representations in the Notice (63 FR 53703, 53706, October 6, 1998)
for Salomon Smith Barney, Inc. Similarly, for descriptions of the
Swiss Federal Banking Commission and the MOF, which regulate both
banks and broker-dealers comprising Affiliated Borrower/Switzerland
and Affiliated Borrower/Japan, respectively, see Representations 3
and 4 of the Notice for the Union Bank of Switzerland and UBS
Securities, LLC (63 FR 15452, 15455, March 31, 1998).
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7. Aside from the protections afforded by the regulators in each
foreign jurisdiction, the Applicant represents that the Foreign
Affiliates 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. Specifically, Paragraph (a)(4)(i) of
Rule 15a-6 provides an exemption from U.S. broker-dealer registration
for a foreign broker-dealer that effects transactions in securities
with or for, or induces or attempts to induce the purchase or sale of
any security by ``a registered broker or dealer, whether the registered
broker or dealer is acting as principal for its own account or as agent
for others, or a bank acting in a broker-dealer capacity as permitted
by U.S. law.'' 18 In engaging in borrowing activities, each
Foreign Affiliate, relying on the Paragraph (a)(4)(i) exemption will be
interacting solely with the Applicant, each of which is such a
``registered broker or dealer'' or ``bank,'' and will not be
interacting with the Applicant's underlying Client Plans.
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\18\ 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 15a-6(b)(3) 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
Applicant is willing to represent that its Foreign Affiliates will
comply with the applicable provisions and relevant SEC
interpretations and amendments of Rule 15a-6.
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Paragraph (a)(3) of 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.
[[Page 57146]]
institutional investor,'' as defined in Rule 15a-6(b)(7), includes an
employee benefit plan within the meaning of the Employee Retirement
Income Security Act of 1974 (the Act) if (a) the investment decision is
made by a plan fiduciary, as defined in section 3(21) of the Act, which
is either a bank, savings and loan association, insurance company or
registered investment adviser, or (b) the employee benefit plan 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.19 The term ``major U.S. major institutional
investor'' is defined in Rule 15a-6(b)(4) as a person that is a U.S.
institutional investor that has total assets in excess of $100 million
or an investment adviser registered under Section 203 of the Advisers
Act that has total assets under management in excess of $100
million.20
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\19\ To the extent permitted by applicable U.S. securities law,
the Foreign Affiliates may rely on a U.S. bank or trust company to
perform this role.
\20\ 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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8. The Applicant represents that under Rule 15a-6, a foreign
broker-dealer that, in reliance on the Paragraph (a)(3) exemption,
induces or attempts to induce the purchase or sale of any security by a
U.S. institutional or 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 through which the
transactions with the U.S. institutional and major U.S.
institutional investors are effected to (among other things):
(1) Effect the transactions, other than negotiating their terms;
(2) Issue all required confirmations and statements;
(3) As between the foreign broker-dealer and the U.S. registered
broker-dealer, extend or arrange for the extension of credit in
connection with the transactions;
(4) Maintain required books and records relating to the
transactions, including those required by Rules 17a-3 (Records to be
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved
by Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
(5) Receive, deliver and safeguard funds and securities in
connection with the transactions on behalf of the U.S. institutional
investor or major U.S. institutional investor in compliance with
Rule 15c3-3 of the 1934 Act (Customer Protection--Reserves and
Custody of Securities); 21 and
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\21\ 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 an Affiliated Borrower. The Applicant 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 institutional
investors.22
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\22\ 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.
9. As the DB Lending Agent, the Applicant provides securities
lending services on an agency basis to institutional clients. The DB
Lending Agent, pursuant to authorization from its client, will
negotiate the terms of loans with borrowers pursuant to a client-
approved form of Loan Agreement and will act as a liaison between the
lender (i.e., the Client Plan and its custodian) and the borrower to
facilitate the lending transaction. No loans of futures contracts will
be involved. The DB Lending Agent will have responsibility for
monitoring receipt of all required collateral and marking such
collateral to market daily so that adequate levels of collateral are
maintained. The DB Lending Agent also will monitor and evaluate on a
continuing basis the performance and creditworthiness of the borrowers.
The DB Lending Agent may or may not act as a custodian or directed
trustee with respect to the client's portfolio of securities being
loaned. The DB Lending Agent may be authorized, from time to time, by a
Client Plan to receive and hold pledged collateral and invest cash
collateral pursuant to guidelines established by such Client Plan. All
of the DB Lending Agent's procedures for lending securities will be
designed to comply with the applicable conditions of PTE 81-6 and PTE
82-63 (as such PTEs may be amended or superseded).23
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\23\ 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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10. The DB Lending Agent may be retained occasionally by other
primary securities lending agents to provide securities lending
services in a sub-agent capacity with respect to portfolio securities
of clients of such primary lending agents. As securities lending sub-
agent, the DB Lending Agent's role under the lending transactions
(i.e., negotiating the terms of loans with borrowers pursuant to a
client-approved form of Loan Agreement and monitoring receipt of, and
marking to market, required collateral) parallels those under lending
transactions for which the DB Lending Agent acts as primary lending
agent on behalf of its clients.24
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\24\ 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 the DB Lending
Agent and its affiliates, beyond that provided by PTEs 81-6 and 82-
63.
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11. When a loan is collateralized with cash, the cash will be
invested for the benefit and at the risk of the Client Plan, and
resulting earnings (net of a rebate to the borrower) comprise the
compensation to the Client Plan in respect of such loan, which is split
between the Client Plan and the securities lending agent. Where
collateral consists of obligations other than cash, the borrower pays a
fee (loan premium), which is split between the Client Plan and the
securities lending agent.
12. Accordingly, the Applicant requests an administrative exemption
from the Department with respect to: (a) The lending of securities
owned by certain Client Plans for which the DB Lending Agent will serve
as securities lending agent or sub-agent to its Affiliated Borrowers
(both current and future) 25 following disclosure of their
affiliation with the DB Lending Agent; and (b) the receipt of
compensation by the DB Lending Agent in connection
[[Page 57147]]
with such transactions. For each Client Plan, neither the DB Lending
Agent nor any affiliate will have discretionary authority or control or
render investment advice over Client Plans' decisions concerning the
acquisition or disposition of securities available for loan. The DB
Lending Agent's discretion will be limited to activities such as
negotiating the terms of the securities loans with the Affiliated
Borrowers 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, the DB Lending Agent would
have discretion to lend Client Plan securities to an Affiliated
Borrower, and because the Affiliated Borrower is an affiliate of the DB
Lending Agent, the lending of securities to Affiliated Borrowers by a
Client Plan for which the DB Lending Agent serves as securities lending
agent (or sub-agent) may be outside the scope of relief provided by PTE
81-6 and PTE 82-63. Moreover, loans to the Foreign Affiliates would be
outside of the relief granted in PTE 81-6 (because it limits its relief
to banks and U.S. registered broker-dealers). 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 proposed lending program
will incorporate the conditions contained in PTE 81-6 and PTE 82-63 and
will be in compliance with all securities laws of the United States, to
the extent applicable.
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\25\ For the sake of simplicity, future references to the DB
Lending Agent's performance of services as securities lending agent
should be deemed to include its parallel performance as securities
lending sub-agent and references to Client Plans should be deemed to
refer to Plans for which the DB Lending Agent is acting as sub-agent
with respect to securities lending activities, unless otherwise
indicated specifically or by the context of the reference.
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13. Where a DB Lending Agent is the direct securities lending
agent, a fiduciary of a Client Plan which is independent of the DB
Lending Agent will sign a securities lending agency agreement with the
DB Lending Agent (the Agency Agreement) before the Client Plan
participates in a securities lending program. The Agency Agreement and
the explanatory material accompanying such agreement will, among other
things, describe the operation of the lending program, prescribe the
form of securities Loan Agreement to be entered into on behalf of the
Client Plan with borrowers, specify the securities which are available
to be lent, required margin and daily marking-to-market, and provide a
list of permissible borrowers, including the Affiliated Borrowers. The
Agency Agreement will also set forth the basis and rate for the DB
Lending Agent's compensation from the Client Plan for the performance
of securities lending services.
14. The Agency Agreement will contain provisions to the effect that
if the Affiliated Borrowers are designated by the Client Plan as
approved borrowers: (a) The Client Plan will acknowledge that the
Affiliated Borrowers are affiliates of the DB Lending Agent; and (b)
the DB Lending Agent will represent to the Client Plan that each and
every loan made to the Affiliated Borrowers on behalf of the Client
Plan will be at market rates which are no less favorable to the Client
Plan than a loan of such securities, made at the same time and under
the same circumstances, to an unaffiliated borrower.
15. When the DB Lending Agent is lending securities under a sub-
agency arrangement, the primary lending agent will enter into a
securities lending agency agreement (the Primary Lending Agreement)
with a fiduciary of a Client Plan who is independent of such primary
lending agent, the DB Lending Agent or an Affiliated Borrower, before
the Client Plan participates in the securities lending program. The
primary lending agent will be unaffiliated with the DB Lending Agent or
its affiliates. The DB Lending Agent will not enter into a sub-agent
arrangement unless the Primary Lending Agreement contains 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 lent, required margin and daily marking-to-market, and provision
of a list of approved borrowers (which will include Affiliated
Borrowers). The Primary Lending Agreement will specifically authorize
the primary lending agent to appoint sub-agents, to facilitate its
performance of securities lending agency functions. Where the DB
Lending Agent is to act as such a sub-agent, the Primary Lending
Agreement will expressly disclose that the DB Lending Agent is to so
act. The Primary Lending Agreement will also set forth the basis and
rate for the primary lending agent's compensation from the Client Plan
for the performance of securities lending services and will authorize
the primary lending agent to pay a portion of its fee, as the primary
lending agent determines in its sole discretion, to any sub-agent(s) it
retains pursuant to the authority granted under such agreement.
Pursuant to its authority to appoint sub-agents, the primary
lending agent will enter into a securities lending sub-agency agreement
(the Sub-Agency Agreement) with the DB Lending Agent under which the
primary lending agent will retain and authorize the DB Lending Agent as
sub-agent, to lend securities of the primary lending agent's Client
Plans, subject to the same terms and conditions as are specified in the
Primary Lending Agreement. Thus, for example, the form of Loan
Agreement will be the same as that approved by the Client Plan
fiduciary in the Primary Lending Agreement and the list of permissible
borrowers under the Sub-Agency Agreement (which will include the
Affiliated Borrowers) will be limited to those approved borrowers
listed as such under the Primary Lending Agreement.
The Applicant states that the 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 the DB
Lending Agent is the primary lending agent. In this regard, the DB
Lending Agent will make the same representation in the Sub-Agency
Agreement as described above in Representation 14 with respect to arm's
length dealings with the Affiliated Borrowers. The Sub-Agency Agreement
will also set forth the basis and rate for the DB Lending Agent's
compensation to be paid by the primary lending agent.26
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\26\ The agreement setting forth the respective rights and
obligations of the parties in a sub-agency arrangement may be a
tripartite agreement among the Primary Lending Agent, the Client
Plan and the DB Lending Agent.
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16. In all cases, the DB Lending Agent will maintain transactional
and market records sufficient to assure compliance with its
representation that all loans to the Affiliated Borrowers are
effectively at arm's length terms. Such records will be provided to the
appropriate Client Plan fiduciary in the manner and format agreed to
with the such Client Plan fiduciary, without charge to the Client Plan.
A Client Plan may terminate the Agency Agreement (or the Primary
Lending Agreement) at any time, without penalty to the Client Plan, on
five business days notice. In addition, the DB Lending Agent will make
and retain for six months, tape recordings evidencing all securities
loan transactions with Affiliated Borrowers.
17. The DB Lending Agent will negotiate the Loan Agreement with the
Affiliated Borrowers on behalf of Client Plans as it does with all
other borrowers. An independent fiduciary of the Client Plan will
approve the terms of the Loan Agreement. The Loan Agreement will
specify, among other things, the right of the Client Plan to terminate
a loan at any time and the Plan's rights in the event of any default by
an Affiliated Borrower. The Loan Agreement will explain the basis for
[[Page 57148]]
compensation to the Client Plan for lending securities to the
Affiliated Borrowers under each category of collateral. The Loan
Agreement also will contain a requirement that the Affiliated Borrowers
must pay all transfer fees and transfer taxes related to the security
loans.
18. Before authorizing the program permitting loans to Affiliated
Borrowers, a Client Plan will be furnished, upon request, the most
recently available audited and unaudited financial statements of the
Affiliated Borrowers. The Loan Agreement will contain a requirement
that the Affiliated Borrower must give prompt notice at the time of a
loan of any material adverse changes in its financial condition since
the date of the most recently furnished financial
statements.27 If any such changes have taken place, the DB
Lending Agent will not make any further loans unless an independent
fiduciary of the Client Plan has approved the loan in view of the
changed financial condition. Conversely, if the Affiliated Borrower
fails to provide notice of such a change in its financial condition,
such failure will trigger an event of default under the Loan Agreement.
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\27\ Like broker-dealers registered with the SEC, the Foreign
Affiliates are subject to capital adequacy provisions of their
respective regulatory entities. It is represented that such rules
require the Foreign Affiliates 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.
These regulatory authority rules require that if a firm's financial
resources fall below a certain percentage, the regulatory authority
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. If the breach is not promptly resolved, the
firm's activities may be restricted.
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19. As noted above, the agreement by the DB Lending Agent to
provide securities lending services, as agent, to a Client Plan will be
embodied in the Agency Agreement. The Client Plan and the DB Lending
Agent will agree to the arrangement under which the DB Lending Agent
will be compensated for its services as lending agent, including
services as custodian, where applicable, and manager of the cash
collateral received, where applicable, prior to the commencement of any
lending activity. The securities lending fee arrangement will be set
forth in the Agency Agreement and thereby will be subject to the prior
written approval of a fiduciary of the Client Plan who is independent
of the DB Lending Agent. Similarly, with respect to arrangements under
which the DB Lending Agent 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 or the tripartite agreement,
and such agreement will specifically authorize the primary lending
agent to pay a portion of such fee, as the primary lending agent and
sub-agent may agree, to any sub-agent, including the DB Lending Agent,
which is to provide securities lending services to the Client
Plan.28 The Client Plan will be provided with any reasonably
available information which is necessary for the Client Plan fiduciary
to make a determination whether to enter into or continue to
participate under the Agency Agreement (or the Primary Lending
Agreement or the tripartite agreement) and any other reasonably
available information which the Client Plan fiduciary may reasonably
request.
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\28\ 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.
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20. Each time a Client Plan lends securities to an Affiliated
Borrower pursuant to the Loan Agreement, the DB Lending Agent will
reflect in its records the material terms of the loan, including the
securities to be loaned, the required level of collateral, and the fee
or rebate payable. The terms of the fee or rebate payable for each loan
will be at least as favorable to the Client Plan as those of a
comparable arm's length transaction between unrelated parties.
21. The Client Plan will be entitled to the equivalent of all
interest, dividends and distributions on the loaned securities during
the loan period. The Loan Agreement will provide that the Client Plan
may terminate any loan at any time without penalty to such Client Plan.
Upon a termination, the Affiliated Borrower 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 pursuant to a class exemption). If the Affiliated Borrower
fails to return the securities within the designated time, the Client
Plan will have the right under the Loan Agreement to purchase
securities identical to the borrowed securities and apply the
collateral to payment of the purchase price and any other expenses of
the Client Plan associated with the sale and/or purchase.
22. The DB Lending Agent will establish each day a written schedule
of lending fees 29 and rebate rates 30 in order
to assure uniformity of treatment among borrowing brokers and to limit
the discretion the DB Lending Agent would have in negotiating
securities loans to the Affiliated Borrowers. Loans to all borrowers of
a given security on that day will be made at rates or lending fees on
the relevant daily schedules or at rates or lending fees which may be
more advantageous to the Client Plans. It is represented that in no
case will loans be made to Affiliated Borrowers 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 Client Plan's reinvestment vehicles and on market
conditions, as reflected by demand for securities by borrowers other
than the Affiliated Borrowers. 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 the Affiliated
Borrowers, and will generally track the rebate rates with respect to
the same security or class of security.
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\29\ The DB Lending Agent will adopt minimum daily lending fees
for non-cash collateral payable by the Affiliated Borrowers to the
DB Lending Agent on behalf of a Client Plan. The DB Lending Agent
will submit the method for determining such minimum daily lending
fees to an independent fiduciary of the Client Plan for approval
before initially lending any securities to the Affiliated Borrower
on behalf of such Client Plan.
\30\ The DB Lending Agent will adopt separate maximum daily
rebate rates with respect to securities loans collateralized with
cash collateral. Such rebate rates will be based upon an objective
methodology which takes into account several factors, including
potential demand for loaned securities, the applicable benchmark
cost of fund indices, and anticipated investment return on overnight
investments permitted by the Client Plan's independent fiduciary.
The DB Lending Agent will submit the method for determining such
maximum daily rebate rates to such fiduciary before initially
lending any securities to an Affiliated Borrower on behalf of the
Client Plan.
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23. The rebate rates (in respect of cash-collateralized loans made
by Client Plans) which are established will also take into account the
potential demand for loaned securities, the applicable benchmark cost
of funds indices (typically, Federal Funds, overnight repo rate or the
like) and anticipated investment return on overnight investments which
are permitted by the relevant Client Plan fiduciary. Further, the
lending fees (in respect of loans made by Client Plans collateralized
by other than cash) which are established
[[Page 57149]]
will be set daily to reflect conditions as influenced by potential
market demand.
24. The DB Lending Agent will negotiate rebate rates for cash
collateral payable to each borrower, including the Affiliated
Borrowers, on behalf of a Client Plan. With respect to each designated
class of securities, the maximum daily rebate rate will generally be
the lower of (a) the overnight repo rate or Federal Funds rate, minus a
stated percentage, and (b) the actual investment rate for the cash
collateral, minus a stated percentage. Where cash collateral is derived
from a loan with an expected maturity date (term loan) and is intended
to be invested in instruments with similar maturities, the maximum
rebate fee will be less than the expected investment return (assuming
no investment default). With respect to any loan to an Affiliated
Borrower, the DB Lending Agent will not negotiate a rebate rate with
respect to such loan which would be expected, at the time of the loan,
to produce a zero or negative return to the Client Plan (assuming no
default on the investments related to the cash collateral from such
loan). The Applicant represents that the written rebate rate
established daily for cash collateral under loans negotiated with the
Affiliated Borrower will not exceed the rebate rate which would be paid
to a similarly situated unrelated borrower with respect to a comparable
securities lending transaction. The DB Lending Agent will disclose the
method for determining the maximum daily rebate rate as described above
to an independent fiduciary of a Client Plan for approval before
lending any securities to an Affiliated Borrower on behalf of the
Client Plan.
25. For collateral other than cash, the applicable loan fee in
respect of any outstanding loan is reviewed daily for competitiveness
and adjusted, where necessary, to reflect market terms and conditions.
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 will be to unrelated borrowers.
This will ensure that the competitiveness of the loan fee will be
tested in the marketplace. Accordingly, loans to an Affiliated Borrower
should result in competitive rate income to the lending Client Plan. At
all times, the DB Lending Agent will effect loans in a prudent and
diversified manner. While the DB Lending Agent will normally lend
securities to requesting borrowers on a ``first come, first served''
basis, as a means of assuring uniformity of treatment among borrowers,
it should be recognized that in some cases it may not be possible to
adhere to a ``first come, first served'' allocation. This can occur,
for instance where: (a) The credit limit established for such borrower
by the DB Lending Agent 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 DB Lending Agent 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.
26. The method of determining the daily securities lending rates
(fees and rebates), the minimum lending fees payable by the Affiliated
Borrowers and the maximum rebate payable to the Affiliated Borrower
will be specified in the Agency Agreement or a tripartite agreement.
27. If the DB Lending Agent reduces the lending fee or increases
the rebate rate on any outstanding loan to an Affiliated Borrower
(except for any change resulting from a change in the value of any
third party independent index with respect to which the fee or rebate
is calculated), the DB Lending Agent, by the close of business on the
date of such adjustment, will provide the independent fiduciary of the
Client Plan with notice that it has reduced such fee or increased the
rebate rate to such Affiliated Borrower and that the Client Plan may
terminate such loan at any time. In addition, the DB Lending Agent will
provide the independent fiduciary of the Client Plan with such
information as the fiduciary may reasonably request regarding such
adjustment.
28. The DB Lending Agent or an affiliate which is domiciled in the
United States (for purposes of this paragraph ``the Deutsche Entity''),
will indemnify and hold harmless each lending Client Plan in the United
States against any shortfall in the collateral, as clearly set forth in
the applicable lending agreement, plus interest and any transaction
costs incurred (including attorney's fees of the Client Plan arising
out of the default on the loans or the failure to indemnify properly
under this provision) which the Client Plan may incur or suffer
directly arising out of the lending of securities of such Client Plan
to such Affiliated Borrowers, to the extent permitted by law, except to
the extent that such losses or damages are caused by the Client Plan's
negligence.
In the event the Affiliated Borrower defaults on a loan, the DB
Lending Agent will liquidate the loan collateral to purchase identical
securities for the Client Plan. If the collateral is insufficient to
accomplish such purchase, the DB Lending Agent, or in the case of
affiliates which are U.S. broker-dealers, that broker-dealer or another
Deutsche Entity 31 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 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 DB Lending Agent (or
the affiliated U.S. broker-dealer or Deutsche Entity) will pay the
Client Plan cash equal to the market value of the borrowed securities
as of the date they should have been returned to the Client Plan plus
all interest and accrued financial benefits derived from the beneficial
ownership of such loaned securities. Under such circumstances, the DB
Lending Agent (or the affiliated U.S. broker-dealer or a Deutsche
Entity) will pay the Client Plan an amount equal to (a) the value of
the securities as of the date such securities should have been returned
to the Client Plan plus (b) all of the accrued financial benefits
derived from the beneficial ownership of such loan securities as of
such date, plus (c) interest from such date through the date of
payment.
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\31\ It is represented that U.S. banking law prohibits the
indemnification of certain affiliates.
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29. The Client Plan will receive collateral from the Affiliated
Borrower by physical delivery, book entry in a U.S. securities
depository, wire transfer or similar means by the close of business on
or before the day the loaned securities are delivered to the Affiliated
Borrower. 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 an affiliate of
the DB Lending Agent) or such other types of collateral which might be
permitted by the Department under a class exemption. 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 and a lien on or title to the
collateral. The DB Lending Agent
[[Page 57150]]
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, the DB
Lending Agent will require the Affiliated Borrower to deliver, by the
close of business the next day, sufficient additional collateral to
bring the level back to at least 102 percent.
30. With respect to loans involving Foreign Affiliates, the
following additional conditions will be applicable: (a) All collateral
will be maintained in United States dollars or dollar-denominated
securities or letters of credit; (b) all collateral will be held in the
United States and the DB Lending Agent will maintain the situs of the
securities loan agreements in the United States under an arrangement
that will comply with the indicia of ownership requirements under
section 404(b) of the Act and the regulations promulgated under 29 CFR
2550.404b-1; and (c) a written consent to service of process in the
United States for any civil action or proceeding brought in respect of
the securities lending transaction, which consent provides that process
may be served on the DB Lending Agent.
31. Each Client Plan participating in the lending program will be
sent a monthly transaction report. The monthly report will provide a
list of all security loans outstanding and closed for a specified
period. The report will identify for each open loan position, the
securities involved, the value of the security for collateralization
purposes, the current value of the collateral, the rebate or loan
premium (as the case may be) at which the security is loaned, and the
number of days the security has been on loan. In addition, if requested
by the lending customer, the DB Lending Agent will provide more
frequent confirmations of securities lending transactions, and, with
respect to monthly reports, if requested by the customer, the DB
Lending Agent will provide weekly or daily reports, setting forth for
each transaction made or outstanding during the relevant reporting
period, the loaned securities, the related collateral, rebates and loan
premiums and such other information in such format as shall be agreed
to by the parties. Further, prior to a Client Plan's approval of a
securities lending program, the DB Lending Agent will provide a Client
Plan fiduciary with a copy of the proposed exemption and the notice
granting the exemption.
32. In order to provide the means for monitoring lending activity,
the monthly report will reflect rates on loans by the Client Plans to
Affiliated Borrowers and rates on loans to other brokers as well as the
level of collateral on the loans. In this regard, the monthly report
will show, on a daily basis, the market value of all outstanding
security loans to the Affiliated Borrowers and to other borrowers. 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 the Affiliated Borrowers
and those at which securities are loaned to other brokers. This
statement will give an independent fiduciary information which can be
compared to that contained in the daily rate schedule.
33. Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to the
Affiliated Borrowers. 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 the DB Lending Agent, 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 the DB Lending Agent, 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;
32 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.
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\32\ For purposes of this proposed exemption, the term ``full
investment responsibility'' means that the fiduciary 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.
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In addition, none of the entities described above must be formed
for the sole purpose of making loans of securities.
34. In summary, the Applicant represents that the described
transactions have satisfied or 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 loan is
effected has been or will be approved by a fiduciary of the Client Plan
which is independent of the DB Lending Agent before a Client Plan lends
any securities to an Affiliated Borrower.
(b) The lending arrangements (1) will permit the Client Plans to
lend to the Affiliated Borrowers 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 have received or will receive sufficient
information concerning the Affiliated Borrowers' financial condition
before the Client Plan lends any securities to any of those entities.
(d) The collateral on each loan to the Affiliated Borrowers
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 has been and will be monitored daily by
the DB Lending Agent.
(e) The Client Plans have received and will receive a monthly
report which provides an independent fiduciary of
[[Page 57151]]
the Client Plans with information on loan activity, fees, loan return/
yield and the rates on loans to the Affiliated Borrowers as compared
with loans to other brokers and the level of collateral on the loans.
(f) Neither the DB Lending Agent nor any affiliate has or will have
discretionary authority or control over the Client Plan's acquisition
or disposition of securities available for loan.
(g) The terms of the fee or rebate payable for each loan have been
and will be at least as favorable to the Client Plans as those of a
comparable arm's length transaction between unrelated parties.
(h) All of the procedures under the transactions have conformed or
will conform to the applicable provisions of PTE 81-6 and PTE 82-63 and
also have been and will be in compliance with the applicable securities
laws of the United States and the local laws of the Foreign Affiliates.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Information Systems Development, Inc. Employees Profit Sharing Plan
(the Plan), Located in Cincinnati, Ohio
[Application No. D-10787]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed sale by the Plan of certain
illiquid limited partnership interests (collectively; the Interests) to
CONVERGYS Information Management Group Inc. (the Company), the sponsor
of the Plan and a party in interest with respect to the Plan, provided
that the following conditions are met:
(1) The sale is a one-time transaction for cash;
(2) The Plan receives an amount equal to the greater of: (a) The
Plan's cost for the Interests, less all cash distributions received as
a result of owning the Interests (i.e., the adjusted cost), (b) the
fair market value of the Interests on the date of the sale, as
established by a qualified independent appraiser, or (c) the estimated
value of the Interests, as determined by the general partner of each
partnership and reported on the most recent account statements
available at the time of the sale;
(3) The Plan pays no commissions or any other expenses relating to
the sale; and
(4) The Plan suffers no loss, as a result of its acquisition and
holding of the Interests, taking into account all cash distributions
received by the Plan as a result of owning the Interests.
Summary of Facts and Representations
1. The Plan is a 401(k) defined contribution, profit sharing plan
with approximately 43 participants and $2,487,682.52 in total assets as
of March 31, 1999. Approximately 1.16% of the Plan's total assets will
be involved in the proposed transaction. Mr. James Dahmus, a Senior
Vice President and Controller of the Company, is the trustee of the
Plan.
The Plan was originally established and maintained by Information
Systems Development, Inc. (ISD). The Company acquired ISD effective
January 1, 1996, and as a result became the sponsor of the Plan. The
Company is in the business of providing billing and customer support
solutions for the communications industry, both domestically and
internationally.
2. Among the assets of the Plan are investments in five limited
partnerships (i.e., the Interests): (i) Pegasus Aircraft Partners, L.P.
(Pegasus I); (ii) Pegasus Aircraft Partners II, L.P. (Pegasus II);
(iii) Paine Webber Equity Partners Two Limited Partnership (PW Equity);
(iv) Paine Webber Preferred Yield Fund, L.P. (PW Yield); and (v)
Geodyne Energy Income Ltd. Partnership II D (Geodyne).
3. Pegasus I was formed in June, 1988, for the purpose of acquiring
a specified portfolio of used commercial aircraft and leasing them to
commercial airlines. The managing general partner is Pegasus Aircraft
Management Corporation, located in San Francisco, California.
On December 21, 1988, the Plan purchased its Interests for cash
during the original offering to the public through Paine Webber
Incorporated (Paine Webber), a sales agent.33 Specifically,
the Plan purchased 255 units in Pegasus I at a price of $20 per unit,
for a total purchase price of $5,100. The Plan's interest in Pegasus I
represents a 0.006% interest in the partnership. As of December 31,
1998, the Plan had received total distributions from Pegasus I in the
amount of $4,917.
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\33\ The Plan's account relating to the holding of the Interests
is currently serviced through a Paine Webber office located in Fort
Lauderdale, Florida. The Interests were purchased by the Plan
through Paine Webber's office in Plantation, Florida, but this
office has now closed.
---------------------------------------------------------------------------
4. Pegasus II was formed in April, 1989, also for the purpose of
acquiring a specified portfolio of used commercial aircraft and leasing
them to commercial airlines. The managing general partner is Pegasus
Aircraft Management Corporation, located in San Francisco, California.
On December 21, 1989, the Plan purchased for cash from Paine Webber
1,000 units in Pegasus II at a price of $20 per unit, for a total
purchase price of $20,000. The Plan's interest represents a 0.136%
interest in Pegasus II. As of December 31, 1998, the Plan had received
distributions from Pegasus II in the amount of $15,380.
5. PW Equity was formed in May, 1986, for the purpose of investing
in a diversified portfolio of existing, newly-constructed, or to-be-
built, income-producing real properties such as apartments, shopping
centers, hotels, office buildings and industrial buildings. The
managing general partner is Second Equity Partners, Inc., located in
Boston, Massachusetts.
On June 30, 1987, the Plan purchased for cash from Paine Webber
35,000 units in PW Equity at a price of $1.00 per unit, for a total
purchase price of $35,000. The Plan's interest represents a 0.026%
interest in PW Equity. As of May 15, 1998, the Plan received
distributions from PW Equity totaling $21,675.81.
6. PW Yield was formed in December, 1989, for the purpose of
acquiring a portfolio of equipment for leasing to unaffiliated parties.
PW Yield's portfolio of equipment includes industrial, materials
handling, mining, medical, research and development, transportation,
store fixtures, manufacturing testing and office technology equipment.
The managing general partner is CAI Equipment Leasing II Corp., located
in Denver, Colorado.
On October 30, 1990, the Plan purchased for cash from Paine Webber
37 units in PW Yield at a price of $500 per unit for a total purchase
price of $18,500. The Plan's interest in PW Yield represents a 0.026%
interest in the partnership. As of December 31, 1998, the Plan had
received distributions from the partnership totaling $19,340.
7. Geodyne was formed in May, 1988, for the purpose of engaging in
the business of owning interests in producing oil and gas properties
located in the continental United States. The general partner is
Geodyne Resources, Inc., located in Tulsa, Oklahoma.
On April 15, 1988, the Plan purchased for cash from Paine Webber
250 units in
[[Page 57152]]
Geodyne at a price of $100 per unit for a total purchase price of
$25,000. The Plan's interest represents a 0.079% interest in Geodyne.
As of May 15, 1998, the Plan had received distributions from Geodyne
totaling $22,022.
8. The partnerships and their general partners are unrelated to
ISD, the Company and the Plan. As noted above, the five limited
partnerships (the Partnerships) were organized and marketed by Paine
Webber.34 The Partnerships and their underlying assets are
valued semiannually by an independent appraiser.
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\34\ The applicant represents that Paine Webber is not the
general partner of any of the Partnerships; however, Paine Webber's
parent company, Paine Webber Group Inc., is the parent company of
the following general partners:
Pegasus I--Air Transport Leasing, Inc. (Administrative general
partner)
Pegasus II--Air Transport Leasing, Inc. (Administrative general
partner)
PW Yield--General Equipment Management, Inc. (Administrative
general partner)
PW Equity--Second Equity Partners, Inc. (Managing general
partner)
---------------------------------------------------------------------------
9. The applicant represents that there is no ready market for the
Partnerships, and the general partners are under no obligation to aid
in the sale of the Interests. The Company's efforts to find a buyer for
the Interests have been unsuccessful. As a result, the Plan now
proposes to sell the Interests to the Company. The Company will
purchase the Interests for the greater of: (i) The cost of the
Interests less the distributions received by the Plan from each
Partnership (i.e., the adjusted cost); (ii) fair market value of the
Interests, as determined on the date of the proposed sale by an
independent, qualified appraiser; or (iii) the estimated value of the
Interests, as determined by the general partner of each partnership and
reported on the most recent account statements available at the time of
the sale.
10. Valuations of the Interests are provided to Paine Webber by
independent valuation services twice a year. Pegasus I, Pegasus II, PW
Equity and PW Yield are valued by the Valuation Group (VG), an
independent qualified appraisal firm located in Memphis, Tennessee, and
Geodyne is valued by Stanger & Company (SC), an independent qualified
appraisal firm located in Shrewsbury, New Jersey. The VG and SC are
independent of each Partnership, the Plan and the Company.
In the reports dated June 22, 1999 (the VG Reports), Michael D.
Phelan (Mr. Phelan), the president of VG, stated that the aggregate
fair market value of: the Pegasus I Interests is $1,173 ($4.60 per
unit); the Pegasus II Interests is $4,690 ($4.69 per unit); the PW
Equity Interests is $5,600 ($0.16 per unit); and the PW Yield Interests
is $481 ($13 per unit). The VG Reports indicate that these investments
are generally illiquid, non-tradeable investment vehicles designed to
be held by the original investors until the partnership sponsor elects
to sell the underlying assets and make liquidating distributions to
limited partners. Although there is no readily available market for the
Interests, VG conducts a partnership valuation process involving the
following procedures: (i) Financial statement analysis and review of
the partnership's legal structure and related issues; (ii) research of
the underlying assets; and (iii) analysis related to the market for
limited partnership interests and similar traded securities.
11. The fair market value determination for Geodyne was prepared by
SC on March 31, 1999 and states that the fair market value per each
Geodyne Interest is $18.00 per unit for 250 units for a total price of
$4500 (SC Report). SC Report states that in estimating the value of a
business or its securities, consideration is typically given to the
following approaches to value: the Asset Accumulation or Net Asset
Approach, the Capital Market Valuation Approach and the Income
Approach.
12. On August 1, 1994, the Plan appointed Fidelity Trust Management
Company (Fidelity) as trustee and record-keeper for the Plan's assets
(excluding the Interests). The applicant represents that Fidelity did
not accept trusteeship over the Interests because, due to their
illiquid nature, they could not be valued on the same basis as the
Plan's other investments.35 ISD, the prior Plan sponsor, at
that time determined that the Interests had no value and ceased
allocations to the participants' accounts with respect to the
Interests.36 The applicant states that it subsequently
determined that this approach was incorrect. Therefore, the Company
filed an application with the Internal Revenue Service (IRS) on April
21, 1997, under its Voluntary Compliance Resolution Program (VCR
Program). A compliance statement was issued in September of 1997,
approving the correction methodology of allocating the value of the
Interests on a pro rata basis to the participants' accounts.
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\35\ Paine Webber is currently the custodian of the Interests.
\36\ The Department is providing no opinion herein regarding
whether ISD's determinations with respect to the Interests violated
any provision of Part 4 of Title I of the Act.
---------------------------------------------------------------------------
The Company now desires to purchase the Interests from the Plan for
cash in order to allow the Plan to accomplish this allocation. The Plan
allows its participants to access their account valuations, and to
direct the investment of their accounts, on a daily basis. However, the
applicant states that the Interests are illiquid and incompatible with
the Plan's daily valuation system. The sale of the Interests to the
Company would allow the participants to receive an allocation of cash
which they could invest in other investment vehicles offered under the
Plan, and would facilitate distributions from the Plan.
13. The Company proposes to pay the Plan the greater of: (i) The
original purchase price of the Interests less distributions received
from the Partnerships (i.e., adjusted cost); (ii) the fair market value
as of the date of the sale, as established by a qualified independent
appraiser; or (iii) the estimated value of the Interests, as determined
by the general partner of each Partnership and reported on the most
recent account statements available at the time of the sale. With
respect to the valuations noted in item (ii) above, the applicant
represents that fair market value of the Interests is determined twice
a year by an independent, qualified valuation firm and provided to
Paine Webber for the purpose of issuing account statements. The Paine
Webber account statements also include an estimated value provided by
the general partner of each Partnership, which indicate the amounts
noted in item (iii) above. Based on the most recent Paine Webber
statements, the Company would buy the Interests for the purchase price
shown in the table below.
----------------------------------------------------------------------------------------------------------------
Fair
Partnership Adjusted market Issuer Purchase
cost \37\ value value \38\ price
----------------------------------------------------------------------------------------------------------------
Pegasus I....................................................... $183 $1,173 $1,877 $1,877
Pegasus II...................................................... 4,620 4,690 7,210 7,210
PW Equity....................................................... 13,324 5,600 9,450 13,324
PW Yield........................................................ (840) 481 777 777
[[Page 57153]]
Geodyne......................................................... 2,998 4,500 5,783 5,783
-----------------------------------------------
Total....................................................... .......... .......... .......... 28,971
----------------------------------------------------------------------------------------------------------------
14. Certain Repurchase Offers for the Interests. The applicant
states that the general partner of Geodyne is obligated by the terms of
the Partnership agreement to annually issue a repurchase offer which is
based on the estimated future net revenues from the Partnership's
reserves. The most recent repurchase offer was for an amount which was
less than either the third party determination of fair market value, or
the issuer estimated value. The current repurchase price is in the
process of being determined.
---------------------------------------------------------------------------
\37\ The adjusted cost is the cost of the Interests less
distributions received by the Plan from each Partnership.
\38\ This is the estimated value of the Interests as determined
by the general partner of each Partnership.
---------------------------------------------------------------------------
Three purchase offers were made in 1998 to the limited partners in
PW Equity. First Commercial Guarantee, in an offer dated May 8, 1998,
was seeking to acquire up to 0.8% of the outstanding Interests for
$0.28 per Interest. Madison Partnership Liquidity Investors 27, LLC, in
an offer dated April 29, 1998, was seeking to acquire up to 4.9% of the
outstanding Interests for $0.21 per interest. Smithtown Bay, LLC, in an
offer dated March 11, 1998, was seeking to acquire approximately 4.9%
of the outstanding Interests for $0.20 per Interest. The applicant
represents, however, that the managing general partner advised the
limited partners of PW Equity that it did not support these offers
because such offers were financially inadequate as compared to the
managing general partner's recent estimate of the Partnership's value.
A repurchase offer was recently made to the limited partners in
Pegasus II. Madison Liquidity Investors 102, LLC, in an offer dated
March 23, 1999, was seeking to acquire up to 4.9% of the outstanding
Interests for $3.50 per Interest. The offer expired April 30, 1999. The
purchase price of $3.50 per Interest was less than the general partners
estimate and a third party estimate of value.
15. The applicant represents that the proposed transaction is
administratively feasible, and in the best interest and protective of
the Plan. The transaction will be for cash and the Plan will pay no
costs or commissions associated with the sale. Furthermore, the
applicant represents that the Interests are the subject of a Compliance
Statement between the IRS and the Company. The Compliance Statement
states that the participants' accounts would be credited with their pro
rata share of the value of the Interests. Therefore, cash received from
the sale of the Interests will be allocated to the participants'
accounts in the Plan. Additionally, the Plan has changed to daily
recordkeeping, and the Interests cannot be valued on the daily basis.
The applicant represents that the Interests are incompatible with the
Plan's current investment environment, which allows the participants to
obtain the value of their accounts and direct the investment of their
accounts on the daily basis. Therefore, liquidating the Interests would
generate cash to the Plan that would facilitate any required
distributions to the Plan's participants and beneficiaries. The
applicant states that if the Interests were sold to an unrelated third
party, the Plan would receive substantially less than the amounts the
Company is proposing to pay for the Interests. Furthermore, the
applicant represents that any amounts received by the Plan as a result
of the proposed transaction, which are in excess of the fair market
value of the Interests will be treated as a contribution to the Plan,
but that this contribution will not exceed limitations of section 415
of the Internal Revenue Code.
16. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (a) The sale will
be a one-time transaction for cash; (b) the Plan will pay no
commissions or any other expenses relating to the sale; (c) the Plan
will receive an amount equal to the greater of: (i) The Plan's cost for
the Interests, less all cash distributions received as a result of
owning the Interests (i.e., the adjusted cost), (ii) the fair market
value of the Interests on the date of the sale, as established by a
qualified independent appraiser, or (iii) the estimated value of the
Interests, as determined by the general partner and reported on the
most recent account statements available at the time of the sale; and
(d) the sale will enhance the liquidity and diversification of the
Plan's assets and facilitate any required distributions to the
participants and beneficiaries.
Tax Consequences of Transaction
The Department of Treasury has determined that if a transaction
between a qualified employee benefit plan and its sponsoring employer
(or an affiliate thereof) results in the plan either paying less or
receiving more than fair market value, such excess may be considered a
contribution by the sponsoring employer to the plan, and therefore must
be examined under the applicable provisions of the Internal Revenue
Code, including sections 401(a)(4), 404 and 415.
Notice to Interested Persons
Notice of the proposed exemption will be given to all interested
parties (participants and beneficiaries) by first class mail or inter-
office mail within ten (10) days of the date of publication of this
notice of pendency in the Federal Register. Such notice will include a
copy of the notice of proposed exemption as published in the Federal
Register and a supplemental statement, as required pursuant to 29 CFR
2570.43(b)(2). This supplemental statement will inform all interested
persons of their right to comment on the proposed exemption and to
request a hearing. All written comments and requests for a hearing are
due within forty (40) days of the publication of this notice of
proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan 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
[[Page 57154]]
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 18th day of October, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 99-27520 Filed 10-21-99; 8:45 am]
BILLING CODE 4510-29-P