[Federal Register Volume 65, Number 106 (Thursday, June 1, 2000)]
[Notices]
[Pages 35129-35138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-13641]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Prohibited Transaction Exemptions 2000-25, et al.; Application Nos. D-
10119 and D-10120, et al.]


Morgan Guaranty Trust Company of New York, et al.

AGENCY: Pension and Welfare Benefits Administration, Department of 
Labor.

ACTION: Grant of Individual Exemptions.\1\

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    \1\ The term ``Individual Exemptions'' refers to the following 
Prohibited Transaction Exemptions (PTEs): PTE 2000-25 (Application 
Nos. D-10119 and D-10120, Morgan Guaranty Trust Company of New York 
and J.P. Morgan Investment Management Inc.); PTE 2000-26 
(Application No. D-10587, Goldman, Sachs & Co.); PTE 2000-27 
(Application No. D-10779, The Chase Manhattan Bank); PTE 2000-28 
(Application No. D-10820, Citigroup Inc); and PTE 2000-29 
(Application No. D-10832, Morgan Stanley Dean Witter & Co.).
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SUMMARY: This document contains individual exemptions issued by the 
Department of Labor (the Department) from the prohibited transaction 
restrictions of the Employee Retirement Income Security Act of 1974 
(the Act) and from the taxes imposed by the Internal Revenue Code of 
1986 (the Code). The exemptions permit purchases of securities by the 
applicants' asset management affiliate, on behalf of employee benefit 
plans for which such asset management affiliate is a fiduciary, from 
underwriting or selling syndicates where the applicants' broker-dealer 
affiliate participates as a manager or syndicate member. The exemptions 
affect participants and beneficiaries of the plans investing in such 
securities.

EFFECTIVE DATE: The exemptions are effective as of February 8, 2000.

FOR FURTHER INFORMATION CONTACT: Ms. Andrea W. Selvaggio or Ms. Karin 
Weng of the Department, telephone (202) 219-8881. (This is not a toll-
free number.)

SUPPLEMENTARY INFORMATION: On February 8, 2000, the Department 
published a notice of pendency in the Federal Register (65 FR 6229) of 
the proposed exemptions from the restrictions of section 406 of the Act 
and the sanctions resulting from the application of section 4975 of the 
Code, by reason of section 4975(c)(1) of the Code. The exemptions were 
requested in separate applications filed pursuant to 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), by the following entities: Morgan Guaranty Trust 
Company of New York and J.P. Morgan Investment Management Inc. 
(together, J.P. Morgan) Goldman, Sachs & Co. (Goldman), The Chase 
Manhattan Bank (Chase), Citigroup Inc. (Citigroup), and Morgan Stanley 
Dean Witter & Co. (Morgan Stanley).
    Effective December 31, 1978, section 102 of Reorganization Plan No. 
4 of 1978, 5 U.S.C. App. 1 (1996), generally transferred the authority 
of the Secretary of the Treasury to issue exemptions of the type 
requested to the Secretary of Labor. Accordingly, these exemptions are 
being issued solely by the Department. \2\ For convenience, each 
applicant and its affiliates shall be referred to in the exemption in 
generic terms that denote certain roles, namely, ``the Applicant,'' 
``the Asset Manager,'' \3\ or ``the Affiliated Broker-Dealer.'' \4\
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    \2\ All references to specific provisions of Title I of the Act 
herein shall refer also to the corresponding provisions of the Code 
(if any).
    \3\ To the extent that the Applicant has more than one asset 
management affiliate, all references to the Asset Manager herein 
shall refer also to the other asset management entity or entities.
    \4\ To the extent that the Applicant has more than one 
registered broker-dealer affiliate that participates in underwriting 
or selling syndicates, all references to the Affiliated Broker-
Dealer herein shall refer also to the other broker-dealer entity or 
entities.
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    The notice of pendency invited all interested persons to submit 
written comments or request a public hearing concerning the proposed 
exemptions by March 24, 2000. The Department received six written 
comments and no requests for a hearing in response to the notice. Each 
of the five Applicants

[[Page 35130]]

submitted a comment. In addition, a law firm, located in Hartford, 
Connecticut, representing an unidentified financial institution, 
submitted a comment. Based upon the information contained in the entire 
record, the Department has determined to grant the proposed exemptions, 
subject to certain modifications. The comments and modifications are 
discussed below.

Discussion of the Comments

    1. Three of the Applicants, Goldman, Chase, and Citigroup, wished 
to correct or clarify certain representations made in the Summary of 
Facts and Representations (the Summary) contained in the notice of 
proposed exemption (the Notice) (see 65 FR 6229).
    a. Goldman stated that the fourth sentence in Item 2 of the Summary 
(65 FR at 6230) should be revised to read,

    The Investment Management Division of the Applicant 
(hereinafter, the Asset Manager) includes Goldman Sachs Asset 
Management and is a separate operating division of the Applicant * * 
*

    b. Chase stated that, as a technical matter, the precise name of 
its registered investment adviser subsidiary is ``Chase Asset 
Management, Inc.,'' not ``Chase Asset Management,'' as appears in the 
second sentence of Item 3 of the Summary (65 FR at 6230).
    c. Citigroup stated that the last two sentences in Item 4 of the 
Summary (65 FR at 6230) should be revised to read,

    It is represented that, as of December 31, 1999, the last day of 
its most recent fiscal year, all of Citigroup's asset management 
affiliates had, in the aggregate, client assets under management of 
approximately $364.4 billion. As of that date, approximately 3.9% of 
client assets under management were attributable to Client Plans, 
including those investing in a Pooled Fund.

    d. In addition, Citigroup requested that, in clause (e) of the last 
``Summary'' paragraph (65 FR at 6234) of the Summary, the phrase ``* * 
* for the account of a Client Plan'' be added at the end of the clause 
after ``Asset Manager.''
    The Department acknowledges the Applicants' corrections to the 
Summary and concurs in the clarifying revision to clause (e) on page 
6234 of the Summary.
    The remainder of the comments requested certain modifications to 
the proposed operative language in this final exemption.

2. Section I(b)--Issuer Requirements and Exceptions

    Three of the Applicants, J.P. Morgan, Goldman, and Morgan Stanley, 
requested clarification of Section I(b) of the Notice (65 FR at 6237), 
which requires the issuer of the securities to have been in continuous 
operation for not less than three years, with certain exceptions. 
Specifically, Section I(b)(3) provides an exception where the 
securities are fully guaranteed by a person who has issued securities 
described in certain other provisions of the exemption ``* * * and this 
paragraph (b).'' The Applicants stated that this language is circular 
because it is not clear which part of Section I(b) is being referred 
to.
    The Department concurs in the Applicants' request for 
clarification, and the language of Section I(b) has been revised in the 
final exemption so that Section I(b)(3) refers explicitly to a 
guarantee by a person who ``has been in continuous operation for not 
less than three years, including the operation of any predecessors,'' 
as described in the lead-in language of paragraph (b).

3. Section I(c) & (d)--Three Percent Limitations and Pooled Funds

    The five Applicants requested the deletion of references to 
``Pooled Funds'' in connection with the three percent limitations in 
Section I(c) and (d) of the Notice. Section I(c) requires that the 
amount of securities purchased by the Asset Manager on behalf of a 
particular Client Plan or Pooled Fund may not exceed three percent of 
the total amount of securities being offered, subject to certain 
aggregate percentage limitations. Section I(d) requires that the 
consideration paid by the Client Plan or Pooled Fund for such 
securities may not exceed three percent of the fair market value of 
such Client Plan's or Pooled Fund's total net assets.
    The Applicants noted that imposing the three percent limitations 
contained in both Section I(c) and (d) of the Notice on a Pooled Fund 
as a whole would result in a Client Plan's being treated differently, 
depending on whether it invests in a Pooled Fund or whether its assets 
are managed by the Asset Manager directly. They argued that there was 
no basis for the different treatment, given that Pooled Funds are 
``look-through'' vehicles under the Department's ``plan assets'' 
regulation (29 CFR 2510.3-101). Therefore, the Applicants believe that 
the three percent limitations should be applied on a plan-by-plan 
basis.
    For example, J.P. Morgan noted that a Pooled Fund is a commingled 
investment pool with multiple Client Plan investors, which, by its 
nature, spreads risks among those investors. A single Client Plan's 
risk would be limited to its proportionate share of any assets of the 
Pooled Fund. Thus, for a Client Plan with a five percent interest in a 
Pooled Fund, even if the Pooled Fund were to purchase 10 percent of an 
offering, such Client Plan's exposure to the offering would be only 
one-half of one percent. As another example, Chase stated that, if six 
Client Plans are in a Pooled Fund, the Pooled Fund should be permitted 
to purchase 18 percent of an offering, subject to the aggregate 
percentage limitations in Section I(c).
    The Applicants stated that the same rationale supports the 
elimination of the three percent limitation on the consideration paid 
by a Pooled Fund for such securities in Section I(d) of the Notice. 
Therefore, in their view, the three percent limitation should apply 
only to the net assets of each Client Plan in the Pooled Fund.
    The Department concurs in the Applicants' request to modify Section 
I(c) and (d) of the Notice so that both provisions impose a three 
percent limitation on each Client Plan investing in a Pooled Fund, 
rather than on the Pooled Fund as a whole. Accordingly, the Department 
has deleted the references to ``Pooled Funds'' in connection with the 
three percent limitations in Section I(c) and (d) of the final 
exemption. However, the Department notes that a Pooled Fund would 
remain subject to the percentage limitations described in Section I(c) 
of the exemption on the aggregate amount of securities that may be 
purchased in an offering by the Asset Manager for all its Client Plans.
    4. Section I(a)(1)(ii) & (a)(2), (b), and (c)--

Characterization of Asset-Backed Securities

    Among the securities that may be purchased under the exemption are 
pass-through certificates representing interests in asset pools. Such 
certificates are often referred to as ``mortgage-backed'' securities or 
``asset-backed'' securities and may have characteristics of both equity 
and debt. The five Applicants requested clarification that asset-backed 
securities will be treated as ``debt'' for purposes of the exemption.
    For example, Section I(c) of the Notice imposes certain aggregate 
percentage limitations on the amount of securities that may be 
purchased in an offering by the Asset Manager for all its managed 
Client Plans. These percentage limitations differ, depending on whether 
the securities involved are equity securities, debt securities rated in 
one of the four highest rating categories, or debt securities rated in 
the fifth or sixth highest rating categories.
    The Applicants noted that asset-backed securities, which entitle 
the holder to pass-through payments of principal and interest relating 
to assets

[[Page 35131]]

held in the underlying pool, are normally rated by nationally 
recognized statistical rating organizations and are regarded in the 
market as debt securities. The Applicants argued, therefore, that 
asset-backed securities should be categorized as debt for purposes of 
the exemption.
    Other relevant provisions, in addition to Section I(c), are as 
follows: Section I(a)(1)(ii), which requires that, in the case of 
equity securities in an Eligible Rule 144A Offering, the offering 
syndicate must obtain a legal opinion regarding the adequacy of the 
disclosure in the offering memorandum; Section I(a)(2), which provides 
an exception for debt securities from the general requirement that the 
securities are purchased prior to the end of the first day on which any 
sales are made, at a price that is not more than the price paid by each 
other purchaser of securities in that offering; and Section I(b), which 
provides an exception for certain debt securities from the general 
requirement that the issuer of the securities must have been in 
continuous operation for not less than three years.
    The Department concurs in the Applicants' suggestion that, solely 
for purposes of the exemption, appropriately rated mortgage-backed or 
other asset-backed securities should be treated as debt securities. 
Accordingly, this clarification has been added to the definition of 
``security'' in Section II of the final exemption.
    The Department is persuaded to take this position within the 
limited context of this exemption in recognition of the fact that most 
purchasers view asset-backed securities as debt securities. However, 
the Department is providing no opinion herein as to whether asset-
backed securities should be considered either equity or debt securities 
for any other purposes outside the scope of this exemption.\5\
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    \5\ The Department notes that under Title I of the Act, and the 
``plan assets'' regulation, ``a beneficial interest in a trust [is] 
an equity interest,'' 29 CFR 2510.3-101(b)(1). As noted in the 
proposed exemption, footnote 13 (FR 65 at 6234), certain purchases 
of asset-backed securities may result in other prohibited 
transactions requiring additional exemptive relief because these 
securities are not publicly offered and the ``significant 
participation'' exception to the ``look-through rule'' of the ``plan 
assets'' regulation (29 CFR 2510.3-101(b)(3)) would not apply. A 
list of individual exemptions then existing for asset-backed 
securities may be found in PTE 97-34 (62 FR 39021, July 21, 1997), 
which granted an amendment to these exemptions.
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5. Section I(i)(1) and (k)(1)--Notice of Proposed Exemption

    Two of the Applicants, Goldman and Morgan Stanley, requested the 
deletion of the requirement in Section I(i)(1) and (k)(1) of the Notice 
(65 FR at 6238) that a copy of such Notice, as published in the Federal 
Register on February 8, 2000, in addition to a copy of the final 
exemption, be provided to the Independent Fiduciaries of the Client 
Plans. They argued that providing both documents is unnecessary and 
that most of the Client Plans will already have received a copy of the 
Notice in connection with the Department's procedural requirements 
regarding notice to interested persons.
    In response to the comments, the Department notes that new Client 
Plans will not have received a copy of the Notice. The Department 
believes that the proposed exemption provides useful information about 
the underwriting business that may be helpful to the Independent 
Fiduciaries monitoring covered transactions. Accordingly, the 
Department has retained the disclosure requirements pertaining to the 
Notice in the final exemption.

6. Section I(n)(1)--Quarterly Report Information

    The five Applicants requested the deletion in Section I(n)(1) of 
the Notice (65 FR 6239) of various items of information about the 
purchased securities required to be provided on a quarterly basis to 
the Independent Fiduciaries. According to the Applicants, this 
information is unnecessary and should be disclosed to the Independent 
Fiduciaries only upon request, as required in Section I(n)(3) of the 
Notice (65 FR at 6239).
    The items in Section I(n)(1) of the Notice that the Applicants do 
not wish to specifically disclose in the quarterly reports to the 
Client Plans are as follows.
    a. The first day on which any sale was made during the offering 
(iii).
    b. The size of the issue (iv).
    c. The identity of the underwriter from whom the securities were 
purchased (vi)--this deletion was requested only by J.P. Morgan and 
Citigroup.
    d. The spread on the underwriting (vii)--this deletion was 
requested only by J.P. Morgan and Citigroup.
    e. In addition, Citigroup requested that item (ix) be revised to 
read, `` * * * the price at which any such securities purchased during 
the period were sold'' [added word underlined], in order to clarify 
that the securities referred to are those purchased for a Client Plan 
under the exemption.
    In this regard, the Department concurs in the revision to item (ix) 
of Section I(n)(1) of the Notice, as requested by Citigroup. However, 
the Department believes that the information required to be reported in 
items (iii), (iv), (vi), and (vii) of Section I(n)(1) of the Notice are 
relevant for purposes of monitoring covered transactions by the 
Independent Fiduciaries. As explained in the proposed exemption, the 
items listed in Section I(n)(1) are virtually identical to the 
information already required by Securities and Exchange Commission 
(SEC) Rule 10f-3 under the Investment Company Act of 1940 (the 1940 
Act), which the Applicants encouraged the Department to use as a model 
for this exemption. Under Rule 10f-3, the independent directors of 
mutual funds are charged with reviewing transactions where a mutual 
fund buys securities from a syndicate in which the fund's affiliate is 
a ``principal underwriter,'' as defined in Section 2(a)(29) of the 1940 
Act.\6\
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    \6\ The Department understands that the Applicants, or their 
affiliates, are covered by Rule 10f-3 and, hence, are familiar with 
quarterly reporting of certain underwriting transactions. As a point 
of clarification, the Department notes that under the SEC's 
definition of ``principal underwriter,'' underwriters, whether 
managers or members, have the same reporting requirements pursuant 
to Rule 10f-3. PTE 75-1, Part III, on the other hand, distinguishes 
between managers and members, defining a manager as an underwriter 
``* * * authorized to act on behalf of all members * * * or who 
receives compensation from the members of the syndicate for its 
services as a manager * * *'' In situations where an Applicant is a 
member, not a manager, the Applicant may continue to rely on PTE 75-
1, Part III, to purchase securities covered by that exemption. These 
individual exemptions also permit the purchase of Eligible Rule 144A 
Securities. Where an Applicant wishes to obtain the additional 
relief granted in these exemptions, the same conditions apply to 
both managers and members. To further clarify, the Department has 
added the definition of ``manager,'' as defined in PTE 75-1, Part 
III, to the definition of ``Affiliated Broker-Dealer'' in Section II 
of the final exemption.
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    The Department continues to believe that the quarterly report, 
which summarizes all the key elements of the subject transactions, will 
provide the Independent Fiduciaries with a convenient way to regularly 
monitor compliance with the exemption. Accordingly, the Department has 
retained the requirement in the final exemption to report the 
information listed in items (iii), (iv), (vi), and (vii) on a quarterly 
basis to the Independent Fiduciaries.

7. Section I(n)(2)--Quarterly Affiliated Broker-Dealer Certification

    Four of the Applicants, J.P. Morgan, Goldman, Chase, and Morgan 
Stanley, commented on Section I(n)(2) of the Notice (65 FR at 6239), 
which requires that the written certification from the Affiliated 
Broker-Dealer mandated by Section I(g)(2) of the Notice be made part of 
the quarterly reports to the Independent Fiduciaries.

[[Page 35132]]

    a. Chase requested that Section I(n)(2) of the Notice be modified 
so that the time frame for providing the certification would be no 
later than the report covering the second calendar quarter after the 
quarter in which an underwriting occurred. In addition, Chase requested 
clarification regarding any difference in meaning behind the different 
terminology used to denote time periods in Section I(n)(4) and (n)(2) 
of the Notice--``next quarterly report'' and ``preceding quarter'' 
versus ``past quarter.''
    b. J.P. Morgan, Goldman, and Morgan Stanley argued that it is 
unnecessary to provide the actual certification, which will likely look 
the same from quarter to quarter and which will be maintained pursuant 
to the exemption's recordkeeping conditions. Therefore, the Applicants 
requested that the Asset Manager be required instead to merely state in 
its quarterly reports that it has received such certification from the 
Affiliated Broker-Dealer, and that a copy of such certification will be 
provided to the Independent Fiduciaries upon request.
    With respect to the modification to Section I(n)(2) of the Notice 
requested by Chase regarding an extension of time for providing the 
certification to the Independent Fiduciaries, the Department believes 
that 45 days following the period in which an underwriting occurred is 
a sufficient time to provide the certification. In addition, the 
Department wishes to clarify that no difference in meaning was intended 
by the different terminology used to denote time periods in Section 
I(n)(4) and (n)(2) of the Notice. Therefore, the language of Section 
I(n)(4) has been revised in the final exemption to eliminate any 
appearance of inconsistency. Specifically, the phrase ``next quarterly 
report'' has been changed to ``quarterly report,'' and the phrase 
``preceding quarter'' to ``past quarter.''
    With respect to the modification to Section I(n)(2) of the Notice 
requested by J.P. Morgan, Goldman, and Morgan Stanley, the Department 
concurs in the Applicants' suggestion that a representation regarding 
the certification in the quarterly reports may be made in lieu of 
providing the actual certification to the Independent Fiduciaries. The 
representation in the quarterly reports must state that the 
certification relates to each covered transaction during the past 
quarter. Accordingly, the Department has modified Section I(n)(2) in 
the final exemption.

8. Section I(n)(4)--Quarterly Reporting on Trading Restrictions

    The five Applicants raised concerns that the language in Section 
I(n)(4) of the Notice (65 FR at 6239), which requires the disclosure in 
the quarterly reports of restrictions on trading in the covered 
securities, may be broader than necessary.
    The Department notes that, according to the Applicants, their 
business separation policies are designed, among other things, to limit 
the flow of information that could restrict the Asset Manager's 
flexibility in managing client assets (65 FR at 6232). In deciding to 
propose the exemptions, the Department was reassured by those 
representations. Should this flexibility be limited, for example, by a 
restriction that precluded the Asset Manager's sale of the securities 
purchased in the underwriting, the Department believes that any such 
restriction should be disclosed to the Independent Fiduciaries. After 
consideration of the issue, the Department has determined to narrow the 
language in Section I(n)(4) in the final exemption by substituting the 
term ``selling'' in place of the term ``trading in.'' In addition, the 
Department has revised the condition so that it refers explicitly to 
covered securities purchased during the past quarter.

9. Section I(i)(3), (j) & (k)(3), (l) and (m)--Termination Form

    Four of the Applicants, J.P. Morgan, Goldman, Morgan Stanley, and 
Citigroup, requested deletion of the requirement that a ``termination 
form'' be provided annually that enables the Independent Fiduciaries to 
terminate authorization, without penalty, for the Asset Manager to 
engage in transactions pursuant to the exemption. In addition, Chase 
commented that the reference in Section I(j) of the Notice to Section 
I(i)(3) is duplicative and should be deleted.
    Section I(i)(3) of the Notice (65 FR at 6238) requires that the 
termination form be provided as part of the initial disclosure to the 
Independent Fiduciaries of single Client Plans, while Section I(j) of 
the Notice (65 FR at 6238) requires that such a termination form also 
be provided at least annually. Section I(k)(3), (l), and (m) of the 
Notice (65 FR at 6238, 6239) contain parallel requirements for the 
Independent Fiduciaries of Client Plans investing in a Pooled Fund. The 
Applicants argued that termination forms are unnecessary, given the 
type of sophisticated plans that would be covered by the exemption and 
the quarterly disclosures that would also be required. They stated that 
a more practical and efficient alternative would be the addition to the 
quarterly reports of a reminder that a Client Plan's prior consent to 
the covered transactions may be withdrawn at any time.
    For a single Client Plan, it was suggested that such notification 
explicitly state that the authorization to engage in the covered 
transactions, as described in the quarterly report, may be terminated 
without penalty by the Independent Fiduciary on no more than five days' 
notice and would identify a contact person. For Client Plans investing 
a Pooled Fund that engages in the covered transactions, the 
notification would explicitly state that the Independent Fiduciary may 
terminate investment in the Pooled Fund without penalty and would 
identify a contact person.
    The Department concurs in the Applicants' request to eliminate 
initial termination forms for single Client Plans and annual 
termination forms for both single Client Plans and Client Plans 
investing in a Pooled Fund. However, the Department believes that it is 
important for Client Plans in a Pooled Fund to receive a termination 
form as part of the initial disclosure materials, since withdrawing 
from the Pooled Fund is the only option available to a Client Plan not 
wishing to authorize use of the exemption. In lieu of annual 
termination forms, notification to the Independent Fiduciaries 
regarding their right to terminate authorization may be made in the 
quarterly reports, provided that such notification is prominently 
displayed. These modifications are reflected in Section I(i)(3), (j) & 
(k)(3), (l) and (m) of the final exemption. In this regard, the 
Department notes that the cross-reference in the original Section I(m) 
of the Notice to Section I(k)(3) was a typographical error that should 
have been a cross-reference to Section I(k)(2). To clarify, the 
Department has deleted such cross-references in parallel conditions 
Section I(j) and (m) of the final exemption and written out the 
relevant language concerning the requirement for making ongoing 
disclosures to the Independent Fiduciaries. The Department believes 
that these revisions are also responsive to Chase's comment regarding 
Section I(j) of the Notice.

10. Section I(o)--$50 Million Plan Size Requirement

    A comment concerning Section I(o) of the Notice was submitted by an 
unidentified financial institution which supports the grant of this 
final exemption by the Department. Although not one of the original 
Applicants, the

[[Page 35133]]

unidentified financial institution raised a concern that may be shared 
by other similarly situated financial institutions interested in the 
subject transactions.
    The commentator noted that Section I(o) of the Notice limited 
exemptive relief to Client Plans with total net assets of $50 million 
or more, or to Pooled Funds where at least 50 percent of the units of 
beneficial interest in such Pooled Fund are held by Client Plans having 
total net assets of at least $50 million. The Department stated, in 
paragraph 13 of the Discussion of the Proposed Exemption in the Notice 
(65 FR at 6236), that the minimum plan size requirements will help 
insure that Client Plans have the resources and investment 
sophistication needed to monitor the Asset Manager's investment 
performance with respect to the covered transactions. However, the 
commentator argued that some smaller companies with qualified plans 
having total assets in the range of $10 million to $50 million are very 
sophisticated. The commentator stated that lowering the minimum plan 
size requirement would afford smaller companies and newer plans access 
to desirable investment opportunities.
    After consideration of the issue, the Department has determined 
that the present minimum plan size requirements are necessary to insure 
an appropriate level of plan investor sophistication for the covered 
transactions. Of course, upon proper application, the Department would 
be prepared to consider additional relief for transactions that do not 
meet all the conditions of this exemption, provided that the findings 
under section 408(a) of the Act may be made.

11. Section I(o)--Single Master Trust Requirement

    Three of the Applicants, J.P. Morgan, Goldman, and Morgan Stanley, 
requested a modification to Section I(o) of the Notice. The second 
paragraph of Section I(o) provides that the assets of a group of Client 
Plans maintained by a single employer, or controlled group of 
employers, may be aggregated for purposes of meeting the minimum size 
requirements therein, but only if the assets are pooled for investment 
purposes in a single master trust. Under the modification requested by 
the Applicants, aggregation of plan assets would be permitted even when 
such assets are not in a single master trust, if managed by a single 
Independent Fiduciary.
    As noted in Item 10, above, the minimum size requirements for 
Client Plans and Pooled Funds in Section I(o) are designed to insure a 
certain level of investment sophistication on the part of the 
Independent Fiduciaries who will be responsible for approving and 
monitoring the covered transactions. However, the Applicants argued 
that, if the assets of related plans are not pooled in a single master 
trust, that fact is not necessarily indicative of a lack of 
sophistication on the part of a single fiduciary who may be managing 
such assets.
    After consideration of the issue, the Department is not persuaded 
by the arguments submitted in favor of modifying the exception to the 
minimum plan size requirements. Accordingly, the Department has 
retained the condition that aggregation of certain plan assets for 
purposes of meeting the minimum size requirements in Section I(o) of 
the final exemption is permitted only if the assets are held in a 
single master trust.

12. Section I(q)--10 Percent Limitation on In-house Plan Investment in 
Pooled Funds

    Four of the Applicants, J.P. Morgan, Goldman, Chase, and Morgan 
Stanley, requested deletion of the requirement in Section I(q) of the 
Notice that no more than 10 percent of the assets of a Pooled Fund may 
be comprised of assets of employee benefit plans maintained by the 
Asset Manager, Affiliated Broker-Dealer, or an affiliate thereof, for 
their own employees (an In-house Plan), for which the Asset Manager, 
Affiliated Broker-Dealer, or an affiliate exercises investment 
discretion. This condition would be measured at the time of a covered 
transaction.
    The Applicants stated that this 10 percent limitation has no direct 
bearing on the covered transactions themselves, insofar as permissible 
fees or the disclosure and approval process for Client Plans. Further, 
In-house Plans are limited in their ability to invest in Pooled Funds, 
even in situations where an additional investment may be in the 
interests of the In-house Plans. As an alternative to eliminating any 
percentage limitation altogether, J.P. Morgan suggested that a 25 
percent limitation be substituted for the 10 percent limitation in 
Section I(q) of the Notice.
    With respect to the Applicants' request to eliminate the 10 percent 
limitation in Section I(q) of the Notice, the Department is not 
persuaded by the arguments submitted in favor of deletion of this 
percentage requirement. The Department believes that elimination of 
this condition could result in a failure to insure a sufficient level 
of independent client oversight over transactions involving a Pooled 
Fund.
    However, the Department believes that a 20 percent limitation would 
still insure a sufficient level of independent investor oversight of 
the Asset Manager and would not unduly restrict the investment 
opportunities available for In-house Plans. Accordingly, the Department 
has substituted a 20 percent limitation on In-house Plan investment in 
Pooled Funds in Section I(q) of the final exemption.

13. Section II(g)--Definition of Independent Fiduciary

    The five Applicants commented that Section II(g) of the Notice 
defining the term ``Independent Fiduciary'' for purposes of the subject 
transactions is too narrow. Specifically, Section II(g)(2) deems a 
fiduciary not to be ``independent'' of the Asset Manager if such 
fiduciary, or any officer, director, partner, employee, or relative of 
the fiduciary, is an officer, director, partner, or employee of the 
Asset Manager (or is a relative of such persons). The Applicants noted 
that it is too administratively burdensome to be required to track all 
such relationships to specific individuals who may be employed by such 
large organizations, especially when most of these persons would have 
no power to influence any decisions of the fiduciary on matters 
relating to the exemption.
    As a solution to this problem, Chase favored the deletion of a 
separate definition of ``Independent Fiduciary'' and noted that users 
of certain class exemptions, such as PTE 94-20 (59 FR 8022, February 
17, 1994) \7\ and PTE 98-54 (63 FR 63503, November 13, 1998), \8\ 
determine themselves whether a fiduciary is independent. Chase, along 
with Goldman and Morgan Stanley, suggested the adoption of the 
functional test for an Independent Fiduciary, as used in PTE 86-128 (51 
FR 41686, November 18, 1986). \9\ In Section I(f) of PTE 86-128, a plan 
fiduciary is deemed to be independent of a person in the absence of a 
relationship or interest in such person that might affect the

[[Page 35134]]

exercise of such fiduciary's best judgment in connection with the 
subject transactions.
---------------------------------------------------------------------------

    \7\ PTE 94-20 provides a class exemption, under certain 
conditions, for the purchase and sale of foreign currencies between 
an employee benefit plan and a bank or a broker-dealer or an 
affiliate thereof, which is a party in interest with respect to such 
plan.
    \8\ PTE 98-54 provides a class exemption, under certain 
conditions, for foreign exchange transactions executed pursuant to 
standing instructions.
    \9\ PTE 86-128 provides a class exemption, under certain 
conditions, permitting persons who serve as fiduciaries for employee 
benefit plans to effect or execute securities transactions on behalf 
of such plans.
---------------------------------------------------------------------------

    As a third possibility, J.P. Morgan, Goldman, Morgan Stanley, and 
Citigroup requested an expansion of the ``carve-out'' provision, in 
Section II(g) of the Notice, for the Asset Manager's personnel who 
serve as directors of other organizations. Under the expanded ``carve-
out'' provision, another organization may still be deemed 
``independent'' of the Asset Manager, if such organization's officer, 
partner, or employee, as well as director, (or a relative of such 
persons), who is affiliated with the Asset Manager, abstains from 
participation in certain decisions relating to the retention of the 
Asset Manager and the required authorizations under the exemption. In 
this regard, J.P. Morgan suggested specific language to be added to the 
end of Section II(g) of the Notice.
    The Department concurs in the Applicants' request for a revision to 
the definition of ``Independent Fiduciary'' in Section II(g) of the 
Notice. After discussion with all of the Applicants, the Department is 
persuaded that such definition can be revised in a manner calculated to 
minimize administrative burdens in connection with the exemption, while 
restricting those persons whose independent judgment might be 
compromised from acting as a fiduciary for a Client Plan because of 
certain relationships to the Asset Manager. Accordingly, the Department 
has modified the definition of ``Independent Fiduciary'' in Section 
II(g) of the final exemption to read as follows:

    (g)(1) The term ``Independent Fiduciary'' means a fiduciary of a 
Client Plan who is unrelated to, and independent of, the Asset 
Manager and the Affiliated Broker-Dealer. For purposes of this 
exemption, a Client Plan fiduciary will be deemed to be unrelated 
to, and independent of, the Asset Manager and the Affiliated Broker-
Dealer if such fiduciary represents that neither such fiduciary, nor 
any individual responsible for the decision to authorize or 
terminate authorization for transactions described in Section I, is 
an officer, director, or highly compensated employee (within the 
meaning of section 4975(e)(2)(H) of the Code) of the Asset Manager 
or the Affiliated Broker-Dealer and represents that such fiduciary 
shall advise the Asset Manager if those facts change.
    (2) Notwithstanding anything to the contrary in this Section 
II(g), a fiduciary is not independent if:
    (i) such fiduciary directly or indirectly controls, is 
controlled by, or is under common control with the Asset Manager or 
the Affiliated Broker-Dealer;
    (ii) such fiduciary directly or indirectly receives any 
compensation or other consideration from the Asset Manager or the 
Affiliated Broker-Dealer for his or her own personal account in 
connection with any transaction described in this exemption;
    (iii) any officer, director, or highly compensated employee 
(within the meaning of section 4975(e)(2)(H) of the Code) of the 
Asset Manager, responsible for the transactions described in Section 
I, is an officer, director, or highly compensated employee (within 
the meaning of section 4975(e)(2)(H) of the Code) of the Client Plan 
sponsor or of the fiduciary responsible for the decision to 
authorize or terminate authorization for transactions described in 
Section I. However, if such individual is a director of the Client 
Plan sponsor or of the responsible fiduciary, and if he or she 
abstains from participation in (A) the choice of the Plan's 
investment manager/adviser and (B) the decision to authorize or 
terminate authorization for transactions described in Section I, 
then Section II (g)(2)(iii) shall not apply.
    (3) The term ``officer'' means a president, any vice president 
in charge of a principal business unit, division or function (such 
as sales, administration or finance), or any other officer who 
performs a policy-making function for the entity.
    (4) In the case of existing Client Plans in a Pooled Fund, at 
the time the Asset Manager provides such Client Plans with initial 
notice pursuant to this exemption, the Asset Manager will notify the 
fiduciaries of such Client Plans that they must advise the Asset 
Manager, in writing, if they are not independent, within the meaning 
of this Section II (g).

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 section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and 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 require, among other things, that a fiduciary 
discharge his or her duties respecting a plan solely in the interest of 
the participants and beneficiaries of such plan and in a prudent manner 
in accordance with section 404(a)(1)(B) of the Act; nor does it affect 
the requirements of section 401(a) of the Code that the plan operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) In accordance with section 408(a) of the Act and section 
4975(c)(2) of the Code, the Department finds that the exemptions are 
administratively feasible, in the interests of the affected plans and 
their participants and beneficiaries, and protective of the rights of 
those participants and beneficiaries; and
    (3) The exemptions are supplemental to, and not in derogation of, 
any other provisions of the Act and the Code, including statutory or 
administrative exemptions. 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.
    (4) The exemptions are subject to the express condition that the 
material facts and representations contained in the applications 
accurately describe all material terms of the transactions that are the 
subject of the exemptions.

Exemption

    Under the authority of section 408(a) of the Employee Retirement 
Income Security Act (the Act) and section 4975(c)(2) of the Internal 
Revenue Code of 1986 (the Code) and in accordance with the procedures 
set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, August 10, 
1990), the Department grants the following individual Prohibited 
Transaction Exemptions (PTEs): PTE 2000-, Morgan Guaranty Trust Company 
of New York and J.P. Morgan Investment Management Inc.; PTE 2000-, 
Goldman, Sachs & Co.; PTE 2000-, The Chase Manhattan Bank; PTE 2000-, 
Citigroup Inc; and PTE 2000-, Morgan Stanley Dean Witter & Co.

Section I--Transactions

    Effective February 8, 2000, the restrictions of section 406 of the 
Act and the sanctions resulting from the application of section 4975 of 
the Code, by reason of section 4975(c)(1) of the Code, shall not apply 
to the purchase of any securities by the Asset Manager on behalf of 
employee benefit plans (Client Plans), including Client Plans investing 
in a pooled fund (Pooled Fund), for which the Asset Manager acts as a 
fiduciary, from any person other than the Asset Manager or an affiliate 
thereof, during the existence of an underwriting or selling syndicate 
with respect to such securities, where the Affiliated Broker-Dealer is 
a manager or member of such syndicate, provided that the following 
conditions are satisfied:
    (a) The securities to be purchased are--
    (1) either:
    (i) part of an issue registered under the Securities Act of 1933 
(the 1933 Act) (15 U.S.C. 77a et seq.) or, if exempt from such 
registration requirement, are (A) issued or guaranteed by the United 
States or by any person controlled or supervised by and acting as an 
instrumentality of the United States

[[Page 35135]]

pursuant to authority granted by the Congress of the United States, (B) 
issued by a bank, (C) exempt from such registration requirement 
pursuant to a federal statute other than the 1933 Act, or (D) are the 
subject of a distribution and are of a class which is required to be 
registered under section 12 of the Securities Exchange Act of 1934 (the 
1934 Act) (15 U.S.C. 781), and the issuer of which has been subject to 
the reporting requirements of section 13 of that Act (15 U.S.C. 78m) 
for a period of at least 90 days immediately preceding the sale of 
securities and has filed all reports required to be filed thereunder 
with the Securities and Exchange Commission (SEC) during the preceding 
12 months; or
    (ii) part of an issue that is an ``Eligible Rule 144A Offering,'' 
as defined in SEC Rule 10f-3 (17 CFR 270.10f-3(a)(4)). Where the 
Eligible Rule 144A Offering is of equity securities, the offering 
syndicate shall obtain a legal opinion regarding the adequacy of the 
disclosure in the offering memorandum;
    (2) purchased prior to the end of the first day on which any sales 
are made, at a price that is not more than the price paid by each other 
purchaser of securities in that offering or in any concurrent offering 
of the securities, except that--
    (i) if such securities are offered for subscription upon exercise 
of rights, they may be purchased on or before the fourth day preceding 
the day on which the rights offering terminates; or
    (ii) if such securities are debt securities, they may be purchased 
at a price that is not more than the price paid by each other purchaser 
of securities in that offering or in any concurrent offering of the 
securities and may be purchased on a day subsequent to the end of the 
first day on which any sales are made, provided that the interest rates 
on comparable debt securities offered to the public subsequent to the 
first day and prior to the purchase are less than the interest rate of 
the debt securities being purchased; and
    (3) offered pursuant to an underwriting or selling agreement under 
which the members of the syndicate are committed to purchase all of the 
securities being offered, except if--
    (i) such securities are purchased by others pursuant to a rights 
offering; or
    (ii) such securities are offered pursuant to an over-allotment 
option.
    (b) The issuer of such securities has been in continuous operation 
for not less than three years, including the operation of any 
predecessors, unless--
    (1) such securities are non-convertible debt securities rated in 
one of the four highest rating categories by at least one nationally 
recognized statistical rating organization, i.e., Standard & Poor's 
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit 
Rating Co., or Fitch IBCA, Inc., or their successors (collectively, the 
Rating Organizations); or
    (2) such securities are issued or fully guaranteed by a person 
described in paragraph (a)(1)(i)(A) of this exemption; or
    (3) such securities are fully guaranteed by a person who has issued 
securities described in (a)(1)(i)(B), (C), or (D), and who has been in 
continuous operation for not less than three years, including the 
operation of any predecessors.
    (c) The amount of such securities to be purchased by the Asset 
Manager on behalf of a Client Plan does not exceed three percent of the 
total amount of the securities being offered. Notwithstanding the 
foregoing, the aggregate amount of any securities purchased with assets 
of all Client Plans (including Pooled Funds) managed by the Asset 
Manager (or with respect to which the Asset Manager renders investment 
advice within the meaning of 29 CFR 2510.3-21(c)) does not exceed:
    (1) 10 percent of the total amount of any equity securities being 
offered;
    (2) 35 percent of the total amount of any debt securities being 
offered that are rated in one of the four highest rating categories by 
at least one of the Rating Organizations; or
    (3) 25 percent of the total amount of any debt securities being 
offered that are rated in the fifth or sixth highest rating categories 
by at least one of the Rating Organizations; and
    (4) if purchased in an Eligible Rule 144A Offering, the total 
amount of the securities being offered for purposes of determining the 
percentages for (1)-(3) above is the total of:
    (i) the principal amount of the offering of such class sold by 
underwriters or members of the selling syndicate to ``qualified 
institutional buyers'' (QIBs), as defined in SEC Rule 144A (17 CFR 
230.144A(a)(1)); plus
    (ii) the principal amount of the offering of such class in any 
concurrent public offering.
    (d) The consideration to be paid by the Client Plan in purchasing 
such securities does not exceed three percent of the fair market value 
of the total net assets of the Client Plan, as of the last day of the 
most recent fiscal quarter of the Client Plan prior to such 
transaction.
    (e) The transaction is not part of an agreement, arrangement, or 
understanding designed to benefit the Asset Manager or an affiliate.
    (f) The Affiliated Broker-Dealer does not receive, either directly, 
indirectly, or through designation, any selling concession or other 
consideration that is based upon the amount of securities purchased by 
Client Plans pursuant to this exemption. In this regard, the Affiliated 
Broker-Dealer may not receive, either directly or indirectly, any 
compensation that is attributable to the fixed designations generated 
by purchases of securities by the Asset Manager on behalf of its Client 
Plans.
    (g)(1) The amount the Affiliated Broker-Dealer receives in 
management, underwriting or other compensation is not increased through 
an agreement, arrangement, or understanding for the purpose of 
compensating the Affiliated Broker-Dealer for foregoing any selling 
concessions for those securities sold pursuant to this exemption. 
Except as described above, nothing in this paragraph shall be construed 
as precluding the Affiliated Broker-Dealer from receiving management 
fees for serving as manager of the underwriting or selling syndicate, 
underwriting fees for assuming the responsibilities of an underwriter 
in the underwriting or selling syndicate, or other consideration that 
is not based upon the amount of securities purchased by the Asset 
Manager on behalf of Client Plans pursuant to this exemption; and
    (2) The Affiliated Broker-Dealer shall provide to the Asset Manager 
a written certification, signed by an officer of the Affiliated Broker-
Dealer, stating the amount that the Affiliated Broker-Dealer received 
in compensation during the past quarter, in connection with any 
offerings covered by this exemption, was not adjusted in a manner 
inconsistent with Section I, paragraphs (e), (f), or (g), of this 
exemption.
    (h) In the case of a single Client Plan, the covered transaction is 
performed under a written authorization executed in advance by an 
independent fiduciary (Independent Fiduciary) of the Client Plan.
    (i) Prior to the execution of the written authorization described 
in paragraph (h) above, the following information and materials must be 
provided by the Asset Manager to the Independent Fiduciary of each 
single Client Plan:
    (1) a copy of the notice of proposed exemption and of the final 
exemption, as published in the Federal Register; and
    (2) any other reasonably available information regarding the 
covered transactions that the Independent Fiduciary requests.

[[Page 35136]]

    (j) Subsequent to an Independent Fiduciary's initial authorization 
permitting the Asset Manager to engage in the covered transactions on 
behalf of a single Client Plan, the Asset Manager will continue to be 
subject to the requirement to provide any reasonably available 
information regarding the covered transactions that the Independent 
Fiduciary requests.
    (k) In the case of existing plan investors in a Pooled Fund, such 
Pooled Fund may not engage in any covered transactions pursuant to this 
exemption, unless the Asset Manager has provided the written 
information described below to the Independent Fiduciary of each plan 
participating in the Pooled Fund. The following information and 
materials shall be provided not less than 45 days prior to the Asset 
Manager's engaging in the covered transactions on behalf of the Pooled 
Fund pursuant to the exemption:
    (1) A notice of the Pooled Fund's intent to purchase securities 
pursuant to this exemption and a copy of the notice of proposed 
exemption and of the final exemption, as published in the Federal 
Register;
    (2) Any other reasonably available information regarding the 
covered transactions that the Independent Fiduciary requests; and
    (3) A termination form expressly providing an election for the 
Independent Fiduciary to terminate the plan's investment in the Pooled 
Fund without penalty to the plan. Such form shall include instructions 
specifying how to use the form. Specifically, the instructions will 
explain that the plan has an opportunity to withdraw its assets from 
the Pooled Fund for a period at least 30 days after the plan's receipt 
of the initial notice described in subparagraph (1) above and that the 
failure of the Independent Fiduciary to return the termination form by 
the specified date shall be deemed to be an approval by the plan of its 
participation in covered transactions as a Pooled Fund investor. 
Further, the instructions will identify the Asset Manager and its 
Affiliated Broker-Dealer and state that this exemption may be 
unavailable unless the Independent Fiduciary is, in fact, independent 
of those persons. Such fiduciary must advise the Asset Manager, in 
writing, if it is not an ``independent Fiduciary,'' as that term is 
defined in Section II(g) of this exemption.
    For purposes of this paragraph, the requirement that the 
authorizing fiduciary be independent of the Asset Manager shall not 
apply in the case of an in-house plan sponsored by the Applicant or an 
affiliate thereof. However, in-house plans must notify the Asset 
Manager, as provided above.
    (l) In the case of a plan whose assets are proposed to be invested 
in a Pooled Fund subsequent to implementation of the procedures to 
engage in the covered transactions, the plan's investment in the Pooled 
Fund is subject to the prior written authorization of an Independent 
Fiduciary, following the receipt by the Independent Fiduciary of the 
materials described in subparagraphs (1) and (2) of paragraph (k). For 
purposes of this paragraph, the requirement that the authorizing 
fiduciary be independent of the Asset Manager shall not apply in the 
case of an in-house plan sponsored by the Applicant or an affiliate 
thereof.
    (m) Subsequent to an Independent Fiduciary's initial authorization 
of a plan's investment in a Pooled Fund that engages in the covered 
transactions, the Asset Manager will continue to be subject to the 
requirement to provide any reasonably available information regarding 
the covered transactions that the Independent Fiduciary requests.
    (n) At least once every three months, and not later than 45 days 
following the period to which such information relates, the Asset 
Manager shall:
    (1) furnish the Independent Fiduciary of each single Client Plan, 
and of each plan investing in a Pooled Fund, with a report (which may 
be provided electronically) disclosing all securities purchased on 
behalf of that Client Plan or Pooled Fund pursuant to the exemption 
during the period to which such report relates, and the terms of the 
transactions, including:
    (i) the type of security (including the rating of any debt 
security);
    (ii) the price at which the securities were purchased;
    (iii) the first day on which any sale was made during this 
offering;
    (iv) the size of the issue;
    (v) the number of securities purchased by the Asset Manager for the 
specific Client Plan or Pooled Fund;
    (vi) the identity of the underwriter from whom the securities were 
purchased;
    (vii) the spread on the underwriting;
    (ix) the price at which any such securities purchased during the 
period were sold; and
    (x) the market value at the end of such period of each security 
purchased during the period and not sold;
    (2) provide to the Independent Fiduciary in the quarterly report a 
representation that the Asset Manager has received a written 
certification signed by an officer of the Affiliated Broker-Dealer, as 
described in paragraph (g)(2), affirming that, as to each offering 
covered by this exemption during the past quarter, the Affiliated 
Broker-Dealer acted in compliance with Section I, paragraphs (e), (f), 
and (g) of this exemption, and that a copy of such certification will 
be provided to the Independent Fiduciary upon request;
    (3) disclose to the Independent Fiduciary that, upon request, any 
other reasonably available information regarding the covered 
transactions that the Independent Fiduciary requests will be provided, 
including, but not limited to:
    (i) the date on which the securities were purchased on behalf of 
the plan;
    (ii) the percentage of the offering purchased on behalf of all 
Client Plans and Pooled Funds; and
    (iii) the identity of all members of the underwriting syndicate;
    (4) disclose to the Independent Fiduciary in the quarterly report, 
any instance during the past quarter where the Asset Manager was 
precluded for any period of time from selling a security purchased 
under this exemption in that quarter because of its status as an 
affiliate of the Affiliated Broker-Dealer and the reason for this 
restriction;
    (5) provide explicit notification, prominently displayed in each 
quarterly report, to the Independent Fiduciary of a single Client Plan, 
that the authorization to engage in the covered transactions may be 
terminated, without penalty, by the Independent Fiduciary on no more 
than five days' notice by contacting an identified person; and
    (6) provide explicit notification, prominently displayed in each 
quarterly report, to the Independent Fiduciary of a Client Plan 
investing a Pooled Fund, that the Independent Fiduciary may terminate 
investment in the Pooled Fund, without penalty, by contacting an 
identified person.
    (o) Each single Client Plan shall have total net assets with a 
value of at least $50 million. In addition, in the case of a 
transaction involving an Eligible Rule 144A Offering on behalf of a 
single Client Plan, each such Client Plan shall have at least $100 
million in securities, as determined pursuant to SEC Rule 144A (17 CFR 
230.144A). In the case of a Pooled Fund, the $50 million requirement 
will be met if 50 percent or more of the units of beneficial interest 
in such Pooled Fund are held by plans having total net assets with a 
value of at least $50 million. For purchases involving an Eligible Rule 
144A Offering on behalf of a Pooled Fund, the $100 million requirement 
will be met if 50 percent or more of the units of beneficial interest 
in such Pooled Fund are held by plans having at least $100 million in 
assets and the Pooled Fund

[[Page 35137]]

itself qualifies as a QIB, as determined pursuant to SEC Rule 144A (17 
CFR 230.144A(a)(F)).
    For purposes of the net asset tests described above, where a group 
of Client Plans is maintained by a single employer or controlled group 
of employers, as defined in section 407(d)(7) of the Act, the $50 
million net asset requirement or the $100 million net asset requirement 
may be met by aggregating the assets of such Client Plans, if the 
assets are pooled for investment purposes in a single master trust.
    (p) The Asset Manager qualifies as a ``qualified professional asset 
manager'' (QPAM), as that term is defined under Part V(a) of Prohibited 
Transaction Exemption 84-14 (49 FR 9494, 9506, March 13, 1984) and, in 
addition, has, as of the last day of its most recent fiscal year, total 
client assets under its management and control in excess of $5 billion 
and shareholders' or partners' equity in excess of $1 million.
    (q) No more than 20 percent of the assets of a Pooled Fund, at the 
time of a covered transaction, are comprised of assets of employee 
benefit plans maintained by the Asset Manager, the Affiliated Broker-
Dealer, or an affiliate for their own employees, for which the Asset 
Manager, the Affiliated Broker-Dealer, or an affiliate exercises 
investment discretion.
    (r) The Asset Manager and the Affiliated Broker-Dealer maintain, or 
cause to be maintained, for a period of six years from the date of any 
covered transaction such records as are necessary to enable the persons 
described in paragraph(s) of this exemption to determine whether the 
conditions of this exemption have been met, except that--
    (1) no party in interest with respect to a Client Plan, other than 
the Asset Manager and the Affiliated Broker-Dealer, shall be subject to 
a civil penalty under section 502(i) of the Act or the taxes imposed by 
section 4975(a) and (b) of the Code, if such records are not 
maintained, or not available for examination, as required by paragraph 
(s); and
    (2) a prohibited transaction shall not be considered to have 
occurred if, due to circumstances beyond the control of the Asset 
Manager or the Affiliated Broker-Dealer, such records are lost or 
destroyed prior to the end of the six-year period.
    (s)(1) Except as provided in subparagraph (2) of this paragraph (s) 
and notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the records referred to in paragraph (r) are 
unconditionally available at their customary location for examination 
during normal business hours by--
    (i) any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the SEC; or
    (ii) any fiduciary of a Client Plan, or any duly authorized 
employee or representative of such fiduciary; or
    (iii) any employer of participants and beneficiaries and any 
employee organization whose members are covered by a Client Plan, or 
any authorized employee or representative of these entities; or
    (iv) any participant or beneficiary of a Client Plan, or duly 
authorized employee or representative of such participant or 
beneficiary;
    (2) none of the persons described in paragraphs (s)(1)(ii)-(iv) 
shall be authorized to examine trade secrets of the Asset Manager or 
the Affiliated Broker-Dealer, or commercial or financial information 
which is privileged or confidential; and
    (3) should the Asset Manager or the Affiliated Broker-Dealer refuse 
to disclose information on the basis that such information is exempt 
from disclosure pursuant to paragraph (s)(2) above, the Asset Manager 
shall, by the close of the thirtieth (30th) day following the request, 
provide a written notice advising that person of the reasons for the 
refusal and that the Department may request such information.

Section II--Definitions

    (a) The term ``Asset Manager'' means any asset management affiliate 
of the Applicant (as ``affiliate'' is defined in paragraph (c)) that 
meets the requirements of this exemption.
    (b) The term ``Affiliated Broker-Dealer'' means any broker-dealer 
affiliate of the Applicant (as ``affiliate'' is defined in paragraph 
(c)) that meets the requirements of this exemption. Such Affiliated 
Broker-Dealer may participate in an underwriting or selling syndicate 
as a manager or member. The term ``manager'' means any member of an 
underwriting or selling syndicate who, either alone or together with 
other members of the syndicate, is authorized to act on behalf of the 
members of the syndicate in connection with the sale and distribution 
of the securities being offered, or who receives compensation from the 
members of the syndicate for its services as a manager of the 
syndicate.
    (c) The term ``affiliate'' of a person includes:
    (1) any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with such person;
    (2) any officer, director, partner, employee, or relative (as 
defined in section 3(15) of the Act) of 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 ``Client Plan'' means an employee benefit plan that is 
subject to the fiduciary responsibility provisions of the Act and whose 
assets are under the management of the Asset Manager, including a plan 
investing in a Pooled Fund (as ``Pooled Fund'' is defined in paragraph 
(f) below).
    (f) The term ``Pooled Fund'' means a common or collective trust 
fund or pooled investment fund maintained by the Asset Manager.
    (g)(1) The term ``Independent Fiduciary'' means a fiduciary of a 
Client Plan who is unrelated to, and independent of, the Asset Manager 
and the Affiliated Broker-Dealer. For purposes of this exemption, a 
Client Plan fiduciary will be deemed to be unrelated to, and 
independent of, the Asset Manager and the Affiliated Broker-Dealer if 
such fiduciary represents that neither such fiduciary, nor any 
individual responsible for the decision to authorize or terminate 
authorization for transactions described in Section I, is an officer, 
director, or highly compensated employee (within the meaning of section 
4975(e)(2)(H) of the Code) of the Asset Manager or the Affiliated 
Broker-Dealer and represents that such fiduciary shall advise the Asset 
Manager if those facts change.
    (2) Notwithstanding anything to the contrary in this Section II(g), 
a fiduciary is not independent if:
    (i) such fiduciary directly or indirectly controls, is controlled 
by, or is under common control with the Asset Manager or the Affiliated 
Broker-Dealer;
    (ii) such fiduciary directly or indirectly receives any 
compensation or other consideration from the Asset Manager or the 
Affiliated Broker-Dealer for his or her own personal account in 
connection with any transaction described in this exemption;
    (iii) any officer, director, or highly compensated employee (within 
the meaning of section 4975(e)(2)(H) of the Code) of the Asset Manager, 
responsible for the transactions described in Section I, is an officer, 
director, or highly compensated employee (within the meaning of section 
4975(e)(2)(H) of the

[[Page 35138]]

Code) of the Client Plan sponsor or of the fiduciary responsible for 
the decision to authorize or terminate authorization for transactions 
described in Section I. However, if such individual is a director of 
the Client Plan sponsor or of the responsible fiduciary, and if he or 
she abstains from participation in (A) the choice of the Plan's 
investment manager/adviser and (B) the decision to authorize or 
terminate authorization for transactions described in Section I, then 
Section II (g)(2)(iii) shall not apply.
    (3) The term ``officer'' means a president, any vice president in 
charge of a principal business unit, division or function (such as 
sales, administration or finance), or any other officer who performs a 
policy-making function for the entity.
    (4) In the case of existing Client Plans in a Pooled Fund, at the 
time the Asset Manager provides such Client Plans with initial notice 
pursuant to this exemption, the Asset Manager will notify the 
fiduciaries of such Client Plans that they must advise the Asset 
Manager, in writing, if they are not independent, within the meaning of 
this Section II (g).
    (h) The term ``security'' shall have the same meaning as defined in 
section 2(36) of the Investment Company Act of 1940 (the 1940 Act), as 
amended (15 U.S.C. 80a-2(36)(1996)). For purposes of this exemption, 
mortgage-backed or other asset-backed securities rated by a Rating 
Organization will be treated as debt securities.
    (i) The term ``Eligible Rule 144A Offering'' shall have the same 
meaning as defined in SEC Rule 10f-3(a)(4) (17 CFR 270. 10f-3(a)(4)) 
under the 1940 Act.
    (j) The term ``qualified institutional buyer'' or ``QIB'' shall 
have the same meaning as defined in SEC Rule 144A (17 CFR 
230.144A(a)(1)) under the 1933 Act.
    (k) The term ``Rating Organizations'' means Standard & Poor's 
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit 
Rating Co., or Fitch IBCA, Inc., or their successors.

    Signed at Washington, D.C., this 25th day of May, 2000.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 00-13641 Filed 5-31-00; 8:45 am]
BILLING CODE 4510-29-P