[Federal Register Volume 67, Number 13 (Friday, January 18, 2002)]
[Notices]
[Pages 2699-2702]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1364]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application Number D-11041]


Notice of Proposed Individual Exemption To Modify Prohibited 
Transaction Exemption 90-23 (PTE 90-23); Prohibited Transaction 
Exemption 90-31 (PTE 90-31) and Prohibited Transaction Exemption 90-33 
(PTE 90-33) Involving J.P. Morgan Chase & Company and Its Affiliates 
(the Applicants) Located in New York, NY

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

ACTION: Notice of proposed individual exemption to modify PTE 90-23; 
PTE 90-31; and PTE 90-33 (collectively, the Exemptions).

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed individual 
administrative exemption which, if granted, would amend: PTE 90-23 (55 
FR 20545, May 17, 1990), an exemption which was granted to J.P. Morgan 
Securities, Inc.; PTE 90-31 (55 FR 23144, June 6, 1990), an exemption 
which was granted to Chase Manhattan Bank; and PTE 90-33 (55 FR 23151, 
June 6, 1990), an exemption which was granted to Chemical Banking 
Corporation.\1\ The Exemptions provide relief for the operation of 
certain asset pool investment trusts and the acquisition, holding and 
disposition by employee benefit plans (the Plans) of certificates or 
debt instruments that are issued by such trusts with respect to which 
one of the Applicants is the lead underwriter or a co-managing 
underwriter. If granted, this proposed amendment would permit the 
trustee of the trust to be an affiliate of the underwriter. If adopted, 
the proposed amendment would affect the participants and beneficiaries 
of the Plans participating

[[Page 2700]]

in such transactions and the fiduciaries with respect to such Plans.
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    \1\ The notice of proposed exemption for PTE 90-23 was published 
on February 20, 1990 at 55 FR 5906; the notice of proposed exemption 
for PTE 90-31 was published on February 21, 1990 at 55 FR 6074; and 
the notice of proposed exemption for PTE 90-33 was published on 
February 21, 1990 at 55 FR 6082.

DATES: Written comments and requests for a public hearing should be 
received by the Department on or before 45 days from the date of the 
publication in the Federal Register of this notice of proposed 
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amendment.

ADDRESSES: All written comments and requests for a public hearing 
(preferably three copies) should be addressed to the U.S. Department of 
Labor, Office of Exemption Determinations, Pension and Welfare Benefits 
Administration, Room N-5649, 200 Constitution Avenue, NW., Washington, 
DC 20210, (attention: Application No. D-11041; Proposal to Amend 
Certain Individual Exemptions for J.P. Morgan Chase & Co. and its 
Affiliates). Interested persons are also invited to submit comments 
and/or hearing requests to PWBA via e-mail or FAX. Any such comments or 
requests should be sent either by e-mail to: ``[email protected]'' 
or by FAX to (202) 219-0204 by the end of the scheduled comment period. 
The application pertaining to the exemptive relief proposed herein 
(Application No. D-11041) and the comments received will be available 
for public inspection in the Public Documents Room of the Pension and 
Welfare Benefits Administration, U.S. Department of Labor, Room N-1513, 
200 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz, Office of 
Exemption Determinations, Pension and Welfare Benefits Administration, 
U.S. Department of Labor, telephone (202) 693-8546. (This is not a 
toll-free number).

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed amendment that would modify the 
Exemptions. The Exemptions provide relief from certain prohibited 
transaction restrictions of sections 406 and 407(a) of the Employee 
Retirement Income Security Act of 1974 (the Act), as amended, and from 
the sanctions resulting from the application of section 4975 of the 
Internal Revenue Code of 1986 (the Code), as amended, by reason of 
section 4975(c)(1) of the Code. Specifically, the Exemptions are three 
of the individual exemptions commonly known as the ``underwriter 
exemptions,'' all of which are essentially identical to the original 
underwriter exemptions issued by the Department in 1989 to permit Plans 
to invest in pass-through certificates representing undivided interests 
in certain categories of investment trusts, if certain conditions are 
met. All of the underwriter exemptions, including the Exemptions, were 
subsequently amended by Prohibited Transaction Exemption 97-34 (PTE 97-
34, 62 FR 39021, July 21, 1997) and by Prohibited Transaction Exemption 
2000-58 (PTE 2000-58, 65 FR 67765, November 13, 2000).
    The proposed amendment has been requested in an application filed 
on behalf of J.P. Morgan Chase & Company and its Affiliates, 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 2570, subpart B (55 
FR 32836, 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. 
Accordingly, this proposed exemption is issued solely by the 
Department.
    In their current form, the Exemptions permit employee benefit plans 
to purchase certain securities representing interests in asset- or 
mortgage-backed investment pools for which one of the Applicants is the 
lead underwriter or a co-managing underwriter. The securities generally 
take the form of certificates issued by a trust (the Trust). The 
Exemptions permit transactions involving a Trust (including the 
servicing, management and operation of the Trust) and certificates 
evidencing interests therein (including the sale, exchange or transfer 
of certificates in the initial issuance of the certificates or in the 
secondary market for such certificates). The entities covered include 
the sponsor of the Trust as well as the underwriter for the 
certificates issued by the Trust when the sponsor, servicer, trustee or 
insurer of the Trust, the underwriter of the certificates issued by the 
Trust, or an obligor of the receivables contained in the Trust, is a 
party in interest with respect to an investing plan.\2\
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    \2\ Interested persons should review the Department's 
regulations at 29 CFR 2510.3-101 (Definition of ``plan assets''--
plan investments) for the reasons why a Plan's investment in 
certificates issued by a Trust may raise prohibited transaction 
issues with respect to parties in interest.
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    One of the requirements of the Exemptions (as amended by PTE 2000-
58) is that the trustee of the Trust not be an affiliate of any member 
of what the Exemptions define as the ``Restricted Group''; i.e., in 
addition to the trustee, each underwriter, each servicer, each insurer, 
the sponsor, any more than 5% obligor with respect to receivables 
included in the Trust, each counterparty in an Eligible Swap Agreement, 
and any affiliate of such persons. This restriction is common to all of 
the underwriter exemptions.
    The Applicants represent that, while the provision requiring an 
independent trustee was not a major issue in 1989, developments in the 
banking industry over the past twelve years have caused the requirement 
to become onerous and disadvantageous to investors, including Plans. As 
the banking industry has consolidated, the number of banks 
participating in the corporate trust business has shrunk dramatically. 
This trend has been due to a number of factors which have made 
participation in the trust business less attractive to banks. On the 
income side, these factors include competitive pressure on pricing 
corporate trust services and loss of transactional fees and traditional 
float income due to the growth in book entry securities. On the expense 
side, the cost of entry into the corporate trust business and the cost 
of remaining in the business have increased dramatically. This increase 
includes both technological and personnel costs. The cost increase is 
particularly acute in the structured finance sector of the corporate 
trust business, where both systems and staff need to have the 
capability of supporting increasingly complex transactions.The 
Applicants represent that the changes in the securities underwriting 
business are equally significant. These include the increased 
participation by banks and bank affiliates, and consolidation within 
the industry. As of the calendar year 2000, four of the top ten 
underwriters for structured finance transactions had affiliated 
corporate trust businesses. Eight of the top ten trustees, a group with 
a combined market share of over 76 percent in 2000, were affiliates of 
underwriters active in the structured finance sector. The trend in the 
market to broadly syndicate underwriting exacerbates the problem: the 
underwriter exemptions, including the Exemptions, prohibit affiliation 
not only between the trustee and the lead underwriter, but between the 
trustee and any underwriter, without regard to the amount underwritten.
    The Applicants state that currently most providers of corporate 
trust and related services in the structured finance marketplace are 
large banks that have the requisite staff and systems resources to 
efficiently serve this marketplace. Most of these same banks, 
particularly those that are profitable and well-capitalized, have 
expanded into the securities underwriting business, including 
underwriting of structured finance transactions. Not only will 
investors (including Plans) be disadvantaged if banks and their

[[Page 2701]]

affiliates which underwrite securities continue to be precluded from 
providing trust services, but further, it is clearly not in the best 
interest of investors, including Plan investors, to eliminate those 
banks-- often the most competent in the servicing of structured finance 
transactions--from the pool of available corporate trust providers.
    A trustee in a structured finance transaction, while involved in 
complex calculations and reporting, typically does not perform any 
discretionary functions. Such a trustee operates as a stakeholder and 
strictly in accordance with the explicit terms of the governing 
agreements so that the intent of the crafters of the transaction may be 
carried out. These functions are essentially ministerial, such as 
establishing accounts, receiving funds, making payments and issuing 
reports, all in a predetermined manner. Unlike trustees for corporate 
or municipal debt, there is no need for trustees in structured finance 
transactions to assume discretionary functions in order to protect the 
interests of debt holders in the event of default or bankruptcy, 
because structured finance entities are bankruptcy remote vehicles. 
There is no ``issuer'' outside the structured transaction to pursue for 
repayment of the debt. The trustee's role is defined by a contract, 
which provides an explicit structure spelling out the action to be 
taken upon the happening of specified events. There is no opportunity 
or incentive for the trustee in a structured finance transaction, by 
reason of its affiliation with an underwriter or otherwise, to take or 
not to take actions which might benefit the underwriter to the 
detriment of Plan investors. The Applicants represent that the role of 
the underwriter in a structured financing involves, among other things, 
assisting the sponsor or originator in structuring the contemplated 
transaction. The trustee becomes involved later in the process, after 
the principal parties have agreed on the essential components, to 
review the proposed transaction from the limited standpoints of 
technical workability and potential trustee liability. After the 
issuance of securities to the public, in a structured financing, while 
the trustee performs its role as trustee over the life of the 
transaction, the underwriter has no further role in the transaction. 
The trustee has no opportunity to take or not take action, or to use 
information in ways which might advantage the underwriter to the 
detriment of Plan investors. In fact, from the point of view of 
enhancing its reputation, the underwriter clearly wants the transaction 
to succeed as it was structured, which includes the trustee performing 
in a manner independent of the underwriter. Accordingly, the Applicants 
have requested this modification to the Exemptions to permit the 
trustee of the Trust to be an affiliate of the underwriter.
    In summary, the Applicants represent that the proposed modification 
of the Exemptions satisfies the statutory criteria for an exemption 
under section 408(a) of the Act for the following reasons: (a) The 
amendment will benefit Plans by ensuring that the most capable 
corporate trustees will continue in the corporate trust business; (b) 
the amendment will not be harmful to Plans because the affiliation of 
the trustee to an underwriter will not cause any benefit to the 
underwriter to the detriment of any Plan investor; and (c) the 
safeguards provided by the Exemptions will not otherwise be altered.

Notice to Interested Persons

    The Applicants believe that the market for the securities described 
in their application is so broad, and the number of potentially 
affected Plans is so large, that notice by mailing is impracticable and 
inadequate. Thus, publication of this Notice in the Federal Register is 
the only practical means of providing notice to interested persons. 
Written comments and hearing requests are due within 45 days of the 
publication of the Notice in the Federal Register.

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, a fiduciary to 
discharge his or her duties respecting the plan solely in the interest 
of the participants and beneficiaries of the plan and in a prudent 
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it 
affect the 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) Before an exemption can be granted under section 408(a) of the 
Act and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interest of the plan 
and of its participants and beneficiaries and protective of the rights 
of participants and beneficiaries of the plan;
    (3) This proposed exemption, if granted, will be 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; and
    (4) This proposed exemption, if granted, is subject to the express 
condition that the Summary of Facts and Representations set forth in 
the notices of proposed exemption relating to the Exemptions, as 
modified by this Notice, accurately describe, where relevant, the 
material terms of the transactions to be consummated pursuant to this 
exemption.

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a hearing on the pending exemption to the address above, 
within the time frame set forth above, after the publication of this 
proposed exemption in the Federal Register. All comments will be made a 
part of the record. Comments received will be available for public 
inspection with the referenced applications at the address set forth 
above.

Proposed Exemption

    Based on the facts and representations set forth in the 
application, 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), the Department proposes to modify PTE 90-23, PTE 90-31 and PTE 
90-33, each as subsequently amended by PTE 97-34 and PTE 2000-58, as 
set forth below:

    The first sentence of section II.A.(4) of the Exemptions is 
amended to read: ``The trustee is not an Affiliate of any member of 
the Restricted Group, other than an Underwriter.''

    The availability of this proposed exemption is subject to the 
express condition that the material facts and representations contained 
in the application for exemption are true and complete and accurately 
describe all material terms of the transactions. In the case of 
continuing transactions, if any of

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the material facts or representations described in the applications 
change, the exemption will cease to apply as of the date of such 
change. In the event of any such change, an application for a new 
exemption must be made to the Department.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant the Exemptions, refer to 
the proposed exemptions and the grant notices that are cited above.

    Signed at Washington, DC, this 15th day of January, 2002.
Ivan L. Strasfeld,
Director of Exemption, Determinations, Pension and Welfare Benefits, 
Administration, U.S. Department of Labor.
[FR Doc. 02-1364 Filed 1-17-02; 8:45 am]
BILLING CODE 4510-29-P