Prohibited Transaction Exemption (PTE) 2006-16; Class Exemption
To Permit Certain Loans of Securities by Employee Benefit Plans
[10/31/2006]
Volume 71, Number 210, Page 63786-63799
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application Nos. D-08295 and D-10365]
RIN 1210-ZA10
Prohibited Transaction Exemption (PTE) 2006-16; Class Exemption
To Permit Certain Loans of Securities by Employee Benefit Plans
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Adoption of Amendment and Revocation of PTEs 81-6 and 82-63.
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SUMMARY: This document amends and replaces Prohibited Transaction
Exemption (PTE) 81-6 (46 FR 7527, January 23, 1981) and PTE 82-63 (47
FR 14804, April 6, 1982). PTE 81-6 exempts the lending of securities by
employee benefit plans to certain banks and broker-dealers, and PTE 82-
63 exempts certain compensation arrangements for the provision of
securities lending services by a plan fiduciary to an employee benefit
plan. The final amendment incorporates the exemptions into one
renumbered exemption, and expands the relief that was provided in PTEs
81-6 and 82-63 to include additional parties and additional forms of
collateral subject to the specified conditions. The exemption affects
participants and beneficiaries of employee benefit plans, persons who
lend securities on behalf of such plans, and parties in interest who
engage in securities lending transactions with such plans.
DATES: The effective date of this amendment is January 2, 2007. The
revocation of PTEs 81-6 and 82-63 is effective on January 2, 2007.
FOR FURTHER INFORMATION CONTACT: Allison Padams Lavigne, Office of
Exemption Determinations, Employee Benefits Security Administration,
U.S. Department of Labor, (202) 693-8540 (This is not a toll-free
number.)
SUPPLEMENTARY INFORMATION: On October 23, 2003, the Department proposed
a notice in the Federal Register of a proposed class exemption to amend
PTEs 81-6 and 82-63 by incorporating PTEs 81-6 and 82-63 into a new
class exemption and expanding the existing relief from the restrictions
of sections 406(a)(1)(A) through (D) and 406(b)(1) of ERISA and the
taxes imposed by section 4975(a) and (b) of the Code by reason of
section 4975(c)(1)(A) through (E) of the Code to additional parties
under modified conditions.\1\ The notice also proposed the revocation
of PTEs 81-6 and 82-63. The proposal was published in response to two
exemption applications. One application was submitted by the American
Bankers Association (ABA) (D-08295), and the second application was
submitted by the Robert Morris Associates, now known as the Risk
Management Association (RMA) (D-10365). The applications were filed
pursuant to section 408(a) of ERISA 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).
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\1\ 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 under Code section 4975(c)(2) to
the Secretary of Labor.
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The notice of pendency gave interested persons an opportunity to
comment or request a public hearing on the proposal. The Department
received six public comments. No request for a hearing was received.
Upon
[[Page 63787]]
consideration of the comments received, the Department has determined
to grant the proposed class exemption, subject to certain
modifications. These modifications and the comments are discussed
below.
Executive Order 12866
Under Executive Order 12866, the Department must determine whether
the regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f), the order defines a
``significant regulatory action'' as an action that is likely to result
in a rule (1) having an annual effect on the economy of $100 million or
more, or adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant''); (2) creating serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order.
This class exemption has been drafted and reviewed in accordance
with Executive Order 12866, section 1(b), Principles of Regulation. The
Department has determined that this exemption is not a ``significant
regulatory action'' under section 3(f) of the Executive Order.
Accordingly, it does not require an assessment of potential costs and
benefits under section 6(a)(3) of that Order.
Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department of Labor conducts a preclearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested data
will be provided in the desired format, that the reporting burden (time
and financial resources) imposed on respondents is minimized, that the
public can clearly understand the Department's collection instruments,
and that the Department can properly assess the impact of its
collection requirements on respondents.
The Department previously solicited comments concerning the
information collection request (ICR) included in the Proposed Amendment
to PTE 81-6 and Proposed Restatement and Redesignation of PTE 82-63
(the Proposal) when that document was published in the Federal Register
on October 23, 2003 (68 FR 60715). The ICR re-stated and combined then-
existing ICRs previously approved under OMB Control Numbers 1210-0065
(PTE 81-6) and 1210-0062 (PTE-82-63) and requested approval for the
program changes set forth in the Proposal, as well as an adjustment in
the burden estimates based on updated information. The ICR was reviewed
by OMB and approved on April 11, 2004, under the control number 1210-
0065, and that approval is currently scheduled to expire on December
31, 2006.
The class exemption published in this notice has been revised from
the Proposal in two basic ways. First, the categories of eligible
foreign banks and broker dealers have been broadened to include foreign
banks and broker dealers located in additional specified foreign
countries, provided that such entities meet the additional specified
conditions. Second, the permitted types of collateral for loans of
securities by plans to eligible banks and broker dealers have been
enlarged to include additional types of collateral. Currently, the
Department is soliciting comments concerning revisions in the burden
estimates for the ICR resulting from these modifications and from
further changes in the Department's assumptions and estimation
methodology, which are due to better understanding of the existing
market for foreign and domestic securities lending. After consideration
of any public comments received in response to this solicitation, the
Department intends to submit an ICR to OMB for review of the paperwork
burden modifications and changes described in this section. Under 5 CFR
1320.5(b), an Agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the
collection displays a valid control number. The Department will publish
notice in the Federal Register of OMB's decision upon review of the
Department's ICR.
A copy of the ICR may be obtained by contacting Susan G. Lahne,
Office of Policy and Research, U.S. Department of Labor, Employee
Benefits Security Administration, 200 Constitution Avenue, NW., Room N-
5647, Washington, DC 20210. Telephone: (202) 693-8410; Fax: (202) 219-
5333. These are not toll-free numbers. The ICR also may be viewed via
the internet at http://www.reginfo.gov/public/do/PRAMain. The
Department and OMB are particularly interested in comments that:
Evaluate whether the collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., by
permitting electronic submission of responses.
Comments should be sent to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Room 10235, New Executive
Office Building, Washington, DC 20503; Attention: Desk Officer for the
Employee Benefits Security Administration. Although comments may be
submitted through January 2, 2007, OMB requests that comments be
received within 30 days of publication of this class exemption to
ensure their consideration.
The Department has consulted with industry experts and has received
additional information on the nature and operation of the foreign and
domestic securities lending markets. Based on this new information, the
Department is revising its prior paperwork burden analysis to reflect
its better understanding of the likely impact of the exemption.
In its prior paperwork burden analysis, the Department based its
estimates conservatively on the assumption that all domestic broker
dealers and banks with trust powers would take advantage of the
exemption. This led to an estimate of 13,900 domestic entities that
would be respondents to the information collections of the Proposal.
Given the highly sophisticated nature of the securities lending market
in general and the specific limitations of the exemption in particular,
including the required indemnification agreements, equity capital
minimums, and levels of collateralization, the Department believes that
its original estimate
[[Page 63788]]
overstated the likely incidence of reliance. The Department now assumes
that the exemption will be relied upon only by the limited group of
large, sophisticated domestic broker dealers and banks currently active
in the securities lending market, which the Department estimates at
approximately 140 separate entities. In addition, the Department
estimates that in total 60 foreign broker dealers and banks will begin
to rely upon the exemption in its final form, including the 13 entities
located in the United Kingdom that were previously included in the
Department's paperwork burden analysis for the Proposal. This produces
a total estimate of 200 respondents.
Given the nature of securities lending practices, which require
expert knowledge, efficient and sophisticated communications systems,
and careful monitoring and control of the timing of securities loan
transactions, the Department further believes that each of the
borrowing entities will establish securities lending relationships with
only a limited number of plans. For purposes of this estimate, the
Department has assumed that each borrower will sign a contract with no
more than 10 employee benefit plans.
The specific information collections of this exemption have not
changed from the Proposal. As described in the prior ICR, the exemption
provides that, before a plan can lend securities, the borrower must
provide the plan with a financial statement. In addition, the
agreements regarding the loan transaction or series of transactions and
the compensation arrangement for the Lending Fiduciary must be
described in a written document. The Department continues to assume
that these documents are routinely prepared by the respondent entities
in-house as part of usual and customary business practice. The
Department has therefore treated the preparation and review of these
documents as an hour burden for purposes of this analysis; the cost
burden derives solely from material and postage costs for distribution.
These costs were estimated at $4.00 per priority or overnight domestic
mailing of the documents. Discussions with industry experts indicated
that nearly all of the foreign-based institutions likely to rely on the
exemption have established domestic branches. The Department assumes,
therefore, that all mailings will be handled by the domestic-based
operations and that there will be few, if any, respondents using
foreign mail services.
The Department has also assumed that the respondents, all of which
are large, sophisticated financial entities, will generally communicate
by electronic means. Because electronic communications will be
undertaken through existing electronic systems and databases, the
Department has not added any additional burden for documents that are
assumed to be distributed by electronic means.
Financial statements. The Department assumes that each of the 200
respondents will provide each plan with which it has a master lending
agreement (10 plans each) with a new financial statement on a quarterly
basis, resulting in an estimate of 8,000 financial statements
distributed annually (200 respondents x 10 plans x 4 quarterly
financial statements). No preparation burden for these statements is
assumed, however, since the financial statements will have been
prepared for other purposes. The Department has assumed that only 10
percent of the respondents will distribute the financial statements in
paper by mail. For the 800 financial statements that are therefore
assumed to be distributed annually by mail (10 percent of 8,000 = 800),
the Department assumes an hour burden of 5 minutes per statement,
consisting of the preparation of an overnight or priority delivery
package, resulting in an annual hour burden of 67 hours of clerical
time (800 mailings x 5 min./60 min.). For these purposes, each
statement is assumed, based on financial statements filed with the
Securities and Exchange Commission, to consist of 10 pages. For the 800
financial statements delivered via mail, the Department further assumes
a total annual cost of $3,200 (800 mailings x $4.00 per mailing).
For the remaining 90 percent of the financial statements
distributed annually, or 7,200 statements (8,000 - 800 = 7,200), the
Department has assumed electronic distribution and has not estimated
any additional distribution burden.
Lending and compensation agreements. The Department assumes that
each respondent will use master agreements for both the lending
agreement and the lending fiduciary compensation agreement and will
review and distribute them on an annual basis. For purposes of burden
analysis, the Department has assumed that each respondent will annually
require 30 minutes to review each of these two agreements for
compliance (1 hour total per respondent), resulting in an annual hour
burden of 200 hours (200 respondents x 1 hour per respondent).
The respondents are further assumed to require 5 minutes to package
and mail the agreements. Because of the nature of these agreements, the
Department assumes that the respondents will provide each of their plan
partners with a single mailing annually containing both the lending
agreement and the compensation agreement for that partner and that all
agreements will be distributed in paper form by priority or overnight
mail. The total time for preparation is 167 hours (200 respondents x 10
lending partners x 5 minutes per agreement)/60). The cost for the
distribution of these 2,000 documents (2,000 = 200 respondents x 10
lending partners each) by overnight or priority mail is estimated at
$8,000.
The total annual hour burden for this information collection, based
on these assumptions, is therefore 434 hours (67 hours + 200 hours +
167 hours). The equivalent cost of the annual hour burden is estimated
at $21,514, based on $16,600 for legal staff review of the agreements
(200 hours x $83 per hour = $16,600) and $4,914 for clerical time to
prepare and distribute the documents (234 hours x $21 per hour =
$4,914).
The total annual cost burden for this information collection is
estimated at $11,200 ($8,000 for the agreements + $3,200 for the
financial statements = $11,200).
The following summarizes the Department's paperwork burden
estimates for this information collection:
Type of Review: Revision of a currently approved collection.
Agency: Employee Benefits Security Administration, Department of
Labor.
Title: Securities Lending Prohibited Transaction Exemption.
OMB Number: 1210-0065.
Affected Public: Business or other for-profit, Not-for-profit
institutions.
Total Respondents: 200.
Frequency: On occasion.
Total Responses: 2,000.
Estimated Total Burden Hours: 434.
Estimated Burden Cost: $11,200.
Discussion of Comments Received
The Department received six comments regarding the proposed class
exemption. The commenters requested specific modifications to the
proposal in the following areas:
1. Definition of ``Foreign Broker-Dealer'' and ``Foreign Bank''
One commenter asked the Department to expand the definition of
Foreign Broker-Dealers and Foreign Banks to include those foreign
broker-dealers or foreign banks that are located in a foreign country
in which a foreign broker-dealer or a foreign bank has received an
individual exemption involving the lending of securities by plans. The
commenter notes that, in each of these exemptions, the foreign
[[Page 63789]]
banks and foreign broker-dealers were under their country's
governmental regulation and oversight, which provided a sufficient
level of protection for plans. Another commenter asked the Department
to expand relief to include broker-dealers and banks of Germany and the
Netherlands within the definitions of Foreign Bank and Foreign Broker-
Dealer. In the alternative, the commenter requested that relief be
extended to broker-dealers and banks of Germany and the Netherlands,
provided that the Lending Fiduciary is a U.S. Broker-Dealer or U.S.
Bank and such fiduciary indemnifies the plan against losses that arise
from a borrower's default. This commenter states that this type of
indemnification agreement is present in most securities lending
transactions.
The Department notes that the terms and conditions of the
individual exemptions generally require that the foreign borrower be
affiliated with a U.S. Bank or a U.S. Broker-Dealer that indemnifies
the plan in the United States against potential loss resulting from a
borrower's default. In addition, those exemptions require that the
collateral be maintained in the United States in U.S. dollars or U.S.
denominated securities. The Department notes that while these
conditions were appropriate and protective of the plan in the context
of an individual exemption, they may not be feasible in the context of
a class exemption.\2\ Thus, for purposes of the class exemption, it may
be difficult for a plan to readily assess the risk of lending
securities to broker-dealers and banks located in the various foreign
jurisdictions. The Department believes that the presence of
governmental regulation and oversight by the foreign countries that
were involved in the individual exemptions, and an indemnification by a
U.S. regulated entity, provide a significant degree of protection for
plans. Accordingly, the Department has determined to expand the
definition of Foreign Broker-Dealer (as defined in section V(c)) and
Foreign Bank (as defined in section V(d)) under limited circumstances.
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\2\ The terms and conditions of the individual exemptions
generally involve the lending of securities by a plan to a foreign
affiliate of a U.S. broker-dealer or U.S. bank and require the U.S.
affiliate to indemnify the plan in the United States against any
potential losses arising from a default. In addition, these
exemptions require that the collateral be maintained in U.S. dollars
or U.S. denominated securities and be held in the U.S. The proposed
class exemption did not contain an affiliate requirement and
permitted non-U.S. forms of collateral that may be maintained
outside the U.S.
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Under the final exemption, the definition of Foreign Broker-Dealer
has been expanded to include those broker-dealers registered and
regulated under the relevant securities laws of a governmental entity
of a country other than the United States where such securities laws
were applicable to a broker-dealer that received: (i) An individual
exemption, granted by the Department under section 408(a) of ERISA,
involving the loan of securities by a plan to a broker-dealer or (ii) a
final authorization by the Department to engage in an otherwise
prohibited transaction pursuant to PTE 96-62, as amended, (61 FR 39988
(July 31, 1996); 67 FR 44622 (July 3, 2002)) involving the loan of
securities by a plan to a broker-dealer. The term ``Foreign Bank'' has
been expanded to include those banks subject to regulation by the
relevant governmental banking agency(ies) of a country other than the
United States, where the regulation and oversight of these banking
agencies were applicable to a bank that received: (i) An individual
exemption, granted by the Department under section 408(a) of ERISA,
involving the loan of securities by a plan to a bank or (ii) a final
authorization by the Department to engage in an otherwise prohibited
transaction pursuant to PTE 96-62, as amended, (61 FR 39988 (July 31,
1996); 67 FR 44622 (July 3, 2002)) involving the loan of securities by
a plan to a bank.\3\
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\3\ To date, individual exemptions have been granted and
transactions have received final authorization under PTE 96-62, as
amended, that involve securities loans by plans to broker-dealers
and banks regulated under the applicable laws of Japan, Germany, the
Netherlands, Sweden, Switzerland, France, Australia, Canada and the
United Kingdom. Thus, any broker-dealer or bank that is subject to
government regulation in any one of these countries would be able to
utilize the relief provided in this exemption, if all applicable
conditions are met. In this regard, if in the future, the Department
grants individual exemptions or final authorizations under PTE 96-62
for transactions involving securities loans by plans to broker-
dealers or banks regulated under the applicable laws of additional
foreign countries, broker-dealers and banks subject to such
government regulation would be able to utilize the final exemption
provided all applicable conditions are met.
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However, to further protect the plans from any unnecessary costs
and risks associated with the lending of securities in the different
foreign jurisdictions, a new condition has been added to section III(c)
of the exemption. This condition requires, in the case of a securities
lending transaction involving a Foreign Broker-Dealer or a Foreign Bank
that is described above (as defined in section V(c)(2) and V(d)(2) of
the exemption), the Lending Fiduciary to be a U.S. Bank or U.S. Broker-
Dealer that indemnifies the plan with respect to the difference, if
any, between the replacement cost of the borrowed securities and the
market value of the collateral on the date of a borrower default plus
interest and any transaction costs incurred (including attorney's fees
of such plan arising out of the default on the loans or the failure to
indemnify properly under this provision) which the plan may incur or
suffer directly arising out of a borrower default. In this regard, it
is the Department's understanding that in a default situation, the plan
will be able to recover the money it is owed under this indemnification
agreement from the lending fiduciary in the United States.
Another commenter asked the Department to expand the definition of
borrower to include Canadian broker-dealers and Canadian banks. The
commenter described a strong similarity in the type of government
oversight between broker-dealers and banks in Canada and the United
States. In particular, the commenter described the regulation of
Canadian broker-dealers. In Canada, securities regulation is within the
jurisdiction of the Provinces. In Ontario, the Ontario Securities
Commission (OSC) is responsible for regulating the securities markets
with the purpose of protecting investors, ensuring optimal allocation
of financial resources and maintaining public confidence in the
markets. The OSC regulates market participants by notices and orders.
It has an enforcement role in the market. It has the power to ensure
that trading activities are carried out in accordance with applicable
regulations. It can investigate, prosecute and impose penalties on
individuals who do not comply with such regulations. Other provincial
securities commissions operate similarly. All powers of all the
commissions are subject to the oversight of the Ministers of Finance in
each Province.
In addition, the commenter notes that the Canadian Securities
Administration (CSA) reviews the activities of the provincial
securities commissions to ensure consistency in the regulatory
framework among the Provinces. The commenter adds that Canadian broker-
dealers are subject to oversight by self-regulatory organizations
(SRO's), which are subject to the supervision of the provincial
commissions. According to the commenter, the Market Regulation Services
is the independent regulation services provider for Canadian equity
markets and is a recognized SRO by the CSA. Its mandate is to foster
and protect investor confidence and market integrity through the
administration, interpretation and enforcement of a
[[Page 63790]]
common set of market integrity principles.
The commenter also described the regulation of Canadian banks. The
commenter noted that the Office of Superintendent of Financial
Institutions (OSFI) regulates Canadian banks. OSFI is an independent
agency of the Government of Canada and reports to the Minister of
Finance. Its principal role is to safeguard depositors and other
banking clients. OSFI imposes capital requirements to ensure that
Canadian banks are able to meet their financial obligations as well as
strict reporting, managing, accounting and auditing requirements.
Lastly, the commenter represented that under Canadian law,
counterparties may agree to submit to the jurisdiction of the courts of
the United States and the judgments of the courts in the United States
are readily enforceable in Canada. Based on the representations of the
commenter regarding the regulatory supervision of Canadian broker-
dealers and banks, the Department has expanded the definition of
``Foreign Broker-Dealer'' to include any broker-dealer that: (i) Is
regulated by a securities commission of a Province of Canada that is a
``member'' of the Canadian Securities Administration, and (ii) is
subject to the oversight of a Canadian SRO; and has expanded the
definition of ``Foreign Bank'' to include any bank that is regulated by
the Office of the Superintendent of Financial Institutions in Canada.
Finally, one commenter requested that plans be permitted to loan
securities to entities other than those permitted under the proposed
exemption, provided that all obligations of the borrower are fully
guaranteed by an entity that could have borrowed the securities itself.
To the extent the commenter is referring to entities other than broker-
dealers and banks for which the Department has previously granted
relief, this comment raises issues that are beyond the scope of our
original consideration, and the commenter has not provided sufficient
information for the Department to consider this request. Accordingly,
the Department has determined not to adopt this comment.
2. Level of Foreign Collateral That Must Be Pledged
One commenter expressed support for the collateral requirements
found in the proposed exemption. Three commenters (including the
Applicant) requested that the collateralization requirements (described
in section II(b) of the proposed exemption) be made consistent with
those in SEC Rule 15c3-3 (17 CFR 240.15c3-3).\4\ The Applicant states
that regulatory and market developments have occurred since the
Applicant first filed its exemption application. The Applicant
expressed concern that, if the exemption requires different
collateralization levels for plans than what is required for other
investors by Rule 15c3-3, plans would be placed at a competitive
disadvantage. Another commenter suggested that the level of
collateralization required in SEC Rule 15c3-3 be required for those
transactions in which the lending fiduciary is a U.S. Bank and such
lending fiduciary indemnifies the plan against losses resulting from
the borrower's default. According to the commenter, most securities
lending transactions include these types of indemnification
arrangements. Lastly, a commenter suggested that the collateralization
requirements stated in the proposed exemption only be modified for
those transactions involving plans with total assets in excess of $500
million.
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\4\ On April 16, 2003, the SEC issued the Order Regarding the
Collateral Broker-Dealers Must Pledge When Borrowing Customer
Securities (Release No. 47683). Rule 15c3-3 specifies the types and
amount of collateral that may be offered by broker-dealers who
borrow fully paid and excess margin securities from customers. For
purposes of this exemption, the term ``Rule 15c3-3'' shall also
refer to the SEC Order contained in Release No. 47683.
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Rule 15c3-3 requires 100% collateralization if the collateral and
securities are denominated in the same currency; 101% if the collateral
and securities are denominated in a different currency (i.e., Euros,
British pounds, Swiss francs, Canadian dollars, and Japanese yen); and
105% if the collateral and securities are denominated in a different
currency and such currency is other than those specified above.
On the basis of the comments, the Department has determined to
adopt the collateralization requirements in Rule 15c3-3 for certain
transactions where the lending fiduciary is a U.S. Broker-Dealer or
U.S. Bank, and such fiduciary indemnifies the plan against loss in the
event of borrower default.
Specifically, the Department has expanded section II(b) of the
exemption to provide that: In the case of a securities lending
transaction in which the Lending Fiduciary is a U.S. Bank or U.S.
Broker-Dealer, and such Lending Fiduciary indemnifies the plan with
respect to the difference, if any, between the replacement cost of the
borrowed securities and the market value of the collateral on the date
of a borrower default, the plan receives from the borrower by the close
of the Lending Fiduciary's business on the day in which the securities
lent are delivered to the borrower: ``Foreign Collateral'' having, as
of the close of business on the preceding business day, a market value
or, in the case of bank letters of credit, a stated amount, equal to
not less than: (i) 100 percent of the then market value of the
securities lent as valued on a recognized securities exchange (as
defined in section V(j)) or an automated trading system (as defined in
section V(k)) on which the securities are primarily traded if the
collateral posted is denominated in the same currency as the securities
lent; or (ii) 101 percent of the then market value of the securities
lent as valued on a recognized securities exchange (as defined in
section V(j)) or an automated trading system (as defined in section
V(k)) on which the securities are primarily traded if the collateral
posted is in a different currency than the securities lent and such
currency is denominated in Euros, British pounds, Japanese yen, Swiss
francs or Canadian dollars; or (iii) 105 percent of the then market
value of the securities lent as valued on a recognized securities
exchange (as defined in section V(j)) or an automated trading system
(as defined in section V(k)) if the collateral posted is in a different
currency than the securities lent and is denominated in a currency
other than those specified above.
Lastly, the Department believes that the Lending Fiduciary
indemnification requirement discussed above provides a sufficient
safeguard to protect a plan's interest under the revised
collateralization levels making the $500 million plan asset test
unnecessary. Accordingly, the Department has not modified the exemption
in this respect.
3. Expand The Types of Collateral Permitted Under The Exemption
Several commenters requested that the class exemption permit plans
to accept the types of collateral permitted under SEC Rule 15c3-3.
Another commenter requested that the definition of foreign collateral
be broadened to include equity securities and fixed income securities.
Rule 15c3-3 permits the following forms of collateral:
1. Government securities as defined in section 3(42)(A) and (B)
of the Securities Exchange Act of 1934 (the Exchange Act) (15 U.S.C.
78c(42)(A) and (B)) may be pledged when borrowing any securities.
2. Government securities as defined in section 3(42)(C) of the
Exchange Act (15 U.S.C. 78c(42)(C)) and issued or guaranteed as to
principal or interest by the following corporations may be pledged
when borrowing any securities: (i) Federal Home Loan Mortgage
Corporation, (ii) the Federal
[[Page 63791]]
National Mortgage Corporation, (iii) the Student Loan Marketing
Association and (iv) the Financing Corporation.
3. Securities issued by, or guaranteed as to principal and
interest by, the following Multinational Banks--the obligations of
which are backed by participating countries, including the United
States--may be pledged when borrowing any securities: (i)
International Bank for Reconstruction and Development, (ii) the
Inter-American Development Bank, (iii) the Asian Development Bank,
(iv) the African Development Bank, (v) the European Bank for
Reconstruction and Development, and (vi) the International Finance
Corporation.
4. Mortgage-backed securities that meet the definition of a
``mortgage related security'' as defined by section 3(a)(41) of the
Exchange Act (15 U.S.C. 78c(a)(41)) may be pledged when borrowing
any securities.
5. Negotiable certificates of deposit and bankers acceptances
issued by a ``bank'' as that term is defined in section 3(a)(6) of
the Exchange Act (15 U.S.C. 78c(a)(6)), and which are payable in the
United States and deemed to have a ``ready market'' as that term is
defined in 17 CFR 240.15c3-1, may be pledged when borrowing any
securities.
6. Foreign sovereign debt securities may be pledged when
borrowing any securities, provided that: (i) At least one nationally
recognized statistical rating agency (NRSRO) has rated in one of its
two highest rating categories either the issue, the issuer or
guarantor, or other outstanding unsecured long-term debt securities
issued or guaranteed by the issuer or guarantor; and (ii) if the
securities pledged are denominated in a different currency than
those borrowed, the broker-dealer shall provide collateral in an
amount that exceeds the minimum collateralization requirements in
paragraph (b)(3) of Rule 15c3-3 (100%) by 1% when the collateral is
denominated in the Euro, British pound, Swiss franc, Canadian dollar
or Japanese yen, or by 5% when it is denominated in another
currency.
7. Foreign sovereign debt securities that do not meet the NRSRO
rating condition set forth in Item 6 above may be pledged only when
borrowing non-equity securities issued by a person organized or
incorporated in the same jurisdiction (including other debt
securities issued by the foreign sovereign); provided that, if such
foreign sovereign debt securities have been assigned a rating lower
than the securities borrowed, such foreign sovereign debt securities
must be rated in one of the four highest rating categories by at
least one NRSRO. If the securities pledged are denominated in a
different currency than those borrowed, the broker-dealer shall
provide collateral in an amount that exceeds the minimum
collateralization requirement in paragraph (b)(3) of Rule 15c3-3 by
1% when the collateral is denominated in the Euro, British pound,
Swiss franc, Canadian dollar or Japanese yen, or by 5% when it is
denominated in another currency.
8. The Euro, British pound, Swiss franc, Canadian dollar or
Japanese yen may be pledged when borrowing any securities, provided
that, when the securities borrowed are denominated in a different
currency than that pledged, the broker-dealer shall provide
collateral in an amount that exceeds the minimum collateralization
requirement in paragraph (b)(3) of Rule 15c3-3 by 1%. Any other
foreign currency may be pledged when borrowing any non-equity
securities denominated in the same currency.
9. Non-governmental debt securities may be pledged when
borrowing any securities, provided that, in the relevant cash market
they are not traded flat or in default as to principal or interest,
and are rated in one of the two highest rating categories by at
least one NRSRO. If such securities are not denominated in U.S.
dollars or in the currency of the securities being borrowed, the
broker-dealer shall provide collateral in an amount that exceeds the
minimum collateralization requirement in paragraph (b)(3) of Rule
15c3-3 by 1% when the securities pledged are denominated in the
Euro, British pound, Swiss franc, Canadian dollar or Japanese yen,
or by 5% when they are denominated in any other currency.
The Department agrees with the commenters that the types of the
collateral allowed under the class exemption should be expanded.
Although the SEC concluded that the designation of additional
categories of permissible collateral will add liquidity to the
securities lending market and lower borrowing costs for broker-dealers,
the Department does not believe that the commenters have made a
sufficient showing that adopting all the categories of collateral
described in Rule 15c3-3 would be protective of the interests of
participants and beneficiaries if a borrower were to default.
In this regard, the Department notes that the collateral described
in categories 1 and 2 of Rule 15c3-3 satisfies the definition of ``U.S.
Collateral'' under the proposed exemption. For the sake of clarity, the
Department has revised the definition of ``U.S. Collateral'' to
specifically include: Government securities as defined in section
3(42)(A) and (B) of the Securities Exchange Act of 1934 (the Exchange
Act); and Government securities as defined in section 3(42)(C) of the
Exchange Act and issued or guaranteed as to principal or interest by
the following corporations: (i) Federal Home Loan Mortgage Corporation,
(ii) the Federal National Mortgage Corporation, (iii) the Student Loan
Marketing Association and (iv) the Financing Corporation.
Additionally, the Department believes that it would be appropriate
to expand the definition of ``U.S. Collateral'' to include: ``Mortgage-
backed securities'' as described in category 4 of Rule 15c3-3, and
``negotiable certificates of deposit and banker acceptances'' as
described in category 5 of Rule 15c3-3.
Further, the Department has determined that it would be appropriate
to expand the definition of ``Foreign Collateral'' to include all other
types of collateral that are specified under Rule 15c3-3, as amended by
the SEC from time to time, provided the Lending Fiduciary is a U.S.
Broker-Dealer or U.S. Bank, and such entity provides the plan with an
indemnification with respect to the difference, if any, between the
replacement cost of the borrowed securities and the market value of the
collateral on the date of a borrower default plus interest and any
transaction costs which a plan may incur or suffer directly arising out
of a borrower default. In the absence of an indemnification by a U.S.
Broker-Dealer or U.S. Bank, the definition of ``Foreign Collateral'' in
the final exemption has been revised to include the types of collateral
described in categories 3 of Rule 15c3-3, rated foreign sovereign debt
described in category 6, and the British pound, the Canadian dollar,
the Swiss franc, the Japanese yen or the Euro.
In response to a comment, the Department has determined not to
revise the exemption to include equity securities and fixed-income
securities as these items appear to be outside the scope of Rule 15c3-
3, and the Department has insufficient information about how these
items would function as collateral.
4. Issues Relating to the Lending Fiduciary's Indemnification of the
Plan From Loss Upon a Borrower's Default
Two commenters requested that the Department revise the
indemnification provision of section III(b) to limit the lending
fiduciary's indemnification obligation to losses resulting from a
borrower's default, and not from any shortfall in the earnings on the
collateral. The Department notes that the indemnification by the
Lending Fiduciary is only applicable when the borrower defaults and
there is a difference, if any, between the replacement cost of the
borrowed securities and the market value of the collateral on the date
of a borrower default plus interest and any transaction costs incurred
(including attorney's fees of such plan arising out of the default on
the loans or the failure to indemnify properly under this provision)
which the plan may incur or suffer directly arising out of a borrower
default. The indemnification requirement, under the proposal, was never
intended to encompass losses arising out of the investment of the
collateral by a Lending Fiduciary or other party. Accordingly, the
Department has clarified section III(b)(2) of the exemption to reflect
this intent.
[[Page 63792]]
Another commenter asked the Department to expand section III(b)(2)
of the proposed exemption to permit a parent corporation (which may or
may not be domiciled in the United States) of a U.S. subsidiary acting
as a Lending Fiduciary to provide the indemnity in lieu of the Lending
Fiduciary itself. The Department believes that this request raises
issues that are beyond the scope of the proposed exemption and has
determined not to modify the exemption as requested by the commenter.
One commenter requested clarification regarding the scope of the
indemnification provisions under the exemption. Specifically, the
commenter questioned whether, in accordance with the provisions in an
indemnification agreement, a Lending Fiduciary can stand in the shoes
of the plan, and seek recovery from the borrower. Nothing in the final
exemption would preclude a Lending Fiduciary from entering into an
indemnification agreement that permits the Lending Fiduciary to seek
recovery against a defaulting borrower after the Lending Fiduciary has
made the plan whole pursuant to the indemnification agreement.
5. Miscellaneous Comments
Another commenter questioned whether the exemption would apply to
repurchase agreements (repos). The commenter states that in the context
of securities loans that are structured and documented as repos, a
Master Repurchase Agreement is utilized instead of a Master Securities
Lending Agreement. Except for the difference in the form of the
arrangement, such an agreement contains all of the same information and
substantive requirements that would be found in a typical Master
Securities Lending Agreement. The commenter indicates that the Master
Repurchase Agreement contains terms and conditions that satisfy all of
the substantive requirements of the exemption, including the
requirement that the securities be returned at termination of the loan
(i.e., repurchase transaction) in consideration for the return of the
cash, the requirement that any interest or dividends on the securities
lent (i.e., sold) be paid by the securities borrower (i.e., the
purchaser) to the securities lender (i.e., the seller) as and when
paid, and the requirement that the securities lender (i.e., the seller)
receive reasonable compensation for the loan of the securities (which
may consist of the ability to retain investment earnings on the cash
collateral in excess of a pre-specified rebate amount).
The Department notes that the exemption permits securities loans
that are structured as repos, provided that all of the other terms and
conditions of the exemption are otherwise met. For the sake of clarity,
the Department has added a definition of the terms ``lending of
securities'' or ``loan of securities'' to include securities loans that
are structured as repurchase agreements, provided that all terms of the
exemption are otherwise met (section V(l) of the exemption).
Another commenter expressed concern that the exemption prevents
plans from lending certain fixed income securities when a plan accepts
foreign collateral by requiring the collateralization level for foreign
collateral to be determined by reference to the market value of the
securities lent on a ``recognized securities exchange,'' or an
``automated trading system.'' (See section II(b)(1)(B) and
II(b)(2)(B))) The commenter requests that market value be determined in
the same manner as set out under the 2000 version of the Master
Securities Loan Agreement which was jointly published by the commenter
and the Securities Industry Association. The Department believes that
the objective standard contained in the proposal is an important
safeguard, and is not persuaded by the comment.
One commenter requested that the Department clarify section IV(c)
of the proposal. Section IV(c) of the proposal requires that the
compensation be reasonable and be paid to the Lending Fiduciary in
accordance with the terms of a written instrument, which may be in the
form of a master agreement covering a series of securities lending
transactions. The commenter was concerned that this provision could
require that the aggregate compensation for all loans be reasonable.
Thus, if one loan's compensation failed, then all loans would fail this
condition. The Department intended that this condition apply on a loan-
by-loan basis. Thus, the failure of one loan to meet this requirement
would not cause all loans entered into pursuant to a master agreement
to fail such requirement.
A commenter requested clarification on whether the exemption covers
``fee-for-hold'' arrangements. The commenter describes ``fee-for-
holds'' as the following. The borrower pays a fee in exchange for the
guaranteed availability of a particular security for a specified period
of time or until the arrangement is terminated by either party. If a
fee-for-hold arrangement is in place and the holding borrower chooses
to borrow any such held securities, the fee-for-hold arrangement with
respect to such securities terminates and the borrower will enter into
a securities loan arrangement. These arrangements may take two forms:
(1) The plan may grant the borrower the right of first refusal
essentially giving the borrower an option to borrow the securities if
the lending plan is approached by another party seeking to borrow the
same held securities; or (2) the plan may grant the borrower the
exclusive right to borrow the securities. The commenter stated that
title to the securities does not transfer until securities are actually
delivered. The borrower pays a fee related to the type, quantity and
duration of the fee-for-hold arrangement. Once loaned, the lending fee
paid is based on market conditions at the time of the loan. The plan
may terminate the arrangement at any time so that it may dispose of the
securities at any time. The Department is of the view that these
arrangements are within the scope of the exemption, provided that all
terms and conditions are otherwise met.
One commenter requested that relief be extended to transactions
covered by the Federal Employee's Retirement System Act of 1986
(FERSA). The Department notes that relief from the prohibited
transaction provisions of FERSA is provided for transactions described
in section I(c) of the final amendment by reason of PTE T88-1, as
amended (53 FR 52838 (December 29, 1988), 57 FR 8689 (March 11, 1992).)
No additional exemptive relief is necessary under the final amendment
for those prohibited transactions described in FERSA which parallel
those described in section 406(a) of ERISA, if the plan receives no
less than adequate consideration.
In this regard, PTE T88-1, as amended, adopted six prohibited
transaction class exemptions (including PTE 82-63) for purposes of
section 8477(c)(2) of FERSA. The amendment to PTE T88-1 extended such
relief to any amendments of these class exemptions which are granted by
the Department pursuant to section 408(a) of ERISA unless the
Department determines that PTE T88-1, as amended does not apply to such
amendment. Accordingly, the Department determines that PTE T88-1, as
amended shall apply to this final amendment for purposes of FERSA.
One commenter noted that the requirements in section II(d) that the
loan agreement identify the currency in which payment of any fees will
be made to the plan would be burdensome. The commenter noted that, in
the context of securities loans secured by cash collateral, it is
industry practice that the lender pays a rebate to the borrower rather
than receiving a fee. Secondly, it is industry practice that the
borrower's rebate will be in the same currency as
[[Page 63793]]
the currency of the cash collateral. In addition, many loans are
covered by a master agreement and, in the context of a securities loan
secured by non-cash collateral, parties may need to offer different
forms of collateral on a loan-by-loan basis. Thus, the commenter
requests that the parties be permitted to specify the currency of the
fees in the loan confirmation. The Department concurs with the comment,
and has modified the final exemption accordingly.
A commenter asked the Department to clarify how the final exemption
would apply to securities loans that were entered into pursuant to PTEs
81-6 and 82-63 prior to the effective date of the final exemption. The
Department notes that loan transactions entered into prior to the
effective date of this exemption would be covered by PTE 81-6 and PTE
82-63, provided all conditions of the exemption are met. Transactions
entered into on or after the effective date of the final exemption
would be covered by this exemption, provided that the conditions
therein are met. The Department notes that the conditions of PTE 81-6
and PTE 82-63 have been incorporated into this class exemption.
Description of the Exemption
Section I of the exemption describes the transactions that are
covered by the exemption. Section I(a) tracks the language of PTE 81-6
by permitting the lending of securities that are assets of an employee
benefit plan to a U.S. Broker-Dealer or U.S. Bank, if the general
conditions set forth in section II are met. However, the conditions
contained in PTE 81-6 have been amended to permit additional types of
collateral to be used for the securities loan. Section I(b) of the
exemption expands PTE 81-6 by permitting the lending of securities that
are assets of an employee benefit plan to a Foreign Broker-Dealer or a
Foreign Bank. A Foreign Broker-Dealer or a Foreign Bank must meet both
the general conditions set forth in section II of the proposed
exemption, as well as the specific conditions described in section III.
Under the final exemption, a Foreign Broker-Dealer is defined in
section V(c) as a broker-dealer that has, as of the last day of its
most recent fiscal year, equity capital that is the equivalent of no
less than $200 million and is: (1)(i) Registered and regulated under
the laws of the Financial Services Authority in the United Kingdom, or
(ii)(a) registered and regulated under the laws of a securities
commission of a Province of Canada that is a member of the Canadian
Securities Administration, and (b) is subject to the oversight of a
Canadian self-regulatory authority; or (2) registered and regulated,
under the relevant securities laws of a governmental entity of a
country other than the United States, and such securities laws and
regulation were applicable to a broker-dealer that received: (i) An
individual exemption, granted by the Department under section 408(a) of
ERISA, involving the loan of securities by a plan to a broker-dealer or
(ii) a final authorization by the Department to engage in an otherwise
prohibited transaction pursuant to PTE 96-62, as amended involving the
loan of securities by a plan to a broker-dealer.
Section V(d) of the final exemption defines the term ``Foreign
Bank'' to mean: An institution that has, substantially similar powers
to a bank as defined in section 202(a)(2) of the Investment Advisers
Act, has as of the last day of its most recent fiscal year, equity
capital which is the equivalent of no less than $200 million, and is
subject to: (1) Regulation by the Financial Services Authority in the
United Kingdom or the Office of the Superintendent of Financial
Institutions in Canada, or (2) regulation by the relevant governmental
banking agency(ies) of a country other than the United States, and the
regulation and oversight of these banking agencies were applicable to a
bank that received: (i) An individual exemption, granted by the
Department under section 408(a) of ERISA, involving the loan of
securities by a plan to a bank or (ii) a final authorization by the
Department to engage in an otherwise prohibited transaction pursuant to
PTE 96-62, as amended involving the loan of securities by a plan to a
bank.
Section I(c) permits the payment to a lending fiduciary of
compensation for services rendered in connection with loans of plan
assets that are securities, provided that the conditions set forth in
section IV are met. The conditions found in section IV mirror the
conditions that were found in PTE 82-63. Although the relief provided
by section I(c) would apply to a broader range of lending activities,
no changes have been made with respect to any of the conditions that
are contained in PTE 82-63.
Section II(a) of the final exemption remains as proposed and
requires that neither the borrower nor any affiliate of the borrower
have or exercise discretionary authority or control with respect to the
investment of the plan assets involved in the transaction, or render
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to those assets.
Under the final exemption, section II(b)requires that the plan
receive from the borrower by the close of the Lending Fiduciary's
business on the day in which the securities lent are delivered to the
borrower, (1) ``U.S. Collateral'' having, as of the close of business
on the preceding business day, a market value or, in the case of bank
letters of credit, a stated amount, equal to not less than 100 percent
of the then market value of the securities lent; or (2) ``Foreign
Collateral'' having as of the close of business on the preceding
business day, a market value or, in the case of bank letters of credit,
a stated amount, equal to not less than: (i) 102 percent of the then
market value of the securities lent as valued on a recognized
securities exchange (as defined in section V(j)) or an automated
trading system (as defined in section V(k)) on which the securities are
primarily traded if the collateral posted is denominated in the same
currency as the securities lent, or(ii) 105 percent of the then market
value of the securities lent as valued on a recognized securities
exchange (as defined in section V(j)) or an automated trading system
(as defined in V(k)) on which the securities are primarily traded if
the collateral posted is denominated in a different currency than the
securities.
In addition, section II(b) has been expanded to include new
collateralization requirements in the case of a securities lending
transaction in which the Lending Fiduciary is a U.S. Bank or U.S.
Broker-Dealer, and such Lending Fiduciary indemnifies the plan with
respect to the difference, if any, between the replacement cost of the
borrowed securities and the market value of the collateral on the date
of a borrower default. For those securities transactions involving such
an indemnification, the plan may receive from the borrower by the close
of the Lending Fiduciary's business on the day in which the securities
lent are delivered to the borrower: Foreign Collateral having, as of
the close of business on the preceding day, a market value or in the
case of bank letters of credit, a stated amount, equal to not less
than:
(i) 100 percent of the then market value of the securities lent as
valued on a recognized securities exchange (as defined in section V(j))
or an automated trading system (as defined in section V(k)) on which
the securities are primarily traded if the collateral posted is
denominated in the same currency as the securities lent; or (ii) 101
percent of the then market value of the securities lent as valued on a
recognized securities exchange (as defined in section V(j)) or an
automated trading system (as defined
[[Page 63794]]
in section V(k)) on which the securities are primarily traded if the
collateral posted is in a different currency than the securities lent
and such currency is denominated in Euros, British pounds, Japanese
yen, Swiss francs or Canadian dollars; or (iii) 105 percent of the then
market value of the securities lent as valued on a recognized
securities exchange or an automated trading system (as defined in
section V(k)) if the collateral posted is in a different currency than
the securities lent and is denominated in a currency other than those
specified above.\5\
---------------------------------------------------------------------------
\5\ The Department notes that this requirement would not
preclude the Lending Fiduciary from requiring additional collateral
should the circumstances so warrant.
---------------------------------------------------------------------------
The final exemption contains a revised definition of ``U.S.
Collateral'' that incorporates additional forms of collateral described
in Rule 15c3-3. The term ``U.S. Collateral'' is defined in section V(e)
as:
(1) U.S. currency,
(2) ``government securities'' as defined in section 3(a)(42)(A) and
(B) of the Securities Exchange Act of 1934 (the Exchange Act),
(3) ``government securities'' as defined in section 3(a)(42)(C) of
the Exchange Act issued or guaranteed as to principal or interest by
the following corporations: The Federal Home Loan Mortgage Corporation,
the Federal National Mortgage Association, the Student Loan Marketing
Association and the Financing Corporation,
(4) mortgage-backed securities meeting the definition of a
``mortgage related security'' set forth in section 3(a)(41) of the
Exchange Act,
(5) negotiable certificates of deposit and bankers' acceptances
issued by a ``bank'' as that term is defined in section 3(a)(6) of the
Exchange Act, and which are payable in the United States and deemed to
have a ``ready market'' as that term is defined in 17 CFR 240.15c3-1,
or
(6) irrevocable letters of credit issued by a U.S. Bank other than
the borrower or an affiliate thereof, or any combination thereof.
The final exemption contains a revised definition of ``Foreign
Collateral'' that permits U.S. Banks, U.S. Broker-Dealers, Foreign
Banks and Foreign Broker-Dealers to accept a broader range of
collateral. The term ``Foreign Collateral'' is defined in section V(f)
as:
(1) Securities issued by or guaranteed as to principal and
interest by the following Multilateral Development Banks--the
obligations of which are backed by the participating countries,
including the United States: The International Bank for
Reconstruction and Development, the Inter-American Development Bank,
the Asian Development Bank, the African Development Bank, the
European Bank for Reconstruction and Development and the
International Finance Corporation.
(2) Foreign sovereign debt securities provided that at least one
nationally recognized statistical rating organization has rated in
one of its two highest categories either the issue, the issuer or
guarantor;
(3) the British pound, Canadian dollar, Swiss franc, Japanese
yen or the Euro;
(4) irrevocable letters of credit issued by a Foreign Bank,
other than the borrower or an affiliate thereof, which has a
counterparty rating of investment grade or better as determined by a
nationally recognized statistical rating organization; or
(5) any type of collateral described in Rule 15c3-3 of the
Exchange Act, as amended from time to time, provided that the
lending fiduciary is a U.S. Bank or U.S. Broker-Dealer and such
fiduciary indemnifies the plan with respect to the difference, if
any, between the replacement cost of the borrowed securities and the
market value of the collateral on the date of a borrower default
plus interest and any transaction costs which a plan may incur or
suffer directly arising out of a borrower default.
The Department notes that section II(c) of the exemption remains
unchanged from the proposal and requires that plans receive collateral
from borrowers by physical delivery, by wire transfer or by book entry
in a securities depository located in the United States. For borrowers
that are Foreign Banks and Foreign Broker-Dealers, the exemption
requires that the plan receive either collateral by physical delivery,
by wire entry or by book entry in a securities depository located in
the United States or held on behalf of the plan at an Eligible
Securities Depository as defined in section V(i)of the exemption.
Section II(d) of the exemption has been modified in light of the
expanded definition of ``Foreign Broker-Dealer'' and ``Foreign Bank.''
That section requires that the borrower furnish the Lending Fiduciary
with its most recent available audited statement of the borrower's
financial condition, as audited by a United States certified public
accounting firm or in the case of a borrower that is a Foreign Broker-
Dealer or Foreign Bank, a firm which is eligible or authorized to issue
audited financial statements in conformity with accounting principles
generally accepted in the primary jurisdiction that governs the
borrowing Foreign Broker-Dealer or Foreign Bank.
Under section II(e) of the exemption, the loan must be made
pursuant to a written loan agreement. Section II(e) further requires
that the securities lending agreement must give the plan a continuing
security interest in, title to, or the rights of a secured creditor
with respect to the collateral received by the plan. In section (f) of
the exemption, the plan may receive a reasonable fee in connection with
the securities loan or have the opportunity to derive compensation
through the investment of the currency collateral. The plan may pay a
loan rebate or similar fee to the borrower where the plan invests the
currency collateral.
Section II(g) of the exemption requires that the fees and other
consideration received by the plan in connection with the loan of
securities must be reasonable. The identity of the currency in which
payment of fees and rebates will be made must be disclosed to the plan
either in the written loan agreement or the loan confirmation as agreed
to by the borrower and the plan (or Lending Fiduciary) prior to the
making of the loan.
Under the exemption, section II(h) requires that the plan receive
the equivalent of all distributions made to holders of the borrower
securities during the term of the loan including, but not limited to,
dividends, interest payments, shares of stock as a result of stock
splits and rights to purchase additional securities. Section II(i)
requires that, if the market value of the collateral at the close of
trading on a business day is less than the applicable percentage of the
market value of the borrowed securities at the close of trading on that
day, then the borrower shall deliver, by the close of business on the
following business day, an additional amount of U.S. Collateral or
Foreign Collateral, the market value of which, together with the market
value of all previously delivered collateral, equals at least the
applicable percentage of the market value of all borrowed securities as
of such preceding day. Notwithstanding the foregoing, part of the U.S.
Collateral or Foreign Collateral may be returned to the borrower if the
market value of the collateral exceeds the applicable percentage
described in this exemption as long as the market value of the
remaining collateral equals the applicable percentage described in the
exemption of the market value of the borrowed securities.
Under section II(j) of the exemption, a plan may terminate a loan
at any time. Section II(k) of the exemption permits a plan to purchase
securities identical to the loaned securities if the borrower does not
return the loaned securities, and obligates the borrower to pay to the
plan any amount of remaining obligation and expenses not covered by the
collateral. Section II(l) of the
[[Page 63795]]
exemption states that if a borrower fails to comply with any provision
of a loan agreement which requires compliance with this exemption, the
plan fiduciary who caused the plan to engage in such transaction shall
not be deemed to have caused the plan to engage in a transaction
prohibited by section 406(a)(1)(A) through (D) of ERISA solely by
reason of the borrower's failure to comply with the conditions of the
exemption.
Section III of the exemption contains conditions that are
applicable to securities lending transactions with Foreign Broker-
Dealers and Foreign Banks. Section III(a) requires that the lending
fiduciary maintain the situs of the loan agreement in accordance with
the indicia of ownership requirements under section 404(b) of ERISA and
the regulations promulgated under 29 CFR 2550.404(b)-1. Further,
section III(b) requires that a foreign borrower agree to submit to the
jurisdiction of the district courts of the United States, and agree
that the plan may in its sole discretion enforce the agreement in a
U.S. court. It is the Department's understanding that in the event the
borrower were to default, the plan would be able to secure a judgment
in the United States which would be enforceable in a UK or a Canadian
court. As an alternative to the requirement that the Foreign Broker-
Dealer or Foreign Bank must agree to submit to the jurisdiction of the
United States courts, the lending fiduciary may, if a U.S. Bank or U.S.
Broker-Dealer, indemnify the plan with respect to the difference, if
any, between the replacement cost of the borrowed securities and the
market value of the collateral on the date of a borrower default plus
interest and any transaction cost incurred (including attorney's fees
of such plan arising out of the default on the loans or the failure to
indemnify properly under the exemption) which the plan may incur or
suffer directly arising out of a borrower's default.
The final exemption contains a new condition in section III(c)
which requires that in the case of a securities lending transaction
involving a Foreign Broker-Dealer or a Foreign Bank that is described
in section V(c)(2) or V(d)(2), the Lending Fiduciary must be a U.S.
Bank or U.S. Broker-Dealer and prior to entering into the loan
transaction, such fiduciary must agree to indemnify the plan with
respect to the difference, if any, between the replacement cost of the
borrowed securities and the market value of the collateral on the date
of a borrower default plus interest and any transaction costs incurred
(including attorney's fees of such plan arising out of the default on
the loans or the failure to indemnify properly under this provision)
which the plan may incur or suffer directly arising out of a borrower
default. It is the Department's understanding that, in the event of a
borrower default, the plan would be able to recover from the lending
fiduciary, in the United States, the amount it is entitled to under the
indemnification agreement.
As in the proposal, section IV of the exemption incorporates the
conditions of PTE 82-63. Section V of the exemption contains the
definitions. Unless noted above, the definitions of the exemption
remain as they were in the proposed exemption.
The Department has added section VI that specifies the effective
dates of the final exemption and the revocation of PTEs 81-6 and 82-63.
Lastly, the Department notes that section 611(d)(1) of the Pension
Protection Act of 2006 (Pub. L. 109-280) (the PPA) amended the Employee
Retirement Income Security Act of 1974 (ERISA) in part, by adding a new
section 408(b)(17) which provides relief from ERISA section
406(a)(1)(A), (B) and (D) for any transaction between a plan and a
person that is a party in interest other than fiduciary (or an
affiliate) who has or exercises any discretionary authority or control
with respect to the investment of the plan assets involved in the
transaction or renders investment advice (within the meaning of section
3(21)(A)(ii)) with respect to those assets, solely by reason of
providing services to the plan or solely by reason of a relationship to
such a service provider described in ERISA section 3(14)(F), (G), (H)
or (I), or both, but only if in connection with such transaction the
plan receives no less, nor pays more, than adequate consideration.\6\
The Department notes that to the extent that a transaction involving a
loan of securities by a plan to a party in interest meets the
requirements of ERISA section 408(b)(17), such transaction does not
need to comply with the terms of this class exemption. The Department
further notes that the new section 408(b)(17) will not be available for
the payment of compensation to a plan's securities lending agent. In
this regard, see 408(b)(2) of ERISA and section I(c) of this final
exemption for relief permitting the payment of compensation related to
foreign securities lending services.
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\6\ Section 611(d)(2) of the PPA provided similar exemptive
relief in amending section 4975 of the Code to add the new section
4975(c)(20).
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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 ERISA 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 ERISA and the
Code. These provisions include any prohibited transaction provisions
to which the exemption does not apply and the general fiduciary
responsibility provisions of section 404 of ERISA which, among other
things, require a fiduciary to discharge his duties respecting the
plan solely in the interest of the participants and beneficiaries of
the plan and in a prudent fashion in accordance with section
404(a)(1)(B) of ERISA; 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) In accordance with section 408(a) of ERISA and section
4975(c)(2) of the Code, and based on the entire record, the
Department finds that the exemption is administratively feasible, in
the interests of the plan(s) and of its participants and
beneficiaries, and protective of the rights of the participants and
beneficiaries of the plan;
(3) This exemption is supplemental to, and not in derogation of,
any other provisions of ERISA and 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 class exemption is applicable to a particular
transaction only if the transaction satisfies the conditions
specified in the class exemption.
Exemption
Accordingly, the following exemption is granted under the authority
of section 408(a) of ERISA 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).
I. Transactions
(a) Effective January 2, 2007, the restrictions of section
406(a)(1)(A) through (D) of ERISA and the taxes imposed by section
4975(a) and (b) of the Code by reason of section 4975(c)(1)(A) through
(D) of the Code shall not apply to the lending of securities that are
assets of an employee benefit plan to a ``U.S. Broker-Dealer'' or to a
``U.S. Bank,'' provided that the conditions set forth in section II
below are met.
(b) Effective January 2, 2007, the restrictions of section
406(a)(1)(A) through (D) of ERISA and the taxes imposed by section
4975(a) and (b) of
[[Page 63796]]
the Code by reason of section 4975(c)(1)(A) through (D) of the Code
shall not apply to the lending of securities that are assets of an
employee benefit plan to a ``Foreign Broker-Dealer'' or ``Foreign
Bank'', provided that the conditions set forth in sections II and III
below are met.
(c) Effective January 2, 2007, the restrictions of section
406(b)(1) of ERISA and the taxes imposed by section 4975(a) and (b) of
the Code by reason of section 4975(c)(1)(E) of the Code shall not apply
to the payment to a fiduciary (the Lending Fiduciary) of compensation
for services rendered in connection with loans of plan assets that are
securities, provided that the conditions set forth in section IV below
are met.
II. General Conditions For Transactions Described in Sections I(a) and
I(b)
(a) Neither the borrower nor any affiliate of the borrower has or
exercises discretionary authority or control with respect to the
investment of the plan assets involved in the transaction, or renders
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to those assets;
(b) The plan receives from the borrower by the close of the Lending
Fiduciary's business on the day in which the securities lent are
delivered to the borrower, (1) ``U.S. Collateral'' having, as of the
close of business on the preceding business day, a market value or, in
the case of bank letters of credit, a stated amount, equal to not less
than 100 percent of the then market value of the securities lent; or
(2) ``Foreign Collateral'' having as of the close of business on
the preceding business day, a market value or, in the case of bank
letters of credit, a stated amount, equal to not less than:
(i) 102 percent of the then market value of the securities lent
as valued on a recognized securities exchange (as defined in section
V(j)) or an automated trading system (as defined in section V(k)) on
which the securities are primarily traded if the collateral posted
is denominated in the same currency as the securities lent, or
(ii) 105 percent of the then market value of the securities lent
as valued on a recognized securities exchange (as defined in section
V(j)) or an automated trading system (as defined in V(k)) on which
the securities are primarily traded if the collateral posted is
denominated in a different currency than the securities lent.
Notwithstanding the foregoing, if the Lending Fiduciary is a U.S.
Bank or U.S. Broker-Dealer, and such Lending Fiduciary indemnifies the
plan with respect to the difference, if any, between the replacement
cost of the borrowed securities and the market value of the collateral
on the date of a borrower default, the plan receives from the borrower
by the close of the Lending Fiduciary's business on the day in which
the securities lent are delivered to the borrower, ``Foreign
Collateral'' having as of the close of business on the preceding
business day, a market value or, in the case of bank letters of credit,
a stated amount, equal to not less than:
(i) 100 percent of the then market value of the securities lent
as valued on a recognized securities exchange (as defined in section
V(j)) or an automated trading system (as defined in section V(k)) on
which the securities are primarily traded if the collateral posted
is denominated in the same currency as the securities lent; or
(ii) 101 percent of the then market value of the securities lent
as valued on a recognized securities exchange (as defined in section
V(j)) or an automated trading system (as defined in V(k)) on which
the securities are primarily traded if the collateral posted is
denominated in a different currency than the securities lent and
such currency is denominated in Euros, British pounds, Japanese yen,
Swiss francs or Canadian dollars; or
(iii) 105 percent of the then market value of the securities
lent as valued on a recognized securities exchange (as defined in
section V(j)) or an automated trading system (as defined in V(k)) if
the collateral posted is denominated in a different currency than
the securities lent and such currency is other than those specified
above.
(c)(1) If the borrower is a U.S. Bank or U.S. Broker-Dealer, the
Plan receives such U.S. Collateral or Foreign Collateral from the
borrower by the close of the Lending Fiduciary's business on the day in
which the securities are delivered to the borrower. Such collateral is
received by the plan either by physical delivery, wire transfer or by
book entry in a securities depository located in the United States. or,
(2) If the borrower is a Foreign Bank or Foreign Broker-Dealer, the
plan receives U.S. Collateral or Foreign Collateral from the borrower
by the close of the Lending Fiduciary's business on the day in which
the securities are delivered to the borrower. Such collateral is
received by the plan either by physical delivery, wire transfer or by
book entry in a securities depository located in the United States or
held on behalf of the plan at an Eligible Securities Depository. The
indicia of ownership of such collateral shall be maintained in
accordance with section 404(b) of ERISA and 29 CFR 2550.404b-1.
(d) Prior to making of any such loan, the borrower shall have
furnished the Lending Fiduciary with:
(1) The most recent available audited statement of the
borrower's financial condition, as audited by a United States
certified public accounting firm or in the case of a borrower that
is a Foreign Broker-Dealer or Foreign Bank, a firm which is eligible
or authorized to issue audited financial statements in conformity
with accounting principles generally accepted in the primary
jurisdiction that governs the borrowing Foreign Broker-Dealer or
Foreign Bank;
(2) The most recent available unaudited statement of its
financial condition (if the unaudited statement is more recent than
such audited financial statement); and
(3) A representation that, at the time the loan is negotiated,
there has been no material adverse change in its financial condition
since the date of the most recent financial statement furnished to
the plan that has not been disclosed to the Lending Fiduciary. Such
representations may be made by the borrower's agreement that each
loan shall constitute a representation by the borrower that there
has been no such material adverse change.
(e) The loan is made pursuant to a written loan agreement, the
terms of which are at least as favorable to the plan as an arm's-length
transaction with an unrelated party would be. Such loan agreement
states that the plan has a continuing security interest in, title to,
or the rights of a secured creditor with respect to the collateral.
Such agreement may be in the form of a master agreement covering a
series of securities lending transactions.
(f) In return for lending securities, the plan:
(1) Receives a reasonable fee (in connection with the securities
lending transaction), and/or
(2) Has the opportunity to derive compensation through the
investment of the currency collateral. Where the plan has that
opportunity, the plan may pay a loan rebate or similar fee to the
borrower, if such fee is not greater than the plan would pay in a
comparable transaction with an unrelated party.
(g) All fees and other consideration received by the plan in
connection with the loan of securities are reasonable. The identity of
the currency in which the payment of fees and rebates will be made
shall be disclosed to the plan either in the written loan agreement or
the loan confirmation as agreed to by the borrower and the plan (or
Lending Fiduciary) prior to the making of the loan.
(h) The 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, dividends, interest payments, shares of
stock as a result of stock splits and rights to purchase additional
securities;
(i) If the market value of the collateral at the close of trading
on a business day is less than the applicable percentage of the market
value of the borrowed
[[Page 63797]]
securities at the close of trading on that day (as described in section
II(b) of this exemption), then the borrower shall deliver, by the close
of business on the following business day, an additional amount of U.S.
Collateral or Foreign Collateral the market value of which, together
with the market value of all previously delivered collateral, equals at
least the applicable percentage of the market value of all the borrowed
securities as of such preceding day.
Notwithstanding the foregoing, part of the U.S. Collateral or
Foreign Collateral may be returned to the borrower if the market value
of the collateral exceeds the applicable percentage (described in
section II(b)) of the exemption) of the market value of the borrowed
securities, as long as the market value of the remaining U.S.
Collateral or Foreign Collateral equals at least the applicable
percentage of the market value of the borrowed securities;
(j) The loan may be terminated by the plan at any time, whereupon
the borrower shall deliver certificates for securities identical to the
borrowed securities (or the equivalent thereof in the event of
reorganization, recapitalization or merger of the issuer of the
borrowed securities) to the plan within the lesser of:
(1) The customary delivery period for such securities,
(2) Five business days, or
(3) The time negotiated for such delivery by the plan and the
borrower.
(k) In the event that the loan is terminated, and the borrower
fails to return the borrowed securities or the equivalent thereof
within the applicable time described in section II(j) above, the plan
may, under the terms of the loan agreement:
(1) Purchase securities identical to the borrowed securities (or
their equivalent as described above) and may apply the collateral to
the payment of the purchase price, any other obligations of the
borrower under the agreement, and any expenses associated with the
sale and/or purchase, and
(2) The borrower is obligated, under the terms of the loan
agreement, to pay, and does pay to the plan the amount of any
remaining obligations and expenses not covered by the collateral,
including reasonable attorney's fees incurred by the plan for legal
action arising out of default on the loans, plus interest at a
reasonable rate.
Notwithstanding the foregoing, the borrower may, in the event the
borrower fails to return borrowed securities as described above,
replace collateral, other than U.S. currency, with an amount of U.S.
currency that is not less than the then current market value of the
collateral, provided such replacement is approved by the Lending
Fiduciary.
(l) If the borrower fails to comply with any provision of a loan
agreement which requires compliance with this exemption, the plan
fiduciary who caused the plan to engage in such transaction shall not
be deemed to have caused the plan to engage in a transaction prohibited
by section 406(a)(1)(A) through (D) of ERISA solely by reason of the
borrower's failure to comply with the conditions of the exemption.
III. Specific Conditions For Transactions Described in Section I(b)
(a) The Lending Fiduciary maintains the written documentation for
the loan agreement at a site within the jurisdiction of the courts of
the United States.
(b) Prior to entering into a transaction involving a Foreign
Broker-Dealer that is described in section V(c)(1) or a Foreign Bank
that is described in section V(d)(1) either:
(1) The Foreign Broker-Dealer or Foreign Bank agrees to submit
to the jurisdiction of the United States; agrees to appoint an agent
for service of process in the United States, which may be an
affiliate (the Process Agent); consents to service of process on the
Process Agent; and agrees that any enforcement by a plan of its
rights under the securities lending agreement will, at the option of
the plan, occur exclusively in the United States courts; or
(2) The Lending Fiduciary, if a U.S. Bank or U.S. Broker-Dealer,
agrees to indemnify the plan with respect to the difference, if any,
between the replacement cost of the borrowed securities and the
market value of the collateral on the date of a borrower default
plus interest and any transaction costs incurred (including
attorney's fees of such plan arising out of the default on the loans
or the failure to indemnify properly under this provision) which the
plan may incur or suffer directly arising out of a borrower default
by the Foreign Broker-Dealer or Foreign Bank.
(c) In the case of a securities lending transaction involving a
Foreign Broker-Dealer that is described in section V(c)(2) or a Foreign
Bank that is described in section V(d)(2), the Lending Fiduciary must
be a U.S. Bank or U.S. Broker-Dealer, and prior to entering into the
loan transaction, such fiduciary must agree to indemnify the plan with
respect to the difference, if any, between the replacement cost of the
borrowed securities and the market value of the collateral on the date
of a borrower default plus interest and any transaction costs incurred
(including attorney's fees of such plan arising out of the default on
the loans or the failure to indemnify properly under this provision)
which the plan may incur or suffer directly arising out of a borrower
default by the Foreign Broker-Dealer or Foreign Bank.
IV. Specific Conditions for Transactions Described in Section I(c)
(a) The loan of securities is not prohibited by section 406(a) of
ERISA or otherwise satisfies the conditions of this exemption.
(b) The Lending Fiduciary is authorized to engage in securities
lending transactions on behalf of the plan.
(c) The compensation is reasonable and is paid in accordance with
the terms of a written instrument, which may be in the form of a master
agreement covering a series of securities lending transactions.
(d) Except as otherwise provided in section IV(f), the arrangement
under which the compensation is paid:
(1) Is subject to the prior written authorization of a plan
fiduciary (the ``authorizing fiduciary''), who is (other than in the
case of a plan covering only employees of the Lending Fiduciary or
any affiliates of such fiduciary) independent of the Lending
Fiduciary and of any affiliate thereof, and
(2) May be terminated by the authorizing fiduciary within:
(A) The time negotiated for such notice of termination by the
plan and the Lending Fiduciary, or
(B) five business days, whichever is less, in either case
without penalty to the plan.
(e) No such authorization is made or renewed unless the Lending
Fiduciary shall have furnished the authorizing fiduciary with any
reasonably available information which the Lending Fiduciary reasonably
believes to be necessary to determine whether such authorization should
be made or renewed, and any other reasonably available information
regarding the matter that the authorizing fiduciary may reasonably
request.
(f) (Special Rule for Commingled Investment Funds) In the case of a
pooled separate account maintained by an insurance company qualified to
do business in a State or a common or collective trust fund maintained
by a bank or trust company supervised by a State or Federal agency, the
requirements of section IV(d) of this exemption shall not apply,
provided that:
(1) The information described in section IV(e) (including
information with respect to any material change in the arrangement)
shall be furnished by the Lending Fiduciary to the authorizing
fiduciary described in section IV(d) with respect to each plan whose
assets are invested in the account or fund, not less than 30 days
prior to implementation of the arrangement or material change
thereto, and, where requested, upon the reasonable request of the
authorizing fiduciary;
[[Page 63798]]
(2) In the event any such authorizing fiduciary submits a notice
in writing to the Lending Fiduciary objecting to the implementation
of, material change in, or continuation of the arrangement, the plan
on whose behalf the objection was tendered is given the opportunity
to terminate its investment in the account or fund, without penalty
to the plan, within such time as may be necessary to effect such
withdrawal in an orderly manner that is equitable to all withdrawing
plans and to the non-withdrawing plans. In the case of a plan that
elects to withdraw pursuant to the foregoing, such withdrawal shall
be effected prior to the implementation of, or material change in,
the arrangement; but an existing arrangement need not be
discontinued by reason of a plan electing to withdraw; and
(3) In the case of a plan whose assets are proposed to be
invested in the account or fund subsequent to the implementation of
the compensation arrangement and which has not authorized the
arrangement in the manner described in sections IV(f)(1) and
IV(f)(2), the plan's investment in the account or fund shall be
authorized in the manner described in section IV(d)(1).
V. Definitions
For purposes of this exemption:
(a) The term ``U.S. Broker-Dealer'' means a broker-dealer
registered under the Securities Exchange Act of 1934 (the 1934 Act
or the Exchange Act) or exempted from registration under section
15(a)(1) of the 1934 Act as a dealer in exempted government
securities (as defined in section 3(a)(12) of the 1934 Act).
(b) The term ``U.S. Bank'' means a bank as defined in section
202(a)(2) of the Investment Advisers Act.
(c) The term ``Foreign Broker-Dealer'' means a broker-dealer
that has, as of the last day of its most recent fiscal year, equity
capital that is equivalent of no less than $200 million and is:
(1) (i) Registered and regulated under the laws of the Financial
Services Authority in the United Kingdom, or
(ii)(a) registered and regulated by a securities commission of a
Province of Canada that is a member of the Canadian Securities
Administration, and (b) is subject to the oversight of a Canadian
self-regulatory authority; or
(2) registered and regulated under the relevant securities laws
of a governmental entity of a country other than the United States,
and such securities laws and regulation were applicable to a broker-
dealer that received: (i) An individual exemption, granted by the
Department under section 408(a) of ERISA, involving the loan of
securities by a plan to a broker-dealer or (ii) a final
authorization by the Department to engage in an otherwise prohibited
transaction pursuant to PTE 96-62, as amended, involving the loan of
securities by a plan to a broker-dealer.
(d) The term ``Foreign Bank'' means an institution that has
substantially similar powers to a bank as defined in section
202(a)(2) of the Investment Advisers Act, has as of the last day of
its most recent fiscal year, equity capital which is equivalent of
no less than $200 million, and is subject to:
(1) Regulation by the Financial Services Authority in the United
Kingdom or the Office of the Superintendent of Financial
Institutions in Canada, or
(2) regulation by the relevant governmental banking agency(ies)
of a country other than the United States, and the regulation and
oversight of these banking agencies were applicable to a bank that
received: (a) An individual exemption, granted by the Department
under section 408(a) of ERISA, involving the loan of securities by a
plan to a bank or (b) a final authorization by the Department to
engage in an otherwise prohibited transaction pursuant to PTE 96-62,
as amended, involving the loan of securities by a plan to a bank.
(e) The term ``U.S. Collateral'' means:
(1) U.S. currency;
(2) ``government securities'' as defined in section 3(a)(42)(A)
and (B) of the Exchange Act;
(3) ``government securities'' as defined in section 3(a)(42)(C)
of the Exchange Act issued or guaranteed as to principal or interest
by the following corporations: The Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, the Student
Loan Marketing Association and the Financing Corporation
(4) mortgage-backed securities meeting the definition of a
``mortgage related security'' set forth in section 3(a)(41) of the
Exchange Act;
(5) negotiable certificates of deposit and bankers acceptances
issued by a ``bank'' as that term is defined in section 3(a)(6) of
the Exchange Act, and which are payable in the United States and
deemed to have a ``ready market'' as that term is defined in 17 CFR
240.15c3-1; or
(6) irrevocable letters of credit issued by a U.S. Bank other
than the borrower or an affiliate thereof, or any combination,
thereof.
(f) The term ``Foreign Collateral'' means:
(1) Securities issued by or guaranteed as to principal and
interest by the following Multilateral Development Banks--the
obligations of which are backed by the participating countries,
including the United States: The International Bank for
Reconstruction and Development, the Inter-American Development Bank,
the Asian Development Bank, the African Development Bank, the
European Bank for Reconstruction and Development and the
International Finance Corporation;
(2) foreign sovereign debt securities provided that at least one
nationally recognized statistical rating organization has rated in
one of its two highest categories either the issue, the issuer or
guarantor;
(3) the British pound, the Canadian dollar, the Swiss franc, the
Japanese yen or the Euro;
(4) irrevocable letters of credit issued by a Foreign Bank,
other than the borrower or an affiliate thereof, which has a
counterparty rating of investment grade or better as determined by a
nationally recognized statistical rating organization; or
(5) any type of collateral described in Rule 15c3-3 of the
Exchange Act as amended from time to time provided that the lending
fiduciary is a U.S. Bank or U.S. Broker-Dealer and such fiduciary
indemnifies the plan with respect to the difference, if any, between
the replacement cost of the borrowed securities and the market value
of the collateral on the date of a borrower default plus interest
and any transaction costs which a plan may incur or suffer directly
arising out of a borrower default. Notwithstanding the foregoing,
collateral described in any of the categories enumerated in section
V(e) will be considered U.S. Collateral for purposes of the
exemption.
(g) The term ``affiliate'' of another person means:
(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 ERISA) of such other person; and
(3) Any corporation or partnership of which such other person is
an officer, director, partner or employee.
(h) The term ``control'' means the power to exercise a
controlling influence over the management or policies of a person
other than an individual.
(i) The term ``Eligible Securities Depository'' means an
eligible securities depository as that term is defined under Rule
17f-7 of the Investment Company Act of 1940 [15 U.S.C. 80a], as such
definition may be amended from time to time.
(j) The term ``recognized securities exchange'' means a U.S.
securities exchange that is registered as a ``national securities
exchange'' under section 6 of the Exchange Act of 1934 (15 U.S.C.
78f) or a designated offshore securities market as defined in
Regulation S of the Securities Act of 1933 [17 CFR part 230.902(B)],
as such definition may be amended from time to time, which performs
with respect to securities, the functions commonly performed by a
stock exchange within the meaning of the definitions under the
applicable securities laws (e.g., 17 CFR part 240.3b-16).
(k) The term ``automated trading system'' means an electronic
trading system that functions in a manner intended to simulate a
securities exchange by electronically matching orders on an agency
basis from multiple buyers and sellers such as an ``alternative
trading system'' within the meaning of SEC's Reg. ATS [17 CFR part
242.300] as such definition may be amended from time to time, or an
``automated quotation system'' as described in section
3(a)(51)(A)(ii) of the Securities and Exchange Act of 1934 [15
U.S.C. 78c(a)(51)(A)(ii)].
(l) The term ``lending of securities'' or ``loan of securities''
shall include securities loans that are structured as repurchase
agreements provided, that all terms of the exemption are otherwise
met.
VI. Effective Dates
(a) This exemption is effective on January 2, 2007.
(b) PTEs 81-6 and 82-63 are revoked effective January 2, 2007.
[[Page 63799]]
Signed at Washington, DC, this 25th day of October, 2006.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. E6-18238 Filed 10-30-06; 8:45 am]
BILLING CODE 4510-29-P
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