EBSA
Notices
Proposed Exemptions Involving; D-11082 & D-11109--Deutsche Bank, AG; D-11263--Banc One Investment Advisors Corporation and J.P. Morgan Investment Management Inc.; D-11449--Pileco, Inc. Employees Profit Sharing Plan; and D-11460--Mellon Bank N.A.
[ 7/8/2008]
[ PDF]
FR Doc E8-15320
[Federal Register: July 8, 2008 (Volume 73, Number 131)]
[Notices]
[Page 39157-39180]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jy08-144]
[[Page 39157]]
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Part III
Department of Labor
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Employee Benefits Security Administration
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Proposed Exemptions Involving; D-11082 & D-11109--Deutsche Bank, AG; D-
11263--Banc One Investment Advisors Corporation and J.P. Morgan
Investment Management Inc.; D-11449--Pileco, Inc. Employees Profit
Sharing Plan; and D-11460--Mellon Bank N.A.; Notice
[[Page 39158]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application Nos. D-11082 & D-11109; D-11263; D-11449; and D-11460]
Proposed Exemptions Involving; D-11082 & D-11109--Deutsche Bank,
AG; D-11263--Banc One Investment Advisors Corporation and J.P. Morgan
Investment Management Inc.; D-11449--Pileco, Inc. Employees Profit
Sharing Plan; and D-11460--Mellon Bank N.A.
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of Proposed Exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the
Internal Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5700,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ----, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
moffitt.betty@dol.gov, or by FAX to (202) 219-0204 by the end of the
scheduled comment period. The application for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
persons in the manner agreed upon by the applicant and the Department
within 15 days of the date of publication in the Federal Register. Such
notice shall include a copy of the notice of proposed exemption as
published in the Federal Register and shall inform interested persons
of their right to comment and to request a hearing (where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemption was requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, this notice of proposed exemption
are issued solely by the Department.
The application contains representations with regard to the
proposed exemption which is summarized below. Interested persons are
referred to the application on file with the Department for a complete
statement of the facts and representations.
Deutsche Bank, AG (Deutsche Bank or the Applicant)
Located in Germany, with Affiliates in New York, NY and Other
Locations.
[Application Nos. D-11082 and D-11109]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act (or 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, 32847, August 10, 1990).\1
\
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\1\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
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Section I. Covered Transactions
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(A) through (D) and 406(b)(1) and (b)(2) of the Act, and the
taxes imposed by section 4975(a) and (b) of Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply to the following
foreign exchange transactions involving less developed currencies, that
are executed by Deutsche Bank or a current or future affiliate
(domestic or foreign) thereof that is a bank or broker-dealer, acting
as a local subcustodian in connection with a determination by Deutsche
Bank or its affiliates to invest the assets of a client plan, an in-
house plan whose assets are invested in a separately managed account
with Deutsche Bank, or a pooled fund, in foreign securities, if the
conditions set forth in Sections II, III and IV below are met with
respect to:
(1) A trade-related currency conversion, or
(2) An income item conversion.
Section II. General Conditions
(a) At the time the foreign exchange transaction is entered into,
the terms of the transaction are not less favorable to the client plan,
in-house plan or pooled fund than the terms generally available in a
comparable arm's length foreign exchange transaction between unrelated
parties.
(b) The exchange rate used for a particular foreign exchange
transaction does not deviate by more than 3 percent (above or below)
the interbank bid and asked rates for such currency at the time of the
transaction as displayed on an independent, nationally-recognized
service that reports rates of exchange in the foreign currency market
for such currency.
(c) The covered transactions are limited to those less developed
currencies in which a transaction is executed with Deutsche Bank or its
affiliate acting as local subcustodian at the direction of the global
custodian because the global custodian either does not make a market in
such currency, or otherwise determines to execute with the local
subcustodian because of market conditions, market restrictions,
illiquidity of the currency or similar exigencies.
(d) Where a market is served by more than one subcustodian,
Deutsche Bank, as asset manager, has no decision making authority or
role, or otherwise makes no recommendations with respect to the global
custodian's selection of the subcustodian.
(e) The foreign exchange transaction is executed by Deutsche Bank
or its
[[Page 39159]]
affiliate thereof acting as subcustodian at the direction of the global
custodian in the ordinary course of its business as global custodian.
(f) The decision to select Deutsche Bank or its affiliate as the
subcustodian is made by a global custodian which is unrelated to
Deutsche Bank or any affiliate thereof.
(g) The selection of Deutsche Bank or its affiliate as subcustodian
and any foreign exchange transactions executed by Deutsche Bank or its
affiliate at the direction of the global custodian are not part of any
agreement, arrangement or understanding, written or otherwise, designed
to benefit Deutsche Bank, its affiliate or any other party in interest.
(h) Deutsche Bank or its affiliate appoints an independent
fiduciary to represent the interests of (1) an in-house plan, or (2)
plans investing in a large pooled fund.
(i) The decision to invest in a market and to select Deutsche Bank
or its affiliate as asset manager is part of an investment strategy
that is adopted by an independent fiduciary of a client plan, the
independent fiduciary of an in-house plan, the independent fiduciary of
a large pooled fund, or the independent fiduciary of an unrelated
pooled fund.
(j) On an annual basis, the percentage of assets of in-house plans
and pooled funds for which Deutsche Bank and/or its affiliates select
the global custodian represent less than 20 percent of the total assets
under custody by any such global custodian.
(k) Foreign affiliates of Deutsche Bank who engage in the covered
transactions--
(1) Agree to submit to the jurisdiction of the United States;
(2) Agree to appoint an agent for service of process in the United
States, which may be an affiliate (the Process Agent);
(3) Consent to service of process on the Process Agent;
(4) Agree that they may be sued in the United
States Courts in connection with the covered transactions described
in this proposed exemption;
(5) Agree that any judgment on behalf of a plan or pooled fund may
be collected in the United States from Deutsche Bank; and
(6) Agree to comply with, and be subject to, all relevant
provisions of the Act.
(l) With respect to the covered transactions--
(1) Deutsche Bank or its affiliate designates an individual
responsible for periodically (but no less frequently than on an annual
basis) reviewing a sample of such foreign exchange transactions to
determine whether the covered transactions have been executed in
accordance with the terms of this exemption. Such sample must include a
sufficient number of transactions to ensure that each affected currency
is tested.
(2) Deutsche Bank or its affiliate provides such individual with
the records (which may be provided electronically) described in Section
IV(a)(1)-(7), on an annual basis.
(3) Such individual notifies Deutsche Bank or its affiliate, the
independent fiduciary of a client plan, the independent fiduciary of an
in-house plan, the independent fiduciary of a large pooled fund, the
independent fiduciary of an unrelated pooled fund, or the receiving
fiduciary of a small pooled fund, of its findings in a written report
within 90 days after the period to which the periodic review relates.
Such report describes the steps performed by such individual during the
course of the review, the level of compliance by Deutsche Bank or its
affiliate with the terms and conditions of the exemption, and any
specific instances of non-compliance by Deutsche Bank or its affiliate
with the terms and conditions of the exemption.
Section III. Notice Requirements
(a) At the time Deutsche Bank or its affiliate is retained as asset
manager, or prior to the initial investment of the plan's assets or
pooled fund's assets in any foreign investments that may require the
execution of a foreign exchange transaction by Deutsche Bank or its
affiliate as subcustodian, Deutsche Bank or its affiliate provides the
independent fiduciary of a client plan, the independent fiduciary of an
in-house plan, the independent fiduciary of a large pooled fund, the
independent fiduciary of an unrelated pooled fund, or the receiving
fiduciary of a small pooled fund, a written notice (which may be
effected electronically) that includes the following:
(1) The reasons why Deutsche Bank or its affiliate may consider a
particular market to be an appropriate investment for the plan or
pooled fund.
(2) The factors considered by Deutsche Bank or its affiliate in its
selection of global custodian (if applicable) including: (i) the
identity of the global custodian; and (ii) a summary of the global
custodian's policies and procedures regarding the handling of foreign
exchange transactions for plans or pooled funds with respect to which
Deutsche Bank or its affiliate is a fiduciary and the factors that the
global custodian considers in its selection of a subcustodian.
(3) Notice that such foreign exchange transaction may be executed
by Deutsche Bank or its affiliate as subcustodian, at the direction of
a global custodian.
(4) A list of the markets in which plans or pooled funds may invest
where Deutsche Bank or its affiliate serves as a subcustodian.
(5) A list of the markets where currency transactions are executed
by a subcustodian, to the extent known.
(6) Notice that Deutsche Bank or its affiliate maintains records
(described in Section IV), and such records are reasonably available at
their customary location for examination in the U.S., during normal
business hours, by the responsible reviewing individual, the
independent fiduciary of a client plan, the independent fiduciary of an
in-house plan, the independent fiduciary of a large pooled fund, the
independent fiduciary of an unrelated pooled fund, or the receiving
fiduciary of a small pooled fund, any participant or beneficiary of
such plan or pooled fund, or any duly authorized employee or
representative of such participant or beneficiary.
(7) Copies of the notice of proposed exemption and the grant of
final exemption with respect to the subject transactions.
(b) If the independent fiduciary fails to object in writing to
Deutsche Bank or its affiliate within 30 days following receipt of the
information described in section III(a) by such fiduciary, then such
fiduciary's authorization of the arrangement contemplated under this
exemption shall be presumed.
(c) Deutsche Bank or its affiliate shall provide notification of
any changes to the information required by Section III, including, but
not limited to, the situation where Deutsche Bank or its affiliate
replaces the global custodian with another independent entity or where
there are changes in the markets in which currency transactions are
executed by the subcustodian. If the independent fiduciary fails to
object in writing to Deutsche Bank or its affiliate within 30 days
following disclosure of such changes, such fiduciary's approval of
these changes shall be presumed.
Section IV. Recordkeeping Requirements
(a) Deutsche Bank or its affiliate maintains, or causes to be
maintained, for a period of six years from the date of the covered
transactions, the following records, as well as any records necessary
to enable the persons described in paragraph (c) of this
[[Page 39160]]
Section IV, to determine whether the conditions of this exemption have
been met:
(1) The account name,
(2) The foreign exchange transaction execution date,
(3) The exchange rate,
(4) The high and low on Reuters or similar independent service on
the date of the transaction,
(5) The identity of the foreign currency sold or purchased,
(6) The amount of foreign currency sold or purchased,
(7) The amount of U.S. dollars exchanged, where the exchange is
between foreign currencies and U.S. dollars or the amount of foreign
currency exchanged, where the exchange is between two foreign
currencies, and
(8) The annual report described in Section II(l).
(b) The following are exceptions to paragraph (a) of this Section
IV:
(1) If the records necessary to enable the persons described in
paragraph (c) to determine whether the conditions of the exemption have
been met are lost or destroyed, due to circumstances beyond the control
of Deutsche Bank, then no prohibited transaction will be considered to
have occurred solely on the basis of the unavailability of those
records; and
(2) No party in interest, other than Deutsche Bank, shall be
subject to the civil penalty that may be assessed under section 502(i)
of the Act or to the taxes imposed by section 4975(a) and (b) of the
Code if the records are not maintained or are not available for
examination as required by paragraph (c) below.
(c)(1) Except as provided in paragraph (c)(2) of this Section IV
and notwithstanding the provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to above in paragraph (a)
of this Section IV are unconditionally available for examination during
normal business hours at their customary location to the following
persons or an authorized representative thereof:
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service (the Service);
(ii) The independent fiduciary of a client plan, the independent
fiduciary of an in-house plan, the independent fiduciary of a large
pooled fund, the independent fiduciary of an unrelated pooled fund, or
the receiving fiduciary of a small pooled fund, or
(iii) Any participant or beneficiary of such plans or pooled funds
or any duly authorized employee or representative of such participant
or beneficiary.
(2) None of the persons described above in paragraphs (ii) and
(iii) of this paragraph (c)(1) of this Section IV shall be authorized
to examine trade secrets of Deutsche Bank, or any commercial or
financial information, which is privileged or confidential.
Section V. Definitions
For purposes of this proposed exemption,
(a) The term ``Deutsche Bank'' means Deutsche Bank AG.
(b) An ``affiliate'' of Deutsche Bank means any domestic or foreign
bank or broker-dealer directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Deutsche Bank;
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``bank'' means a bank as defined in section 202(a)(2)
of the Investment Advisers Act of 1940 (the Investment Advisers Act),
or an institution that has substantially similar powers to a bank
defined in section 202(a) of the Investment Advisers Act, and is --
(i) Supervised by the United States or a State;
(ii) Supervised and examined by the German banking authorities, or
monitored and controlled pursuant to the statutory and regulatory
standards of German law; or
(iii) Subject to regulation and oversight by governmental entities
that are substantially similar to the regulatory oversight of banks
present in the United States.
(e) The term ``broker-dealer'' means a broker-dealer registered
under the Securities Exchange Act of 1934, or is engaged in the
business of effecting transactions in securities for the account of
others, and is --
(i) Registered and regulated under the relevant securities laws of
the United States;
(ii) Registered and regulated under the relevant securities laws of
Germany; or
(iii) Registered and regulated under the relevant securities laws
of a country with securities laws that are substantially similar to the
securities laws governing broker-dealers in the United States.
(f) The term ``global custodian'' means a bank or broker-dealer
that is unrelated to Deutsche Bank or its affiliate, which is selected
by (1) The named fiduciary of a client plan; (2) the sponsor (other
than Deutsche Bank or its affiliate) of an unrelated pooled fund; (3)
Deutsche Bank or its affiliate in the case of an in-house plan; or (4)
Deutsche Bank or its affiliate in the case of a pooled fund established
by Deutsche Bank or an affiliate, for the purpose of holding and
safeguarding all assets of the client plan, in-house plan, or pooled
fund, physically or through a depository, through its branches or
through its subcustodian network.
(g) The term ``subcustodian'' means a bank or broker-dealer,
selected by a global custodian, to hold and safekeep designated assets
of the plan or pooled fund at securities depositories, foreign clearing
agencies or other entities which act as securities depositories, and to
execute foreign exchange transactions and income item conversions. A
subcustodian has no contractual relationship with the global
custodian's clients, but only with the global custodian.
(h) The term ``responsible reviewing individual'' means a senior
official appointed by Deutsche Bank who has at least 10 years
experience with the fiduciary responsibility provisions of the Act, and
appropriate compliance training. Such person is appointed by Deutsche
Bank to review a sample of the covered transactions periodically, but
no less frequently than on an annual basis, in order to ensure
compliance with the terms of the exemption on behalf of a client plan
an in-house plan, or a pooled fund.
(i) The term ``in-house plan'' means a plan sponsored by Deutsche
Bank or any person that directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common
control with, Deutsche Bank.
(j) The term ``client plan'' means an employee benefit plan, other
than a plan sponsored by Deutsche Bank, as described in section 3(3) of
the Act or section 4975(e)(1) of the Code with respect to which
Deutsche Bank or its affiliate acts as a fiduciary having full
investment discretion.
(k) The term ``pooled fund'' means a collective investment fund or
a pooled arrangement established for investment on behalf of two or
more unrelated employee benefit plans by Deutsche Bank or an affiliate
or by a fund sponsor other than Deutsche Bank or an affiliate for which
Deutsche Bank or its affiliate acts as fiduciary with full investment
discretion. The assets of a pooled fund may include the assets of (i)
Client plans, (ii) in-house plans of Deutsche Bank or an affiliate,
(iii) other pooled funds in which Deutsche Bank or an affiliate is not
the fund sponsor, and (iv) other pooled funds in which Deutsche Bank or
an affiliate is the fund sponsor.
(l) The term ``large pooled fund'' refers to a pooled fund that is
sponsored
[[Page 39161]]
and managed by Deutsche Bank or an affiliate. A large pooled fund may
include the assets of (i) Client plans, (ii) in-house plans of Deutsche
Bank or an affiliate, (iii) other pooled funds in which Deutsche Bank
or an affiliate is not the fund sponsor, and (iv) other pooled funds in
which Deutsche Bank or an affiliate is the fund sponsor. In a large
pooled fund, the total invested assets of an in-house plan (or in-house
plans), if aggregated (whether invested directly or indirectly through
another pooled fund), represent more than 20% of the total invested
assets of such fund. Also, in a large pooled fund, Deutsche Bank will
appoint an independent fiduciary, as described in Section V(o) below,
to represent the interests of all plans investing in such fund.
(m) The term ``small pooled fund'' refers to a pooled fund that is
sponsored and managed by Deutsche Bank or an affiliate. A small pooled
fund may include the assets of (i) Client plans, (ii) in-house plans of
Deutsche Bank or an affiliate, (iii) other pooled funds in which
Deutsche Bank or an affiliate is not the fund sponsor, and (iv) other
pooled funds in which Deutsche Bank or an affiliate is the fund
sponsor. In a small pooled fund, the total invested assets of an in-
house plan (or in-house plans), if aggregated (whether invested
directly or through another pooled fund), represent less than 20% of
the total invested assets of such fund.
(n) The term ``unrelated pooled fund'' refers to a pooled fund that
is not sponsored by Deutsche Bank or an affiliate, but is managed by
either of these entities.
(o) The term ``independent fiduciary'' means --
(1) In the case of a client plan or an unrelated pooled fund, a
plan fiduciary or the named fiduciary of a pooled fund that is
unrelated to, and independent of, Deutsche Bank and it affiliates. For
purposes of this exemption, a plan fiduciary will be deemed to be
unrelated to, and independent of, Deutsche Bank if such fiduciary
represents that neither such fiduciary, nor any individual responsible
for the decision to authorize or terminate authorization for the
transactions described in Section I, is an officer, director, or highly
compensated employee (within the meaning of section 4975(e)(2)(H) of
the Code) of Deutsche Bank and represents that such fiduciary must
advise Deutsche Bank or its affiliate if those facts change, or
(2) In the case of an in-house plan or a large pooled fund, an
individual or company is unrelated and independent of Deutsche Bank and
its affiliates if such individual or company has at least 10 years
experience in the financial services business and significant
experience in foreign currency trading and pricing who certifies that
the gross income received from Deutsche Bank and its affiliates for the
current year does not exceed 5% of such fiduciary's gross income from
all services for the prior fiscal year. The independent fiduciary
represents that such fiduciary is aware of its ERISA duties and
responsibilities in acting as a fiduciary with respect to an in-house
plan and the covered transactions.
(3) Notwithstanding anything to the contrary in this Section V(o),
a plan fiduciary is not independent if--
(i) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with Deutsche Bank, other than described
herein;
(ii) Such fiduciary directly or indirectly receives any
compensation or other consideration from Deutsche Bank for his own
personal account in connection with any transaction described in this
exemption in excess of the 5 percent gross income limitation set forth
in Section V(o)(2) above;
(iii) Any officer, director or highly compensated employee (within
the meaning of section 4975(e)(2)(H) of the Code) of Deutsche Bank or
an affiliate responsible for the transactions described in Section I is
an officer, director or highly compensated employee (within the meaning
of section 4975(e)(2)(H) of the Code) of the client plan sponsor, the
sponsor of an unrelated pooled fund, or of the fiduciary responsible
for the decision to authorize or terminate authorization for
transactions described in Section I. However, if such individual is a
director of the client plan sponsor, the sponsor of an unrelated pooled
fund, or of the responsible fiduciary, and if he or she abstains from
participation in (A) the choice of Deutsche Bank or an affiliate as the
investment manager/adviser for the client plan or unrelated pooled fund
and (B) the decision to authorize or terminate authorization for
transactions described in Section I, then Section V(o)(3)(iii) shall
not apply.
(p) The term ``officer'' means a president, any vice president in
charge of a principal business unit, division or function (such as
sales, administration or finance), or any other officer who performs a
policy-making function for the entity.
(q) The term ``receiving fiduciary'' means a person or entity in a
small pooled fund who is designated to receive the disclosures
described in Sections III and IV above, for dissemination to the
fiduciaries of plans or other pooled funds participating in such small
pooled fund.
(r) The term ``foreign exchange'' transaction means the exchange of
the currency of one nation for the currency of another nation.
(s) The term ``less developed currencies'' means those currencies
in which the global custodian does not make a market at the time of the
transaction and in which the global custodian determines to purchase
from or sell to the plan's or pooled fund's local subcustodian on
behalf of a plan or pooled fund because the currency is difficult to
trade, undeveloped or the subject of local government restrictions, or
because of the volatility or lack of liquidity in the market at the
time of the transaction. The term ``less developed currencies'' does
not include the following currencies: the Euro; the British pound; the
Swiss franc, the Canadian dollar; or the Japanese yen.
(t) The term ``trade-related currency conversion'' means the
conversion of trade-related items (i.e., amounts necessary for
purchases or proceeds from sales) into foreign currency or into U.S.
dollars in order to permit purchase transactions to settle, and to
permit proceeds of sales to be deployed in other investments or to be
used to make distributions.
(u) The term ``income item conversions'' means the conversion of
income items (e.g., interest, dividends, tax reclaims or other
distributions) denominated in a foreign currency into U.S. dollars or
another foreign currency.
Effective Date: If granted, this proposed exemption will be
effective as of the date the proposed exemption is published in the
Federal Register.
Summary of Facts and Representations
Deutsche Bank
1. Deutsche Bank is a German banking corporation and commercial
bank, which provides a wide range of services to various types of
entities worldwide. Deutsche Bank is a financial institution that in
2006 managed approximately $716 billion in assets either through
collective trusts, separately managed accounts or mutual funds.
Deutsche Bank's asset management clients include a number of employee
benefit plans covered by the Act, either in:
(a) Separately managed accounts, where the plan sponsor, and not
the Applicant selects the global custodian, (b) pooled funds, where the
fund sponsor, and not the Applicant selects the global custodian, and
(c) pooled funds where the Applicant selects the global custodian, or
(d) for its own plans, where the Applicant selects the global
custodian.
[[Page 39162]]
Regulatory Authority
2. The Applicant states that it is subject to a comprehensive
system of regulatory oversight and a mandatory insurance program. With
respect to the regulatory and supervisory requirements applicable to
Deutsche Bank, the Applicant states that Deutsche Bank, its branches,
and its subsidiary banks worldwide are subject to regulatory
requirements and protections that are, qualitatively, at least equal to
those imposed on U.S.-domiciled banks.\2\ Within the United States, the
New York branch of Deutsche Bank and Deutsche Bank Trust Company
Americas are regulated and supervised by the New York State Banking
Department. In addition, certain activities of Deutsche Bank's New York
branch and Deutsche Bank Trust Company Americas (the trustee of ERISA-
covered bank collective trusts) are regulated and supervised by the
Federal Reserve Bank of New York. Deutsche Asset Management Inc. and
Deutsche Investment Management Americas Inc. are investment advisers
registered under the Investment Advisers Act of 1940 and supervised by
the Securities and Exchange Commission. With respect to Deutsche Bank
itself, globally, the bank is regulated and supervised by the
Bundesanstalt f[uuml]r Finanzdienstleistungsaufsicht (the BAFin), in
cooperation with the Bundesbank. The BAFin is a federal institution
with ultimate responsibility to the German Ministry of Finance. The
Bundesbank, in turn, is the central bank of the Federal Republic of
Germany and a part of the European Central Banks.
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\2\ In support of this, the Applicant notes that the U.S.
Department of Treasury has accorded national treatment to German
bank branches, and the German Ministry of Finance has granted relief
to branches of U.S. banks in Germany, in particular with respect to
``dotation'' or endowment capital requirements and capital adequacy
standards.
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3. The Applicant states that the BAFin requires that it have
procedures for monitoring and controlling its worldwide activities
through the implementation of various statutory and regulatory
standards. Among those standards are requirements for adequate internal
controls, oversight, administration, and financial resources. The BAFin
reviews compliance with these operational and internal control
standards through an annual audit performed by the year-end auditor and
through special audits ordered by the BAFin. In addition to the
regulatory and supervisory arrangements described above, the Applicant
states that Deutsche Bank and its foreign branches are covered under a
mandatory deposit insurance program.\3\ According to the Applicant,
this insurance program is maintained by an institution separate from
Deutsche Bank and is supervised by the BAFin. The program insures
deposits denominated in the currency of a European Economic Area member
state up to the lesser of 90 percent of the deposit amount or 20,000
Euros.
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\3\ The Applicant states that, in addition, Deutsche Bank and
its foreign branches are covered by a voluntary deposit protection
program called the Deposit Protection Fund that safeguards
liabilities in excess of the thresholds guaranteed by the European
Union Program discussed above.
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Request for Exemptive Relief
4. The Applicant seeks an exemption to permit plans, either
directly or through pooled arrangements, to engage in certain trade-
related and income-related foreign exchange transactions through
subcustodians selected by unaffiliated global custodians in connection
with a determination by Deutsche Bank and its affiliates to invest
assets of a client plan, an in-house plan or a pooled fund in foreign
securities. As described below, in some cases, the subcustodians
selected by such global custodian will be Deutsche Bank and its current
and future affiliates. The Applicant notes that the requested exemption
would not apply to foreign exchange transactions for reasons other than
trade-related currency conversions, or income item conversions. If
granted, the exemption would be effective as of the date the notice of
proposed exemption is published in the Federal Register.
Global Strategy
5. As noted above, Deutsche Bank acts as an investment manager to
numerous plans, many of which are managed in a global strategy. In such
strategies, each time a transaction is entered into, or income on held
securities is received, a foreign exchange transaction is required. For
example, if the investment manager decides to invest plan assets in a
Japanese security, a trade-related currency conversion is required to
convert the plan's U.S. dollars into the amount of Japanese yen
required to purchase the security and settle the transaction.
Similarly, each time a Japanese fixed income instrument pays interest
(generally, semiannually or quarterly), that payment, which is made in
yen, will generally be converted back to U.S. dollars.
6. The Applicant states that in well-developed markets, such as the
one described above, there are many banks and broker-dealers with which
the investment manager can effect transactions involving foreign
currency. In addition, the Applicant states there is little difficulty,
either from a price or a settlement perspective, in doing so, with
respect to freely traded currencies, such as the British pound, the
Euro, and the Japanese yen. The Applicant represents that in effecting
foreign exchange transactions in well-developed markets for an account,
the investment manager generally has two options: (a) to send the
transaction to the account's global custodian, in which case the
transactions are generally effected at the global custodian's own
proprietary desk in the U.S. or at the global custodian's London
branch; or (b) to find a counterparty to effect the transaction, other
than the account's global custodian.
7. The Applicant states that the choices differ somewhat with
respect to emerging markets, which include much of Central and South
America, Africa, and Asia.\4\ According to the Applicant, in markets
where currency is hard to trade, undeveloped, or subject to local
restrictions, the investment manager still chooses between routing the
trade to its global custodian, or locating another counterparty, if it
can find a counterparty with adequate credit and performance. In many
instances, an investment manager cannot locate a counterparty of its
own, and these instances generally occur in the same less developed
currencies where the global custodian is unable or unwilling to make a
market in that currency and instead will usually rely on a subcustodian
in the applicable market, which may be the Applicant's affiliate. With
respect to the option of locating another counterparty, the Applicant
states that the investment manager would need to locate a local bank or
broker-dealer in the applicable market, open a trading account after
investigating the bank or broker-dealer's credit, and would then trade
directly with that bank or broker-dealer, while relying on the global
custodian to settle both the securities transaction and the foreign
exchange transaction.
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\4\ The list of emerging market currencies may change from time
to time, as conditions change in the world market. For example,
during recent years, the Argentine peso has transitioned back and
forth from being freely traded to restricted.
---------------------------------------------------------------------------
8. According to the Applicant, in markets where the currency is
illiquid, or the penalties for transaction failure are severe, an
investment manager generally does not attempt to locate a counterparty
in the local market. Rather, the Applicant believes that it is very
often the practice of investment managers to send foreign exchange
transactions to the global custodian for execution, to obtain more
certainty that
[[Page 39163]]
the underlying securities transaction, with its foreign exchange
component, will settle in a timely fashion.\5\ The Applicant states
that not doing so raises the risk that the entire transaction will fail
because the currency transaction becomes separated from the securities
transaction in a market that is either very manual or where the
settlement period is very short. The Applicant represents that where
the penalty for failure is thousands of dollars or a suspension of
one's license to trade, it is particularly important that an asset
manager take all steps possible to avoid settlement failure.
---------------------------------------------------------------------------
\5\ When trades are routed to the global custodian, it becomes
responsible for ensuring that the subcustodian settles both the
foreign exchange conversion, and the underlying transaction.
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Global Custody/Subcustody Arrangements
9. The Applicant states that each plan generally appoints a
``global custodian'' other than Deutsche Bank or its affiliate to hold
and safekeep plan assets. A global custodian is typically a bank or
trust company, selected by an independent plan fiduciary for a client
plan, a sponsor of an unrelated pooled, or Deutsche Bank as asset
manager for an in-house plan or a pooled fund. The Applicant further
explains that assets are held either by the global custodian itself, or
through a nominee, physically, or through a depository, in the United
States or outside of the United States, through its branches or through
its subcustody network, which generally consists of foreign banks or
branches of U.S. banks, including its own branches. Accordingly, the
Applicant states that even though Deutsche Bank or its affiliates, as
trustee, may choose the global custodian in the case of a collective
investment fund or other pooled fund it sponsors (rather than an
independent fiduciary of a client plan, in the case of a separately
managed account), the reasons for preferring conversion through one's
global custodian are precisely the same for both types of accounts.\6\
---------------------------------------------------------------------------
\6\ Deutsche Bank represents that since 2003, it has not acted
as global custodian for plans.
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10. The Applicant explains that a subcustodian is generally a bank
or trust company, foreign or domestic, which is selected by a global
custodian, to hold and safekeep designated assets of the plan,
including in its own name, at securities depositories, or at foreign
clearing agencies or other entities which act as securities
depositories. The Applicant states that a subcustodian has no
contractual relationship with the global custodian's clients (i.e.,
plans or other accounts), but only with the global custodian.
11. According to the Applicant, one of the most important functions
of a global custodian is to provide a foreign exchange facility for its
customers, either through a central global trading desk, for readily
tradable currencies, or through its subcustody network, for less
developed currencies. The Applicant represents that, in all cases where
it acts as investment manager for plan assets, a global custodian is
solely in charge of selecting its subcustody network. The Applicant
further represents that it is the responsibility of the global
custodian to monitor its subcustodians on all performance and credit
issues. Generally, the asset manager for an account (or the trustee for
a collective investment fund) has no direct contact at all with the
subcustodian.
12. With respect to selection of subcustodians, the Applicant
states that a global custodian may have more than one option to choose
from, and may, in fact, use more than one subcustodian in a market,
depending on its business needs, but a particular account is only
subcustodied with one subcustodian (i.e., all the assets of the plan in
that market are held with one subcustodian). The Applicant represents
that generally, if the global custodian uses more than one subcustodian
(i.e., puts some clients with one and some with another, because of
size, diversification of risk, price competition or credit concerns),
the choice of which clients are assigned to which subcustodian is made
by the global custodian, not by the client. However, the Applicant
notes that it is far more common for a global custodian to have one
subcustodian. The Applicant states that an account is held at that
subcustodian, and the investment manager knows its identity, because
all transactions are settled by the subcustodian, and information
regarding the subcustodian is required when giving counterparties
settlement instructions.
The Applicant explains that a subcustodian is not hired on a
transaction by transaction basis, but remains the subcustodian for an
account until the global custodian replaces the subcustodian for that
entire account.
The Applicant represents that a subcustodian's relationship with
the global custodian is generally governed by a standard contract which
the global custodian presents to all of its subcustodians. Client
accounts are not parties to the contract.
13. The Applicant represents that it has no control or input with
respect to the subcustodians selected by a global custodian or the
procedures the global custodian uses in making such selections.
Therefore, the decision to select Deutsche Bank or its affiliate as
subcustodian by the global custodian, and any foreign exchange
transactions executed by Deutsche Bank or its affiliate at the
direction of the global custodian, are not part of an understanding,
arrangement, agreement, written or otherwise, designed to benefit
Deutsche Bank, its affiliates or another party in interest.\7\
Furthermore, the decision to invest in a market and to select Deutsche
Bank or its affiliates as asset manager is part of an investment
strategy that is adopted by an independent fiduciary of a client plan,
an independent fiduciary of an in-house plan, an independent fiduciary
of a large pooled fund, or an independent fiduciary of an unrelated
pooled fund.
---------------------------------------------------------------------------
\7\ The Applicant notes that Deutsche Bank asset management
division is separate from the Deutsche Bank's custody division, and
this condition does not preclude the custody division from marketing
its services to the global custodian.
---------------------------------------------------------------------------
For example, the Applicant states that even in a market where more
than one subcustodian is available, assume that the global custodian
has a choice between using the Applicant's affiliate, Large
International Bank X, and several local banks. The Applicant explains
that if the global custodian preferred to select the Applicant's
affiliate due to past experience with the other banks, transaction
costs, each bank's credit rating, or other factors, the global
custodian may select the Applicant's affiliate. The Applicant states
that the global custodians use their own internal procedures and
safeguards to select subcustodians for their clients, including any
plans for which Deutsche Bank or its affiliate may serve as a trustee,
investment manager, fiduciary or other party in interest. The Applicant
represents that, in selecting a global custodian, the trustee would
generally look at such factors as price (including the cost of
transactions inside and outside of the network, reputation, the size of
the global custodian's subcustody network, the number of markets in
which the global custodian has subcustodians, the number of markets
where interest is credited overnight, the global custodian's error rate
and responsiveness, the number and performance of cash sweep vehicles
offered by the global custodian, the global custodian's securities
lending program, and the technology used by the global custodian and
its subcustodians, among many other considerations.
[[Page 39164]]
Trade-Related Currency Conversions
14. The Applicant seeks relief with respect to certain trade-
related foreign exchange transactions in markets with less developed
currencies or in restricted markets. Specifically, Deutsche Bank is
requesting that the proposed exemption apply to situations where
Deutsche Bank (or its current or future affiliates) act as an
investment manager to a plan or pooled fund, and the plan or pooled
fund engages in certain trade-related currency conversions with the
Applicant (or its affiliate), acting as a subcustodian with respect to
the assets involved in the transaction. The Applicant notes that the
requested relief would only apply to those currencies where the global
custodian does not itself make a principal market in the currency and
where the global custodian has selected a Deutsche Bank affiliate as
subcustodian and sends client trades to that subcustodian.
15. According to the Applicant, trade-related currency conversions
may be necessary in several situations. For example, the Applicant
states that where plan assets managed by the Applicant or its affiliate
are subcustodied with its affiliate, exemptive relief is necessary for
such transactions to take place, because Prohibited Transaction
Exemption (PTE) 98-54 (63 FR 63503, November 13, 1998) does not provide
relief for managed accounts, or for the Applicant's foreign affiliates.
PTE 98-54 requires that, in a purchase or sale transaction between a
bank and a plan, the bank (or any domestic affiliate thereof) must be
``supervised by the United States or a State thereof.'' The Applicant
further notes that, when operating outside the United States, Deutsche
Bank is not supervised by a State or by the United States.
The Applicant represents that trade-related currency conversions
are necessary with respect to both well-developed and less developed
currencies. However, in the absence of the requested relief, asset
management in emerging markets is nearly impossible to undertake where
the global custodian has selected a Deutsche Bank affiliate as
subcustodian. As the Applicant describes above, in order for a plan to
purchase a foreign security or other investment, it is often necessary
to make a trade-related currency conversion in order to facilitate the
purchase transaction. In addition, the Applicant states that such
currency conversions may be necessary for purposes of investing sales
proceeds in other investments, or for making distributions of such
proceeds. According to the Applicant, in cases where the manager wants
to avoid currency risk, or to convert funds to a different currency to
experience higher returns (such as a conversion from foreign currency
to U.S. dollars, in order to experience higher returns available on a
U.S. investment), it is important that the investment manager be able
to convert available funds quickly.
16. The Applicant states that there are generally no additional
fees added to transactions executed within a global custodian's
subcustody network, while additional charges are often incurred for
transactions done outside that network. The Applicant represents that
those additional fees may make the currency conversion transaction
disadvantageous to the plan for still another reason--price. In
addition, the Applicant represents that, because the subcustodian
generally receives significant transaction flow from the global
custodian, which is also monitoring rates and performance, it is more
likely that the rates provided by the subcustodian will be at least as
good as might be available from a local bank or broker-dealer outside
the global custodian's network. While the Applicant is not a global
custodian and cannot describe each global custodian's practices, the
Applicant believes that it is customary for all custody client trades
to be forwarded to a subcustodian at the same time, and for the trades
to be executed at the same rate as other trades received by the
subcustodian at approximately the same time. The Applicant notes that
confirmations of the transactions do not always reflect where the
foreign exchange trade was executed. The investment manager generally
does not know the rate before a foreign exchange trade is executed, and
the manager may know the range in which it will fall and will approve
that range. The Applicant states that the investment manager is advised
of the rate late in the day for western hemisphere trades, and the next
morning for the eastern hemisphere. The Applicant further represents
that these rates can be verified using Reuters or a similar service.
17. According to the Applicant, in effecting foreign exchange
transactions, the investment manager would generally rely on PTE 84-14
(49 FR 9494, March 13, 1984), or PTE 91-38 (67 FR 9483, March 1, 2002).
However, the Applicant states that neither exemption is available where
the trade is routed to a subcustodian who is an affiliate of the
Applicant. Thus, the Applicant seeks relief for foreign exchange
transactions where its affiliate is selected by a global custodian. The
Applicant states that not only does the investment manager have no
control over the global custodian's selection of subcustodians, but it
also cannot control which currencies a global custodian chooses to deal
in, which impacts whether the global custodian has to send the foreign
exchange transactions to its subcustodian in a particular market. The
Applicant further states that the investment manager is not necessarily
advised when a currency is added to the global custodian's dealing
desk, or deleted from it.
Income-Related Transactions
18. The Applicant also seeks relief, with respect to certain
income-related foreign exchange transactions. The covered transactions
for which the Applicant requests relief also involve the Applicant or
its affiliate, as investment manager for a plan or pooled fund, causing
such plan or pooled fund to engage in foreign exchange transactions
with the Applicant's affiliates, who may be acting as subcustodian for
the assets involved in the transaction. Specifically, the Applicant is
requesting an exemption that would apply to income item conversions in
all currencies, which would not be covered by PTE 98-54, for the same
reasons that the exemption does not apply to trade-related foreign
exchange transactions. The Applicant explains that as with trade-
related transactions, an income-related transaction is not itself an
investment, but is an integral component of a plan's or pooled fund's
foreign investment activities.
19. The Applicant states that the purpose of income-related
transactions is to convert income items, such as interest, dividends,
tax reclaims, and other distributions, either from foreign currency
into U.S. dollars, or into another foreign currency. For example, the
Applicant states that the manager may wish to convert dividend income
to U.S. dollars to permit reinvestment, to enhance the plan's
liquidity, or because the earnings on U.S. dollar cash equivalents are
higher than the potential earnings on foreign cash equivalents. As with
trade-related foreign exchange transactions, conversion may also be
desirable to avoid currency risk with respect to income items.
20. According to the Applicant, global banks typically repatriate
income through a process called ``auto-repatriation,'' which minimizes
the time that income receipts are held in foreign currency. The
Applicant states that an account owner (such as a plan sponsor) would
choose to use this process at the
[[Page 39165]]
inception of its relationship with a global custodian, or its
investment manager would select auto-repatriation instead, at the time
that it commences its investment management responsibilities for the
account. The Applicant notes that disclosure regarding the auto-
repatriation process is generally found in the service level agreements
provided to customers by a global custodian.
Deutsche Bank further describes the typical auto-repatriation
process as follows:
A global custodian using the auto-repatriation process contracts
with a third-party vendor that electronically alerts the global
custodian to expected income payments in all global fixed income and
equity securities. Generally, that notice is received in advance of
the expected income payment date. The global custodian's
recordkeeping system, which is linked to the information feed,
creates an ``income map,'' or list of all the accounts (whether plan
accounts or not) that hold the security with respect to which an
income payment is expected, and the amount of the expected payment
in the foreign currency for each account. A ``pending transaction''
for the income receipt is created, and the income map aggregates all
accounts expecting that income payment and the total income expected
for the entire custody client base of the global custodian. The
aggregate amount of expected foreign income is sent either to the
global custodian's own foreign exchange desk (in the case of
developed currencies) or to the subcustodian (in the case of
emerging markets or less-developed currencies). In addition,
unexpected income items, such as tax reclaims, are also aggregated
by currency, bundled with income trades involving non-plan clients
of Deutsche Bank, and promptly executed and each aggregated account
receives the same foreign exchange prices as all other accounts.
21. Deutsche Bank believes that many cash management programs
automatically sweep idle U.S. dollar balances to their designated sweep
vehicle at the end of each day. Therefore, the Applicant represents
that automatic repatriation allows the account to experience no delay
or gap in earning income on the U.S. dollar equivalent of their income
payments. The Applicant opines that this is particularly beneficial in
countries where either no interest is credited on foreign balances or
where the interest credited on the foreign currency balance is
relatively low compared to the rate of interest credited on U.S. dollar
balances.
The Applicant further represents that auto-repatriation also
minimizes the delays inherent in executing income transactions on a
piecemeal basis, so that plans are able to realize investment returns
on income more quickly. The Applicant states that generally, foreign
income trades do not settle until 2 days after the trade date. Thus, if
auto-repatriation is not used, the investment manager must wait for
foreign income to be received into a plan account, where the manager
will actually see the income appear on the next day. According to the
Applicant, before acting, the investment manager must first determine
whether the amount of the foreign income payment is large enough to
trade. If so, the trade will be executed, but not settled until 2 days
after the trade date. Therefore, the Applicant states that the account
would receive lower interest (or no interest) on foreign income for up
to 3 days after the foreign income payment is made. A longer delay may
result where the income payment is not large enough to trade (e.g.,
because, due to the amount of income involved, the transaction costs
would exceed the amount of the income receipt).
In contrast, the Applicant represents that when auto-repatriation
is used, the expected amount of income is sent to the global custodian
or subcustodian before settlement and is aggregated with other income
payments. As a result, the Applicant explains that income-related
trades are completed quickly and the account (including plan accounts)
begins to earn interest on funds as soon as possible.
22. As with trade-related foreign exchange transactions, the
Applicant states that participation in auto-repatriation may cause plan
assets which are managed by Deutsche Bank or its affiliate to be routed
to an affiliate of Deutsche Bank which acts as a subcustodian for the
plan. Thus, the Applicant represents that if a plan holds an investment
in an emerging market, and the investment produces an income item in
that market's currency, auto-repatriation of the income item to U.S.
dollars may result in the conversion trade being directed to an
affiliate of Deutsche Bank, through the global custodian's auto-
repatriation system.
23. The Applicant explains that the direction of trades to an
affiliate through auto-repatriation is not something that Deutsche Bank
can control, nor would Deutsche Bank necessarily know about it in
advance of the trade. Therefore, the Applicant states that the only way
to prevent these transactions is for the plan not to repatriate income
items using this process. The Applicant represents that, as a result,
income items would have to be converted separately, most likely at a
significant added cost to plans.
24. According to the Applicant, the inability to be part of the
automatic income processing system may also have an unintended effect
on the global cash management system. The Applicant represents that
most plans rely on their global custodian's deposits or its
subcustodian deposits for overnight interest in a particular currency.
To the extent that the economics and the inefficiencies of doing small
income trades are reasons to leave foreign currency amounts
unconverted, the Applicant notes that the transactions which are the
subject of the exemption would result in more managed money being held
in deposits of the global custodian or the subcustodian.
Summary of Exemption Request
25. The Applicant states that the proposed exemption would apply
solely in the context of a global custodian which selects the
Applicant's local branch as a subcustodian, in a market where the
global custodian does not make a market in the local currency and,
thus, the currency can be deemed to be ``less developed'' based on the
trading perspective of the global custodian.
The Applicant represents that the proposed exemption would apply
only when: (a) A client plan's independent fiduciary or the independent
trustee of a pooled fund (other than Deutsche Bank or its affiliate)
has chosen a global custodian which, in turn, selects a Deutsche Bank
affiliate to act as a subcustodian, or (b) Deutsche Bank or its
affiliate, as trustee of a pooled fund or for its in-house plans,
chooses a global custodian which selects a Deutsche Bank affiliate to
act as a subcustodian. In either case, Deutsche Bank believes that
exemptive relief under section 406(b) of the Act may be necessary for
both trade-related and income-related foreign exchange transactions
effected with its affiliate, if that affiliate is the subcustodian for
a plan or a pooled fund in an emerging market, and the Applicant is
aware that transactions for foreign exchange in connection with
securities or other investment transactions that are sent to the global
custodian will be effected through the subcustodian.
With respect to a client plan, the Applicant states that Deutsche
Bank or its affiliate has no control over the selection of a global
custodian by the independent fiduciary. Furthermore, the Applicant
states that Deutsche Bank or its affiliate has no control over: The
subcustodian chosen by such global custodian; the global custodian's
arrangements with subcustodians; or the global custodian's processes
and procedures. Where Deutsche Bank or its affiliate acts as a trustee
of a pooled fund or where it acts as a fiduciary for
[[Page 39166]]
an in-house plan, the Applicant notes that Deutsche Bank or its
affiliate selects the global custodian, but has no control over that
global custodian's subcustody network or arrangements with the
subcustodians.
26. The Applicant states that the proposed exemption is beneficial
to plans because under current law, the only option which the Applicant
is able to exercise is not to invest plan assets in certain emerging
markets that have less developed currencies. As a result, the Applicant
states that the investment opportunities and flexibility available to
plans or pooled funds clients are severely limited. The Applicant
represents that it needs to be able to trade in emerging markets for
plan, or pooled funds, regardless of whom the subcustodian is, so long
as it is chosen by someone other than the Applicant or its affiliates.
The Applicant states that the proposed exemption is also beneficial
to plans or pooled funds because even in markets where another
subcustodian is available, plans may be faced with higher transaction
costs. Therefore, using the Applicant's subcustodian may not be an
option, even if it offers the same rates as other subcustodians. The
Applicant opines that it is not practical or commercially reasonable to
require a client plan's global custodian to refrain from using the
Applicant's affiliates as subcustodians. In addition, the Applicant
again emphasizes that it does not have the ability to control a global
custodian from including the Applicant's affiliates in its subcustody
networks.
27. The Applicant represents that under the proposed exemption, at
the time a foreign exchange transaction is entered into, the terms of
the transaction must be no less favorable to the plan or pooled fund
than the terms generally available in a comparable arm's length foreign
exchange transaction between unrelated parties. In addition, the
exchange rate used for a particular foreign exchange transaction must
not deviate by more than 3 percent (above or below) the interbank bid
and asked rates for such currency at the time of the transaction as
displayed on an independent, nationally-recognized service that reports
rates of exchange in the foreign currency market for such currency.
Further, the Applicant states that the transactions must be executed
with the Applicant or its affiliate through the global custodian, in
the course of the global custodian's normal transaction processing as
global custodian. The Applicant states that these conditions are
intended to ensure that the benefits of and costs to the plan are the
same as the benefits and costs experienced by other accounts.
28. The Applicant represents that the proposed exemption would not
apply to foreign exchange transactions in which the global custodian is
the Applicant or its affiliate. As noted above, the Applicant states
that it divested itself of its global custody business in 2003. In all
cases, the proposed exemption would require that the choice of the
Applicant or its affiliate as a subcustodian be made by the unrelated
global custodian, and not by the Applicant or its affiliate.
29. The proposed exemption also includes a condition that requires
that the assets of plans and pooled funds for which Deutsche Bank and/
or its affiliates select the global custodian be less than 20 percent
of the total assets under the global custodian's custody.
As for other substantive safeguards, the foreign affiliates of
Deutsche Bank agree to submit to the jurisdiction of the United States;
agree to appoint a Process Agent in the United States, which may be an
affiliate; consent to service of process on the Process Agent; agree
that it may be sued in the United States Courts in connection with the
covered transactions described in this proposed exemption; agree that
any judgment on behalf of a plan or pooled fund may be collected in the
United States from Deutsche Bank by the independent fiduciary to the
extent applicable; and agree to comply with, and be subject to, all
relevant provisions of the Act.
In addition, Deutsche Bank or its affiliate will designate a senior
official who has at least ten years experience with the fiduciary
responsibility provisions of the Act and appropriate compliance
training as the ``responsible reviewing individual.'' Such individual
will review the covered transactions periodically (but not less
frequently than on an annual basis) to ensure compliance with the terms
of the exemption on behalf of a client plan, an in-house plan, or a
large pooled fund. Following such review, the responsible reviewing
individual will issue a written report to Deutsche Bank, the
independent fiduciary of the client plan, the independent fiduciary of
the in-house plan, the independent fiduciary of the large pooled fund,
the independent fiduciary of the unrelated pooled fund, or the
receiving fiduciary of the small pooled fund, within 90 days after the
period to which the periodic review relates. The report will describe
the steps performed by the responsible reviewing individual during the
course of the review, the level of compliance by Deutsche Bank or its
affiliate with the terms and conditions of the exemption, and any
specific instances of non-compliance by Deutsche Bank or its affiliate
with the terms and conditions of the exemption.
If the findings of the responsible reviewing individual disclose
that Deutsche Bank or its affiliate has failed to comply with the terms
and conditions of this exemption with respect to multiple transactions
executed on an on-going basis, or there has been a material factual
change to the representations contained in the Summary of Facts and
Representations of the proposed exemption, the exemption will no longer
be available as of the date of such noncompliance. In the event the
exemption is no longer effective, Deutsche Bank may apply for a new
exemption seeking retroactive relief from the date it comes back into
compliance, provided that Deutsche Bank: (a) Notifies the Department of
the period during which it was in noncompliance and the underlying
facts of such noncompliance, (b) files a Form 5330 with the Service and
pays all applicable excise taxes, (c) makes the affected plan or pooled
fund whole if the plan or pooled fund has suffered a loss as a result
of such noncompliance, and (d) develops and adopts appropriate policies
and procedures to ensure all future transactions are executed in
compliance with the terms and conditions of the exemption. In the
alternative, if the findings of the responsible reviewing individual
disclose that Deutsche Bank has failed to comply with the terms and
conditions of this exemption with respect to an isolated transaction,
the exemption will continue to provide exemptive relief for covered
transactions apart from the non-recurring transaction as long as
Deutsche Bank: (a) files a Form 5330 with the Service and pays any
applicable excise taxes, and (b) makes the affected plan or pooled fund
whole if the plan or pooled fund has suffered a loss as a result of
such noncompliance.\8\
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\8\ The sole failure of a global custodian to comply with a
condition of the exemption despite Deutsche Bank's best efforts to
ensure the global custodian's compliance, shall not result in the
loss of the exemption with respect to Deutsche Bank provided all
other conditions have been met.
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With respect to the covered transactions, Deutsche Bank will hire
an independent fiduciary to represent the interests of an in-house plan
or a large pooled fund. This independent fiduciary will be an
individual or company that: (a) Is unrelated and independent of
Deutsche Bank, with at least 10 years experience in the financial
services business and
[[Page 39167]]
significant experience in foreign currency trading and pricing; (b)
certifies that the gross income such fiduciary receives from Deutsche
Bank and its affiliates for the current year does not exceed 5% of such
fiduciary's gross income from all services for the prior fiscal year;
and (c) represents that it understands its ERISA duties and
responsibilities in acting as a fiduciary with respect to the plan(s)
(or pooled funds) and the covered transactions. The independent
fiduciary will review the transactions executed under the exemption,
ask Deutsche Bank questions that it may have regarding such
transactions, and take appropriate action on behalf of the plans or
pooled funds if it has concerns about the trades.
Further, Deutsche Bank or its affiliate will maintain or cause to
be maintained for a period of six years from the date of the covered
transactions written records of the transaction to enable persons such
as: the responsible reviewing individual, independent fiduciaries of
client plans, independent fiduciaries in-house plans, independent
fiduciaries of large pooled funds, independent fiduciaries of unrelated
pooled funds, receiving fiduciaries of small pooled funds,
participants, or representatives of the Department or the Service to
determine whether the conditions of the exemption have been met. Such
written records include: (a) The account name; (b) the foreign exchange
transaction execution date; (c) the exchange rate; (d) the high and low
on Reuters or similar service on the date of the transaction; (e) the
identity of the foreign currency sold or purchased; (f) the amount of
foreign currency sold or purchased; (g) the amount of U.S. dollars
exchanged, where the exchange is between foreign currencies and U.S.
dollars or the amount of foreign currency exchanged, where the exchange
is between two foreign currencies; and (h) the annual report issued by
the responsible reviewing individual.
30. Additionally, the proposed exemption includes a requirement
that prior to the investment of a plan's or pooled fund's assets in a
foreign investment, that may result in the execution of a foreign
exchange transaction with Deutsche Bank or its affiliate as
subcustodian, Deutsche Bank will provide written notice to the
independent fiduciary of a client plan, the independent fiduciary of an
in-house plan, the independent fiduciary of a large pooled fund, the
independent fiduciary of an unrelated pooled fund, or the receiving
fiduciary of a small pooled fund that includes the following
information: (a) The reasons why Deutsche Bank or its affiliate may
consider the investment appropriate for the plan; (b) the identity of
the global custodian and the factors considered in such global
custodian's selection; (c) notice that such foreign exchange
transaction may be executed by Deutsche Bank or its affiliate at the
direction of a global custodian, and full disclosure of all fees that
Deutsche Bank or its affiliate may receive as a result of the foreign
exchange transaction; (d) in those cases where Deutsche Bank or its
affiliate selects the global custodian, a summary of the global
custodian's policies and procedures regarding the handling of foreign
exchange transactions for plans or pooled funds with respect to which
Deutsche Bank or its affiliate is a fiduciary and the factors that the
global custodian considers in its selection of a subcustodian; (e) a
list of the markets in which Deutsche Bank or its affiliate serves as a
subcustodian, and whether a particular market is served by more than
one subcustodian; (f) a list of the markets where currency transactions
are executed by a subcustodian, to the extent known; (g) notice that
Deutsche Bank or its affiliate maintains the required records, and such
records are reasonably available at their customary location for
examination in the U.S., during normal business hours, by the
responsible reviewing individual, the independent fiduciary of a client
plan, the independent fiduciary of an in-house plan whose assets are
invested in a separately managed account with Deutsche Bank, the
independent fiduciary of a large pooled fund, the independent fiduciary
of an unrelated pooled fund, the receiving fiduciary of a small pooled
fund, any participant or beneficiary of such plan or pooled fund, or
any duly authorized employee or representative of such participant or
beneficiary; (h) the independent fiduciary shall have 30 days to object
in writing to Deutsche Bank or its affiliate, following disclosure by
Deutsche Bank or its affiliate of the arrangement contemplated under
the exemption. If such fiduciary fails to object in writing within this
period, then such fiduciary's authorization of the arrangement shall be
presumed; (i) notification of any changes to the information described
above, including, but not limited to, the situation where Deutsche Bank
or its affiliate replaces the global custodian with another independent
entity; and (j) copies of the notice of proposed exemption and grant of
final exemption with respect to the subject transactions. Such report
may be provided electronically.
In addition, upon the request of the independent fiduciary, and
within 90 days of such request, Deutsche Bank or its affiliate will
provide compliance reports (which may be transmitted electronically)
that demonstrate that the terms of the exemption have been met. Such
written reports will include the information described above.
31. In summary, the Applicant represents that the transactions will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act since, among other things:
(a) At the time the foreign exchange transaction is entered into,
the terms of the transaction will not be less favorable to the plan or
pooled fund than the terms generally available in comparable arm's
length foreign exchange transactions between unrelated parties.
(b) The exchange rate used for a particular foreign exchange
transaction will not deviate by more than 3 percent (above or below)
the interbank bid and asked rates for such currency at the time of the
transaction as displayed on an independent, nationally-recognized
service that reports rates of exchange in the foreign currency market
for such currency.
(c) The covered transactions will be limited to those currencies in
which a transaction is executed with a Deutsche Bank affiliate acting
as local subcustodian at the direction of the global custodian because
the global custodian either does not make a market in such currency, or
otherwise determines to execute with the local subcustodian because of
market conditions, market restrictions, illiquidity of the currency or
similar exigencies.
(d) Where a market is served by more than one subcustodian,
Deutsche Bank or its affiliate will have no decision making authority
or role with respect to the global custodian's selection of the
subcustodian.
(e) The global custodian will not be Deutsche Bank or any affiliate
thereof.
(f) The foreign exchange transaction will be executed by Deutsche
Bank or its affiliate thereof acting as subcustodian at the direction
of the global custodian in its normal course of business as global
custodian.
(g) The decision to select Deutsche Bank or its affiliate as the
subcustodian will be made by an unrelated global custodian.
(h) The selection of Deutsche Bank or its affiliate as subcustodian
and any foreign exchange transactions executed by Deutsche Bank or its
affiliate at the direction of a global custodian will not be part of an
understanding, arrangement or agreement, written or
[[Page 39168]]
otherwise, designed to benefit Deutsche Bank, its affiliate or another
party in interest.
(i) The decision to invest in a market and to select Deutsche Bank
or its affiliate as asset manager will be part of an investment
strategy that is adopted by an independent fiduciary of a client plan,
the independent fiduciary of an in-house plan, the independent
fiduciary of a large pooled fund, or the independent fiduciary of an
unrelated pooled fund.
(j) On an annual basis, the percentage of assets of plans and
pooled funds for which Deutsche Bank or its affiliates select the
global custodian will be less than 20 percent of the total assets under
the global custodian's custody.
(k) Foreign affiliates of Deutsche Bank who engage in the covered
transaction will agree to submit to the jurisdiction of the United
States Courts and consent to service of process on the Process Agent
for purposes of any lawsuits that may be brought in connection with the
foreign exchange transactions, and comply with, and be subject to, all
relevant provisions of the Act.
(l) Deutsche Bank or its affiliate will designate an individual
responsible for reviewing periodically a representative sample of
consummated foreign exchange transactions, no less frequently than on
an annual basis, to determine whether the covered transactions have
been executed in accordance with the terms of this exemption.
(m) Prior to the investment of the plan's assets in a foreign
investment that may require the execution of a foreign exchange
transaction, Deutsche Bank or its affiliate will provide to the
independent fiduciary of a client plan, the independent fiduciary of an
in-house plan, the independent fiduciary of a large pooled fund, or the
independent fiduciary of an unrelated pooled fund, a written notice
(which may be effected electronically) that will include all relevant
information pertaining to Deutsche Bank's investment strategy with
respect to foreign exchange transactions.
(n) On the basis of such information, the independent fiduciary
will adopt Deutsche Bank's investment strategy with respect to foreign
exchange transactions.
(o) Upon the request of the independent fiduciary, and within 90
days of such request, Deutsche Bank or an affiliate will provide
written compliance reports (which may be transmitted electronically)
that demonstrate that the terms of the exemption have been met.
(p) Deutsche Bank or its affiliate will maintain, or will cause to
be maintained, for a period of six years from the date of the covered
transactions, certain records to enable such persons as: The
responsible reviewing individual, the independent fiduciary of a client
plan, or any duly authorized representative of the Department or the
Service, to determine whether the conditions of this exemption have
been met.
Notice to Interested Persons
The Applicant represents that because those potentially interested
client plans cannot all be identified at the time this proposed
exemption is published in the Federal Register, the only practical
means of notifying the independent fiduciaries of such plans of the
proposed exemption is by publication of the notice of pendency in the
Federal Register. However, with respect to the fiduciaries of in-house
plans (including independent fiduciaries of large pooled funds,
independent fiduciaries of unrelated pooled funds, or receiving
fiduciaries of small pooled funds), the Applicant will provide copies
of the proposed exemption to such interested persons either by first
class mail, hand delivery or electronic mail within 15 days of the
publication of the proposed exemption in the Federal Register.
Therefore, written comments and/or requests for a public hearing must
be received by the Department not later than 45 days from the date of
publication of this notice of proposed exemption in the Federal
Register.
If granted, this exemption will be available to Deutsche Bank for
as long as the terms and conditions of the exemption are satisfied with
respect to the assets of client plans, in-house plans or pooled funds
that are engaged in the covered foreign exchange transactions.
For Further Information Contact: Allison Padams-Lavigne, U.S.
Department of Labor, telephone (202) 693-8564. (This is not a toll-free
number.)
Banc One Investment Advisors Corporation (BOIA) and J.P. Morgan
Investment Management Inc. (JPMIM) and their Affiliates (Collectively,
JPMorgan)
Located in New York, New York.
[Application No. D-11263]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code, in accordance with the procedures set forth in 29 CFR Part 2570,
Subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Retroactive Exemption for the Acquisition, Holding, and
Disposition of JPMorgan Chase & Co. Stock
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(D), 406(b)(1) and 406(b)(2) of the Act, and the sanctions
resulting from the application of section 4975 of the Code by reason of
section 4975(c)(1)(D) and (E) of the Code, shall not apply, as of
January 14, 2004, until the date this proposed exemption is granted, to
the acquisition, holding, and disposition of the common stock of
JPMorgan Chase & Co. (the JPM Stock) by Index and Model-Driven Funds
managed by JPMorgan, provided that the following conditions and the
general conditions in Section III are satisfied:
(a) The acquisition or disposition of the JPM Stock is for the sole
purpose of maintaining strict quantitative conformity with the relevant
index upon which the Index or Model-Driven Fund is based.
(b) The acquisition or disposition of the JPM Stock does not
involve any agreement, arrangement, or understanding regarding the
design or operation of the Fund acquiring the JPM Stock which is
intended to benefit JPMorgan or any party in which JPMorgan may have an
interest.
(c) All aggregate daily purchases of JPM Stock by the Funds do not
exceed, on any particular day, the greater of:
(1) Fifteen (15) percent of the aggregate average daily trading
volume for the JPM Stock occurring on the applicable exchange and
automated trading system (as described in paragraph (d) below) for the
previous five business days, or
(2) Fifteen (15) percent of the trading volume for the JPM Stock
occurring on the applicable exchange and automated trading system on
the date of the transaction, both as determined by the best available
information for the trades occurring on that date or dates.
(d) All purchases and sales of JPM Stock are either (i) Entered
into on a principal basis in a direct, arm's length transaction with a
broker-dealer, in the ordinary course of its business, where such
broker-dealer is independent of JP Morgan and is either registered
under the Securities Exchange Act of 1934 (the 1934 Act), and thereby
subject to regulation by the Securities and Exchange Commission (SEC),
(ii) effected on an automated trading system (as defined in Section
IV(i) below) operated by a broker-dealer independent of JPMorgan that
is subject to regulation
[[Page 39169]]
by the SEC, or an automated trading system operated by a recognized
U.S. securities exchange (as defined in Section IV(j) below), which, in
either case, provides a mechanism for customer orders to be matched on
an anonymous basis without the participation of a broker-dealer, or
(iii) effected on a recognized securities exchange (as defined in
Section IV(j) below), so long as the broker is acting on an agency
basis.
(e) No transactions by a Fund involve purchases from, or sales to,
JPMorgan (including officers, directors, or employees thereof), or any
party in interest that is a fiduciary with discretion to invest plan
assets into the Fund (unless the transaction by the Fund with such
party in interest would otherwise be subject to an exemption); however,
this condition would not apply to purchases or sales on an exchange or
through an automated trading system (described in paragraph (d) of this
Section) on a blind basis where the identity of the counterparty is not
known.
(f) No more than five (5) percent of the total amount of JPM Stock
that is issued and outstanding at any time is held in the aggregate by
Index and Model-Driven Funds managed by JPMorgan.
(g) JPM Stock constitutes no more than three (3) percent of any
independent third party index on which the investments of an Index or
Model-Driven Fund are based.
(h) A plan fiduciary which is independent of JPMorgan authorizes
the investment of such plan's assets in an Index or Model-Driven Fund
which purchases and/or holds JPM Stock, pursuant to the procedures
described herein (see Paragraph 12 of the Summary of Facts and
Representations, below, regarding portfolio management services
provided for particular plans).
(i) A fiduciary independent of JPMorgan directs the voting of the
JPM Stock held by an Index or Model-Driven Fund on any matter in which
shareholders of JPM Stock are required or permitted to vote.
Section II--Prospective Exemption for the Acquisition, Holding, and
Disposition of JPMorgan Chase & Co. Stock
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(D), 406(b)(1) and 406(b)(2) of the Act, and the sanctions
resulting from the application of section 4975 of the Code by reason of
section 4975(c)(1)(D) and (E) of the Code, shall not apply, as of the
date this proposed exemption is granted, to the acquisition, holding,
and disposition of JPM Stock by Index and Model-Driven Funds managed by
JPMorgan, provided that the following conditions and the general
conditions in Section III are satisfied:
(a) The acquisition or disposition of JPM Stock is for the sole
purpose of maintaining strict quantitative conformity with the relevant
index upon which the Index or Model-Driven Fund is based.
(b) The acquisition or disposition of JPM Stock does not involve
any agreement, arrangement or understanding regarding the design or
operation of the Fund acquiring the JPM Stock which is intended to
benefit JPMorgan or any party in which JPMorgan may have an interest.
(c) All purchases of JPM Stock pursuant to a Buy-up (as defined in
Section IV(d)) occur in the following manner:
(1) Purchases on a single trading day are from, or through, only
one broker or dealer;
(2) Based on the best available information, purchases are not the
opening transaction for the trading day;
(3) Purchases are not effected in the last half hour before the
scheduled close of the trading day;
(4) Purchases are at a price that is not higher than the lowest
current independent offer quotation, determined on the basis of
reasonable inquiry from brokers that are not affiliates of JPMorgan (as
defined in section IV(g));
(5) Aggregate daily purchases of JPM Stock by the Funds do not
exceed, on any particular day, the greater of: (i) Fifteen (15) percent
of the aggregate average daily trading volume for the security
occurring on the applicable exchange and automated trading system for
the previous five business days, or (ii) fifteen (15) percent of the
trading volume for the security occurring on the applicable exchange
and automated trading system on the date of the transaction, as
determined by the best available information for the trades occurring
on that date;
(6) All purchases and sales of JPM Stock occur either (i) on a
recognized securities exchange (as defined in Section IV(j) below),
(ii) through an automated trading system (as defined in Section IV(i)
below) operated by a broker-dealer independent of JPMorgan that is
registered under the 1934 Act, and thereby subject to regulation by the
SEC, which provides a mechanism for customer orders to be matched on an
anonymous basis without the participation of a broker-dealer, or (iii)
through an automated trading system (as defined in Section IV(i) below)
that is operated by a recognized securities exchange (as defined in
Section IV(j) below), pursuant to the applicable securities laws, and
provides a mechanism for customer orders to be matched on an anonymous
basis without the participation of a broker-dealer; and
(7) If the necessary number of shares of JPM Stock cannot be
acquired within 10 business days from the date of the event that causes
the particular Fund to require JPM Stock, JPMorgan appoints a fiduciary
that is independent of JPMorgan to design acquisition procedures and
monitor JPMorgan's compliance with such procedures, in accordance with
Representation 7 in the Summary of Facts and Representations.
(d) For transactions subsequent to a Buy-up, all aggregate daily
purchases of JPM Stock by the Funds do not exceed, on any particular
day, the greater of:
(1) Fifteen (15) percent of the aggregate average daily trading
volume for the JPM Stock occurring on the applicable exchange and
automated trading system for the previous five (5) business days, or
(2) Fifteen (15) percent of the trading volume for JPM Stock
occurring on the applicable exchange and automated trading system on
the date of the transaction, as determined by the best available
information for the trades that occurred on such date.
(e) All transactions in JPM Stock not otherwise described in
paragraph (c) above are either: (i) Entered into on a principal basis
in a direct, arms-length transaction with a broker-dealer, in the
ordinary course of its business, where such broker-dealer is
independent of JPMorgan and is registered under the 1934 Act, and
thereby subject to regulation by the SEC, (ii) effected on an automated
trading system (as defined in Section IV(i) below) operated by a
broker-dealer independent of JPMorgan that is subject to regulation by
the SEC, or an automated trading system operated by a recognized
securities exchange (as defined in Section IV(j) below), which, in
either case, provides a mechanism for customer orders to be matched on
an anonymous basis without the participation of a broker-dealer, or
(iii) effected through a recognized securities exchange (as defined in
Section IV(j) below), so long as the broker is acting on an agency
basis.
(f) No transactions by a Fund involve purchases from, or sales to,
JPMorgan (including officers, directors, or employees thereof), or any
party in interest that is a fiduciary with discretion to invest plan
assets in the Fund (unless the transaction by the Fund with such party
in interest would
[[Page 39170]]
otherwise be subject to an exemption); however, this condition would
not apply to purchases or sales on an exchange or through an automated
trading system (described in paragraphs (c) and (e) of this Section) on
a blind basis where the identity of the counterparty is not known.
(g) No more than five (5) percent of the total amount of JPM Stock
that is issued and outstanding at any time is held in the aggregate by
Index and Model-Driven Funds managed by JPMorgan.
(h) JPM Stock constitutes no more than five (5) percent of any
independent third party index on which the investments of an Index or
Model-Driven Fund are based.
(i) A plan fiduciary independent of JPMorgan authorizes the
investment of such plan's assets in an Index or Model-Driven Fund which
purchases and/or holds JPM Stock, pursuant to the procedures described
herein (see Paragraph 12 of the Summary of Facts and Representations
below regarding portfolio management services provided for particular
plans).
(j) A fiduciary independent of JPMorgan directs the voting of the
JPM Stock held by an Index or Model-Driven Fund on any matter in which
shareholders of JPM Stock are required or permitted to vote.
Section III--General Conditions
(a) JPMorgan maintains or causes to be maintained, for a period of
six years from the date of the transaction, the records necessary to
enable the persons described in paragraph (b) of this Section to
determine whether the conditions of this exemption have been met,
except that (1) a prohibited transaction will not be considered to have
occurred if, solely due to circumstances beyond the control of
JPMorgan, the records are lost or destroyed prior to the end of the
six-year period, and (2) no party in interest other than JPMorgan shall
be subject to the civil penalty that may be assessed under section
502(i) of the Act or to the taxes imposed by section 4975(a) and (b) of
the Code if the records are not maintained or are not available for
examination as required by paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (a) of this Section are unconditionally
available at their customary location for examination during normal
business hours by --
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission,
(B) Any fiduciary of a plan participating in an Index or Model-
Driven Fund who has authority to acquire or dispose of the interests of
the plan, or any duly authorized employee or representative of such
fiduciary,
(C) Any contributing employer to any plan participating in an Index
or Model-Driven Fund or any duly authorized employee or representative
of such employer, and
(D) Any participant or beneficiary of any plan participating in an
Index or Model-Driven Fund, or a representative of such participant or
beneficiary.
(2) None of the persons described in subparagraphs (B) through (D)
of this paragraph (b) shall be authorized to examine trade secrets of
JPMorgan or commercial or financial information that is considered
confidential.
Section IV--Definitions
(a) The term ``Index Fund'' means any investment fund, account, or
portfolio sponsored, maintained, trusteed, or managed by JPMorgan, in
which one or more investors invest, and--
(1) That is designed to track the rate of return, risk profile, and
other characteristics of an independently maintained securities Index,
as described in Section IV(c) below, by either (i) replicating the same
combination of securities that comprise such Index, or (ii) sampling
the securities that comprise such Index based on objective criteria and
data;
(2) For which JPMorgan does not use its discretion, or data within
its control, to affect the identity or amount of securities to be
purchased or sold;
(3) That contains ``plan assets'' subject to the Act; and,
(4) That involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund which is intended to
benefit JPMorgan or any party in which JPMorgan may have an interest.
(b) The term ``Model-Driven Fund'' means any investment fund,
account, or portfolio sponsored, maintained, trusteed, or managed by
JPMorgan, in which one or more investors invest, and--
(1) That is composed of securities, the identity of which and the
amount of which are selected by a computer model that is based on
prescribed objective criteria using independent third party data, not
within the control of JPMorgan, to transform an independently
maintained Index, as described in Section IV(c) below;
(2) That contains ``plan assets'' subject to the Act; and
(3) That involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund or the utilization of any
specific objective criteria that is intended to benefit JPMorgan or any
party in which JPMorgan may have an interest.
(c) The term ``Index'' means a securities index that represents the
investment performance of a specific segment of the public market for
equity or debt securities in the United States and/or foreign
countries, but only if --
(1) The organization creating and maintaining the index is--
(A) Engaged in the business of providing financial information,
evaluation, advice or securities brokerage services to institutional
clients,
(B) A publisher of financial news or information, or
(C) A public stock exchange or association of securities dealers;
and,
(2) The index is created and maintained by an organization
independent of JPMorgan; and,
(3) The index is a generally accepted standardized index of
securities that is not specifically tailored for the use of JPMorgan.
(d) The term ``Buy-up'' means an initial acquisition of JPM Stock
by an Index or Model-Driven Fund which is necessary to bring the Fund's
holdings of such stock either to its capitalization-weighted or other
specified composition in the relevant index, as determined by the
independent organization maintaining such index, or to its correct
weighting as determined by the model which has been used to transform
the index.
(e) The term ``JPMorgan'' refers to Bank One Investment Advisors
Corporation (BOIA) and J.P. Morgan Investment Management Inc. (JPMIM),
and their respective Affiliates, as defined in paragraph (f) below.
(f) The term ``Affiliate'' means, with respect to BOIA or JPMIM, an
entity which, directly or indirectly, through one or more
intermediaries, is controlling, controlled by, or under common control
with BOIA or JPMIM;
(g) An ``affiliate'' of a person includes:
(1) Any person, directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
the person;
(2) Any officer, director, employee or relative of such person, or
partner of any such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(h) The term ``control'' means the power to exercise a controlling
influence over the management or
[[Page 39171]]
policies of a person other than an individual.
(i) 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 the SEC's Reg. ATS [17 CFR
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 1934 Act [15 U.S.C. 78c(a)(51)(A)(ii)].
(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 1934 Act (15 U.S.C. 78f), 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 definitions under the applicable
securities laws (e.g., 17 CFR 240.3b-16).
(k) The term ``Fund'' means an Index Fund (as described in Section
IV(a)) or a Model-Driven Fund (as described in IV(b)).
Summary of Facts and Representations
1. On January 14, 2004, Bank One Corporation (Bank One), a publicly
traded bank holding company, and J.P. Morgan Chase & Co. (JPMC), a
publicly traded bank holding company, entered into an agreement to
effect a merger of the assets and business operations of the two
financial institutions (the Merger). The Merger became effective on
July 1, 2004, on which date each share of Bank One common stock was
exchanged for 1.32 shares of the common stock of JPMC. The combined
company is known as JPMorgan Chase & Co. (also referred to herein as
JPMC) and continues its corporate existence under Delaware law. The
common stock of JPMC trades on the New York Stock exchange under the
trading symbol ``JPM.''
With assets of approximately $1.1 trillion and operations in more
than 50 countries, JPMC is a leader in investment banking, financial
services for consumers and businesses, financial transaction
processing, asset and wealth management, and private equity. The
headquarters for JPMC is located in New York.
JPMC is internally organized for management reporting purposes into
six major lines of business: (i) Asset & Wealth Management; (ii) Card
Services; (iii) Commercial Banking; (iv) Investment Banking; (v) Retail
Financial Services; and (vi) Treasury & Securities Services. Only the
first line of business is relevant to the Applicants' exemption
request.
Banc One Investment Advisors Corporation (BOIA) is an investment
adviser registered under the Investment Advisers Act of 1940 (the
Advisers Act). BOIA acts as an investment manager to employee benefit
plans subject to the fiduciary responsibility provisions of ERISA, as
well as governmental plans and other trusts or funds that are exempt
from taxation under section 501(a) of the Code.
J.P. Morgan Investment Management, Inc. (JPMIM) is an investment
adviser registered under the Advisers Act that manages assets for a
wide range of institutional and private clients around the globe. As of
December 31, 2005, JPMIM managed approximately $1.19 trillion in assets
for defined benefit and defined contribution plans, endowments and
foundations, and other institutional clients, mutual funds, and high
net worth individuals.
Effective as of the date of the Merger, BOIA and JPMIM are both
wholly owned subsidiaries of JPMC. BOIA, JPMIM and their Affiliates
that are now or may, in the future, be engaged in providing asset
management services to ERISA-covered plans are collectively referred to
as ``JPMorgan.''
2. Prior to January 14, 2004, BOIA maintained and managed Index and
Model-Driven Funds which held assets of ERISA-covered employee benefit
plans. The Applicants represent that, as a result of the Merger, an
individual exemption for the acquisition, holding, and disposition of
common stock of JPMC (i.e., JPM Stock) is necessary to enable certain
Index and Model-Driven Funds managed by JPMorgan (formerly managed by
BOIA) to acquire, hold, and dispose of JPM Stock. In this regard, there
have been Funds that, since January 14, 2004, have acquired, held, and/
or disposed of JPM Stock. The Applicants request a retroactive
exemption, effective as of January 14, 2004 to the date that this
proposed exemption is granted, to permit such transactions by these
Funds. The Applicants are not requesting any retroactive relief for any
pre-Merger acquisition, holding or disposition of the common stock of
Bank One.
3. The Applicants represent that they provide investment advisory
and management services to ERISA-covered plans through separately
managed accounts and through collective investment vehicles. The
Applicants' investment management services include indexed,
quantitative, and structured investment strategies. In addition to
ERISA-covered plans, the Applicants' clients include retirement plans
with non-U.S. participants, governmental entities, governmental plans,
church plans, endowments and foundations, mutual funds, and other
institutional investors.
4. In its capacity as fiduciary of an employee benefit plan, each
of the Applicants is appointed by an independent plan fiduciary. The
Applicants represent that their discretionary authority over whether
the plan invests in particular Funds is restricted by guidelines
adopted by an independent plan fiduciary, unless the plan subscribes to
the Applicants' portfolio management in Funds (PMF) services (as
discussed below).
5. The Applicants request that Index and Model-Driven Funds be
permitted to invest in JPM Stock if such Stock is included among the
securities listed in the index utilized by the Fund. The Applicants
represent that indices that include JPM Stock include the S&P 500 Index
and the Russell 1000 Value Index, among others. These indices are
compiled by financial information agencies, such as Standard & Poor's
and Frank Russell. These agencies are engaged in the provision of
financial information or securities brokerage services to institutional
investors and/or are publishers of financial information. In each
instance, the indices are compiled by organizations that are
independent of JPMorgan and are generally accepted standardized indices
of securities that are not tailored for the use of JPMorgan. While many
of these indices are not currently utilized by JPMorgan for its Index
and Model-Driven Funds, there is a possibility that Funds holding
assets of ERISA-covered plans will be established in the future that
are based on these indices.
The Applicants represent that there were at least seven (7)
different Index Funds maintained by Bank One that included JPM Stock in
their portfolios, as of January 14, 2004. These Funds were all
separately managed accounts that invest in either an S&P 500 or Russell
1000 Value Index strategy.
6. The Applicants state that the proposed exemption is desirable to
allow Funds holding ``plan assets'' to purchase and hold JPM Stock in
order to replicate the capitalization-weighted or other specified
composition of JPM Stock in an independently maintained third party
index \9\ used by an Index
[[Page 39172]]
Fund or to achieve the desired transformation of an index used to
create a portfolio for a Model-Driven Fund.\10\ In addition, the
Applicants represent that there will be instances, once this proposed
exemption is granted, when JPM Stock will be added to an index on which
a Fund is based or will be added to the portfolio of a Fund which seeks
to track an index that includes such Stock.\11\ In such instances,
acquisitions of JPM Stock will be necessary to bring the Fund's
holdings of such Stock either to its capitalization-weighted or other
specified composition in the index, as determined by the independent
organization maintaining such index, or to the correct weighting for
such Stock as determined by the computer model that has been used to
transform the index. If the Index or Model-Driven Fund holds ``plan
assets,'' the Applicants represent that all acquisitions of JPM Stock
by such Fund will comply with the ``Buy-up'' conditions contained in
Section II(c) of this proposed exemption.\12\
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\9\ According to the Applicants, various methods other than
capitalization-weighting that may be used to determine the
composition of JPM Stock in an index are as follows: (i) An index
may weigh each of the securities that comprise the index equally,
regardless of the relative capitalization of the issuer; (ii) an
index might use share weighting, where the weighting of each stock
is determined based on the total number of shares of each issuer
available on the market; and (iii) in price weighting, the weighting
of each stock is based on the price of the stocks in the index, a
stock with a higher price will have a greater weight in the index
than a stock with a lower price. The Dow Jones Industrial Average is
an example of a price weighted index.
\10\ The Applicants are not requesting any relief from sections
406 or 407(a) of the Act in connection with the acquisition and
holding of JPM Stock by any employee benefit plans established and
maintained by JPMorgan for its own employees that invest in the
Applicants' Index Funds. In this regard, the Applicants represent
that such transactions may be covered by the statutory exemption
under section 408(e) of the Act, if the conditions of that exemption
are met. However, the Department expresses no opinion in this
proposed exemption as to whether the conditions of section 408(e) of
the act have been or will be met.
\11\ The Applicants represent that the inclusion or exclusion of
JPM Stock from an index and the weighting or changes to the
weighting of JPM Stock in an index are based on data, criteria, and
methodology determined by the organization that creates and
maintains the index, which cannot be varied by JPMorgan. Changes in
the weighting of JPM Stock in a Fund would occur when there is a
change in factors underlying the applicable weighting methodology.
Changes in index weightings are, for the most part, triggered by
corporate actions (buying back shares, issuing more shares or
acquiring another company for stock).
\12\ The Applicants anticipate that, generally, acquisitions of
JPM Stock by an Index or Model-Driven Fund in a ``Buy-up'' will
occur within 10 business days from the date of the event that causes
the particular Fund to require the addition of JPM Stock. The
Applicants do not anticipate that the amounts of JPM Stock acquired
by any Fund in a ``Buy-up'' will be significant. In this regard, the
Department notes that the conditions required herein are designed to
minimize the market impact of purchases made by the Funds in any
``Buy-up'' of JPM Stock.
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7. In the case of a Buy-up, if the necessary number of shares of
JPM Stock cannot be acquired within 10 days from the date of the event
that causes the particular Fund to require JPM Stock, JPMorgan will
appoint a fiduciary that is independent of JPMorgan to design
acquisition procedures and monitor JPMorgan's compliance with such
procedures.\13\ The independent fiduciary and its principals will be
completely independent from the Applicants. The independent fiduciary
will also be experienced in developing and operating investment
strategies for individual and collective investment vehicles that track
third party indices. Furthermore, the independent fiduciary will not
act as the broker for any purchases or sales of JPM Stock and will not
receive any commissions as a result of this initial acquisition
program.
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\13\ In this regard, all Funds holding JPM Stock, as of January
14, 2004, that have continued to acquire, hold, and dispose of JPM
Stock in order to track indices including JPM Stock will not need to
have daily transactions involving such Stock directed by an
independent fiduciary. The Applicants state that the amount of JPM
Stock involved in such transactions has been and continues to be
determined by the independent organization that created and
maintains the relevant index, and all other conditions required
under this proposed exemption have been met.
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The independent fiduciary will have as its primary goal the
development of trading procedures that minimize the market impact of
purchases made pursuant to the initial acquisition program by the
Funds. The Applicants would expect that, under the trading procedures
established by the independent fiduciary, the trading activities will
be conducted in a low-profile, mechanical, non-discretionary manner and
would involve a number of small purchases over the course of each day,
randomly timed. The Applicants further expect that such a program will
allow the Applicants to acquire the necessary shares of JPM Stock for
the Funds with minimum impact on the market and in a manner that will
be in the best interests of any employee benefit plans that participate
in such Funds.
The independent fiduciary will also be required to monitor the
Applicants' compliance with the trading program and procedures
developed for the initial acquisition of JPM Stock. During the course
of any initial acquisition program, the independent fiduciary will be
required to review the activities weekly to determine compliance with
the trading procedures and notify the Applicants should any non-
compliance be detected. Should the trading procedures need
modifications due to unforeseen events or consequences, the independent
fiduciary will be required to consult with the Applicants and must
approve in advance any alteration of the trading procedures.
8. Subsequent to initial acquisitions pursuant to a Buy-up, all
aggregate daily purchases of JPM Stock by the Funds will not exceed, on
any particular day, the greater of:
(i) Fifteen (15) percent of the average daily trading volume for
the JPM Stock occurring on the applicable exchange and automated
trading system (as described herein) \14\ for the previous five (5)
business days, or
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\14\ The Department notes that the Act's fiduciary
responsibility provisions would apply to the manager's selection of
a trading venue, including an automated trading system, to effect
purchases and sales of JPM Stock on behalf of its managed Index and
Model-Driven Funds.
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(ii) Fifteen (15) percent of the trading volume for JPM Stock
occurring on the applicable exchange and automated trading system (as
described herein) on the date of the transaction, as determined by the
best available information for the trades that occurred on such date.
9. JPMorgan represents that, as of January 14, 2004, until the date
this proposed exemption is granted, all purchases and sales of JPM
Stock by the Funds have occurred and will continue to occur in one of
the following ways: (i) Through a direct, arms-length transaction
entered into on a principal basis with a broker-dealer \15\ that is
independent of JPMorgan and is registered under the 1934 Act, and
thereby subject to regulation by the SEC; (ii) through an automated
trading system (as defined in Section IV(i) above) operated by a
broker-dealer independent of JPMorgan that is registered under the 1934
Act, and thereby subject to regulation by the SEC, or an automated
trading system operated by a recognized securities
[[Page 39173]]
exchange (as defined in Section IV(j) above), which, in either case,
provides a mechanism for customer orders to be matched on an anonymous
basis without the participation of a broker-dealer; or (iii) through a
recognized securities exchange as defined in Section IV(j) above so
long as the broker is acting on an agency basis.
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\15\ The Department notes that no relief is provided herein for
purchases and sales of securities between a Fund and a broker-
dealer, acting as a principal, which may be considered prohibited
transactions as a result of such broker-dealer being a party in
interest, under section 3(14) of the Act, with respect to any plans
that are investors in the Fund. However, such transactions may be
covered by one or more of the Department's existing class
exemptions. For example, PTE 84-14 (49 FR 9497, March 13, 1984, as
amended 70 FR 49305 (Aug. 23 2005)) permits, under certain
conditions, parties in interest to engage in various transactions
with plans whose assets are invested in an investment fund managed
by a ``qualified professional asset manager'' (QPAM) who is
independent of the parties in interest (with certain limited
exceptions) and meets specified financial standards. The Department
expresses no opinion as to whether any of its class exemptions would
provide relief in this circumstance.
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In addition, JPMorgan states that as of the date this proposed
exemption is granted, all future transactions by the Funds involving
JPM Stock which do not occur in connection with a Buy-up of such Stock
by a Fund, as described above, will be either: (i) Entered into on a
principal basis with a broker-dealer that is registered under the 1934
Act, and thereby subject to regulation by the SEC; (ii) effected on an
automated trading system (as defined in Section IV(i) above) operated
by a broker-dealer independent of JPMorgan subject to regulation by the
SEC, or on an automated trading system operated by a recognized
securities exchange (as defined in Section IV(j) above) which, in
either case, provides a mechanism for customer orders to be matched on
an anonymous basis without the participation of a broker-dealer; or
(iii) effected through a recognized securities exchange (as defined in
Section IV(j) above), so long as the broker is acting on an agency
basis.\16\
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\16\ PTE 86-128 (51 FR 41686, November 18, 1986) provides a
class exemption, under certain conditions, permitting persons who
serve as fiduciaries for employee benefit plans to effect or execute
securities transactions on behalf of such plans. The Department
expresses no opinion as to whether the conditions of this exemption
would be satisfied.
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10. With respect to all acquisitions and dispositions of JPM Stock
by the Funds since January 14, 2004, the Applicants state that no such
transactions have involved purchases from or sales to JPMorgan
(including officers, directors, or employees thereof), or any party in
interest that is a fiduciary with discretion to invest plan assets in
the Fund (except for purchases or sales on an exchange or through an
automated trading system on a blind basis where the identity of the
counterparty is not known). The Applicants represent that all future
acquisitions and dispositions of JPM Stock by any Index or Model-Driven
Funds maintained by JPMorgan also will not involve any purchases from
or sales to JPMorgan (including officers, directors, or employees
thereof), or any party in interest that is a fiduciary with discretion
to invest plan assets in the Fund (unless the transaction by the Fund
with such party in interest would otherwise be subject to an
exemption), other than certain blind trades.\17\
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\17\ As set forth in Section II(e), the condition would not
apply to purchases or sales on an exchange or through an automated
trading system on a blind basis where the identity of the
counterparty is not known.
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11. The Applicants state that no more than five (5) percent of the
total amount of JPM Stock that is issued and outstanding at the time,
will be held in the aggregate by Index and Model-Driven Funds managed
by JPMorgan.
For purposes of the acquisition and holding of JPM Stock by Funds
from January 14, 2004 until the date this proposed exemption is
granted, such Stock will constitute no more than three (3) percent of
any independent third party index on which the investments of an Index
or Model-Driven Fund are based. For example, as of March 31, 2008, JPM
Stock represents 1.27% of the S&P 500 Index and 2.31% of the Russell
1000 Value Index. Although some indices may include JPM Stock in
percentages that exceed three (3) percent of the index, JPMorgan does
not currently utilize such indices for its Index and Model-Driven Funds
with ``plan assets'' subject to the Act.
For purposes of future acquisitions and holdings of JPM Stock by
such Funds, if this proposed exemption is granted, JPM Stock will
constitute no more than five (5) percent of any independent third party
index on which the investments of an Index or Model-Driven Fund are
based.
With respect to an index's specified composition of particular
stocks in its portfolio, the Applicants state that future Funds may
track an index where the appropriate weighting for stocks listed in the
index is not capitalization-weighted. Thus, the Applicants state that
Funds maintained by JPMorgan and affiliates of JPMC may track indices
where the selection of a particular stock by the index, and the amount
of stock to be included in the index, is not established based on the
market capitalization of the corporation issuing such stock. Therefore,
since an independent organization may choose to create an index where
there are other index weightings for stocks comprising the index, the
Applicants request that the proposed exemption allow for JPM Stock to
be acquired by a Fund in the amounts that are specified by the
particular index, subject to the other restrictions imposed by this
proposed exemption. The Applicants represent that, in all instances,
acquisitions or dispositions of JPM Stock by a Fund will be for the
sole purpose of maintaining strict quantitative conformity with the
relevant index upon which the Fund is based or, in the case of a Model-
Driven Fund, a modified version of such an index as created by a
computer model based on prescribed objective criteria and third party
data.\18\
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\18\ The Applicants represent that JPMorgan does not currently
manage any Model-Driven Funds, but, consistent with prior similar
exemption (e.g., see PTE 2000-30 (65 FR 37165, June 13, 2000)
granted to Barclays Bank PLC), JPMorgan would like to retain the
flexibility to do so in the future in reliance on this exemption, if
granted. A Model-Driven Fund would be composed of securities the
identity of which and the amount of which are selected by a computer
model that is based upon prescribed objective criteria using
independent third party data, not within the control of JPMorgan, to
transform an independently maintained index. In managing a Model
Driven Fund that includes JPM Stock, JPMorgan would maintain the
weightings of JPM Stock in strict quantitative conformity with the
weightings determined by the computer model.
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12. The Applicants state that plan fiduciaries independent of
JPMorgan have authorized and will continue to authorize the investment
of any plan's assets in an Index or Model-Driven Fund that purchases
and/or holds JPM Stock.
With respect to transactions involving JPM Stock, the Applicants
state that they may provide portfolio management services (i.e., PMF
services) to a particular plan (a PMF Plan). In this regard, the
Applicants may exercise some discretion in allocating and reallocating
the plan's assets among various funds, including Index or Model-Driven
Funds that may hold JPM Stock. These allocations are based on a plan's
investment objectives, risk profile, and market conditions. However,
the Applicants make the following representations with respect to the
purchase, directly or indirectly, of JPM Stock by such plans:
(a) The Applicants represent that any prohibited transactions that
might occur as a result of the discretionary allocation and
reallocation of plan assets among collective investment funds will be
exempt from the prohibitions of section 406 of the Act by reason of
section 408(b)(8).\19\
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\19\ The Department expresses no opinion in this proposed
exemption as to whether the Applicants' discretionary allocation and
reallocation services for any collective investment funds maintained
by the Applicants satisfy the requirements of section 408(b)(8) of
the Act and is not proposing any exemptive relief beyond that
offered by section 408(b)(8) for such transactions.
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(b) Before JPM Stock is purchased by a Fund, the appropriate
independent fiduciary for each PMF Plan that is currently invested, or
could be invested, in such Fund will be furnished an explanation and a
simple form to return to JPMorgan for the purpose of indicating either
approval or disapproval of investments in the Fund
[[Page 39174]]
including JPM Stock, together with a postage-paid return envelope. If
the form is not returned to the Applicants, the Applicants may obtain a
verbal response by telephone. If a verbal response is obtained by
telephone, the Applicants will confirm the fiduciary's decision in
writing within five (5) business days. In the event that no response is
obtained from a plan fiduciary, the assets of the plan will not be
invested in any Fund that invests in JPM Stock and any plan assets
currently invested in such Fund at that time will be withdrawn.
(c) Each new management agreement with such a plan will contain
language specifically approving or disapproving the investment in any
Fund which holds or might hold JPM Stock. The fiduciary for each such
plan will be informed that the existing management agreement could be
modified in the same way. However, if the fiduciary does not
specifically approve language in the agreement allowing the investment
of plan assets in Funds which hold or might hold JPM Stock, then no
such investment will be made by the Applicants.
(d) Each such plan will be informed on a quarterly basis of any
investment in, or withdrawal from, any Fund holding JPM Stock. On an
annual basis, the plan will be notified of its right to terminate the
Applicants' discretionary authority to invest in or withdraw from such
Funds. If the plan terminates the Applicants' authority to invest in or
withdraw from the Funds, then the Applicants will effect the plan's
withdrawal from the Funds as soon as reasonably practicable after being
notified of such termination.
13. The Applicants will appoint an independent fiduciary that will
direct the voting of JPM Stock held by the Funds. Currently, the
independent fiduciary that directs the voting of JPM Stock held by the
Funds is Institutional Shareholder Services, Inc.\20\
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\20\ See 29 CFR 2509.94-2--Interpretive bulletin relating to
written statements of investment policy, including proxy voting
policy or guidelines. The Department further notes that the Act's
general standards of fiduciary conduct also would apply to the
selection of a service provider specializing in proxy voting.
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JPMorgan states that in all instances the independent fiduciary
chosen to vote JPM Stock for the Funds will be a consulting firm
specializing in corporate governance issues and proxy voting on behalf
of institutional investors with large equity portfolios. The fiduciary
will develop and follow standard guidelines and procedures for the
voting of proxies by institutional fiduciaries. The Applicants will
provide the independent fiduciary with all necessary information
regarding the Funds that hold JPM Stock, the amount of JPM Stock held
by the Funds on the record date for shareholder meetings of the
Applicants, and all proxy and consent materials with respect to JPM
Stock. The independent fiduciary will maintain records with respect to
its activities as an independent fiduciary on behalf of the Funds,
including the number of shares of JPM Stock voted, the manner in which
they were voted, and the rationale for the vote. The independent
fiduciary will supply the Applicants with such information after each
shareholder meeting. The independent fiduciary will be required to
acknowledge that it will be acting as a fiduciary with respect to the
plans that invest in the Funds that own JPM Stock, when voting such
Stock.
14. In summary, with respect to all past acquisitions, holdings,
and dispositions of JPM Stock by the Funds since January 14, 2004, the
Applicants represent that such transactions meet the criteria of
section 408(a) of the Act for the following reasons:
(a) Each Index or Model-Driven Fund involved is based on an Index,
as defined in Section IV(c) above;
(b) The acquisition, holding, and disposition of the JPM Stock by
the Index or Model-Driven Fund is for the sole purpose of maintaining
strict quantitative conformity with the relevant index upon which the
Fund is based, and does not involve any agreement, arrangement, or
understanding regarding the design or operation of the Fund acquiring
the JPM Stock that is intended to benefit JPMorgan or any party in
which JPMorgan may have an interest;
(c) All aggregate daily purchases of JPM Stock by the Funds do not
exceed, on any particular day, the greater of: fifteen (15) percent of
the aggregate average daily trading volume for such Stock occurring on
the applicable exchange and automated trading system for the previous
five (5) business days, or fifteen (15) percent of the trading volume
for the Stock occurring on the applicable exchange and automated
trading system on the date of the transaction, both as determined by
the best available information for the trades occurring on that date or
dates;
(d) All purchases and sales of JPM Stock occur either (i) on a
principal basis in a direct, arms-length transaction with a broker-
dealer, in the ordinary course of its business, where such broker-
dealer is independent of JPMorgan and is registered under the 1934 Act,
and thereby subject to regulation by the SEC, (ii) effected on an
automated trading system operated by a broker-dealer independent of
JPMorgan that is subject to regulation by the SEC, or an automated
trading system operated by a recognized securities exchange, which, in
either case, provides a mechanism for customer orders to be matched on
an anonymous basis without the participation of a broker-dealer, or
(iii) effected through a recognized securities exchange, so long as the
broker is acting on an agency basis.
(e) No transactions by a Fund involve purchases from or sales to
JPMorgan (including officers, directors, or employees thereof), or any
party in interest that is a fiduciary with discretion to invest plan
assets into the Fund (unless the transaction by the Fund with such
party in interest would otherwise be subject to an exemption); however,
this condition would not apply to purchases or sales on an exchange or
through an automated trading system on a blind basis where the identity
of the counterparty is not known;
(f) No more than five (5) percent of the total amount of JPM Stock
issued and outstanding at any time is held in the aggregate by Index
and Model-Driven Funds managed by JPMorgan;
(g) JPM Stock constitutes no more than three (3) percent of any
independent third party index on which the investments of an Index or
Model-Driven Fund are based;
(h) A plan fiduciary independent of JPMorgan authorizes the
investment of such plan's assets in an Index or Model-Driven Fund which
purchases and/or holds JPM Stock; and
(i) A fiduciary independent of JPMorgan directs the voting of the
JPM Stock held by an Index or Model-Driven Fund on any matter in which
shareholders of JPM Stock are required or permitted to vote.
With respect to all prospective acquisitions, holdings, and
dispositions of JPM Stock by the Funds after this proposed exemption is
granted, the Applicants represent that such transactions will meet the
criteria of section 408(a) of the Act for the following reasons:
(a) Each Index or Model-Driven Fund involved will be based on an
Index, as defined in Section IV(c) above;
(b) The acquisition or disposition of JPM Stock will be for the
sole purpose of maintaining strict quantitative conformity with the
relevant Index upon which the Index or Model-Driven Fund is based, and
will not involve any agreement, arrangement, or understanding regarding
the design or operation of the Fund acquiring the JPM
[[Page 39175]]
Stock that is intended to benefit JPMorgan or any party in which
JPMorgan may have an interest;
(c) Whenever JPM Stock is initially added to an index on which a
Fund is based, or initially added to the portfolio of a Fund (i.e., a
Buy-up), all acquisitions of JPM Stock necessary to bring the Fund's
holdings of such Stock either to its capitalization-weighted or other
specified composition in the relevant index, as determined by the
independent organization maintaining such index, or to its correct
weighting as determined by the computer model that has been used to
transform the index, will be restricted by conditions that are designed
to prevent possible market price manipulations;
(d) Subsequent to acquisitions necessary to bring a Fund's holdings
of JPM Stock to its specified weighting in the index or model, pursuant
to the restrictions noted in paragraph (c) above, all aggregate daily
purchases of JPM Stock by the Funds will not exceed, on any particular
day, the greater of: fifteen (15) percent of the aggregate average
daily trading volume for such Stock occurring on the applicable
exchange and automated trading system for the previous five (5)
business days, or fifteen (15) percent of the trading volume for the
Stock occurring on the applicable exchange and automated trading system
on the date of the transaction, both as determined by the best
available information for the trades that occurred on such date or
dates;
(e) All transactions in JPM Stock, other than acquisitions of such
Stock in a Buy-up described in paragraph (c) above, will be either: (i)
Entered into on a principal basis with a broker-dealer, in the ordinary
course of its business, where such broker-dealer is independent of
JPMorgan and is registered under the 1934 Act, and thereby subject to
regulation by the SEC, (ii) effected on an automated trading system
operated by a broker-dealer independent of JPMorgan subject to
regulation by the SEC, or by a recognized securities exchange which, in
either case, provides a mechanism for customer orders to be matched on
an anonymous basis without the participation of a broker-dealer, or
(iii) effected through a recognized securities exchange (as defined
herein), so long as the broker is acting on an agency basis;
(f) No transactions by a Fund will involve purchases from or sales
to JPMorgan (including officers, directors, or employees thereof), or
any party in interest that is a fiduciary with discretion to invest
plan assets into the Fund (unless the transaction by the Fund with such
party in interest would otherwise be subject to an exemption); however,
this condition would not apply to purchases or sales on an exchange or
through an automated trading system on a blind basis where the identity
of the counterparty is not known;
(g) No more than five (5) percent of the total amount of JPM Stock
that is issued and outstanding at any time, will be held in the
aggregate by Index and Model-Driven Funds managed by JPMorgan;
(h) JPM Stock will constitute no more than five (5) percent of any
independent third party index on which the investments of an Index or
Model-Driven Fund are based;
(i) A plan fiduciary independent of JPMorgan will authorize the
investment of such plan's assets in an Index or Model-Driven Fund that
purchases and/or holds JPM Stock pursuant to the procedures described
herein, including those which relate to portfolio management services
provided to certain plans (see Item 12 of the Summary of Facts and
Representations above); and
(k) A fiduciary independent of JPMorgan will direct the voting of
the JPM Stock held by an Index or Model-Driven Fund on any matter in
which shareholders of JPM Stock are required or permitted to vote.
Notice to Interested Persons
Notice of the proposed exemption shall be mailed by first class
mail to interested persons, including the appropriate independent
fiduciaries for employee benefit plans currently invested in the Index
and/or Model-Driven Funds that acquire and hold JPM Stock. The notice
shall contain a copy of the proposed exemption as published in the
Federal Register and an explanation of the rights of interested parties
to comment, or request a hearing, regarding the proposed exemption. All
notices should be sent to interested persons within 15 days of the
publication of this proposed exemption in the Federal Register. Any
written comments and/or requests for a hearing must be received by the
Department from interested persons within 45 days of the publication of
this proposed exemption in the Federal Register.
In addition, if this exemption is granted, JPMorgan shall provide a
copy of the proposed exemption and a copy of the final exemption upon
request to all ERISA-covered plans that invest in any Index or Model-
Driven Fund that will include JPM Stock in its portfolio after the date
the final exemption is published in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Karen Lloyd of the Department,
telephone (202) 693-8554. (This is not a toll-free number.)
Pileco, Inc. Employees Profit Sharing Plan (the Plan) Located in
Houston, Texas
[Application No. D-11449]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and(b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed sale of certain unimproved real
property (the Property) by the Plan to Pileco, Inc. (Pileco or the
Applicant), the sponsor of the Plan, and a party in interest with
respect to the Plan, provided that the following conditions are
satisfied:
(a) The sale is a one-time transaction for cash;
(b) At the time of the sale, the Plan receives the greater of
either: (1) $280,000; or (2) the fair market value of the Property as
established by a qualified, independent appraiser in an updated
appraisal of such Property;
(c) The Plan pays no fees, commissions or other expenses associated
with the sale;
(d) The terms and conditions of the sale are at least as favorable
to the Plan as those obtainable in an arm's length transaction with an
unrelated third party; and
(e) The Plan trustee (1) Determines, among other things, whether it
is in the best interest of the Plan to proceed with the sale of the
Property; (2) reviews and approves the methodology used in the
appraisal that is being relied upon; and (3) ensures that such
methodology is applied by the qualified independent appraiser in
determining the fair market value of the Property on the date of the
sale.
Summary of Facts and Representations
1. The Plan is a defined contribution profit sharing plan without a
401(k) feature. The Plan was effective as of October 1, 1974, and was
most recently restated effective May 8, 2004. As of September 30, 2006,
the Plan had a total of 27 participants, and approximately $2.99
million in total assets. The Plan's current trustee is Mr. Otto
Kammerer,
[[Page 39176]]
who is also the Chairman of the Board of Directors of Pileco, as well
as the Plan participant with the largest account balance. As of
September 30, 2006, Mr. Kammerer's Plan account comprised approximately
28% (or $837,200) of the Plan's total assets.
2. Pileco, which maintains its principal place of business in
Houston, Texas, is primarily involved in the engineering, fabrication,
sale, rental, and servicing of diesel pile hammers. Pileco is a wholly-
owned subsidiary of Bauer Mashinen, GmbH (Bauer), a corporation
organized under the laws of the Federal Republic of Germany. Bauer is a
multinational firm, headquartered in Schrobenhausen, Germany, that
specializes in engineering, construction, and heavy equipment
manufacturing.
3. On March 26, 1980, the Plan purchased the Property from Richard
and Christine Levinge, unrelated third parties, for $77,912.15. The
consideration was paid in cash. The Property is a vacant and unimproved
69,670 square foot parcel of land (consisting of 1.5994 acres) located
east of Madie Drive, and north of Berry Road in Houston, Texas (Harris
County). The Property is adjacent to other unimproved property that is
owned by Pileco. Mr. Kammerer, as the Plan trustee, made the original
decision to purchase the Property as a long-term growth investment for
the Plan.\21\ Since the time of acquisition, the Property has not been
an income-producing asset. Mr. Kammerer represents that all holding
costs that have been incurred with respect to the Property since its
acquisition in 1980, including, but not limited to: Property taxes,
liability insurance premiums, and expenses associated with securing the
premises, have been paid in full by Pileco.
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\21\ The Plan once owned another parcel of property that was
adjacent to the subject Property. This property was sold to Pileco
for $152,678, pursuant to the Department's expedited exemption
procedure (See E-00521; FAN 2006-12E, June 8, 2006).
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4. The Property was originally appraised on September 22, 2006, by
Stephen M. LaGrasta, MAI, who is an independent, state-certified real
estate appraiser in the State of Texas. Mr. LaGrasta is a principal in
the real estate appraisal firm of Yates-LaGrasta, Inc. of Houston,
Texas. In an appraisal report dated October 2, 2006, Mr. LaGrasta
valued the Property using the Sales Comparison Approach. Mr. LaGrasta
compared the Property to five other properties sold within close
proximity to the Property between January 2005 and September 2006. He
adjusted the sale price of the comparable properties based upon sales
date, location, size and shape. Mr. LaGrasta determined that the fair
market value of the Property was $140,000 as of September 22, 2006.
In his original appraisal, Mr. LaGrasta did not attribute any
special benefit to the value of the Property from Pileco's ownership of
the adjacent property due to a number of factors, including: (a) A
large amount of undeveloped land that is available in the area for
purchase; (b) the comparatively larger size of Pileco's neighboring
land in comparison to the size of the Property; (c) the less desirable
location of the Property in relation to Pileco's neighboring land; and
(d) the Property's lack of significant street frontage or other
qualities that make it attractive for purposes of commercial
development. Therefore, Mr. LaGrasta did not include any premium for
assemblage value.\22\
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\22\ ``Assemblage'' value reflects the willingness of a
purchaser to pay above market value for a parcel of property in
order to preserve such purchaser's interest in their present
holdings of other parcels which are adjacent to such property.
---------------------------------------------------------------------------
5. An updated appraisal of the Property was prepared by Mr.
LaGrasta on January 21, 2008, and it reflects the current market
conditions. The Property was again valued using the Sales Comparison
Approach. Mr. LaGrasta compared the Property to three other similar
properties sold within close proximity to the Property since March
2007. He adjusted the sales price of the comparable properties based
upon the sales date, location, size and shape. Mr. LaGrasta determined
that the fair market value of the Property was $270,000 as of January
21, 2008. Based on its current appraised value, the Property currently
represents approximately 9% of the Plan's assets.
In the updated appraisal report, Mr. LaGrasta again stated that the
subject Property does not enhance the value of the property currently
owned by Pileco. He determined that the payment by Pileco of an
adjacency premium for the Property is not supported because: (a) The
Pileco tract has extensive frontage in its current configuration; (b)
there is other land available in the mixed use area and scarcity would
not be an issue; (c) the Pileco property is not hampered by size,
visibility and street frontage; and (d) the Pileco-owned property can
be easily developed without the addition of the subject Property.
Further, Mr. LaGrasta pointed out that the addition of the Property
would tend to lower the per square foot value of the combined tract due
to doubling in size. Also, Mr. LaGrasta noted that the combined tract
would still be irregularly-shaped, which could hamper development and
make the site less functional.
6. The Applicant requests an individual exemption from the
Department in order to purchase the Property from the Plan. The
Applicant represents that the Property is being sold as part of a
change in control in which 100% of the capital stock of Pileco was
acquired on October 7, 2005 by Bauer, which was then unaffiliated with
the pre-October 7, 2005 shareholders of Pileco. The Board of Directors
of Pileco has approved the complete freeze and termination of the Plan
coincident with the closing of such an acquisition. In connection with
the termination of the Plan, an application will be filed with the
Internal Revenue Service for a favorable determination regarding the
Plan's status as a qualified plan. Once such determination is received,
the Plan will be liquidated and all account balances under the Plan
will be distributed. Thus, the proposed transaction is motivated, in
part, by a need to increase the Plan's liquidity in anticipation of the
distribution of participants' account balances.
7. It is also represented that the Plan has made efforts to sell
the Property to unrelated third parties. To this end, the Plan listed
the Property on the open market for a number of years at a listing
price of $4.00 per square foot ($278,680). However, this listing price
was not based on a professional appraisal of the Property. During the
listing period, the Plan did not receive any offers from third-party
purchasers to purchase the Property.
8. The Plan will pay no real estate commissions or other expenses
associated with the sale. Pileco will pay the Plan in cash, the greater
of either: (a) $280,000; \23\ or (b) the fair market value of the
Property, as established by a qualified, independent appraiser on the
date of the transaction, as reflected in an updated appraisal of such
Property.\24\ Further, the parties will enter into a real estate
contract to evidence the proposed sale transaction.
---------------------------------------------------------------------------
\23\ Pileco proposes to pay the appraised fair market value of
the Property of $270,000, plus $10,000 which would be paid in full,
in cash, at a closing to be held within thirty (30) days of the
publication in the Federal Register of the notice granting the final
exemption.
\24\ The Applicant represents that, to the best of its
knowledge, to the extent the amount paid by Pileco for the Property
exceeds its fair market value, such excess amount (if treated as an
employer contribution) will not cause the annual additions to the
Plan to exceed the limitations prescribed by section 415 of the
Code.
---------------------------------------------------------------------------
9. As the Plan trustee, Mr. Kammerer, will determine, among other
things, whether it is in the best interest of the Plan to go forward
with the sale of the Property. In addition, Mr. Kammerer will review
and approve the
[[Page 39177]]
methodology used in the appraisal that is being relied upon, and he
will ensure that such methodology is applied by a qualified independent
appraiser in determining the fair market value of the Property on the
date of the sale.
10. In summary, it is represented that the proposed transaction
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The proposed sale will be a one-time transaction for cash;
(b) The Plan will receive the greater of either:
(i) $280,000; or (ii) the fair market value for the Property, as
established on the date of the sale by an independent, qualified
appraiser in an updated appraisal of such Property;
(c) The Plan will pay no fees, commissions or other expenses
associated with the sale;
(d) The terms and conditions of the sale will be at least as
favorable to the Plan as those obtainable in an arm's length
transaction with an unrelated third party; and
(e) The Plan trustee: (i) Will determine, among other things,
whether it is in the best interest of the Plan to proceed with the sale
of the Property; (ii) will review and approve the methodology used in
the appraisal that is being relied upon; and (iii) will ensure that
such methodology is applied by the qualified independent appraiser in
determining the fair market value of the Property on the date of the
sale.
Tax Consequences of the Proposed Transaction
The Department of the Treasury has determined that if a transaction
between a qualified employee benefit plan and its sponsoring employer
(or affiliate thereof) results in the plan either paying less than or
receiving more than fair market value, such excess may be considered to
be a contribution by the sponsoring employer to the plan and,
therefore, must be examined under applicable provisions of the Internal
Revenue Code, including sections 401(a)(4), 404 and 415.
FOR FURTHER INFORMATION CONTACT: Blessed Chuksorji-Keefe of the
Department at (202) 693-8567. (This is not a toll-free number).
Mellon Bank N.A. (Mellon)
Located in Pittsburgh, Pennsylvania.
[Application No. D-11460]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code, in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (55 FR 32836, 32847, August 10, 1990).
If the proposed exemption is granted, the restrictions of sections
406(a), 406(b)(1) and 406(b)(2) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply as of January
18, 2008, to the cash sale of certain medium term notes (the Notes) for
$28,584,601.46 by the EB Daily Liquidity Money Market Fund (the Fund)
to The Bank of New York Mellon Corporation (BNYMC), a party in interest
with respect to employee benefit plans invested in the Fund, provided
that the following conditions are met.
(a) The sale was a one-time transaction for cash payment made on a
delivery versus payment basis in the amount described in paragraph (b);
(b) The Fund received an amount as of the settlement date of the
sale which was equal to the greatest of:
(i) The amortized cost of the Notes as of the date of the sale, if
the Fund has been valued at amortized cost at any time within the
preceding year;
(ii) The price at which the Fund purchased the Notes, if the Fund
is valued at fair market value and the Fund has not been valued at
amortized cost at any time within the preceding year; or
(iii) The fair market value of the Notes as of the date of the
sale, as determined by an independent third party source or independent
appraisal (in each case, including accrued but unpaid interest);
(c) The Fund did not bear any commissions or transaction costs with
respect to the sale;
(d) Mellon, as trustee of the Fund, determined that the sale of the
Notes was appropriate for and in the best interests of the Fund, and
the employee benefit plans invested, directly or indirectly, in the
Fund, at the time of the transaction;
(e) Mellon took all appropriate actions necessary to safeguard the
interests of the Fund, and the employee benefit plans invested in the
Fund, in connection with the transactions;
(f) If the exercise of any of BNYMC's rights, claims or causes of
action in connection with its ownership of the Notes results in BNYMC
recovering from the issuer of the Notes, or any third party, an
aggregate amount that is more than the sum of:
(i) The purchase price paid for the Notes by BNYMC (i.e., $28.5
million); and
(ii) The interest due on the Notes from and after the date BNYMC
purchased the Notes from the Fund, at the rate specified in the Notes,
BNYMC will refund such excess amounts promptly to the Fund (after
deducting all reasonable expenses incurred in connection with the
recovery).
(g) Mellon and its affiliates, as applicable, maintain, or cause to
be maintained, for a period of six (6) years from the date of any
covered transaction such records as are necessary to enable the persons
described below in paragraph (h)(i), to determine whether the
conditions of this exemption have been met, except that--
(i) No party in interest with respect to a plan which engages in
the covered transactions, other than Mellon and its affiliates, as
applicable, shall be subject to a civil penalty under section 502(i) of
the Act or the taxes imposed by section 4975(a) and (b) of the Code, if
such records are not maintained, or not available for examination, as
required, below, by paragraph (h)(i); and
(ii) A separate prohibited transaction shall not be considered to
have occurred solely because due to circumstances beyond the control of
Mellon or its affiliate, as applicable, such records are lost or
destroyed prior to the end of the six-year period.
(h)(i) Except as provided, below, in paragraph (h)(ii), and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to, above, in paragraph (g) are
unconditionally available at their customary location for examination
during normal business hours by--
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the SEC; or
(B) Any fiduciary of any plan that engages in the covered
transactions, or any duly authorized employee or representative of such
fiduciary; or
(C) Any employer of participants and beneficiaries and any employee
organization whose members are covered by a plan that engages in the
covered transactions, or any authorized employee or representative of
these entities; or
(D) Any participant or beneficiary of a plan that engages in the
covered transactions, or duly authorized employee or representative of
such participant or beneficiary;
(ii) None of the persons described, above, in paragraph (h)(i)(B)--
(D) Shall be authorized to examine trade secrets of Mellon, or
commercial or financial information which is privileged or
confidential; and
(iii) Should Mellon refuse to disclose information on the basis
that such information is exempt from disclosure, Mellon shall, by the
close of the thirtieth (30th) day following the
[[Page 39178]]
request, provide a written notice advising that person of the reasons
for the refusal and that the Department may request such information.
Summary of Facts and Representations
1. Mellon Bank, N.A. (Mellon) is a subsidiary of The Bank of New
York Mellon Corporation (BNYMC), a Delaware financial services company
that provides a wide range of banking and fiduciary services to a broad
array of clients, including employee benefit plans subject to the Act.
The Fund is a collective investment fund established and maintained by
Mellon, as trustee, for the collective investment and reinvestment of
assets contributed thereto by Mellon and its affiliates on behalf of
their employee benefit plan clients. The Fund is a group trust that is
exempt from federal income tax pursuant to Rev. Rul. 81-100. As of
January 7, 2008, the value of the Fund's portfolio (including the
Notes) was approximately $1.39 billion. As of such date, there were 25
direct investors in the Fund, including 21 other collective investment
funds maintained by Mellon, three employee benefit plans subject to the
Act (including the Mellon 401(k) Retirement Savings Plan) and one
government plan.
2. The Fund is a short-term investment fund (``STIF'') that is
utilized as (i) a short-term investment vehicle for the uninvested cash
held by other Mellon collective investment funds and individual
employee benefit plan clients of Mellon and its affiliates, and (ii) as
an investment option for 401(k) plan clients. As of January 7, 2008,
the Fund's dollar-weighted average duration/days to reset was 30.7
days. The Fund's stated investment objective provides that the Fund is
to achieve a high level of current income consistent with stability of
principal and liquidity. The assets of the Fund are invested in a
diversified portfolio of investment grade money market instruments
including, without limitation, commercial paper (including paper issued
under Section 3(a)(3), Section 4(2) and Rule 144A of the Securities Act
of 1933), the Mellon EB Temporary Investment Fund, notes, repurchase
agreements and other evidences of indebtedness which are payable on
demand or which have a maturity date not exceeding 13 months from date
of purchase, except for floating rate securities, which may have a
final maturity of up to two years from date of purchase. The Fund
maintains a dollar-weighted average portfolio maturity of 90 days or
less. Consistent with the foregoing, the Fund utilizes so-called
amortized cost accounting (similar to a money market mutual fund) with
the result that units of the Fund are generally valued at a constant
amount equal to $1.00. The Fund's net income (including any accretion
of discounts or amortization of premiums) is accrued daily and
additional units are issued to reflect such net income.
3. The Fund purchased the Notes on January 27, 2007, for $28.5
million. The Notes were two year bonds with a par value of $28.5
million, issued by Stanfield Victoria Finance Ltd. (the Issuer) on
March 24, 2006, with a maturity date of March 27, 2008. Interest on the
Notes was taxable and payable quarterly at a variable rate which was
reset each quarter based upon the three-month London Interbank Offered
Rate (LIBOR). The principal amount and unpaid interest on the Notes
were payable at maturity.
4. The Issuer is a so-called structured investment vehicle (SIV)
that raised capital primarily by issuing various types and classes of
notes, including the Notes. The capital raised was then utilized by the
Issuer to purchase various financial assets, including other asset-
backed securities and mortgage-backed securities. The assets acquired
by the Issuer were pledged to secure payment of certain of the notes
issued by the Issuer, including the Notes, pursuant to a security
agreement with an independent bank serving as collateral agent. This
security agreement provided that, as a general rule, upon the
occurrence of an ``Enforcement Event,'' as defined in the agreement,
the collateral agent was required to sell all of the Issuer's assets
and distribute the proceeds thereof.
5. The decision to invest Fund assets in the Notes was made by
Mellon as trustee of the Fund. Prior to the investment, Mellon
conducted an investigation of the potential investment, examining and
considering the economic and other terms of the Notes. Mellon
represents that the Fund's investment in the Notes was consistent with
the Fund's investment policies and objectives. At the time the Fund
acquired the Notes, the Notes were rated ``AAA'' by Standard & Poor's
Corporation (``S&P'') and ``Aaa'' by Moody's Investor Services, Inc.
(``Moody's''). Based on its consideration of the relevant facts and
circumstances, Mellon states that it was prudent and appropriate for
the Fund to acquire the Notes.\25\
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\25\ The Department is expressing no opinion in this proposed
exemption regarding whether the acquisition and holding of the Notes
by the Fund violated any of the fiduciary responsibility provisions
of Part 4 of Title I of the Act.
---------------------------------------------------------------------------
6. On November 7, 2007, S&P placed a ``negative watch'' on the
Notes. On December 21, 2007, Moody's downgraded the rating of the Notes
to ``Baa3.'' On January 7, 2008, S&P downgraded the rating of the Notes
to ``B-.'' Responding to these events, Mellon, on behalf of the Fund,
executed an amendment to the security agreement governing the Notes on
January 7, 2008. Pursuant to this amendment, by providing notice
(Election Notice) on or before January 17, 2008, Mellon could elect to
have the pro-rata share of the collateral assets allocable the Notes
held by the Fund excluded from any asset sale by the collateral agent
that would otherwise occur immediately upon the occurrence of an
Enforcement Event. On January 8, 2008, as a result of the foregoing
ratings down-grades, an Enforcement Event occurred. On January 10,
2008, the Issuer did not repay certain notes maturing on that date. On
January 14, 2008, Mellon submitted an Election Notice to the collateral
agent instructing the collateral agent to exclude the Fund's pro rata
share of the Issuer's assets from the asset sale triggered by the
occurrence of the Enforcement Event on January 8, 2008. On January 15,
2008, Moody's further downgraded its rating of the Notes to ``B2.'' On
January 17, 2008, S&P further downgraded its rating of the Notes to
``D.''
7. Mellon's election was based on Mellon's determination that the
market for the collateral assets securing the Notes was severely
distressed and that the inherent value of such assets was substantially
greater than the price that could have been obtained if such assets
were sold currently by the collateral agent. Accordingly, Mellon
determined that it was in the best interest of the Fund to exclude such
assets from a current sale.
8. While the units of the Fund are generally valued at $1.00,
Mellon, as Trustee of the Fund, obtains market prices for all of the
Fund's assets to confirm that the fair market value of such assets is
substantially consistent with the constant $1.00 value being utilized
in the operation of the Fund. Mellon utilizes an unrelated entity,
Interactive Data Corporation (IDC), as a pricing service for this
purpose. On January 11, 2008, IDC reported the price of the Notes as
being 99.0501 percent of their par value. Mellon questioned the IDC
price in light of the facts discussed in paragraph 6 above and the fact
that Credit Suisse First Boston had indicated that the Notes were
trading at distressed levels. IDC announced on January 11, 2008 that,
effective January 15, 2008, it would no longer price the Notes in view
[[Page 39179]]
of the occurrence of an Enforcement Event and ``the lack of current bid
and other verifiable market and/or credit information pertaining'' to
the Notes. As a result of the events described in paragraph 6, an
independent analysis of the Notes prepared by Gifford Fong Associates
(GFA) was obtained on January 11, 2008. The analysis estimated the
value of the Notes, as of January 10, 2008, at 91 percent of their par
value. GFA's determination of the value of the Notes was based upon its
analysis and evaluation of the underlying assets of the Issuer relating
to the Notes.
9. In view of the foregoing, Mellon determined that it would be
appropriate and in the best interest of the Fund for the Notes to be
sold by the Fund for their par value plus accrued interest. Mellon also
determined that the purchase of the Notes by BNYMC would be permissible
under applicable banking law. Therefore, in order to protect the Fund
and the participating investors having an interest in the Fund from
potential investment losses, Mellon determined that a sale of the Notes
by the Fund to BNYMC at a price equal to the par value of the Notes
plus accrued interest would be in the best interest of the Fund and all
of its participating investors. On January 17, 2008, notice of this
determination was provided to a representative of each of the 25
investors having a direct interest in the Fund.
10. On January 18, 2008, BNYMC purchased the Notes from the Fund
for a lump sum cash payment of $28,584,601.46. This sum represented the
par value of the Notes (i.e. $28.5 million) plus the accrued interest
owing on the Notes (i.e. $84,601.46) as of January 17, 2008. Mellon
represents that this amount equals the amortized cost of the Notes plus
accrued but unpaid interest.
11. As noted in paragraph 8, prior to the consummation of the
transaction, valuations of the Notes were obtained on January 11, 2008
(seven days prior to the sale) from an independent pricing service,
GFA, in addition to the most recent price available from IDC. GFA's
valuation of the Notes reflected its estimation of the value of the
Notes as of January 10, 2008. Mellon states that GFA is a highly-
regarded independent valuation firm with respect to the pricing of
securities such as the Notes. As noted in paragraph 8 above, the
valuation of the Notes obtained from GFA was 91 percent of their par
value. Moreover, Mellon had obtained information from an independent
broker-dealer that the market for the Notes was in extreme distress
with prices for any actual trades being substantially below the GFA
value. On the basis of this information, Mellon determined that the
purchase price paid by BNYMC to the Fund exceeded the aggregate fair
market value of the Notes as of the date of the transaction.
12. Mellon, as trustee of the Fund, believed that the sale of the
Notes to BNYMC was in the best interests of the Fund, and the employee
benefit plans invested in the Fund, at the time of the transaction.
Mellon states that any sale of the Notes on the open market would have
produced significant losses for the Fund and for the participating
investors in the Fund. Mellon represents that the sale of the Notes by
the Fund to BNYMC benefited the participating investors in the Fund by
placing such investors in the same economic position they would have
occupied absent the deterioration in the value of the Notes due to
their rating downgrades, the occurrence of an Enforcement Event and the
general disruption in the relevant markets. The participating investors
in the Fund benefited further because the purchase price paid by BNYMC
for the Notes substantially exceeded the aggregate fair market value of
the Notes, as determined by GFA.
In addition, Mellon states that the transaction was a one-time sale
for cash in connection with which the Fund did not bear any brokerage
commissions, fees, or other expenses. Mellon represents that it took
all appropriate actions necessary to safeguard the interests of the
Fund and its participating investors in connection with the sale of the
Notes.
13. Mellon states that the sale of the Notes by the Fund to BNYMC
resulted in an assignment of all of the Fund's rights, claims, and
causes of action against the Issuer or any third party arising in
connection with or out of the issuance of the Notes or the purchase of
the Notes by the Fund. Mellon states further that if the exercise of
any of the foregoing rights, claims or causes of action results in
BNYMC recovering from the Issuer or any third party an aggregate amount
that is more than the sum of (a) the purchase price paid for the Notes
by BNYMC (i.e. $28.5 million); and (b) the interest due on the Notes
from and after the date BNYMC purchased the Notes from the Fund, at the
rate specified in the Notes, BNYMC will refund such excess amounts
promptly to the Fund (after deducting all reasonable expenses incurred
in connection with the recovery).
14. In summary, the applicant represents that the transaction
satisfied the statutory criteria of section 408(a) of the Act and
section 4975 of the Code because: (a) The sale of the Notes by the Fund
was a one-time transaction for cash payment made on a delivery versus
payment basis; (b) the Fund received an amount equal to the amortized
cost of the Notes, plus accrued but unpaid interest, at the time of
sale, which was greater than the aggregate fair market value of the
Notes as determined by an independent pricing service and an
independent valuation firm at the time of sale; (c) the Fund did not
pay any commissions or other expenses with respect to the sale; (d)
Mellon, as trustee of the Fund, determined that the sale of the Notes
to BNYMC was in the best interests of the Fund, and the employee
benefit plans invested, directly or indirectly, in the Fund, at the
time of the transaction; (e) Mellon took all appropriate actions
necessary to safeguard the interests of the Fund in connection with the
transactions; and (f) BNYMC will promptly refund to the Fund any
amounts recovered from the Issuer or any third party in connection with
its exercise of any rights, claims or causes of action as a result of
its ownership of the Notes, if such amounts are in excess of the sum
of: (i) the purchase price paid for the Notes by BNYMC (i.e. $28.5
million) and (ii) the interest due on the Notes from and after the date
BNYMC purchased the Notes from the Fund, at the rate specified in the
Notes.
Notice to Interested Persons
Written notice will be provided to a representative of each of the
25 investors having a direct interest in the Fund. The notice shall
contain a copy of the proposed exemption as published in the Federal
Register and an explanation of the rights of interested parties to
comment, or request a hearing, regarding the proposed exemption. Such
notice will be provided by personal or express delivery within 15 days
of the issuance of a proposed exemption. Any written comments and/or
requests for a hearing must be received by the Department from
interested persons within 45 days of the publication of this proposed
exemption in the Federal Register.
For Further Information Contact: Ms. Karen Lloyd of the Department,
telephone (202) 693-8554. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or
[[Page 39180]]
disqualified person from certain other provisions of the Act and/or the
Code, including any prohibited transaction provisions to which the
exemption does not apply and the general fiduciary responsibility
provisions of section 404 of the Act, which, among other things,
require a fiduciary to discharge his duties respecting the plan solely
in the interest of the participants and beneficiaries of the plan and
in a prudent fashion in accordance with section 404(a)(1)(b) of the
Act; nor does it affect the requirement of section 401(a) of the Code
that the plan must operate for the exclusive benefit of the employees
of the employer maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemption, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 1st day of July, 2008.
Ivan Strasfeld
Director of Exemption Determinations,
[FR Doc. E8-15320 Filed 7-7-08; 8:45 am]
BILLING CODE 4510-29-P
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